TITLE:  Department of the Navy--Reconsideration, B-286194.7, May 29, 2002
BNUMBER:  B-286194.7
DATE:  May 29, 2002
**********************************************************************
Decision

Matter of:   Department of the Navy--Reconsideration

File:            B-286194.7

Date:              May 29, 2002

Sophie A. Krasik, Esq., Robert T. Cali, Esq., Gregory H. Sears, Esq., and
Robert E. Little, Esq., Department of the Navy, for the requester.
William A. Roberts, III, Esq., and Janet L. Eichers, Esq., Wiley, Rein and
Fielding, for The Jones/Hill Joint Venture, the protester.
Glenn G. Wolcott, Esq., and Jerold D. Cohen, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

DIGEST

1.  Prior GAO decision sustaining a protest that challenged an agency's
decision to retain in-house performance of certain activities under a
Circular A-76 study properly characterized the team tasked with preparing
the agency's in-house management plan as ?essentially a competitor.?

2.  The nature and status of an agency team tasked with preparing the
in-house management plan in a Circular A-76 study do not justify exempting
that team from the conflict of interest limitations generally applied to
private-sector competitors.

3.  In complying with the conflict of interest requirements of Federal
Acquisition Regulation (FAR) subpart 3.1, government officials involved in
A-76 procurements should consider the instruction and guidance provided by
FAR subpart 9.5.

4.  Where a protest establishes facts that constitute a conflict of interest
or an apparent conflict of interest, GAO will presume prejudice unless the
record affirmatively demonstrates its absence.

5.  Recommended corrective action addressing conflict of interest portion of
prior decision is modified to provide for only prospective application.

DECISION

The Department of the Navy requests reconsideration of our decision, The
Jones/Hill Joint Venture, B-286194.4 et al., Dec. 5, 2001, 2001 CPD para. 194,
in which we sustained Jones/Hill's protest challenging the Navy's
determination, pursuant to Office of Management and Budget (OMB) Circular
A-76, that it would be more economical to perform base operations and
support services in?house at the Naval Air Station, Lemoore (NASL)
California, than to contract for those services with Jones/Hill.  We
sustained the protest on the basis of multiple procurement flaws, including
the Navy's failure to comply with the conflict of interest requirements of
the Federal Acquisition Regulation (FAR), subpart 3.1. [1]   Specifically,
we concluded that the Navy's use of the same employee and consultants to
develop both the PWS and the in-house management plan for performance by the
government's ?most efficient organization? (MEO) was contrary to the FAR
requirement that procuring agencies ?avoid strictly any conflict of interest
or even the appearance of a conflict of interest.?  FAR sect. 3.101-1.

The Navy requests reconsideration of our decision to the extent we concluded
that a conflict of interest existed.  We affirm our decision, but modify our
recommended corrective action so as to apply the conflict of interest
portion of the decision only prospectively.

BACKGROUND

In January 1998, the Navy initiated a commercial activities study to
determine whether it would be more economical to perform base operations
support services for the NASL in-house, using government employees, or under
contract with a private-sector firm.[2]  Thereafter, various Navy personnel
were tasked with developing the PWS to be used in this matter.  To assist
the Navy personnel in this task, the agency contracted with a private
consultant, E.L. Hamm, Inc.  As ultimately issued, the PWS was
performance-oriented, specifying 13 particular ?outcome[s],? each of which
listed a number of ?mandatory contract requirement[s],? along with
corresponding ?metric[s]? to be used in measuring performance.
RFP sect.sect. C.5.1-13.

Following completion of the PWS, the agency assigned various Navy employees
to prepare the agency's in-house management plan and, again, relied on the
consulting firm of E.L. Hamm, Inc. to assist in this effort.  The record
establishes, and the Navy does not dispute, that an agency employee, along
with Hamm consultants, were substantially involved in the development and
preparation of the PWS and were also primarily responsible for development
and preparation of the in-house management plan.[3]

Meanwhile, the Navy issued request for proposals (RFP) No. N62474-98-R-2069,
seeking private-sector proposals to perform the PWS activities.  Six
offerors, including Jones/Hill, submitted proposals by the specified closing
date.  The agency evaluated each proposal against the PWS requirements, and
selected Jones/Hill's as the proposal representing the best value to the
government.  Thereafter, the agency performed a cost comparison between
Jones/Hill's proposal and the in-house management plan, concluding that it
would be more economical to retain performance of the PWS activities
in-house.

In August 2001, Jones/Hill filed a protest challenging the Navy's
determination to retain performance of the PWS activities in-house.[4]  That
protest led to GAO's decision, issued on December 5, 2001, in which we
sustained Jones/Hill's protest based on the various flaws listed above,
including the Navy's failure to comply with the conflict of interest
requirements of FAR subpart 3.1.  The Navy seeks reconsideration of our
decision to the extent we concluded that a conflict of interest was created
by having the same personnel develop both the PWS and the MEO management
plan.

In responding to the Navy's reconsideration request, we conducted a
conference with counsel for the Navy and Jones/Hill and, following that
conference, requested and received written comments from both parties.[5]
As discussed below, we affirm our conclusion that a conflict of interest
existed, but modify our recommended corrective action to provide for only
prospective application.

DISCUSSION

As an initial matter, the Navy challenges our decision's description of the
MEO team that developed the in-house management plan as ?essentially a
competitor.?  In this regard, our decision stated:

[G]iven the use of the competitive system in Circular A-76 studies and the
MEO team's status as essentially a competitor in the study, we believe that
the provisions of [FAR] subpart 9.5 serve as useful guidance in determining
whether the type of conflict of interest prohibited under subpart 3.1 of the
FAR exists . . . .
The Jones/Hill Joint Venture, supra, at 11.

The Navy argues that our characterization of the MEO team as ?essentially a
competitor? fails to recognize that the in-house management plan is not
legally an ?offer? and that the MEO team is not legally an ?offeror.?  Thus,
the Navy maintains, our conflict of interest analysis is based on an invalid
premise.

We reject the Navy's assertion that our characterization of the MEO team as
?essentially a competitor? was inappropriate for purposes of assessing
whether a conflict of interest existed.  While we agree that, for purposes
of contract formation, the MEO management plan is not technically an
?offer,? nor the MEO team technically an ?offeror,? the reality is that, in
preparing the in-house plan for performance, the MEO team members
functioned, and viewed themselves, as competitors.  At the protest hearing
conducted by GAO prior to issuing the December 5 decision, the Navy's MEO
team leader testified that it was his goal ?[t]o successfully compete? for
the PWS requirements, elaborating that his aim was ?[t]o develop a
management plan that fulfilled the performance work statement goals and
would compete at a level or better than the commercial sector.?[6]  Protest
Hearing Transcript at 300.

Consistent with the MEO team leader's testimony, the Circular A-76 Handbook
recognizes and reenforces the fact that agencies in A-76 studies are
competing with the private sector, stating:

Circular A-76 is not designed to simply contract out.  Rather, it is
designed to:  (1) balance the interests of the parties to a make or buy cost
comparison (2) provide a level playing field between public and private
offerors to a competition, and (3) encourage competition and choice in the
management and performance of commercial activities.
A-76 Revised Supplemental Handbook (1996), Introduction, at iii (emphasis
added).

Elsewhere throughout the A-76 Handbook, that authority similarly describes
the A?76 process as a ?competition? between the private sector and the
government.  See, e.g., Handbook at 4 (?Competitions based upon output and
cost performance measures must reflect the agency's fully allocated costs of
performance?).

While we recognize that A-76 studies can legitimately be characterized as
tools for management to reach make-or-buy decisions, we believe it important
to also recognize the reality, which is that Circular A-76 studies
essentially are competitions between the public and private sectors, and
they are so viewed by all sides.  See, e.g., Commercial Activities Panel,
Final Report:  Improving the Sourcing Decisions of the Government (Apr.
2002) at 58 (statement of Under Secretary of Defense for Acquisition,
Technology, and Logistics) (referring to ?A-76 competitions?); at 65
(statement of National President, American Federation of Government
Employees) (referring to ?A-76 competition process?).  Once the reality is
recognized that these are, indeed, public/private competitions, the Navy's
position becomes that, in these competitions, there is no public?sector
competitor.  We reject this assertion as an attempt to elevate form over
substance, and we stand by our characterization of the MEO team as
?essentially a competitor.?

In a similar vein, the Navy argues that our consideration of an MEO team as
?essentially a competitor? fails to recognize certain factors that should
properly distinguish in-house teams from their private-sector counterparts.
Specifically, the Navy notes that, unlike private-sector competitors, MEO
teams are charged with ?writing the most cost effective means to achieve the
required level of output as described in the PWS?; that PWS and MEO teams
are supervised, and their work products are reviewed and certified, by other
government managers; and that government employees are ?presumed to act in
good faith.?  Navy Post?Conference Comments, Feb. 15, 2002, at 2-6.  The
Navy maintains that the safeguards built into the A?76 process and the
unique status and responsibilities of MEO team members, along with their
government supervisors and managers, provide an adequate basis to exempt MEO
teams from application of the conflict of interest rules generally
applicable to private-sector competitors.

The conflict of interest rules serve to separate roles that require
neutrality (such as drafting the ground rules of a competition) from those
where advocacy is permissible (such as assisting one side in the ensuing
competition).  In developing a PWS to be used in an A-76 procurement, the
personnel tasked with that effort are, in effect, setting the ground rules
for the subsequent competition, and they are thus expected to act in a
neutral fashion.  As a general matter, if those who set such ground rules
will later compete under those rules, a conflict of interest arises.  See
Aetna Gov't Health Plans, Inc.; Found. Health Fed. Servs., Inc., B-254397.15
et al., July 27, 1995, 95-2 CPD para. 129 at 13.  The primary concerns in such
situations are that those personnel responsible for establishing the ground
rules may, intentionally or unintentionally, select rules that skew the
subsequent competition in their own favor, and/or will obtain unique and
otherwise-unavailable information that provides an unfair competitive
advantage.  Id.

In the protest hearing conducted by GAO prior to issuing our December 5
decision, one of the Navy witnesses expressly acknowledged the relevance of
these concerns, testifying that having the same personnel create both the
PWS and MEO management plan created the risk of ?crafting [the PWS] in a
manner which would make it advantageous to the MEO,? and further testifying,
?I think . . . intimate knowledge of the PWS would allow you to provide a
better MEO.?  Protest Hearing Transcript at 228-29.

We do not dispute the Navy's general observations regarding the
responsibilities of MEO team members, along with their supervisors and
managers, and the presumed good faith of government employees.  We reject,
however, the proposition that these factors effectively eliminate the
conflict of interest concerns that exist in the competitive environment of
an A-76 process.  Indeed, our Office's prior decisions involving conflicts
of interest in A-76 studies have similarly considered the realities of this
competitive environment.  For example, in DZS/Baker LLC; Morrison Knudsen
Corp., B-281224 et al., Jan. 12, 1999, 99-1 CPD para. 19, we found that a
conflict of interest was created when 14 of the 16 evaluators who were
responsible for evaluating private-sector proposals in an A-76 study also
held positions that were subject to the study.  In concluding that an
impermissible conflict of interest existed in DZS/Baker, we were aware of
the various unique aspects of A-76 studies--including the responsibilities
with which the government evaluators were charged, the supervision to which
they were subject, and the presumed good faith of government employees.
Nonetheless, our conclusion that a conflict of interest existed, and that
corrective action was necessary, was based on the reality--as here--that,
despite these responsibilities and attributes of government employees, when
such personnel are competing for selection in an A?76 study the conflict of
interest considerations applicable to private-sector competitors should also
be applied to government competitors.

In its reconsideration request, the Navy expresses agreement with our
decision in DZS/Baker, noting that there are certain ?common-sense
principles regarding conflicts of interest that should be observed.?  Navy
Reconsideration Request at 3.  Specifically with regard to the situation in
that case, the Navy states that corrective action was ?obviously the right
thing to do.?  Id.  In our view, the Navy's argument that MEO teams should
be exempt from conflict of interest rules due to their unique status and
responsibilities, or because of the involvement of government supervisors,
is inconsistent with the agency's express acknowledgment that our decision
in DZS/Baker reflects ?common-sense principles regarding conflicts of
interest that should be observed.?  Consistent with our decision in
DZS/Baker, we reject the Navy's assertion that the unique attributes of MEO
teams eliminate otherwise relevant conflict of interest concerns.

More generally, the Navy criticizes our Jones/Hill decision for its
references to the conflict of interest provisions of FAR subpart 9.5, since
that portion of the FAR refers to ?contractors? and ?companies? rather than
to ?agencies.?  The Navy asserts that because ?FAR subpart 9.5 does not
apply to the [A-76] process,? GAO's consideration of those FAR provisions
renders the decision invalid.  Id.  We disagree.

As we stated in our decision, we sustained the Jones/Hill protest on the
basis that the agency failed to comply with the conflict of interest
requirements contained in FAR subpart 3.1, which establishes the standard of
conduct applicable to government procurement officials.  Specifically, that
portion of the FAR states:

Government business shall be conducted in a manner above reproach and,
except as authorized by statute or regulation, with complete impartiality
and with preferential treatment for none.  Transactions relating to the
expenditure of public funds require the highest degree of public trust and
an impeccable standard of conduct.  The general
rule is to avoid strictly any conflict of interest or even the appearance of
a conflict of interest in Government-contractor relationships.
FAR sect. 3.101-1 (emphasis added).

In considering whether the agency met its obligation under FAR sect. 3.101-1, we
did, indeed, consider the instruction and guidance provided by FAR subpart
9.5.[7]  Our consideration of FAR subpart 9.5 reflects the fact that this
portion of the FAR contains detailed guidance and specific examples of
conflict of interest situations which apply to private-sector competitors.
For example, FAR subpart 9.5 generally precludes a private-sector offeror
from competing for a contract where the offeror prepares the statement of
work (FAR sect. 9.505-2), evaluates other offerors' proposals (FAR sect. 9.505?3),
or obtains information that provides an unfair competitive advantage (FAR sect.
9.505-4).  In contrast to FAR subpart 9.5's detailed guidance and specific
examples, FAR sect. 3.101?1, while establishing the requirement to ?avoid
strictly any conflict of interest or even the appearance of a conflict of
interest,? does not provide further guidance on implementing that
directive.  While FAR sect. 3.101?1 is thus less detailed than FAR subpart 9.5,
it is at least as strict in its prohibition of conflicts of interest, and we
view it as reasonable to look to subpart 9.5 for guidance.  Based, in part,
on the fact that a private-sector competitor, such as Jones/Hill, would have
been precluded from both developing the PWS at issue here and submitting a
proposal responding to that PWS, see FAR sect. 9.505-2, our decision concluded
that, by permitting a Navy employee and consultant to develop and prepare
both the PWS and the MEO management plan, the Navy failed to reasonably
comply with the conflict of interest requirements of FAR sect. 3.101-1.

The Department of Defense (DOD) apparently agrees with our view of the
relevance of FAR subpart 9.5 to A-76 studies, since it issued conflict of
interest guidance more than 2 years ago which directs DOD agencies
conducting A-76 studies to avoid conflicts of interest ?in accordance with
FAR Part 9.?  DOD Interim Guidance (Feb. 29, 2000). [8]  Specifically, that
DOD Guidance states:  ?[W]here private sector consultants are assisting DOD
Components in preparing both a PWS and [MEO] Management Plan for a specific
A?76 cost comparison, sufficient measures shall be taken to avoid potential
conflicts of interest in accordance with FAR Part 9.?[9]  Id.  While it is
true that the DOD Guidance, by its terms, applies only to consultants
assisting in A-76 studies, it reflects a recognition of the relevance of FAR
subpart 9.5 even to A-76 studies, which the Navy vigorously argues are not
competitions at all, and it would appear to recognize that FAR subpart 9.5
prohibits the conflict of interest (that of Hamm) that was one of the bases
for our sustaining the protest here.

Accordingly, we reject the Navy's assertion that our decision regarding an
existing conflict of interest is invalid because ?FAR subpart 9.5 does not
apply to the [A-76] process.?  The Navy does not dispute its obligation,
pursuant to FAR sect. 3.101-1, to strictly avoid conflicts of interest as well
as the appearance of conflicts of interest,  and DOD has instructed agencies
to avoid conflicts ?in accordance with FAR Part 9.?  We believe that, in
determining how to implement the mandate of FAR sect. 3.101-1 in the context of
conducting A-76 studies, it is not reasonable for an agency to ignore the
instruction and guidance provided by FAR subpart 9.5 on the basis that, by
its terms, that portion of the FAR technically applies only to
private-sector competitors.

The Navy next takes exception to our consideration of the specific portion
of FAR subpart 9.5 that limits competitors' involvement in the preparation
of work statements.  See FAR sect. 9.505-2.[10]  The Navy complains that the
prior decisions of this Office have not specifically dealt with the type of
situation discussed in FAR sect. 9.505?2, and that the issue regarding
development of both a PWS and MEO management plan is substantively
distinguishable from other conflict of interest situations addressed
elsewhere in FAR subpart 9.5.[11]  Navy Reconsideration Request at 3.
Noting that the PWS here is ?outcome-based,? the Navy argues it would be
?very difficult, if not impossible to slant [such a PWS] in favor of a
MEO.?  Id.  Based on the nature of this PWS, along with the fact that our
Office has not previously discussed the specific relevance of FAR sect. 9.505-2
to MEO teams, the Navy asserts it had no reason to know that its use of
common personnel to prepare both the PWS and MEO management plan would be
considered a conflict of interest.

As discussed above, the underlying rationale for viewing the examples
contained in FAR subpart 9.5 as relevant to MEO teams is the reality that
MEO teams are, in fact, competing to perform the PWS.  Our Office has
repeatedly advised that, when conducting A-76 studies or other procurements
in which a government entity is participating as a competitor, procuring
agencies should consider the instruction and guidance provided by FAR
subpart 9.5 in connection with their obligations to avoid conflicts of
interest under FAR sect. 3.101-1.  See, e.g., Battelle Mem'l Inst., B?278673,
Feb. 27, 1998, 98-1 CPD para. 107 at 6-7; DZS/Baker, supra, at 4; IT Facility
Servs.--Joint Venture, B?285841, Oct. 17, 2000, 2000 CPD para. 177 at 14.  Our
recommendations regarding the relevance of FAR subpart 9.5's detailed
guidance have not been limited to any particular segments of that authority,
since the underlying rationale regarding the competitive environment in A-76
studies is generally applicable to all of the analogous FAR subpart 9.5
examples.  Indeed, in responding to questions raised by the Office of
Government Ethics following our decision in DZS/Baker, we noted that,
because of the competitive environment in A-76 studies, an actual or
apparent conflict of interest ?would taint more than the individual source
selection; it would undermine the integrity of the A?76 process and the
procurement system overall.?  GAO Letter to the Office of Government Ethics
Regarding Conflicts of Interest in A?76 Cost Comparisons, B?281224.8, Nov.
19, 1999, 99-2 CPD para. 103 at 2.

As discussed above, where one competitor has established the ground rules
applicable to all competitors by developing and drafting the PWS, there is
significant risk of at least the perception that the ground rules were
written in a manner that skews the competition or that, by virtue of the
unique access to information required to develop the PWS, provides the
competitor with an unfair advantage.  Consistent with these common-sense
bases for concern, the DOD Guidance discussed above specifically precludes
precisely the situation that existed in the Jones/Hill matter.  That
guidance states:

[W]here private sector consultants are assisting DOD Components in preparing
both a PWS and [MEO] Management Plan for a specific A-76 cost comparison,
sufficient measures shall be taken to avoid potential conflicts of interest
in accordance with FAR Part 9 or the appearance of such conflicts.  These
measures shall include, at a minimum, sufficient ?firewalls? within the
private sector consultant to prevent the same individuals from both
developing the PWS and assisting in preparation of the MEO.
DOD Interim Guidance (Feb. 29, 2000) (emphasis added).

Thus, the Navy's assertion that the conflict of interest situation addressed
in FAR sect. 9.505-2 is substantially different from the situations addressed in
other portions of FAR subpart 9.5, and that the prohibition therein is
uniquely inapplicable to government competitors, directly conflicts with
DOD's own Guidance--which prohibits precisely the situation that existed in
the Jones/Hill matter.

As noted above, we recognize that the DOD Guidance, by its terms, applies
only to individuals within a private-sector consultant firm, and not to
government employees.  Nonetheless, we fail to see how a reasonable argument
can be made that preparation of both a PWS and MEO plan by consultant
employees creates greater conflict of interest concerns than such actions by
government employees. We therefore conclude that, just as FAR subpart 9.5
supports the prohibition set out in the DOD Guidance, FAR sect. 3.101-1 requires
that this prohibition be applied to government employees.  In summary,
consistent with the DOD Guidance, we believe that the practice of generally
precluding one competitor from establishing the ground rules applicable to
all competitors reflects, to use the Navy's phrase, ?[a] common sense
principle[]? that should be observed by both government and private-sector
competitors in A-76 procurements.[12]

The Navy next argues that, even if the situation here created the appearance
of a conflict of interest, it was improper to sustain Jones/Hill's protest
because Jones/Hill did not demonstrate, nor did our decision describe, the
specific portion of the PWS that favored the MEO management plan or the
particular information obtained by the MEO team that constituted an unfair
advantage.  In short, the Navy maintains that our decision is flawed because
Jones/Hill did not demonstrate prejudice.

Prejudice is an essential element of every viable protest.
McDonald-Bradley, B?270126, Feb. 8, 1996, 96-1 CPD para. 54 at 3; see
Statistica, Inc. v. Christopher, 102 F.3d 1577 (Fed. Cir. 1996).
Nonetheless, the provisions of FAR sect. 3.101-1 direct agencies to ?avoid
strictly any conflict of interest or even the appearance of a conflict of
interest.?  (Emphasis added.)  We believe that the strict limitation on both
actual and apparent conflicts reflects the reality that the potential harm
flowing from such situations is, by its nature, frequently not susceptible
to demonstrable proof.  For example, here, the PWS contained multiple
?outcomes,? ?mandatory contract requirement[s],? and corresponding ?metrics?
to measure performance.  RFP sect.sect. C.5.1-13.  The process of preparing the PWS
included multiple modifications, revisions, and amendments.  As in the
preparation of a statement of work in a private/private competition, it
appears indisputable that, in developing the PWS, the authors made countless
determinations related to what should constitute a ?mandatory requirement,?
and what type of ?metric? should be used in measuring performance.[13]  The
end product reflects the authors' ultimate conclusions regarding these
issues; what is not readily apparent are the multiple alternatives that may
have been considered and rejected, and the bases for rejecting such
alternatives.

We believe that, if the prohibition on common personnel preparing both the
PWS and MEO management plan were to be enforced only when a protester could
specifically identify and prove that a particular ?road not taken? would,
likely, have led to selection of the protester's proposal over the MEO
management plan, the prohibition would be largely meaningless.[14]
Accordingly, where a protest establishes facts that constitute a conflict or
apparent conflict, we will presume prejudice unless the record affirmatively
demonstrates its absence.[15]  See Basile, Baumann, Prost & Assocs., Inc.,
B?274870, Jan. 10, 1997, 97-1 CPD para. 15 at 4.  Based on the record here, we
reject the Navy's assertion that our decision was flawed because Jones/Hill
failed to demonstrate prejudice.

Finally, the Navy, along with the Office of the Under Secretary of Defense,
the Army and the Defense Logistics Agency, assert that our decision will
have a serious negative impact on multiple ongoing A-76 studies, and may
require the cancellation of a significant portion of those studies.[16]
Accordingly, the agencies request that we modify our decision and
recommended corrective action to apply the conflict of interest portion only
prospectively.

As discussed above, we believe that the integrity of the decision-making
process in A-76 cost studies should be above reproach.  Nonetheless, just as
our decision reflected the reality that A-76 studies are essentially
public/private competitions, we believe it important to recognize the
practical realities supporting the agencies' request for prospective
application of the conflict of interest portion of our decision.  The fact
is that disruption or cancellation of large numbers of studies will not
serve the private-sector firms who would presumably be disadvantaged by the
conflicts, nor the agencies endeavoring to conduct the studies, nor the
viability of the A-76 process overall.  In addition to the large number of
ongoing studies that could be affected, the corrective action contemplated
by our initial decision--rewriting the PWS--would entail a significant
period of delay for each affected study that would lengthen what is, often,
already a lengthy process.

We are authorized under the Competition in Contracting Act of 1984 (CICA),
where we sustain a protest, to make recommendations that we determine ?to be
necessary in order to promote compliance with procurement statutes and
regulations.?  31 U.S.C. sect. 3554(b) (2000).  Exercising that authority, and
taking into consideration the widespread concern that numerous ongoing A-76
studies will have to be canceled or largely re-done, we are modifying our
recommended corrective action to apply the conflict of interest portion of
the decision only prospectively.[17]

With regard to an A-76 study in which, prior to the public release of our
initial decision,[18] an agency had already completed the PWS and invested
substantial time and/or resources (a determination that we leave to the
agency's reasonable exercise of discretion) in preparing the MEO in-house
plan, we will not consider a protest ground alleging a conflict of interest
based on the Jones/Hill decision.  If the PWS had been completed but the
agency had not yet invested substantial time and/or resources in preparing
the in-house plan, we do not expect the agency to rewrite the PWS, but we
would consider a protest alleging that the agency had failed to take steps
to avoid or mitigate a conflict in the writing of the in-house plan (for
example, ensuring that no individual substantially involved in writing the
PWS also plays a substantial role in drafting the in-house plan).  Our
decision today also does not preclude consideration of a protest alleging
that an agency failed to comply with DOD's February 2000 Guidance regarding
consultants, where that guidance was applicable, or consideration of an
otherwise timely protest of a specific aspect of a performance work
statement (for example, challenging it as unduly restrictive of
competition).[19]  Moreover, even where the prospective application of our
decision would shield an agency from having a protest ground considered, we
would encourage the agency to take steps to address any appearance of a
conflict, where the agency deems that practicable.

The decision is affirmed, but the recommended corrective action is modified
to reflect only prospective application of the conflict of interest portion
of the decision.

Anthony H. Gamboa
General Counsel

-------------------------

[1] We also sustained the protest on the following bases:  the agency's
independent review official (IRO) failed to reasonably support his
determination that the government would be able to perform the performance
work statement (PWS) requirements with the resources reflected in the agency
management plan for in?house performance; the in-house management plan
failed to include the costs of all resources that would be used by the
agency; and the agency failed to reasonably compare the level and quality of
performance reflected in the in-house management plan with the level and
quality of performance reflected in Jones/Hill's proposal.  The Navy's
reconsideration request does not challenge any of these bases for our
decision.
[2] The process for determining whether activities should be performed
in?house or with a contractor is set forth in OMB Circular A-76 and that
Circular's Revised Supplemental Handbook.  The Department of Defense (DOD)
and its military departments are required to use the Circular and its
Handbook in performing commercial activities studies.  32 C.F.R. sect.
169a.15(d) (2001).  The required process includes preparation of a PWS
outlining the task and performance requirements, preparation of a management
plan for performance of the PWS tasks by the agency's MEO, a competition
among private-sector proposals, and a cost comparison between the successful
private-sector proposal and the MEO management plan.
[3] E.L. Hamm, Inc. provided at least three employees who worked on both the
PWS and MEO management plan.  At the GAO protest hearing, one of these
employees testified that he ?was the editor of the PWS and . . . the [MEO]
management plan.?  Protest Hearing Transcript at 337.  A Navy witness
described Hamm's role as that of a ?co-producer? of the PWS and ?full
participant? in development of the in-house management plan.  Id. at
245-46.  Similarly, a Navy employee who chaired the agency's commercial
activity team and was instrumental in developing the PWS also served as the
leader of the MEO team that developed the in-house management plan.
[4] Prior to the August 2001 protest, there were various other
administrative appeals and protests.
[5]  We also invited both parties to solicit and submit comments from other
organizations having an interest in this matter.  The Navy provided comments
from the Office of the Under Secretary of Defense, the Department of the
Army, and the Defense Logistics Agency.  Jones/Hill provided comments from
the Professional Services Council.
[6] The Navy's MEO team leader provided further insight into the realities
of the competitive situation, testifying as follows:
Q.      On your MEO team, were any of your members part of the group whose
jobs were being reviewed . . . ?
A.      Almost all of them, yes, were members.  That's a pretty strong
incentive, just as in the commercial [sector], that if you want to compete
very strongly, their job's at risk.
Protest Hearing Transcript at 297.
[7] Specifically, our decision stated:  ?[A]lthough FAR subpart 9.5, by its
terms, does not apply to government agencies or employees, it is instructive
in determining whether an agency has reasonably met its obligation to avoid
conflicts under FAR sect. 3.101-1.?  The Jones/Hill Joint Venture, supra, at 9.
We took the same approach in DZS/Baker (at 3-6).
[8] The DOD Guidance augments DOD Instruction 4100.33, Commercial Activities
Program Procedures, Sept. 9, 1985.
[9] The Navy maintains that this DOD Guidance was inapplicable to the A-76
study in the Jones/Hill matter because that study was initiated before the
Guidance was published.
[10] This section of the FAR states, among other things:
When contractor assistance is necessary [to prepare work statements], the
contractor might often be in a position to favor its own products or
capabilities.  To overcome the possibility of bias, contractors are
prohibited from supplying a system or services acquired on the basis of work
statements growing out of their services, unless [otherwise excepted].
FAR sect. 9.505-2(b)(2).
[11] For example, in DZS/Baker, we considered the guidance provided by FAR
sect. 9.505?3, which precludes private-sector offerors from evaluating competing
proposals.
[12] Application of this common-sense principle does not preclude obviously
necessary interaction among the PWS team, the MEO team, and other personnel
who are currently performing the tasks under study.  Rather, the principle
enunciated in our prior decision, and affirmed here today, precludes common
personnel from playing a substantial/leadership role in developing both the
PWS and MEO management plan.  We recognize that distinguishing between
activities that constitute ?obviously necessary interaction? and those that
constitute ?playing a substantial/leadership role? will require ongoing,
subjective judgments by responsible agency officials based on the individual
facts and circumstances of individual A-76 studies.
[13] For example the record contains a memorandum written by a Hamm
consultant to the Navy employee acting as coordinator of the Navy's
commercial activities team which summarized various specific outcomes the
Hamm consultants had rewritten.  The memo requested that the Navy team
?complete [and/or] correct? a certain portion of the outcomes, and described
other outcomes that had been revised from an earlier draft as having been
?simplified,? restricted?, ?replace[d],? ?rolled into one [another],? and
?written to a much broader level.?  The memorandum concluded by stating:
?We look forward to your constructive critique of these outcomes soon.  How
we organize workload, what specific regulatory requirements are included,
and the organization of the MEO requirements all hinge on the outcomes.?
Memorandum from Hamm Consultant to Navy Commercial Activities Coordinator
(Sept. 9, 1998).
[14] We note in this regard that FAR sect. 9.505-2(b) establishes a general
prohibition on a firm receiving a contract where the firm wrote, or assisted
in the writing of, the statement of work.  Nothing suggests that this
prohibition should be enforced only if there is proof that the statement of
work was actually biased in the firm's favor, and, indeed, the regulation
explains that the prohibition is in place ?[t]o overcome the possibility of
bias.?  FAR sect. 9.505-2(b)(2) (emphasis added).
[15] The Navy asserts that our decision means that the presumption of
prejudice is ?irrebuttable? for purposes of a protest before our Office.
The Navy is mistaken.  Our Office has demonstrated that, even when a
conflict of interest situation exists, a protest will not be sustained where
the record affirmatively demonstrates that, even if the conflict had been
eliminated, the protester would not have had a substantial chance of
receiving award.  See TDF Corp., B?288392, B?288392.2, Oct. 23, 2001, 2001
CPD para.178 at 9?10; IT Facility Servs.--Joint Venture, supra, at 12?13.
[16] The Navy states there are 160 ongoing A-76 studies within the
Department of the Navy that could be affected by the Jones/Hill decision.
Navy Reconsideration Request at 5.  The Office of the Under Secretary of
Defense expresses concern that ?widespread cancellation [of ongoing A?76
studies] will undermine DOD's competitive sourcing programs.?  Letter from
Director, Competitive Sourcing & Privatization, Office of the Deputy Under
Secretary of Defense, to GAO, Mar. 5, 2002, at 2.
[17] Specifically, our decision today supersedes our prior recommendation
that in the NASL study the Navy should issue a new PWS/RFP, prepare a new
MEO management plan, and resolicit private-sector proposals.  In light of
the other bases for sustaining the protest, however, we recommend that the
agency take action correcting the other specific concerns identified in our
decision.  Specifically, we recommend that the Navy review the RFP to be
certain that it adequately reflects the agency's requirements.  Assuming
that it does, the agency should then ensure that all appropriate costs are
included in the in-house cost estimate; specifically review the existing MEO
plan with regard to the staffing concerns identified in our decision, either
adjusting the staffing levels of the MEO plan, along with the addition of
appropriate costs, or documenting the basis for concluding that the proposed
staffing will satisfy the PWS requirements and offer a level and quality of
performance comparable to those in Jones/Hill's proposal, taking into
account the specific evaluated strengths in that proposal; and, finally,
perform a new cost comparison.
[18] The decision was issued under protective order on December 5, 2001; the
redacted version was released to the public on December 10, 2001.
[19] In its reconsideration request, the Navy also sought guidance regarding
the permissibility of executing conflict of interest waivers.  In this
regard, the FAR states:
The agency head or a designee may waive any general rule or procedure of
this subpart by determining that its application in a particular situation
would not be in the Government's interest.  Any request for waiver must be
in writing, shall set forth the extent of the conflict, and requires
approval by the agency head or a designee.  Agency heads shall not delegate
waiver authority below the level of head of a contracting activity.
FAR sect. 9.503.
Consistent with our view that MEO teams are essentially competitors in the
A-76 process and should be treated as such for conflict of interest
purposes, we see no reason why agencies may not, consistent with the
provisions of FAR sect. 9.503 quoted above, execute conflict of interest waivers
with regard to MEO teams or consultants assisting them.  As with any such
determination applicable to private-sector competitors, we would expect
waivers to be consistent with, and reasonably supported by, the record.