SAIC’s Spinoff Jeopardizes Its $1.8 Billion NASA Contract

A U.S. government mediator upheld a challenge to a health-services contract awarded by NASA to SAIC Inc. (SAIC), saying the company’s corporate spinoff invalidated the award valued at as much as $1.76 billion.

The Government Accountability Office, which arbitrates federal contract disputes, concurred with the protest by the losing bidder, Wyle Laboratories Inc., which said SAIC’s proposal was inaccurate because it didn’t reflect the company’s plan to split into two entities. Court Square Capital Partners LP, a New York-based private equity firm, acquired Wyle in 2009.

The GAO, in its decision, said the National Aeronautics and Space Administration should either award the contract to Wyle, based in El Segundo, California, or seek new bids for the work.

SAIC Inc., based in McLean, Virginia, split into two companies in September, a month after the award. Leidos Holdings Inc. (LDOS) became the parent company and Science Applications International Corp. became a spin-off business that would assume the NASA work.

“The substitution of a new prime contractor, in place of the original offeror, may well have a material effect on both the costs incurred and technical approach employed during contract performance,” the GAO found.

Susan Poling, the GAO’s general counsel, said in a written decision that in competing for the work, SAIC “did not intend to perform as the prime contractor, but rather intended that another entity, with substantially fewer resources, that was completely separate from ‘old’ SAIC, would be the prime contractor.”

Possible Ramifications

“This decision could have ramifications for other companies that are restructuring in the face of declining defense spending,” said Brian Friel, a Bloomberg Government spending analyst, who cited plans by Exelis Inc. (XLS), also based in McLean, Virginia, to spin off a services unit this year. “Competitors could use this ruling to challenge other awards to SAIC and Leidos.” he said.

SAIC spokeswoman Lauren Darson declined to comment on the decision. A Wyle spokesman couldn’t immediately be reached for comment.

The GAO, Congress’s investigative arm, issues decisions that provide guidance to government agencies during contract disputes. While it can’t compel agencies to comply, its guidance is rarely ignored, according to Ralph O. White, the GAO’s managing associate general counsel for procurement law.

To contact the reporter on this story: David Lerman in Washington at dlerman1@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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