BNUMBER: B-281784.3; B-281784.4
DATE: April 26, 1999
TITLE: L-3 Communications Corporation, Ocean Systems Division, B-
281784.3; B-281784.4, April 26, 1999
**********************************************************************
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:L-3 Communications Corporation, Ocean Systems Division
File: B-281784.3; B-281784.4
Date:April 26, 1999
John H. Horne, Esq., Steffanie F. Walke, Esq., Carl A. Gebo, Esq.,
David C. Hammond, Esq., and Mary Baroody Lowe, Esq., Powell,
Goldstein, Frazer & Murphy, for the protester.
Thomas L. McGovern III, Esq., Michael F. Mason, Esq., Robert J.
Kenney, Jr., Esq., and S. Gregg Kunzi, Esq., Hogan & Hartson; and
Bucky P. Mansuy, Esq., for Lockheed Martin Integrated Systems, Inc.,
the intervenor.
Josie C. Serracin, Esq., Michael Glennon, Esq., Eileen White, Esq.,
Kelly Swartz, Esq., and Trina Alexander, Esq., Department of the Navy,
Naval Sea Systems Command, for the agency.
Susan K. McAuliffe, Esq., and Christine S. Melody, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
1. Protest of agency's upward adjustment to protester's cost proposal
in evaluation for cost realism is sustained where agency improperly
relied on an unaudited summary of indirect rate data obtained from the
Defense Contract Audit Agency (DCAA) which was rescinded by the
protester as unauthorized and invalid shortly after submission to
DCAA. Although DCAA failed to notify the contracting agency, prior to
award, of the rescission of those rates, agency's use of the rescinded
rates nevertheless was improper because the agency made no attempt at
verifying their reliability, despite the fact that the rates were
unsupported, summary in nature, and not reviewed by DCAA. Further,
even after the contracting agency had actual knowledge of the
rescission of those rates, it improperly continued to rely on those
rates in conducting post-award re-analysis of the protester's indirect
rates.
2. Agency's disallowance of protester's proposed uncompensated
overtime (UCOT) is unobjectionable where contemporaneous evaluation
record adequately documents agency's legitimate concerns regarding the
protester's proposal's lack of detail about the firm's successful use
of UCOT on prior contracts, and the UCOT proposal's potential adverse
effects on employee morale and retention, and contract performance.
DECISION
L-3 Communications Corporation, Ocean Systems Division, protests the
award of a contract to Lockheed Martin Integrated Systems, Inc. under
request for proposals (RFP) No. N00024-98-R-6207, issued by the
Department of the Navy, Naval Sea Systems Command (NAVSEA), for the
design and production of Omnibus Towed Array Systems. L-3 contends
that the agency improperly adjusted its proposed costs upward in
evaluating the firm's proposal for cost realism; specifically, the
protester challenges as unreasonable the agency's upward adjustment of
L-3's proposed indirect rates on the basis of alleged erroneous and
invalid L-3 rate data obtained from the Defense Contract Audit Agency
(DCAA), failure to accept L-3's "fixed price" subcontractor costs as
proposed, and disallowance of L-3's proposed uncompensated overtime.
Additionally, L-3 protests the propriety of the agency's best value
determination on the ground that selection of an offeror that
submitted the lower-cost, lower technically rated proposal was
unreasonable and inconsistent with the RFP's evaluation scheme, which
provided that the technical considerations were to be more important
than cost.[1]
We sustain the protest in part, and deny it in part.[2]
BACKGROUND
The solicitation
The RFP, issued on April 16, 1998, contemplated the award of a
cost-plus-fixed-fee, level-of-effort engineering services contract,
with options for cost-plus-incentive-fee low rate initial production
(LRIP) and an ordering provision for fixed-price full rate production
of Navy towed systems.[3] Offerors were to base their proposals on
four sample tasks considered indicative of the type of work required
under the contract. Section M of the RFP set forth the evaluation
factors for award, where the technical proposal was "more important"
than the cost proposal.[4] RFP sec. M, para. 2.1, at 222. Offerors were
advised of the agency's willingness to pay a cost premium for a
technically superior proposal offering the best value to the
government. RFP sec. M, para. 3.3, at 230.
Sections L and M of the RFP provided instructions regarding the
preparation and submission of cost proposals. Offerors were notified
that the agency would evaluate proposals for reasonableness and
realism. RFP sec. M, para. 2.7.1, at 225. The RFP further notified offerors
that the number and mix of labor hours, labor rates, material costs,
indirect rates, and subcontractor costs (and any other "likely"
performance costs) would be reviewed "in light of data available to
the Contracting Officer." Id. at 226. Section L of the RFP advised
offerors of the importance of submitting detailed cost proposals--all
cost summaries were to include supporting data (e.g., support for
proposed engineering labor and overhead, manufacturing labor and
overhead, subcontracts (and related overhead), interdivisional
transfers, general and administrative expense, and other costs). RFP sec.
L-3, para. 3.1.3.3, at 176; para. 3.1.3.4-.5, at 177. Specifically, each
offeror was required to provide its (and its subcontractors') pricing,
and supporting data, by government fiscal year (1998 through 2002),
which was to include "base amounts, units of measure, rates, and costs
for each year." RFP sec. L-3, para. 3.1.2.1, at 169.
The RFP provided that the supporting cost data were required to
facilitate an agency estimate of the "likely costs of performance
should the Offeror receive the award." RFP sec. L-3, para. 3.1.3, at 172.
For instance, proposed management reductions were to be supported by
an explanation of the offeror's plan for achieving the projected
savings, including the proposal of new cost allocation rates, with an
explanation as to the offeror's commitment to maintain the proposed
reductions after award; any rate caps offered were to be analyzed,
with an assessment of potential risks should actual rates exceed
capped rates. RFP sec. L-3, para. 3.1.3, at 173. A 40-hour week was
recommended in the RFP--deviations were to be explained and
supported--and specific uncompensated overtime disclosure and
supporting data requirements were included in the RFP by incorporation
of a NAVSEA "requirements concerning work week" clause, discussed in
further detail below. RFP sec. L, at 152, 173-74. The offerors'
evaluated costs were to be used for award determination purposes
(costs associated with the sample tasks were to be given four times
greater weight than, for instance, the separately priced fixed fee and
LRIP option items). RFP sec. M, para. 2.7.1, at 226. A cost/technical
tradeoff methodology was to be used in determining which proposal
offered the best value to the agency for purposes of receiving the
contract award. RFP sec. M, para. 3.3, at 230.
Submission of proposals
L-3 and Lockheed submitted the only two proposals received in response
to the RFP by the June 8 closing date. Technical proposals were
evaluated by the technical evaluation review panel (TERP); cost
proposals were reviewed by the cost evaluation panel (CEP). DCAA was
requested to review the offerors' and subcontractors' proposed costs
and rates, and the DCAA responses (received by NAVSEA by July 20) were
considered by the CEP. At that time, DCAA could not recommend
indirect rates for L-3, since it was a newly formed company that had
not yet submitted a forward pricing rate proposal to DCAA for review
for purposes of reaching DCAA-recommended or agreed forward pricing
rates for the firm for its government contracts.[5]
Discussions were conducted with the offerors regarding numerous
aspects of their proposals. In response to the agency's discussion
request to L-3 for additional rate information, expressed as a request
for information as to when L-3 planned to forward its indirect rate
proposal to DCAA, on September 28, L-3 submitted to NAVSEA revised
Omnibus cost proposal information (which included various schedules
dated September 24 and references to its September 25 forward pricing
rate submission), in which the protester significantly lowered its
initially proposed Omnibus rates. On September 25, L-3 had submitted
a forward pricing rate proposal (which, as discussed below, was
submitted in regard to a separate procurement) to DCAA.
L-3's submission to DCAA of its proposed forward pricing rates
There appears to have been some confusion at times during this
procurement regarding alleged inconsistencies between the "September
24" and "September 25" L-3 rate submissions. Hearing Transcript (Tr.)
at 204, 276-81.[6] For the most part, the record reflects that the
alleged inconsistencies are related to the fact that the indirect
rates submitted to DCAA (primarily for review in connection with a
separate, ongoing TB-23 spare parts contract held by L-3) were
calculated without the potential beneficial effects of an award to L-3
of the Omnibus contract under the current RFP. Unlike the submission
to DCAA, L-3's rate proposal to NAVSEA under the Omnibus RFP reflected
the beneficial effect of the Omnibus award (and associated increased
business base) on L-3's proposed indirect rates, and thus included
substantially lower indirect rates than the DCAA submission.
The Navy reports that, in conducting a cost realism analysis of L-3's
revised proposal, the CEP chairman, on November 10, contacted DCAA for
updated rate information on L-3. Tr. at 203. The DCAA auditor
reviewing L-3's forward pricing rate proposal told the CEP chairman
that he could only recommend rates for fiscal year 1998, but not the
out-years, since the DCAA audit was not yet completed. That DCAA
auditor told the CEP chairman, however, that L-3 had submitted
additional rate data to DCAA on November 6. The DCAA auditor then
faxed a summary page of those rates to the CEP chairman on November
13. Agency Report, Feb. 8, 1999, at 5-6, 11; Tr. at 207, 314. Those
November 6 indirect rates (which exclude the effects of an Omnibus
award) are substantially higher than the protester's proposed rates
for the Omnibus procurement.
The CEP chairman, who had noted that L-3 had made "multiple rate
submissions," decided to rely on the November 6 rate summary as an
important factor in the evaluation of L-3's cost proposal for realism,
considering that the November 6 summary presented the most recent
information available and that it had been submitted by L-3. Tr. at
293.[7] The CEP thereafter relied on the 1-page summary of November 6
rates in its cost realism evaluation of the protester's proposal.
Specifically, the CEP chairman averaged the November 6 rates stated on
the summary chart for each out-year with the DCAA-recommended rate for
1998 (flat-lined as a baseline for all out-years), to calculate an
evaluated rate for L-3 for each out-year. Agency Report, Feb. 8,
1999, at 11-13. Next, to evaluate the L-3 proposal, the CEP compared
this "averaged" rate per year to the L-3 final Omnibus proposal and
performed its evaluated cost analysis of the proposal based on the
higher of the two rates; where L-3 had proposed capped rates (e.g.,
for [deleted]), the protester's capped rates were used. Where the
evaluated cost was higher than capped, the agency expressed its
concern about potential cost overruns as a "cost sensitivity" issue
(but since L-3 would be responsible for any costs exceeding its capped
rates, the potential cost overruns were not added to the total
evaluated cost calculated by the CEP for the L-3 proposal).
During this same time period (November and early December 1998), L-3
continued to work with DCAA in an effort to finalize DCAA-recommended
forward pricing rates for L-3 to use in negotiating prices with its
administrative contracting officer (ACO) on its TB-23 spare parts
contract. L-3 has explained that the November 6 rates were submitted
to DCAA as one of multiple expected "iterations" in a continuing rate
review process.[8] Tr. at 13-17. One week after the summary of L-3
November 6 rates was forwarded to the CEP chairman by the DCAA
auditor, L-3 submitted updated, lower rates to the same DCAA auditor
on November 20.[9] DCAA did not inform NAVSEA of these lower rates.
Concerned that recommended rates were still not being finalized with
DCAA in a timely manner for the TB-23 spare parts contract, the L-3
employee (L-3's budget manager) who had worked with DCAA on the
November 6 and 20 rate iterations discussed the matter with his
supervisor, the controller of L-3, who reviewed the November 6 and 20
data submissions, and immediately told the budget manager to notify
DCAA that the November 6 and 20 data exchange iterations were
unauthorized and invalid. According to the controller, the data were
not approved under L-3's formal corporate review procedures for
submission of proposed rate revisions, and thus were unauthorized, and
were inconsistent with current corporate financial data, and thus
invalid.[10] Tr. at 140-41.
At a December 4 meeting, the L-3 controller and budget manager
notified DCAA that the November 6 and November 20 data submissions
were unauthorized, invalid, and were not revised forward pricing rate
baselines; L-3 emphasized to DCAA that only its September forward
pricing proposal rates were to be audited. DCAA, which now had a new
supervisory auditor assigned to the L-3 forward pricing rate audit,
immediately ceased review of the rescinded November 6 and 20 data
submissions (which included the same November 6 rates the DCAA auditor
had
forwarded to the CEP chairman). DCAA instead commenced its audit of
L-3's (lower) September forward pricing rate proposal. DCAA did not
notify NAVSEA at that time that L-3 had rescinded the November 6 and
20 rates. The CEP chairman testified that he first learned on
December 30 about L-3's December 4 rescission of the November 6 rates
he had used to adjust the L-3 proposed rates substantially upward.
Tr. at 214. He also reported that he did not learn of the November 20
data submission, Tr. at 223, or L-3's claim of a significant error in
the November 6 rate data, until after L-3 filed its protest with our
Office. Agency Report, Mar. 3, 1999, at 6.
L-3 reports that DCAA completed its review of L-3's September forward
pricing rate proposal on January 7, less than 3 weeks after the award
was made to Lockheed, and 1 week prior to the agency's post-protest
affirmation of its award to Lockheed (discussed below). L-3 states
that in that report, DCAA found L-3's September rates (which were
substantially lower than the rescinded November 6 rates, and which
correlate to its Omnibus proposal's low rates) acceptable for use in
negotiation of L-3's out-year contract rates.
Source selection
By December 16, final technical proposal scores and evaluated costs
had been assigned to the two proposals. L-3's proposal, evaluated at
$[deleted], received a technical score of [deleted] points (with an
adjectival rating of [deleted]; Lockheed's proposal, evaluated at
$[deleted], received a technical score of [deleted] points (with an
adjectival rating of [deleted]). Agency Report, Feb. 8, 1999, at 6.
The contract award review panel (CARP) reviewed the TERP and CEP
reports, acknowledged that L-3 submitted the technically superior
proposal, but recommended to the source selection authority (SSA) that
award be made to Lockheed, as the offeror that submitted the proposal
offering the best value to the agency. The CARP reasoned that
government management and supervision of Lockheed's contract
performance could minimize concerns associated with the cited
weaknesses in the Lockheed proposal, so that payment of the cost
premium involved in an award to L-3 was not warranted. Memorandum
from the Chairman, CARP to the SSA 10 (Dec. 16 1998). The SSA, upon
consideration of the CARP recommendation, selected Lockheed for award
of the contract. Notice of the award to Lockheed was sent to L-3 on
December 18. L-3 received a debriefing on December 22. On December
23, the Navy produced redacted copies of its evaluation reports to
L-3. L-3 filed its initial protest with our Office on December
24.[11]
Post-protest CEP re-analysis of L-3 indirect rates for Omnibus effect
adjustment
Immediately after L-3's December 22 debriefing, L-3 notified NAVSEA
that the CEP's significant upward adjustment to the protester's
proposed September rates was improper, not only for failing to
adequately consider substantial rate reductions proposed by L-3,
resulting from L-3's on-going management cost reduction efforts, but
for improperly failing to take into account the anticipated beneficial
effects of the Omnibus award on L-3's indirect rates for the
out-years, as indicated in L-3's Omnibus proposal. The matter was
also timely protested to our Office.[12] Subsequent to award and the
debriefing challenge lodged by L-3 on the matter, the CEP conceded
that it erroneously failed to evaluate the L-3 Omnibus proposal for
the out-years based upon the potential beneficial effect of a
substantial increase in business base if L-3 were awarded the Omnibus
contract.
In a post-award, post-protest re-analysis of L-3's indirect rates to
correct this error, the CEP calculated an adjustment factor (derived
from the CEP's comparison of the L-3 proposal's indirect rates
excluding Omnibus to the firm's proposed indirect rates with Omnibus),
which it then applied to the rates used by the CEP for L-3 in its
pre-award evaluation of the proposal. The CEP concluded that the
evaluated cost of the L-3 proposal, prior to award to Lockheed, had
indeed been erroneously overstated by approximately $[deleted]. The
CEP also reconsidered its "cost sensitivity" concern about L-3's
potential cost overruns, associated with the use of L-3's proposed
capped rates, and concluded that the CEP had erroneously earlier
evaluated that overrun to be approximately $[deleted]; upon
re-analysis, the overrun potential was reduced to $[deleted]. The CEP
concluded, however, that although lessened, the potential overrun
continued to be a concern.[13] The only other area reviewed by the
CEP in this limited re-analysis was one specifically requested by the
SSA, who asked that certain L-3 subcontractor-related costs be
reviewed; errors found in that portion of the CEP re-analysis show an
additional approximate $[deleted] overstatement in L-3's evaluated
cost prior to award. Addendum to the CEP Report, Jan. 12, 1999, at
1-6.
After the re-analysis of the L-3 proposal's indirect rates, the
revised evaluated cost for L-3 was determined to be $[deleted];
Lockheed's proposal remained at $[deleted]. The CARP reviewed the
amended CEP report describing the recalculations, and again
recommended award to Lockheed, stating that the cost premium, although
reduced, was not worth paying, for the same reasons stated in the
initial CARP report. As it had found before, the CARP believed that
Lockheed's proposal's weaknesses could be minimized through government
management and supervision of contract performance. Memorandum from
the Chairman, CARP to the SSA at 5 (Jan. 14, 1999). The SSA
considered the revised CEP and CARP reports, and, noting that the CARP
had not changed its recommendation for award, on January 14, affirmed
the award selection.
PROTEST CONTENTIONS
Evaluation of L-3's indirect rates
L-3 initially protests the agency's evaluation of its indirect
rates.[14] Specifically, the protester challenges the agency's
reliance on the November 6 summary of rates forwarded to the CEP
chairman by DCAA, without supporting data or a DCAA recommendation for
use in the agency's evaluation. Tr. at 144. L-3 contends that the
agency's reliance on the rescinded November 6 rates was unreasonable
and improper, and that it was prejudiced thereby, since the alleged
error in the underlying rate data for those rates would have a
widespread effect on other figures included in the rate data
schedules. Tr. at 43, 129. L-3 contends that the agency instead
should have accepted, as adequately supported, the significantly lower
rates contained in its responses to discussion questions. These
reduced rates were presented as projections by L-3 for the out-years
of the contract, based upon its anticipated cost savings from its
recent implementation of substantial management reorganization and
cost reduction efforts, as described in its discussion responses.
When an agency evaluates proposals for the award of a
cost-reimbursement contract, an offeror's proposed estimated cost of
contract performance is not controlling, since it is only an estimate
and may not provide a valid indication of the final actual cost the
government will be required to pay. See Federal Acquisition
Regulation (FAR) sec. 15.305(a)(1); General Research Corp., B-241569,
Feb. 19, 19991, 91-1 CPD para. 183 at 5. Consequently, a cost realism
analysis must be performed by the agency to determine the extent to
which an offeror's proposed costs represent what the contract should
cost, assuming reasonable economy and efficiency. FAR sec.
15.404-1(d)(2); ManTech Envtl. Tech., Inc., B-271002 et al., June 3,
1996, 96-1 CPD para. 272 at 8. Because the contracting agency is in the
best position to make this cost realism determination, our review is
limited to determining whether the agency's cost realism analysis is
reasonably based and not arbitrary. Grey Adver., Inc., B-184825, May
14, 1976, 76-1 CPD para. 325 at 17-18, 27-28. Although an agency may
ordinarily rely upon DCAA in performing a cost realism analysis rather
than perform all aspects of the evaluation itself, NKF Eng'g, Inc.;
Stanley Assocs., B-232143, B-232143.2, Nov. 21, 1988, 88-2 CPD para. 497
at 7-8, this does not mean that the agency is thereby insulated from
responsibility for error on the part of DCAA, or error in audit advice
or information, even where, at the time, the agency is unaware that
information it is given by DCAA is incorrect. Where the agency's
judgment in conducting its cost realism evaluation is founded upon
incorrect information, it will not be deemed reasonable. American
Management Sys., Inc.; Department of the Army--Recon., B-241569.2,
B-241569.3, May 21, 1991, 91-1 CPD para. 492 at 7-8.
Based on the record here, including testimony at the hearing, we find
that NAVSEA's cost realism determination regarding L-3's proposed
indirect rates was not reasonably based. The agency advances numerous
reasons why its reliance on the November 6 rates received from DCAA
was reasonable. For instance, the agency states that these rates were
the most recent information available, representing at least an
additional 2 months of rate history on this newly created company;
testimony at the hearing confirmed, however, that the November 6
rates, at best, were rescinded reformulations of earlier submitted
data and did not include any actual or historical rate information
more recent than that which was submitted by L-3 with its proposed
rates in September. Tr. at 23, 73. In fact, if the agency desired
recent actual data from current L-3 operations, testimony from the
DCAA auditor confirmed the protester's testimony that DCAA did in fact
have additional
1998 actual rates for review and consideration, yet that information
was not independently reviewed in the cost realism evaluation of L-3's
proposed rates for the out-years. Tr. at 72, 116, 300.
Next, the agency contends that unaudited rate checks from DCAA are
acceptable in conducting cost realism evaluations where that is the
best information available; the CEP's testimony also gives some weight
to the fact that the rates came from DCAA, which is a recognized
authority on contractor rates. Tr. at 290-91. Although unaudited
rate checks may be reasonable for use in evaluations of cost proposals
for realism, see Intermetrics, Inc., B-259254.2, Apr. 3, 1995, 95-1
CPD para. 215 at 7-8, the reasonableness of the information must be viewed
in terms of its reliability--for example, where rate checks provided
by DCAA, although not audited, are based on current contract data, the
rates are inherently more reliable, in that they are tested, easily
confirmed measures of realism. See Radian, Inc., B-256313.2,
B-256313.4, June 27, 1994, 94-2 CPD para. 104 at 6-7.
Here, however, there was no measure of reliability of the November 6
rates. First, from testimony at the hearing by the DCAA auditor and
the CEP chairman, it is clear that no independent audit-type review
for accuracy or realism had been performed on these rates for this
newly created company. Tr. at 212, 311. Although we appreciate that
it was difficult for the CEP, as explained by the agency, to evaluate
for realism the proposal submitted by L-3, in light of the minimal
data provided, and the lack of historical data for the new company,
there is no showing in this record that any independent actual rate
data for any relevant, available period were sought by the CEP, either
in terms of separate, available DCAA "actuals" data for 1998, or
agency records on current L-3 contracts, or otherwise, for evaluation
of L-3's proposed out-year rates. We think this is especially
significant here, where the RFP required detailed cost data from
offerors for the purpose of evaluation of the proposals, and the
contracting agency specifically requested detailed supporting data
from DCAA in its earlier requests for recommendations, yet used an
unexplained, rescinded set of rates (presented only by summary
percentages) in calculating the offeror's evaluated costs. Further,
there is no indication in the record that DCAA questioned L-3's
rescission of the rates--rather, the record demonstrates that DCAA
fully accepted L-3's disavowal and immediately ceased its review of
those rates. Consequently, the protester here had a reasonable basis
to believe the rescinded rates were eliminated from any further
consideration.
Given the facts of this case, notably, the protester's rescission of
the November 6 rates, we cannot conclude that the DCAA's mere
forwarding of a fax of summary rates (prior to their rescission),
which DCAA did not review in any way, is an appropriate verification
of rates by DCAA for purposes of reliance on those rates by the CEP
for a cost realism evaluation of the protester's proposal. Although
the record indicates that the agency did not know of the rescission at
the time it was conducting its cost evaluations, the record is clear
that, once it did have actual knowledge of the rescission, the agency
still did nothing to correct its erroneous use of untested,
unsupported, and rescinded data. In fact, the CEP performed its
post-award, post-protest re-analysis of L-3's rates using the same
rescinded rates, with full knowledge that the source of the
information, L-3, had disavowed them.
Our Office will not sustain a protest unless the protester
demonstrates a reasonable possibility that it was prejudiced by the
agency's actions, that is, unless the protester demonstrates that, but
for the agency's actions, it would have had a substantial chance of
receiving the award. McDonald-Bradley, B-270126, Feb. 8, 1996, 96-1
CPD para. 54 at 3; see Statistica Inc. v. Christopher, 102 F.3d 1577, 1581
(Fed. Cir. 1996). In this case, calculating the impact of the
agency's improper reliance on the higher, November 6 rates is
difficult, because of the number of variables: in addition to the
complexity of the calculations in this case (with some capped rates,
such as for [deleted], and different rates, such as for [deleted]), we
cannot be certain what rates the agency would have found reasonable,
had it done an adequate indirect rate analysis. It appears, however,
that the impact could have been quite substantial: for example, for
[deleted], an important element of evaluated costs, the protester's
September rates of [deleted] percent (for 1999-2002, respectively) are
substantially lower than the [deleted] percent rates in the November 6
data submission.[15] Enclosure 2 to CEP Report, Dec. 14, 1998, at 10.
While we cannot calculate precisely the effect on L-3's costs of the
disparity in the various rates, the agency does not argue that it
could not have had a material effect. Given that L-3 submitted the
proposal that the agency found technically superior and the agency
selected the awardee only because of the cost differential, any
significant change in the protester's proposal's evaluated cost could
substantially increase its chances for award. We therefore conclude
that L-3 was prejudiced by the agency's use of rates without a
reasonable cost realism analysis, and we sustain the protest on this
ground.[16]
Disallowance of L-3's proposed uncompensated overtime
L-3 challenges the agency's determination not to accept its proposal
of uncompensated overtime (UCOT). The protester contends that, if its
proposed UCOT had been accepted, the savings associated with that UCOT
would have substantially lowered its proposal's evaluated cost. L-3
contends that the agency unreasonably concluded that L-3 would suffer
too great a financial burden in performing the contract without charge
for the [deleted] additional hours per week proposed for certain of
its employees. The agency responds that financial risk related to the
UCOT proposal was not a significant issue. Rather, the Navy reports,
because L-3 would be reinstating a prior UCOT policy, which the
protester did not adequately explain, the proposed UCOT may have an
adverse effect on the morale and retention of L-3 personnel, and thus
on contract performance.
Section L of the RFP included the agency's "requirements concerning
work week" clause, requiring offerors to provide specific supporting
information when proposing UCOT (personnel hours in excess of 40 hours
per week, without additional compensation for such work). That
clause, among other things, required the offeror to provide its
corporate UCOT policy, information about the adequacy of its
accounting system to report UCOT, and an assessment of the
productivity of the proposed UCOT effort. RFP sec. L, at 152. Elsewhere
in section L, each offeror was notified that it must discuss its
proposed UCOT and company policy on uncompensated time that may affect
the program. Id. para. 3.1.4, at 180.
In evaluating L-3's proposed [deleted]-hour week for certain
employees, the agency determined that insufficient support was
provided by L-3 for this proposed UCOT. L-3's newly re-instituted
UCOT policy merely provided terms regarding the payment of overtime to
certain employees if [deleted] hours were worked per week (i.e., it
was a statement of L-3's overtime policy). The agency also was
interested in reviewing any L-3 accounting records supporting UCOT
performed on other projects. Consequently, during discussions, the
protester was asked to substantiate that its previous use of UCOT had
been successful; for instance, the protester was asked for a
description of its past programs utilizing UCOT, and L-3 was asked to
provide copies of its UCOT accounting records to substantiate its
claims of successful UCOT use. In response, L-3 only generally
described partial UCOT data available for the firm (without describing
the nature of the projects that used UCOT), stated that L-3 employees
will record all overtime hours in the future, and estimated that
certain employees will work an average of [deleted] UCOT hours per
week (with a guarantee of [deleted] UCOT hours per week).
The evaluators found that insufficient information had been submitted
by L-3 to substantiate the proposed UCOT's promised benefits to the
agency. The CEP determined that, without a presentation of adequate
support for the proposed UCOT, the effects of the proposed UCOT upon
employee retention and morale could not be assessed; the CEP included
the proposed UCOT as a "cost sensitivity" concern in its evaluation
report. The CARP reviewed the CEP findings and concluded that
although the agency could accept the offeror's UCOT proposal, it would
not do so here, in light of the fact that possible personnel retention
and morale problems posed a risk to performance of the contract.
An offeror is responsible for affirmatively demonstrating the merits
of its proposal, Radian, Inc., supra, at 8. Here, we find that the
agency reasonably determined that L-3 failed to submit adequate
support for its proposed UCOT (such as a showing of the firm's
successful historical use of UCOT or measures that may prevent any
adverse effect of the use of the proposed UCOT on productivity) and
the agency expressed a legitimate concern regarding the application of
the proposed UCOT to the Omnibus contract, in terms of its potential
adverse effect on the firm's performance of the contract. The record
on this issue thus provides no basis to question the propriety of the
agency's determination to disallow the protester's proposed UCOT.[17]
Recommendation
We recommend that the Navy conduct discussions with both offerors
regarding any remaining cost proposal concerns (regarding, at a
minimum, each offeror's indirect rates), request revised cost
proposals, and evaluate those offers for cost realism.[18] If, after
the selection process has concluded, the protester's proposal is
determined to offer the greatest value to the government under the
terms of the RFP, the Navy should terminate Lockheed's contract, and
award to L-3.[19] We also recommend that the protester be reimbursed
the reasonable cost of filing and pursuing its protest, including
attorneys' fees. 4 C.F.R. sec. 21.8(d)(1). The protester should submit
its claim for costs, detailing and certifying the time expended and
costs incurred, with the contracting agency within 60 days after
receipt of this decision. 4 C.F.R. sec. 21.8(f)(1).
The protest is sustained in part and denied in part.
Comptroller General
of the United States
1. L-3 does not challenge the agency's evaluation of the technical
proposals.
2. L-3 also requests reconsideration of our decision, L-3
Communications Corp., B-281784.2, Feb.1, 1999, in which we dismissed,
as untimely, several supplemental protest contentions raised by L-3 on
January 14, approximately 3 weeks after its receipt of the agency
evaluation documents that gave rise to the challenges. As we stated
in that decision, our Bid Protest Regulations require protest
contentions involving other than solicitation improprieties, to be
filed within 10 days of the time the basis of protest is known or
should have been known. 4 C.F.R. sec. 21.2(a)(2) (1998). The
protester's request for reconsideration of that decision is denied,
since the protester essentially repeats arguments it made previously
and expresses disagreement with our decision, but fails to present any
error of fact or law that shows reconsideration is warranted in any
way. 4 C.F.R. sec. 21.14; R.E. Scherrer, Inc.--Recon., B-231101.3, Sept.
21, 1988, 88-2 CPD para. 274 at 2. The protester's strained allegation
that the agency's re-analysis of certain L-3 indirect rates revives
its previously dismissed issues regarding other aspects of the cost
evaluation of its proposal is unfounded; where a protester initially
fails to timely protest issues, subsequent action does not necessarily
make them timely. Here, the agency's continued use of previously
adjusted labor hours, in its post-award indirect rate re-analysis to
determine the L-3 proposal's evaluated costs, without further
evaluation of those labor hours, does not now render timely the
otherwise untimely protest issues related to the adjustment of the
firm's proposed labor hours. See Southwest Eng'g Assocs.;
Gutierrez-Palmenberg, Inc., B-276465.6, B-276465.7, July 28, 1997,
97-2 CPD para. 31 at 2-3.
3. The towed array systems are underwater acoustic sensor systems
deployed from submarine and surface ships. These towed array systems
are equipped with hydrophones and other electronics contained in hoses
that range from 200 to 2500 feet in length, and are up to 3 1/2 inches
in diameter. The RFP emphasized the agency's desire for a single
source for the towed systems to maximize component and subsystem
commonality and included "existing and known future U.S. Navy
requirements for towed acoustic sensor systems engineering development
and production." RFP sec. L-3, para. 1, at 154-56. It was apparently to
reflect the all-inclusive purpose of the procurement that the record
refers to the solicitation as the "Omnibus RFP," and the resulting
award as the "Omnibus contract."
4. The RFP provided three technical evaluation factors for award,
listed in descending order of importance. The "performance" factor
(assigned a weight of 65 percent and described as "significantly more
important" than the other two factors) was composed of the following
equally weighted subfactors: acoustic performance; telemetry;
hydro-mechanical; mechanical; supportability; and risk mitigation.
The management factor (assigned a weight of 20 percent) consisted of
two subfactors, resources and schedule. The past performance factor
was the final and least important technical factor (assigned a weight
of 15 percent). Adjectival ratings (with correlating numerical
scores) were to be assigned under each technical evaluation subfactor
and the past performance factor. RFP sec. M, para. 2.0, 2.5,
at 221-22, 223.
5. L-3, which recently acquired AlliedSignal Ocean Systems, was formed
in March 1998.
6. Our Office held a hearing on the issue of the propriety of the
Navy's reliance on the November 6 rates (discussed below) forwarded by
DCAA to NAVSEA in its cost realism evaluation of the L-3 proposal. We
received testimony from L-3 personnel, the CEP chairman, and the DCAA
auditor who forwarded the November 6 rates to him.
7. The Navy reports that, at the time, the CEP reasoned that the
November 6 rates were appropriate for use in the cost realism
evaluation because they reflected 2 additional months of "rate
history" for this newly created company. Agency Report, Feb. 8, 1999,
at 12. L-3 and DCAA have confirmed, however, that the November 6
rates were not based on any additional actual rate history from the
company other than that which was included in its Omnibus proposal.
Tr. at 23, 73, 333.
8. This iterative process, according to L-3, was to be a continuing
data-exchange type of evaluation process, where different adjustments
were to be made to its early "officially" proposed rates to reflect
what effect a change in certain factors (e.g., head count or
depreciation) may have on the proposed rates. L-3 has explained that
it considered increases and decreases in these iterative rates part of
the review exercise; L-3, however, apparently anticipated that DCAA's
final audit findings would support the firm's lower, initial rates as
acceptable for negotiation with the ACO for L-3's contract rates. Tr.
at 13-17. Conversely, the DCAA auditor testified that he viewed each
iteration as a new rate proposal that superseded any prior submission,
and thus, once he received the L-3 November 6 data, he ceased review
of the initial September rates; consequently, when he subsequently
received November 20 data from L-3, he ceased his review of the
November 6 rates. Tr. at 310.
9. L-3 has explained, however, that although some updates were made in
this November 20 data, a significant error, not noticed by L-3 or DCAA
prior to the November 20 submission, remained in that submission (as
it had in the November 6 submission); specifically, L-3 contends that
its direct labor base was substantially understated, resulting in an
erroneous increase in rates. While the agency points out that L-3 did
not identify this alleged error until after award, we see no reason
for L-3, which had advised the only government agency it had shared
the data with that the data were rescinded, to have pursued the matter
until it learned, after award, that the Navy had relied on those data.
10. We use the term "submission" in this decision, as we did in the
hearing, Tr. at 218, to refer generally to the transfer of information
from one source (L-3) to the recipient (DCAA), without indicating that
the submission is a formal or official rate proposal.
11. L-3 filed its first supplemental protest on January 14, 1999, and
its second supplemental protest on February 18; the protester also
raised additional arguments in its March 10 comments responding to the
agency's March 3 supplemental report. We have closely reviewed all of
the protester's numerous protest contentions raised to date, but we
find that each of those issues, except the one sustained in this
decision (regarding the evaluation of L-3's indirect rates for cost
realism) either lacks factual or legal merit, is untimely, or is
rendered academic by our corrective recommendation. This decision
responds to the more substantial issues timely raised by the
protester.
12. L-3, in its protest to our Office on December 24, specifically
alleged that the agency failed to properly evaluate its forward
pricing indirect rate proposal, and in its January 14, 1999 protest,
the firm reiterated that the agency should have considered the
benefits of the Omnibus award in reducing its indirect rates.
Although the agency sought dismissal of this January 14 allegation as
untimely, in our decision of February 1, in which we dismissed several
other supplemental protest issues as untimely, we specifically found
that the Omnibus-effect issue was timely, since it was reasonably
encompassed by the original protest of the alleged improper evaluation
of the firm's forward pricing indirect rates proposal. L-3
Communications Corp., B-281784.2, Feb. 1, 1999, at 4 n.2.
13. This overrun was always cited by the agency only as a cost
sensitivity issue, rather than as a basis for adjustment in L-3's
evaluated cost; it did not affect the L-3 proposal's total evaluated
cost either prior to award or during the post-award re-analysis.
14. L-3 also generally contends that the agency failed to properly
evaluate the firm's proposed risk reduction efforts and its capped
rates. The record shows, however, that the agency reasonably did
evaluate, and credit, the L-3 proposal for these initiatives. For
instance, although the agency found that many of the proposed risk
reduction efforts would not be required after award of the contract,
the agency gave the protester an approximate $[deleted] credit for the
balance of the proposed efforts, lowering L-3's total evaluated costs,
and the agency accepted the offeror's capped rates. The protester has
not shown why these aspects of its proposal's evaluation are not
reasonable.
15. Both these September and November rates exclude the effect of the
Omnibus contract.
16. L-3 challenges the adequacy of discussions held with the firm on
the matter of indirect rates. The record demonstrates, however, that
discussions were meaningful in this area. [deleted]. Clearly, the
offeror was led directly to the areas of its proposal where additional
information was needed to improve its cost proposal. To the extent
the protester asserts that the agency should have conducted another
round of discussions if any questions remained based upon new cost
information in its discussion responses, the agency had no obligation
to conduct another round of discussions, since an offeror assumes the
risk that changes in its final offer might raise questions about its
ability to meet solicitation requirements. Joint Threat Servs.,
B-278168, B-278168.2, Jan. 5, 1998, 98-1 CPD para. 18 at 10; Signal Corp.,
B-241849 et al., Feb. 26, 1991, 91-1 CPD para. 218 at 5.
17. As to L-3's contention that the Navy improperly adjusted its
proposed "fixed-price" subcontractor costs, the record reflects, and
the protester concedes, that there were no fixed-price contracts
entered into between the protester and its subcontractors. Rather,
the subcontractor quotations were based only on the RFP's sample
tasks, which are not actual contract performance requirements. The
record otherwise shows that the agency's subcontractor cost evaluation
considered information from the cognizant DCAA offices, and that L-3
does not challenge, with any level of specificity, the actual bases
asserted by the agency in support of its adjustments to L-3's proposed
subcontractor costs. In sum, L-3 provides insufficient basis to
question the reasonableness of the evaluation of its subcontractor
costs. Additionally, although the protester speculates that Lockheed
had superior knowledge about the government's requirements under the
RFP (e.g., regarding government furnished materials), possibly due to
improper communications between Lockheed and the agency, the record
shows no evidence to support this allegation.
18. Given the passage of time since the agency's earlier requests for
indirect rate information, and possible changed circumstances for the
offerors, we recommend that discussions with L-3 and Lockheed include,
for example, requests for more recent supporting data and information
in support of the indirect rates they propose. Since the technical
evaluation of the proposals was not protested by L-3, it was not a
subject for review by our Office, and thus, is not included in our
recommendation.
19. L-3's protest of the propriety of the agency's tradeoff analysis
for award is rendered academic, in light of our recommended corrective
action.