TITLE:  Day Zimmermann Hawthorne Corporation, B-287121, March 30, 2001
BNUMBER:  B-287121
DATE:  March 30, 2001
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Day Zimmermann Hawthorne Corporation, B-287121, March 30, 2001

Decision

Matter of: Day Zimmermann Hawthorne Corporation

File: B-287121

Date: March 30, 2001

Joan K. Fiorino, Esq., John C. Dulske, Esq., and Valinda J. Astoria, Esq.,
Thurman & Phillips, for the protester.

M. Lee Johnson, Esq., and Barbara J. Amster, Esq., Department of the Navy,
for the agency.

Tania Calhoun, Esq., and Christine S. Melody, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

DIGEST

1. Protest that contracting agency improperly failed to include the clause
at Federal Acquisition Regulation sect. 52.250-1, "Indemnification Under Public
Law 85-804," in solicitation that includes requirements for ordnance
handling and support services is denied where the record shows that the
Navy's decision was reasonable.

2. Protest that solicitation that includes requirements for ordnance
handling and support services imposes inordinate and unjustified risks that
unduly restrict competition is denied where the solicitation provided
offerors with extensive detail in order to inform them about any risks that
might exist in the performance of the contract and imposed numerous safety
requirements that limit those risks, and where competition does not appear
to have been unduly restricted; the mere presence of risk in a solicitation
does not make it improper.

DECISION

Day Zimmermann Hawthorne Corporation (DZHC) protests the terms of request
for proposals (RFP) No. N00244-00-R-0021, issued by the Department of the
Navy to obtain ordnance handling operations support and specific base
operations support services for the Naval Weapons Station Seal Beach,
California and its detachment in Fallbrook, California. The procurement is
being conducted pursuant to Office of Management and Budget (OMB) A-76 cost
comparison guidelines. DZHC contends that the solicitation improperly fails
to include the clause at Federal Acquisition Regulation (FAR) sect. 52.250-1,
"Indemnification Under Public Law 85-804," and imposes inordinate and
unjustified risks that unduly restrict competition. DZHC also contends that
the Navy will have an unfair competitive advantage during the cost
comparison.

We deny the protest.

These services are required to support Seal Beach's mission as the primary
retail ammunition supply point for the West Coast. The selected service
provider is to provide responsive, reliable, affordable, and cost-effective
ammunition receipt, segregation, storage, and issue operations at Seal Beach
and Fallbrook, as well as reliable and cost-effective facilities operation
and maintenance and other specified support services to Navy and other
defense and federal tenants at these installations. Among the services to be
provided are facilities operation, maintenance and repair; transportation;
bachelor quarters operation and maintenance; administrative support; Navy
Occupational Safety and Health program support; environmental program
support; contingency preparedness; and ordnance handling operations. The
Navy plans to select the best value proposal for the cost comparison with
the in-house management plan. If the results of the cost comparison favor
performance by contract, the Navy anticipates the award of a fixed-price
contract with award fee provisions to the private contractor.

The ordnance handling operations function includes receiving, segregating,
storing, repackaging, moving, lifting, transporting, and issuing
conventional ammunition, mines, torpedoes, missiles, and components at the
Seal Beach and Fallbrook installations. RFP attach. 1, annex 10, sect. 10.1.1.
The Navy expects the service provider to use to full advantage the equipment
and facilities provided by the government to offer the safest and most
efficient ordnance handling services possible. In this regard, the RFP
required that these services be conducted in accordance with a wide range of
safety-related guidance and directives, and set forth numerous specific
criteria and standards for their performance. Id. sect.sect. 10.1.3, 10.1.10.1.
Among other things, since any site where ordnance is handled or stored
requires large surrounding areas free of inhabited structures and other
facilities where human life might be endangered, the service provider was to
ensure that all handling, storage, movement, and shipment of ordnance was
conducted within each station's explosive safety quantity-distance limits,
i.e., safety zones. Id. sect. 10.1.3;

RFP sect. C.1.5.1. The RFP cautioned that the services will rely heavily on
knowledgeable, experienced individuals capable of identifying potential
safety risks, assessing the immediate need, and applying all actions
necessary to control and eliminate the danger and perform the mission, and
established minimum requirements for proposed ordnance handling operations
personnel. RFP at 19-21. The RFP included extensive historical workload data
associated with these services in order to assist contractors in preparing
their proposals. RFP attach. 1, annex 10.

Since the installations encompass environmentally and historically sensitive
lands, the service provider is required to comply with all applicable
federal, state, and local environmental laws and statutes, and with all
Department of Defense and Navy prescriptive environmental requirements. RFP
sect. C.1.5.3. The RFP included a summary listing of the applicable
environmental laws, statutes, and policy requirements. The RFP advised
potential offerors that operations in these sensitive areas were generally
subject to assessment, review, and restrictions. Id.

These services are to be provided on government installations. As a result,
the RFP included the clause at FAR sect. 52.228-5, "Insurance-Work on a
Government Installation." Pursuant to that clause, the RFP set forth the
kinds and minimum amounts of insurance required for the services to be
provided here. In addition to general liability coverage for bodily injury,
the RFP required automobile and aircraft liability insurance for bodily
injury and property damage associated with performance of the contract. The
solicitation also incorporated the clauses at

FAR sect.sect. 52.245-2 (Alternate 1) and 52.246-25, which limit a contractor's
liability for loss, destruction of, or damage to government property.

Amendment No. 3, issued November 28, incorporated questions and answers from
prospective offerors. In response to Question No. 56, "Will the Navy provide
indemnification to the Service provider to cover explosive and environmental
incidents?," the Navy replied, "No."

On December 20, DZHC filed a timely agency-level protest in which it argued
that the Navy was required to incorporate FAR sect. 52.250-1, "Indemnification
Under Public Law 85-804," into this solicitation. This clause provides that
it is to be inserted in contracts whenever the approving official determines
that the contractor shall be indemnified against "unusually hazardous or
nuclear risks." DZHC argued that the solicitation's allocation of risk
subjected contractors to inordinate and unjustified risks that unduly
restricted competition, and that the in-house management plan will have an
unfair competitive advantage during the cost comparison. Proposals were
submitted during the pendency of the agency-level protest. The Navy
subsequently denied DZHC's protest and the firm filed the same protest here.

DZHC argues that the nature of this procurement requires the Navy to
incorporate FAR sect. 52.250-1 into this solicitation. DZHC contends that the
ordnance handling support services to be provided here are "unusually
hazardous" because they involve the handling and transportation of
explosives on installations which encompass environmentally and historically
sensitive locations, and asserts that the Navy declined to incorporate the
clause based upon its overly restrictive definition of the term "unusually
hazardous." We do not agree.

Public Law No. 85-804, codified at 50 U.S.C. sect. 1431-35 (Supp. IV 1998),
grants to the President the authority to authorize any agency which
exercises functions in connection with the national defense to enter into
contracts or into amendments or modifications of contracts, and to make
advance payments, without regard to other applicable legal provisions
whenever such action would facilitate the national defense. [1] 50 U.S.C. sect.
1431. The legislative history of the statute indicates that it may also be
used as the basis for making indemnity payments under certain government
contracts, the so-called "residual powers." ECR Current Materials at 1005,
1021. The legislative history explains that "[t]he need for indemnity
clauses in most cases arises from the advent of nuclear power and the use of
highly volatile fuels in the missile program. The magnitude of the risks
involved under procurement contracts in these areas have rendered commercial
insurance either unavailable or limited in coverage." S. Rep. No. 85-2281,
at 3 (1958), reprinted in 1958 U.S.C.C.A.N. 4043, 4045.

Part 50 of the FAR implements Public Law No. 85-804, and Subpart 50.4,
"Residual Powers," governs the indemnification authority. Various provisions
therein set forth standards for use of the indemnification clause and
describe the mechanism of the indemnification process. Pursuant to FAR sect.
50.403-3, the contracting officer is to insert the clause at sect. 52.250-1,
"Indemnification under Public Law 85-804," in contracts whenever the
approving official determines that the contractor shall be indemnified
against "unusually hazardous or nuclear risks."

As a threshold matter, we agree with the Navy that these indemnification
provisions are couched in terms of a post-award environment, when an actual
contract exists. However, we do not read the statutory or regulatory
language to prohibit a solicitation's inclusion of FAR sect. 52.250-1 or
language indicating that the government anticipates providing for
indemnification, such as in solicitations for goods or services for which
indemnification has historically been granted. See Air Force Indemnification
Guide for Unusually Hazardous or Nuclear Risks, July 7, 1997, Revision A
(Apr. 1, 1998) at 3, 6, at .
Here, DZHC has alleged that the Navy's decision not to include this
indemnification provision resulted in a defective solicitation. In such
cases, since the decision whether to include an indemnity provision is
within an agency's discretion, Dames & Moore, B-257139, Aug. 30, 1994, 1994
U.S. Comp. Gen. LEXIS 711 at *5, our review is limited to considering
whether that decision was reasonable. See B&P Refuse Disposal, Inc.,
B-253661, Sept. 16, 1993, 93-2 CPD para. 177 at 2-3. Our review of the record
shows that the Navy's decision here was, in fact, reasonable.

The Navy states that, while the handling or physical movement of ordnance
may be viewed as "hazardous," it is not "unusually hazardous" as
contemplated by Public Law No. 85-804. The Navy states that no nuclear
materials are involved; the extensive environmental and safety standards set
forth in the solicitation minimize the risks of accidental incidents;
performance will take place on government installations; and there is no
history of incidents requiring indemnification for catastrophic events. The
Navy's decision here is consistent with prior practice. The Deputy Counsel
to the Assistant Secretary for the Navy for Research, Development and
Acquisition states that the Navy has not provided indemnification for

non-nuclear hazardous work, with the exception of repairing the U.S.S. Cole
after it was the target of a terrorist explosion. Agency Supplemental Report
attach. 1. This statement is supported by other information in the record
showing that the Navy historically authorizes Public Law 85-804 clauses in
contracts for the procurement of nuclear-powered vessels, missiles, and
components or subcomponents, and for disposal of low-level nuclear waste.
Environmental Cleanup: Defense Indemnification for Contractor Operations,
(GAO/NSIAD-95-27, Nov. 1994) at 4-5.

As a general matter, this type of relief has been associated with claims of
death, injury, or property damage arising from "nuclear radiation, use of
high energy propellants, or other significant risks not covered by a
contractor's insurance. Items procured under these types of contracts
generally relate to nuclear-powered vessels, nuclear missiles, experimental
nuclear energy work, explosives, or performance in hazardous areas." ECR
Current Materials at 7980-81. DZHC's reliance on the fact that the clause
has been used in explosives-related contracts ignores the evidence in the
record showing that these have been contracts for the operation and
management of Army ammunition plants. Environmental Cleanup: Defense
Indemnification for Contractor Operations, supra, at 2, 4; "Public Law
85-804 Indemnification," Army Material Command Office of Command Counsel
Newsletter 99-2, at
; see also Thiokol
Corp., ACAB No. 1240 (Feb. 2, 1993), 4 ECR para. 71. DZHC has made no effort to
show that the "unusually hazardous" risks inherent in the operation and
management of an ammunition plant are also present in the provision of
ordnance handling and support services. Moreover, DZHC has not rebutted
evidence provided by the Navy to show that other Navy and DOD installations
have also declined to include indemnification provisions in contracts for
ordnance handling and support services. Under the circumstances, we cannot
conclude that the Navy unreasonably decided that this procurement posed no
"unusually hazardous" risks. Since the presence of such risks is a
prerequisite for the inclusion of the indemnification clause, we deny DZHC's
protest on this basis.

DZHC argues that the RFP imposes inordinate and unjustified risks on the
successful private contractor, which unduly restricts competition. In so
arguing, DZHC first contends that the Navy expects offerors to purchase
coverage for explosive and/or environmental incidents, but does not clearly
set forth this expectation because the general liability insurance required
by the solicitation does not ordinarily include such coverage.

Nothing in the solicitation suggests that the Navy intended to require
offerors to purchase coverage for explosive and/or environmental incidents,
and the Navy states that it had no such intention. The Navy explains that
there is no history of explosive or environmental incidents that would
suggest such a requirement was necessary, and points to the solicitation's
imposition of numerous explosives and environmental safety requirements on
the contractor that are intended to limit the possibility of such incidents.
The Navy explains that the risks contractors choose to bear beyond the
general liability insurance coverage required by the solicitation are a
matter of their business judgment, and that it would be inappropriate to
impose such a requirement when the premiums charged can vary greatly
depending on each offeror's unique situation.

DZHC contends that, absent a requirement for this additional coverage and
attendant liability limitations, there is no reasonable limitation on the
contractor's risk. In this regard, DZHC asserts that the RFP failed to
provide sufficient detail to reasonably put potential offerors on notice
about the extent, depth, and breath of the potential liability facing the
contractor. As a result, competition will be restricted and offers will be
submitted at widely divergent prices.

An agency's decision not to include a solicitation requirement for a
particular type of insurance is not unduly restrictive of competition where,
as here, the agency reasonably determines that such insurance is not
necessary to protect the government's interests. See McNamara-Lunz Vans &
Warehouses, Inc., B-256848, Aug. 3, 1994, 94-2 CPD para. 56 at 3-4. Here, unlike
in the case it cites in support of its position, BMAR & Assocs., Inc.,
B-281664, Mar. 18, 1999, 99-1 CPD para. 62, the RFP does provide reasonable
limitations on a contractor's risks that led the Navy to believe additional
coverage was not warranted. The solicitation provides extensive detail about
the services to be provided, imposed voluminous guidance in the form of
regulations and directives, set forth numerous criteria and performance
standards, described strict personnel qualification requirements, allowed
for site visits, and provided extensive historical workload data. All of
this information combined to provide offerors with ample detail to put them
on notice about the extent, depth, and breadth of the potential liability
that might face them, and to limit that liability. Beyond that, offerors
were free to limit their own risk by purchasing additional coverage using
their business judgment based upon their unique situations and

risk-tolerance levels.

As regards the risk of liability without insurance, the mere presence of
risk in a solicitation does not make the solicitation inappropriate or
improper. Tracor Jitco, Inc., B-220139, Dec. 24, 1985, 85-2 CPD para. 710 at
4-5; see also Aalco Forwarding, Inc., et al., B-277241.8, B-277241.9, Oct.
21, 1997, 97-2 CPD para. 110 at 22-23. It is within the agency's discretion to
offer for competition a proposed contract that imposes maximum risks on the
contractor and minimum burdens on the agency. Tracor Jitco, Inc., supra, at
5. DZHC does not rebut the Navy's assertion that [DELETED] contractors [2]
that usually compete for and perform this type of work submitted proposals
here, which suggests that the solicitation was not so burdensome as to
preclude competition. While it is true that [DELETED] prices are [DELETED],
we have no basis to attribute this [DELETED] to a difference in [DELETED]
costs for insurance coverage.

DZHC finally argues that the Navy will have an unfair competitive advantage
during the cost comparison because private offerors must include costs for
the coverage of explosive and/or environmental incidents, but the in-house
management plan need not include such costs.

Again, with respect to the competition between private offerors, there is no
requirement to include such costs. Offerors were free to include such costs,
or not, based upon their business judgment. With respect to the competition
between the proposal selected for the cost comparison and the in-house
management plan, the Navy notes that since the government always enjoys the
benefits of being self-insured, OMB Circular No. A-76 mandates that certain
adjustments be made to the in-house estimate to take into consideration the
stated requirements imposed on the contractor. See, e.g., OMB Circular No.
A-76, part II, chapt. 2.D.7. The Navy asserts that its estimate, which
remains sealed, has accounted for such an offset. Since the Navy has not yet
selected the best value proposal or completed the cost comparison, any
challenge by DZHC to the anticipated cost comparison is premature. See ITT
Fed. Servs. Corp., B-253740.2, May 27, 1994, 94-2 CPD para. 30 at 14; Del-Jen,
Inc.,

B-218136, Feb. 27, 1985, 85-1 CPD para. 250 at 1-2.

The protest is denied.

Anthony H. Gamboa

General Counsel

Notes

1. A discussion of the origins and uses of Public Law 85-804 can be found in
the Extraordinary Contractual Relief (ECR) Reporter Current Materials at
1003-1029.

2. [DELETED]