TITLE:  Del-Jen, Inc., B-287273.2, January 23, 2002
BNUMBER:  B-287273.2
DATE:  January 23, 2002
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Decision

Matter of: Del-Jen, Inc.

File: B-287273.2

Date: January 23, 2002

William A. Roberts, Esq., Phillip H. Harrington, Esq., William S. Leith,
Esq., and Janet L. Eichers, Esq., Wiley, Rein & Fielding, for the protester.

Gregory H. Petkoff, Esq., Sharon A. Jenks, Esq., Thomas J. Faulconer, Esq.,
Richard C. Bean, Esq., and Edward L. Fitzmaurice, Esq., Department of the
Air Force, for the agency.

David A. Ashen, Esq., and John M. Melody, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

DIGEST

Protest challenging cost comparison conducted pursuant to Office of
Management and Budget Circular A-76 is sustained where the determination of
the appropriate contract administration costs was unreasonable, and did not
result in a fair comparison; record indicates that agency did not properly
account for, and thereby understated, the contract administration effort,
and associated costs, that should be included as costs of in-house
performance, and that, in addition, agency may have overstated the contract
administration effort, and associated costs, that should be included as
costs of performance by the private-sector offeror.

DECISION

Del-Jen, Inc. (DJI) protests the decision of the Department of the Air Force
to retain the civil engineering function at Hanscom Air Force Base (AFB),
Massachusetts, for performance in-house, rather than contract for these
services with DJI, under request for proposals (RFP) No. F19650-00-R-0001.
The Air Force determined to retain the services in-house based on the
results of a cost comparison conducted pursuant to Office of Management and
Budget (OMB) Circular A-76, which compared DJI's proposal to perform the
work against the government's in-house

management plan. [1] DJI asserts that the contract administration costs
included in the cost comparison were unreasonable; the in-house management
plan for a "most efficient organization" (MEO) included insufficient
staffing to perform the performance work statement (PWS); and the agency
improperly failed to ensure that the in-house plan and private-sector offer
were based on a comparable level and quality of performance. [2]

We sustain the protest.

COST COMPARISON

The services solicited, described by the PWS as "typical in the commercial
industry," included customer support services, infrastructure maintenance,
facility maintenance, physical plant operations, utilities management, civil
engineer services, environmental protection services, architectural and
engineering services, construction, property management, and financial
management. PWS sect. 1. In the event of contract performance, the RFP provided
for award of a cost-plus-award-fee contract, for a base year, with 4 option
years. The RFP stated that the private-sector offer to be compared with the
MEO would be that which conformed to the RFP and represented the best value
to the government. Best value was defined as "the most advantageous offer,
cost and other factors considered, providing the best technical quality,
business aspects, risks, and costs for a given application, and in
consonance with the Government's stated importance of evaluation criteria."
RFP sect. M.1.

Private-sector proposals were to be evaluated based on the following
factors: (1) mission capability, including business plan demonstrating an
ability to meet the mission requirements, manning/staffing, and knowledge
and response to unique military requirements; (2) proposal risk; (3) past
performance; and (4) cost/price. The mission capability, proposal risk, and
past performance factors were of equal importance, and each was more
important than cost/price.

Technical/past performance proposals were received from [DELETED] offerors,
including DJI. After conducting several rounds of discussions, and after the
withdrawal of one of the proposals, the Air Force requested complete
proposals, including cost proposals, from the remaining [DELETED] offerors.
Based on the complete proposals, the agency established a competitive range
consisting only of DJI. After further discussions with DJI, the Air Force
requested final proposal revisions; based on its revised proposal, DJI's
proposal was selected for comparison with the in-house MEO. The ensuing
September 2000 cost comparison resulted in a tentative decision that
performance by DJI of the civil engineering function would cost less than
in-house performance. Specifically, the Air Force found that the evaluated
cost of performance by DJI over 5 years would be $160,352,343 (including the
application of contract administration costs and the minimum conversion
differential), as compared to the MEO's cost of $162,154,921, a difference
of $1,802,578 in DJI's favor.

Affected civil engineering employees thereupon filed a number of appeals
with the Base Administrative Appeal Review Team (BAART). Among other things,
the employees asserted that the cost of administering a contract with DJI
had been understated. (Under Circular A-76, the cost of administering a
contract is added to the private-sector proposal for purposes of the
public/private comparison.) In the appeal, the employees contended that,
while the estimate used in the comparison was based on using seven contract
administrators, including three GS-12, two GS-11 and two GS-9 positions, in
fact eight contract administrators were required and the GS-9 positions
should have been GS-11 positions. By decision dated February 2, 2001, the
BAART found for the employees on these and several other issues. This
resulted in the elimination of DJI's evaluated cost advantage--as revised
after the BAART decision, DJI's cost was $160,846,703, as compared to the
MEO's cost of $156,434,748--and, consequently, reversal of the determination
to contract out to DJI.

On February 12, 2001, DJI protested to our Office the Air Force's decision
to retain the function in-house rather than contract with DJI. Among the
issues raised in DJI's protest to our Office were a number of issues which
the BAART had declined to address when DJI raised them in its comments on
the appeals filed by the affected employees. Subsequent to filing its
protest at out Office, DJI filed an appeal with the agency raising those
issues. In light of these facts, the Air Force maintained that we should
allow DJI's agency-level appeal to run its course before reviewing the
matter. After conference calls with the parties, we dismissed DJI's protest
pending the exhaustion of the agency appeal process (B-287273, Apr. 11,
2001). See DZS/Baker LLC; Morrison Knudsen Corp., B-281224 et al., Jan. 12,
1999, 99-1 CPD para. 19 at 2 n.1.

By decision dated October 2, the BAART found for DJI with respect to four of
its appeal issues. However, the resulting October 3 revised cost comparison
still favored in-house performance of the civil engineering function, as
shown below:

                                 MEO            DJI

 Total proposed costs            $72,121,940    $65,104,637

 Contract administration         0              3,157,781

 One-time conversion costs       0              152,115

 Federal income tax adjustment   0              <325,522>

 Total adjusted costs            72,121,940     68,089,011

 Minimum conversion              0              4,927,421
 differential

 Final adjusted costs [3]        $72,121,940    $73,016,432

In responding to the protest, the Air Force conceded that the MEO had failed
to provide for computer repair and maintenance required by the PWS. When the
cost of providing these services was included in the MEO cost, the MEO's
advantage with respect to adjusted costs decreased to $471,656. Agency
Memorandum of Law at 41. DJI asserts that the in-house cost estimate and the
overall cost comparison were flawed in a number of other respects, and that,
if these errors were corrected, its evaluated cost would be lower than the
MEO's.

Where, as here, an agency has used the procurement system to determine
whether to contract out or to perform work in-house, we will consider a
protest alleging that the agency has not complied with the applicable
procedures in its selection process, or that the evaluation was inconsistent
with the solicitation criteria or otherwise unreasonable. See Trajen, Inc.,
B-284310, B-284310.2, Mar. 28, 2000, 2000 CPD para. 61 at 3. To succeed in its
protest, a protester must demonstrate, not only that the agency failed to
follow established procedures, but that its failure could have materially
affected the outcome of the cost comparison. BAE Sys., B-287189, B-287189.2,
May 14, 2001, 2001 CPD para. 86 at 19. Here, we conclude that the cost
comparison was unreasonable in several respects, and that the deficiencies
could have materially affected the outcome of the comparison.

Contract Administration

As noted above, estimated contract administration costs are normally added
to the cost of the private-sector proposal for purposes of cost comparisons
under Circular A-76. Here, the cost of contract administration is an element
both of the evaluated cost of private-sector performance, where it
represents the expected cost to the government of administering the
contract, and of the cost of in-house performance, where it represents the
effort the MEO must undertake in order to ensure proper performance of its
support contracts--referred to in the record here as "MEO subcontracts"--
which the MEO proposed as part of its effort in performing the PWS. In this
regard, while an adequate contract administration effort clearly is
essential to ensuring that cost, schedule and performance requirements are
met, a realistic estimate of expected contract administration effort for
purposes of the comparison of the cost of in-house performance to the cost
of contract performance also is essential if the cost comparison is to be
realistic and fair. See 10 U.S.C. sect. 2462. The realism and fairness of the
estimates of contract administration costs play an especially important role
here, because the evaluated cost of performance by DJI is lower than the
cost of in-house performance, even after addition of the conversion
differential, and the cost of in-house performance becomes low only after
consideration of the cost of contract administration.

Accounting for the required contract administration effort in a realistic
and fair manner can be difficult in view of the necessarily uncertain nature
of estimating the number and grade of the contract administrators that will
be necessary to administer the contract. We think it helpful that the most
recent guidance from the Department of Defense in this regard, the
department's A-76 Costing Manual (Mar. 14, 2001), specifies the number and
grade level of the contract administrators whose cost is to be included in
the cost of contract performance (and effectively establishes a ceiling on
the number of contract administrators whose cost is to be included in the
in-house cost). A-76 Costing Manual, sect.sect. C1.4.2.3, C8.2.7. Because of the
chronology of events, however, the Air Force was not required to use that
guidance here. [4]

Another problematic element in arriving at a fair and realistic estimate of
the contract administration effort is that the applicable guidance provides
for determining the maximum permitted estimate of the expected contract
administration resources based on the MEO staffing level, not the staffing
of the offeror whose contract actually would be administered. [5] RSH, part
II, ch. 3 sect. C.2 and Table 3-1; AFP 26-12 (1996) sect. 3e(1) and app. B. Thus,
the MEO staffing level, which here includes both specifically identified
government in-house positions and staff attributed to the MEO subcontracts,
becomes a critically important consideration in ensuring a fair comparison.

Here, our review of the record indicates that the Air Force's approach in
determining the appropriate contract administration costs was unreasonable,
and did not result in a fair comparison. Specifically, we find that the
agency did not properly account for, and it thereby understated, the
contract administration effort, and associated costs, that should be
included as costs of in-house performance. In addition, the record indicates
that the agency may have overstated the contract administration effort, and
associated costs, that should be included as costs of performance by DJI. We
set out our findings in detail below.

MEO Subcontracts

DJI asserts that the in-house management plan understated the number of
contract professionals that would be required to administer MEO
subcontracts. These "subcontracts" represent existing contract support to
the facility which the MEO intended to continue to rely upon (in addition to
government FTEs) in performing the PWS.

The calculation of the cost of in-house performance, as set forth in the OMB
Circular A-76 cost comparison form, includes personnel costs (Line 1),
material and supply costs (Line 2), other specifically attributable costs
(Line 3), overhead costs (Line 4), and additional costs (Line 5). The RSH
further provides that Line 1 "includes the cost of all direct in-house labor
and supervision necessary to accomplish the requirements specified in the
PWS." RSH, part II, ch. 2 sect. B.1. In addition, the RSH states as follows:

In-house cost estimates that assume a mix of in-house labor and existing
contract support should include the cost of labor for the Government's
administration and in-house inspection of those support contracts on Line 1.
. . . The cost of the support contracts themselves, including the cost of
related Government furnished equipment and

facilities not provided to the contractor under this cost comparison, should
be entered on Line 3 Other Specifically Attributable costs.

RSH, part II, ch. 2 sect.sect. B.2, D.9.

In response to DJI's appeal of the adequacy of the MEO contract
administration staff, the BAART found that the MEO included 3 FTEs of
quality assurance-type contract administration effort spread over 26
existing personnel positions, the cost of which was properly included in the
in-house cost on Line 1 (personnel cost) of the cost comparison. [6] The
BAART also found that the MEO included government contracting professionals
necessary to perform the contract administration effort, see AFP 26-12 sect.
10-13a; it stated that the cost of these professionals was "properly
accounted for in the COMPARE model," but did not specify where the costs
were listed. Second Appeal Decision of the BAART, Oct. 2, 2001, para. 71. It has
become evident during the course of the protest that it is the Air Force's
position that the cost of the required contracting professionals is included
in overhead. Agency Comments, Jan. 2, 2002, at 10; Agency Memorandum of Law
at 23; Contracting Officer's Statement at 47.

DJI argues that the in-house contract professional positions required to
administer the MEO subcontracts should have been costed on Line 1, rather
than included in overhead, and that the MEO cost was understated as a
result. Citing an example set forth in DOD's current A-76 Costing
Manual--for a hypothetical MEO of 38.61 FTEs, the cost comparison included
2 contract administration FTEs, including 1 GS-12 contracting officer's
representative and 1 GS-11 contract specialist--DJI asserts that the cost
(estimated as $349,233) for at least 1 GS-11 contract specialist should be
added to Line 1 (personnel) of the cost comparison form. A-76 Costing Manual
sect. C8.3.2.

The Air Force claims that the cost of the required contracting professionals
was properly accounted for as overhead in Line 4, which the 1996 version of
AFP 26-12 (as well as the RSH) calculates as 12 percent of the total
civilian personnel costs entered on Line 1. Agency Comments, Jan. 2, 2002,
at 10; Agency Memorandum of Law at 23; Contracting Officer's Statement at
47; RSH, part II, ch. 2 sect. E.3; AFP 26-12 (1996) sect. 3.c. In support of this
position, the agency cites the 1992 version of AFP 26-12, which provides
that overhead is to be calculated based on the addition of various
operations and general and administrative overhead costs; as noted by the
agency, "Procurement and Contracting" is listed as one of the typical types
of general and administrative overhead activities. AFP 26-12, fig. 10-16.

We agree with DJI that the cost comparison did not properly account for the
cost of the contract professional effort required for administration of the
MEO subcontracts. While the agency is correct in its reference to AFP 26-12,
the pamphlet was revised in 1996 to specifically provide that "[i]n-house
cost estimates that assume a mix of in-house labor and existing contract
support should include the cost of labor for the Government's administration
of those support contracts on Line 1 of the Cost Comparison Form." AFP 26-12
(1996) sect. 5c. This is consistent with the 1996 version of the RSH, which, as
noted above, similarly directs that the cost comparison "include the MEO
cost of labor for the Government's administration and in-house inspection of
the continued support contracts on Line 1." RSH, part II, ch. 2 sect.sect. B.2, D.9.
[7] In short, this direction clearly, and, in our view, reasonably, requires
that the cost of all of the personnel necessary to administer the support
contracts--the MEO subcontracts--must be included in the MEO's Line 1 cost,
and not assumed to simply be part of the Line 4 overhead cost. [8] These are
additional costs to the government, over and above ordinary overhead,
attributable directly to the MEO's planned approach. Thus, the agency's
failure to include the cost of the required contracting professionals on
Line 1 was improper.

DJI Contract Cost Adjustments

DJI asserts that the agency's estimates of the number and grade levels of
the contract administrators that would be required to administer DJI's
contract, the cost of which is added to DJI's contract price for purposes of
the cost comparison, were improperly increased during the appeals process.

Both the RSH and AFP 26-12 include a table for use in determining the
maximum number of contract administration FTEs required to administer the
private-sector contract. The table provides for calculating the maximum
contract administration effort based on the level of MEO staffing, but does
not address the grade level of the contract administrators. [9] RSH, part
II, ch. 3 sect. C.2 and Table 3-1; AFP 26-12 (1996) sect. 3e(1) and app. B. In
contrast, the current DOD A-76 Costing Manual does specify grade levels.
A-76 Costing Manual sect. C8.2.7, fig. C8.F1.

In the initial cost comparison, the contract administration cost associated
with administering the private-sector contract was calculated based on
7 contract administrators, including three GS-12s, two GS-11s and two GS-9s.
As explained by the Air Force during the subsequent appeals, in determining
the appropriate number of contract administration personnel by reference to
the table, it interpreted AFP 26-12 as allowing consideration of only the
163 FTEs which comprised the MEO in-house staff, and not the additional
contract manpower equivalents (CME) associated with the MEO subcontracts. In
its decision on the appeals, however, the BAART noted that AFP 26-12
specifically provides that "the CMEs associated with . . . purchased
services should be added to the FTEs reflected in the MEO to determine the
number of contract administration positions required." AFP 26-12 sect. 10-13b.
The BAART concluded that the agency was required to include the CMEs for
purposes of determining the appropriate number of contract administrators in
the case of award to DJI. Final Appeal Decision of the BAART, Jan. 22, 2001
(First Appeal Decision) para.para. 112, 118. The agency determined that there were
70 CMEs associated with the MEO subcontracts; when the 70 CMEs were added to
the in-house government FTEs, the total MEO staffing was 233 FTEs. Since the
contract administration table allowed a maximum of eight contract
administrators for staffing at this level, the cost of an additional GS-11
contract administrator was added to DJI's contract cost in the revised cost
comparison. The BAART also found that the skill mix for contract
administrators--two GS-9s, two GS-11s, and three GS-12s--used in the initial
cost comparison was inadequate; as a result, the two GS-9 positions were
raised to, and costed as, GS-11 positions in the revised cost comparison.
Id. para.para. 10, 42, 45.

Additional Contract Administrator--CME Calculation

DJI argues that it was improper to add an eighth contract administrator to
the cost of contracting out, and calculates that this resulted in the
overstatement of DJI's costs by $351,673. According to the protester, adding
the eighth position was improper because the BAART misread the applicable
guidance to require that the CMEs be considered in using the contract
administration table, and, alternatively, because the number of CMEs was
overstated, leading to an overstatement of the number of contract
administrators needed.

We do not agree with DJI that the CMEs should not have been included in the
contract administrator calculation. Rather, based on the plain language of
AFP 26-12 sect. 10-13b, quoted above and cited by the BAART, we think it is
clear that the guidance requires that CMEs should be added to the MEO FTEs
to derive the staffing number used to determine the maximum permitted number
of contract administrators from the table. Further, although it was not
required to be used in this cost comparison, we consider it instructive that
the current DOD A-76 Costing Manual, sect. C8.2.1, fig., likewise expressly
requires that the MEO staffing level used to estimate the size of the
contract administration effort include CMEs. We recognize that, as noted by
DJI, the RSH does not define the concept of "MEO Staffing" to be used in the
contract administration table with the same precision as AFP 26-12 or DOD's
A-76 Costing Manual. However, while the RSH does not expressly require
consideration of the CMEs in calculating the MEO staffing, it also does not
exclude their consideration, and thus does not provide a basis for ignoring
the express requirements of AFP 26-12.

We do agree with DJI, however, that the record does not support the agency's
attribution of 70 CMEs to the MEO subcontracts. In defending its
calculation, the Air Force explains that the CME staffing was derived by a
support service contractor using several techniques, including consultation
with Hanscom AFB functional experts; use of the Air Force Manpower Standard
listing the average manpower needed to accomplish certain tasks and the
average monthly workload associated with the task at a normal base;
technical estimates; and, for 14 of the CMEs, application of an "average
labor factor"(FTE cost) of $25,000 to the assumed labor component (70
percent) of the contract cost. Current Year (1999) Contract Manpower
Equivalent (CME) Determination Process; Agency Comments, Jan. 8, 2002, at
8-10; Agency Comments, Dec. 5, 2001, at 7.

While the Air Force has presented a general explanation of the approach used
to calculate the CMEs, it has not detailed the actual calculations involved,
notwithstanding our specific request that it do so. The agency's failure in
this regard is significant, since the calculation that it does
describe--applying an average FTE cost of $25,000 to the assumed 70-percent
labor component of the contract cost--appears questionable on its face. [10]
The Air Force has furnished no evidence that it can obtain the required
labor for an average, fully burdened cost of $25,000 per CME, and its
assumption that such low-cost employees will be available seems inconsistent
with its assertion elsewhere (as discussed below) that it was necessary to
calculate the contract administration costs for DJI using higher-grade
contract administrators partly because Hanscom AFB is in such a high-cost
area. While the agency argues that the $25,000 per CME relates to only 14 of
the 70 CMEs, who were unskilled labor, if we assume a 70-percent labor
component and a total subcontract value of $2,603,500 (the figure used by
the agency), the fully burdened cost per CME for all 70 CMEs does not
increase by much--the average remains only $26,035, which would still appear
to be unrealistically low. We conclude that the calculation of 70 CMEs lacks
a reasonable basis, and that unless the in-house estimate of its subcontract
costs is increased, the estimated number of its subcontract personnel
appears overstated.

Since the record suggests that fewer than 70 CMEs should have been included
in the agency's staffing, the determination that 8 contract administrators
would be required to administer DJI's contract (which determination, again,
is based on the MEO's staffing) is necessarily drawn into question. The
agency generally explains that eight contract administrators are required
because the requirement here is an extremely complex one that includes all
of the functions that operate and maintain the infrastructure of the base,
as well as quality of life enhancements. According to the agency, the
complexity of the requirement, when considered in conjunction with the
complex, cost-plus-award-fee contract type, will present significant
contract administration challenges with respect to both quality assurance
and the processing of contract payments. Contracting Officer's Statement of
Facts at 43; Agency Memorandum of Law at 18. However, the contemporaneous
determination that these considerations warrant 8 contract administrators
was premised on a staffing level (233 FTEs) that included 70 CMEs. It is
fair to assume that, if a significantly lower number of CMEs were attributed
to the MEO subcontracts, the agency may have determined that fewer
administrators were needed.

For example, using the $40,000 cost per CME suggested by DJI, and assuming
(as the agency did for some contracts) that labor amounts to 70 percent of
the cost of the support contracts, the number of CMEs could be as low as 46,
for an overall total MEO effort of 209 FTEs. While 209 FTEs falls within the
201-to-250 FTE range for which the relevant table permits 8 contract
administration FTEs, the number of contract administration FTEs specified in
the table, as the protester notes, is only a maximum; the agency still must
perform a reasoned analysis of the number of contract administrators
actually required. See BAE Sys., supra, at 29-30 (RSH specifies the maximum
level of contract administration staffing, not the required level, and
provides for the agency to perform a reasoned analysis of the number of
contract administrators actually required). In our view, a reduction in the
underlying contract staffing by as much as 10 percent (from 233 to 209 FTEs)
warrants a new, reasoned and dispassionate determination, not undertaken in
the heat of litigation, of the contract administration staffing level that
would be required in the case of an award to DJI. [11]

Skill Mix

DJI also questions the BAART's determination that the skill mix of the
initial contract administration team (three GS-12s, two GS-11s and two
GS-9s) should be enhanced by adding higher-grade personnel; this resulted in
converting the two GS-9s into GS-11s, as well as the subsequent addition of
a GS-11 (rather than a GS-9) as the eighth contract administrator. The
protester claims that the agency has failed to justify using a mix of
personnel different from that used in the initial cost comparison and that,
contrary to the requirements in the current DOD A-76 Costing Manual, it
improperly failed to include any position of a lesser grade than GS-11. It
concludes that these errors unfairly inflated the cost of contracting with
DJI. [12]

The Air Force defends the revised skill mix, maintaining that the
preliminary grade mix was inconsistent with the position descriptions as
subsequently properly classified by the personnel specialist and certified
by the deputy base civil engineer (as her supervisor); the replacement of
GS-9s with GS-11s as a result of the appeal process therefore simply
corrected a mistake. In addition, in response to our request that it explain
why there was insufficient less-complex contract administration work to
warrant any contract administration-related position with a grade below
GS-11, the Air Force maintains that the ultimate grade levels were
consistent with the complexity of the requirement, the complex
cost-plus-award-fee contract type, the fact that the MEO included only a
small proportion of low-grade (GS-6 or WG-6) positions, and the high cost of
living in the area surrounding Hanscom AFB.

The agency's position is unpersuasive. As an initial matter, there is a
stark inconsistency between the agency's approach and the contract
administration staffing mix required under the current DOD A-76 Costing
Manual. Whereas the agency is adding to DJI's proposed price the cost of
three GS-12s and five GS-11s, the Costing Manual currently requires that a
contract administration staff of eight include two GS-6s and two GS-9s, with
no more than 2 GS-11s and 2 GS-12s. A-76 Costing Manual sect. C8.2.7, fig.C8.f1.
Although the Costing Manual was not required to be used here (since the
in-house management plan was projected to be submitted to the IRO before
March 15, 2001), its use was permitted, and we consider the manual
persuasive evidence of at least a starting point for a realistic and fair
estimate of contract administration costs. [13]

Further, the agency's position that higher-grade, higher-cost contract
administrators were warranted for DJI by the complexity of the requirement
and the high cost of living appears to be inconsistent with the approach to
determining the MEO's own subcontract administration costs. In this regard,
according to the agency, the quality assurance part of the contract
administration effort required for the MEO subcontracts--which accounted for
approximately [DELETED] percent of the MEO's total first year cost--could be
satisfied by 3 FTEs of effort from a group of 26 employee positions,
including [DELETED] GS-7s and [DELETED] GS-9s, as well as [DELETED] GS-12s
and [DELETED] GS-11s. In other words, notwithstanding that the MEO
subcontracts necessarily encompassed the same PWS requirements reflected in
DJI's proposal, the agency assumed that higher-level, more expensive
contract administrators would be necessary to administer DJI's contract,
while at the same time apparently assuming that some lower-grade, less
expensive personnel were adequate to administer the PWS work under the MEO
subcontracts. The agency claims that this anomaly is explainable by the fact
that the quality assurance requirements with respect to MEO subcontracts
would be somewhat less demanding than administering DJI's contract. This
claim, in our view, is undermined by the agency's inconsistent positions
regarding the complexity of the PWS work. Moreover, since the agency's
rationale for using higher-grade personnel to administer DJI's contract
depended in part on the fact that Hanscom AFB is in a high-cost area, we
would expect a similar impact on the in-house costs; however, there is
nothing in the record showing that the skill mix for the MEO subcontract
administrators reflects this consideration. We conclude that the contract
administration costs included in DJI's performance cost have not been shown
to be reasonable. [14]

Compliance with PWS

DJI asserts that the Air Force failed to ensure that the MEO includes
sufficient staffing to satisfy the PWS requirements. We do not agree. Our
review of the record indicates that the MEO's management and technical
performance plans described how the current agency operations would be
streamlined and consolidated; presented an approach to performing the PWS
that included such efficiencies as the multitasking of MEO staff (as
documented in the position descriptions prepared for each MEO position);
and, significantly, proposed a staffing level that exceeded DJI's proposed
staffing level. [15] Furthermore, the MEO furnished the IRO (who certified
that the in-house management plan satisfies the requirements of the PWS)
with a detailed work breakdown statement specifying which MEO positions
would be involved in satisfying significant PWS requirements. We conclude
that DJI has furnished no basis for finding the staffing of the MEO
inadequate.

comparable level and quality of performance

DJI asserts that the agency improperly failed to ensure that the in-house
plan and private-sector offer were based on a comparable level and quality
of performance.

In this regard, in an A-76 procurement where, as here, the private-sector
competition is conducted on a best-value basis and an agency identifies
areas in the private-sector proposal that exceed the performance work
statement requirements, the agency must assess whether or not the same level
of performance and performance quality will be achieved by the MEO and
ensure that the in-house cost estimate and private-sector offer are "based
upon the same scope of work and performance standards." RSH, part I, ch. 3,
sect.sect. H.3.d, e, J.3; DynCorp Tech. Servs. LLC, B-284833.3, B-284833.4, July 17,
2001, 2001 CPD para. 112 at 12-13; Aberdeen Tech. Servs., B-283727.2, Feb. 22,
2000, 2000 CPD para. 46 at 13-15. This "leveling of the playing field" is
necessary because a best-value solicitation invites submission of proposals
that exceed the RFP requirements, together with the higher costs or prices
that often accompany a technically superior approach. The Jones/Hill Joint
Venture-Costs, B-286194.3, Mar. 27, 2001, 2001 CPD para. 62 at 10. Otherwise,
the successful private-sector offeror may be at an unfair disadvantage when
compared to the in-house cost estimate, which must only satisfy the minimum
performance work statement requirements.

DJI asserts that the agency improperly failed to ensure that the in-house
cost estimate was based on the level of performance and performance quality
reflected in DJI's offer to [DELETED].

DJI's argument is without merit. Here, the Air Force repeatedly advised DJI
that its proposal did not include elements with respect to mission
capability/risk, other than its proposal to [DELETED], that constituted a
strength, that is, "a significant, outstanding, or exceptional aspect of an
offeror's proposal that has merit and exceeds the specified performance or
capability requirements in a way beneficial to the Air Force." Release of
Interim Ratings and Request For Complete/Cost Proposals, June 30, 2000, at
slides 2, 7-9. On three occasions, including twice after DJI responded to
the agency's first notice by claiming that its proposed enhancements
exceeded the minimum requirements in a way beneficial to the agency, the Air
Force effectively advised DJI that it did not view aspects other than
[DELETED] as beneficial ones that would warrant a higher price/cost. Id.;
DJI Proposal Submission, July 10, 2000; Evaluation Notices, Aug. 1, 2000;
Request for Final Proposal Revision, Aug. 14, 2000. Further, while the
proposal to [DELETED] was listed as a strength in the interim evaluations
released to DJI, and the agency viewed this (in conjunction with other
measures) as enhancing DJI's ability to minimize turnover and retain staff,
Proposal Analysis Report, at 11, we agree with the agency that this proposed
approach did not amount to the proposal of a measurable enhancement in
performance and performance quality requiring an adjustment to the MEO plan.

RECOMMENDATION

We conclude that there were deficiencies in the cost comparison that could
have materially affected the outcome of the comparison. Since, however,
there is no way on this record to determine the precise cost impact of these
deficiencies and what the proper costs should be when the deficiencies are
corrected, we recommend that the Air Force review the cost comparison
consistent with our discussion. If, as a result of that review, the Air
Force concludes that DJI's evaluated price (including the various
adjustments) is lower than the cost of in-house performance, we recommend
that the agency make award to DJI. We also recommend that the protester be
reimbursed the reasonable costs of filing and pursuing the protest,
including reasonable attorneys' fees. 4 C.F.R. sect. 21.8(d)(1) (2001). The
protester's certified claim for costs, detailing the time spent and costs
incurred, must be submitted to the agency within 60 days of receiving this
decision. 4 C.F.R. sect. 21.8(f)(1).

The protest is sustained.

Anthony H. Gamboa

General Counsel

Notes

1. The solicitation provided for a cost comparison study under OMB Circular
A-76, as implemented by Federal Acquisition Regulation sect. 52.207-2, OMB
Circular A-76 Revised Supplemental Handbook (RSH), and Air Force Pamphlet
No. 26-12, Sept. 25, 1992, revised Sept. 6, 1996 (AFP 26-12), Guidelines for
Implementing the Air Force Commercial Activities Program.

2. The procedures for determining whether the government should perform an
activity in-house, or have the activity performed by a contractor, are set
forth in OMB Circular A-76 and the RSH, which have been made expressly
applicable to the Department of Defense and its military departments and
agencies. See 32 C.F.R. sect. 169a.15(d) (2001). The process set out in the
Circular and the RSH broadly encompasses the following steps in conducting
the public/private competition. First, after the PWS has been drafted, the
agency ensures, through certification by an independent reviewing official
(IRO), that the government's in-house management plan satisfies the
requirements of the PWS. See RSH, part I, ch. 3, sect. I. (The MEO reflects the
in-house management plan, which is prepared by a study team and sets out the
changes that will be made to the current organization.) Second, there is a
competition among private-sector offerors, which is conducted much as any
competed federal procurement. Third, if that competition is done on the
basis of a comparative technical evaluation (that is, if a cost/technical
tradeoff is contemplated), the government's in-house plan is compared with
the winning private-sector offer to assess whether or not they are based on
a comparable level of performance and performance quality--and if not, to
make all changes necessary to make the level of the in-house plan comparable
to that of the private-sector proposal. Id. sect. H.3.d.e. Finally, once the
playing field is thus leveled, there is a cost comparison between the
private-sector offer and the in-house plan. Id. sect.sect. H, J.

3. Unlike the prior cost comparisons, the costs used for the October 2001
cost comparison did not include project work, which explains the much lower
numbers.

4. DOD components are required to use the Department of Defense's (DOD)
current A-76 Costing Manual where the in-house management plan was projected
to be submitted to the IRO on or after March 15, 2001, or was submitted to
the IRO after April 15, 2001, and may use it where, as here, the in-house
management plan was projected to be submitted to the IRO before March 15.
Memorandum From DOD Deputy Under Secretary of Defense (Installations), DOD
A-76 Costing Manual (Interim Guidance) and DOD A-76 Costing Software
(win.COMPARE2), Mar. 13, 2001.

5. The record here does not make clear why the applicable guidance bases the
estimated contract administration effort required to administer the
private-sector contract on the MEO's, rather than the private-sector
offeror's, proposed staffing level.

6. The 3 FTEs of contract administration effort included in the MEO staffing
were spread over the following 26 personnel positions--[DELETED]. Second
Appeal Decision para. 70 n.4.

7. Consistent with the AFP and RSH, the current DOD A-76 Costing Manual
directs that Line 1 include "(1) the cost of the FTEs necessary to perform
inspection and surveillance of the MEO subcontract and (2) the cost of FTEs
necessary to perform contract administration for the MEO subcontract." A-76
Costing Manual sect. C1.4.2.

8. While the 1996 revisions to AFP 26-12 did not specifically address the
reference to "Procurement and Contracting" in the definition of overhead
activities, we note that the 1996 revisions to AFP 26-12 were furnished in
the form of general revisions, rather than specific change pages or a
reissuance of the entire pamphlet.

9. As revised in 1996 to decrease the maximum number of contract
administration FTEs, the table specifies, for example, a ceiling of
2 contract administration FTEs for MEO staffing of 21 to 50; 3 FTEs for MEO
staffing of 51 to 75; 4 FTEs for MEO staffing of 76 to 100; 5 FTEs for MEO
staffing of 101 to 120; 6 FTEs for MEO staffing of 121 to 150; 7 FTEs for
MEO staffing of 151 to 200; 8 FTEs for MEO staffing of 201 to 250; and 9
FTEs for MEO staffing of 251 to 300. RSH, part II, ch. 3, Table 3-1;
61 FR 14,344 (1996); AFP 26-12 (1996) app. B.

10. DJI argued in its BAART appeal that a more realistic cost would be
$40,000 per CME. Using this cost, DJI concluded that the value of the MEO
subcontracts must have been greater than the $2,603,500 reported by the
agency. Second Appeal Decision para.para. 57-65.

11. We note that although Table 10-3 in AFP 26-12 requires command clearance
to use fewer than the number of contract administrators allowed under the
contract administration table in AFP 26-12, the table does not prohibit
using fewer contract administrators. Further, AFP 26-12 sect. 10-13c
specifically contemplates that "it may be possible to use lower contract
administration staffing than is shown" in the contract administration table.
In any case, the requirement to obtain command clearance does not relieve
the agency of its obligation under Circular A-76, which is the overriding
guidance for this cost comparison, to perform a reasoned analysis of the
number of contract administrators actually required. See BAE Sys., supra, at
29-30.

12. Del Jen calculates that $142,687 was added to its price as a result of
converting the two GS-9 contract administration positions to GS-11
positions.

13. As noted in the manual, "[t]he grades outlined in Figure C8.F1 were
developed by the Defense Contract Management Agency (DCMA) by utilizing
statistics developed to comply with the Defense Acquisition Workforce
Improvement Act (DAWIA). This data was used to develop the average grades
for contract administration FTEs. The table in Figure C8.F1 was created to
streamline the costing for contract administration and to ensure all DOD
Components use the same standardized approach." A-76 Costing Manual sect.
C8.2.5.

14. The Air Force argues that, in noting the disparity between the grade
levels of the MEO contract administration (quality assurance) staff and
those of the contract administrators, DJI raised a new, untimely argument.
We disagree with the agency that the argument is untimely; rather, we view
it as merely further support for DJI's challenge of the skill mix. Further,
even if this particular sub-issue were viewed as untimely, we would view it
as appropriate for resolution pursuant to the exception to our timeliness
rules for protests raising issues significant to the procurement system.
4 C.F.R. sect. 21.2(c) (2001). Specifically, this issue is significant because
it brings into question the realism and fairness of contract administration
costs in an A-76 cost comparison.

15. The record indicates that the MEO included: (1) 163 government in-house
FTEs; and (2) $2,603,500 annually in subcontracted effort, which the agency
determined encompassed a significant number of CMEs, and DJI's assumption of
$40,000 per CME (with labor amounting to 70 percent of the cost) indicated
could include as few as 46 CMEs. In contrast, DJI's proposal indicated that
DJI and its principal subcontractor together would furnish [DELETED] FTEs,
and that DJI would subcontract for only an additional annual $[DELETED] in
subcontract effort (which translates to [DELETED] CMEs using the above
calculation).