TITLE:  PADCO, Inc.--Costs, B-289096.3, May 3, 2002
BNUMBER:  B-289096.3
DATE:  May 3, 2002
**********************************************************************
PADCO, Inc.--Costs, B-289096.3, May 3, 2002

   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:   PADCO, Inc.--Costs
    
File:            B-289096.3
    
Date:              May 3, 2002
    
Kenneth A. Martin, Esq., and Jennifer C. Adams, Esq., Martin & Adams, for
the protester.
Stephanie L. Buser, Esq., U.S. Agency for International Development, for
the agency.
Louis A. Chiarella, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
    
1.  Protest challenging reasonableness of the agency's cost realism
analysis of the awardee's proposed indirect costs was clearly meritorious
where the agency accepted, without any analysis, the awardee's unexplained
final proposed rates, which were substantially less than those initially
proposed, its historical rates, and its proposed ceiling rates.
    
2.  General Accounting Office (GAO) recommends that protester be
reimbursed the costs of filing and pursuing its initial protest where the
agency unduly delayed taking corrective action in response to the initial
protest, which was clearly meritorious, until almost 2 months after the
initial protest was filed and after submitting a report on the protest;
GAO does not recommend the reimbursement of the costs of filing and
pursuing supplemental protest grounds, which were clearly severable from
the initial protest bases, because the agency did not unduly delay, but
took corrective action in response to these protest grounds within 2 weeks
of these grounds being raised, before the agency report on the
supplemental protest grounds was due.
DECISION
    
PADCO, Inc. requests that our Office recommend that it be reimbursed the
costs of filing and pursuing its protests challenging the award of a
contract to The Louis Berger Group (LBG) under request for proposals (RFP)
No. M/OP-01-003, issued by the U.S. Agency for International Development
(USAID) for technical support services for the United States-Asia
Environmental Partnership Program.
    
We recommend that USAID reimburse PADCO the reasonable protest costs of
filing and pursuing its initial protest.
The RFP contemplated a *best value* award of a cost-plus-fixed-fee
contract for a base period of 3 years with one 2-year option.  RFP S:S:
B.1, B.2, M.1(a).  The RFP established, in descending order of importance,
five non-cost factors:  acceptability, institutional capability, past
performance, key personnel, and small business subcontracting
participation.  RFP S: M.5(b).  The solicitation stated that the combined
weight of the evaluation factors, other than cost, was significantly more
important than cost.  RFP S: M.5(a).  The RFP also provided for the
evaluation of cost realism, and contemplated that proposed costs might be
adjusted based on the results of the cost realism evaluation, with the
adjusted cost being used in the evaluation of cost.  RFP S: M.7.
    
Six offerors, including PADCO and LBG, submitted initial proposals by the
March 16, 2001 closing date.  USAID evaluated the proposals, conducted
discussions, received revised proposals by August 23, and final revised
proposals by September 14.  A technical evaluation committee evaluated the
revised proposals and assigned scores of [DELETED] points to PADCO's
proposal, and [DELETED] points to LBG's proposal.  Agency Report, Tab 6,
Negotiation Memorandum, at 10.  The agency performed a cost evaluation of
the proposals, determined that PADCO's final proposed cost of $35,901,583
and LBG's final proposed cost of $27,938,639 were each reasonable and
realistic, and made no probable cost adjustments.[1]  Agency Report at 7;
Tab 6, Negotiation Memorandum, at 12-19.  USAID made award to LBG on
September 27, after determining that LBG's proposal represented the best
value.  Agency Report, Tab 6, Negotiation Memorandum, at 21. 
    
On October 5, following a debriefing by USAID in which the protester
learned the reasons for its nonselection for award, PADCO filed a timely
protest with our Office.[2]
PADCO protested, among other things, that the agency had failed to perform
an adequate cost realism analysis of the awardee's proposal,
notwithstanding that the awardee's final proposed cost was significantly
less than its initial proposal.  In this regard, PADCO alleged that USAID
apparently limited its cost realism evaluation to direct cost elements,
and did not determine the realism of offerors' proposed indirect
costs.[3]  Protest at 5.
    
On November 5 the agency submitted its report responding to PADCO's
protest, maintaining that the entire protest was without merit.  USAID
denied PADCO's allegation that the agency had failed to conduct a proper
cost realism analysis, and denied the specific assertion that its analysis
had not included an adequate review of LBG's proposed indirect costs. 
Agency Report at 8, 11-12.
    
PADCO filed a supplemental protest on November 13 in which it argued that
LBG's proposal was unacceptable because its proposed subcontracting plan
indicated its small business subcontracting effort would only be 10
percent of its total planned subcontracting, even though the solicitation
required offerors to submit plans demonstrating small business
subcontracting of at least 10 percent of the total contract value.
    
The protester filed its comments on the agency report on November 15.  In
addition to reiterating the grounds set forth in its initial and
supplemental protests, PADCO also argued that the agency had impermissibly
permitted LBG to vary from the predetermined *not to exceed* figure stated
in the solicitation for *other direct costs.*  The protester asserted that
notwithstanding the agency having informed offerors that they could not
make adjustments to the *not to exceed* figure for other direct costs and
should consider *not to exceed* amounts as *plug-in* costs, USAID's
evaluation had permitted LBG to propose a lower cost and did not upwardly
adjust this cost in the cost evaluation.  Protester's Comments at 4-6.
    
Our Office established a due date of November 28 for the agency to respond
to PADCO's supplemental protest and the comments.
    
On November 27, the agency requested dismissal of PADCO's protests because
it had decided to take corrective action.  USAID stated that its
corrective action would be to request another round of proposal revisions
regarding the subcontracting plan and its requirements, the meaning of
*not to exceed* for other direct costs, and the need for offerors to
justify all elements of costs to allow for a cost realism analysis.[4] 
We, therefore, dismissed the protests as academic on December 4.
    
PADCO now requests that we recommend the reimbursement of its protest
costs, including attorneys' fees.
    
Our Bid Protest Regulations provide that where the contracting agency
decides to take corrective action in response to a protest, we may
recommend that the agency pay the protester the costs of filing and
pursuing the protest, including reasonable attorneys' fees.  4 C.F.R. S:
21.8(e) (2001).  We will make such a recommendation where, based on the
circumstances of the case, we determine that the agency unduly delayed
taking corrective action in the face of a clearly meritorious protest. 
Oklahoma Indian Corp.--Claim for Costs, B-243785.2, June 10, 1991, 91-1
CPD P: 558 at 2.  A protest is clearly meritorious when a reasonable
agency inquiry into the protester's allegations would show facts
disclosing the absence of a defensible legal position (i.e., not a close
question).  As a general rule, so long as an agency takes corrective
action in response to a protest by the due date of its protest report, we
regard such action as prompt and decline to consider favorably a request
to recommend reimbursement of protest costs.  J.A. Jones Mgmt. Servs.,
Inc.--Costs, B‑284909.4, July 31, 2000, 2000 CPD P: 123 at 4.  Our
rule is intended to prevent inordinate delay in investigating the merits
of a protest and taking corrective action once an error is evident, so
that a protester will not incur unnecessary effort and expense in pursuing
its remedies before our Office.  Innovative Logistics Techniques,
Inc.--Costs, B-289031.3, Feb. 4, 2002, 2002 CPD P: 34 at 4.
    
USAID asserts that a recommendation by our Office that the agency
reimburse PADCO's protest costs, including attorneys' fees, is unwarranted
here.  The agency argues that the two issues that were the actual basis
for its corrective action decision--the subcontracting plan requirements
and the meaning of *not to exceed* for other direct costs--were grounds
first raised by PADCO in its supplemental protest and comments,
respectively, and the agency's corrective action cannot be said to be
unduly delayed because it was taken within 2 weeks and before the report
was due on these supplemental protest grounds.[5]
    
PADCO responds that the agency's corrective action decision was not
limited to the grounds first raised in PADCO's supplemental protest and
comments, but also included the cost realism evaluation issue.  PADCO
contends that since this clearly meritorious issue was first raised in its
initial protest, the agency did unduly delay taking corrective action, and
we should therefore recommend that USAID reimburse the protester's costs
of filing and pursuing all of its protest grounds. 
    
As discussed below, PADCO's cost realism analysis issue was clearly
meritorious because USAID's cost realism analysis unreasonably accepted as
realistic, without any analysis, LBG's proposed indirect costs that were
based on rates significantly below LBG's initially proposed rates, its
historical rates, and its proposed indirect rate ceiling.  While USAID
asserts that the cost realism analysis issue was not the primary basis for
its corrective action, we find this characterization irrelevant to our
determination here; the fact is that the agency took corrective action on
this clearly meritorious protest basis squarely raised by PADCO in its
initial protest.
When an agency evaluates proposals for the award of a cost-reimbursement
contract, an offeror's proposed estimated cost 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 costs are likely to be under the offeror's
technical approach, assuming reasonable economy and efficiency.  Federal
Acquisition Regulation (FAR) S: 15.404-1(d)(1), (2); The Futures Group
Int'l, B‑281274.2, Mar. 3, 1999, 2000 CPD P: 147 at 3.  Proposed
costs should be adjusted when appropriate based on the results of the cost
realism analysis.  FAR S: 15.404‑1(d)(2)(ii).  Our review of an
agency's cost realism evaluation is limited to determining whether the
cost analysis is reasonably based.  The Futures Group Int'l, supra.
    
LBG's initial cost proposal included a negotiated indirect cost rate
agreement (NICRA), demonstrating that the awardee's current overhead and
general and administrative (G&A) rate was [DELETED], and its total
indirect cost rate was [DELETED].[6]  LBG's Cost Proposal (March 2001), S:
2, Supporting Budget:  Cost and Price Information, at 15-17.  As part of
its revised cost proposal, LBG agreed to an overhead and G&A rate ceiling
of [DELETED].[7]  LBG's Revised Cost Proposal (Aug. 23, 2001), S: III,
Certification and Forecast for Indirect Costs and Proposed Ceilings, at
1.  LBG's offer to cap its overhead and G&A rate resulted in a total
indirect cost rate ceiling of [DELETED] being incorporated into the
contract as awarded.[8]  Agency Report, Tab 1, Contract, S: B.6.
    
However, the record shows that the indirect costs included in LBG's final
proposed costs, which USAID determined reasonable and realistic, were not
based on either the awardee's negotiated indirect cost rate or its rate
ceiling.  In its initial proposal, LBG's direct costs were [DELETED] and
its indirect costs were [DELETED].[9]  LBG's Cost Proposal (March 2001),
S: 2, Supporting Budget:  Cost and Price Information, at 11.  Here, LBG's
indirect costs were based on the ceiling rate of [DELETED] for performance
in year 1 of the contract, and below its ceiling rate by [DELETED] for
years 2 through 5 of the contract.  Id.  By contrast, LBG's subsequent
cost proposals utilized, without any support or explanation, indirect cost
rates that were increasingly below the awardee's proposed indirect rate
ceiling, thereby resulting in significant reductions in the proposed
indirect costs.[10]  In its final revised offer, LBG's proposed direct
costs were [DELETED], while its proposed indirect costs were [DELETED],
its overhead rates having dropped to [DELETED] for the various direct cost
pools, depending on the particular staff groups included in LBG's direct
costs, where it had initially used the [DELETED] ceiling rate.[11]  LBG's
Corrected Final Revised Proposal (Sept. 24, 2001), at 5.  Completely
absent from LBG's revised cost proposals was an explanation or
justification as to why its indirect rates were substantially less than
its current negotiated rate, its historical rates, or its proposed rate
ceiling.  Moreover, as LBG's substantial decrease in proposed indirect
costs was not accompanied by any decrease in its indirect cost rate
ceiling, the agency's contractual obligation to pay was considerably
greater than LBG's final proposed cost, if LBG's actual indirect costs
ultimately exceeded those proposed.[12]  See FAR S: 42.707(c).
The evaluation record provides no explanation of how USAID determined that
LBG's final proposed costs were reasonable and realistic when the
awardee's proposed indirect cost rates were substantially lower than its
rate ceiling, as well as the initially proposed rates and its historical
rates, without any explanation.  In fact, the record is bereft of evidence
that USAID even recognized that the awardee had proposed indirect costs
that were not based on either its NICRA indirect cost rate or its indirect
cost rate ceiling.  In this regard, in documenting the cost evaluation
supporting the award decision, USAID stated:
    
The most recent [LBG] Audited NICRA rate for indirect costs is [DELETED].
. . .  All rates are in accordance with NICRA and appear reasonable and
allocable.  In addition, the Offeror will propose a Ceiling Indirect Rate,
per Clause B.6.  [LBG] proposed a ceiling rate of [DELETED].
Agency Report, Tab 6, Negotiation Memorandum, at 13-14.  In its response
to PADCO's initial protest, the agency argued that as LBG had proposed a
ceiling on its indirect rates, which USAID incorporated into the awarded
contract, the agency had reasonably determined that LBG's final proposed
cost was realistic.[13]  Agency Report at 11-12.  The agency's belief that
LBG's indirect cost rates were reasonable was thus apparently premised on
the mistaken belief that the awardee's proposed indirect rates were in
accordance with its negotiated rate agreement or ceiling rate.
    
Because the record does not reasonably support the agency's acceptance of
the realism of LBG's proposed indirect rates, we conclude that the
protester's challenge to the cost realism evaluation, which was raised in
the initial protest, was clearly meritorious.[14]  Moreover, we regard the
agency's corrective action, undertaken almost 2 months after the initial
protest was filed and well after having submitted its agency report, as
unduly delayed.  Had USAID undertaken a reasonable investigation into the
adequacy of its cost realism evaluation in response to the initial
protest, it would have seen that LBG's proposed indirect cost rates were
lower than both its negotiated and ceiling rates, and the merits of
PADCO's contentions here would have been clear.  Accordingly, PADCO should
be reimbursed its costs of filing and pursuing its initial protest.
    
PADCO also requests that we recommend the reimbursement of its costs
related to its protests of LBG's subcontracting plan and pricing of other
direct costs.  PADCO asserts that a reasonable investigation by USAID
after PADCO had filed its initial protest would have disclosed the flaws
that PADCO subsequently pointed out in its supplemental protest and
comments.
    
Where, as here, a protester raises different protest grounds in multiple
submissions to our Office, the filing of the initial protest establishes
the appropriate date for determining the promptness of the agency's
subsequent corrective action only where there is a nexus between the
protest grounds set forth at that time and the corrective action.  J.A.
Jones Mgmt. Servs., Inc.--Costs, supra, at 3.  The promptness of the
agency's corrective action is not measured from the initial protest where
the initial protest did not identify the issue on which the agency based
its corrective action.  Id.  Where the issues are so clearly severable as
to constitute separate protests, we will recommend reimbursement of only
those costs of filing and pursuing clearly meritorious protest bases as to
which the agency unduly delayed taking corrective action, and will decline
to recommend reimbursement of the costs of filing and pursuing other
protest grounds.  See TRW, Inc.--Costs, B‑282459.3, Aug. 4, 1999,
99-2 CPD P: 26 at 3; Browning-Ferris Indus. of Hawaii, Inc.--Costs,
B-278051.2, Apr. 27, 1998, 98-1 CPD P: 122 at 6 n.5; Holiday
Inn-Laurel--Protest and Request for Costs, B‑270860.3, B-270860.4,
May 30, 1996, 96-1 CPD P: 259 at 3 n.2.
    
Applying these standards to the present case, we find that PADCO is not
entitled to reimbursement of its protest costs related to LBG's
subcontracting plan and the pricing of other direct costs.  We find no
nexus between these issues and those raised in PADCO's initial protest. 
Moreover, USAID took corrective action no more than 2 weeks after these
protest grounds were first raised and before the supplemental agency
report was due.  Even if we assume that these protest grounds were clearly
meritorious, the agency's corrective action was not unduly delayed. [15]
    
Accordingly, we recommend that PADCO be reimbursed the reasonable costs of
filing and pursuing its initial protest, including the reasonable costs of
preparing that portion of the protest comments relating to its initial
protest grounds.  PADCO should submit its claim for costs, detailing and
certifying the time expended and costs incurred, directly to USAID within
60 days of receipt of this decision.[16]
    
Anthony H. Gamboa
General Counsel
    
    

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

   [1] During the review of LBG's September 14 final revised cost proposal of
[DELETED], USAID noticed an apparent arithmetic error for which it
requested clarification.  On September 24 LBG submitted a corrected final
revised cost proposal of $27,938,639.  Agency Report at 6.
[2] On November 1, the agency determined that it was in the government's
best interests to proceed with contract performance.  Agency Report at 1.
[3] On October 15, PADCO clarified its protest grounds, particularly with
regard to the agency's failure to reasonably evaluate the offerors'
proposed indirect costs.
[4] The agency's corrective action also proposed to point out the
solicitation requirements regarding past performance references and key
personnel commitments and how they should be treated in the revised
proposals.  This issue was not a subject of PADCO's protests.
[5] The agency contends that the other two items to be addressed in the
corrective action related to matters not raised by the protester or, in
the case of the indirect cost realism issue, were not clearly meritorious
protest grounds.
[6] LBG's total indirect cost rate is the sum of its overhead and G&A
rate, and its payroll additive rate ([DELETED]).  (The latter figure is
not at issue in this protest.)  LBG's NICRA also included the awardee's
historical negotiated indirect cost rates since July 1, 1991, which
[DELETED].
[7] LBG's revised cost proposal asserted that the overhead and G&A rate
ceiling of [DELETED] was [DELETED] between its current NICRA rate for
these costs of [DELETED], and its projected overhead and G&A rate of
[DELETED].  LBG's Revised Cost Proposal (Aug. 23, 2001), S: III,
Certification and Forecast for Indirect Costs and Proposed Ceilings, at 1.
[8] This figure is the sum of the [DELETED] rate for overhead and G&A and
the [DELETED] rate for payroll additives.
[9] We note that what LBG identifies as *indirect costs (overhead)* in its
cost proposals corresponds to the overhead and G&A costs portion of the
awardee's NICRA.
[10] In its revised cost proposal, LBG's direct costs were [DELETED],
while its indirect costs were [DELETED], having replaced the [DELETED]
ceiling rate with overhead rates of [DELETED], to be applied to the
various direct cost pools, depending on the particular staff group
included in LBG's direct costs.  LBG's Revised Cost Proposal (Aug. 23,
2001), S: I, Revised Budget, at 7.  In its initial final revised proposal,
LBG proposed direct costs of [DELETED] and indirect costs of [DELETED],
having utilized overhead rates of [DELETED], to be applied to the various
direct cost pools, depending on the various staff groups.  LBG's Final
Revised Proposal (Sept. 14, 2001), at 6.
[11] We note that while LBG's total direct costs decreased between initial
and final cost proposals by [DELETED] (approximately [DELETED]), its total
proposed indirect costs decreased by [DELETED] (approximately [DELETED]).
[12] According to the protester's calculations, if the higher ceiling
rates were applied to LBG's proposed direct costs instead of LBG's
proposed rates, it would cause LBG's evaluated costs to increase by $2.9
million, such that, when combined with the unfair cost advantage LBG
improperly obtained by proposing costs less than the *not to exceed*
figures for other direct costs, LBG's evaluated costs would be roughly
equal to PADCO's proposed costs.  Protester's Comments at 3.
[13] USAID cited BNF Techs., Inc., B-254953.3, Mar. 14, 1994, 94-1 CPD P:
274, to support its argument that when an offeror agrees to cap certain
cost items--including by means of indirect rate ceilings--then that amount
can reasonably be used by the agency as the probable costs for purposes of
a cost realism analysis.  Id. at 12.  We find that case inapposite to the
present situation.  In BNF, what the protester actually proposed was its
ceiling rates.  Here, what LBG proposed and what the agency accepted as
LBG's probable costs was significantly below the ceiling rates.
[14] We also note that *LBG acknowledges that [the] agency failed to
conduct a thorough cost realism analysis of LBG's indirect costs.* 
Intervenor's Comments on Agency Corrective Action (Nov. 30, 2001), at 3.
[15] While PADCO points out that it mentioned in its initial protest the
substantial reduction in costs in LBG's revised proposal and argues that
this was sufficient to put USAID on notice to investigate its evaluation
of LBG's cost proposal, including the other direct costs, the fact is that
PADCO's initial protest did not in any way reference the other direct cost
issue, but challenged other aspects of the cost realism analysis of LBG's
cost proposal, in particular its proposed indirect costs.
[16] To the extent that PADCO incurred additional expenses in challenging
the corrective action offered by the agency, these costs are not
reimbursable since they are not costs incurred in pursuing the protest
(i.e., in persuading the agency of the merits of the protest).  Southern
Techs., Inc.*Recon. and Costs, B-278030.3, Apr. 29, 1998, 98-1 CPD P: 125
at 7 n.3.