BNUMBER:  B-265884
DATE:  November 7, 1995
TITLE:  [Letter]

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B-265884

November 7, 1995

The Honorable Dan Burton
House of Representatives

Dear Mr. Burton:

This responds to your August 4, 1995, letter requesting that our 
Office review the Army's planned procurement of metal parts for M-795 
high fragmentation artillery projectiles.  On July 20, 1995, the 
Deputy Assistant Secretary of the Army for Procurement signed a 
Justification and Approval (J&A) to authorize limited competition for 
this procurement.  The J&A establishes a mobilization base for the 
item consisting of two government-owned, contractor-operated Army 
ammunition plants, the Scranton and Louisiana Army Ammunition Plants 
(SAAP and LAAP, respectively).  

You ask several specific questions about the validity of the J&A 
prepared in this case.  First, you ask whether the Army violated the 
Competition in Contracting Act of 1984 (CICA).  You also ask about the 
accuracy of the J&A's reference to a prior contract for M-795 metal 
parts, and whether incorrect information about a prior procurement 
would invalidate the J&A.  Finally, you request additional information 
on procurement of high fragmentation projectiles and ask whether costs 
are affected by restricted competition in artillery projectile 
procurements.  

CICA permits restricted competition when supported by a properly 
prepared J&A.  We note that the Army's J&A includes extensive 
discussion of the need to "prove out" the new and "vital flex-line 
manufacturing process," but does not discuss mobilization concerns in 
the same depth.  As a result, it is not clear from the J&A as written 
that it fully documents the need for a mobilization base.  Your staff 
has advised us that your constituent, ERI Babcock & Wilcox, Inc. of 
Indianapolis (ERI), intends to file a bid protest contesting the 
Army's mobilization base determination.  Receipt of a timely bid 
protest will permit us to exercise our statutory function to gather 
all information and render a decision on the validity of the Army's 
justification for excluding ERI. 

In response to your second question, SAAP apparently produced a small 
quantity of M-795 metal parts in 1978.  This was in connection with 
the development of a Technical Data Package for the M-795.  However, 
the prior contract has no apparent bearing on the validity of the 
present J&A.  As to procurement costs, it is generally agreed that 
limiting competition increases costs.  Although cost savings are 
certainly desirable, the mobilization base exception in CICA also 
takes account of the need to preserve production capacity for a 
national emergency.    

Statutory Background

The Competition in Contracting Act, at 10 U.S.C.  2304, requires the 
Department of Defense to obtain full and open competition in its 
procurements.  Subparagraph (c)(3)(A) of section 2304, authorizes an 
exception when:

     "it is necessary to award the contract to a particular source or 
     sources in order . . . to maintain a facility, producer, 
     manufacturer, or other supplier available for furnishing property 
     or services in case of a national emergency or to achieve 
     industrial mobilization. . . . "

Before using this CICA exception, the procuring agency must prepare a 
written J&A.  A properly prepared and approved J&A permits the agency 
to restrict competition consistent with the law.  Along with other 
procedural requirements, the statute and the Federal Acquisition 
Regulation (FAR) provide that a J&A must identify the exception 
sought, and include:

     "a demonstration, based on the proposed contractor's 
     qualifications or the nature of the procurement, of the reasons 
     for using that exception"
                    
10 U.S.C.  2304(f).  See also, 48 C.F.R.  6.303 and 6.303-2. 
 
The FAR also lists the proper purposes for restricting competition to 
a mobilization base.  They include:  "[k]eep[ing] vital facilities or 
suppliers in business," and "[m]aintain[ing] properly balanced sources 
of supply for meeting the requirements of acquisition programs in the 
interest of industrial mobilization."  48 C.F.R. 
 6.302-3(b)(i) and (iii). 

By executing a J&A, military agencies may limit competition in order 
to create or preserve a mobilization base.  Use of the mobilization 
base exception authorizes preselection of an appropriately limited 
number of sources for a specific critical item.  These suppliers 
comprise the mobilization base.  Once the mobilization base is 
established, the procuring entity may award future contracts 
exclusively to the 
suppliers in the base.  The goal of this procurement strategy is to 
provide those suppliers with sufficient work on a continuing basis to 
allow them to maintain the production capability that would be needed 
immediately in time of war.[1]

Ammunition Plant Closure and Congressional Response

In April 1991 the Army issued its Ammunition Production Base Planning 
and Restructuring Study.[2]  Recognizing that reduced threat in the 
post-cold war era would continue to diminish the need for new 
production of ammunition, the Army formulated a plan for downsizing 
the existing ammunition industrial base.  As part of that plan, the 
Army articulated a policy to rely on the commercial sector to produce 
metal parts.  Consistent with the policy, it listed several GOCO 
plants producing metal parts for closure.  SAAP and LAAP were both 
scheduled to be closed in 1995. 

In fiscal year 1993, despite the announced closure, Congress began 
allocating funds specifically for upgrading SAAP and LAAP to "flexible 
manufacturing centers."  Since 1993, almost $50 million has been 
designated for improvements at these two plants.  Meanwhile, both 
plants remained on the closure list, and over time their active 
workload was reduced.  Then, the conferees on the fiscal year (FY) 
1995 Defense Appropriations Act directed that M-795 metal parts be 
procured from the "existing government-owned production base." H.R. 
Rep. No. 103-747, reprinted in 140 Cong. Rec. H9632 (daily ed. Sept. 
26, 1994).  The same conference report directed that $25 million in FY 
1994 funds be transferred from other uses to the 
M-795 procurement and used for a "prove-out of the flexible 
manufacturing capabilities at the Louisiana and Scranton Army 
Ammunition Plants."[3]  According to the J&A, without the opportunity 
to demonstrate flex-line manufacturing techniques on the M-795 
procurement, SAAP and LAAP would apparently have little or no other 
work.   

M-795 Procurement

The J&A for the M-795 procurement states that the acquisition strategy 
is to limit competition for producing metal parts to SAAP and LAAP, 
"which recently have been facilitated with unique flex-line 
manufacturing capabilities so as to prove-out the flex-line concept 
and to keep those vital facilities/suppliers in business."  The J&A 
explains that the flexible manufacturing concept "integrates a 
development and production capability into a single facility [and] 
creates a unique capability . . . that will allow the Army to obtain 
similar manufacturing technology production efforts of various items 
from" the GOCOs.

The J&A then lists a number of specific benefits to be derived from 
flexible manufacturing centers, and suggests that, if shown to be 
successful, the concept will be extended throughout the ammunition 
industrial base.  The J&A goes on to state that restricting the M-795 
program to SAAP and LAAP will ensure that the plants have sufficient 
workload to retain the expertise needed for the demonstration project.  
Referring to the $50 million investment directed by Congress, the J&A 
concludes that if SAAP's and LAAP's "vital expertise is lost, then the 
Army's considerable investment in the vital flexible manufacturing 
center concept will, effectively, also be lost."  Specifically with 
respect to ERI, the J&A concludes that although the firm is capable of 
the contract performance requirements, "the contractor's facility has 
not been deemed vital for this acquisition as it does not have a 
flex-line manufacturing capability." 

Case Law

Over the years, our Office has decided a number of bid protests 
involving the establishment of a mobilization base, and the inclusion 
or exclusion of particular suppliers from the base.  Consistently, we 
have recognized that such determinations involve complex judgments and 
the exercise of discretion by agency officials.  We limit our standard 
of review in such cases because the normal concern of maximizing 
competition is secondary to the ends of industrial mobilization.  
However, if a firm convincingly demonstrates an abuse of discretion, 
we will sustain a protest of the need for or the composition of a 
mobilization base.  See NI Industries, Inc., Vernon Division, 
B-223941, Dec. 15, 1986, 86-2 CPD  674.

Your letter includes a June 21 letter from counsel for ERI Babcock & 
Wilcox of Indianapolis (ERI).  ERI had initially expressed interest in 
participating in the mobilization base, but the firm ultimately was 
excluded because it lacks flex-line manufacturing capability.  That 
letter, however, was written without benefit of the J&A, which was not 
executed until July 20.  The bid protest process will afford ERI the 
opportunity to examine and comment on the Army's specific reasons for 
limiting the acquisition to the two GOCO's, and will result in 
creation of a full record for purposes of a decision by our Office 
under our bid protest authority.  

Army officials advised us that a request for proposals for M-795 metal 
parts was issued in mid-September 1995, with evaluations scheduled for 
November 1995, and award contemplated in February of 1996.  If we find 
in the bid protest that the exclusion of ERI was improper, we are 
authorized to recommend that the firm be permitted to compete.  See 31 
U.S.C.  3554(b). 

Other Concerns

You asked whether a previous contract for M-795 parts mentioned in the 
J&A was actually performed at SAAP.  According to the J&A, a contract 
was awarded to SAAP in 1978 to produce a few M-795 projectiles for 
testing, and it also resulted in the delivery of a Level III Technical 
Data Package.  We have no information that would disprove the 
statement in the J&A that the metal parts work was done at SAAP.  In 
any case, the J&A does not suggest that the Army selected SAAP for the 
mobilization base on the basis of expertise acquired under the 1978 
contract.  Therefore, the prior procurement history does not appear to 
be related to the decision to limit competition. 
 
You also asked whether full and open competition has been secured in 
the procurement of other high fragmentation artillery projectiles.  To 
the best of our knowledge, in recent years all or nearly all 
procurements of large ammunition items, such as grenades and artillery 
shells, have been accomplished using established mobilization bases 
appropriate to the item procured and the quantity needed.  In fact, 
ERI is a participant in the mobilization base for Navy 105mm 
projectiles, and has been since at least 1990.

Your last question is whether the procurement methods have had any 
impact on cost.  In general, restricted procurements cause higher 
costs.  However, in the case of mobilization base contracting, the 
government receives the benefit of the contractors' continuing 
availability to produce quickly the large quantities of specialized 
items needed in time of war.  The mobilization base exception in CICA 
reflects the Congress' determination that this advantage is worth a 
premium.  
See Bulova Technologies, Inc., B-252660, July 15, 1993, 93-2 CPD  23, 
at 6.

Contract awards in procurements restricted to a mobilization base may 
be made on the basis of factors other than cost.  In Lance Ordnance 
Co. Inc., et al., B-246849, 
et al., Mar. 31, 1992, 92-2 CPD  29, for example, a mobilization base 
supplier was selected for award of additional quantities because its 
existing contract was near completion.  However, cost may be a primary 
factor as well.  In Honeywell, Inc., 
B-236357, Nov. 22, 1989, 89-2 CPD  490, the contract properly was 
awarded to the lowest offeror among several in the mobilization base.  

Finally, the decision to utilize a mobilization base to procure a 
critical item does not always signal the end of further competition 
for the item.  In some cases, it may be necessary to enlarge the base.  
See Propper International, Inc., B-229888, et al.,  Mar. 22, 1988, 
88-1 CPD  296.  In addition, if procurement needs for an item exceed 
the amount necessary to sustain the mobilization base, all responsive 
and responsible offerors must be permitted to participate in the 
acquisition of the excess amounts.  

We are enclosing for your information a copy of our new Bid Protest 
Regulations, which are effective as of October 1, and a recent report 
on artillery projectile inventories that also discusses future 
procurement needs.  We trust the foregoing is helpful to you.
 
Sincerely yours, 

Robert P. Murphy 
General Counsel

Enclosures

B-265884

November 7, 1995

DIGEST

The Competition in Contracting Act, 10 U.S.C.  2304, permits 
restriction of competition to insure suppliers of critical items 
constantly maintain the production capacity that would be needed in 
the event of a national emergency.   GAO's standard of review 
recognizes substantial agency discretion in the establishment and 
composition of a mobilization base.  

1. In the field of ammunition production, some of the manufacturers 
are government-owned, government-operated (GOGO) or government-owned, 
contractor-operated (GOCO) plants.  Like other potential participants 
in the mobilization base, the GOGOs and GOCOs need continuous work if 
they are to remain active and retain their production skills and 
capabilities. 

2. The study was updated in 1993.  Army officials advised us 
informally that there is no 1995 update.

3. In an attempt to counteract the FY 95 conference instructions, the 
Senate Armed Services Committee reporting S. 1087, the FY 1996 
National Defense Authorization bill, directed the Army to consider 
public-private competition for the parts.  
S. Rep. No. 112, 104th Cong., 1st Sess. 32.  The Senate Appropriations 
Committee also recommended increasing the amount allocated for the 
M-795 procurement by $20 million for FY 1996.  S. Rep. No. 124, 104th 
Cong., 1st Sess. 62.  As of
 October 31, 1995, there has been no final Conference action on either 
act.