TITLE:  Imaging Systems Technology, B-283817.3, December 19, 2000
BNUMBER:  B-283817.3
DATE:  December 19, 2000
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Imaging Systems Technology, B-283817.3, December 19, 2000

Decision

Matter of: Imaging Systems Technology

File: B-283817.3

Date: December 19, 2000

Claude P. Goddard, Jr., Esq., and Hal J. Perloff, Esq., Wickwire Gavin, for
the protester.

Gregory H. Petkoff, Esq., John D. Inazu, Esq., and John C. Gatlin, Esq.,
Department of the Air Force, for the agency.

Daniel I. Gordon, Esq., and John M. Melody, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

DIGEST

Cancellation of solicitation based on a determination that in-house
performance would cost the government less than contractor performance was
improper where comparison of in-house and contractor performance was neither
realistic nor fair.

DECISION

Imaging Systems Technology (IST) protests the cancellation of request for
proposals (RFP) No. F04606-99-R-90052, issued by the Department of the Air
Force for logistics support for the Programmable Indicator Data Processor
(PIDP) air traffic control and landing system. The agency cancelled the
solicitation based on a determination that performing the work in-house
would result in cost savings. IST, the incumbent contractor, contends that
the cancellation lacked a reasonable basis because the agency failed to
conduct a realistic or fair comparison of the cost of in-house and
contractor performance.

We sustain the protest.

The RFP, a total set-aside for small businesses, sought proposals to furnish
all necessary resources required to provide logistics support for the PIDP
system and peripheral equipment. The PIDP system is a standardized automated
radar display, tracking, and flight data processing system used in the
provision of air traffic control services at locations identified in the
RFP, including dozens in the continental United States together with others
as distant as Japan and Germany.

The logistics support covered by the RFP was defined in the "Work
Description Document" to include depot-level repair, software engineering
support, emergency on-site technical assistance, contingency assets (spares)
procurement and management, configuration management and control, and
logistics information reporting during performance of the contract. Other
than a relatively minor "data item," the items whose prices were to be
provided in proposals and evaluated as part of the award decision were items
for which fixed labor rates were to be proposed. [1] RFP sect. B. The evaluated
prices for those items (which together represented the great majority of the
offerors' evaluated price) were calculated by multiplying the proposed
hourly labor rates against the RFP's estimate of the number of hours the
item would be needed. Id. sect. M-502. Those line items were telephone technical
support (for which the RFP estimated 2,400 annual hours); depot-level
support (estimate: 500 annual hours); and on-site emergency technical
support (estimate: 500 annual hours). Id.

The RFP was issued on June 30, 1999; proposals were due on August 31. During
the course of August, the Air Force decided (for reasons not relevant here)
to review the need for any of the work covered by the RFP to be performed by
a contractor, rather than brought in-house at Tinker Air Force Base. That
review led to the conclusion that the contractor's work was either
unnecessary or could be performed by [deleted] personnel at Tinker who were
already working on software support. [2] Contracting Officer's Statement of
Facts at 2. Overall, the Air Force concluded that the PIDP support effort no
longer represented a significant workload, that the "low level of activity
over the last few years does not justify the cost of a private contractor,"
and that any work that did remain could be performed by Air Force personnel
at Tinker as "other duties as assigned." Id. at 4. This led to a decision to
cancel the RFP and bring the work in-house at Tinker. Because of delays
within the Air Force, the amendment cancelling the RFP was not issued until
September 14, 1999. By then, however, two firms, including IST, had
submitted proposals. Because of the cancellation, the Air Force decided not
to open the proposals. Id.

IST protested the cancellation to our Office. Among the various issues
raised by the protester was the allegation that the cancellation violated 10
U.S.C. sect. 2462 (1994), because the agency had not performed a realistic and
fair comparison of the cost of in-house and contractor performance. On
January 6, 2000, the Air Force advised our Office that the agency intended
to take corrective action. Specifically, the Air Force wrote that it
intended "to more fully analyze and document the costs that would be
incurred performing the solicited services in-house in comparison to the
costs that would be incurred under a contract for those same services."
Because of the Air Force decision to take corrective action, our Office
dismissed the protest on January 12, 2000.

In an August 29, 2000, letter (received August 31), the Air Force advised
IST that the agency had performed a cost comparison and decided to stand by
its decision to cancel the RFP. The letter included a copy of the cost
comparison, which was dated January 6, 2000 (the same date as the Air
Force's notice to our Office of the intent to take corrective action). IST
filed a protest with our Office on September 11.

The protester's core allegation is that the Air Force failed to ensure that
all costs considered in the comparison of in-house and contractor
performance were realistic and fair. The protester contends that this
failure violates 10 U.S.C. sect. 2462(b) and the Federal Activities Inventory
Reform (FAIR) Act of 1998, 31 U.S.C. sect. 501 note (Supp. IV 1998), and that,
more generally, the agency improperly failed to follow the cost comparison
process set out in Office of Management and Budget Circular A-76, as
allegedly required by 32 C.F.R. Parts 169, 169a. With respect to the cost of
contracting, the protester contends that the Air Force did not calculate
those costs realistically or fairly since the agency never opened and
reviewed IST's proposal; the contractor costs relied on were those under the
predecessor contract which, IST argues, reflected somewhat different
requirements. With respect to the cost of in-house performance, the
protester argues that the cost figure included in the January 6 cost
comparison was neither realistic nor fair, because it assumed all the work
required by the RFP could be performed by [deleted] people, when, in the
protester's view, it could not. In addition, IST contends that the costs of
in-house performance did not include various elements allegedly required by
Circular A-76 and the FAIR Act.

The Air Force contends that our Office lacks jurisdiction to consider the
protest because the cancellation took place before the proposals were
evaluated or even opened. As to the merits of the protest, the agency
contends that the costs considered in the cost comparison were realistic and
fair.

JURISDICTION

The Competition in Contracting Act of 1984 (CICA), 31 U.S.C. sect.sect. 3551-56
(Supp. IV 1998), which forms the statutory basis for the procurement protest
system under which we review the contracting actions of federal agencies,
limits our review to consideration of objections to solicitations,
cancellations of solicitations, proposed awards, and awards of contracts for
the procurement of property or services, and to terminations of such awards
under limited circumstances. 31 U.S.C. sect. 3551(1) (1994). Thus, as the Air
Force acknowledges, this Office has jurisdiction under CICA to review and
decide objections to the cancellation of a solicitation.

CICA provides further that the Comptroller General shall decide protests
"concerning an alleged violation of a procurement statute or regulation." 31
U.S.C. sect. 3552. Section 2462 of title 10 mandates that Department of Defense
(DOD) agencies procure goods or services from a source in the private sector
under specified circumstances, rather than from an agency source; therefore
it is a procurement statute. As we noted in 1998, where a DOD agency issues
a solicitation, receives and evaluates bids or proposals, and awards a
contract, and then cancels the solicitation to take the work in-house, CICA
grants us the authority to consider a protest that the agency did not comply
with the requirements of 10 U.S.C. sect. 2462. Pemco Aeroplex, Inc., Aero Corp.,
B-275587.9 et al., June 29, 1998, 98-2 CPD para. 17 at 5-6. In the Pemco
decision, we reserved judgment on whether we would have jurisdiction where a
solicitation is cancelled prior to receipt and evaluation of proposals. Id.
at 6 n.2. Here, we face a variant of that question, since the solicitation
was cancelled after proposals were received, but before they were opened and
evaluated. We conclude that we do have jurisdiction over IST's challenge to
the cancellation of the RFP. Our jurisdiction to hear protests objecting to
the cancellation of solicitations is not limited by CICA to situations where
the cancellation occurred after proposals had been received or evaluated. In
this case, therefore, we have jurisdiction to consider the propriety of the
Air Force's decision to cancel the solicitation, including whether the
effect of that decision--taking the PIDP work in-house--is consistent with
10 U.S.C. sect. 2462.

APPLICABLE LAW

Because, as discussed above, 10 U.S.C. sect. 2462 is a procurement statute that
applies to DOD procurements of services, such as those being procured under
the RFP, we conclude that the language in that statute governs here. Section
2462 provides:

(a) In general.--Except as otherwise provided by law, the Secretary of
Defense shall procure each supply or service necessary for or beneficial to
the accomplishment of the authorized functions of the Department of Defense
(other than functions which the Secretary of Defense determines must be
performed by military or Government personnel) from a source in the private
sector if such a source can provide such supply or service to the Department
at a cost that is lower (after including any cost differential required by
law, Executive order, or regulation) than the cost at which the Department
can provide the same supply or service.

(b) Realistic and fair cost comparisons.--For the purpose of determining
whether to contract with a source in the private sector for the performance
of a Department of Defense function on the basis of a comparison of the
costs of procuring supplies or services from such a source with the costs of
providing the same supplies or services by the Department of Defense, the
Secretary of Defense shall ensure that all costs considered (including the
costs of quality assurance, technical monitoring of the performance of such
function, liability insurance, employee retirement and disability benefits,
and all other overhead costs) are realistic and fair.

Under this statutory language, if a private-sector source can provide
services that the Air Force needs at a cost that is lower than the cost of
in-house performance, the Air Force must obtain the services from the
private sector, unless the Secretary of Defense determines that the services
must be obtained from military or government personnel. Since no such
determination was made here, the key question becomes how to compare the
cost of contractor and in-house performance. Much of the balance of this
decision is devoted to a discussion of whether the Air Force's actions met
the statutory requirement that the costs considered in the comparison be
"realistic and fair." The Air Force agrees that this is the relevant
question. [3] See Air Force Response to Protester's Comments (Nov. 9, 2000)
at 1.

With respect to Circular A-76, there is generally no question as to the
applicability of the Circular in bid protests, because the solicitations at
issue have typically committed the agency to following the Circular's
provisions in conducting a public/private cost comparison. In such a case,
our Office, in considering whether the agency's action complied with
Circular A-76, is assessing whether the agency followed the evaluation and
source selection procedures incorporated into the solicitation. See, e.g.,
Trajen, Inc., B-284310, B-284310.2, Mar. 28, 2000, 2000 CPD para. 61 at 2. Here,
there is no such solicitation provision. We recognize that Circular A-76 may
well be mandatory within the executive branch as a matter of policy (so that
the Air Force should have followed it here). [4] See Circular A-76 para. 7.a.
("Unless otherwise provided by law, this Circular and its Supplement shall
apply to all executive agencies . . . ."). Nonetheless, in the absence of a
solicitation reference to Circular A-76, we view compliance with the
Circular as a matter of following executive branch policy; thus, an alleged
failure to follow the Circular does not, in and of itself, constitute a
valid basis of protest. [5] See Crown Healthcare Laundry Servs., Inc.,
B-270827, B-270827.2, Apr. 30, 1996, 96-1 CPD para. 207 at 3. Accordingly, we do
not consider the protester's allegations regarding the failure to comply
with Circular A-76.

REALISM AND FAIRNESS OF THE COSTS AND COST COMPARISON

In order to satisfy the standard of 10 U.S.C. sect. 2642, the Air Force needed
to calculate the costs of in-house and contractor performance realistically
and fairly. We set out in detail below the concerns that we have about the
agency's calculation of both in-house and contractor performance costs. In
addition, we view it as implicit in the requirement for a realistic and fair
cost comparison that the Air Force needed to ensure that the costs compared
were for essentially the same work. Our discussion below explains why, in
our view, the cost comparison here did not meet that standard.

Cost of Contractor Performance

The Air Force's January 6, 2000, cost comparison found that the average
annual cost of contractor performance was $438,754 (for a 5-year total of
$2,193,772). [6] This was calculated by averaging the fixed and
cost-reimbursement costs paid to the contractor (excluding material costs)
each year over the 5 years of the predecessor contract.

IST contends, and we agree, that the January 6, 2000, cost comparison was
unrealistic and unfair in not taking into account the price proposals that
were in the Air Force's possession. Once the Air Force had received the
proposals in response to the RFP (IST's and another offeror's), in our view
those proposals could not fairly be ignored in the Air Force's estimate of
the price of contractor performance. IST contends that its proposed prices
(with unit prices multiplied by the RFP's estimated quantities) amount to a
total cost to the government of an annual average of [deleted] (for a 5-year
total of [deleted]). IST's proposal noted that the firm had [deleted]
reduced its prices from those under the predecessor contract. Protester's
Comments, exh. 6, IST Proposal, at 27.

The Air Force does not dispute any of these numbers. Indeed, the agency
concedes that IST's proposed prices are "[deleted] less than the cost of the
previous contract" and that, when the proposed prices are compared with the
Air Force's January 6, 2000 estimate of in-house cost, this "suggests" that
contractor performance would cost the government less than in-house
performance. Air Force Response to Protester's Comments (Nov. 9, 2000) at 2.
While the Air Force, once it learned of the protester's proposed prices,
proffered other reasons to defend its cost comparison conclusion (discussed
below), we view it as essentially undisputed that the Air Force's estimate
of the cost of contractor performance was unrealistically and unfairly high
because it failed to take into account IST's proposed prices.

Cost of In-House Performance

With respect to the calculation of the cost of in-house performance, the Air
Force has changed its position during the course of the protest. The
one-page cost comparison dated January 6, 2000, itself included two
different ways to calculate the in-house cost. On the one hand, it stated
that [deleted] in-house individuals were able to absorb the work earlier
performed by the contractor in addition to the other work they were
performing; because the government would have to pay those employees'
salaries whether they performed the extra work or not, those were "sunk
costs," so that the real cost to the government of doing the previously
contracted work in-house would be zero. On the other hand, the January 6
cost comparison identified the [deleted] salaries, totaling [deleted] per
year (for a 5-year total of [deleted]), thus suggesting that this figure
represented the cost of in-house performance.

Regarding the "sunk cost" argument, the protester contends that the fact
that there is apparently excess staff capacity at Tinker Air Force Base does
not mean that the time of in-house staff at Tinker can reasonably be
considered cost-free for purposes of a cost comparison. Protester's Reply to
Air Force Response (Nov. 15, 2000) at 4. We agree that, in a cost
comparison, the fact that current government staff may be able to absorb
work without extra hiring does not justify treating the staff's time as
cost-free. Instead, we believe that the agency needs to estimate the
percentage of the staff's time that will be taken up performing the work and
multiply that percentage by the overall cost of the staff (if the work will
take up a de minimis portion of the staff's time, as the Air Force may be
suggesting, the resulting cost figure will itself presumably be minimal).
Cf. Circular A-76 Revised Supplemental Handbook, ch. 2, sect.sect. B.5, B.6.

Regarding the number of in-house personnel needed to perform the work, the
protester challenges the argument that [deleted] individuals could do all of
the work required by the RFP. Among other things, the protester argues that,
because of the need to take into account factors such as sick leave and
annual leave, it is physically impossible for [deleted] individuals to
provide the telephone coverage required by the RFP (24 hours a day, 365 days
a year). The protester also points out that the in-house estimate includes
only salary costs (the protester identifies a series of additional costs
that it alleges should have been included), and that even the salary costs
are improperly assumed not to increase over the 5 years of performance.
While each of these points has merit, we need not address them in detail,
because, once it learned that IST's proposed prices represented a cost to
the government below the salary costs of the [deleted] individuals, the Air
Force essentially abandoned the [deleted] salary basis of calculating
in-house performance costs. Instead, the agency proffered a series of
different arguments to defend its position. We address each in turn.

First, the Air Force disclosed that it had decided to reduce the scope of
work from that set out in the RFP. In particular, after IST's contract ended
in September 1999, the Air Force states, the agency reduced telephone
coverage from 24 hours a day, 365 days a year to 8 hours a day, 5 days a
week, and approximately 260 days a year. Air Force Response to Protester's
Comments (Nov. 9, 2000) at 3. While the change in the scope of work affects
the nature of the cost comparison between in-house and contractor
performance (discussed below), we find no basis (nor has IST suggested any)
to question the realism or reasonableness of the Air Force's definition of
the scope of work needed.

Second, the Air Force concluded, based on its analysis of usage over recent
years, that the services covered by the RFP were needed far less than the
quantity estimates in the RFP indicated. In particular, while the RFP
estimated 2,400 annual hours of telephone technical support, the Air Force
reports that it now has only [deleted] handling all the calls, and that
[deleted] receiving only three or four calls a week, each needing responses
taking from a few minutes to several hours. Air Force Response to
Protester's Comments (Nov. 9, 2000) at 4. Indeed, the Air Force contends
that [deleted] performing all of the work previously performed by the
contractor in approximately 40 percent of [deleted] work time. Id. The Air
Force calculates that 40 percent of the [deleted] will represent [deleted]
in fiscal year 2000. Id. Again, while we will address below concerns raised
by the inconsistency between the RFP's estimate and the Air Force's current
assessment of the number of hours of telephone technical support, we find no
basis (nor has IST suggested any) to question the realism or accuracy of the
current assessment. [7]

Third, the Air Force decided not to count any costs for work being performed
by Air Force personnel outside Tinker. For example, while the Air Force
recognizes that emergency on-site engineering technical assistance is still
needed, it did not include any costs for that work, because the work is
"being performed on site by the Air Force Commands who may be the owners of
the systems in question, on an as needed basis." Air Force Response to
Protester's Comments (Nov. 9, 2000) at 3. For the same reason, the Air Force
assumes zero cost for performing preventative maintenance on computer
reprogramming and other equipment on a quarterly basis and for performing
equipment performance serviceability checks upon completion of maintenance
action in the field. We see no basis for treating the performance of work by
Air Force personnel outside Tinker as cost-free to the government; doing so
is neither realistic in terms of the actual cost to the government nor fair
to the private-sector offerors. The protester contends that this category
includes substantial amounts of work, such as hardware maintenance and
emergency service. In our view, as with the time of the [deleted] at Tinker,
the amount of time to be spent by the other Air Force personnel should be
estimated and calculated in terms of percentages of the salary and other
costs of the Air Force personnel expected to perform the work. Cf. Circular
A-76 Revised Supplemental Handbook, ch. 2, sect.sect. B.5, B.6.

Fourth, the Air Force contends that it no longer requires performance of
some of the tasks listed in the RFP. These are items not separately priced
by offerors and are generally requirements premised on the work being
contracted out, so that it is undisputed that the items are not needed if
the work is performed in-house (for example, the RFP required that the
contractor designate a program manager). The protester does not dispute this
aspect of the Air Force's calculation. It should be noted, however, that the
contractor does not appear to have charged the government separately for any
of these items.

In sum, we conclude that the estimate of the cost of in-house performance
was unrealistically low for failure to include work performed by Air Force
personnel at locations other than Tinker Air Force Base. The extent of the
costs missing from the Air Force figure cannot be calculated on the present
record.

Fairness of the Comparison

As discussed above, 10 U.S.C. sect. 2462 requires that an agency's cost
comparison be realistic and fair. In both its January 6, 2000, cost
comparison and its subsequent calculations, the Air Force has (1) failed to
realistically determine the cost of in-house performance (by failing to
include in its in-house estimate costs properly allocable to the
requirement) and (2) failed to reasonably calculate the cost of contractor
performance (by failing to consider the prices submitted by the offerors).
In addition, the comparison between in-house and contractor performance was
unfair, because the Air Force failed to compare the costs on the basis of a
similar level of effort.

Specifically, as the analysis above shows, there are significant areas in
which the cost comparison was not based on the same work effort for the
in-house and contractor personnel. Essentially, the Air Force concluded that
the quantity estimates in the RFP were unrealistically high, and calculated
the cost of in-house performance based on more realistic, but much lower,
quantity estimates. While the Air Force vigorously defends its current
assessment of how little it needs the services covered by the RFP, that
defense misses the point. In our view, the Air Force is not performing the
realistic and fair cost comparison required by 10 U.S.C. sect. 2462 when it
compares the cost of contractor performance of (to take the clearest
example) 2,400 annual hours of telephone technical support to the cost of
in-house performance of what will apparently be at most a few hundred hours
of telephone technical support a year. [8]

Because of the lack of realism in the calculation of the cost of contractor
and in-house performance and the lack of fairness in the cost comparison
between the two, we conclude that the agency failed to comply with 10 U.S.C.
sect. 2462, so that the cancellation of the RFP lacked a reasonable basis.
Accordingly, we sustain the protest. We recommend that, consistent with the
analysis set out above, the Air Force review its estimated costs of
contractor and in-house performance, as well as the comparison between the
two. If the agency's assessment is that its needs have changed as much as
indicated during the course of the protest, we recommend that, prior to the
cost comparison, the Air Force amend the solicitation to reflect the current
assessment of the agency's needs, and then solicit revised proposals. We
also recommend that IST be reimbursed the costs of filing and pursing its
protest,

including reasonable attorneys' fees. Bid Protest Regulations, 4 C.F.R.
sect. 21.8(d)(1). IST's certified claim for costs, detailing the time spent and
the costs incurred, must be submitted to the agency within 60 days after
receiving this decision.

The protest is sustained.

Anthony H. Gamboa

Acting General Counsel

Notes

1. Some items ("over and above expenses") were to be paid at prices
negotiated during performance; others (travel and materials) were to be paid
on a reimbursement basis.

2. For example, Air Force officials concluded that, while the contractor
staffed a toll-free telephone number that Air Force technicians could call
with questions, the technicians might be calling the number merely out of
convenience, so that, without that resource, they might be able to solve the
problems on their own. Contracting Officer's Statement of Facts at 2.
Furthermore, an Air Force logistics management specialist performed an
analysis which indicated that the toll-free number was, in any event, not
being used often, with approximately 180 calls per year since 1992. Id. at
3.

3. Regarding the FAIR Act, we need not consider its applicability here,
because its requirement for realistic and fair cost comparisons is virtually
identical to the language in 10 U.S.C. sect. 2462 requiring that the costs
compared be realistic and fair.

4. The Air Force argues that Circular A-76's cost comparison requirements do
not apply where the function involves fewer than 10 full-time equivalents
(FTE), which the Air Force contends is the case here. As the protester
points out, however, the 10-FTE exception for conversion to in-house
performance applies only if the contracting officer determines that
performance is unsatisfactory or that fair and reasonable prices cannot be
otherwise obtained, which the record does not indicate occurred here (other
than in the sense that the Air Force viewed any contract costs as
unreasonable in comparison with zero costs for in-house performance).
Circular No. A-76 Revised Supplemental Handbook, ch. 1, para. C.6.

5. While IST argues that 32 C.F.R. Parts 169 and 169a establish a regulatory
requirement for cost comparisons to be conducted pursuant to Circular A-76,
we see no such requirement in those regulatory provisions. Weighing against
allowing an alleged violation of the Circular to create a basis of protest
is the explicit language in Circular A-76 stating that the Circular and its
Supplement "shall not . . . [e]stablish and shall not be construed to create
any substantive or procedural basis for anyone to challenge any agency
action or inaction on the basis that such action or inaction was not in
accordance with this Circular, except as specifically set forth in [sections
not relevant here]." Circular A-76, para. 7.c.8.

6. All the numbers here are rounded to the nearest dollar.

7. We note that the Air Force's use of 40 percent of [deleted], assuming
[deleted] 40 percent of [deleted] time on this work, is in contrast to the
Air Force's earlier "sunk cost" argument, which, as explained earlier, we
find unreasonable.

8. Even the reduction of coverage from 24 hours a day, 365 days a year to
coverage during what are apparently ordinary business hours may well mean
that the contractor's costs (and therefore presumably its proposed prices)
are unnecessarily high, due to the need to pay for coverage on holidays,
nights, and weekends.