TITLE:  HSG Philipp Holzmann Technischer Service GmbH, B-289607, March 22, 2002
BNUMBER:  B-289607
DATE:  March 22, 2002
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HSG Philipp Holzmann Technischer Service GmbH, B-289607, March 22, 2002

[Text Box: DOCUMENT FOR PUBLIC RELEASEThe 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:   HSG Philipp Holzmann Technischer Service GmbH

File:            B-289607

Date:              March 22, 2002
Reed von Maur, Esq., Reed L. von Maur Law Office, for the protester.
Lee P. Curtis, Esq., W. Hartmann Young, Esq., and Suzette W. Derrevere,
Esq., Perkins Coie LLP, for PAE Technical Service GmbH, an intervenor.
Maj. Karl W. Kuhn, Department of the Army, for the agency.
Paula A. Williams, Esq., and Michael R. Golden, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

DIGEST

Protest that awardee's prices were unbalanced is denied where the prices are
neither significantly understated nor overstated.

DECISION

HSG Philipp Holzmann Technischer Service GmbH (Holzmann) protests the award
of a contract to PAE Technical Service GmbH under request for proposals
(RFP) No. DAJA22-01-R-0022, issued by the United States Army, for laundry
and dry cleaning services.  Holzmann, the incumbent contractor, contends
that PAE's proposal should have been rejected on the basis that PAE's prices
were unbalanced.

We deny the protest.

The RFP was issued on July 18, 2001, and as amended, contemplated the award
of a fixed-price contract for a base year with four 1-year options to manage
and operate the government-owned laundry and dry-cleaning plant in Wurzburg,
Germany.
RFP at 76, 91.  The RFP required offerors to complete a price schedule with
separate entries made for the base year requirements and for each of the
four option year requirements, listed as contract line items (CLIN).[1]

The base contract year has four CLINs.  CLIN 0001 includes all of the effort
required to operate and manage the Wurzburg plant, as well as the actual
cleaning of the laundry and dry-cleaning items.  The estimated annual
quantity of the items to be laundered and dry-cleaned are set forth in
technical exhibit (TE) 3.  RFP sect. C, at 31.  Under CLIN 0002, the contractor
is to provide on-site personnel to collect, transport, and return laundry
items from various troop collection point (TCP) locations in accordance with
the performance work statement (PWS).  The TCP locations are identified in
TE-1.  Id. at 26-28.  CLIN 0003 requirements include the pickup,
transportation, and return of laundry items from Army lodgings; no on-site
personnel were required at these locations.  CLIN 0004 calls for the
contractor to provide repair parts for the government-owned equipment in
accordance with the PWS with a "not to exceed estimated cost" of 40,000
euros.[2]  RFP at 3-12.

The four base year CLINs, 0001-0004, carry over into each of the option
years with some additions.  RFP at 12-58.  Specifically, in the first option
year, CLIN 1005 was added for an optional increase of 482,000 pieces in the
estimated annual quantity of items to be picked up and returned from the
existing TCP and from the Army lodgings.  Id. at 22.  CLIN 1005 is
separately exercisable and carries over into the three remaining option
years.  RFP at 33, 45, 57.  In the second option year,
CLIN 2006 is also added as an optional increase of 3,000,000 pieces of
laundry to be picked up, processed, and returned to three Air Force
lodgings.  This CLIN also is separately exercisable and carries over into
the remaining two option years.
Id. at 34, 46, 58.

The RFP states that award will be made to the responsible offeror whose
offer conforms to the solicitation, is determined technically acceptable
based on the listed evaluation factors, and offers the lowest evaluated
price, based on the total price for the base year and all option years.[3]
RFP at 93, 94.  Section M of the RFP states that technical/management
proposals would be evaluated for technical acceptability only and the
solicitation identifies the following non-price evaluation factors to
determine acceptability:  (1) operational organization and work flow, (2)
proposed staffing,
(3) quality control plan, and (4) experience/past performance.  Prices
proposed were to be evaluated to determine that they were fair and
reasonable.  Id. at 93-94.

Holzmann and PAE were the only offerors to submit proposals.[4]  While both
proposals were evaluated as technically acceptable, the evaluation materials
identified a concern regarding the Holzmann proposal.  Specifically, under
the staffing evaluation factor, an evaluator noted a "concern in needing
[DELETED] if hotels [Army lodgings] and Air Force runs are added.  Currently
[DELETED] are sufficient."  Agency Report (AR) exh. 13, Technical Evaluation
Committee Report.  The evaluators nonetheless concluded that each proposal
demonstrated the offeror's total understanding of the solicitation
requirements and ability to perform the contract.  The offerors' price
proposals were also evaluated to determine reasonableness by comparing the
proposed prices to each other.  AR exh. 6,
Pre-Award Memorandum, at 3-4.  On November 20, 2001, discussion letters were
sent to both offerors raising a number of price concerns and both offerors
were given an opportunity to submit final proposal revisions.

The relevant text of PAE's discussion letter provided as follows:

1.      In your proposal, Section B, the following Sub CLINs are missing:

2003AG, 2003AH, 2003AJ, 3003AG, 3003AH, 3003AJ, 4003AG, 4003AH and 4003AJ.

2.      As indicated in Section C, Performance Work Statement, Paragraph
C-1.1, pick up/delivery of hotel items shall be provided as required
(maximum 3 times per week).  Please verify and explain if your prices
specifically for CLINs 0003, 1003, 2003, 3003 and 4003 . . . have taken this
requirement into consideration.

3.      Request that total amount for each contract period, as well as the
grand total be provided.

AR exh. 12, Contracting Officer's Letter to PAE, Nov. 20, 2001.

Holzmann's discussion letter advised the firm, in relevant part, that:

1.      As indicated in Section C, Performance Work Statement, Paragraph
C-1.1, pick up/delivery of hotel items shall be provided as required
(maximum 3 times per week).  Please verify if your prices specifically for
CLINs 0003, 1003, 2003, 3003 and 4003 . . . have taken this requirement into
consideration.

2.      Request that total amount for each contract period, as well as the
grand total be provided.

AR exh. 12, Contracting Officer's Letter to Holzmann, Nov. 20, 2001.

Shortly thereafter, the contracting officer issued amendment No. 0005
primarily to change some required Army lodging pickup and delivery to
optional sub-CLINs.  In addition, amendment No. 5 adjusted the monthly
workload for the TCP locations listed in TE-1.  RFP amend. No. 5.  On
November 26, amendment No. 6 was issued to correct an error in amendment No.
5 which failed to include a list of hotels, which was part of TE-1.  RFP
amend. No. 6.

Final proposal revisions were received and evaluated and the revised prices
submitted by both offerors were determined to be fair and reasonable.  The
final prices were calculated as follows:[5]

                  Holzmann         PAE

Base Year         [DELETED]        2,050,752.00

1st Option Year   [DELETED]        2,145,504.00

2nd Option Year   [DELETED]        2,850,048.00

3rd Option Year   [DELETED]        2,921,628.00

4th Option Year   [DELETED]        2,993,664.00

TOTAL PRICE       [DELETED]          12,961,596.00

AR exh. 7, Abstract of Final Offers.

The contracting officer reports that an independent government estimate was
not available.  In reviewing the prices, she inferred that PAE's higher
price for the base year included initial start up costs, which Holzmann as
the incumbent contractor would not have.  Further, she concluded that:

1.      Even though firm PAE's offered price for the basic year is [DELETED]
than [Holzmann's], the 1st, 2nd, 3rd, and 4th options are [DELETED] than
[Holzmann's] by [DELETED] respectively.  The grand total price of firm PAE
is [DELETED] than that of [Holzmann].

2.      The offer of firm PAE is materially balanced and the price increase
by 2.5% for the successive periods reflects the anticipated change in German
tariff.  The price increase by 5.6% from 1st option to 2nd option reflects
the increase in optional workload.  Therefore, the offer is considered fair
and reasonable and hence acceptable.

AR exh. 6, Pre-Award Summary, at 4.  The agency awarded the contract to PAE
on December 19.  After requesting and receiving a debriefing, Holzmann filed
this protest, challenging the agency's evaluation of PAE's price proposal on
several grounds.

Holzmann maintains that PAE's offer was unbalanced and could not be accepted
for award because its prices for CLIN 0003 were significantly understated.
Specifically, Holzmann alleges that PAE's line item prices for CLIN 0003
particularly in the option years following the addition of the Air Force
estimated annual quantity of 3,000,000 items do not reflect the pickup and
delivery services required by this three-fold increase in the annual
estimated requirement of 1,050,000 items for the base year.  As such, the
protester states, the cost of transporting, i.e., pickup and delivery, of
this three-fold volume increase was not reflected in PAE's proposed
pricing.  Protest
at 10-11; Protester's Comments at 10-14.  Holzmann also contends that the
agency failed to perform a proper price reasonableness analysis in
evaluating PAE's proposal, based on PAE's prices not being in line with
Holzmann's prices.

Unbalanced pricing exists when, despite an acceptable total evaluated price,
the price of one or more contract line items is significantly overstated or
understated.  Federal Acquisition Regulation (FAR) sect. 15.404-1(g)(1).  While
unbalanced pricing may increase risk to the government, agencies are not
required to reject an offer solely because it is unbalanced.  Id.  Rather,
where the contracting officer receives an unbalanced offer, the contracting
officer is required to consider the risks to the government associated with
the unbalanced pricing in making the award decision, and whether a contract
will result in unreasonably high prices for contract performance.  FAR sect.
15.404-1(g)(2).  Reflecting these regulatory provisions, the solicitation
here specifically provided that a proposal could be rejected if the agency
determined that, due to unbalanced pricing, the proposal posed an
unacceptable risk.  RFP at 90.

The agency explains that in its view PAE's prices were not unbalanced.  The
agency states that the difference in Holzmann's and PAE's pricing can be
explained by their differing pricing strategy.  According to the agency, the
RFP did not specify which costs were to be included in CLIN 0003 as opposed
to CLIN 0001 (for the operation of the Wurzburg plant and actual laundering
of the basic annual requirement),
CLIN 1005 for laundering the optional Army lodging requirements, or CLIN
2006 for laundering the optional Air Force requirements.  In addition, since
many of the Army lodgings were located in the same city as the TCP
locations, the agency considered PAE's proposal--to modify its existing
pickup and delivery routes to accommodate the Army lodgings and Air Force
requirements--reasonable.  Further, the Army reports that during contract
review by Army headquarters, an analysis of PAE's proposed prices for all 5
years was prepared.  This analysis shows no pricing discrepancy in PAE's
offer and that the 33 percent difference in pricing between the first and
second option years is attributable to the addition of the CLIN 2006
optional Air Force requirements.  The analysis further shows that the annual
escalation for the third and fourth option years is approximately 2.5
percent, which the agency concluded was fair and reasonable.  AR exh. 1,
Contracting Officer's Statement, at 6; AR exh. 6, Pre-award Summary, at 6.

The potential risk associated with unbalanced pricing arises from line items
with overstated prices, not from underpriced ones.  While Holzmann
disagrees, the record here supports the reasonableness of the agency's
analysis and of its conclusion that PAE's proposal was not unbalanced.
There is simply no evidence that any of PAE's prices were so overstated as
to create any concern of risk to the government.  While PAE's overall price
for the base year is [DELETED] than Holzmann's proposed prices, this small
difference cannot reasonably be viewed as creating a risk to the
government.  The differences in the prices between the two offerors are not
sufficiently significant to warrant the conclusion that any of PAE's prices
are significantly understated or overstated.  Thus, there is no basis to
conclude that PAE's pricing is unbalanced.[6]  See MG Indus., B-283010.3,
Jan. 24, 2000, 2000 CPD
para. 17 at 7-8.

Next, we find without merit the protester's assertion that the agency failed
to perform an adequate price reasonableness analysis of PAE's proposal.  The
protester's primary disagreement with the agency's conclusion is based on
its erroneous belief that an in-depth price analysis of the awardee's price
proposal should have been performed, rather than simply comparing the prices
received with each other.  The depth of an agency's price analysis is a
matter within the sound exercise of an agency's discretion.  See FAR sect.
15.404-1(b); OMV Med., Inc.; Saratoga Med. Ctr., Inc., B-281387 et al., Feb.
3, 1999, 99-1 CPD para. 52 at 5-6.  The record reflects that the contracting
officer reviewed the proposed prices received on a CLIN by CLIN basis and on
a total price basis, and concluded that the prices proposed were
reasonable.  As the contracting officer concluded, there is little
difference between the two offerors' proposed pricing.  There simply is no
merit to Holzmann's allegation that the agency failed to properly evaluate
PAE's price proposal and we have no basis to question the analysis performed
here.

Moreover, to the extent Holzmann alleges that the agency's evaluation of
PAE's proposal under the proposed staffing evaluation factor was flawed
because the agency did not consider that PAE would be unable to perform at
the prices offered for certain CLINs, the allegation is without merit.
Under this factor, the agency was required to evaluate offerors' staffing to
determine whether the number and qualifications of the proposed personnel
would be adequate to successfully perform the solicitation requirements.
RFP at 94.  The agency performed this evaluation.  The solicitation did not
indicate that proposed prices would be used to evaluate offers for
understanding of requirements under this (or any other) technical factor.
Accordingly, the agency properly did not consider price in evaluating PAE's
proposal under the proposed staffing factor.  Possehn Consulting, B-278579,
Jan. 9, 1998, 98-1 CPD para. 10 at 3-4.

Finally, the protester also contends that the agency conducted flawed
discussions by not advising the firm that its prices were too high.  While
FAR sect. 15.306(e)(3) gives the contracting officer the discretion to inform an
offeror that its price is too high, it does not require that the contracting
officer do so, especially where, as here, the proposed price reflected an
acceptable technical approach and the agency did not consider the pricing a
significant weakness or deficiency.  See AJT & Assocs., Inc.,
B-284305, B-284305.2, Mar. 27, 2000, 2000 CPD para. 60 at 8-9; National
Projects, Inc.,
B-283887, Jan. 19, 2000, 2000 CPD para. 16 at 5.  Moreover, the small difference
between the prices of the two proposals again supports the agency's decision
not to have concern that Holzmann's prices were too high or to raise that
subject during discussions.

In sum, the record provides no basis to object to the agency's determination
to award to PAE on the basis that PAE proposed the lowest total evaluated
price.

The protest is denied.

Anthony H. Gamboa
General Counsel

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

[1] The solicitation instructed offerors to submit their prices in euros and
advised that all payments under the resultant contract will be made in
euros.  Consequently, all references to price in this decision are in
euros.  RFP sect. A, Cover Sheet.
[2] Except for CLIN 0004 (and corresponding sub-CLINs), which required
offerors to propose a percentage material and handling fee, offerors were to
submit fixed prices for each CLIN and sub-CLIN.  See, e.g., sub-CLINs
0003AA, 1003AA, 3003AA and 4003AA.  RFP amend. No. 5, at 2.
[3] Cost and pricing data were not required but offerors were to submit a
signed Standard Form 33, a completed Section B price schedule, and signed
Section K certifications and description of the firm's cost accounting
system for the reimbursable portion of the PWS.
[4] The record shows that PAE has performed laundry and dry-cleaning
services at the Wurzburg plant under a previous contract, and both PAE and
Holzmann have provided laundry services under contracts for the Air Force in
Germany.
[5] The prices include the government estimate of 40,000 plus [DELETED]
proposed by Holzmann and [DELETED] proposed by PAE, respectively, for
reimbursement CLINs 0004, 1004, 2004, 3004, and 4004.  AR exh. 6, Pre-Award
Memorandum, at 4.
[6] In any event, the record also reflects that the variations in pricing
between the two offerors are related to the different approaches proposed
for performing the requirements.