TITLE:  Duke Engineering & Services, Inc., B-284605, May 17, 2000
BNUMBER:  B-284605
DATE:  May 17, 2000
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Duke Engineering & Services, Inc., B-284605, May 17, 2000

Decision

Matter of: Duke Engineering & Services, Inc.

File: B-284605

Date: May 17, 2000

Michael R. Charness, Esq., David R. Johnson, Esq., and Robert J. Rothwell,
Esq., Vinson & Elkins, for the protester.

William A. Shook, Esq., Kelly Doran, Esq., and Gary Campbell, Esq., Preston,
Gates Ellis & Rouvelas, Meeds, for Foster Wheeler Environmental Corporation,
an intervenor.

Gena E. Cadieux, Esq., Scott Van Lente, Esq., and Simon Martin, Esq.,
Department of Energy, for the agency.

Scott H. Riback, Esq., and John M. Melody, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

DIGEST

Protest that agency made award to firm that improperly frontloaded its offer
in violation of the National Defense Authorization Act for Fiscal Year 1998
and advance payment prohibition in 31 U.S.C. sect. 3324(a) (1994) is denied
where record does not establish that the firm included costs for later
phases of work in its price for initial contract work.

DECISION

Duke Engineering and Services, Inc. protests the proposed award of a
contract to Foster Wheeler Environmental Corporation by the Department of
Energy under request for proposals (RFP) No. DE-RP07-99ID13729, for the
design, construction, operation and maintenance of an interim dry storage
facility for spent nuclear fuel (SNF) at the agency's Idaho National
Engineering and Environmental Laboratory. Duke maintains that the proposed
award violates the advance payment prohibition in 31 U.S.C. sect. 3324(a) (1994)
and an additional statutory provision that the protester reads as
prohibiting frontloading. [1]

We deny the protest.

BACKGROUND

The RFP contemplated a four-phase project for the design, licensing,
construction, and operation and maintenance of an interim facility for the
dry storage of several different types of nuclear waste referred to
generically as SNF. RFP at B-1. Under Phase I-A, the contractor is required
to prepare its design and an application for a Nuclear Regulatory Commission
(NRC) license for an SNF storage facility. Id. Under Phase I-B, the
contractor is required to obtain the license from the NRC. Id. Under Phase
II, the contractor is required to construct the facility. Id. Under Phase
III, the contractor is required to place SNF that is currently stored
elsewhere into the storage facility. Id. Under Phase IV (which is optional),
the contractor is required to operate and maintain the facility for a period
of time. Id.

The RFP required offerors to submit pricing using two different formats,
depending on when the contractor would be paid for the work. One format
(referred to in the record as pricing method 1) was to be based on the
agency not paying the contractor for work done in any of the phases until
completion of the work under that phase (with certain exceptions and
conditions not relevant here); the second format, (referred to in the record
as pricing method 2) was more conventional and assumed that the agency would
provide progress payments throughout the course of the design and
construction phases.

Pricing method 1, under which no progress payments are provided, reflects
the provisions of section 3132 of the National Defense Authorization Act for
Fiscal Year 1998 (the 1998 Act), Pub. L. No. 105-85, sect. 3132, 111 Stat. 1629,
2034 (1997), which provides, in relevant part, as follows:

(a) Authority to Enter Into Contracts.--The Secretary of Energy may, using
funds authorized to be appropriated by [a particular section] for a project
referred to in that section, enter into a contract that--

(1) is awarded on a competitive basis;

(2) requires the contractor to construct or acquire any equipment or
facilities required to carry out the contract;

(3) requires the contractor to bear any of the costs of the construction,
acquisition, and operation of such equipment or facilities that arise before
the commencement of the provision of goods or services under the contract;
and

(4) provides for payment to the contractor under the contract only upon the
meeting of performance specifications in the contract.

This protest concerns the meaning and impact of paragraph (3), requiring the
contractor to "bear any of the costs of the construction, acquisition, and
operation" until "the commencement of the provision of goods or services."

The RFP reflected the statutory provision by stating that payment for Phase
I-A work (the design work and preparation of the license application) would
be made in the form of a lump sum provided upon completion of Phase I-A. [2]
During Phase II work (the construction work), the contractor would receive
no payment for that construction work; instead, the contractor would be paid
for the construction work only during performance of Phase III (through
amortization of the Phase II price over a fixed quantity of units of SNF
stored during Phase III). Work under Phase III (fuel handling, packaging,
and storing) would be paid on a fixed-unit-price basis as the work was
completed.

DOE received three offers, including Duke's and Foster Wheeler's. The agency
evaluated the offers from a technical and price standpoint and engaged in
discussions with all three firms. After discussions and the submission of
proposal revisions, the agency assigned level of confidence assessment
rating (LOCAR) scores (expressed as a decimal between 0 and 1, with 1
reflecting complete confidence and 0 reflecting no confidence) to each
proposal. The scoring and prices (with rounded numbers) under pricing method
1 (as well as the independent government estimate) were as follows:

                Duke           Foster          Offeror C      Gov't
                               Wheeler                        Estimate

 LOCAR Score    .6             .9              .6             n/a

 Phase I-A      $18.8M         $67M            $[DELETED]     $22.3M

 Phase I-B      $[DELETED]     $5.5M           $[DELETED]     $6.6M

 Phase II       $[DELETED]     $113.9M         $[DELETED]     $131M [3]

 Phase III      $[DELETED]     $30.8M          $[DELETED]     $43M

 Total          $[DELETED]     $217.4M         $[DELETED]     $208M

Of significance for purposes of the protest, the agency concluded after its
initial evaluation that the Foster Wheeler proposal appeared to be
materially unbalanced as between its proposed Phase I-A price and its price
for the balance of the contract, and DOE brought this matter to Foster
Wheeler's attention during discussions. Contracting Officer's Memorandum to
the File, Oct. 7, 1999. Foster Wheeler did not significantly alter its
pricing structure in response to the agency discussion question (although it
did lower its Phase I-A price by approximately $[DELETED] and raise its
Phase III price by [DELETED]). Instead, it provided the agency with a
narrative justification for its apparently high Phase I-A price;
essentially, Foster Wheeler represented that its Phase I-A price was higher
because its technical approach involved a significantly more comprehensive
effort during the design phase of the project. Foster Wheeler Proposal
Revision, Sept. 16, 1999, Response No. 8.

In performing its final proposal evaluation and making its source selection
decision, DOE continued to express concern that the Foster Wheeler proposal
reflected unbalanced pricing. It nonetheless selected Foster Wheeler for
award, finding the firm's narrative explanation regarding its high Phase I-A
costs persuasive, and concluding that there was little risk in accepting
Foster Wheeler's apparently unbalanced offer, since the agency intended to
have the contract fully performed. Final Source Evaluation Board (SEB)
Report, Nov. 5, 1999, at 11-12.

ALLEGATION

Duke contends that Foster Wheeler's proposed price for Phase I-A includes
costs that are properly attributable to other phases of the project, and
therefore includes an impermissible advance payment. Duke alleges that this
expressly violates the requirements of the 1998 Act, because Foster Wheeler
will be paid for work other than the Phase I-A work when it receives the
lump-sum payment at the conclusion of Phase I-A, despite the fact that it
will have tendered only the Phase I-A deliverable. Duke also maintains that
the pricing structure of the Foster Wheeler proposal will result in a
violation of the more general proscription against advance payments under 31
U.S.C. sect. 3324(a).

In the protester's view, the 1998 Act places limits on how the agency can
use certain funds, namely, the funds in its Defense Environmental Management
Privatization Account (referred to below as "privatization account funds").
It is undisputed that the agency intends to use funds from that account to
pay for Phase I-A and Phase II. Agency Report at 8. The agency argues that
the use of the term "may" in the statute ("The Secretary of Energy may . . .
enter into a contract") is permissive and therefore does not limit the
agency's authority. [4]

We need not resolve this dispute because, as explained below, we conclude
that the record does not establish that Foster Wheeler included costs for
later phases of work in its price for Phase I-A. Accordingly, even if we
accept, arguendo, the protester's interpretation of how the statute applies
to the facts of this case, we still have no basis to sustain the protest.

Specifically, Foster Wheeler provided to our Office, and to the parties
under a protective order, cost information supporting its own and its
subcontractors' prices. Our Office then provided Duke the opportunity to
review that information and to identify costs included in Foster Wheeler's
Phase I-A price that the protester believes reflected costs that the awardee
will actually incur during later phases of the work. We have considered each
of these claimed costs and, while we recognize that Foster Wheeler's cost
information may not be complete or unambiguous, we see nothing that
establishes a violation of paragraph (3) of the statute, even under Duke's
reading of the law.

For example, Duke points to the fact that Foster Wheeler included in its
Phase I-A price [DELETED] of Phase I-A labor costs for its proposed project
manager, scheduler, engineers, and other personnel, even though the awardee
claimed that it would complete Phase I-A in [DELETED]. Protester's May 1,
2000 Submission at 3-4. We do not view the inclusion of [DELETED] work in
Foster Wheeler's Phase I-A price as a violation of paragraph (3) of the
statute, as interpreted by the protester. The investment of additional
effort in Phase I-A is consistent with Foster Wheeler's response to the
agency's discussion question regarding apparent unbalancing and with the
agency's ultimate conclusion that Foster Wheeler's extra work up front could
help ensure success in the project.

Duke also views Foster Wheeler's inclusion in its Phase I-A price of a
[DELETED] profit percentage and a [DELETED] as evidence that the firm
improperly included large amounts "not attributable to any cost" in that
price. Duke also appears to find objectionable Foster Wheeler's inclusion of
financing costs in its Phase I-A price. Protester's May 1, 2000 Submission
at 4. We see nothing in any of those charges that violates Duke's reading of
paragraph (3) of the statute. Nothing in that provision precludes a
contractor from including Phase I-A profit, [DELETED], or Phase I-A
financing costs in its Phase I-A price. The reasonableness of those amounts
may be a matter that the agency would wish to pursue in discussions,
although, particularly in the context of Phase I-A's fixed-price basis, the
agency was also free to limit its consideration to price reasonableness. [5]

Finally, Duke contends that the proposal of one of Foster Wheeler's
subcontractors provides a "clear example" of non-Phase I-A costs that Foster
Wheeler included in its Phase I-A price. Protester's May 1, 2000 Submission
at 2. That proposal, actually a series of spreadsheets, included a breakdown
of the subcontractor's prices for various parts of the work. In Duke's view,
a reference on one of the spreadsheets to a particular line item of a
statement of work establishes that the subcontractor was including costs for
Phase II work, because that line item included, among other things, at least
six tasks that Duke identifies as Phase II tasks. We find Duke's inference
unsupported. The spreadsheet explicitly identifies the amount under the line
item as covering Phase I-A work, and separately lists, on other
spreadsheets, work under that line item for Phase I-B and Phase III work.
Moreover, the Phase I-A spreadsheet includes the dates of anticipated
performance, [DELETED], which are roughly consistent with the period of
Phase I-A performance in Foster Wheeler's proposal. We conclude that the
record does not establish frontloading by Foster Wheeler of the cost of
later phases into its Phase I-A price. [6]

As a final matter, we briefly address Duke's allegation that award to Foster
Wheeler violated 31 U.S.C. sect. 3324(a), which provides that, with limited
exceptions, "a payment under a contract to provide a service or deliver an
article for the United States Government may not be more than the value of
the service already provided or the article already delivered." This
"advance payment" prohibition does not, in our view, require that agencies
seek cost data in the context of a fixed-price procurement, such as the one
at issue here. [7] In any event, as indicated by our discussion above, we do
not believe that DOE's payment of Foster Wheeler's proposed Phase I-A price
entailed an advance payment.

The protest is denied.

Comptroller General

of the United States

Notes

1. In its initial protest, Duke also maintained that the agency misevaluated
technical proposals and improperly failed to engage in adequate discussions
with Duke and, as a consequence, made an irrational cost/technical tradeoff
in selecting Foster Wheeler for award. By letter dated March 20, 2000, Duke
advised our Office that it did not intend to further pursue these
assertions.

2. For reasons not relevant here, Phase I-B work was handled differently and
priced on a cost-reimbursement basis, with the contractor being paid on a
monthly basis. Department of Energy Report to Congress, "Spent Nuclear Fuel
Dry Storage Project," DOE-ID-10717, at 20.

3. For Phase II, the government estimate included two different cost
estimates, one based on the use of "vault" storage technology and another
based on "pad" storage technology. [DELETED].

4. We note that DOE also contends that the solicitation "comports with the
described elements set forth" in the statute. Agency Report at 13.

5. We understand why Duke focuses on the level of Foster Wheeler's profit on
Phase I-A: if a firm could earn a substantial profit in that phase without
violating the 1998 Act, it could use that profit to help finance later
phases of the work. Duke has failed to establish, however, that anything in
the 1998 Act prohibited the contractor from including profit (even a
substantial profit) in its Phase I-A price or from using that profit to help
finance later phases of the work.

6. Duke also alleges that Foster Wheeler included in its Phase I-A price
$[DELETED] that a law firm which was to be one of Foster Wheeler's
subcontractors identified as work to be performed later. Protester's May 1,
2000 Submission at 2. According to the protester, the law firm's proposal
broke down the firm's price into phases corresponding to the phases of the
RFP. Because the law firm included only $[DELETED] under item 1.A. in its
proposal, Duke contends that it was improper for Foster Wheeler's Phase I-A
price to also include the $[DELETED] that the law firm identified in item 2
of its proposal. We do not view the law firm's very skeletal "proposal" as
establishing evidence of frontloading. It is not clear what the purpose of
the $[DELETED] under the firm's item 2 is; it is labeled "Corrective Action
Program," without explanation. We see no basis to infer that it is work to
be performed during Phase II, the construction phase, as the protester
suggests.

7. Where, as here, an agency has concern that an offeror's prices may be
unbalanced between two or more line items, it would appear prudent for the
agency to review the price for each line item for price reasonableness,
something which DOE apparently did not do here. Cf. FAR sect. 14.404-2(f)
(unreasonableness of price includes not only the total price of the bid, but
the prices for individual line items as well). Such a price reasonableness
determination is subject to protest. See, e.g., Nomura Enter., Inc.,
B-271215, May 24, 1996, 96-1 CPD para. 253 at 2. Assuming that the determination
could withstand review in a protest, there should be no basis for concern
about a potential violation of the advance payment statute, since, if it is
true that the government is paying a reasonable price for each of the
various line items (and overall), it should also follow that the government
is not paying more than the value of the good or service being provided
under each of those line items (or overall).