United States: Federal Circuit Decision Settles GAO/COFC Split On Agency’s Use Of Cooperative Agreements

In March, the Federal Circuit settled a split between the Government Accountability Office ("GAO") and the Court of Federal Claims that focused on the gray area between cooperative agreements and procurement contracts. Siding with the GAO, the appeals court ruled that the Department of Housing and Urban Development ("HUD") could not sidestep federal competition requirements by using cooperative agreements, instead of procurement contracts, to outsource its contract administration services. The ruling provides rare insight on the Federal Circuit's interpretation of the Federal Grant and Cooperative Agreements Act, and serves as a warning shot against any federal agency that feels inclined to disregard the GAO. Similarly, federal contractors should remain vigilant and determine whether their agencies' use of cooperative agreements gives rise to a potential protest.

The HUD's cooperative agreements for administering low-income rent subsidies

The HUD's cooperative agreements existed in a gray area not unfamiliar to entities that do business with the government. On one hand, the cooperative agreements were put in place to further HUD's mission and can be likened to programs where government works with the awardee to fulfill some public purpose. On the other hand, the awardees administered contracts, acting like intermediaries and other federal contractors that support their respective agency's mission.

In 1937, Congress authorized HUD to provide rent benefits to low-income families and individuals, which included direct payments to the owners of privately owned dwellings ("project owners"). The project owners would then subsidize the cost of rent. Originally, HUD would pay these subsidies directly through Housing Assistance Program ("HAP") contracts. After 1974, however, Congress gave HUD a second option: paying subsidies through an intermediary (a Public Housing Agency ("PHA")) under an Annual Contributions contract. When the contracts for direct subsidies began expiring in 1997, Congress authorized their renewal. At that time, HUD was facing deep budget cuts and planned to reduce its staff by one-third. To deal with the prospect of its inability to manage the contracts, HUD began to outsource some contract administration services through the intermediaries.

On and after 1999, HUD awarded one of the intermediary subsidy contracts—known as Performance-Based Annual Contribution Contracts ("PBACC") — in each of the 50 states, plus D.C. and Puerto Rico. The PHAs would remain intermediaries, but were labeled Performance-Based Contract Administrators ("PBCA"). In 2011, HUD sought to re-compete with the PBACCs, the results of which prompted bid protests before the GAO. The protestors argued that the PBACCs were procurement contracts, and that HUD did not comply with federal procurement law. HUD then withdrew the awards for protested contracts, re-issued its solicitation, and labeled it a "Notice of Funding Availability" ("NOFA"). NOFAs are typically reserved for cooperative agreements, and the new designation accompanied a change in HUD's policy: applicants could not compete outside their home states.

When is an agreement a procurement contract? Context matters.

Ultimately, the GAO agreed with the protestors that labeling the PBACCs as "cooperative agreements" did not make them so. The GAO pointed to the Federal Grant and Cooperative Agreements Act ("FGCAA") for the standard that determines the type of legal instrument an agency must use when awarding a federal grant or contract. To summarize, one must examine the legal instrument's principal purpose:

  • Procurement contracts: this legal instrument must be used by an agency when "the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services the direct benefit or use" of the government. See FGCAA, 31 U.S.C. § 6303. 
  • Cooperative agreements: this legal instrument must be used by an agency when "the principal purpose of the relationship is to transfer a thing of value to the [recipient] to carry out a public purpose of support or stimulation authorized by [U.S. law] instead of acquiring . . . property or services." See FGCAA, 31 U.S.C. § 6305(2).

The GAO rejected HUD's argument that the intermediaries (the PBCAs) were receiving a "thing of value," and was instead convinced that the PBCAs received administrative fees that compensated them for administering the contracts. The GAO also determined that whether the PBACCs were cooperative agreements or procurement contracts depended on the agency's relationship with the intermediary and its principal federal purpose. The GAO found that HUD and the PBCAs shared the same purpose: fulfilling the terms of the HAP contracts. The PBCAs were therefore acting for HUD's direct benefit and use.

An agency rarely disagrees with the GAO in this context, but HUD decided to ignore the GAO's determination and proceed with the new solicitation. The court noted that in the past two decades, an agency has disregarded the GAO's recommendation only 10 times. That is 10 times out of 5,703 merit decisions and 1,099 protests sustained. HUD's disregard of the GAO's determination prompted pre-award protests in the Court of Federal Claims. The Court of Federal Claims disagreed with the GAO, noting that no statutory or regulatory authority bound HUD to maintain the HAP contracts, and that the PBCAs were being enlisted to take on programmatic responsibilities.

On appeal, the Federal Circuit sided with the GAO, resting its opinion on whether the PBAACs were procurement contracts or cooperative agreements. Applying the FGCAA standards noted above, the court examined the following factors to discern the principal purpose of the PBACCs:

  • Why the cooperative agreements were put in place. The appeals court noted that HUD implemented the program in part to make up for a budgetary and staffing shortfall. The PBACCs were a way for HUD to continue conducting its business.
  • How the agency characterized the nature of the deliverables under the agreements. In the 1999 RFP and HUD's other characterizations of the agreements, HUD made references to how the PBACCs improved HUD's performance and delivered value to HUD. Moreover, HUD noted that the PBCAs acted as "support" for the agency's staff.
  • The nature of the payments made to PBCAs. The housing-assistance payments HUD made to PBCAs were intermediary transfers. HUD would transfer the money to the PBCAs, then the PBCAs would transfer the money to project owners. The administrative fee covered only the administrative expenses of administering the HAP contracts.

The Federal Circuit was persuaded that HUD had an "intermediary relationship" with the PBCAs. The PBCAs existed to provide services to HUD and were not receiving assistance from HUD to provide assistance to the project owners that were paid under the HAP contracts.

The appeals court remanded the case to the Court of Federal Claims without reaching the argument that the PBACCs' anti-competitive requirements were arbitrary and capricious. More litigation will likely follow this decision, which should serve to remind agencies and contractors alike that the nature of their relationships trumps any labels imposed on their agreements. Federal contractors should therefore scrutinize their agencies' agreements to ensure that federal agencies are not circumventing federal competition requirements.

More coverage of this story may be found here and here. The full opinion can be read here (PDF). The case is before the U.S. Court of Appeals for the Federal Circuit under CMS Contract Management Services, et al. v. United States, Case No. 13-5093.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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