BNUMBER: B-278360
DATE: January 20, 1998
TITLE: Tidewater Construction Corporation, B-278360, January 20,
1998
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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:Tidewater Construction Corporation
File: B-278360
Date:January 20, 1998
Daniel R. Weckstein, Esq., and Howard W. Roth, III, Esq., Vandeventer,
Black, Meredith & Martin, L.L.P., for the protester.
Harold I. Rosen, Esq., and Mark E. Davis, Esq., Seltzer and Rosen, for
Pizzagalli Construction Company, an intervenor.
George N. Brezna, Esq., and Vicki O'Keefe, Esq., Department of the
Navy, for the agency.
Charles W. Morrow, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
Agency failed to perform a proper cost realism analysis in evaluating
for the award of a cost-plus-award-fee construction contract where its
only analysis of the offerors' proposals was a comparison of the
proposed costs for various work items to the government estimate, and
there was no analysis of the cost elements of the proposed costs or
consideration of possible differences in technical approach between
the proposals and the government estimate.
DECISION
Tidewater Construction Corporation protests the award of a contract to
Pizzagalli Construction Company under request for proposals (RFP) No.
N62470-96-R-6134, issued by the Naval Facilities Engineering Command,
for the construction of a crane rail interconnect system at the
Norfolk Naval Shipyard, Portsmouth, Virginia. Tidewater objects to
the Navy's cost realism evaluation and best value analysis that
resulted in Pizzagalli's lower-rated, lower-cost proposal being
selected for the award.
We sustain the protest.
The RFP, issued on April 22, 1997, contemplated the award of a
cost-plus-award-fee contract for the construction of an
interconnecting crane rail system on certain piers, including
relocation of railroad tracks and utilities, paving, and related site
work. The RFP, as amended, broke down the basic work into 13 work
items. Offerors were required to propose a "target cost" for each of
the 13 items, and a proposed award fee for the first work item, the
second work item, and the combination of the other 11 work items. The
RFP, as amended, also contained four priced options. Options 1 and 2
required the construction of a crane rail between certain piers.
Option 3 required the construction of an oily waste/waste oil
collection system. Options 4 and 5 required the construction of crane
rail spurs at certain piers. Target costs and award fees were
requested for each option. In addition, option 1 was broken down into
2 work items and option 3 was broken down into 7 work items.
The RFP evaluation scheme provided for award on a best-value basis in
which the technical area was said to be more important than cost. At
the time the RFP was issued, proposals were to be based upon a
60-percent design of the project. Proposals were to be evaluated for
"technical and contractual acceptability, and for cost
reasonableness." The technical evaluation factors, listed in
descending order of importance, were as follows:
1. Prime Contractor's Past Performance
2. Prime Contractor's Corporate Experience
3. Major Subcontractor's Corporate Experience and Performance
4. Work Plan/Schedule/Contractor Quality/Safety
5. Support for Small Business, Small Disadvantaged, And Women
Owned Small Business Program
The RFP did not request detailed cost information, but advised that
back-up documentation to support proposed costs for various large
elements of cost and elements of cost making up the offeror's overhead
pool would be requested during discussions. Subsequent amendments
requested offerors to identify the home office overhead rate, and the
elements of cost thereof, and advised that overhead should be included
in all prices and that overhead would be reimbursed at the actual
incurred rate determined by yearly Defense Contract Audit Agency
(DCAA) audits. During discussions, the offerors were requested to
identify cost items under the first work item of the basic contract
that exceeded $400,000.[1] No other information regarding the
offerors' elements of their proposed costs was requested. To assist
in the cost evaluation, the Navy had an architect/engineer prepare
cost estimates tracking 35 percent, 60 percent, and 100 percent design
of the project.
On May 22, the Navy received proposals from Tidewater, Pizzagalli,
[DELETED]. All were included in the competitive range. After
discussions, offerors submitted revised technical and cost proposals
incorporating various amendments, including the 100-percent design of
the project. After further discussions, best and final offers (BAFO)
were submitted on September 8.
Tidewater's BAFO proposed a total target cost plus fee of [DELETED]
and Pizzagalli's BAFO proposed a total target cost plus fee of
[DELETED].[2] The architect/engineer's estimate based on the
100-percent design was [DELETED]. This estimate was the basis for the
agency's cost realism and reasonableness evaluation. Hearing
Transcript (Tr.) at 14-17, 36-39, 50, 61.[3] The Navy's cost realism
evaluation consisted solely of comparing each offeror's target cost
under work items to the government estimate for each of these items.
Tr. at 14-17. Based on this evaluation, no probable cost adjustments
were made to the proposed costs, and the Navy determined each
offeror's price to be fair and reasonable. The Navy specifically
noted that Pizzagalli's proposed target cost plus fee "compared
favorably" to the government estimate, in which the government had a
high level of confidence.
Tidewater's BAFO technical proposal was [DELETED] rated with a
[DELETED] rating, and Pizzagalli's BAFO received an "[DELETED]"
rating.[4] Tidewater's [DELETED]. However, the SSA found
[DELETED].[5] The Navy awarded the contract to Pizzagalli on
September 26. This protest from Tidewater followed. Contract
performance has been stayed pending our decision in the matter.
Tidewater contends that the Navy's evaluation of cost realism,
particularly regarding Pizzagalli's low cost proposal, which consisted
of merely a comparison of each offeror's proposed target cost plus fee
to the government estimate, did not constitute a proper cost realism
analysis. Tidewater also argues that the government estimate was
defective and could not serve as a proper basis to evaluate cost
realism, as is indicated by the fact that the two more experienced and
higher-rated offerors proposed costs more than [DELETED] the
government estimate.
When an agency evaluates proposals for the award of a cost
reimbursement contract, an offeror's proposed estimated cost of
contract performance and proposed fees should not be considered
controlling since, regardless of the costs proposed by an offeror, the
government is bound to pay the contractor its actual and allowable
costs. United Int'l Eng'g, Inc. et al., 71 Comp. Gen. 177, 185
(1992), 92-1 CPD para. 122 at 10. Consequently, the agency must perform a
cost realism analysis to determine the realism of the offeror's
proposed costs and to determine what the costs are likely to be under
the offeror's technical approach, assuming reasonable economy and
efficiency. AT&T Corp., Advanced Technology Sys., B-261154.4, Oct.
16, 1995, 96-1 CPD para. 232 at 8. Defense Federal Acquisition Regulation
Supplement sections 215.801 and 215.805-70 require that whenever a
cost reimbursement contract is anticipated, a cost realism analysis be
performed of the overall costs in an offeror's proposal to determine
if they (1) are realistic for the work to be performed, (2) reflect a
clear understanding of the requirements, and (3) are consistent with
the various elements of the offeror's technical proposal. Our review
of an agency's cost evaluation is limited to a determination of
whether the evaluation was reasonably based and was not arbitrary.
The Jonathan Corp., Metro Mach. Corp., B-251698.3, B-251698.4, May 17,
1993, 93-2 CPD para. 174 at 10.
The SSA testified that the cost realism analysis of Pizzagalli's and
the other offerors' costs consisted solely of a comparison of the
bottom line target cost plus fee for the 40 work items making up the
basic contract and option work to the government estimate for these
items.[6] Tr. at 14-16, 49-50, 61, 112. The SSA stated that the Navy
did not attempt to independently verify whether Pizzagalli's or the
other offerors' target costs plus fees were realistic in light of
their individual technical approaches. See Tr. at 36-38. Further,
the SSA testified that the agency did not make any attempt to analyze
the differences in the offeror's technical approaches to determine if
the cost differences resulted from their technical approaches or some
other factors. Tr. at 38-39. The SSA also testified, and the record
confirms, that no information was requested to evaluate the cost
elements of the cost proposals, and DCAA was not asked to review cost
proposals because this would be too time consuming. See Tr. at 65-69.
Indeed, the SSA stated that no attempt was made to calculate an
evaluated probable cost for Pizzagalli, or the other offerors, except
to confirm their proposed target costs. Tr. at 49-52.
We find that the Navy's reliance solely upon a comparison of
Pizzagalli's and the other offerors' target costs to the government
estimate as the basis for determining cost realism and reasonableness
was improper. To determine cost realism, an agency must perform a
cost analysis in accordance with Federal Acquisition Regulation (FAR)
sections 15.801 and 15.805-3 (June 1997). Specifically, FAR sec. 15.801
defines cost analysis to mean:
the review and evaluation of the separate cost elements and
proposed profit of--(a) an offeror's . . . cost or pricing data
or information other than cost or pricing data; and (b) the
judgmental factors applied in projecting from the data to the
estimated costs in order to form an opinion on the degree to
which the proposed costs represent what the cost of the contract
should be, assuming reasonable economy and efficiency.
While the agency in its report argues that it performed a cost realism
analysis "consistent with the techniques suggested by FAR sec. 15.805-3,"
the agency could not have done so because it did not require offerors
to provide or identify elements of cost and did not in any case
analyze such costs in determining cost realism.[7] Tr. at 38, 67-68.
Rather, the record establishes that the agency's evaluation was a
"price analysis" that is only intended to "ensure a fair and
reasonable price," and is not intended to be used, nor can it
reasonably be used, to ascertain the cost realism of a cost
reimbursement proposal. See FAR sec. 15.805-2; see KPMG Peat Marwick,
L.L.P., B-259479.2, May 9, 1995, 95-2 CPD para. 13 at 7-10. This is so
because the government will be liable to reimburse the contractor its
actual costs (within certain limits), not the offeror's proposed
costs, such that the government should determine what the contract
should cost, assuming reasonable economy and efficiency. The Jonathan
Corp., Metro Mach. Corp., supra, at 10.
The Navy's comparison of the various work item costs in the government
estimate to the offerors' target costs for the same line items cannot
suffice as a sufficient analysis of cost realism where the agency has
not considered the offerors' individual technical approaches or
determined whether the offerors' proposals are consistent with the
technical and cost parameters that were reflected in the government
estimate. See ManTech Envtl. Tech., Inc., B-271002 et al., June 3,
1996, 96-1 CPD para. 272 at 4-5, 8-12; The Jonathan Corp., Metro Mach.
Corp., supra, at 11-13. As indicated above, the agency made no
attempt to determine the offerors' technical approaches. Tr. 36-39.
Further, the efficacy of the agency's cost realism analysis is also
put into question by the fact that the Navy did not make any
adjustments or question Pizzagalli's or the other offerors' costs for
the work items, even where the proposed target costs were
significantly different from those reflected in the government
estimate, and provided no explanation for its failure to do so, except
to point out that the bottom line of Pizzagalli's proposed target
costs was close to the bottom line of the government estimate.[8] Tr.
at 49-52, 57-61. Moreover, while the SSA testified that it did not
undertake any more steps to evaluate cost realism because of his high
confidence in the government estimate, Tr. at 16-17, 19, the
individual who prepared the estimate admitted at the hearing that the
estimate contained various errors and understated costs.[9] Tr.
118-119, 128-129, 132-133.
In sum, we find that the Navy did not perform a reasonable evaluation
of cost realism, and we sustain the protest on this basis.
We recommend that the Navy obtain cost data sufficient to perform a
cost realism analysis, and make a new source selection.[10] We also
recommend that the protester be reimbursed the reasonable costs of
filing and pursuing the protest, including attorneys' fees. 4 C.F.R. sec.
21.8(d)(1) (1997). The protester should submit its certified claim
for such costs, detailing the time expended and the costs incurred,
directly to the contracting agency within 60 days after receipt of
this decision.
The protest is sustained.
Comptroller General
of the United States
1. This information was requested because the agency was concerned
that the offerors' proposed costs for the basic contract work exceeded
available funding. In discussions, the agency explored with the
offerors possible design changes to address these concerns. According
to the agency, some changes that reduced cost were incorporated into
the RFP.
2. The [DELETED] target cost plus fee was [DELETED].
3. A hearing was conducted to elicit testimony regarding the
government estimate, cost evaluation, and best-value analysis from the
source selection authority (SSA) and an architect/engineer
representative responsible for preparing the government estimate.
4. The [DELETED] technical proposal received [DELETED]. The possible
ratings were unacceptable, [DELETED].
5. Similarly, the agency found [DELETED].
6. We note that there were actually only 24 separate work items for
which offerors proposed costs. The other 16 items that were compared
were for award fee or for totals of separate work items and award
fees.
7. While the agency did request and obtain certain elements of cost
during discussions, these constituted a relatively small percentage of
the contract value and they were not used in the cost realism
analysis. For example, while the agency requested and obtained the
costs of items exceeding $400,000 for the first of the 24 work items,
this was in the context of ascertaining why proposals exceeded the
government funding for this work item. Tr. at 15-16. The agency does
not state how this was used to determine the cost realism of the
BAFOs, and the contemporaneous documentation does not evidence that it
was considered in the cost realism analysis of the BAFOs. With regard
to the overhead rates and the elements thereof, the SSA testified that
this information was not evaluated in determining cost realism. Tr.
at 67-68.
8. For example, for Option 2, the government estimate is approximately
[DELETED] whereas Pizzagalli's proposal was approximately [DELETED].
Tr. at 60.
9. The preparer of the estimate testified at the hearing that the
estimate would not have changed notwithstanding the various errors.
Tr. 185-186. However, the preparer also testified that he did not do
a thorough re-analysis of the estimate in response to the protest, Tr.
137, and initially in an affidavit the preparer argued that some of
the same errors that it now admits are errors were not committed. In
light of our recommendation, we expect that the agency will thoroughly
review the estimate.
10. The agency acknowledges certain technical scoring errors that the
protester states were not properly accounted for in the award
selection. The agency should give appropriate consideration to these
matters in making its new award selection.