TITLE:  Pacific Support Group, LLC, B-290467, August 8, 2002
BNUMBER:  B-290467
DATE:  August 8, 2002
**********************************************************************
Pacific Support Group, LLC, B-290467, August 8, 2002

   DOCUMENT FOR PUBLIC RELEASE                                                
   The decision issued on the date below was subject to a GAO Protective      
   Order.  This redacted version has been approved for public release.        

   Decision
    
   Matter of:   Pacific Support Group, LLC
    
   File:            B-290467
    
   Date:              August 8, 2002
    
   Richard L. Moorhouse, Esq., Dorn C. McGrath, III, Esq., and Stephen M.
   Sorrett, Esq., ReedSmith, for the protester.
   Raymond M. Saunders, Esq., Lt. Col. Daniel K. Poling, Maj. Karl W. Kuhn,
   and Capt. Timothy J. Ryan, Department of the Army, for the agency.
   Paul I. Lieberman, Esq., and Michael R. Golden, Esq., Office of the
   General Counsel, GAO, participated in the preparation of the decision.
   DIGEST
    
   1.  Protest against determination to retain in-house certain real property
   maintenance functions as a result of a cost comparison conducted pursuant
   to Office of Management and Budget Circular A-76, alleging that agency
   improperly failed to include costs for all of the personnel required to
   meet the requirements of the performance work statement (PWS), or to
   appropriately reduce the evaluated cost of contractor performance, is
   denied; the record provides no basis to question the reasonableness of the
   agency's finding that, as adjusted, the cost of in-house performance
   included all staffing necessary to meet the PWS requirements, and that
   after appropriate reduction to the evaluated cost of contractor
   performance had been taken as well, the cost of in-house performance
   remained low by a substantial margin.
    
   2.  Adjustment to the most efficient organization (MEO) staffing cost
   estimate as necessary to satisfy the performance work statement
   requirements, based on findings by the agency administrative appeals board
   after consultation with MEO study team, is an appropriate element of
   agency-level A-76 appeal process, the adoption of which does not provide a
   basis to object to the propriety of the cost comparison determination.
   DECISION
    
   Pacific Support Group, LLC (PSG) protests the Department of the Army's
   determination to retain in-house the real property maintenance support
   services for the U.S. Army Garrison, Hawaii, rather than to contract for
   these services with PSG under request for proposals (RFP) No.
   DAPC50-00-R-0007.  The Army decided to retain the services in-house based
   on the results of a cost comparison conducted pursuant to Office of
   Management and Budget (OMB) Circular A-76, which compared PSG's proposal
   to perform the work against the government's in-house management plan,
   that is, its *most efficient organization* (MEO).  PSG challenges numerous
   aspects of the agency's determination that in-house performance remained
   more economical than contractor performance, even after the agency had
   made certain adjustments to reflect the findings of the agency's
   administrative appeal board (AAB).  Although the AAB had agreed with PSG
   with respect to parts of certain of the appeal issues that PSG had raised,
   as a result of which both the protester's evaluated cost and the in-house
   cost estimate (IHCE) had been adjusted, the resultant cost comparison did
   not change the agency's initial determination that it was more economical,
   by a substantial margin, to retain the services in-house.  PSG argues
   primarily that the MEO is understaffed in numerous regards and does not
   include required costs for all of the necessary personnel under the PWS,
   and that there are various calculation errors that result in overstatement
   of PSG's evaluated cost and understatement of the IHCE.  PSG also
   questions the propriety of the procedures followed by the AAB in reaching
   its determination. 
    
   We deny the protest.
    
   BACKGROUND
    
   In October 1997, the Army announced that the Directorate of Public Works
   (DPW) for the U.S. Army Garrison, Hawaii, which then employed
   approximately 400 civilian employees to perform real property maintenance
   activity support services for Army facilities in Hawaii, would be the
   subject of a commercial activities study.  A performance work statement
   (PWS) for this function was prepared by the agency for inclusion in a
   solicitation to be issued as part of a public/private cost comparison
   under Circular A-76, in which the selected offeror's proposal to perform
   the work would be compared with the agency's MEO.[1] 
    
   On January 17, 2001, the MEO and IHCE that had been prepared by the DPW
   management study team was submitted to the Army Audit Agency, which served
   as the IRO.  The MEO was based on performing the PWS requirements under a
   plan which took into account the historical staffing levels adjusted to
   reflect *efficiencies that will streamline operations and fully utilize
   its smaller workforce,* and reflected certain changes in *current business
   practices.*  Agency Report (AR), Tab 7, IRO Review and Adjustment
   Memorandum, at 764-65.  The IRO evaluated the MEO and recommended certain
   adjustments to in-house costs, which were made with the agreement of the
   DPW study team, after which the IRO concluded that the MEO *reasonably
   establishes the Government's ability to perform work requirements of the
   performance work statement with the resources [indicated],* and that the
   IHCE *provides a reasonable estimate of government costs and has been
   completed in compliance with OMB Circular A-76, its supplement, and
   related DOD and Army Guidance.*  Id. at 758-59, 764.
    
   The RFP was issued electronically on November 2, 2000, seeking proposals
   to provide all resources and management necessary to perform real property
   maintenance activity support services for the U.S. Army Garrison, Hawaii. 
   The major functional areas included in the services to be performed were
   DPW business management, housing, environmental compliance and pollution
   prevention, engineering, plans and services, operations support, and
   maintenance and repair of facilities.  The RFP contemplated the award (if
   the private sector offeror won the cost comparison) of a
   cost-plus-award-fee contract for a 9-month base period, with four 1-year
   options, plus phase‑in/phase-out transition periods, and provided
   that the offeror with the lowest cost, technically acceptable offer after
   the most probable cost evaluation would be selected for comparison with
   the government IHCE.  PSG was the only firm that submitted a proposal by
   the February 1, 2001 amended closing time.  PSG's initial proposal was
   evaluated as technically unacceptable at an overall evaluated cost of
   $116,155,237.10.  AR, Tab 23, Price Negotiation Memorandum, at 3.  After
   discussions, PSG's revised proposal was eventually found technically
   acceptable, at an evaluated total cost of $119,204,215.49, id.,[2] and on
   October 9, 2001, PSG's proposal (the only proposal received) was selected
   to compete with the in-house plan.
    
   The initial cost comparison, conducted on November 12, 2001, resulted in a
   determination that in-house cost for the 5-year performance period would
   be $78,588,438, while evaluated contractor performance cost was
   $88,490,058, plus a conversion differential of $6,797,325, for a total
   cost of $95,528,383.  AR, Memorandum of Law, at 4.  Thus, in-house
   performance would save $16,698,945.  Id.
    
   PSG appealed this determination to the agency on December 13, 2001, and an
   AAB was convened on January 7, 2002.[3]  The AAB review was completed on
   April 26, 2002, and denied the majority of PSG issues, but sustained six
   issues in part, as well as one issue that had been raised by the union
   (IAMAW) in its appeal.  Based on the AAB findings, the IHCE was adjusted
   to $76,041,899; the evaluated contractor performance cost was adjusted to
   $79,220,505 plus a minimum conversion differential of $6,683,861, for a
   total cost of $85,862,467, resulting in an evaluated total cost advantage
   of $9,862,467 for in-house performance.  AR, Tab 4, AAB Decision, at 128. 
   Accordingly, the agency determined that it was appropriate to retain
   performance in-house, and after receiving notice of this determination,
   PSG filed this protest with our Office. 
    
   A-76 REVIEW STANDARD
    
   Where, as here, an agency has conducted a cost comparison under Circular
   A-76, thus 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 is otherwise unreasonable. 
   See Trajen, Inc., B-284310, B-284310.2, Mar. 28, 2000, 2000 CPD P: 61 at
   3.  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, P: H.3.e;  Aberdeen Technical Servs.,
   B-283727.2, Feb. 22, 2000, 2000 CPD P: 46 at 8.  The RSH requires that
   both the in-house offer and the private-sector proposals comply with the
   minimum PWS requirements.  RSH, part II, ch. 2, P: A.1.b.[4]  To succeed
   in its protest, the protester must demonstrate that the agency failed to
   follow established procedures and that this failure could have materially
   affected the outcome of the cost comparison.  Aberdeen, supra, at 5.
    
   PROTEST
    
   In its agency-level appeal and in this protest, PSG raised a wide array of
   issues.  The issues before our Office, as refined by the protester's
   comments, fall into three core areas.  First, PSG complains that *the
   integrity of the procurement process is undermined by the AAB's failure to
   properly fulfill its role under OMB Circular No. A-76.*  Protester's
   Comments at 2 (all upper case in original).  Next, PSG asserts that the
   *MEO does not meet the PWS requirements* (all upper case in original)
   therefore, even the revised IHCE is understated.  Id. at 6.  Finally, PSG
   contends that *the AAB's revised cost comparison is inaccurate and
   mistaken* in various regards.  Id. at 13 (all upper case in original).  In
   addition, PSG has propounded a variety of less significant *additional
   issues.*  Id. at 18.  We have carefully considered all of PSG's
   allegations, find each without merit and conclude that the cost comparison
   has not been shown to be unreasonable, and that there is no basis to
   conclude that it reflects any deficiencies that could have materially
   affected the outcome of the comparison.  This decision will specifically
   address issues that are central to PSG's contentions, and are
   representative of all of its arguments.  
    
   PRIME VENDOR SUBCONTRACTING UNDER THE MEO
    
   Propriety of the AAB Review
    
   PSG's first two core issue areas focus on the MEO's use of a *prime
   vendor* concept, under which certain PWS maintenance and repair functions
   are to be performed by subcontract.  PSG asserted in its agency appeal
   that this type of subcontracting was prohibited on the basis of the DoD
   Costing Manual (Manual) and the associated requisite software,
   win.COMPARE2..  However, the AAB properly rejected this contention,
   finding that the government was not required to use the Manual and
   associated software here because it was only necessary to do so where the
   government management plan, including the IHCE, was submitted to the IRO
   after April 15, 2001.  Here, the MEO and IHCE had been submitted on
   January 7, 2001, and the IRO had actually completed its review by February
   16, 2001, prior to the triggering date.[5]  AR, Tab 4, AAB Decision, at
   7.  Accordingly, the agency was permitted to, and did use its
   then‑current costing practices in compliance with the RSH, and the
   associated COMPARE software (a prior version).  Id. at 7-8.  Additionally,
   the AAB recognized that here, because the RFP had explicitly stated that
   COMPARE software would be used in developing the IHCE, any subsequent
   revision to the IHCE would be required to be prepared using the same
   software and associated costing policies.  Id. at 8.
    
   The AAB noted that use of prime vendor subcontractors to obtain
   furnishings, supplies and materials was permissible and a common practice,
   but the AAB went on to recognize the merit of the protester's contentions
   that here, the cost of staffing for requirements set forth in the PWS that
   went beyond the scope of procurement of supplies and materials had to be
   added to the MEO cost.  Id. at 12.  This was necessary because otherwise
   the cost would not be appropriately attributed to the government for
   comparison purposes because it had been included under the category of
   supplies and materials, a wash cost which is eliminated from consideration
   during the cost comparison process.  The AAB concluded that the government
   must include in its MEO cost staff sufficient to perform the function. 
   Id. at 10, 12.  In order to estimate the appropriate cost, AAB sought
   input from the PWS study group, which in turn obtained input from IRO, and
   eventually recommended the addition of the cost of 8 full-time equivalent
   employees (FTE), along with the reallocation of 2 FTEs, as sufficient to
   perform the work at issue.  The AAB identified the applicable work to be
   performed under the PWS and how it would be performed under this staffing,
   and adopted the finding that a total of 10 positions was a reasonable
   estimate of the number of in-house FTEs required to perform the
   furnishings and supply and material warehousings requirements, noting that
   PSG had proposed approximately 11.5 individuals to perform these
   functions.  Id. at 14.
   PSG contends that because of the use of prime vendor subcontracting, the
   MEO is *technically unacceptable,* Protest at 8, and that the agency's
   adjustment of the MEO costs to reflect the cost of appropriate staffing
   reflects that *the AAB improperly took over the role of rewriting the
   [MEO].*  Protester's Comments at 4 (all upper case in original).  In this
   same regard, PSG objects that the AAB unfairly favored the MEO over PSG by
   providing the MEO opportunities to change both its approach and work
   standards, while PSG was excluded from participation in this process.  Id.
   4-5. 
    
   We see no basis to find any impropriety on the part of the AAB or the
   agency in this regard.  The extent of, or limits on, participation by the
   various sides in the agency appeal process are not matters for review by
   our Office.  Johnson, supra, at 9 n.7.  Moreover, there is nothing wrong
   with the AAB requesting further explanations to assist in reaching its
   conclusion, and the fact that the request was made and information was
   provided by the DPW team after consultation with the IRO does not warrant
   a conclusion that the MEO was, as PSG frames it, *technically
   unacceptable,*[6] or otherwise inadequate to support the cost comparison. 
   Id.  Additionally, PSG's argument misconstrues the substance of the AAB
   process that was actually undertaken.  As explained above, the AAB did not
   find that prime vendor subcontracting was prohibited, or that the MEO had
   to be rewritten.  Rather, in order to fairly estimate certain costs that
   had been masked in the comparison by the way in which the prime vendor
   subcontracting costs had been treated, the AAB recognized the need to make
   a cost adjustment to account for the appropriate number of government FTEs
   needed to perform the work in question under the MEO, in order to permit
   an accurate cost comparison.  This is directly consistent with the purpose
   of the A-76 cost comparison process, not an impropriety or defect. 
    
   Reasonableness of the Subcontractor Cost Adjustment
    
   The AAB's cost adjustment associated with correcting the IHCE error that
   had been introduced as a result of the MEO's subcontracting approach is
   also central to PSG's second core argument.  PSG contends that adjusting
   the IHCE to reflect the cost of 10 FTEs was insufficient and that the cost
   associated with 25 FTEs should have been added.  PSG bases this on its
   allegation that the prime vendor subcontracting approach had called for
   performance by 25 individuals.  Protester's Comments at 7.  The agency has
   provided a detailed explanation of the functions encompassed and a
   rationale for the determination that 10 FTEs can perform the work in
   question, and points out that PSG itself proposed 11.5 FTEs to perform the
   work.  PSG posits that the MEO's approach was radically different because
   of use of the prime vendor concept, and that PSG expected efficiencies as
   a result of the different approach under its proposal; therefore, PSG
   contends that the agency was required to add 15 FTEs to the MEO at a cost
   of $4,132,500.  Protester's Comments at 7.  
    
   In our view, PSG's contention is without merit.  The agency has provided a
   detailed explanation of its foundation for adjustment on the basis of the
   number of FTEs that it used, including particulars of how the PWS
   requirements in question are satisfied as a result.  PSG's contention that
   the cost of 15 in-house FTEs must be added simply to remain consistent
   with what PSG claims is the total number of employees that is contemplated
   under prime vendor subcontracting is merely mechanical, and without any
   basis.  PSG has not identified any particular efficiencies associated with
   its proposal, nor has PSG provided any basis to question the
   reasonableness of the agency rationale for 10 FTEs.  Accordingly, the
   allegation is without merit.
    
   COLLECTIVE BARGAINING AGREEMENT
    
   PSG also argues that the MEO fails to satisfy the PWS requirements because
   *[t]he Government's man-year used for purposes of calculating FTEs . . .
   is insufficient to comply with all the requirements of the [applicable]
   Collective Bargaining Agreement ('CBA').*  Protester's Comments at 10. 
   PSG recites a variety of nonproductive tasks provided for under the extant
   CBA, along with estimates of the time PSG posits will be associated with
   these tasks, and concludes that the government's use of 1,776 hours out of
   a 2,087 hour total as a productive staff-year for calculation purposes
   fails to allow sufficient time for nonproductive tasks for which time is
   required under the CBA.  Id.  PSG estimates that the impact of the
   shortfall is 33.41 FTEs over the life of the contract, or $9,508,458 in
   additional costs that must be added to the IHCE.  Id.  PSG would have it
   that *[t]he question is whether the AAB 'has done the math' to show that
   the CBA requirements can be met with the . . . nonproductive time
   remaining after holiday, leave, and sick time have been taken into
   account.  The AAB has made no such demonstration.*  Id. at 11. 
    
   The protester's calculations are essentially based on plugging in
   estimated hours to cover CBA-provided non-productive tasks such as time
   for workers to vote in elections, tool issue time, and clean-up time. The
   agency has provided an explanation for its calculation of productive
   versus non-productive hours, on the basis of which it concludes that there
   are sufficient hours available to perform all non-productive tasks under
   the 1,776 productive hour calculation.  More important, the protester's
   allegation is without merit because the RSH expressly provides for the
   productive hour calculation methodology used by the agency, as follows:
    
   For full-time and part-time positions, estimate the total hours required
   by skill and divide by 1,776 annual available hours to determine the
   number of FTE positions required . . . .  The productive hours exclude
   annual leave, sick leave, administrative leave, training and other
   nonproductive hours.
   RSH, Part II, chap. 2, P: b.5.
    
   Because the agency's use of 1,776 hours per FTE in preparing the MEO
   reflects the direct application of express instructions of the RSH, PSG's
   objection in this regard is unfounded and PSG's remaining allegations in
   this second core area are similarly nonmeritorious.
    
    
   ALLEGED CALCULATION ERRORS
    
   Conversion Costs
    
   PSG's third major issue area consists of what it characterizes as
   calculation errors, which show that *the AAB's revised cost comparison is
   inaccurate and mistaken.*  Protester's Comments at 13.  Here, for example,
   PSG contends that the one-time conversion costs were miscalculated and
   overstated because the agency failed to apply the DoD Costing Manual and
   the COMPARE2  software.  Id. at 16.   As explained above, the AAB
   correctly determined that the agency was not required to use this approach
   because the IHCE had been submitted to the IRO prior to the applicable
   date, and the RFP stated that guidelines consistent with the RSH and the
   older edition of the COMPARE software would be used.  PSG contends that
   because the subcontracting revision to the MEO was substantial and
   occurred after the March 15, 2001 cutoff date, the agency was required to
   use the Manual and COMPARE2.  Id.
    
   As also explained above, this argument misconstrues the substance of the
   process that was actually undertaken.  The AAB did not find that prime
   vendor subcontracting was prohibited, or that the MEO had to be
   rewritten.  Rather, in order to fairly estimate costs that had been masked
   in the comparison, the AAB directed a cost adjustment to account for the
   appropriate number of FTEs needed to perform the work in question under
   the MEO.  In addition, the AAB recognized that by its express transmittal
   terms, the Manual provided that if a revision to the government management
   plan, including the IHCE, was required after the initial IRO
   certification, the same software and associated costing policies must be
   used for the revision.  AR, Tab 4, AAB Decision, at 8.  Thus, it would
   have been improper for the agency to change the applicable software and
   costing policies in midstream.
    
   Enhanced Personal Digital Assistants
    
   Another PSG contention in this area concerns the personal digital
   assistants (PDA) that PSG had proposed.  PSG asserts that it recognized
   that the 80 off-the-shelf Palm Pilot PDAs specified under the RFP as
   government-furnished property (GFP) were inadequate to meet the PWS
   computerized maintenance management system requirements and, therefore,
   PSG proposed upgraded PDAs in the form of [deleted] with appropriate
   software, at a cost of $963,953.  Protester's Comments at 13-14.  Since
   the AAB did not *level* up the MEO to match this enhanced PDA performance,
   PSG contends that its proposed costs should have been reduced by $963,953
   to delete the proposed enhancement. 
    
   In our view, this is not an alleged calculation error.  In the first
   instance, it constitutes an untimely protest that the RFP specifications
   are inadequate to satisfy the PWS.  That is, PSG is actually contending
   that the specified GFP is deficient. Beyond that, this argument actually
   consists of a contention that PSG's proposed enhancements beyond the RFP
   requirements required leveling.  As explained above,
   because this was not a best value RFP, such leveling was not required in
   the cost comparison conducted here.  PSG's argument in this regard is
   without foundation or merit. 
    
   In sum, PSG's protest reflects assertions that a variety of adjustments
   are necessary to the IHCE because of features or FTE levels contained in
   PSG's own proposal, or in the MEO subcontracting plan, or based on PSG's
   unsubstantiated construct of what is necessary to satisfy the PWS work
   requirements; additionally, PSG questions the propriety of the agency cost
   comparison process on the basis of nonmeritorious contentions concerning
   the applicable requirements under A-76 cost comparison procedures.  None
   of the issues presented by PSG raises any material question as to the
   reasonableness of the agency's determinations, or the propriety of its
   decision to retain performance in-house.
    
   The protest is denied.
    
   Anthony H. Gamboa
   General Counsel
    
    
    
    

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

   [1] The procedures for determining whether the government should perform
   an activity in-house or by a contractor are set forth in Circular A-76 and
   the Revised Supplemental Handbook (RSH) to it, which have been made
   expressly applicable to the Department of Defense (DOD) and its military
   departments.  See 32 C.F.R. S: 169a.15(d) (2002).  The process set out in
   the Circular and the RSH broadly encompass the following steps in
   conducting the public/private competition.  First, after the PWS has been
   drafted, the agency ensures, through certification by an independent
   reviewing official (IRO), that the government's in-house management plan
   satisfies the requirements of the PWS.  See RSH, part I, ch. 3, S: I. 
   (The MEO reflects the in-house management plan, which is prepared by a
   study team and sets out the changes that will be made to the current
   organization.)  Second, there is a competition among private-sector
   offerors, which is conducted much as any competed federal procurement.  If
   that competition is done on the basis of a comparative technical
   evaluation (that is, if a cost/technical tradeoff is contemplated--which
   was not the case here), the government's in-house plan is compared with
   the winning private-sector offer to assess whether or not they are based
   on a comparable level of performance and performance quality--and if not,
   to make all changes necessary to make the level of the in-house plan
   comparable to that of the private-sector proposal.  Id. at S: H.3.d.e. 
   Finally, there is a cost comparison between the private-sector offer and
   the in-house plan.  Id. at S:S: H, J.
   [2] PSG's evaluated total cost includes more than $30 million in *wash*
   costs, that is, costs for items such as government furnished supplies
   which are the same regardless of the eventual decision and, therefore, are
   eliminated from both the IHCE and contractor cost totals for purposes of
   performing the cost comparison. 
   [3] Hawaii Federal Lodge No. 1998 of the International Association of
   Machinists and Aerospace Workers (IAMAW) also filed an agency-level
   appeal, alleging that certain elements of the IHCE had been overstated. 
   AR, Tab 38, IAMAW Appeal.  
   [4] Here, because the RFP called for the agency to select the
   lowest-priced, technically acceptable proposal for the cost comparison,
   with no assessment or ranking of proposals based on *technical
   superiority* for purposes of making a best-value tradeoff, there was no
   requirement that the agency go through the *leveling* process called for
   where the solicitation entails a comparative technical evaluation. 
   Johnson Controls World Servs., Inc., B-288636, B-288636.2, Nov. 23, 2001,
   2001 CPD P:191 at 11.
    
   [5]In its protest to our Office, PSG does not dispute that this is the
   specified triggering date for the Manual.
   [6] The concept of technical unacceptability is inapplicable to the MEO;
   indeed, as explained above, in the first instance, it is the IRO's
   responsibility to certify that the MEO satisfies the PWS requirements, and
   the AAB review encompasses a determination that cost adjustments to the
   MEO are necessary to ensure that the PWS requirements can be satisfied
   under the MEO--as was done here.