BNUMBER:  B-270448.3
DATE:  May 1, 1996
TITLE:  Dynamic Science, Inc.

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DOCUMENT FOR PUBLIC RELEASE
A protected decision was issued on the date below and was subject to a 
GAO Protective Order.  This version has been redacted or approved by 
the parties involved for public release.
Matter of:Dynamic Science, Inc.

File:     B-270448.3

Date:May 1, 1996

Peter T. Fagan, Esq., Bryan Cave, for the protester.
Laura K. Kennedy, Esq., Grace Bateman, Esq., and Trisa J. Thompson, 
Esq., Seyfarth, Shaw, Fairweather & Geraldson, for Kay & Associates, 
Inc., an intervenor.
Paul Fisher, Esq., and Russell P. Spindler, Esq., Department of the 
Navy, for the agency.
David A. Ashen, Esq., and John M. Melody, Esq., Office of the General 
Counsel, GAO, participated in the preparation of the decision.

DIGEST

Protest against agency determination to disregard proposed discount 
that would render offer for indefinite delivery/indefinite quantity 
contract low is denied where proposal with discount was mathematically 
unbalanced and agency had a reasonable basis to doubt that award to 
protester would result in lowest overall cost to the government in 
light of the inherent unreliability of its estimates.

DECISION

Dynamic Science, Inc. (DSI) protests the Naval Air Systems Command's 
(NAVAIR) award of a contract to Kay & Associates, Inc., under request 
for proposals (RFP) No. N68936-95-R-0190, for aircraft maintenance 
support services at the Naval Air Warfare Center, China Lake, 
California.  DSI argues that NAVAIR improperly disregarded DSI's 
proposed pricing discount that rendered its proposal low and did not 
conduct meaningful discussions with respect to the discount.

We deny the protest.

The solicitation contemplated the award of a time-and-materials, 
indefinite delivery/indefinite quantity contract for a 3-year base 
period, with 2 option years, to the low, technically acceptable 
offeror.  The solicitation requested labor rates and included 
"estimated annual manhours per category" for 20 specified labor 
categories.  It cautioned, however, that while the estimates 
represented the government's "best estimate of the requirements" and 
were to be used in preparing cost proposals, "the Government can 
guarantee neither the estimated quantities of man-hours shown for 
individual labor categories nor the total estimated man-hours." 
NAVAIR received three proposals by the closing time.  Following 
discussions with all offerors, the agency requested best and final 
offers (BAFO).  The agency initially determined that, based upon its 
eligibility for a small disadvantaged business (SDB) preference 
evaluation factor, JIL Information Systems had submitted the low, 
technically acceptable BAFO.  The resulting award to JIL, however, was 
subsequently terminated after it became apparent that JIL was not in 
fact an SDB.

Of the two remaining offerors, DSI proposed higher hourly labor rates 
than Kay, but also offered a discount pursuant to which it generally 
would not charge for labor hours in excess of approximately 80 percent 
and up to 100 percent of the solicitation estimate for a specified 
labor category.  The evaluated cost of DSI's BAFO with the discount 
($33,009,492) was approximately 14 percent lower than Kay's 
($38,481,284).  However, NAVAIR determined that DSI's offer was 
mathematically unbalanced, on the basis that the prices for the 
initial labor hours were overstated, and that, since actual labor hour 
usage could vary from the solicitation estimates, it was unlikely that 
the government would benefit from the proposed discount.  NAVAIR 
concluded that Kay's BAFO offered the lowest cost to the government 
and made award to Kay on that basis.  

DSI essentially argues that, since its offer was low when evaluated 
with the proposed discount at the stated estimated labor hours, NAVAIR 
was required to make award to it.  DSI specifically denies that its 
offer was unbalanced.

The solicitation incorporated by reference Federal Acquisition 
Regulation (FAR) clause "Contract Award ALT III," FAR  sec.  52.215-16 (FAC 
90-13), which cautioned offerors that the agency "may determine that 
an offeror is unacceptable if the prices proposed are materially 
unbalanced between line items or subline items."  In this regard, 
there are two aspects to unbalancing.  The first is a mathematical 
evaluation of the offer to determine whether each element of the offer 
carries its share of the cost of the work plus profit, or whether the 
offer is based on nominal prices for some work and enhanced prices for 
other work.  The second aspect--material unbalancing--involves an 
assessment of the cost impact of a mathematically unbalanced offer.  
An offer is materially unbalanced where there is reasonable doubt that 
award based on the offer will result in the lowest ultimate cost to 
the government.  USA Pro Co., Inc., B-220976, Feb. 13, 1986, 86-1 CPD  para.  
159.  With regard to requirements contracts that involve the 
evaluation of estimated quantities, where the estimates are a 
reasonably accurate representation of actual anticipated needs, a low 
evaluated offer, even if mathematically unbalanced, is generally not 
materially unbalanced.  See District Moving & Storage, Inc. et al., 
B-240321 et al., Nov. 7, 1990, 90-2 CPD  para.  373.  However, where the 
agency has substantial reason to believe that its actual needs may 
deviate significantly during performance from the estimates, it 
reasonably may view a mathematically unbalanced offer as not clearly 
representing the lowest cost to the government and therefore as 
materially unbalanced.  Outer Limb, Inc., B-244227, Sept. 16, 1991, 
91-2  para.  248; Food Servs., Inc., B-243173; B-243173.2, July 10, 1991, 
91-2 CPD  para.  39. 

NAVAIR reasonably determined that DSI's proposal was mathematically 
unbalanced.  DSI's price ($0) for the hours subject to the 
discount--those in excess of approximately 80 percent and up to 100 
percent of the solicitation estimate for a specified labor 
category--clearly was nominal.  Further, although DSI denies that it 
offered enhanced prices for any hours, we believe that the agency 
reasonably concluded otherwise.  DSI specifically proposed to assure 
the existence of the financial resources needed to perform the 
contract, including any hours for which no charge was to be made, by 
establishing an escrow account funded first by company stock, and then 
by profit on the initial hours billed the government (at labor rates 
higher than Kay's).  Since DSI's proposed profit rate ([DELETED] 
percent) was more than [DELETED] and more than [DELETED] the third 
offeror's (as well as the level of profit typically earned on aircraft 
maintenance contracts), the agency concluded that DSI was proposing to 
accumulate excess profit on the initial, paid hours in order to fund 
performance of any discounted hours.  Further, as noted by agency 
evaluators, DSI stated in its proposal that 

        "[g]iven the uncertainties of the workload, we have analyzed 
        the estimated workload and competitively structured our bid in 
        such a way to ensure that overhead, [general and 
        administrative], and reasonable profit are realized on the 
        most probable hours worked throughout the contract."[1]

This clearly suggested that DSI structured its offer to assure 
recovery, through the earlier hours expected to be ordered, of not 
only its total contract profit but also its total overhead.  From 
this, we think, the agency could reasonably conclude that DSI had 
offered enhanced prices for the undiscounted hours to pay for any 
discounted hours it might be required to furnish.  See generally 
General Instrument Corp., B-228053, Dec. 8, 1987, 87-2 CPD  para.  564.  It 
follows that the agency reasonably concluded that DSI's offer was 
mathematically unbalanced.

NAVAIR also reasonably concluded that DSI's offer with the discount 
was materially unbalanced.  The record indicates the existence of 
considerable uncertainty as to the agency's likely requirements.  
NAVAIR reports that, as a result of uncertainties with respect to base 
realignment and closure, funding levels, technology, acquisition 
philosophy and individual program requirements, the requirement for 
aircraft maintenance support services was difficult to predict; 
according to the agency, due to this uncertainty its actual 
requirements could fall anywhere between the stated solicitation 
estimates, which the agency considered its best estimate of its 
maximum requirements, and the labor hours guaranteed under the 
solicitation--20 percent of the maximum--which represented its best 
estimate of its minimum requirements.  DSI does not dispute that the 
agency's actual requirements are likely to differ significantly from 
the solicitation labor hour estimates.  To the contrary, DSI clearly 
recognized in its proposal that this was the case, stating that:

        "In fact, in all probability, the actual hours will differ 
        from the estimated level of effort, perhaps significantly.  
        Additionally, the mix of labor categories required for each 
        task also fluctuates, depending upon the nature of the 
        workload."

The record indicates that the requiring activity anticipated, and that 
the agency assumed for purposes of evaluating DSI's discount, that the 
actual requirements would total between 60 and 80 percent of the 
estimated labor hours.  Since DSI's discount generally would not 
become effective for a particular labor category until at least 
approximately 80 percent of the estimated labor hours for that 
category had been ordered, this had the effect of nullifying the 
discount for purposes of the evaluation.  Further, even assuming no 
change in the distribution of hours among the different labor 
categories, DSI's offer would not become low until at least 85 percent 
of the estimated hours were ordered.  Moreover, since the agency (and 
apparently DSI as well) considered it unlikely that its actual 
requirements would in fact conform to the specified labor 
distribution, and DSI's discount did not apply to hours in excess of 
the solicitation estimates, it appears that the crossover point at 
which DSI's offer would become low was likely to be even higher than 
85 percent.
            
Under these circumstances--where the agency had substantial reason to 
believe that its actual needs may deviate significantly during 
performance from the solicitation estimates and DSI's proposal would 
only become low after substantially more than the most likely number 
of labor hours were ordered--NAVAIR properly concluded that there was 
reasonable doubt that the benefit from DSI's discount would be 
sufficient to offset DSI's higher unit prices, and thus result in the 
lowest ultimate cost to the government.  See Outer Limb, Inc., supra. 
     
DSI maintains that NAVAIR was required to advise it of the agency's 
concern with respect to the proposed discount during discussions.  

Agencies are required to conduct meaningful discussions with all 
competitive range offerors, Price Waterhouse, B-254492.2, Feb. 16, 
1994, 94-1 CPD  para.  168, and in order for discussions to be meaningful, 
agencies must generally point out weaknesses, excesses, or 
deficiencies in proposals, unless doing so would result in disclosure 
of one offeror's technical approach to another offeror or technical 
leveling.  See FAR  sec.  15.610; Comarco, Inc., B-258204.6, Oct. 26, 1995, 
96-1 CPD  para.  12; Lone Star Fleischwaren Im-Export GmbH, B-259588.2, May 
25, 1995, 95-1 CPD  para.  263.  Agencies are not required to conduct 
all-encompassing discussions, or to discuss acceptable aspects of a 
proposal merely because they receive lower than the maximum possible 
score, John Brown U.S. Servs., Inc., B-258158 et al., Dec. 21, 1994, 
95-1 CPD  para.  35; they need only reasonably lead offerors into areas of 
their proposals which require amplification or correction.  Medland 
Controls, Inc., B-255204; B-255204.3, Feb. 17, 1994, 94-1 CPD  para.  260; 
Price Waterhouse, supra.

Although the record indicates that the agency's discussions with DSI 
focused on perceived unbalancing in the application of the discount 
(as initially proposed) between the base and option years, it also 
shows that DSI was advised that its pricing of $0 for some labor hours 
was of concern to the agency and that the effect of the discount would 
be evaluated at levels of effort differing from the solicitation 
estimates.  In a letter to the agency contract specialist dated 
September 18, 1995, DSI acknowledged that "[i]n our conversation of 15 
September you indicated that the government might evaluate the bids at 
a number of hours other than the number of hours presented in the 
RFP."  Further, in its September 26 response to DSI's question as to 
the basis for the agency's authority to do this, the agency cited 
language in FAR  sec.  52.215-16 providing for rejection of a 
mathematically unbalanced offer where there is a reasonable doubt that 
the offer would be low.  The agency specifically cautioned that:

        "While the Government will evaluate based on proposed price 
        for total hours, the Government has stated that neither the 
        total quantities of man-hours for individual labor nor the 
        total estimated man-hours are a certainty.  It is difficult to 
        determine how much work will occur under the contract, much 
        less how much for any individual labor category.  Therefore, 
        in evaluating a "discount" based on a specific range of hours 
        being obtained for each labor category, it is necessary to 
        determine if it is reasonable that the discount offered is 
        likely to occur or if it is not."

Thus, in our view, the discussions with the agency clearly placed DSI 
on notice of the agency's concern that the discount could render DSI's 
proposal unbalanced, depending on the actual likely level of effort, 
and of its intention to evaluate the effect of the discount at levels 
of effort differing from the solicitation estimates.[2]

The protest is denied. 

Comptroller General
of the United States

1. Likewise, DSI specifically justified its profit rate on the basis 
"of the uncertainty of the level of effort, skill mix and task 
duration."  

2. DSI also questions the agency's failure to include in the 
solicitation an estimate of the most probable level of effort for use 
in the evaluation.  This allegation is untimely under our Bid Protest 
Regulations.  DSI was on notice not later than the close of 
discussions of the agency's view that the solicitation estimates did 
not necessarily represent the most probable level of effort and of the 
agency's consequent intention to consider the effect of the discount 
at other than the specified levels of effort.  However, DSI did not 
first raise its argument in this regard until more than 1 month later, 
after award.  Such protests must be filed prior to the BAFO closing 
time.  4 C.F.R.  sec.  21.2(a) (1996).