TITLE:  Priority One Services, Inc., B-288836; B-288836.2, December 17, 2001
BNUMBER:  B-288836; B-288836.2
DATE:  December 17, 2001
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DOCUMENT FOR PUBLIC RELEASE
The decision issued on the date below was subject to a GAO Protective
Order.  This redacted version has been approved for public release.
Decision

Matter of:   Priority One Services, Inc.

File:            B-288836; B-288836.2

Date:              December 17, 2001

Kevin P. Mullen, Esq., Piper Marbury Rudnick & Wolfe, for the protester.
Scott A. Ford, Esq., for SoBran Incorporated, an intervenor.
Michael Colvin, Department of Health & Human Services, for the agency.
Charles W. Morrow, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.

DIGEST

1.  Agency failed to perform a proper cost realism evaluation in awarding a
cost reimbursement contract where the agency made no probable cost
adjustments even where it identified costs that it believed were unrealistic
and did not consider the proposed costs in light of the offeror's proposed
technical proposals.

2.  Agency's communications after submission of final proposal revisions
with one offeror constituted discussions where the agency required the
offeror to replace unacceptable personnel, and solicited other proposal
revisions from that offeror, which entailed an increase in its proposed
costs; thus, the agency was required to conduct discussions with all
offerors whose proposals had been determined to be in the competitive range.

DECISION

Priority One Services, Inc. protests the award of a contract to SoBran
Incorporated under request for proposals (RFP) No. NIAID-DIR-01-56, a small
business set-aside, issued by the National Institute of Allergy and
Infectious Diseases (NIAID), National Institutes of Health, Department of
Health & Human Services, for the care, use, and humane treatment of
laboratory animals, and technical skills related to the scientific study and
manipulation of animals and animal products.  Priority One contends, among
other things, that NIAID performed an unreasonable cost evaluation and
conducted improper discussions with SoBran.

We sustain the protest.

The solicited services are to be provided under a cost-plus-fixed-fee
contract for a base year with four 12-month option periods.[1]  Award was to
be made to the offeror whose proposal provided the ?best overall value to
the Government,? considering the following evaluation factors:  past
performance (worth 800 points), technical approach and general understanding
of requirements (worth 700 points), corporate resources (worth 350 points),
small disadvantaged business (SDB) participation
(not scored), and cost (not scored).  Although past performance was said to
be
?of paramount consideration,? cost and SDB participation were ?also
important? to the award decision.  All evaluation factors other than cost,
when combined, were significantly more important than cost.  Under the past
performance factor, the RFP listed 12 variously weighted subfactors,
including whether proposed ?personnel have necessary knowledge, skills and
abilities to successfully complete? the contract (worth 100 points) and
?adequate past performance of [s]ubcontractors? (worth
50 points).[2]  One of the seven subfactors of the technical approach and
general understanding of requirements factor was ?work force
recruitment/retention plan? (worth 100 points).

Four proposals were received by the closing date.  Only Priority One's and
SoBran's proposals were included in the competitive range.   A four-member
technical evaluation panel evaluated and point-scored the technical
proposals.  The proposals underwent a technical and cost evaluation.
Following written discussions, the final revised offers were received and
evaluated as follows:

Offeror      Score        Cost

SoBran       1,606.25     $33,927,775

Priority One 1,394.25     $36,092,283

Based on this evaluation, the technical evaluators ?acknowledged? that the
award should be made to SoBran, but requested ?further
clarification/information from SoBran prior to completing the written
recommendation for award.?  Agency Report, Tab XIII, Source Selection
Determination, at 2.  After receiving SoBran's response, the agency made
award to that firm.  This protest followed.

Priority One argues that NIAID failed to perform a reasonable cost-realism
analysis.  Priority One specifically contends that the SoBran proposal
understated its costs for the other direct cost (ODC) cost element,[3] where
Priority One proposed [DELETED] more in ODCs than did Sobran.[4]  Priority
One alleges that this discrepancy was caused by SoBran's failure to propose
adequate quantities of required laboratory material and equipment.[5]
Priority One argues that had NIAID properly adjusted SoBran's proposal to
account for these understated costs, Priority One would have had the lowest
cost proposal.

NIAID's cost evaluation compared the cost elements of each proposal to each
other and to the independent government cost estimate.[6]  Agency Report,
Tab XIV, Summary of Negotiations, attach. A.  NIAID found SoBran's ODC cost
element was close to the independent government cost estimate for this
element and was thus considered realistic, whereas Priority One's proposed
ODCs reflected that the protester misunderstood the requirements.  In any
case, no probable cost adjustments were made to the proposals.

When an agency evaluates proposals for the award of a cost-reimbursement
contract, an offeror's proposed estimated costs of contract performance
should not be considered controlling since, regardless of the costs proposed
by an offeror, the government is bound to pay the contractor its actual and
allowable costs.  Consequently, the agency must perform a cost-realism
analysis to determine the realism of the offeror's proposed costs and to
determine what the cost are likely to be under the offeror's technical
approach, assuming reasonable economy and efficiency.  Tidewater Constr.
Corp., B-278360, Jan. 20, 1998, 98-1 CPD para. 103 at 4.

Thus, The Federal Acquisition Regulation (FAR) requires an agency to perform
a cost-realism analysis when a cost-reimbursement contract is anticipated to
determine the probable cost of performance for each offeror.  The regulation
advises that the probable cost may differ from the proposed costs and should
reflect the government's best estimate of the cost of any contract that is
most likely to result from the offeror's proposal.  The probable cost of a
proposal is to be used for purposes of evaluation to determine the best
value.  The probable cost is determined by adjusting each offeror's proposed
cost and fee when appropriate to reflect any additions or reductions in cost
elements to realistic levels based on the results of the cost-realism
analysis.  A cost-realism analysis is the process of independently reviewing
and evaluating the specific elements of each offeror's proposed cost
proposal to determine whether the elements are realistic for the work to be
performed, reflect a clear understanding of the requirements, and are
consistent with the unique methods of performance and materials described in
the offeror's technical proposal.  FAR sect.sect. 15.404-1(d)(1), (2).

As discussed above, the agency's cost analysis simply compared the
individual cost elements of each proposal to the elements in the other
proposals and to the independent government cost estimate.  No probable cost
adjustments, either upwards or downwards, as contemplated by FAR
sect. 15.404?1(d)(2), were made, even where Priority One's ODCs were found to be
significantly overstated and unrealistic.  While the agency claims that
Priority One's ODC costs reflected a misunderstanding of the requirements,
it was required in such circumstances to downwardly adjust Priority One's
ODC costs in the cost-realism analysis.[7]

Moreover, simply comparing various cost elements in an independent
government estimate to offerors' cost elements for the same items does not
suffice as a sufficient analysis of cost realism where the agency has not
considered the offerors' individual technical approaches or determined
whether the offeror's proposals are consistent with the technical and cost
parameters that were reflected in the government estimate.  See Tidewater
Constr. Corp., supra, at 5.  The record here is devoid of any evidence that
NIAID made any attempt to adjust offerors' proposed cost or to develop most
probable costs estimates based on the offerors' technical approaches.  Nor
is there any reason evident from the record why the probable costs for the
two offerors' ODC cost element should materially differ, which suggests
that, had NIAID made an appropriate cost-realism adjustment, Priority One's
proposal would have displaced SoBran's as the lowest cost proposal.  In any
event, because the record shows that NIAID did not perform a reasonable
cost-realism analysis, the conclusion that SoBran's proposal was the best
value lacks a reasonable basis, and we sustain the protest on this basis.
See The Futures Group Int'l, B?281274.2, Mar. 3, 1999, 2000 CPD para. 147 at 8.

Priority One also protests that the communications with SoBran after that
firm's tentative selection constituted discussions, requiring discussions
with all competitive range offerors.  Priority One alleges that it could
have improved its technical proposal in several material respects if it had
been provided further discussions.

The communications in question were made by telephone on July 12 and the
source selection document characterizes them as follows:

Clarification was requested about SoBran's intent with regard to some key
personnel proposed in the FRO [final revised offer].  A couple of people had
become unavailable since the FRO submission and a couple of those proposed
were unacceptable.  Further clarification was also requested with regard to
the proposed salaries for the Q/A [quality assurance] Trainer, the
Veterinarian and the Administrative Managers as well as how the overtime
proposed was calculated.  It was unclear whether these positions would be
compensated at a level equivalent to that of the current contract or better,
given the key role that these personnel are to hold in the new contract.
Agency Report, Tab XIII, Source Selection Determination, at 2.  In response
to these communications, SoBran revised its technical and cost proposal by
July 20.  This proposal revision identified various new personnel (including
replacements for personnel found unacceptable by the agency), raised the
salaries of some positions to help ensure employee retention as suggested by
the agency, responded to the agency's various other questions (relating to
such matters as quality assurance implementation, the relationship with its
proposed subcontractor, and the strategy to attract incumbent employees),
and increased its proposed costs by $156,992.

Discussions occur when the government communicates with an offeror for the
purpose of obtaining information essential to determine the acceptability of
a proposal or provides the offeror with an opportunity to revise or modify
its proposal.  In contrast, clarifications are merely inquiries for the
purpose of eliminating minor uncertainties or irregularities in a proposal
and do not give an offeror the opportunity to revise or modify its
proposal.  If a procuring agency holds discussions with one offeror, it must
hold discussions with all offerors whose proposals are in the competitive
range, whereas clarifications may be requested from just one offeror.  See
FAR sect.sect. 15.306(a), (d); Global Assocs. Ltd., B-271693, B-271693.2, Aug. 2,
1996, 96?2 CPD para. 100 at 4.  It is the actions of the parties that determine
whether discussions have been held and not merely the characterization of
the communications by the agency.  The acid test for deciding whether
discussions have been held is whether it can be said that an offeror was
provided the opportunity to revise or modify its proposal.  Raytheon Co.,
B-261959.3, Jan. 23, 1996, 96-1 CPD para. 37 at 11.

Here, the communications in question clearly constituted discussions.  The
agency found that certain proposed personnel were ?unacceptable? and
required SoBran to replace these personnel.  In addition, the agency found
that SoBran may not be able to retain personnel in certain ?key positions?
at the proposed salaries and requested SoBran to address this concern, which
SoBran did by raising the salary levels of these positions.  A variety of
other concerns about the technical and cost proposal were raised and SoBran
amended its technical and cost proposal to address these concerns, including
raising its proposed cost by $156,992.[8]

The protest is sustained.[9]

We recommend that consistent with this decision the agency reopen
discussions with the competitive range offerors, request revised offers,
reevaluate proposals, including performing a proper cost-realism analysis,
and make a new best-value determination.  We also recommend that Priority
One be reimbursed the cost of
filing and pursuing its protest, including reasonable attorneys' fees.  4
C.F.R. sect. 21.8(d)(1) (2001).  The protester should submit its certified claim
for such costs, detailing the time expended and the costs incurred, directly
to the contracting agency within 60 days of receiving this decision.

Anthony H. Gamboa
General Counsel

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

[1] Priority One is the incumbent contractor for these services.
[2] Some of the past performance subfactors by their terms consider matters
not directly related to past performance, such as the personnel subfactor
quoted above.
[3] The costs for certain laboratory equipment and material specified by the
agency such as, for example, lab coats, coveralls, head covers, face masks,
gloves, shoe covers, incidental travel, training, and uniform laundry
services are to be included in the ODC cost element.  Supplemental Protest,
exh. 1, Questions from Pre-Proposal Conference, at 5.
[4] Priority One proposed [DELETED] in ODCs and SoBran and its subcontractor
proposed [DELETED] in ODCs.  Supplemental Protest, exh. 4.
[5] Priority One asserts that SoBran's costs were miscalculated because it
misinterpreted the specified quantities for these items to be individual
quantities instead of cases.  Priority One argues that given the disposable
nature of the materials and equipment, SoBran cannot meet the requirements
at its proposed costs.  SoBran, however, argues that the quantities and
costs it proposed were correct.
[6] The independent cost estimate was $41,295,261.
[7] We need not decide whether Priority One's ODCs are overstated or
SoBran's were understated, nor what the appropriate ODC figure under a
proper cost-realism analysis should be for either proposal.
[8] NIAID argues that Health and Human Services Acquisition Regulations,
48 C.F.R. sect. 315.670 (2000), permitted the agency to conduct ?limited
negotiation? with the selected offeror.  That regulation specifically limits
such negotiations to matters that would have no impact on the award decision
and which do not prejudice the competitive interests or right of the other
offerors.  The negotiations are restricted to ?definitizing the final
agreement on terms and conditions? on such topics, for example, as ?payment
provisions, patent rights, rights in data, property provisions, labor rates,
indirect cost rates, and fees.?  Thus, by its terms, this regulation
provides no authority for the kind of discussions here conducted after
receipt of final proposal revisions with only one of the competitive range
offerors.
[9] Priority One also raised several other arguments against the evaluation
and the conduct of discussions.  We have reviewed the arguments and find
that they are without merit, with two exceptions.  First, the agency
downgraded Priority One's proposal under the ?adequate past performance of
subcontractors? subfactor because of the agency's concerns regarding the
availability of a consultant proposed by Priority One.  Since this alleged
weakness did not reflect inadequate past performance, we question how
Priority One's proposal can be downgraded under this subfactor.
Priority One also alleged that one of the evaluators had a conflict of
interest because she was married to an individual that SoBran was offering a
job under this contract.  Since, as noted by the agency, SoBran did not
propose this individual in its proposal and there is no evidence that SoBran
had some other understanding in this regard during the proposal evaluation
process, and given that Priority One actually did offer and price this
individual in its proposal, we find this alleged conflict provides no basis
to sustain the protest.  Nevertheless, given the present circumstances and
recommendation, NIAID should consider whether it is appropriate to continue
to use this evaluator for this acquisition.