BNUMBER:  B-276162; B-276162.2; B-276162.3 
DATE:  May 2, 1997
TITLE: Matter of:Alliant Techsystems, 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:Alliant Techsystems, Inc.

File:     B-276162; B-276162.2; B-276162.3

Date:May 2, 1997

John S. Pachter, Esq., Jonathan D. Shaffer, Esq., Eun K. (Julie) 
Chung, Esq., and Dorothy E. Terrell, Esq., Smith, Pachter, McWhorter & 
D'Ambrosio, P.L.C., for the protester.
Thomas J. Madden, Esq., Jerome S. Gabig, Jr., Esq., Fernand A. 
Lavallee, Esq., and John J. Pavlick, Jr., Esq., Venable, Baetjer, 
Howard & Civiletti, and Scott W. MacKay, Esq., in-house counsel, for 
Lockheed Martin Corporation, an intervenor.
Gregory H. Petkoff, Esq., and John E. Lariccia, Esq., Department of 
the Air Force, for the agency.
Paul E. Jordan, Esq., and Paul Lieberman, Esq., Office of the General 
Counsel, GAO, participated in the preparation of the decision.

DIGEST

1.  In assessing proposals for multi-year production contract which 
contemplates technology inserts over course of performance, agency 
evaluation of awardee's proposed insert component which is not yet 
developed, including review of proposal, technical briefings, and 
parallel development by other manufacturers, is unobjectionable where 
agency reasonably concludes that component ultimately will be 
successfully produced.  Because agency has right to reject component 
from introduction as technology insert if it does not meet all 
specifications, agency reasonably determined that only potential 
impact of insert component on procurement will be to cost and schedule 
and thus, properly determined to evaluate component under 
affordability evaluation factor.   

2.  In procurement with cost and fixed-price elements, where offerors 
are committed to meet or better proposed system-life average unit 
prices (AUP) or face substantial penalties, agency's affordability 
evaluation is reasonable where it includes appropriate assessment of 
realism, reasonableness, and completeness of proposed costs which 
underlie AUP in accordance with evaluation criteria.

3.  Award decision is unobjectionable where protester's slight 
advantage in "instant" contract cost and lower prices through earlier 
phases of procurement life is outweighed by selected offeror's 
technical advantages and significantly lower proposed prices over life 
of procurement. 

DECISION

Alliant Techsystems, Inc. protests the Department of the Air Force's 
downselection and award of the Wind Corrected Munitions Dispenser 
(WCMD) Pilot Production Option under contract No. F08626-95-C-0106, 
P00010 to Lockheed Martin Corporation.  Alliant contends that the 
agency's technical and cost evaluations were flawed and that the 
source selection authority's best value decision failed to take 
certain risk and cost factors into account.

We deny the protest.

BACKGROUND

The WCMD is a modification kit that replaces the tail sections on a 
portion of current inventory cluster munitions.  The kit will enable 
the tail dispensers which carry the cluster munitions to correct for 
the effects of launch transients, ballistic errors, and unknown winds 
between the release point and the dispenser's functioning point.  
Alliant and Lockheed were each awarded 24-month contracts in January 
1995, to perform engineering and manufacturing development (EMD) of 
the WCMD on a cost-plus-fixed fee basis.  In accordance with the terms 
of these contracts, the Air Force issued a call for 
improvements/request for proposals (CFI/RFP) to each offeror to submit 
updated proposals for the 20-month pilot production phase and optional 
low-rate initial production lots (LRIPs 1 and 2), and prices for three 
full rate production lots (FRP).  The solicitation contemplated award 
of only the pilot production option to one contractor, but reserved 
the right to exercise the options with both EMD contractors, or to 
make no option award at all.  Exercise of the LRIP 1 option was to be 
made not later than 14 months after award of the pilot production 
option and LRIP 2 not later than 14 months after the exercise of LRIP 
1.  Timing of the FRP awards was not included in the CFI/RFP.

Clause H.16 of both EMD contracts sets forth four evaluation areas in 
descending order of importance:  affordability, technical, management, 
and instant contract cost.  General considerations also were to be 
evaluated, but were of lesser importance than the specified criteria.  
Clause H.16 also identified evaluation factors under three of the four 
criteria.  Under affordability, proposals were to be evaluated under 
four factors, in descending order of importance: average unit 
procurement price requirement (AUPPR);[1] manufacturing maturity; 
production risk management; and warranty.  Under the technical area 
there were three factors of equal importance:  system performance; 
system design; and system integration.  Under management there were 
two factors of equal importance: system engineering management and 
cost/schedule control.  With the exception of the AUPPR factor, all 
factors were to be evaluated in three ways: color/adjectival rating; 
proposal risk rating; and performance risk rating.  

The color rating was to depict how well the proposal met the 
evaluation standards and solicitation requirements.  The color and 
adjective ratings used were blue (exceptional), green (acceptable), 
yellow (marginal), and red (unacceptable).  "Proposal risk" was 
defined as an assessment of the risk associated with the offerors' 
proposed approach as it related to accomplishing the requirements of 
this solicitation.  "Performance risk" was defined as an assessment of 
the probability of the offeror's successfully accomplishing the 
proposed effort based on demonstrated present and past performance.  
Performance and proposal risk ratings included high, moderate, and 
low.  

According to clause H.13, the AUPPR is a specified cost in base year 
(BY) 1994 dollars that has been proposed by the contractor.  The AUPPR 
is calculated by taking the total applicable procurement cost of the 
kits and dividing it by 40,000, which represents the total number of 
units to be produced under the program (LRIPs and FRPs combined).  It 
represents a composite of recurring and non-recurring costs that 
include all fully burdened contractor procurement costs incurred in 
the manufacture of a usable end item, the equipment and materials 
required to support it, and initial spares.  The clause provides that 
the proposed AUPPR is a system requirement which the contractor is 
required to meet or better during the life of the program.  Failure to 
meet the AUPPR during performance results in the agency's right to 
impose several possible penalties including competition of production 
lots and requiring provision of a reprocurement data package at no 
cost to the government.  

Each offeror's cost and fee information submitted in support of their 
estimated AUPPRs was evaluated for realism, reasonableness, and 
completeness.  The AUPPR also received an affordability risk rating 
which was given equal consideration with the evaluated cost of the 
AUPPR.  Similarly, the "instant" contract cost (for pilot production 
and the LRIP options) received a performance risk rating to be given 
equal consideration with the evaluated cost of the instant contract. 

Offerors also were required to propose a production price commitment 
agreement (PPCA) to be executed by the awardee which obligates it to 
the proposed AUPPR and places the risk of unreasonable deviation from 
that estimate on the contractor.  The PPCA is in effect for both LRIPs 
1 and 2 and FRPs 1-3.  A similar clause will be negotiated for FRPs 
4-6.  Under the PPCA, for FRPs 1-3, if the contractor submits a 
proposal that exceeds the agreed upon price, the contractor will have 
the opportunity to address the cause of the excessive pricing prior to 
the agency's invoking its rights.  If the agency concludes that it is 
dissatisfied with the contractor's pricing, it has the right to levy 
similar penalties to those addressed in clause H.13.

Both Lockheed and Alliant submitted proposals by the November 1, 1996, 
closing date.  The agency conducted a "fly-off" of the offerors' 
production representative tail kits from November 4 through December 
6.  Both offerors made oral presentations in November.  The agency 
conducted discussions with them in December and completed the 
technical and affordability evaluations in January 1997.  As part of 
its January affordability submittal, Lockheed proposed a technology 
insert to replace the inertial measurement unit (IMU) and related 
components.  The replacement IMU would use micro-machine technology 
resulting in a significantly smaller component set.  The insert was to 
be included in the [deleted] of FRP [deleted] and in all subsequent 
FRPs.  The insert would not change the performance of the WCMD, but 
would result in a significant unit price reduction which was reflected 
in Lockheed's AUPPR. 

The evaluators reviewed this aspect of Lockheed's proposal from a 
technical and cost standpoint.  The proposed IMU is in a developmental 
stage and current versions do not meet the specifications of a 
weapons-grade component.  Based on the evaluators' knowledge of this 
developing technology, including ongoing Air Force research and 
development in the same area, they concluded that the insert would be 
ready at the time proposed by Lockheed or shortly thereafter.  Because 
this technology insert would constitute a "level one change," which 
could not be implemented until after qualification testing and the Air 
Force's determination that the insert met all contract requirements, 
Lockheed would be required, and represented that it would continue, to 
produce the approved (fly-off qualified) version until the insert was 
approved.  As a result, the evaluators concluded that the only 
potential impact of the insert on the program was with regard to AUPPR 
cost risk and took this into account by adjusting Lockheed's AUPPR 
affordability risk rating.  The final evaluation results are as 
follows:

Factors        Lockheed Martin
               Color/Prop Risk/Perf RiskAlliant Techsystems
                                 Color/Prop Risk/Perf Risk

Affordability                    

A.1 AUPPR      $8937
                Moderate-Low     [deleted]
                                 Moderate-Low

A.2 MFG MaturityBlue/ Low/ Low   Blue/ Low/ Low

A.3 Production RiskBlue/ Low/ LowBlue/ Low/ Low

A.4 Warranty   Blue/ Low/ Low    Blue/ Low/ Low

Technical                        

T.1 Sys PerformanceBlue/ Low/ N/ABlue/ Low/ N/A

T.2 Sys Design Blue/ Low/ Low    Blue/ Moderate/ Low

T.3 Sys IntegrityGreen/ Low/ Low Green/ Low/ Low

Management                       

M.1 Sys Eng'g MgtGreen/ Low/ Low Green/ Low/ Low

M.2 Cost/ScheduleGreen/ Low/ Low Green/ Low/ Moderate

Instant Contract Cost$41,995,685 [deleted] 
The evaluators briefed the source selection authority (SSA) on the 
evaluation results.  After obtaining clarification of the 
affordability impact of Lockheed's technology insert, the SSA 
determined that Lockheed's proposal represented the best value to the 
government.  In making this determination, the SSA considered the 
risks to both the Air Force and Lockheed if the technology insert were 
delayed.  For example, if Lockheed could not successfully introduce 
the insert on time, Lockheed would suffer significant losses since the 
approved IMU it would have to continue supplying is more expensive 
than the proposed IMU.  If Lockheed attempted to pass on increased 
costs in the later FRPs, its AUPPR would increase, thereby triggering 
the Air Force's right to penalize Lockheed.  Thus, while there was a 
potential cost risk to the Air Force, the SSA was satisfied that the 
risks to Lockheed provided significant incentives to timely obtain 
approval of and to introduce its proposed insert.  After receiving 
notice of the award and a debriefing, Alliant filed this protest.  The 
agency has stayed performance pending this decision.

Alliant challenges the technical and affordability/cost evaluations of 
Lockheed's proposal, especially with respect to Lockheed's proposed 
technology insert.[2]  Evaluating the relative merits of competing 
proposals is a matter within the discretion of the contracting agency 
since the agency is responsible for defining its needs and the best 
method of accommodating them, and it must bear the burden resulting 
from a defective evaluation.  Advanced Tech. and Research Corp., 
B-257451.2, Dec. 9, 1994, 94-2 CPD  para.  230 at 3.  Consequently, in 
reviewing an evaluation we will not reevaluate proposals but instead 
will examine the agency's evaluation to ensure that it was reasonable 
and consistent with the stated evaluation factors.  Id.  The fact that 
the protester disagrees with the agency's judgment does not render the 
evaluation unreasonable.  As discussed below, we have examined the 
agency's evaluation here and conclude that it was both reasonable and 
consistent with the stated evaluation criteria. 

EVALUATION OF THE TECHNOLOGY INSERT

Alliant contends that the Air Force failed to conduct any meaningful 
evaluation of the technology insert.  Alliant observes that Lockheed's 
proposed IMU and related components are not yet developed to the point 
of meeting the WCMD specifications.  Since the bulk of the 40,000 
units to be produced over the life of the entire program are proposed 
to include the new, as yet undeveloped IMU, Alliant asserts that the 
agency should have evaluated the technology insert under a number of 
factors and rated the proposal's adjectival and risk ratings far less 
favorably.  The Air Force takes the position that its evaluation 
properly accounted for the insert's impact under the affordability and 
technical factors.[3]

The record reflects that the agency conducted a review of the insert 
that was both thorough and appropriate for the proposal.[4]  Here, 
Lockheed proposed a fully functional design for its WCMD which 
performed well in the fly-off evaluation.  It required no major 
changes before the transition to pilot production and LRIP.  In 
accordance with the CFI/RFP instructions, at the time it submitted its 
cost proposal and proposed AUPPR, Lockheed provided a detailed 
description of the new IMU and related components it proposed as a 
technology insert in FRP [deleted].  Lockheed also described the steps 
it was taking to ensure timely development of the IMU, including the 
planned investment of approximately [deleted] million for IMU 
development by Lockheed, [deleted] (its primary IMU subcontractor) and 
[deleted] (its backup IMU subcontractor).  The proposal made clear 
that the new IMU would not affect performance of Lockheed's WCMD, but 
would result in a significant lowering of its AUPPR.

The agency's information on the merits of the technology insert was 
not limited to Lockheed's January 1997 affordability proposal.  From 
the beginning of the WCMD program, the IMU was identified as the prime 
candidate for future cost reduction through technology advancement 
because the IMU represented the largest percentage of system costs.  
IMU technology is the subject of numerous governmental studies and 
technology contracts as well as industry funded efforts.  In view of 
the large numbers of IMUs required for precision guided weapons, it is 
generally accepted in the industry that the future of tactical grade 
IMUs is in micro-machine technology.  Accordingly, the evaluators 
attended IMU symposia and interviewed the leaders in the advanced IMU 
industry.

In October 1996, Lockheed and [deleted] briefed the Air Force 
evaluators, including the technical chief, affordability chief, and 
the A.1 factor captain on a planned micro-machined IMU technology 
insertion, addressing the investment planned, the state of 
development, and the development and production schedule.  In 
December, Lockheed with [deleted] and [deleted] subcontractor briefed 
the technical and affordability chiefs on [deleted] approach to the 
same issues.  The previous September, all the affordability evaluators 
and the technical area chief had conducted site visits to [deleted] to 
observe the production of IMUs and reviewed their production planning.  
Lockheed's proposal provided detailed schedules and milestones that 
confirmed the earlier briefings.  In addition, Alliant's own proposal 
[deleted].[5] 

Lockheed also submitted a time-phased summary of several low cost IMU 
development initiatives being pursued in parallel by a number of 
companies including [deleted].  In addition, after reviewing the 
proposals, the evaluators consulted with the Air Force's Wright 
Laboratory.  Wright had contracted with Hughes to develop a 
micro-machined IMU and expects it to be ready for transition to 
production in 1999, [deleted] Lockheed proposed to furnish the insert.  
Wright reviewed Lockheed's proposal and concluded that there was a low 
risk that the contractor would not meet its proposed schedule.

Since the proposed IMU is in the developmental stage, the evaluators 
could not conduct a detailed evaluation of the item itself.  However, 
the evaluation did not simply rely on Lockheed's promise.  The 
evaluators did extensive research into the area and assembled a 
significant base of information from which to make their 
determination.  When considered together this information provides a 
rational basis for their conclusion that the IMU would be developed to 
meet all requirements.  The only unknown was when this would happen, 
which translated to schedule risk.  Under the evaluation scheme, such 
schedule risk was properly viewed as affecting cost.  That is, since 
Lockheed's lower AUPPR was based on timely insertion of the less 
expensive IMU, any slippage in the schedule could result in increased 
costs to Lockheed which it might attempt to pass on to the agency 
through higher prices for FRPs 4-6.  Accordingly, the evaluators rated 
the risk of insertion on schedule as moderate to moderately high.  

Alliant agrees that it was appropriate to evaluate the insert under 
A.1, but argues that since the insert represents a major change in the 
proposed system, the Air Force should have evaluated it for its impact 
on manufacturing maturity and production risk management under the 
affordability area (factors A.2 and A.3), and for its impact on system 
performance, design, and integration under the technical area (factors 
T.1, T.2, and T.3).  

According to clause H.16, factor A.2 was designed to assess the 
contractor's progress in concurrently developing an affordable design 
and the manufacturing processes required to build the initial units 
during development and future production units.  Included as part of 
the evaluation was an assessment of future manufacturing technology 
insertion.  Factor A.3 was designed to assess the contractor's 
progress in complying with planning to ensure the production phase of 
the program is entered into with low risk.  Factor T.1 focused on how 
well the contractor executed the design, development, build and test 
of the WCMD under development and was to assess the technical approach 
the contractor was pursuing to complete development.  Factor T.2 was 
to evaluate the degree to which the contractor had demonstrated that 
its system design would meet the performance requirements.  The 
maturity of the fly-off hardware and software was to be compared to 
the proposed final production configuration.  Factor T.3 was to assess 
the degree to which the contractor had demonstrated the ability to 
accomplish the technical tasks remaining under the pilot production 
and LRIP.  

After evaluating the technology insert, the evaluators concluded that 
none of the above-listed factors was appropriate for evaluating the 
potential impact of the insert.  For example, impacts to the pilot 
production and LRIP options would be nonexistent since Lockheed did 
not plan the insert until the [deleted] of FRP [deleted].  Thus, the 
evaluators' assessments about Lockheed's existing production design 
remained valid and unchanged.  In addition, Lockheed had proposed, and 
the contract structure mandated, that Lockheed continue to produce its 
approved WCMD until the Air Force approved use of the new IMU in 
production.  Further, apart from the insertion, the remainder of 
Lockheed's WCMD system design would remain the same.  Since the Air 
Force would continue to receive a WCMD which met or exceeded all 
requirements, until such time as the Air Force alone determined that 
the new IMU and related components met or exceeded all requirements, 
any potential negative impact or risk could be eliminated by the 
agency's preventing introduction of the new IMU.  Therefore, the 
evaluators determined that there would be no impact on manufacturing 
maturity, production risk management, or system performance, design 
and integration.[6]  Instead, they concluded that the only appropriate 
factor under which to assess the impact of the insert was 
affordability factor A.1 concerning schedule and cost risk.  Based 
upon all the information before them indicating that the IMU would be 
fully developed within the next several years [deleted], we believe 
the evaluators' conclusion was reasonable.

THE AFFORDABILITY EVALUATION

In the "affordability" area, specifically factor A.1, the evaluators 
were concerned with determining the realism, reasonableness, and 
completeness of program-life costs as expressed in the AUPPR.[7]  As 
described above, the AUPPR represented the unit cost, in BY 1994 
dollars, of each of the 40,000 units to be produced throughout the 
WCMD program, that is, the end of FRP 6.  At the time of contract 
award, prices for units to be produced under FRPs 4-6, representing 
28,581 or more than 50 percent of the total units, were unknown 
because they were to be negotiated at the time the winning contractor 
submitted a proposal for FRP 3.  Since the proposed AUPPR basis 
included non-binding estimates for FRPs 4-6, there was the potential 
for an upward change in the AUPPR.  However, because meeting or 
bettering the proposed AUPPR was a system requirement, the AUPPR 
combined with stated penalties for not meeting it had the effect of 
acting as a cap on future costs.

Alliant contends that the Air Force's affordability evaluation was 
flawed because the agency failed to properly evaluate the realism, 
reasonableness, and completeness of Lockheed's proposed AUPPR.  In 
Alliant's view, the agency merely accepted the proposed AUPPR without 
any meaningful evaluation.  Had the Air Force properly evaluated the 
proposed AUPPR it would have found it unrealistic and deserving of a 
less favorable risk rating.  Alliant's arguments demonstrate a basic 
misunderstanding of what was required in this evaluation.

The affordability evaluation conducted by the agency here was 
different from those done with respect to a pure cost reimbursement 
contract.  Typically, in a cost reimbursement procurement, the 
proposed costs are not binding on the offeror; the agency is required 
to pay a contractor's actual and allowable costs.  Prospect Assocs. 
Ltd., B-249047, Oct. 20, 1992, 92-2 CPD  para.  258 at 7.  Thus, an agency 
must determine the likely cost it will be required to pay and often 
will adjust upward the proposed cost to reflect the anticipated cost.  
While in the EMD procurement the solicitation evaluation scheme 
provided for calculation of a most probable AUPPR, the agency 
specifically modified Alliant's and Lockheed's contracts to eliminate 
this aspect of the evaluation under the CFI/RFP at issue here so that 
the contractors were not required to submit cost information at the 
same level of detail as required in a cost reimbursement contract.  
Rather, the cost information to be provided was to include contractor 
assumptions, ground rules, methodology, and supporting data, 
identification of included and excluded elements of cost, 
identification of recurring and non-recurring costs, and 
identification of costs using the work breakdown structure (WBS) 
identified in the CFI/RFP.  The agency was required to accept the 
AUPPR proposed by each contractor, evaluating it only to determine 
whether that figure was realistic, reasonable, and complete.

With regard to realism, the evaluators were to assess the 
compatibility of the proposed cost with the scope of the estimates and 
the schedule durations.  To this end, they determined whether the 
materials and efforts were consistent with the directed program, 
whether the costs were consistent with the schedule proposed, and 
whether the estimates were based on the quantities provided by the 
CFI/RFP.  They were to assess reasonableness based upon the 
acceptability of the methodology and logic used in developing the cost 
estimates.  In this regard, they evaluated the cost estimates for 
organization and logical development and determined whether the 
contractor's ground rules and assumptions were reasonable; the 
contractor used appropriate historical data, inflation rates, and 
estimating methodology; and the contractor explained any unusual 
approach.  With regard to completeness, they were to assess the 
responsiveness of the offeror in ensuring that all major milestones 
and activities were estimated and that the documentation provided 
traceability of costs.  Here, the evaluators ensured that all 
pertinent costs were included, were shown in appropriate categories, 
were identified per WBS task and level, and were documented in 
sufficient detail to allow cost estimate replication.  Most of 
Alliant's criticisms of these evaluations concern the failure to 
compare Lockheed's costs with its proposed prices.  Since the agency 
is not bound to reimburse the contractors' actual costs, these 
criticisms are without merit.  The agency's evaluation followed the 
stated criteria and resulted in a reasonable conclusion that the 
information supporting both contractors' AUPPRs was realistic, 
reasonable, and complete.  From our review of the agency's evaluation, 
we find nothing objectionable.[8]  

Alliant specifically contends that the evaluators' assessments are 
suspect because they do not specifically account for the "precipitous" 
drop in Lockheed's price between FRP 3 and FRP 4.  In this regard, 
Alliant notes that even though Lockheed proposed to make the 
technology insert in FRP [deleted], its costs and prices are not 
reduced until FRP 4.  Alliant also argues that Lockheed's costs appear 
to be greater than can be accounted for in the pricing estimates.  
From these and other observations, Alliant concludes that Lockheed has 
"gamed" its estimates and the evaluators failed to recognize it.  

The agency explains that it was well aware of the drop in price and 
when it occurred.  The agency found the drop to be attributable to 
several factors including Lockheed's [deleted] pricing strategy in 
FRPs 1-3.  [deleted].  The agency also found that Lockheed anticipated 
more savings between FRPs 3 and 4 based on redesign of components 
related to the IMU technology insert.  Further, in conducting these 
evaluations, the evaluators recognized that the contractors would not 
necessarily recoup all estimated costs since the PPCA and AUPPR served 
to restrict what the agency would be required to pay.  We believe 
these are reasonable conclusions.  In any event, since this is not a 
cost-reimbursement contract, the fact that Lockheed's costs may exceed 
its proposed prices does not necessarily make the AUPPR suspect as 
there is nothing inherently objectionable about a below-cost offer.  
Oshkosh Truck Corp., B-252708.2, Aug. 24, 1993, 93-2 CPD  para.  115 at 6.  

With regard to affordability risk, the evaluators assessed the 
contractors' ability to achieve the proposed AUPPR based on an 
evaluation of three risk drivers: product (40 percent), process (30 
percent), and cost methodology (30 percent).  The WCMD was divided 
into seven WBS areas, each with a predetermined weight (e.g., IMU 
30-percent, fin mechanism 10 percent).  Each WBS area was evaluated 
under the product, process, and methodology drivers based on 
uncertainty factors ranging from low (1 point) to high (10 points).  
Each WBS area received three scores: optimistic, pessimistic, and most 
probable, under each of the three drivers.  These scores were 
multiplied by their weights and combined to calculate a single set of 
optimistic, pessimistic, and most probable scores under each of the 
three risk drivers.  Using the risk driver weights, the three sets 
were then combined to calculate a single optimistic, pessimistic, and 
most probable score for each contractor.  These were then plotted on a 
triangular shaped graph, on which a 90 percent confidence index was 
plotted to derive a single risk score.[9]  The evaluators calculated a 
risk score of [deleted] for Alliant and [deleted] for Lockheed.  Both 
scores equate to a "moderately low" risk rating.  

Alliant argues that Lockheed's proposal should have received a less 
favorable affordability risk rating given the risk involved in the 
technology insert.  For example, Alliant contends that Lockheed's 
product risk rating should be high because it involves "significant 
design changes proposed, retesting and validation required."  Similar 
criteria are present under the other risk drivers of process and cost 
methodology.

Contrary to Alliant's contentions, the risk evaluation did account for 
the higher risk attributable to the technology insert.  However, the 
evaluators concluded that the insert was better assessed as a "major 
modification to fly-off design, significant testing required" and 
rated it as moderately high for the most probable and pessimistic 
scores.  While the IMU is an important component, it represents only 
30 percent of the entire WCMD proposed by Lockheed.  Accordingly, when 
the risk evaluation had calculated the appropriate scores based on WBS 
weights, the higher risk of the technology insert was mitigated by the 
lower risk associated with the balance of the proposed WCMD.  
Alliant's disagreement with the evaluators' judgment does not render 
the evaluation unreasonable. Medland Controls, Inc., B-255204; 
B-255204.3, Feb. 17, 1994, 94-1 CPD  para.  260 at 5.

THE AWARD DETERMINATION

In a negotiated procurement, the government is not required to make 
award to the lowest-cost, technically acceptable offeror unless the 
solicitation specifies that cost or price will be a determinative 
factor for award.  General Servs. Eng'g, Inc., B-245458, Jan. 9, 1992, 
92-1 CPD  para.  44 at 9.  The CFI/RFP, while making cost an important 
consideration, advised the contractors that award would not 
necessarily be made to the lowest offeror.  Agency officials have 
broad discretion in determining the manner and extent to which they 
will make use of technical and cost evaluation results.  
Cost/technical tradeoffs may be made; the extent to which one may be 
sacrificed for the other is governed by the test of rationality and 
consistency with the established evaluation factors.  Id.

Here, the SSA reviewed the evaluations and noted that both proposals 
were more than adequate when measured against the evaluation criteria.  
In this regard, he noted their generally comparable proposal ratings 
in all areas.  However, he specifically noted that Lockheed's AUPPR 
was [deleted] percent ([deleted]/unit) lower than Alliant's AUPPR and 
represented a significant reduction.  While both performed well in the 
fly-off, he noted that Lockheed's fly-off configuration hardware and 
software were evaluated as very mature with few changes needed for 
production and that Alliant's tail kit would require [deleted] which 
could pose a schedule problem.  In the management area, he noted that 
both were rated acceptable, but that Lockheed's performance in cost 
and schedule control during the EMD portion was better than Alliant's.  
While Alliant's proposed instant contract cost was [deleted] percent 
lower than Lockheed's, the SSA found that Lockheed's advantage in 
AUPPR, more mature system design, and better track record in cost and 
schedule control offset this advantage.

Alliant contends that the SSA's award determination was flawed because 
he did not properly consider that Lockheed was not committed to the 
prices in FRPs 4-6; that Lockheed's price, even absent schedule slips 
or cost growth, was significantly higher than Alliant's price until 
sometime in FRP [deleted]; and that there were significant risks 
attributable to the technology insert.  Based on our review of the 
entire record, including the SSA's source selection statement and 
supplemental declaration, we find the SSA's determination was 
reasonable and reflected an appropriate consideration of all these 
matters.

While the SSA's selection statement and supplemental declaration do 
not specifically mention the lack of price commitment or the higher 
initial cost of an award to Lockheed, it is plain from the record that 
the SSA was aware of and considered these matters before making his 
award determination.  For example, the SSA was aware of the provisions 
of the Lockheed and Alliant contracts and the terms of the CFI/RFP, 
none of which required a unit price commitment for FRP's 
4-6.  These prices were to be negotiated at the time the chosen 
contractor submitted prices for FRP 3.  The "commitment" to pricing in 
these three contracts would be supplied by the system requirement that 
the contractor meet or better the proposed AUPPR which would 
necessarily be based in part on these prices.   With regard to the 
higher initial cost of Lockheed's proposal, the SSA's briefing slides, 
which were based on the contractors' proposals, clearly show that the 
SSA was apprised that selection of Lockheed committed the Air Force to 
spend approximately [deleted] more by the end of FRP 3 than it would 
spend if award were made to Alliant.  Implicit in the slides is the 
fact that by the end of FRP 6, if Lockheed met its AUPPR, the Air 
Force would save more than [deleted] by awarding to Lockheed.  While 
not specifically addressed in the selection statement, it appears that 
the SSA considered these matters since his award determination was 
based on an integrated assessment of the contractors' proposals. 

While the difference in cost at the end of FRP 3 is substantial, the 
evaluation was not designed or intended to consider interim cost 
differentials.  Rather, the cost evaluation considered the instant 
contract cost, where the difference between the proposals was 
[deleted], and the AUPPR which encompassed the entire production 
program.  Where, as here, a cost evaluation encompasses both base and 
option work, the fact that effective cost savings are not available 
until near the end of the option period does not invalidate the 
agency's conclusion that an offeror has proposed the lowest overall 
evaluated costs.  Halifax Technical Servs., Inc., B-246236.6 et al., 
Jan. 24, 1994, 94-1 CPD  para.  30 at 10-11. 

With regard to the risk associated with the technology insert, the 
SSA's supplemental declaration provides additional insight to his 
reasoning.  He states that he was familiar with the development of IMU 
technology, including development efforts by contractors in other 
programs with which he dealt.  He further states that he was fully 
briefed on the insert including the fact that it was only in the 
developmental stage, could not presently meet WCMD specification, and 
would not improve performance of the WCMD.  He also considered the 
[deleted] investment Lockheed intended to make in development of the 
insert, but recognized that Lockheed was not contractually bound to 
invest any money.  He specifically challenged the evaluators' 
determination to evaluate the insert under affordability factor A.1, 
but not under the other affordability and technical factors.  Based 
upon their rationale concerning the Air Force's right to require the 
fly-off design until the insert was approved, he agreed that there was 
no threat to manufacturing maturity or other technical aspects and 
agreed that the risk of the insert was properly assessed as pertaining 
to AUPPR cost.  In this regard, he had the evaluators calculate 
potential changes in Lockheed's AUPPR based on a 1- or 2-year schedule 
slip, and if the insert were never approved.  These calculations show 
that a 1-year slip could increase Lockheed's AUPPR, but would still 
result in cost savings to the Air Force. 

Notwithstanding the potential risks to the government, the SSA was 
convinced that Lockheed represented the best value.  This conviction 
was based in part on the significant risk he saw to Lockheed if it 
failed to make the insert on schedule in order to meet its AUPPR.  In 
this regard, he noted that, as in other Air Force programs, failure to 
meet the AUPPR could result in the levy of substantial contractual 
penalties against Lockheed.  He also noted that failure on Lockheed's 
part could result in poor past performance ratings which would affect 
future contract opportunities with the government.   The SSA also was 
aware that Lockheed's profit depended on introduction of the insert.  
The SSA reasoned that these provided significant incentives to 
Lockheed to timely complete development and qualification of the 
insert in order to meet its AUPPR. 

In view of the risks to Lockheed and the Air Force's ability to 
control the introduction of the insert and schedule of the FRPs, we 
believe the SSA's reasoning was sound.  The contract awarded to 
Lockheed is only for pilot production and LRIPs 1 and 2.  Both LRIPs 
are options which do not have to be exercised and the Air Force has no 
contractual commitment to award any of the FRP contracts.  Thus, it 
can stop the program, or postpone full production at the end of pilot 
production, or either of the LRIPs.  If it were to stop at the end of 
LRIP 2, the agency would have invested only [deleted] more by awarding 
to Lockheed, only [deleted] percent of the cost associated with 
Alliant's proposal.  

Clause H.24 of Lockheed's contract sets forth the PPCA unit prices for 
FRPs 1-3.  If the Air Force proceeds, it will obtain a proposal from 
Lockheed for each FRP it decides to award.  If Lockheed proposes 
prices which exceed the PPCA, without an acceptable explanation, the 
agency may take any or all of the following steps: compete the 
production lots; give the remaining production to the competing EMD 
contractor (Alliant); require Lockheed to deliver a complete technical 
data package suitable for reprocurement, at no extra cost to the 
government; and require Lockheed to develop and qualify a second 
source contractor for production of the WCMD at no additional cost to 
the government, paying up to $5 million in liquidated damages if it 
fails to timely provide a qualified second source.  Lockheed plans to 
make the technology insert, if approved, during the [deleted] of FRP 
[deleted].  If Lockheed is unsuccessful or the schedule appears to be 
slipping, the agency will have sufficient time to take action to 
protect itself before spending significantly more money.  For example, 
Lockheed's contract incorporates by reference FAR  sec.  52.249-2 and 
52.249-6 which allow termination for convenience of both fixed-price 
and cost aspects of the contract.  If Lockheed's schedule for the 
insert should slip, it would still be bound to produce its approved 
design at the prices proposed for FRPs 1-3.  Any failure to meet the 
delivery schedule could result in the imposition of default remedies 
including termination.[10]  Should any slip be significant enough to 
affect FRPs 4-6, the agency will have sufficient time to avoid a 
significant investment.  At the time Lockheed submits a proposal for 
FRP 3, it must submit a proposal for FRPs 4-6.  If these submitted 
prices are too high, the agency will not be required to award a 
contract for FRP 3 or FRPs 4-6.[11]

While Lockheed is not bound to propose particular prices for FRPs 4-6, 
the AUPPR requirement effectively commits it to propose appropriately 
low prices or face other penalties from the Air Force.  Clause H.13 
provides that failure to meet or better the proposed AUPPR would 
result in several possibilities: competition of production lots, 
giving total/remaining production to another contractor, requiring the 
contractor to provide a tailored reprocurement data package at no cost 
to the government.  Thus, if Lockheed's insert schedule slipped, it 
would be faced with either proposing all remaining units at prices 
consistent with the AUPPR and absorbing the losses or attempting to 
convince the agency to allow Lockheed to exceed the AUPPR.  Since 
Lockheed's original AUPPR was based on the technology insert, 
notwithstanding various schedule risks, any attempt to increase the 
AUPPR due to schedule slippage could reasonably be rejected by the Air 
Force.  Accordingly, these penalties provide significant incentives to 
meet the schedule or absorb any losses in order to avoid them.  
Moreover, the fact that an offeror may have a "loophole" allowing it 
to exceed a cost cap does not render an agency's evaluation 
unreasonable, where, as here, the agency has retained adequate 
controls over the "loophole" to prevent increased costs.  Vitro Corp., 
B-247734.3, Sept. 24, 1992, 92-2 CPD  para.  202 at 8-9.  Under these 
circumstances we conclude that the SSA's determination was reasonably 
based on a thorough consideration of the appropriate risks attendant 
to a Lockheed award. 

The protest is denied.

Comptroller General
of the United States

1. As part of this evaluation area, the solicitation also called for 
an evaluation of the average field installation unit price.  Since the 
protest does not specifically challenge the evaluation of this figure, 
references to this evaluation will only concern the AUPPR.

2. The protester submitted a number of arguments in support of these 
and other protest grounds; the agency responded to each argument, 
justifying its actions.  We have reviewed the entire record, 
considered all of the arguments, and find no basis for sustaining the 
protest.  This decision will address only the more significant 
arguments.

3. The Air Force argues in part that it was not required to evaluate 
the insert under factors A.2, A.3, T.1, T.2, and T.3 because these 
aspects of the evaluation concerned the instant solicitation only.  
Since the insert was not to be made until after completion of the 
pilot production and LRIP options, the evaluation should properly only 
reflect the system design proposed for those options.  While the Air 
Force is correct that some factors concern only pilot production and 
the LRIPs, we need not resolve this dispute because, from our review 
of the record, it is clear that the agency evaluated all technical and 
affordability concerns with the insert, but reasonably determined that 
the only impact was to the AUPPR affordability risk factor. 

4. Alliant argues that the lack of contemporaneous documentation of 
the agency's evaluation calls into question whether the agency 
adequately evaluated the insert.  An agency's evaluation must be 
sufficiently documented to allow review of the merits of a protest.  
KMS Fusion, Inc., B-242529, May 8, 1991, 91-1 CPD  para.  447 at 7.  In the 
absence of documentation, an agency runs the risk that the inadequate 
supporting rationale in the record for the agency's selection decision 
does not provide a reasonable basis for the decision.  Engineering and 
Computation, Inc., B-261658, Oct. 16, 1995, 95-2 CPD  para.  176 at 3.  
However, in making this determination, we do not limit our review to 
contemporaneous evidence, but consider all the information provided, 
including the parties' arguments and explanations.  KMS Fusion, Inc., 
supra.  While Alliant is correct that we generally accord greater 
weight to contemporaneous materials, this does not mean that we will 
ignore post hoc materials simply because they were not produced at the 
time of the evaluation.  This is especially so, where, as here, the 
post hoc materials do not conflict with contemporaneous documents.

5. The agency considered this proposal, but noted that Alliant had 
[deleted].

6. Alliant speculates that Lockheed will be unable to maintain a dual 
production plan while awaiting qualification of its new IMU.  
[deleted].  The Air Force's acceptance of this plan represents an 
affirmative determination of Lockheed's responsibility.  Alliant's 
speculation provides no basis for us to disturb this determination.  
See King-Fisher Co., B-236687.2, Feb. 12, 1990, 90-1 CPD  para.  177 at 2.

7. In addition to the affordability evaluation, the agency also 
conducted an evaluation of the "instant contract cost" for the pilot 
production (cost reimbursement) and LRIP (fixed price) aspects of the 
procurement.  These costs and prices were evaluated to determine if 
they were realistic for the work to be performed, reflected a clear 
understanding of the requirements, and were consistent with the 
elements of the proposal.  Alliant has not challenged this aspect of 
the cost evaluation.

8. To accomplish their assessments of realism, reasonableness, and 
completeness, the evaluators used a checklist as a guide.  Alliant 
argues that the agency's checklist did not reflect a thorough 
evaluation.  However, the agency explains that the checklist was 
simply a guide for areas to be reviewed, and was not intended to 
reflect the full extent of the evaluation. 

9. Alliant has challenged this methodology, arguing first that the 
agency should have used the "convolution method."  However, after the 
agency pointed out that it had briefed both contractors on the 
triangular method to be used, Alliant argued that the final score was 
improperly calculated because the confidence index was biased toward 
the pessimistic score regardless of the most probable score. While the 
agency used a 90-percent confidence index to arrive at the final risk 
score, Alliant argues that a 50-percent index would be more accurate 
because it is closer to the most probable point.  At the most probable 
point, Alliant's score is [deleted], while Lockheed's is [deleted], a 
difference of more than [deleted].  In Alliant's view, this should 
have resulted in its receiving a "low" risk score, while Lockheed 
would have received the less favorable "moderately low."  We have had 
the agency's and protester's scores reviewed by a statistician within 
our Office.  Under his analysis, Alliant is correct that the Air 
Force's scores were not accurate due to a methodological error in 
plotting the 90-percent confidence index.  However, when correctly 
plotted, both offerors continue to have comparable scores.  At the 
50-percent point, Alliant's score should be [deleted] and Lockheed's 
should be [deleted].  At the 90-percent point, Alliant's score should 
be [deleted] and Lockheed's should be [deleted].  Since the Air 
Force's scoring methodology rounds scores to the nearest whole number, 
all four scores would be rounded to a three or four.  Each number 
represents a "moderately low" risk score since scores between three 
and five were defined as "moderately low."  Since there would be no 
change in the contractors' risk ratings, there was no prejudice to 
Alliant from the Air Force's plotting error.   

10. Alliant notes that clause H.24 limits the agency's default remedy.  
This is only partially true.  If the default were based on Lockheed's 
failure to meet its PPCA prices, the above stated remedies would be 
used in lieu of normal default remedies.  However, clause H.24 
provides that for other defaults, Federal Acquisition Regulation (FAR)  sec.  
52.249-8 is fully effective. 

11. Alliant argues that clause H.24 would require the agency to award 
the FRP contract so long as Lockheed proposed unit prices consistent 
with the PPCA.  While the clause does say that each production lot 
proposal which is equal to or less than the respective price in the 
PPCA schedule "will be awarded to the contractor," Alliant ignores the 
balance of the statement "provided the government's price analysis 
determines the proposed price to be fair and reasonable."  If the 
agency found the FRP prices unreasonable or unfair, it would not be 
required to award a contract to Lockheed.