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Defense Contract Audit Agency (DCAA) which was rescinded by the 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award, of the rescission of those rates, agency's use of the rescinded 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.