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).