BNUMBER:  B-277614 
DATE:  November 3, 1997
TITLE: Madison Services, Inc., B-277614, November 3, 1997
**********************************************************************

DOCUMENT FOR PUBLIC RELEASE
The decision issued on the date below was subject to a GAO Protective 
Order.  This redacted version has been approved for public release.
Matter of:Madison Services, Inc.

File:     B-277614

Date:November 3, 1997

Christopher Solop, Esq., and Lynn Hawkins Patton, Esq., Ott & Purdy, 
for the protester.
Gregory H. Petkoff, Esq., Capt. Steven J. Dunn, and Lt. Col. Gerald M. 
Lawler, Department of the Air Force, for the agency.
Peter A. Iannicelli, Esq., and Michael R. Golden, Esq., Office of the 
General Counsel, GAO, participated in the preparation of the decision.

DIGEST

1.  Protest that Air Force personnel, acting in bad faith, improperly 
"gamed" a cost comparison conducted pursuant to Office of Management 
and Budget Circular 
No. A-76, and that agency's review procedure was biased is denied 
where protest allegations are not supported by the record, which shows 
that agency personnel simply made a mistake in preparing agency's 
in-house cost estimate and that the mistake was corrected during 
agency's review process.

2.  Protest challenging agency decision to retain base operating 
services in-house, rather than contracting for the services, is denied 
where agency's decision was reasonably based on the results of a cost 
comparison conducted pursuant to Office of Management and Budget 
Circular No. A-76, and the protester has not shown that the cost 
comparison was faulty or misleading.

3.  The General Accounting Office will not review allegations that 
certain aspects of the contracting agency's cost comparison were 
incorrect where the protester did not raise the issues in its 
agency-level cost comparison appeals.

DECISION

Madison Services, Inc. protests the Air Force's decision to retain 
in-house performance of base operating services at Columbus Air Force 
Base, Mississippi.  The decision, made in accordance with Office of 
Management and Budget (OMB) Circular No. A-76 procedures, was based on 
a comparison of Madison's offer submitted in response to request for 
proposals (RFP) No. F41689-95-R-0025 with the Air Force's in-house 
cost estimate.  Madison contends that the cost comparison was flawed 
for various reasons discussed below.

We deny the protest.

Issued on January 8, 1996, as a total small business set-aside, the 
RFP solicited offers for performing base operating services at 
Columbus Air Force Base for a basic contract period of 1 year with 
options for 3 additional years.  The RFP divided the base operating 
services into three functional areas--civil engineering, 
transportation, and supply (of which only the civil engineering and 
transportation functions are at issue in this protest).  The civil 
engineering function included responsibility for operations, military 
family housing maintenance, and lodging and linen exchange.  The 
transportation function included traffic management and vehicle 
operations and maintenance.  The RFP invited commercial offerors to 
submit technical and price proposals for any one or all of the 
functional areas. 

The RFP stated that commercial offers would be evaluated on technical 
factors and price to determine which offers, or combination of offers, 
were most advantageous to the government.  The RFP stated that an A-76 
cost comparison, comparing the prices of the most advantageous 
commercial offers with the government's estimate of the cost of 
in-house performance, would then be conducted to determine whether it 
was more efficient to have the services performed by commercial 
entities or to continue to have the services performed in-house.  If a 
decision was made to contract out, the RFP generally contemplated 
award of an indefinite quantity, fixed price contract for the 
engineering portion of the requirement,[1] and indefinite quantity, 
fixed-price with award fee contracts for the supply and transportation 
portion of the requirement.

Six offerors submitted several proposals for one or more functional 
areas (four proposals were submitted for the civil engineering 
function, five for the transportation function, and five for the 
supply function).  Discussions were held, and best and final offers 
(BAFO) were received in October 1996 and evaluated.  A second round of 
discussions was held and revised BAFOs were received in November.  In 
mid-December, after evaluation of revised offers, the source selection 
authority determined that Madison's proposal was most advantageous for 
the civil engineering and transportation functions and that Eagle 
Aviation & Technology, Inc.'s proposal was most advantageous for the 
supply function. 

The agency performed a cost comparison study, determining that it 
would cost less to perform base operating services in-house, and 
notified Madison of its decision on March 21, 1997.[2]  Madison was 
debriefed and, after reviewing the agency's cost comparison study and 
supporting data, Madison filed a base-level appeal, by letter of April 
4, alleging that the cost comparison was flawed for a number of 
reasons.[3]  After making some upward adjustments to the agency's 
in-house cost estimate in response to Madison's appeal, the Air Force 
denied Madison's base-level appeal on May 6.  By letter of May 12, 
Madison requested a major command (MAJCOM) review of the denial of its 
base-level appeal.  After making some additional upward adjustments to 
the in-house cost estimate, by letter of July 17, the MAJCOM cost 
comparison administrative appeal review board upheld the original 
decision to retain the base operating services in-house[4] and denied 
Madison's MAJCOM appeal.[5] Madison filed this protest shortly 
thereafter. 

The protester contends that the cost comparison study and appeal 
process were seriously flawed.[6]  Madison alleges that the base 
personnel who prepared the in-house cost estimate "gamed" the 
procurement by not including some costs in the initial in-house 
estimate so that they could review Madison's and other offerors' 
proposed costs before adding the costs during the appeal process.  
Madison also alleges that the base-level appeal process and review 
team were biased in favor of the base activity and in-house 
performance.  Additionally, Madison asserts that the figures used in 
the cost comparison understate the cost of in-house performance in 
several respects and overstate Madison's proposed price.

OMB Circular No. A-76 describes the executive branch policy on the 
operation of commercial activities that are incidental to performance 
of government functions.  It outlines procedures for determining 
whether commercial activities should be operated under contract by 
private companies or in-house using government facilities and 
personnel.  Generally, such decisions are matters of executive branch 
policy that our Office declines to review.  Crown Healthcare Laundry 
Servs., Inc., B-270827, B-270827.2, Apr. 30, 1996, 96-1 CPD  para.  207 at 
3.  However, we will review A-76 decisions resulting from an agency's 
issuance of a competitive solicitation for the purpose of comparing 
the cost of private and governmental operation of the commercial 
activity to determine whether the comparison was faulty or misleading.  
Id.  Here, we find that Madison's contentions that the agency's appeal 
process was biased and that the cost comparison was flawed are without 
merit.

The protester contends that base activity personnel "gamed" the 
procurement process by omitting material and supply costs from the 
original in-house cost estimate and then, after Madison's prices were 
revealed during the appeals process, inserting an unrealistically low 
figure for the agency's material and supply costs in order to ensure 
that the cost comparison would be decided in favor of retaining 
in-house performance.  Madison states that the performance work 
specifications (PWS) for both the civil engineering and the 
transportation functions contained numerous references to the fact 
that the contractor shall furnish everything needed to perform the 
work, and states that its own proposal included more than $[deleted] 
million for the cost of materials and supplies. In contrast, Madison 
points out that the original in-house cost estimate included a "$0" 
figure for material and supply costs (line 2 of the cost comparison 
study).  Madison asserts that the base personnel who calculated the 
original in-house estimate intentionally inserted $0 for material and 
supply costs so that they could insert a figure that was significantly 
less than Madison's proposed price for materials and supplies during 
the agency's appeals process.  The protester further asserts that the 
base-level appeal procedure was biased towards in-house performance 
and against an award to Madison because the base-level review team 
improperly discussed the omission of material and supply costs from 
the original in-house cost proposal with the base activity employees 
who had made the original cost estimate before making upward 
adjustments to the in-house cost estimate. 

Agency officials are presumed to act in good faith.  Therefore, an 
allegation that contracting officials were biased or acted in bad 
faith to prevent an offeror from being awarded a contract must be 
supported by convincing evidence that agency officials had a specific, 
malicious intent to harm the protester.  ASI Universal Corp., 
Inc.--Recon., B-239680.2, Nov. 13, 1990, 90-2 CPD  para.  389 at 3.  The Air 
Force reports that the omission of material and supply costs from the 
original in-house cost estimate was nothing more than a mistake made 
by the base activity employee who calculated that portion of the 
in-house cost estimate.  After reviewing the entire record,[7] we 
conclude, as discussed below, that the record does not support the 
allegation that base activity officials somehow gamed the procurement 
or that the base-level review procedures were biased against Madison.

It is clear from the record that base personnel were confused 
regarding whether material and supply costs were required in the 
in-house cost estimate.  During the hearing conducted by our Office, 
the base activity's independent review officer (IRO) testified that, 
upon review of the initial draft of the cost comparison form and 
related documents, she was concerned because the in-house cost 
estimate included no material and supply costs.  The record shows that 
when the IRO asked the base employee who had completed the cost 
comparison form why $0 was inserted for the base's material and supply 
costs, the base employee responded that he understood from reading the 
RFP's PWSs that, for the most part, materials and supplies were to be 
government-furnished equipment (GFE) and that, since these items would 
be GFE whether the base activity or a private contractor performed the 
work, the costs were considered common costs that should not be 
included.  The IRO also testified that she had difficulty determining 
from the various PWSs what, if any, material and supplies were 
required to be priced and what were GFE.  At one point, the IRO stated 
in a memorandum for the record, "The wording for government furnished 
items and contractor furnished items was very confusing and seemed 
contradictory."[8]  The IRO's concern was alleviated in part when she 
discussed with the base employee the fact that the in-house cost 
estimate included some material and supply costs in line 3 ("Other 
Specifically Attributable Costs") and line 7 ("Additional Costs") of 
the cost comparison form.  Based upon this record, we think it is 
clear that the base employees simply made a mistake and misinterpreted 
the RFP's requirements, and that Madison's allegation of bad faith, 
based solely on the entry of $0 for material and supply costs, is 
insufficient to establish bad faith.

Concerning the allegation that the base-level review was biased 
against Madison, the protester complains that the review team 
discussed some of the issues raised in Madison's base-level appeal (in 
particular, the lack of any material and supply costs in the in-house 
cost estimate) with base activity personnel before making any upward 
adjustments to the in-house cost estimate.  Madison argues that the 
base activity should not have been permitted to correct the omission 
of material and supply costs once Madison filed its appeal and its 
costs were revealed.  We find no evidence of bias during the agency's 
review process.

Since the procurement included an A-76 cost comparison study, the 
in-house cost estimate was delivered to the contracting officer and 
remained sealed until after the selection of the most advantageous 
contractor proposals was completed.  Therefore, while the agency held 
two rounds of discussions with the private offerors and twice allowed 
them to revise their proposals in an effort to eliminate any 
deficiencies, no discussions were held with the in-house team that 
developed the "most efficient organization" and the in-house cost 
estimate.  When Madison alleged mistakes or unreasonably low costs in 
the in-house estimate, the agency was empowered and obligated to 
review the cost estimate and to correct any errors found in the cost 
comparison as well as in the in-house cost estimate upon which it was 
based.  See EPD Enters., Inc., 69 Comp. Gen. 46, 47-48 (1989), 89-2 
CPD  para.  393 at 3; OMB Circ. No. A-76--Revised Supplemental Handbook, Ch. 
3, Sec. K.5.  In our opinion, since discussions had not been held with 
base personnel concerning cost deficiencies, and because the base 
personnel, having originally calculated the in-house cost estimate as 
well as the most efficient organization upon which it was based, were 
the people who were most knowledgeable about the agency's support for 
its proposed costs, the review team logically and reasonably turned to 
the base activity personnel for justification of the cost estimates 
and for additional information that would allow the review team to 
make appropriate adjustments.  There is no evidence that the review 
team's actions were motivated by bias and, in fact, the review team's 
actions were consistent with the agency's internal guidance on 
conducting cost comparisons.  See Air Force Pamphlet 26-12, "Guidance 
For Implementing The Air Force Commercial Activities Program,"  sec.  6-3 
and 14-3.g(2)  (Sept. 25, 1992).  We note that, after discussing some 
of Madison's allegations with base personnel, the base-level review 
team made upward adjustments of more than $1.7 million to the in-house 
costs estimate--action by the review team that, in our opinion, was 
inconsistent with the protester's assertion of bias against it.   

The protester contends that the cost comparison used unrealistically 
low estimates of the base activity's in-house costs for materials and 
supplies, labor for maintenance of military family housing, and 
quality control.  Madison argues that material and supply costs will 
amount to "over $[deleted] million," the amount Madison alleges it 
included for this item in its proposal.  

The IRO testified that, while the original in-house estimate contained 
$0 for the material and supply costs on line 2 of the cost comparison, 
some material and supply costs were included in line 3 ("Other 
Specifically Attributable Costs") and line 7 ("Additional Costs") of 
the original cost comparison.  The record shows that the base-level 
review team made some fairly large upward adjustments to the in-house 
estimate.  Ms. Ginger Bright, an Air Force cost analyst, testified 
(and her testimony is confirmed by the written record) that, when 
Madison appealed the base-level appeal decision, the MAJCOM appeal 
board appointed a review team to conduct a line-by-line review of the 
PWS to identify all materials and supplies that would be needed to 
perform the work and a separate team of cost analysts to determine, 
using various pricing tools (e.g., commercial catalogues), the cost of 
each of the material and supply items.  The MAJCOM board then made 
additional upward adjustments to the in-house cost estimate.  Thus, 
after considering all appeals, the Air Force added to the material and 
supply costs that were included in the original cost estimate 
approximately $550,000 for material and supplies on line 2 and 
approximately $1.1 million for material and supplies on lines 3 and 7 
(for items such as tool kits, portable radios, a base station, badge 
equipment, miscellaneous equipment for housekeeping, tools, landscape 
materials, ground fuels, and replacement items).  In sum, the record 
shows that when all of the material and supply costs that were 
eventually included in lines 2, 3, and 7 are tallied, the final 
in-house cost estimate included a total of approximately $1.8 million 
for materials and supplies.

While the protester asserts that a more accurate estimate of material 
and supply costs is the more than $[deleted] million that it included 
in its proposal, the record, including the hearing testimony of 
Madison's president, shows that, in fact, Madison's proposal did not 
break out its material and supply costs and that Madison is referring 
to approximately $[deleted] million in other direct costs (ODC) that 
were included in its proposal.  As explained by Ms. Bright during her 
testimony, Madison's ODC figure was not made up exclusively of 
material and supply costs, but also included other significant cost 
elements, such as payroll insurance (approximately $[deleted] over the 
contract period) and certain "not-to-exceed" items (approximately 
$[deleted] over the contract period).  Additionally, Madison's 
president recognized that the firm's dollar figure for each individual 
item of material and supply (even, it was conceded, each roll of 
toilet paper) included an undisclosed amount of profit.  In view of 
the apparently overbroad definition of material and supply costs used 
by the protester, on the one hand, and the very detailed cost analysis 
performed by the Air Force during the appeals process, on the other, 
we find no basis to conclude that the agency's in-house cost estimate 
was unreasonable.

Concerning the labor costs for maintaining military family housing, 
the PWS required the contractor or the base activity to provide all 
personnel to perform maintenance on the base's military family 
housing, and the RFP included estimates of the amount of work that 
would be required during the performance period.  In its base-level 
appeal, Madison stated no reason for questioning the in-house 
estimate, but asserted only that the base activity "failed to address 
the labor costs associated with the requirement."  Contrary to 
Madison's assertion, the in-house proposal included 15 full-time 
employees (and the costs associated with them) to perform the 
maintenance work.  Notwithstanding the fact that Madison did not 
articulate why it believed that the in-house proposal was somehow 
inadequate on maintenance staff, the base-level review team examined 
the in-house proposal and PWS and adjusted the number of maintenance 
personnel upward to 18 full-time positions, which both it and the 
MAJCOM review board deemed adequate to do the work.  In its protest 
before our Office, Madison does not explain why it thinks that the 
base-level review team and the MAJCOM appeal board are wrong; instead, 
Madison simply asserts again that the base activity's estimate does 
not include enough personnel.  Because Madison provided no evidence 
nor any detailed statement of facts to support this allegation, the 
unsupported allegation is not an adequate protest basis.  Bid Protest 
Regulations, 4 C.F.R.  sec.  21.1(c)(4), 21.5(f) (1997); Science 
Applications Int'l Corp., supra.

Madison contends that the RFP's requirements were relaxed in favor of 
the base activity because the agency's technical performance plan did 
not designate an employee to work full-time as the chief of quality 
control and, therefore, Madison asserts that the in-house cost 
estimate for quality control was too low.  The RFP required the 
contractor to include a quality control plan, described a number of 
tasks that the quality control organization would have to perform, and 
required that an on-site employee act as chief of quality control and 
be responsible for all quality control matters.  Contrary to the 
protester's contention, the RFP does not require that an employee be 
designated to work full-time as the chief of quality control and 
therefore the RFP requirements under quality control were not relaxed.  
The agency's technical performance plan stated that the facility 
manager would perform on a part-time basis as the chief of quality 
control and would be the focal point for the agency's quality control 
program.  The agency's technical performance plan also describes five 
supervisory positions, each in a different area of expertise (e.g., 
maintenance mechanic supervisor) and each of which the plan states 
will be delegated some of quality control functions.  We have no basis 
to question the conclusion of the base-level appeal team and the 
MAJCOM review team that the quality control tasks can be performed 
adequately by the agency's team comprised of the facility manager and 
five other supervisors.

The protester also contends that the cost comparison overstated 
Madison's labor costs.  Madison states that the labor rates in its 
BAFO were based upon a $2.56 per-hour fringe benefit rate, which was 
the minimum rate specified in the Department of Labor (DOL) wage 
determination included in the RFP.  Madison states that, on December 
30, 1996, the DOL published in the Federal Register a new rule, 
effective June 1, 1997, that would have allowed Madison to lower its 
hourly fringe benefit rate to $1.16 per hour, since the contract would 
not be awarded before June 1.  Madison contends that, because the 
DOL's new fringe benefit rule was published in the Federal Register 
before the agency completed the cost comparison, the new rule had the 
force and effect of law, and the Air Force should have reduced 
Madison's labor rates by $1.40 per hour for a total reduction of 
approximately $[deleted] million.  

Madison does not state when it first became aware of the DOL's new 
minimum fringe benefits rule, but, as the rule was published in the 
Federal Register, Madison was on constructive notice of it as of 
December 30, 1996.  Inter-Con Sec. Sys., Inc.; Washington Patrol 
Serv., Inc., B-192188, Feb. 9, 1979, 79-1 CPD  para.  86 at 9; see Keci 
Corp.--Recon., B-255193.2, May 25, 1994, 94-1 CPD  para.  323 at 4.  The Air 
Force's March 20, 1997, notice to Madison that the cost comparison 
resulted in a determination to retain performance in-house 
specifically stated that the cost comparison was based on the prices 
Madison had proposed in its BAFO.  Thus, Madison knew everything it 
needed to know concerning this issue on or about March 20.  However, 
Madison did not raise the issue in its April 4 base-level appeal or 
even in its May 12 request for MAJCOM review.  As Madison did not 
raise the issue in its appeal to the Air Force, Madison did not 
exhaust the agency's cost comparison appeals procedure and we will not 
consider the issue.[9]  Trans-Regional Mfg., Inc., B-245399, Nov. 25, 
1991, 91-2 CPD  para.  492 at 3; Dyneteria, Inc., B-222581.3, Jan. 8, 1987, 
87-1 CPD  para.  30 at 3.  We note, however, that the new DOL rule merely 
sets forth a formula for determining the minimum fringe benefit rates 
that must be used in service contracts, and Madison was free to 
propose on the basis of higher than minimum fringe benefit rates.  
Because the Air Force could not simply reduce the labor rates that 
Madison had proposed in its BAFO, we think that it was incumbent upon 
Madison to tell the Air Force (at some time before, or even during, 
the base level-appeal) if it truly intended to lower its proposed 
labor rates because of the new rule.  Madison did not.

Madison also contends that the RFP's historical overtime data were 
inaccurate and misleading.  Madison asserts that in denying Eagle's 
base-level appeal (which alleged, among other things, that the 
in-house estimate of overtime costs was too low) the base-level review 
team revealed that it used historical data that were different from 
the historical overtime data set forth in the RFP.  However, Madison 
received a copy of the base-level denial of its own and Eagle's 
appeals (the appeals were denied in a consolidated decision on May 6, 
1997), but did not raise the issue in its MAJCOM appeal.  Again, 
because Madison did not raise the issue in its appeal to the Air 
Force, Madison did not exhaust its administrative appeals and we will 
not consider the issue.  Id.  In any event, the RFP did not include 
any historical overtime estimates, and, in denying Eagle's appeal, the 
base-level appeal team discussed only the method used by one of its 
members to estimate--using financial data for several different Air 
Force work centers, including but not limited to Columbus Air Force 
Base--how much overtime could reasonably be expected to accrue at 
Columbus.  Thus, the methodology discussed in the denial of Eagle's 
base-level appeal was used to check the accuracy of the in-house 
overtime cost estimate but was not used by the base activity to 
prepare the in-house estimate.  According to the hearing testimony of 
the Chief of the Columbus Wing Manpower and Quality Office, the base 
activity's supervisors calculated the in-house overtime cost estimate 
using their own experience and the description of the work contained 
in the RFP's various PWSs.

In sum, the protester has provided no basis for our Office to conclude 
that either the agency's cost comparison or its appeals procedures 
were improper or otherwise flawed.

The protest is denied.

Comptroller General
of the United States

1. Materials, parts, and supplies for maintenance of military family 
housing was to be provided by the contractor, which would then be 
reimbursed on the basis of cost plus a material handling fee.

2. The initial cost comparison showed that it would cost approximately 
$[deleted] million less to have agency personnel perform the work.  We 
have rounded off cost figures in this decision.

3. Eagle also filed a base-level appeal alleging a number of different 
flaws in the cost comparison.  By letter of April 10, Madison 
incorporated by reference all of the issues raised by Eagle into 
Madison's appeal.

4. The final cost comparison showed that it would cost approximately 
$[deleted] million less to have agency personnel perform the work.

5. Eagle's base-level appeal was also denied, and Eagle requested a 
MAJCOM review of the denial of its base-level appeal.  Eagle's MAJCOM 
review also was denied.

6. In its initial protest letter, Madison stated that it was 
incorporating by reference all of the issues that it previously had 
raised with the Air Force in its base and MAJCOM appeals (which, in 
turn, had incorporated all of the issues raised by Eagle in its 
base-level appeal); Madison stated that it would not actually address 
most of those issues.  Because Madison provided no explanation of what 
it believes was wrong with the base and MAJCOM responses to its two 
agency-level appeals, the unsupported allegations that Madison 
protested solely through incorporation by reference do not provide 
adequate bases for protest.  Bid Protest Regulations, 4 C.F.R.   sec.  
21.1(c)(4), 21.5(f) (1997); Science Applications Int'l Corp., 
B-265607, Sept. 1, 1995, 95-2 CPD  para.  99 at 2.  

7. We reviewed, among other things, the protester's and the Air 
Force's briefs, the RFP, the cost comparison study (including 
revisions and supporting documentation), and all documentation 
associated with the base and MAJCOM-level appeals.  We also considered 
the testimony of witnesses (representing both parties) who testified 
during a hearing convened on October 3 in connection with this 
protest.

8. After reviewing the RFP, we can understand the base personnel's 
confusion.  The RFP is voluminous and requires close scrutiny in order 
to understand what materials and supplies are contractor-provided.  
For example, the RFP requires the contractor to provide materials and 
supplies for most of the work, but also includes a lengthy list of 
GFE; similarly, while the RFP indicates that the contractor will be 
paid on a fixed-price basis for most materials and supplies, it also 
indicates that the contractor will be paid on a cost-reimbursement 
basis for other materials and supplies.  The RFP also states that the 
government will provide automated data processing equipment "to the 
minimum extent necessary for mission accomplishment," without listing 
the exact equipment that will be provided as GFE or defining the term 
"minimum extent necessary."

9. By letter of May 16, 1997, Madison attempted to add this issue to 
its MAJCOM appeal.  While the appeal board commented on the issue in 
dicta in its July 17 denial of the appeal, the board specifically 
stated that it was not ruling on the fringe benefits issue because 
Madison had not raised it in its base-level appeal.