Loser-Pays Rule Raises the Ire of Defense Contract Advocates

(Bloomberg) -- U.S. defense contractors are protesting a pilot program that would require losers in Pentagon competitions to pay the Defense Department’s costs if they challenge a decision and fail to overturn it.

The Professional Services Council, an industry group that represents contractors, opposes the “loser-pays” requirement as “both premature and unnecessary,” said Alan Chvotkin, its executive vice president and counsel.

The fiscal 2018 Defense Authorization Act (HR 2810) signed by President Donald Trump this week mandates a program beginning in two years and running for 36 months. It will require contractors with more than $250 million in revenue to reimburse the Pentagon “for costs incurred in processing covered protests” filed with the Government Accountability Office.

While most defense contract challenges are routine, Boeing Co. and Lockheed Martin Corp. drew attention when they contested the Air Force’s decision in October 2015 to choose Northrop Grumman Corp. instead of their joint bid for the B-21 bomber project that’s valued at about $80 billion. The GAO rejected their challenge in February 2016.

A Compromise

The pilot program was a compromise in response to a proposal by Senate Armed Services Committee Chairman John McCain, Republican of Arizona, that implied the reimbursement requirement would begin this fiscal year. It also would have applied to companies with $100 million or more in revenue.

“If the protests are not legitimate --- most of them wind up being rejected -- we want to discourage” their use, Representative Adam Smith of Washington state, the top Democrat on the House Armed Services Committee, told reporters in November at a Defense Writers Group breakfast in Washington. The final bill language “was sort of the compromise to try to do that,” he said.

The provision also gives the defense industry ample time to try and get it repealed before it takes effect.

The requirement is intended to cover all Defense Department costs, including personnel time and processing. It doesn’t spell out details, such as the formula the Pentagon would use to calculate its expenses in defending an award when a protest is filed.

It’s difficult to say how much money is at stake, said a U.S. government official who closely follows the protest process. In some of the larger cases, big contractors use major law firms that run up hundreds of thousands of dollars in legal fees with attorneys paid $300 to $1,000 an hour, the official said. But U.S. taxpayers pay less for government employees to defend the disputed awards.

‘Data-Driven Analysis’

Lawmakers should have waited for publication of an assessment by Rand Corp. on the protest process required under last year’s defense policy bill that “will contain data-driven analysis” to propose further reform, Wesley Hallman, senior vice president of the National Defense Industrial Association, said in an email. That report is due to Congress later this month.

The GAO said in its latest annual report on the subject that challengers won 17 percent of contract protests, both on defense and non-defense government awards, in fiscal 2017, down from 23 percent in 2016. The GAO sustained 12 percent of challenges in fiscal 2015 and 13 percent in fiscal 2014.

But the Pentagon said in a 2016 report that the GAO told it contractors won only about 1 percent of defense contract protests the previous year.

“The majority of protests are from small businesses,” Hallman said, adding that the loser-pays requirement “could deter new entrants that have relied on bid protests as one tool to break through the complex buying rules of the Defense Department.”

David Melcher, the outgoing president of the Aerospace Industries Association, said “the pilot program will demonstrate the negative effects on DOD’s acquisition process if industry is discouraged from filing legitimate bid protests.”

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