BNUMBER:  B-276300 
DATE:  June 3, 1997
TITLE: DGS Contracting Services, Inc., B-276300, June 3, 1997
**********************************************************************

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:DGS Contracting Services, Inc.

File:     B-276300

Date:June 3, 1997

Richard D. Lieberman, Esq., and J. Randolph MacPherson, Esq., Sullivan 
& Worcester, for the protester.
James E. Stancil for Bach Security Services, Inc., an intervenor.
Diane D. Hayden, Esq., and Howard B. Rein, Esq., Department of the 
Navy; and Audrey H. Liebross, Esq., Small Business Administration, for 
the agencies.
John Van Schaik, Esq., and Michael R. Golden, Esq., Office of the 
General Counsel, GAO, participated in the preparation of the decision.

DIGEST

1.  Based on consideration of government estimate, prices submitted by 
the protester, and prices on another similar contract, agency 
reasonably determined that the price of a modification to a contract 
under the 8(a) program represented a fair market price.

2.  Protest that actions of contracting agency in offering contract 
work to the Small Business Administration (SBA) for the 8(a) program 
violated the "offering letter" rule is denied where SBA officials were 
aware of protester's incumbency and where SBA assumed, in any event, 
that incumbent contractor would prefer to continue performance.

3.  Protest that decision of the Small Business Administration (SBA) 
to accept contract work into the 8(a) program violated the "adverse 
impact" rule is denied where applicable regulations call for 
presumption of adverse impact on a small business if work at issue 
represents 25 percent or more of small business's annual gross sales, 
but SBA reasonably relied on value of the work in the 3-month contract 
work, rather than taking "annualized-value" approach advocated by 
protester.

DECISION

DGS Contracting Services, Inc. protests the modification of the 
contract of Bach Security Services, Inc., contract No. 
N62472-93-C-4705, awarded by the Small Business Administration (SBA) 
for security guard services for the Navy.  

We deny the protest.

In January 1994, the Navy awarded a contract to DGS for guard services 
for the Naval Weapons Station Earle, Colts Neck, New Jersey.  That 
contract was for 1 year with 4 option years.  During the second option 
year, the scope of the contract was reduced so that the amount of work 
required in the third option year was approximately 27 percent less 
than had been anticipated.  Due to the reduced scope of work, instead 
of exercising the option for the third year, the Navy sought only a 
3-month extension of DGS's contract.  DGS informed the Navy that it 
was unable to perform the contract at its existing prices but would 
agree to an extension of the contract for 3 months for an additional 
$10,000 in order to cover increased general and administrative 
expenses resulting from the reduction of the scope of work.  No 
agreement was reached.

DGS's contract expired on February 1, 1997.  Military personnel 
performed the guard services from February 1 until February 10.  The 
Navy reports that it attempted in late January to negotiate a 
modification to an existing contract with a large business to provide 
guards at Earle, but failed.  In addition, the Navy contacted the SBA 
several times in late January to request a modification of the Bach 
contract; that contract had been awarded by SBA under the 8(a) 
program.[1]  The SBA agreed and the modification was issued to Bach on 
January 31.  

DGS first argues that the price of the modification was unreasonable, 
particularly since DGS was willing to perform the work for more than 
$100,000 less than Bach.  Specifically, DGS notes that the 
modification issued to Bach was priced at $644,280.23, while DGS 
submitted two written offers to perform the 3-month extension with 
only a $10,000 increase in its price, for a total of $544,002.  
According to DGS, since its price was 16 percent less, the Bach price 
was unreasonable.  

DGS notes that a Navy contract specialist prepared a price 
reasonableness memorandum that stated that the prices obtained on the 
modification were reasonable based in part on a $2 per hour wage 
increase that would apply to DGS's performance of the work.  DGS 
states that no such increase is called for either by the applicable 
Service Contract Act wage determination or by the applicable 
collective bargaining agreement.  DGS argues that the $2 per hour wage 
increase credited to DGS's price led the Navy to erroneously believe 
DGS's price to be $590,002, instead of $544,002, and that the use of 
the $2 per hour price increase in the contract specialist's memo 
demonstrates bad faith and that the Navy's price reasonableness 
determination was arbitrary and capricious.  

An agency may not award an 8(a) contract if the price of the contract 
would result in a cost to the government which exceeds a fair market 
price (FMP).  Federal Acquisition Regulation (FAR)  sec.  19.806(b).  FMP 
is defined under FAR  sec.  19.001 as "a price based on reasonable costs 
under normal competitive conditions and not on lowest possible cost."  
The procedures for estimating the FMP in 8(a) procurements are set 
forth in 15 U.S.C.  sec.  637(a)(3)(B) and FAR  sec.  19.807.  These provisions 
require agencies to derive an FMP from a price or cost analysis that 
may take into account commercial prices for similar services, 
available in-house cost estimates, cost or pricing data submitted by 
SBA, and information obtained from any other government agency.  Under 
FAR  sec.  15.805-2, "Price Analysis," the agency also may use one or more 
of several listed price analysis methods, including comparing the 
prices received in response to a solicitation and comparison of the 
prices received with a government estimate.  The contracting officer 
has discretion in determining price reasonableness, General Metals, 
Inc., B-248446.3, Oct. 20, 1992, 92-2 CPD  para.  256 at 2, and we will not 
question an agency's FMP determination unless it is not reasonably 
based or there is a showing of fraud or bad faith on the part of 
agency officials.  Government Contracting Resources, B-243915, Aug. 
15, 1991, 91-2 CPD
 para.  153 at 4; Valley Constr. Co., B-247461.2, Aug. 6, 1992, 92-2 CPD
 para.  79 at 2.  

The Navy's determination was based on the contracting officer's 
consideration of a government estimate of $[deleted] for the work, 
DGS's price, and the amount being paid to Bach under a similar 
contract ($644,280).  On that basis, as she explains in a declaration 
submitted in response to the protest, the contracting officer 
determined that Bach's price for the modification was fair and 
reasonable.  The Navy concedes that the $2 per hour wage increase 
mentioned in the contract specialist's memorandum "may have been 
mistakenly considered."  Nonetheless, the agency argues that whether 
DGS's price was $541,002 or $590,000--an 8-percent difference or a 
16-percent difference between DGS's price and Bach's price--Bach's 
price still was reasonable.  

The contract specialist's memorandum apparently was in error 
concerning the      $2 per hour increase.  Although DGS argues that 
the determination was made in bad faith, government officials are 
presumed to act in good faith and we will not attribute unfair or 
prejudicial motives to procurement officials on the basis of inference 
or supposition.  Grace Indus., Inc., B-261020, July 10, 1995, 95-2 CPD  para.  
9 at 3.  In this case, although the Navy offers no defense of the 
contract specialist's reliance on the $2 per hour increase, the record 
includes no evidence that the contract specialist deliberately 
fabricated an erroneous wage increase in order to injure DGS, and we 
will not assume that she did so.   

Moreover, in her declaration, the contracting officer--the agency 
official responsible for the determination of an FMP--did not 
expressly rely on the contract specialist's memo.  Rather, the 
contracting officer stated that she reviewed the prices submitted by 
DGS, in addition to the government estimate and Bach's price under a 
similar contract.  Under the circumstances it is not clear that the $2 
per hour increase had an impact on the contracting officer's 
determination.  
     
Finally, although DGS argues that the determination was per se 
unreasonable simply because Bach's price exceeded DGS's by 16 percent, 
we do not agree.  Such a presumption--based on a particular 
percentage, whether 16 percent or some other percentage--would ignore 
the discretion given to agencies to determine price reasonableness.  
General Metals, Inc., supra.  In any event, we conclude that the 
record includes reasonable support for the determination.  Although 
Bach's price exceeded DGS's price by 16 percent, it exceeded the 
government's estimate by less than 2 percent.  In addition, as Bach 
points out, it was asked to provide these services for only a short 
period of time without the benefit of option years--which under most 
contracts would allow a firm to recover its costs for equipment and 
startup.  In addition to the short timeframe, Bach was asked to 
provide the guard services on an emergency basis.  Both of these 
circumstances in our view would result in a higher price than would be 
available under normal circumstances.  Accordingly, we have no basis 
to conclude that the FMP determination was unreasonable.

DGS also argues that the Navy and the SBA violated regulations 
governing the 8(a) program.  Specifically, DGS argues that the 
agencies failed to comply with the "offering letter" and "adverse 
impact" rules.  The offering letter rule states that "[w]hen a 
requirement is offered to the 8(a) program, the offering letter or 
notification from the procuring activity shall contain [seventeen 
items of] information," including a description of the work to be 
performed or items to be delivered and a copy of the statement of 
work; the estimated period of performance; the anticipated dollar 
value of the requirement; the acquisition history of the requirement; 
the names and addresses of any small business contractors which have 
performed the requirement during the previous 24 months; any other 
information that the procuring agency deems relevant or SBA requests.  
13 C.F.R.    sec.  124.308(c).

Under the adverse impact rule set forth at 13 C.F.R.  sec.  124.309(c), the 
SBA will not accept for 8(a) award proposed procurements not 
previously in the 8(a) program if, among other circumstances,  

     "SBA has made a written determination that acceptance of the 
     procurement for 8(a) award would have an adverse impact on other 
     small business programs or on an individual small business, 
     whether or not the affected small business is in the 8(a) 
     program.  The adverse impact concept is designed to protect small 
     business concerns which are performing Government contracts 
     awarded outside the 8(a) program."

Under 13 C.F.R.  sec.  124.309(c), in determining whether or not adverse 
impact exists, SBA is to consider "all relevant factors" and 

     "SBA presumes adverse impact to exist when a small business 
     concern has performed a specific requirement for at least 24 
     months, it is currently performing the requirement or finished 
     such performance within 30 days of the procuring agency's offer 
     of the requirement for the 8(a) program, and the estimated dollar 
     value of the offered 8(a) award is 25 percent or more of its most 
     recent annual gross sales (including those of its affiliates)." 
     
In response to the Navy's request, on January 31, the SBA modified 
Bach's contract to provide guard services at Earle for 3 months, from 
February 10 through May 8.  Subsequently, by letter dated February 27, 
the Navy offered the Earle requirement to the 8(a) program for 1 year, 
starting May 8.  The Navy nominated Bach to perform the work, stated 
that the estimated dollar value of the requirement was $[deleted], and 
requested that an adverse impact study be performed concerning DGS.  
By letter of March 5, the SBA rejected the offering as not suitable 
for the 8(a) program.  The letter stated that the 3-month modification 
was executed as a bridge contract in order to enable the Navy to 
compete the work as a small business set-aside and that since the work 
had previously been awarded to DGS using small business set-aside 
procedures, using the 8(a) procedures at this time was not 
appropriate.  

On March 21, the Navy contracting officer wrote the SBA to request 
reconsideration of the rejection of the requirement for the 8(a) 
program.  In that letter, the Navy argued that a series of Earle small 
business set-aside contracts had experienced serious problems for a 
number of years and, in particular, that DGS had performed 
inadequately.  SBA again rejected the request.  

By letter dated April 9, for a third time the Navy asked SBA to accept 
the requirement into the 8(a) program.  In that letter, the Navy 
argued that reductions in the scope of work and a change from armed to 
unarmed guards had resulted in a "new" requirement.[2]  By letter of 
May 9, the SBA informed the Navy that the SBA had agreed to a 
month-to-month extension of the modification "to permit [the Navy] 
time to issue a solicitation to procure their needed security 
services."  That letter stated:

     "Thirty day extensions will only be granted if sufficient effort, 
     in SBA's opinion, is taken by [the Navy] to (1) issue a 
     solicitation, (2) evaluate the solicitation and (3) make an 
     award.  A progress report must be submitted to SBA with each 
     extension request.  These extensions are not to be construed as 
     acceptance of this requirement into the 8(a) Program.  SBA 
     anticipates that your award of this requirement will occur within 
     90 to 180 days."

We will sustain a protest where an agency letter offering a 
requirement into the   8(a) program fails to comply with regulatory 
requirements to provide complete and accurate information.  Comint 
Sys. Corp., B-274853; B-274853.2, Jan. 8, 1997, 97-1 CPD  para.  14 at 3-5; 
Korean Maintenance Co., B-243957, Sept. 16, 1991, 91-2 CPD  para.  246 at 
5-6.  Here, although DGS argues that the Navy violated the offering 
letter rule, the only informational deficiency alleged by DGS was the 
Navy's failure to advise the SBA that DGS had submitted two written 
offers to perform the work.  According to DGS, these offers were an 
essential part of the acquisition history and should have been 
furnished to the SBA.

It is not clear whether the SBA was specifically aware of DGS's two 
written offers to the Navy.  Nonetheless, we do not see how this made 
a difference.  The record shows that SBA officials were aware of DGS's 
incumbency.  Moreover, as the SBA explains, it assumes that an 
incumbent contractor would prefer to continue performance.

Nonetheless, DGS argues that the Navy manipulated the numbers in its 
requests to the SBA so that the SBA would not perform an adverse 
impact analysis.  According to DGS, the Navy did this by first stating 
that it intended to award only a 3-month modification and then in 
subsequent letters seeking to obtain a 12-month modification.  In 
addition, DGS references a series of memos in which SBA officials 
describe their communications with the Navy concerning the Earle 
requirement.  As DGS notes, according to those memos, after being 
informed of the 25-percent "rule of thumb" in 13 C.F.R.  sec.  
124.309(c)(2), a Navy official inquired as to whether the Navy could 
request a modification of the Bach contract of a particular dollar 
value and a particular length of time in order to avoid a 
determination of adverse impact.  One of the memos also states:

     "[A Navy official] mentioned an amount of $750,000 which [the SBA 
     official] acknowledge[d] is 25% of the firm's estimated $3.0 
     million in sales (i.e. SBA 25% rule of thumb).  However, I am 
     uncomfortable with the level and state this is wrong and needs to 
     be lower.  She then counters with an offer for a length of 60-90 
     days at the lower dollar level but wants to be able to come back 
     to SBA with another [modification] of additional time and dollars 
     to the out-of-scope [modification] which in my opinion brings it 
     back to the 25% impact point. . . .  Later, we [SBA officials] 
     get back to [Navy] and state this is not possible."

DGS argues that the record demonstrates that the Navy was trying to 
manipulate both the offering letter and adverse impact process to 
award a contract to Bach and "freeze out" DGS.  According to DGS, the 
Navy always intended to award a contract to Bach for a year or more 
solely to avoid having DGS bid on and receive award.  DGS argues that 
the Navy's actions amount to bad faith.

The Small Business Act affords SBA and contracting agencies broad 
discretion in selecting procurements for the 8(a) program; we will not 
consider a protest challenging a decision to procure under the 8(a) 
program absent a showing of possible bad faith on the part of 
government officials or that specific laws or regulations have been 
violated.  Grace Indus., Inc., B-274378, Nov. 8, 1996, 96-2 CPD  para.  178 
at 2; Korean Maintenance Co., supra at 5. 

Although the SBA reports that the dollar value of the 3-month 
requirement "was close to the level where adverse impact would be 
presumed," SBA, in fact, determined that the bridge contract would not 
have an adverse impact on DGS.  DGS does not challenge the SBA's 
determination that the estimated value of the work fell below 25 
percent of DGS's most recent annual gross sales.  Rather, DGS argues 
that whether there is an adverse impact should be determined based on 
the annualized amount of the work offered to the 8(a) program.  
According to DGS, on that basis, even if the amount is not a full 25 
percent of DGS's gross sales, under the "all relevant factors" test of 
the SBA rules, the award to Bach would adversely affect DGS.

Under the regulations, which call for calculation of the 25-percent 
level for presumption of adverse impact based on the value of the 
work--not based on an annualized value--a presumption of adverse 
impact did not apply here since the value of the work for the 3-month 
period was below the 25-percent threshold.  In addition, SBA's 
determination of no adverse impact included consideration of the fact 
that the bridge contract was to be followed by a small business 
set-aside competition under which DGS could compete.  Under these 
circumstances, and given the discretion of the SBA and the contracting 
agencies to select procurements for the 8(a) program, we think the SBA 
reasonably accepted the 3 months of work into the 8(a) program.[3]

Concerning DGS's contention that the Navy "manipulated the numbers" 
and acted in bad faith to "freeze out" DGS, as explained above, 
government officials are presumed to act in good faith;  we will not 
attribute unfair or prejudicial motives to procurement officials on 
the basis of inference or supposition.  Grace Indus., Inc., supra.  
The record here shows that the Navy made repeated attempts to convince 
the SBA to accept the Earle guard services work into the 8(a) 
program--for up to a year if possible and failing that, for as long a 
period short of a year as the SBA would accept.  Although the Navy 
aggressively pursued this objective, the record does not show that the 
Navy presented erroneous or inadequate information to SBA officials.  
In addition, the SBA determined--consistent with applicable 
regulations--that a 3-month bridge contract did not have an adverse 
impact on DGS.  Under the circumstances, we will not infer that the 
Navy acted in bad faith.

DGS also argues that the modification improperly exceeded the scope of 
Bach's contract since that contract previously did not include guard 
services at Earle.  In response, the Navy and SBA agree that the 
modification exceeded the scope of Bach's contract but argue that 13 
C.F.R.  sec.  124.318(c), which reads in part as follows, permits this 
out-of-scope modification:  

     "A modification beyond the scope of the initial 8(a) contract 
     award is considered to be a new contracting action.  As such, if 
     a concern has exited the 8(a) program or is no longer small under 
     the size standard corresponding to the SIC Code for the 
     requirement, the modification cannot be exercised.  If, however, 
     the concern is still a Program Participant and is still a small 
     business under the size standard corresponding to the SIC Code 
     for the requirement, the modification may be made provided the 
     estimated fair market price falls below the applicable threshold 
     amount set forth in  sec.  124.311 and other program requirements are 
     met, since the authority exists to enter into a new 8(a) contract 
     to fulfill the requirement." 

DGS does not argue that the modification exceeded the threshold in
 sec.  124.311; rather, DGS contends that "other program requirements" 
could not be met since "the Navy deceived SBA into believing that this 
was a short bridge contract, after which the requirement would be set 
aside for small business and readvertised."  DGS states:

     "Although it is true that the SBA met all of its own program 
     requirements, the defects in the process introduced by the Navy 
     essentially result in a 'fruit of the poisonous tree' result.  
     GAO must conclude that the end result is tainted by the Navy's 
     lack of adherence to regulations and bad faith."

We have no basis to conclude that the Navy or the SBA failed to adhere 
to applicable regulations and DGS itself concedes that the SBA met its 
own program requirements.  In addition, we will not infer that the 
Navy acted in bad faith.  Under the circumstances, we have no grounds 
to conclude that the SBA's decision to accept the 3-month modification 
into the 8(a) program was improper.

The protest is denied.

Comptroller General 
of the United States

1. Section 8(a) of the Small Business Act authorizes the SBA to 
contract with government agencies and to arrange for performance of 
such contracts by awarding subcontracts to socially and economically 
disadvantaged small businesses.  15 U.S.C.  sec.  637(a) (1994). 

2. Under 13 C.F.R. 124.309(c), the SBA does not perform adverse impact 
determinations for "new" requirements for which there is no small 
business incumbent.  Thus, if SBA were to agree that the requirement 
is new, it would be free to disregard the effect on DGS in deciding 
whether to accept the requirement into the 8(a) program.

3. This decision only concerns the original decision to modify Bach's 
contract for the 3-month period; on April 28 and May 21, DGS filed 
additional protests challenging the Navy's subsequent offering letters 
to the SBA and the SBA's May 9 month-to-month extension of the 
modification.  Those protests will be addressed in a later decision.