TITLE:	Sodexho Management, Inc.
BNUMBER:	   B-289605.2
DATE:		    July 5, 2002
**********************************************************************
Sodexho Management, Inc., B-289605.2, July 5, 2002

Decision


Matter of:   Sodexho Management, Inc.

File:            B-289605.2

Date:              July 5, 2002

Lars E. Anderson, Esq., Thomas J. Madden, Esq., David R. Lasso, Esq., and
Paul N. Wengert, Esq., Venable, Baetjer & Howard, for the protester.
David H. Turner, 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

Protest that contracting agency improperly used nonappropriated funds
instrumentality (NAFI) employees to constitute the overwhelming
majority--more than 80 percent--of the labor force in its "most efficient
organization" (MEO) as part of an Office of Management and Budget Circular
A-76 cost study is sustained; while the A-76 guidance does not explicitly
prohibit the use of NAFI employees in an MEO and may, in fact, be read to
permit at least limited use of NAFI employees, where, as here, the level
playing field promised by the A-76 guidance is tilted toward the in-house
plan in a way that could not be reasonably anticipated by a commercial
offeror based upon the A-76 guidance and the solicitation, the agency
deprived the commercial offeror of the ability to make an intelligent
business judgment concerning whether, and how, to compete.

DECISION

Sodexho Management, Inc. protests the Department of the Navy's
determination, pursuant to Office of Management and Budget (OMB) Circular
A-76, that it would be more economical to perform various community support
services in-house at the Pensacola Naval Regional Complex (PNRC)[1] in
Pensacola, Florida, rather than contract for these services with Sodexho
under request for proposals (RFP)
No. N00140-00-R-G513.[2]  Sodexho primarily contends that the Navy
improperly used nonappropriated fund instrumentality (NAFI) employees to
constitute the overwhelming majority of the labor force in its "most
efficient organization" (MEO).[3]

We sustain the protest.

BACKGROUND

The Navy issued the RFP on February 4, 2000, as part of a Circular A-76
commercial activities study, to determine whether it would be more
economical to perform various community support services in-house, using
government employees, or under contract with a private-sector firm.[4]  The
solicitation divided the requirements into separate "annexes" for support
services associated with Navy family housing, bachelor housing, morale,
welfare, and recreation (MWR), and public affairs.[5]  Each PWS annex
described the scope of work involved, including specific performance
requirements and minimum standards, and provided historical workload data,
lists of government-furnished material, facilities, and equipment, and other
information.  If a private firm was selected, the government planned to
award a fixed-price contract with cost-reimbursable provisions over a
7-month base period, with up to four 1-year option periods and one 5-month
option period.

Private-sector offerors were advised that a "best value" offer would be
selected, with more consideration given to technical proposals than to price
proposals.  The past performance, management plan, and corporate experience
technical evaluation factors were of equal importance, and each individually
was significantly more important than the final technical evaluation factor,
addressing the extent of participation of small businesses, small
disadvantaged businesses, women-owned small businesses, and historically
black colleges or universities and minority institutions in performance of
the contract.  The management plan factor was comprised of two subfactors,
staffing plan and quality control overview.  The former was more important
than the latter, which would be evaluated on a pass/fail basis.  RFP ï¿½
M.(3).

Offerors were required to develop a staffing plan that demonstrated the
ability to successfully accomplish and manage all requirements of the PWS,
starting with the transition phase; addressed the ability to recruit and
retain sufficient personnel to meet the PWS requirements; and described the
risk associated with implementation of the offeror's proposed staffing plan,
and steps to mitigate this risk.  RFP ï¿½ L.III.(1)(b)1.  Offerors were
required to provide an overview of their quality control plan containing
various specified elements.  Id. at ï¿½ L.III.(1)(b)2.

The solicitation included Federal Acquisition Regulation (FAR) ï¿½ 52.222-42,
"Statement of Equivalent Rates for Federal Hires."  In accordance with the
Service Contract Act of 1965, as amended (SCA), the clause identified "the
classes of service employees expected to be employed under the contract and
state[d] the wages and fringe benefits payable to each if they were employed
by the contracting agency subject to the provisions of 5 U.S.C. 5341 or
5332."[6]  RFP at 32-35.  This clause was immediately followed by a list of
GS and FWS appropriated fund employee classes.  Id.; 5 C.F.R. part 532.

The solicitation also included FAR ï¿½ 52.207-3, which states that the
contractor shall give government employees who have been or will be
adversely affected or separated as a result of award of this contract the
right of first refusal for employment openings under the contract in
positions for which they are qualified.  Directly below the provisions of
FAR ï¿½ 52.207-3, the RFP stated that the clause applied to both appropriated
fund and NAFI employees, although the former should be given preference.
RFP at 35.

In the meantime, a cost analysis team of Navy personnel, with contractor
support, had developed the management plan and MEO, as well as a technical
performance plan (TPP) describing how the MEO would accomplish the work
required by the PWS.  The cost of performing the MEO was included in the
in-house cost estimate, and the management plan was forwarded to the
independent review official (IRO) for certification.  On September 13, 2000,
the IRO, a member of the Naval Audit Service, certified that the management
plan reasonably established the government's ability to perform the PWS with
the resources provided.  On June 14, 2001, the IRO recertified the
management plan after it was revised to account for the removal of family
center services support requirements and the alteration of the period of
performance.

The Navy received proposals from two offerors, including Sodexho, by the
RFP's closing date of September 29, 2000.  The Navy's technical evaluation
board (TEB) evaluated both offerors' initial proposals as unacceptable under
every technical evaluation factor and overall.  After including both offers
in the competitive range, the Navy conducted discussions and received and
evaluated final proposal revisions (FPR), finding that both offers were
still technically unacceptable overall.  The Navy established a second
competitive range that included only Sodexho's offer, and conducted
additional discussions with and received additional FPRs from the firm.  The
Navy ultimately found Sodexho's proposal to be acceptable under all of the
technical evaluation factors and overall, but the contemporaneous evaluation
record shows that the TEB identified no strengths or performance
enhancements in the firm's proposal.  On August 29, 2001, the contracting
officer concluded that Sodexho's proposal, the only acceptable
private-sector proposal, represented the best value to the government among
the offers received from the private sector, at a price of $73,116,328.

By memorandum dated September 5, the contracting officer, acting as the
source selection authority (SSA), memorialized his findings that the
in-house management plan met the requirements established by the PWS and
offered the same level of performance and performance quality as did the
Sodexho proposal.  First, the SSA noted that the TEB had not found that
Sodexho's proposal offered changes to the solicitation's requirements or
improvements beyond what was required by the PWS, and had rated the proposal
merely acceptable.  The SSA concurred with the TEB's findings.  Second, the
SSA reviewed the in-house management plan to ensure that it complied with
the PWS requirements.  He found several discrepancies which he forwarded to
the MEO's study team for explanation or clarification, as applicable, and,
based upon the team's responses, concluded that the in-house plan was
sufficient to meet the standards and to perform the PWS requirements.
Third, the SSA compared Sodexho's offer with the in-house plan to ascertain
whether they offered the same level of performance and performance quality.
He acknowledged that the MEO and Sodexho's proposed staffing plan had very
different staffing levels.  Specifically, the Sodexho proposal offered a
total of 459.9 full-time equivalents (FTE) comprised of full and part-time
employees, while the MEO offered 421.8[7] FTE comprised of a mixture of
full-time appropriated funds employees, full-time NAFI employees, and hourly
or "flex-time" NAFI employees.  He did not find this difference in staffing
unreasonable considering their different approaches.  In reviewing these
respective approaches on an annex-by-annex basis, the SSA made specific
findings that, while Sodexho proposed to perform the requirements using more
staff, it did not offer to provide any of the required services at a level
in excess of the minimum performance standards established by the PWS.  The
SSA ultimately concluded that neither Sodexho nor the MEO offered
enhancements to what the solicitation required, and that both were capable
of performing the PWS requirements with the resources proposed at the same
level of performance and performance quality, albeit with differing staffing
complements.  SSA's Memorandum of Sept. 5, 2001 at 5.

On that same day, the SSA opened the in-house cost estimate and completed
the cost comparison form.  He conducted the cost comparison by adding the
minimum conversion differential, the one-time costs of conversion, and
contract administration costs to, and by subtracting federal income taxes
from, Sodexho's proposed price, for an adjusted total cost to contract for
services of $82,641,457.  Because the revised in-house plan's costs totaled
$56,460,369 (a difference of $26,181,108), the agency made a tentative
decision to perform the requirements
in-house and so notified Sodexho.

Sodexho filed an administrative appeal on October 9, based on its review of
the MEO's management plan, the TPP, and the in-house cost estimate.  The
agency's administrative appeal authority found merit in the appeal to the
extent that the MEO's pricing was found to be understated by $1,667,660.80,
but otherwise ratified the determination to perform the requirements
in-house.  The resulting revised cost comparison form reflected an adjusted
total cost of contract performance of $82,791,377 and an adjusted total cost
of in-house performance of $58,137,629, for a difference of $24,653,748.
The appeal was denied on December 10, 2001.  On December 27, Sodexho filed a
protest in our Office challenging the administrative appeal decision.  The
parties subsequently agreed to handle the protest as a timely agency-level
protest pursuant to FAR ï¿½ 33.103, and Sodexho withdrew its GAO protest.  The
agency provided Sodexho with additional documents, and Sodexho filed a
supplemental agency protest on February 25.  After the agency submitted its
response to Sodexho's agency-level protests on March 22, in which it found
that the MEO's pricing was understated by approximately $250,000 but
otherwise rejected Sodexho's allegations, Sodexho filed the instant
protest.

PROTEST ISSUES

Sodexho's allegations fall under three categories.  Sodexho first argues
that the Navy's overall process was flawed and unfair because the cost
comparison was based on an MEO that proposed to perform the requirements
using NAFI employees as 82 percent of its in-house workforce.  Sodexho next
argues that the MEO failed to meet numerous PWS requirements, and that the
IRO's certification of the MEO was inadequately documented and "directed" by
external Navy forces.  Sodexho finally argues that the agency improperly
failed to adjust the in-house offer to equal the level of performance and
performance quality offered by Sodexho.  We sustain the protest in
conjunction with Sodexho's first allegation for the reasons discussed below.

STANDARD OF REVIEW

Circular A-76 describes the executive branch policy on the operation of
commercial activities that are incidental to performance of government
functions.  It outlines procedures for determining whether commercial
activities should be operated under contract by private companies or
in-house using government personnel.  While our Office does not review
internal agency decisions regarding matters not the subject of a
solicitation, where, as here, an agency has issued a solicitation as part of
an A-76 study, thereby using the procurement system to determine whether to
contract out or to perform work in-house, our Office will consider a protest
alleging that the agency has not complied with the applicable procedures in
its selection process, or has conducted an evaluation that is inconsistent
with the solicitation criteria or applicable statutes and regulations.  See
Trajen, Inc., B-284310, B-284310.2, Mar. 28, 2000, 2000 CPD ï¿½ 61 at 3.  To
succeed in its protest, the protester must demonstrate not only that the
agency failed to act properly, but also 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 ï¿½ 86 at 19; Aberdeen Technical Servs.,
B-283727.2, Feb. 22, 2000, 2000 CPD ï¿½ 46 at 5.

USE OF NAFI EMPLOYEES

The central issue in this protest is Sodexho's objection to the MEO's use of
NAFI employees--at NAFI wage rates and benefits levels--as "government
personnel" or "federal employees" as part of its in-house plan to perform
the vast majority of the requirements.  Sodexho contends that NAFI employees
are neither "government personnel" nor "federal employees" for the purpose
of an A-76 cost study and that, even if they can be so construed, the cost
of their wages and benefits must be based on the higher GS/FWS rates
described in the RSH, and not on their actual, generally lower, NAFI wage
rates and benefits levels.

Backdrop[8]

While most of the goods and services that the federal government purchases
are acquired to carry out government business, other goods and services are
acquired to support the efforts of government employees and officers to
carry out the government's business by fulfilling their morale, welfare, and
recreation (MWR) needs.  The private sector can provide some of these MWR
needs, but has been unable or unwilling to meet all MWR needs at every
location.  As a result, the government has often turned to nonappropriated
fund instrumentalities (NAFI) or activities to supply MWR goods and
services.  NAFIs are related to the government and provide a wide range of
government-related services and activities, but occupy a unique legal
status.

NAFIs are not federal agencies or government corporations, and they are not
typical private or commercial enterprises, although they may operate on a
for-profit basis.  Instead, they are "a special breed of federal
instrumentality which cannot be fully analogized to the typical federal
agency supported by federal funds."  Cosme Nieves v. Deshler, 786 F.2d 445,
448 (1st Cir. 1986).  Our Office views their operation with mainly
nonappropriated funds as the defining characteristic of NAFIs.  Principles
of Appropriations Law, supra, at 17-224; Department of Agriculture Graduate
School, 64 Comp. Gen. 110, 111 (1984).  Another important characteristic
that defines NAFIs, and distinguishes them from federal agencies or private
commercial enterprises, is the purposes for which they are created:  to meet
the MWR needs of government officers and employees.  Principles of
Appropriations Law, supra, at 17-225.  DOD articulates the importance of MWR
programs, many of which are carried out by NAFIs, as follows:

MWR programs are vital to mission accomplishment and form an integral part
of the non pay compensation system.  These programs provide a sense of
community among patrons and provide support services commonly furnished by
other employers, or other State and local governments to their employees and
citizens.  MWR programs encourage positive individual values, and aid in the
recruitment and retention of personnel.  They provide for the physical,
cultural, and social needs and general well-being of Service members and
their families, providing community support systems that make DoD bases
temporary hometowns for a mobile military population.

DOD Instruction 1015.10, Morale, Welfare, and Recreation (MWR), Nov. 3,
1995,
ï¿½ 4.2.

Although they are defined as using nonappropriated funds, in cases where
NAFIs have not been profitable or self-sustaining, the government has
subsidized their operations with appropriated funds[9] in order to ensure
the MWR needs are met.[10]  Principles of Appropriations Law, supra, at
17-225.  While the general rule under the early cases had long been that
expenses associated with MWR could not be paid from appropriated funds
unless specifically authorized by law, id. at 17-230, the current trend
increasingly recognizes the use of appropriated funds for expenses related
to MWR.  Id. at 17-231 to 17-238.  Congress has specifically authorized the
use of certain appropriated funds for MWR expenses.  See 10 U.S.C. ï¿½ 2241
(2000) (authorizing the use of operation and maintenance appropriations for
MWR).  In 1987, at the direction of Congress, DOD divided its MWR activities
into three categories receiving varying degrees of appropriated fund support
depending upon how closely related the activities are to sustaining DOD's
mission.[11]  Id. at 17-237 to 17-238; see also DOD Instruction No. 1015.10,
supra.

While this Office has questioned whether it is appropriate for a NAFI to
provide services to federal agencies (since NAFIs exist to help foster the
morale and welfare of military personnel and their dependents), In the
Matter of Obtaining Goods and Services from Nonappropriated Fund Activities
through Intra-Departmental Procedures, 58 Comp. Gen. 94, 98 (1978), we have
since stated that a NAFI may compete in, and be awarded a contract, under a
competitive procurement, unless otherwise precluded by its charter from
doing so.  General Physics Fed. Sys., Inc.,
B-274795, Jan. 6, 1997, 97-1 CPD ï¿½ 8 at 3 n.3, citing Department of
Agriculture Graduate School, supra.

Further, as part of the 1997 National Defense Authorization Act, Pub. L. No.
104-201, Div. A, Title III, ï¿½ 341(a)(1), 110 Stat. 2488 (1996), codified at
10 U.S.C. ï¿½ 2482a, Congress provided:

An agency or instrumentality of the Department of Defense that supports the
operation of the exchange system, or the operation of a morale, welfare, and
recreation system, of the Department of Defense may enter into a contract or
other agreement with another element of the Department of Defense or with
another Federal department, agency, or instrumentality to provide or obtain
goods and services beneficial to the efficient management and operation of
the exchange system or that morale, welfare, and recreation system.

Pub. L. No. 104-201, supra, note 239.

Turning to the case before us, the Navy explains that, when this A-76 study
was announced in January 1997, the Navy infrastructure in the Pensacola area
was already in transition as the result of two Navy initiatives designed to
streamline the organization and reduce costs.  One was a regionalization
initiative to consolidate selected Navy installation services, and the other
was an initiative to transfer all military billets assigned to community
support and absorb the associated workload into the civilian organization.
This latter initiative, which began in 1994, was the result of a downsizing
in the overall number of personnel in the armed forces, including the
personnel that typically staffed bachelor housing performing front desk,
custodial, and maintenance functions.  Statement of Pensacola Regional
Bachelor Housing Director at ï¿½ 7.  In 1996, most of the military personnel
assigned to bachelor housing at Chief of Naval Education and Training (CNET)
activities such as the one at issue here were being assigned to fill fleet
requirements, and bachelor housing military billets were being eliminated,
leaving a critical shortage of personnel at the Pensacola facilities.  Id.
at ï¿½ 8.  As these military billets were eliminated, the Pensacola
organizations had to develop a strategy to handle the loss of those
resources.

In February 1996, the CNET Command authorized the replacement of the
soon-departing military personnel with NAFI civilians.  Id.  Bachelor
housing managers worked with base comptrollers to put together a memorandum
of understanding (MOU) with the bachelor housing NAFI identifying positions
that would be covered by appropriated funds.[12]  The first MOU, signed in
1996, addressed only front desk services.   Subsequent memoranda of
agreement (MOA) added additional areas of service, including maintenance and
custodian services, and new MOAs were completed each year to reflect
changing requirements.  As the regional bachelor housing organization was
established, civil service positions that were unencumbered, i.e., vacant,
were transitioned to NAFI positions.  Id. at ï¿½ 13.

An increasing use of NAFI personnel was also occurring in the MWR programs
in Pensacola in response to the pressure to reduce military infrastructure
costs.  This change occurred following the implementation of a new DOD
policy initiated in
July 1997, the "Utilization, Support and Accountability Practice," or USA
Practice, which provided a vehicle for MWR programs to convert unoccupied
civil service billets to NAFI positions with more flexible personnel
requirements, but to continue funding those positions with appropriated
funds.  In accordance with USA Practice, billets for Pensacola MWR personnel
have been systematically converted to NAFI positions as they have become
vacant and paid with appropriated funds.  Agency Report (AR) at 22.

Accordingly, while the MEO in-house plan was being prepared, the Navy was
pursuing parallel initiatives that resulted in a shift in the mix of
appropriated fund and NAFI employees.  In 1997, the positions initially part
of this study included 755 positions consisting of 261 civil service
positions, 55 military billets, and 439 NAFI positions.  AR at 23.  The Navy
explains, however, that these numbers had diminished by the time the MEO was
developed.  When "the dust settled," the baseline used to develop the MEO
was 682 positions, consisting of 192 civil service positions, 51 military
billets, and 439 NAFI positions.  Id.

The bulk of the MEO's proposed FTEs fall under the two annexes where NAFI
employees are proposed, MWR and bachelor housing.[13]  Under the MWR annex,
the MEO proposed a workforce comprised of 35.77 civil service FTEs and 83.30
NAFI FTEs, including a number of flex-time FTEs, for a total of 119.07
FTEs.  See Management Plan Annex 4 at 129-136.  Under the bachelor housing
annex, the MEO proposed a workforce comprised of 18.67 civil service FTEs,
141.83 NAFI full-time FTEs, and 112.94 NAFI flex-time FTEs for a total of
273.44 FTEs.  Management Plan Annex 3 at 1.  Appropriated funds will be used
to pay for all of these services save the housekeeping services under the
bachelor housing annex, which are paid with nonappropriated funds.[14]  See
supra, note 11.

These NAFI positions were costed at their NAFI wage and benefit levels,
which the parties agree are generally lower, often substantially, than civil
service wage and benefit levels.  Of particular interest to Sodexho are the
NAFI flex-time or flexible employees.  These employees serve in either
continuing or temporary positions, on a scheduled or unscheduled basis, up
to 40 hours per week, and are ineligible to participate in the relevant
benefits program and not entitled to earn sick or annual leave.  BUPERS
INSTRUCTION 5300.10, Bureau of Naval Personnel Nonappropriated Fund
Personnel Manual for Navy Nonappropriated Fund Instrumentality (NAFI)
Employees, ch. 2, ï¿½ 202.b. (Dec. 1997).

Analysis

Circular A-76 and its RSH set forth the procedures for determining whether
commercial activities should be performed under contract with commercial
sources, in-house using "government facilities and personnel," or through
interservice support agreements (ISSA).[15]  Circular A-76 ï¿½ 1; RSH at 1.
The MEO is defined as referring to the government's in-house organization to
perform a commercial activity, and "may include a mix of Federal employees
and contract support."  RSH, app. 1, Definition of Terms, at 36.  Since the
parties agree that the NAFI employees in the MEO do not fall under the
category of "contract support," the first substantive question we must
consider is whether they can properly be viewed as "Federal employees" or
"government personnel" for the purpose of an A-76 cost study.

As a threshold matter, though, the Navy asserts that the composition of its
MEO is not a proper issue for appeal because it falls under the category of
"Government management decisions involving the government's certified MEO,"
one of the categories of questions to which the agency's A-76 administrative
appeal procedures do not apply.  RSH Part I, ch., 3, ï¿½ K.6.c.
Notwithstanding the fact that, when Sodexho raised this issue in its
administrative appeal, it received a detailed response, the Navy argues that
this was not a proper question for the administrative appeal process and, as
a result, cannot be a proper question for a GAO protest.  We do not agree.

Our bid protest jurisdiction is not defined by the scope of the
administrative appeals process.  The Competition in Contracting Act of 1984
(CICA) grants our Office jurisdiction to resolve bid protests concerning
solicitations, cancellations of solicitations, and contract awards that are
issued by a federal agency.  31 U.S.C.
ï¿½ 3551(1)(A) (2000).  As explained above, we review agency decisions to
perform services in-house instead of contracting for them in order to
ascertain whether the agency followed the applicable procedures in its
selection process and conducted an evaluation consistent with the
solicitation criteria and applicable statutes and regulations.  See Trajen,
Inc., supra.  Because Sodexho is arguing that the composition of the MEO,
and the resulting costing of that MEO, do not comply with the A-76 rules as
set forth in the Circular and RSH, this issue is appropriate for our review,
even if the administrative appeal board should not have considered it.  See
Omni Corp., B-281082, Dec. 22, 1998, 98-2 CPD ï¿½ 159 at 4 (holding that GAO
was the appropriate place for a protester to pursue its challenge to the
private-sector competition portion of the A-76 process notwithstanding the
fact that the RSH expressly provided that the A-76 administrative appeals
procedures did not apply to such questions).

Turning to the merits, Sodexho's contention that NAFI employees are not
"Federal employees" for the purpose of an A-76 cost study relies solely on 5
U.S.C. ï¿½ 2105 (2000).  Section 2105 defines "employee" for the purpose of
Title 5 of the United States Code, which governs government organizations
and employees.  Subsection 2105(c) provides that "[a]n employee paid from
nonappropriated funds of . . . instrumentalities of the United States under
the jurisdiction of the armed forces conducted for the comfort, pleasure,
contentment, and mental and physical improvement of personnel of the armed
forces is deemed not an employee for the purpose of -- . . . laws
administered by the Office of Personnel Management," with various stated
exceptions.

We do not read this provision of Title 5 as a per se bar to the inclusion of
NAFI employees in an MEO.  In enacting this provision, Congress was acceding
to DOD's desire to make civilian employment with NAFIs as flexible as
possible and not subject to then-existing civil service protections.
Principles of Appropriations Law, supra, at 17-257; see generally S. Rep.
No. 92-1341 (1952) and H.Rep. No. 82-1995 (1952), reprinted in 2
U.S.C.C.A.N. 1952 at 1520-1528; McAuliffe v. Rice, 966 F.2d 979, 981 (5th
Cir. 1992).  As a result of this provision, with a few exceptions not
relevant here, NAFI employees are not covered by laws that apply to
employees within the civil service.  See McAuliffe v. Rice, supra, at
980-81.  However, neither the Circular nor the RSH expressly define "Federal
employees" as only those within the civil service or subject to its
protections, and Congress has made NAFI employees subject to various laws
applicable to government or federal employees by expressly including them
within the coverage of specific statutes.[16]

Since neither the Circular nor the RSH expressly defines the term "Federal
employee," and since neither mentions NAFI employees or NAFIs (except in the
context of the FAIR Act, discussed below), we must make further inquiry into
the guidance.  As the following discussion indicates, the guidance is
unclear in this respect and leaves room for interpretations that cut both
ways.  On balance, however, our review of the Circular and the RSH in their
entirety leads us to conclude that they anticipate that an MEO will use
civil service employees to constitute its in-house organization as a general
rule, but leave open the possibility that at least some NAFI employees may
be properly included.

Part II of the RSH contains generic principles and procedures for developing
the cost of in-house performance to the government, RSH Part II, ch. 1, ï¿½
B.2, and standard cost factors to be used in calculating the cost of
government performance.  Id. at ch. 2, ï¿½ A.2.  Among other things, the RSH
sets forth considerations to be used to compute personnel costs.  After
identifying the job, the agency is required to "[i]dentify the appropriate
GS/FWS grade for each position title or skill," and to "[i]dentify the FTE
required for each grade, as well as the temporary and intermittent employee
work years."  Using current pay rates based on the "government-wide
representative rate of step 5 for GS and step 4 for FWS employees," the
agency is required to multiply that pay rate by the number of FTEs or actual
hours.  The agency must then multiply a series of government-wide standard
factors by the appropriate basic pay to obtain the costs of fringe benefits
or Federal Insurance Contribution Act costs.  RSH Part II, ch. 2, ï¿½ B.6.

As discussed above, "GS" denotes the primary compensation structure for
civil service personnel performing white-collar work in the federal
government, 5 U.S.C. ï¿½ 5331 et seq. (2000).  "FWS" is a uniform pay system
that covers federal appropriated fund and NAFI blue-collar employees, 5
U.S.C. ï¿½ 5341 et seq. (2000), and, as a result, includes wage designations
for blue-collar NAFI employees.  5 C.F.R. ï¿½ 532.203(a),(b) (2001).  The two
wage systems mentioned in the RSH thus do not include white-collar NAFI
employees.

While the MEO here included many NAFI employees with FWS grades (that is,
blue-collar NAFI employees), the wages and benefits of many of the MEO's
other NAFI employees (the white-collar ones) are not covered by the FWS
system, but fall under the Navy's paybanding system for white-collar NAFI
employees.  See BUPERSINST 5300.10, supra, ch. 3, "NAF Personnel Pay Band
System."  The specific mention of these two wage systems could be read to
mean that the RSH does not permit white-collar NAFI employees to be included
in an MEO.  Indeed, the Navy acknowledges that "NAF employees are not
considered Federal employees so far as applying their labor related costs
when they are included in an A-76 study," Navy MWR A-76 Fringe Benefit Rates
Point Paper, NPC-65FF2/874-6662, Mar. 29, 1999, at
http://www.mwr.navy.mil/mwrprograms/a76fringe.htm; the Chief of Naval
Operations has established fringe benefit rates to be used for NAFI
employees which differ from those in the RSH.

On the other hand, the RSH's specification of these two wage systems, and no
others, may just as well reflect the fact that they cover most "government
employees."  The most recently available statistics show that approximately
1.2 million employees are covered by the GS wage system, and approximately
198,000 employees are covered by the FWS wage system.  Federal Civilian
Workforce Statistics:  Pay Structure of the Federal Civil Service as of
March 31, 2001, OPM, OWI01-04 (Sept. 2001) at 2.  In contrast, DOD estimates
that it has a NAFI workforce of approximately 140,000.  DOD's Civilian
Personnel Management Service, Nonappropriated Fund Personnel Policy Office,
http://www.cpms.osd.mil/nafppo/homepage.html.  It may simply have made
little sense for the A-76 guidance to establish general rules for such a
unique set of personnel, whose role is generally limited by their employment
in a NAFI, whose existence is usually characterized by its operation with
mainly nonappropriated funds and for the purpose of meeting the MWR needs of
government officers and employees.[17]

As a result, while we agree that the RSH's procedures and standard cost
factors were designed for civil service employees under the GS and FWS wage
systems, we cannot conclude that the RSH's specification of these two wage
systems, and no others, must be read to prohibit the use of NAFI employees
in an MEO, particularly since the FWS (which is referenced in the RSH) does
include some NAFI wage designations.

In addition to the inferences that can be drawn from references to GS and
FWS pay in the RSH, the question of the right of first refusal provides some
indicia of whether NAFI employees should be viewed as "Federal employees"
for purposes of inclusion in an MEO staffing plan.  In describing various
personnel considerations that arise in implementing the Circular, the RSH
provides that "Federal employees and existing Federal support contract
employees adversely affected by a decision to convert to contract or ISSA
performance have the Right-of-First-Refusal for jobs for which they are
qualified that are created by the award of the conversion."  RSH Part I, ch.
1, ï¿½ H.2.  Contracting officers are required to include the clause at FAR ï¿½
52.207-3 in A?76 cost comparison solicitations notifying potential
contractors of this requirement, and the right of first refusal is afforded
to "all federal employees adversely affected by the decision to convert to
contract performance."  Id. at ï¿½ H.2.a.  The RSH defines these "adversely
affected federal employees" as "employees identified for release from their
competitive level by an agency, in accordance with 5 C.F.R. Part 351 and
Chapter 35 of Title 5, U.S. Code, as a direct result of a decision to
convert to contract, ISSA performance, or the agency's MEO."  Id. at ï¿½ H.1.

It is not clear that the RSH's definition of "adversely affected federal
employee" encompasses NAFI employees.  As indicated above, NAFI employees
are not deemed to be government employees for the purpose of laws
administered by OPM, with exceptions not relevant here.  The terms
"competitive service" and "preference eligible" are central to the civil
service system but not used in connection with NAFI employees.  See 5 U.S.C.
ï¿½ï¿½ 2102, 2108 (2000); see also Perez v. Army and Air Force Exchange Service,
680 F.2d 779, 787 (1982).  OPM, which administers the reduction in force
laws, 5 U.S.C. ï¿½ 3501 et seq. (2000), has stated that NAFI employees "[are]
not covered by OPM's reduction in force regulations."  Restructuring
Information Handbook, Module 2, Human Resource Responsibilities in
Restructuring," OPM Workforce Restructuring Office, Jan. 1999, at 26,
http://www.opm.gov/rif/handbook/
rih.htm.

The Navy appears to have interpreted the RSH provisions regarding the right
of first refusal as inapplicable to NAFI employees.  In its guidance to MWR
program managers conducting A-76 cost studies, the Navy states:

The legal opinion provided by the Office of General Counsel in Washington,
DC dated 31 July 1998 indicates that the word 'employee' in OMB Circular
A-76 and its supplement, for purposes of applying [right of first refusal]
appears not to apply to NAF employees.

Further, 'while we are not aware of any prohibitions on extending that right
to NAFI employees, the priority must first apply to APF employees'.
Therefore, to ensure that [right of first refusal] is offered to NAF
employees, it must be written in as a requirement of the contract.  This is
the only way to ensure equitable employment protection for NAF employees.

COMNAVPERSCOM (PERS-6), MWR Division, "A-76 & MWR:  MWR Program Manager
Commercial Activity Guidance for an A-76 Study," Rev. 8/30/99, ï¿½ 4.10,
http://www.mwr.navy.mil/mwrprgms/a76guid.htm.  As noted earlier, the RFP at
issue here included the FAR's right of first refusal clause along with
notice that a contractor would have to provide a lower-preference right of
first refusal to NAFI employees.  RFP at 35.

In our view, the fact that the RSH specifically includes the right of first
refusal for civil service employees but is, at a minimum, ambiguous as to
such rights for NAFI employees is additional evidence that the A-76 process
was constructed with the expectation that "Federal employees" in the MEO
will be, as a general rule, civil service personnel.[18]

A final indication of whether Circular A-76 permits an MEO to contain NAFI
employees relates to the Federal Activities Inventory Reform (FAIR) Act,
Pub. L. No. 105-270, 112 Stat. 2382, Oct. 18, 1998, which directs federal
agencies to issue annually an inventory of all commercial activities
performed by federal employees.  The requirements of the FAIR Act do not
apply to a NAFI "if all of its employees are referred to in 5 U.S.C. ï¿½
2105(c)." [19] Pub. L. No. 105-270, 112 Stat. 2382, 2384, ï¿½ 4(b)(3).  By
implication, then, the requirements of the FAIR Act do apply to NAFI
activities staffed with a mix of NAFI employees and civil service
employees.  Consistent with this guidance, DOD's Commercial Activities
Program Procedures Instruction states that it "is not mandatory for
[commercial activities] staffed solely with DOD civilian personnel paid by
nonappropriated funds, such as military exchanges," but "is mandatory for
[commercial activities] when they are staffed partially with DOD civilian
personnel paid by or reimbursed from appropriated funds, such as libraries,
open messes, and other [MWR] activities."  DOD INSTR 4100.33, Commercial
Activities Program Procedures ï¿½ 2.3, Oct. 1995.  The instruction further
provides that "[w]hen related installation support functions are being
cost-compared under a single solicitation, a DOD Component may decide that
it is practical to include activities staffed solely with DOD civilian
personnel paid by nonappropriated funds."  Id.; see also OPNAV INSTRUCTION
4860.7C, Navy Commercial Activities Program Manual, part I, ch. 1, ï¿½ A.3(d),
June 1999.  This guidance indicates that DOD and the Navy have understood
Circular A-76 to allow inclusion of NAFI employees in an MEO.

We thus conclude that the A-76 guidance was constructed with the expectation
that an MEO will, as a general rule, be comprised of a civil service
workforce covered by the two major wage systems discussed above, but leaves
open the possibility that NAFI employees might be part of an MEO.  The
policies, procedures, and standard cost factors in the RSH are designed for
the expected components of an A-76 cost study, and not for NAFI employees or
any other employees under unique wage systems, but the generic nature of the
guidance does not prohibit the inclusion of these employees.  As a result,
we cannot find that the Navy's inclusion of NAFI employees in its MEO
violated the A-76 procedures.

As we explain below, we nonetheless believe that the Navy acted improperly
here, and we sustain the protest on that basis.  Before turning to the
defect in the agency's action in terms of procurement law, though, we note
that the construction of an MEO relying primarily on NAFI employees raises
significant policy concerns, which are to be resolved, not by our Office's
bid protest function, but by the executive branch, and by OMB, in
particular, as the agency responsible for the Circular.  We recognize that
policy considerations may weigh in different directions.  For example, since
the A-76 process is designed to find the lowest-cost solution satisfying the
government's needs, it may be sensible to allow an MEO to be composed
largely (or even entirely) of NAFI employees as long as this strategy
provides that lowest-cost solution.  Such a strategy may, in fact, represent
an innovative and desirable approach to the A-76 process.  A countervailing
consideration would be that the A-76 process is meant to compare the cost of
contractor performance against performance by a civil service workforce, so
that, if performance of a function by NAFI employees is anticipated, that
function should simply be transferred to NAFI employees, and not go through
the A-76 process at all.  Because resolving these matters is properly
reserved to the executive branch, by letter of today, we are suggesting that
OMB issue guidance on the proper role of NAFI employees in an MEO.

In terms of the protest before our Office, we conclude that the Navy's
wholesale use of NAFI employees in the MEO in the circumstances of this case
resulted in an unfair competition, and we sustain the protest on that basis.

In conducting an A-76 competition, as in any competition for a federal
contract, an agency must provide private offerors with sufficient
information to allow an intelligent competition on an equal basis.  Ameriko
Maint. Co., B-243728, Aug. 23, 1991, 91-2 CPD ï¿½ 191 at 3; see also Draeger
Safety, Inc., B-285366, B-285366.2, Aug. 23, 2000, 2000 CPD ï¿½ 139 at 4.
While we have held that agencies conducting an A-76 cost study are not
required to disclose the bases of their cost estimates to private offerors,
Ameriko Maint. Co., supra, that does not mean that the agency can withhold
critical information from either the public or the private participants.

The ground rules by which a commercial offeror and its competitors must
abide are among the factors a commercial offeror considers in deciding
whether to participate in an A-76 cost comparison competition.  The ground
rules for the private-private competition are established by the terms of
the solicitation and applicable statutes and regulations, and the ground
rules for the public-private competition are the Circular and the RSH.[20]
In this regard, the Circular was designed to, among other things, "provide a
level playing field between public and private offerors to a competition."
RSH, Introduction, at iii.  As concerns the construction and costing of an
MEO, this "level playing field" is created by the policies and procedures
provided in the RSH. A commercial offeror examining these ground rules for
the public-private competition would come away with the reasonable
understanding that the government's MEO would be comprised, as a general
rule, of civil service personnel at civil service wage and benefit levels.
In this public-private competition, that commercial offeror would have been
mistaken.

It is true that, while the government and offerors must compete on the same
PWS, when a cost comparison is being considered they may be subject to
different legal obligations regarding performance, which may cause offerors
to suffer a cost disadvantage.  Paige's Sec. Servs., Inc., B-235254, Aug. 9,
1989, 89-2 CPD ï¿½ 118 at 5.  Hence, we have held that the fact a commercial
offeror is required to pay SCA wages and benefits, while civil service and
military wages and benefits that the agency is required to pay may be lower,
does not itself constitute a legally impermissible competitive advantage.
Id.; Ameriko Maint. Co., supra.  When conducting a cost comparison, agencies
must ensure that all costs are considered and that these costs are
realistic[21] and fair, Circular ï¿½ 5.a., but fairness does not extend to
equalizing such inherent disparities.  Paige's Sec. Servs., Inc., supra.  In
these cases, however, the ground rules of the competition--the fact that the
agency intended to pay civil service and military wages--were evident from
the A-76 guidance and the solicitation before the competition began.  In the
case at hand, neither the A-76 guidance nor the solicitation put Sodexho on
notice of the possibility that the Navy would use NAFI employees for the
great majority of its personnel requirements, at their NAFI wage and benefit
levels.

We agree with the Navy that Sodexho was on notice that the MEO might include
some NAFI employees.  The RFP included right of first refusal requirements
for NAFI employees and an MWR annex, and MWR activities are often staffed
with NAFI employees.  The problem here is that neither Sodexho nor any other
commercial offeror could have known that the MEO would staff the bachelor
housing annex, where the bulk of the labor force was required, almost
exclusively with NAFI employees, at their lower wage rate and benefits
levels.

It is one thing for a commercial offeror to enter a competition
understanding that its labor costs might not be competitive under one of six
annexes comprising approximately 25 percent of the labor force (that is, the
MWR annex), since this disadvantage can be offset by the labor costs in the
other annexes.  It is quite another thing for a commercial offeror to enter
a competition without knowing that its labor costs will not be competitive
under annexes comprising approximately 80 percent of the labor force.[22]
In this regard, in one of the few points of agreement evident in these
proceedings, the Navy agrees that Sodexho "simply could not compete with the
wage structure for NAFI personnel as reflected in the wages that were being
paid to the Navy's ongoing NAFI workforce," and "the use of NAFI personnel
results in significant cost savings to the Navy over any cost savings that
might be gained by issuing a private sector contract that must comply with
the Service Contract Act."  AR at 88, 89; see also Navy's May 23, 2002
Submission at 14.

As Sodexho explains,

The handicap created by requiring commercial sources to comply with the SCA,
while allowing the cost of the Navy MEO to be calculated at the wages paid
NAFI flextime employees, made it absolutely impossible for Sodexho to be
cost-competitive in this procurement.  All Navy officials aware of the
extensive use of NAFI employees and NAFI wages in the MEO and [in-house cost
estimate] had to know that no commercial source could come close to being
cost-competitive.  Whether conducting such a procurement constitutes bad
faith may be debatable, but there can be no doubt it was not fair.  If
Sodexho had known the Navy was going to stack the deck in this fashion,
Sodexho would certainly have challenged the legality of this practice under
an A-76 procurement before preparing a proposal.  If it had been determined
by the GAO that it was proper for the MEO and [in-house cost estimate] to be
based upon NAFI employees at NAFI compensation, no commercial contractor
would have bothered to respond to such a Solicitation.

Sodexho May 29, 2002 Comments at 3 n.2.

While there is ample evidence that the Navy knew its extensive use of NAFI
employees gave it a cost advantage here, there is no basis for us to
conclude that the Navy set out to conduct an unfair competition.
Nonetheless, since the Navy knew when it issued the solicitation that the
mix of its employees in the bachelor housing annex had shifted to a largely
NAFI employee population and that the list of employee classes and their
wages and benefits provided in the solicitation pursuant to FAR ï¿½ 52.222-42
"did not give Sodexho a clear indication of the wage grades that would be
included in the MEO," AR at 69, and since the A-76 guidance does not
anticipate the use of NAFI employees for the majority of the MEO workforce,
we believe that fundamental fairness dictates that the Navy should have
provided commercial offerors adequate notice of its intentions.

Where, as here, the level playing field promised by the A-76 guidance is
tilted toward the in-house competitor in a way that cannot be reasonably
anticipated by a commercial offeror, the commercial offeror is deprived of
the ability to make an intelligent business judgment concerning the
competition.  If, as the parties agree, "the use of NAFI personnel
[resulted] in significant cost savings to the Navy over any cost savings
that might be gained by issuing a private sector contract that must comply
with the Service Contract Act," AR at 89, Sodexho was entitled to know that
fact prior to entering the competition.  The Navy's failure to give
commercial offerors adequate notice of its intent to use NAFI employees for
the great majority of its in-house workforce improperly and unfairly
deprived those offerors of the ability to make an informed decision about
whether, and how, to compete.

We now turn to Sodexho's allegations that the MEO improperly failed to meet
the PWS requirements and that the agency improperly failed to adjust the
in-house offer to equal the level of performance and quality provided by
Sodexho's proposal.

COMPLIANCE WITH THE PWS

Sodexho contends that the MEO improperly failed to meet the PWS requirements
in 41 separate areas, and that the in-house cost estimate is, as a result,
understated by approximately $14 million.

To preserve the integrity of the A-76 cost comparison, private-sector
offerors and the government must compete on the basis of the same scope of
work.  See RSH, part I, ch. 3, ï¿½ H.3.e.; see also Aberdeen Tech. Servs.,
supra, at 8.  In the first instance, the RSH requires that both the in-house
plan and the private-sector proposals must comply with the minimum PWS
requirements.  RSH, part II, ch. 2, ï¿½ A.1.b.

It is the IRO's responsibility prior to sealing the government's in-house
plan to ensure that it satisfies the minimum PWS requirements and that any
adjustments necessary to satisfy the PWS requirements are made.[23]  See
RSH, part I, ch. 3, ï¿½ï¿½ H, I, J.  Even after completion of the private-sector
competition, the agency must ensure the compliance of the in-house offer
with the PWS requirements.  BAE Sys., supra, at 20.  If an SSA determines
that the in-house offer does not satisfy the PWS requirements, that
deficiency must be resolved before the agency can proceed to the
public/private cost comparison.  Id.  We have reviewed each issue raised by
Sodexho, along with the agency's response and other documentation in the
record, and summarize our findings as follows.

First, during the course of the various administrative appeals and protest
proceedings involved here, the Navy conceded various errors in the amount of
approximately $1.5 million, and we need not address these matters further.
Second, numerous items in Sodexho's protest were not raised in its
administrative appeal and will not be considered by this Office.  With
respect to challenges to cost comparisons under Circular A-76 procedures, we
have adopted a policy, for the sake of comity and efficiency, of requiring
protesters to exhaust the available administrative appeal process.  As a
result, we have held that where, as here, there is a relatively speedy
appeal process for the review of the agency's cost comparison decision, we
will not consider objections to the cost comparison that were not appealed
to the agency.  See Professional Servs. Unified, Inc., B-257360.2, July 21,
1994, 94-2 CPD ï¿½ 39 at 3; Direct Delivery Sys., B-198361, May 16, 1980, 80-1
CPD ï¿½ 343 at 2.  It is true that there is no statutory or regulatory
requirement that an offeror exhaust available agency-level remedies before
protesting to our Office, and that we retain the discretion to waive the
policy requiring the exhaustion of the Circular A-76 appeals process where
good cause is shown.  BAE Sys., supra, at 17-18.  Here, however, the agency
is correct that Sodexho had sufficient information to have raised numerous
bases for challenging the cost comparison after its review of the MEO's
management plan, TPP, and in-house cost estimate made available during the
public review period following the cost comparison, but failed to raise them
at that time.[24]  There is nothing in the record that would warrant waiving
our policy requiring exhaustion of the appeals process in these instances.
[25]  Johnson Controls World Servs., Inc., B?288636, B-288636.2, Nov. 23,
2001, 2001 CPD ï¿½ 191 at 18.

Our review of the remaining issues shows that Sodexho disagrees with the way
the agency calculated workload and documented the MEO.  Sodexho has
demonstrated that the agency paid less than careful attention to detail when
preparing the management plan and TPP, but has not shown that the MEO failed
to meet the minimum requirements of the PWS.[26]  See Del-Jen, Inc.,
B-287273.2, Jan. 23, 2002, 2002 CPD ï¿½ 27 at 14.  The following examples from
each annex are provided for illustrative purposes.

Under the family housing annex, PWS ï¿½ 2.4.4.2. requires the service provider
(SP) to maintain an accurate inventory of all government-owned appliances
and equipment (such as stoves, refrigerators, water heaters, and lawnmowers)
located in each housing unit and in storage at NASWF only.  The appeals
authority denied Sodexho's appeal allegation that the MEO failed to document
the workload for this requirement, citing to the portion of the MEO
accounting for such workload.  Sodexho now argues that the number of hours
called for in the MEO only permits
33 minutes per property for the inventory, asserts that this is not enough
time, and argues that a more realistic time would be 1 hour per property.
The agency correctly observes that Sodexho cites no basis for its conclusion
that 1 hour per property is more realistic than 33 minutes per property, and
we have no basis to conclude that the MEO failed to meet the PWS
requirements.

Also under the family housing annex, Sodexho's appeal argued that the
current Family Activity Management Information System databases were
separate and not networked between NASP and NASWF, and that the management
plan proposed to provide read-only joint access at both locations to
eliminate inefficiencies but did not include any costs for required changes
in hardware and software configuration.  The appeals authority's denial of
this issue indicated that no technology improvements were planned and stated
that PWS ï¿½ 2.4.2.6 required data entry at NASP and NASWF and the MEO
included data entry hours for both locations.  In its protest, Sodexho
primarily argued that the MEO under-resourced the requirements based on the
number and type of employees used in the past.  The agency provided a
detailed rationale supporting its allocation of resources which Sodexho has
not addressed, and we have no basis to conclude that the MEO did not meet
the minimum requirements of the PWS.

Under the bachelor housing annex, Sodexho's appeal argued that the MEO
calculated the staffing required for room cleaning using a lower number of
transient rooms than provided by the PWS.  The appeals authority agreed with
Sodexho that the bachelor officer housing was underbid by three rooms, and
increased the IHCE by $25,455.02.  The appeals authority explained, however,
that the disparity concerning bachelor enlisted housing was based on the
parties' different methods of calculating the number of rooms in one
building.  With respect to that building, the PWS described the 314 room
units as follows:  "314 E5-E6 TP (each individual guest occupies 2 rooms:
628 rooms)."  PWS attach. 3-3 at 4.  The appeals authority explained that
these are small 220 square feet suites (a bedroom and a living room), that
the MEO considered the 628 rooms to be 314 rooms for cleaning and analysis
purposes since they are both very small, and that the MEO cleaning time was
based on a study of observed cleaning times.  We are not persuaded by
Sodexho's argument that the MEO must base its proposal on cleaning 628 rooms
because Sodexho did so.  All offerors had an opportunity to view room sizes
and configurations during the site visit, and it was up to each offeror how
to calculate the workload.  The agency has provided substantial detail
regarding how it arrived at its workload estimates, and Sodexho has given us
no basis to conclude that the MEO failed to meet the minimum requirements of
the PWS.

Also under the bachelor housing annex, Sodexho's appeal provided specific
examples in support of its argument that the MEO's custodial calculations
omitted part of the requirements.  Sodexho also asserted that the MEO stated
its analysis showed that the median square footage cleaned by a custodian
throughout PNRC was 7,479 square feet, but failed to use this factor in
calculating workload.  The appeals authority found that mistakes had been
made with respect to the specific examples cited by Sodexho, and increased
the in-house cost estimate by $461,120.28 using Sodexho's calculation of
square footage for these locations and the 7,479 square foot factor cited by
Sodexho.  In its agency-level protest and here, Sodexho argues, among other
things,[27] that the agency should apply the 7,479 square feet factor to all
of the square footage in the requirements, not just what had earlier been
omitted.  The Navy has explained that the MEO did not use the 7,479 square
foot factor for all of the required square footage because it recognized
that the square footage provided in the PWS was not all for the same types
of surfaces and did not require the same levels of service.  Moreover, where
the existing crew was cleaning in excess of the median, the MEO chose to
maintain the higher level.  Sodexho has not challenged this explanation or
otherwise shown that the staffing levels provided in the MEO are
insufficient to meet the minimum PWS requirements.

Under the MWR annex, Sodexho's appeal argued that the MEO failed to include
the workload for one of the four locations of athletic fields and
facilities, Saufley Field.  The appeals authority denied this issue,
pointing out that the workload for Saufley Field was incorporated into that
for the Corry Station location.  In its agency-level protest, Sodexho
disputed this response and argued that, for example, both locations each had
two trails to be maintained and the Corry workload of 504 inspections was
the same as two inspections per day or one per trail at Corry, leaving no
workload for Saufley Field.  The agency explained that PWS ï¿½ 4.7.1.5.
required the SP to perform operational maintenance of jogging trails and
tracks including, but not limited to, weekly inspections.  The MEO proposed
189 annual hours for trails inspection at Corry and Saufley, which amounted
to 1.8 hours per base to inspect the two trails located at each facility and
to do what little operational maintenance was required.  As a result, the
agency stated, inspections on a weekly basis would take only 78 hours, so
189 hours was more than enough to meet the PWS requirements.  In its protest
to our Office, Sodexho does not renew the objections it has already raised,
but instead provides new examples of workload allegedly unaccounted for by
the MEO.  Again, since Sodexho could have raised these objections in its
administrative appeal but failed to do so, we will not consider them.

Also under the MWR annex, Sodexho's appeal argued that the frequencies used
by the MEO to develop operational maintenance staffing had little relation
to the quantities and frequencies set forth by the PWS, and that entire
categories of equipment and facilities are omitted.  The appeals authority
denied this issue, finding that the MEO directly corresponded to the
operational requirements in the PWS, and provided a detailed explanation.
In its agency-level protest, Sodexho raised specific examples for the first
time, and received a detailed response from the agency, which it has failed
to address.  Under the circumstances, Sodexho has given us no basis to find
that the MEO failed to meet the minimum requirements of the PWS.

Under the public affairs annex, Sodexho's appeal argued that the MEO failed
to allocate staff to lay out advertisements for the "Whiting Tower," one of
two newspapers, as required by the PWS.  The appeals authority denied this
issue, and the record shows that the MEO specifically states that the
writer/editor at NASWF will "write, edit, and layout" the newspaper.
Management Plan Annex 6 at 10; see also TPP Annex 6 at 3 ("[t]he MEO will
layout advertisements in the Whiting Tower only.")  Sodexho's subsequent
argument that there is insufficient workload accounted for to meet this
requirement is untimely since it could have been raised in the
administrative appeal.  Moreover, the agency report provided a detailed
explanation to account for the workload, which is unrebutted by the
protester.  Under the circumstances, we have no basis to conclude that the
MEO failed to meet the minimum requirements of the PWS.

Finally, also under the public affairs annex, Sodexho's appeal argued that
the lead photographer/audiovisual specialist was not allocated time for the
development of programming and writing for programs and shows of the closed
circuit television station.  The appeals authority denied this issue,
stating that the PWS did not require the SP to develop programming or write
scripts for shows, but merely required the SP to operate the internal cable
network and produce the programs and shows.  The appeals authority explained
that the lead photographer/audiovisual specialist will produce live
broadcasts from prepared programs and scripts provided by customers or
guests.  Sodexho's assertion that the PWS does not say programs and scripts
are prepared by customers is an attempt to read more into the PWS than is
there, and there is no basis for us to conclude that the MEO did not meet
the minimum requirements set forth by the PWS.

COMPARABLE LEVEL AND QUALITY OF PERFORMANCE

Sodexho finally contends that the Navy improperly failed to adjust the
in-house offer to equal the level of performance and quality provided by
Sodexho's proposal.

The RSH provides that where, as here, a "best value" approach is taken in
evaluating private-sector proposals, the agency must compare the in-house
management plan to the successful private-sector proposal to determine
"whether or not the same level of performance and performance quality will
be achieved," and, if not, to make "all changes necessary to meet the
performance standards accepted" in the private sector proposal.  RSH, part
1, ch. 3, ï¿½ï¿½ H.3.d, e.  This "leveling of the playing field" is necessary
because a "best value" solicitation invites the submission of proposals that
exceed the RFP requirements, together with the higher prices that often
accompany a technically superior approach.  Failure to ensure that the
in-house management plan offers the same level of performance as the "best
value" private-sector proposal selected to be compared with the in-house
plan can lead to an unfair situation where the very technical superiority
that led to the private-sector proposal's selection would cause it to lose
the public/private comparison.  The Jones/Hill Joint Venture--Costs,
B-286194.3, Mar. 27, 2001, 2001 CPD ï¿½ 62 at 10.

The starting point for this analysis is the agency's own evaluation, during
the private-sector competition, of the proposal that is ultimately selected
for comparison with the in-house plan.  If an agency identifies strengths in
that proposal, or if it identifies areas in which that proposal exceeds the
RFP requirements, the agency should consider those strengths in comparing
that proposal with the in-house management plan.  RSH, part I, ch. 3, ï¿½ï¿½
H.3.d, e; The Jones/Hill Joint Venture, B-286194.4 et al., Dec. 5, 2001,
2001 CPD ï¿½ 194 at 20; Rice Servs., Ltd., B-284997, June 29, 2000, 2000 CPD ï¿½
113 at 7-8.  A generalized comparison of quality, such as simply stating
that the private offeror and the in-house management plan were given the
same adjectival ratings, cannot substitute for the consideration of whether
the in-house plan offers a level of performance comparable to that of the
selected private-sector proposal.  DynCorp Technical Servs. LLC, B-284833.3,
B-284833.4, July 17, 2001, 2001 CPD ï¿½ 112 at 13.  However, the agency may
ultimately conclude that the two offer comparable levels of performance and
performance quality, despite some differences and, potentially, despite
identified strengths.  See, e.g., NWT, Inc.; PharmChem Labs., Inc.,
B-280988, B-280988.2, Dec. 17, 1998, 98-2 CPD ï¿½ 158 at 14-17.

As discussed above, the TEB evaluated Sodexho's proposal as merely
acceptable under all of the technical evaluation factors and acceptable
overall (with a passing grade under the quality control subfactor).  The TEB
identified no strengths, no performance enhancements, and no improved
performance standards in Sodexho's proposal.  Instead, the documentation
shows that the TEP merely found Sodexho's proposal to be "sufficient" or
"adequate" to meet the PWS requirements.  Technical Evaluation of Proposals,
June 25, 2001; Technical Evaluation of FPRs, Aug. 13, 2001; Contracting
Officer Memorandum to the File, Aug. 29, 2001.  As discussed above, by
memorandum dated September 5, 2001, the contracting officer memorialized his
determination that the in-house proposal offered the same level of
performance and performance quality as did the Sodexho proposal.  He
concurred with the TEB's findings that the Sodexho proposal offered no
changes to the solicitation requirements or improvements to the level of
performance or performance quality beyond what was required by the PWS.  The
contracting officer went on to analyze the differences between the two
proposals, on an annex-by-annex basis, focusing on the differences in
staffing levels, differing approaches, and the minimum standards set forth
in the PWS.  The contracting officer found that the Sodexho proposal did not
offer to provide any of these services at a level in excess of the minimum
standards.  Contracting Officer's Memorandum, Sept. 5, 2001.

Sodexho generally argues that the quality of service it proposed is higher
than that of the MEO because the fact that the majority of the workforce is
earning compensation substantially less than the compensation paid by
Sodexho must have a dramatic impact on the quality of service, retention,
and recruitment.  Sodexho simply has not demonstrated that this is the
case.  Sodexho's focus appears to be on the NAFI flextime employees, who
work on an an-needed basis for an hourly rate that includes few benefits.
As the Navy explains, however, the reality of life on a military
installation is that a substantial pool of labor, largely military spouses
who have benefits through their spouses, wants additional income with
flexible hours and does not need additional benefits.  Sodexho's allegations
that these positions unfairly take advantage of military spouses does not
address the Navy's explanation, and gives us no evidence upon which to base
a conclusion that the Navy's longtime use of flextime employees to perform
many of the tasks at issue here has compromised the Navy's quality of
performance or its ability to recruit or retain employees.

Many of Sodexho's allegations merely reflect differing approaches to
staffing the requirements.[28]  In this regard, however, higher level of
staffing, or a different mix of staffing, does not necessarily offer any
commensurate increase in performance or performance quality.  Just as two
competing private-sector offerors may reasonably propose different levels of
staffing and different staffing mixes, depending on each offeror's technical
approach and proposed efficiencies, so, too, the in-house plan may be based
on a level of staffing or staffing mixes different from that offered by the
private-sector proposal.  Neither the SSEB nor the SSA should impose the
private-sector proposal's staffing levels or approach on the in-house team.
BAE Sys., supra, at 15.  Our review of Sodexho's proposal shows that it
contains little, if any, narrative indicating that its staffing approach
ipso facto indicates an enhanced level of performance quality.[29]

In this regard, Sodexho argues that the MEO must add at least 20 additional
full-time housekeepers in order to approximate the level of service provided
by Sodexho.  The protester argues that its calculations of the number of
workers required was based on its experience and various time and motion
studies, and that the MEO provides fewer FTEs and less worker time per
task.  However, the agency has explained that it, too, has supported its
staffing levels with workload analysis that appears to be reasonable; there
is no indication that Sodexho's minimum qualifications for these positions
are particularly demanding or that the MEO's approach would result in
inferior performance, and no indication that Sodexho will otherwise exceed
the PWS requirements.  While the differing staffing levels and mixes reflect
different approaches, Sodexho has not demonstrated that its approach
represents a performance enhancement.

The same is true for Sodexho's allegations that the MEO must add staff to
meet its own staffing levels for the administrative support requirements
within the general annex.  The Navy explains that the MEO's approach was to
maintain the status quo and operate stovepipe operations for family housing,
bachelor housing, MWR, and public affairs; each organization operates
independently and provides all management, supervision, labor, and
administrative support required.  The Navy explains that the MEO looked at
establishing a centralized community support management and support office
but found no compelling reason to do so.  The MEO team discussed what, if
any, directly operational support the current community support director
provided to the organization and concluded that it was minimal.  The MEO's
staffing for the general annex is consistent with this approach and Sodexho
has not persuaded us that its approach represents a performance enhancement.

We need not address Sodexho's remaining contentions.  After the appeals
process, and considering all of the concessions made by the agency,[30] the
in-house cost estimate is still less costly than Sodexho's proposal by
approximately $23 million.  Even where Sodexho has calculated that
adjustments for leveling will result in a cost increase to the in-house
organization, the sum of those figures does not approach an amount
sufficient to displace the in-house cost estimate.

CONCLUSION AND RECOMMENDATION

As explained above, we sustain the protest because we find that the Navy's
failure to give commercial offerors adequate notice of its intention to use
NAFI employees resulted in an unfair competition.  Because we do not find,
however, that it was unlawful for the Navy to rely so heavily on NAFI
employees, and because Sodexho has indicated it would not have competed if
it had been given notice in this regard, we have no basis to conclude that
Sodexho would participate in a recompetition.  As a result, we recommend
that Sodexho be reimbursed the costs of preparing its proposal to
participate in this competition.  4 C.F.R. ï¿½ 21.8(d)(2); see also
Occu-Health, Inc., B-270228.3, Apr. 3, 1996, 96-1 CPD ï¿½ 196 at 4.  We also
recommend that Sodexho be reimbursed its costs of filing and pursuing the
protest, including reasonable attorneys' fees.  4 C.F.R. ï¿½ 21.8(d)(1).
Sodexho should submit its certified claim for costs, detailing the time
expended and costs incurred, directly to the contracting agency within 60
days after receipt of this decision.  4 C.F.R. ï¿½ 21.8(f)(1).

The protest is sustained.

Anthony H. Gamboa
General Counsel

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

[1] The PNRC encompasses the Naval Air Station Pensacola (NASP); Naval Air
Station Whiting Field (NASWF); Navy Technical Training Center, Corry Station
(NTTC); Naval Education and Training Professional Development Command,
Saufley Field; tenant commands; and outlying airfields located in
northwestern Florida and southern Alabama.
[2] Amendment No. 0012 to the RFP provided a conformed copy of the
solicitation, complete with the performance work statement and all
attachments.  For ease of identification, the Navy numbered the conformed
solicitation N00140-00-R-G513/0012.  All references herein are to the
conformed copy of the solicitation.
[3] The MEO refers to the government's in-house organization to perform a
commercial activity and is the product of the management plan that details
the changes that will be made to perform the commercial activity in-house
and in accordance with the solicitation's performance work statement (PWS).
It may include a mix of federal employees and contract support, and is the
basis for all government costs entered on the cost comparison form.  OMB
Circular A-76, Revised Supplemental Handbook (RSH), app. 1, Definition of
Terms, at 36.
[4] The process for determining whether activities should be performed
in-house or with a contractor is set forth in OMB Circular A-76 and that
Circular's RSH.  The Department of Defense (DOD) and its military
departments are required to use the Circular and its Handbook in performing
commercial activities studies.  See 32 C.F.R. ï¿½ 169a.15(d) (2001).  The
required process includes preparation of a PWS outlining the task and
performance requirements, preparation of a management plan for performance
of the PWS tasks by the agency's MEO, a competition among private-sector
proposals, and a cost comparison between the successful private-sector
proposal and the MEO management plan.
[5] The solicitation also included a general annex intended to capture
administrative support services that were indirect/overhead expenses that
could not be identified with a single annex or might be related to the
performance of services throughout the PWS.  PWS ï¿½ 1.1.  The RFP also
initially included requirements for family service center support services
that were deleted after initial proposals were submitted.
[6] As discussed below, 5 U.S.C. ï¿½ 5341 sets out the uniform pay-setting
system, known as the Federal Wage Schedule (FWS), for appropriated fund and
nonappropriated fund craft, trade, and labor--"blue collar"--employees, and
5 U.S.C. ï¿½ 5332 sets out the General Schedule (GS) wage system, which covers
most civil service "white collar" employees.
[7] There are minor inconsistencies concerning the number of FTE proposed by
the MEO as between the number listed in the transition plan (that used by
the SSA) and the number used in the management plan.  For the purpose of
this decision, we will use the latter, 417.421 FTE.  Management Plan General
Annex at 4.
[8] The following discussion of nonappropriated fund instrumentalities
(NAFI) and activities, and their employees, is drawn from a more detailed
examination of their history and legal status found in GAO's Principles of
Appropriations Law, Vol. IV, GAO-01-179SP, ch. 17, part C, March 2001.
[9] Appropriated funds are funds provided in a regular annual appropriation
act or a continuing or permanent appropriation created when a statute
authorizes the obligation and expenditure of funds and designates the funds
to be used.  Principles of Appropriations Law, supra, at 17-223.
[10] Because of the use of appropriated funds to pay NAFI employees
(including many at issue in this protest), this decision uses the term
"NAFI" throughout, even though we recognize that, in the record and
elsewhere, reference is often made to "NAF employees" or "NAF wages and
benefits."
[11] Category A, "Mission Sustaining Programs," are considered most
essential in meeting organizational objectives and are to be supported
almost entirely with appropriated funds.  These programs promote the
physical and mental well-being of the military member and include such
things as physical fitness facilities, libraries, and unit level sports.
Category B, "Community Support Programs," are closely related to Category A
programs and should receive substantial amounts of appropriated funds
support.  These programs satisfy the basic physiological and psychological
needs of service members and their families, and include such things as
automotive skill development, youth activities, child development programs,
arts and crafts skill development and outdoor recreation.  Category C,
"Revenue Generating Programs," have the business capability of generating
enough income to cover most of their operating expense and, as a result,
receive limited appropriated funds support.  These programs include such
things as golf courses, clubs, bowling, and boating activities.  DOD
Instruction No. 1015.10, supra at ï¿½ 4.3.
[12] Appropriated funds are the primary source of funding for the operation
and maintenance of bachelor housing, but bachelor housing may establish a
nonappropriated billeting fund, which consists of service charges collected
from transient personnel residing in bachelor housing and from permanent
personnel residing in bachelor housing who elect housekeeping services.
These funds are expended to provide housekeeping services and in-room
amenities for transient personnel only, and for the housekeeping service
elected and paid for by permanent personnel.  OPNAVINST 1103.1B, Policies
and Procedures Government Bachelor Housing, Enclosure 11, "Financial
Management," at ï¿½ 1 (Mar. 20 1997).
[13] The MEO proposed to use a total of just 24 FTEs, all of which were
civil service positions, for the family housing and public affairs annexes.
Management Plan Community Support at 4, 7.
[14] Since these housekeeping services are paid out of the nonappropriated
billeting fund consisting of service charges collected from transient
personnel and permanent personnel who elect such services, it is not clear
why they were included in this study or how the inclusion of their costs in
the MEO accurately reflects the costs incurred by the government.
[15] We do not agree with Sodexho that the Navy should have used the RSH's
procedures for an ISSA to obtain the services of these NAFI employees.  In
relevant part, the RSH provides that, in accordance with the provisions of
the Federal Property and Administrative Services Act of 1949 and the Economy
Act, excess property and common administrative services available from other
"federal departments or agencies" may be obtained via an ISSA.  RSH Part I,
Ch. 2, ï¿½ A.1.  As a general matter, NAFIs are not "federal departments or
agencies," Principles of Appropriations Law, supra, at 17-224, and NAFIs are
not "federal agenc[ies]" for the purposes of the Federal Property and
Administrative Services Act of 1949.  40 U.S.C. ï¿½ 472 (Supp. IV 1998).  In
addition, the Economy Act, 31 U.S.C. ï¿½ 1535 (1994 Supp. IV) does not apply
to nonappropriated fund activities.  Department of Agriculture Graduate
School, supra; Principles of Appropriations Law, Vol. IV, GAO-01-179SP, ch.
15, part B, at 15-31.
[16] Among other things, individuals employed in a NAFI under the
jurisdiction of the armed forces are included as those employed by the
government of the United States for purposes of the Fair Labor Standards Act
of 1938, 29 U.S.C. ï¿½ 203(e)(2)(A)(iv) (2000); NAFI employees are government
employees for the purpose of 5 U.S.C.           ï¿½ 7204, which prohibits
discrimination because of race, color, creed, sex or marital status under
various scenarios, 5 U.S.C. ï¿½ 2105(c)(1)(A); under 10 U.S.C. ï¿½ 1587 (2000),
NAFI employees are protected from reprisal for whistleblowing pursuant to
procedures adopted by the Secretary of Defense; NAFI employees are entitled
to maintain actions under Title VII of the Civil Rights Act, 42 U.S.C. ï¿½
2000e-16(a) (Supp. IV 1998); and NAFI employees are federal employees for
purposes of Title II of the Family and Medical Leave Act of 1993.  5 U.S.C.
ï¿½ 2105(c)(1)(E).
[17] A discussion of varying pay systems for federal employees can be found
in Federal Civilian Workforce Statistics:  Pay Structure of the Federal
Civil Service, supra, at app. C.
[18] The Navy's guidance cited above appears to reflect the agency's
recognition that, at least for the purpose of the right of first refusal,
NAFI employees are not government employees when that term is used in the
Circular and the RSH.
[19] As discussed above, 5 U.S.C. ï¿½ 2105(c) provides that NAFI employees are
not government employees for the purpose of laws administered by OPM, with
various stated exceptions.
[20] Circular A-76 studies are essentially competitions between the public
and private sectors, and they are so viewed by all sides.  Department of the
Navy--Recon.,          B-286194.7, May 29, 2002, 2002 CPD ï¿½ __ at 5.
[21] Because the costs used in the public-private cost comparison are to be
realistic, we reject Sodexho's contention that, even if NAFI employees can
be included in an MEO, the in-house cost estimate must calculate their wages
and benefits in conformance with the GS/FWS rates established by the RSH and
in accordance with FAR ï¿½ 52.222-42.  The Navy's costs for these NAFI
employees are not based on GS/FWS rates but on current NAFI wage rates and
benefit levels; it would be antithetical to the purpose of the study to
require the Navy to cost such personnel at unrealistic wage rates and
benefits levels.
[22] These approximate percentages are derived from Sodexho's Initial
Technical Proposal, Management Plan, at 10-27, based upon the six annexes
initially required by the RFP.
[23] We have carefully reviewed Sodexho's allegations that the IRO's
certification was not independent but was, instead, improperly "directed" by
external Navy forces, and find them unpersuasive.  The record does show
vigorous dispute and disagreement on some details of the MEO and its costing
between the IRO and Navy policymakers, much of which stemmed from the
imperfect fit between OMB's A-76 guidance and the Navy's method of using
NAFI employees.  While these disagreements underscore our conclusion that
the A-76 guidance was not designed for the wholesale use of NAFI employees,
particularly NAFI flex-time employees, they do not contradict the IRO's
declarations, made both contemporaneously and during the course of this
protest, that he independently certified the MEO.
[24] The fact that the agency has both argued that these issues are untimely
raised and addressed them on the merits does not change our opinion; we view
the Navy's approach as responsible and helpful.  Also, given the specificity
of the allegations to the procurement at hand, we decline to consider them
under the "significant issue" exception to our timeliness requirements.  4
C.F.R. ï¿½ 21.2(c) (2002); Crown Support Servs., Inc., B-287070, Jan. 31,
2001, 2001 CPD ï¿½ 33 at 3 n.1.
[25] In addition, Sodexho alleges that the MEO failed to include transition
costs despite the fact that the schedule included a line item for such
costs.  As the Navy points out, the RFP specifically advised offerors that
this line item was provided merely as a convenience for payment purposes if
the resulting service provider was other than the government, and explicitly
stated that "for cost comparison purposes, [this line item] will be
considered as part of the contractor's cost to perform recorded on     line
7 of the cost comparison form.  Moreover, the government's in-house cost
estimate will not include any costs related to this line item."  RFP at 14.
To the extent Sodexho believed the MEO should have been required to include
transition costs, it was required to protest that alleged solicitation
impropriety prior to the time set for receipt of initial proposals.  4
C.F.R. ï¿½ 21.2(a)(1).  Sodexho's failure to raise this matter until after the
cost comparison was completed renders it untimely.
[26] We do agree with Sodexho that the Navy has failed to adequately explain
why it did not comply with guidance in effect when the MEO was certified
regarding the cost of a one-time inventory, and that the resulting one-time
conversion costs were overstated by approximately $50,000.
[27] In its agency-level protest and here, Sodexho cites new examples of
square footage that was allegedly not included in the MEO.  Since these
examples could have been raised in the administrative appeal but were not,
we decline to consider them.  Sodexho cannot rely on its citation to some
examples in the administrative appeal to extend to new examples in
subsequent filings; such a practice would circumvent our timeliness
requirements and, in the context of an A-76 procurement, our requirement for
the exhaustion of administrative remedies.  See Litton Sys., Inc., Data Sys.
Div., B-262099, Oct. 11, 1995, 95-2 CPD ï¿½ 215 at 3 n.3.
[28] The Navy is also correct that one of the two issues raised in detail in
Sodexho's comments, which concerns the different staffing levels between
Sodexho and the MEO under the public affairs annex, is untimely.  Sodexho
should have known these differences based on the management plan, TPP, and
in-house cost estimate when it filed its administrative appeal, but did not
raise the issue at that time.
[29] As an example, Sodexho argued in its appeal that the in-house cost
estimate improperly omitted the costs of photo processing under the public
affairs annex.  The appeals authority denied the issue because PWS ï¿½ 6.2.2.
stated that "[p]rocessing will be provided by an outside vendor and the
processing costs will be reimbursed to the SP by the Government."  Sodexho
now argues that its provision of photo processing in-house might result in
faster processing and the ability to meet last minute deadlines and, as a
result, it provided a higher level of service that the MEO should have been
required to meet, but its proposal contains no such statement and there was
no basis for the agency to conclude that Sodexho provided a higher level of
service.
[30] In addition to the concessions described above, the appeals authority
added approximately $120,000 to the IHCE in response to Sodexho's leveling
allegations.