TITLE:  SRS Technologies, B-291618.2; B-291618.3, February 24, 2003
BNUMBER:  B-291618.2; B-291618.3
DATE:  February 24, 2003
**********************************************************************
SRS Technologies, B-291618.2; B-291618.3, February 24, 2003

   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:   SRS Technologies
    
File:            B-291618.2; B-291618.3
    
Date:              February 24, 2003
    
J. Patrick McMahon, Esq., William B. Barton IV, Esq., and William T.
Welch, Esq., Barton, Baker, McMahon & Tolle, for the protester.
Alan Dickson, Esq., Paul C. Burkholder, Esq., and Howard A. Wolf-Rodda,
Esq., Epstein, Becker & Green, for Sparta, Inc., an intervenor.
Raymond M. Saunders, Esq., and Capt. Richard L. Hatfield, Department of
the Army, for the agency.
Henry J. Gorczycki, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
    
Under a solicitation for a cost reimbursement contract for services that
did not prohibit or limit the use of uncompensated overtime, the agency
unreasonably raised the protester's evaluated costs in the cost realism
analysis to remove the impact on the protester's proposed labor rates
based on its use of uncompensated overtime from its labor costs.
DECISION
    
SRS Technologies protests an award to Sparta, Inc. under request for
proposals (RFP) No. HQ0006-02-R-0011, issued by the Missile Defense Agency
(MDA), for support services for the Deputy for Force Structure Integration
and Deployment.  SRS protests the agency's cost and technical evaluation
and the source selection decision.
    
We sustain the protest.
    
The RFP, issued as a small business set-aside on July 31, 2002,
contemplated the award of a cost-plus-fixed-fee, level-of-effort contract
for 1 year with 4 option years.  The resulting contract will consolidate
support services previously covered by two separate contracts for which
the incumbent contractors are SRS and Sparta. 
    
Award was to be made on a *best value* basis with non-cost factors
collectively being significantly more important than cost.  The RFP stated
the non-cost factors in the following descending order of importance:  (1)
technical expertise, (2) corporate experience, (3) management plan, and
(4) past performance.  The RFP stated that the cost evaluation would
consider whether an offeror's proposed costs were realistic, complete and
reasonable.
    
The vast majority of costs under the RFP were for labor.  The RFP provided
estimated total labor hours for each of the contract line item numbers
(CLIN).  The estimated total hours required were 56,400 hours per year
(which represents 30 full‑time equivalents per year) plus 2,880
hours for surge effort per year.  Offerors were to propose an appropriate
mix of staff from various labor categories, along with the portion of the
total estimated hours proposed for each position.  Each offeror was also
to identify its current labor rates, related cost rates, and annual
escalation rates, consistent with its proposed staffing matrix and
management plan.  The RFP stated that, based on the agency's cost realism
analysis, the agency might adjust an offeror's proposed costs to identify
the most probable cost for evaluation purposes.
    
The agency received proposals from SRS and Sparta, which were evaluated as
follows:[1]
    

   +------------------------------------------------------------------------+
|                             |SRS                 |Sparta               |
|-----------------------------+--------------------+---------------------|
|Technical Expertise          |[DELETED]           |[DELETED]            |
|-----------------------------+--------------------+---------------------|
|Corporate Experience         |[DELETED]           |[DELETED]            |
|-----------------------------+--------------------+---------------------|
|Management Plan              |[DELETED]           |[DELETED]            |
|-----------------------------+--------------------+---------------------|
|Past Performance             |[DELETED]           |[DELETED]            |
|-----------------------------+--------------------+---------------------|
|Most Probable Cost           |$[DELETED]          |$37,160,881          |
+------------------------------------------------------------------------+

    
The evaluated cost figures for both proposals reflect adjustments made by
the agency.  Sparta's proposal incorrectly added its individual CLIN
prices and stated in one place a total estimated cost of $[DELETED]. 
Agency Report, Tab C-2, Sparta Proposal, at I-10.  The correct total was
$37,160,881, which was correctly stated in the cost element summary table
included in Sparta's cost proposal.  Id. at II-2.  After verifying this
apparent error with Sparta, the agency stated Sparta's total estimated
cost accordingly.[2]  Contracting Officer's Statement at 4.
    
SRS's proposal stated a total estimated cost of $[DELETED].[3]  Agency
Report, Tab B-2, SRS Proposal, vol. 1, at 9.  This figure was based on
proposed labor rates that assumed the performance of [DELETED] hours of
uncompensated overtime per week ([DELETED] hours annually) per full-time
equivalent.  Id., vol. 2, at 27 and last page (unnumbered).  The impact of
SRS's approach, as calculated by the agency (that is, the increase that
would have occurred in SRS's proposal if SRS's proposed labor rates had
not taken uncompensated overtime into account), totaled $[DELETED]. 
Agency Report, Tab 21, Proposal Analysis Report, at 22.
    
Sparta's proposal did not propose the use of uncompensated overtime or
rates based on the use of uncompensated overtime.  Notwithstanding this,
the agency sent letters to both offerors requesting them to identify how
their accounting systems account for uncompensated overtime and whether
their systems identify uncompensated overtime as delivered level of effort
for direct productive labor hours.  Agency Report, Tab D-17, Letters from
Agency to Offerors (Sept. 17, 2002).  Sparta responded that it identifies
uncompensated overtime hours, but does not charge the government for those
hours; however, Sparta did not revise its proposal to offer uncompensated
overtime, stating that it *did not base its proposal . . . on 'required
uncompensated overtime' by our employees.*  Agency Report, Tab D-17,
Letter from Sparta to Agency (Sept. 19, 2002).  SRS's response essentially
restated the information presented in its cost proposal, i.e., that SRS
charges the government a reduced hourly rate for each productive hour,
whether compensated or uncompensated, that passes on the savings from
uncompensated overtime to the government with each hour billed; SRS stated
that its invoices identify all productive hours and do not distinguish
between compensated and uncompensated hours.[4]  Agency Report, Tab D-17,
Letter from SRS to Agency (Sept. 19, 2002). 
    
In a memorandum to the file following these exchanges, the contracting
officer stated:
    
SRS proposal included labor costs that had been adjusted by the amount of
forecasted Uncompensated Overtime . . .  Sparta['s] proposal did not
address [Uncompensated Overtime]. . . . Discussions with both companies
revealed identical accounting treatment of [Uncompensated Overtime], and
it was assumed that each contractor would deliver the same amount of
[Uncompensated Overtime] in providing the level of effort specified by the
Government.  Therefore, the Government adjusted SRS upward [$[DELETED]] to
assure fair and reasonable comparison of labor costs.
Agency Report, Tab D-15, Contracting Officer's Memo (Oct. 15, 2002), at
1.[5]  This cost adjustment brought SRS's most probable cost from
$[DELETED] to $[DELETED].  Agency Report, Tab D-21, Proposal Analysis
Report, at 22.
    
In briefing the source selection authority (SSA), the source selection
evaluation team (SSET) presented the technical differences between the
proposals and why Sparta's proposal was considered technically superior. 
The SSET also recommended that, although SRS's most probable cost was over
$[DELETED] lower than Sparta's, the evaluated costs should be considered
*equal* because the evaluated cost difference was not considered material,
and that the source selection decision should be based solely on the
evaluated technical superiority of Sparta's proposal.  The SSET's
rationale for considering the $[DELETED] cost difference immaterial was
that, historically, actual costs under cost reimbursement contracts can
vary from the estimates by a similar magnitude for a contract of this size
and scope, and the nature of this contract led the agency to conclude that
a similar level of cost variation should be expected under this contract. 
Agency Report, Tab D-20, SSET's Briefing to SSA, at 39.  The SSA accepted
the SSET's recommendations regarding the technical superiority of Sparta's
proposal and rationale for finding the $[DELETED] price difference not
material, and did not perform a cost/technical tradeoff, but selected
Sparta based solely on its higher evaluated technical merit.[6]  Agency
Report, Tab D‑23, Source Selection Decision, at 3.
    
By letter dated November 12, the agency notified SRS that the contract was
awarded to Sparta.  SRS received a written debriefing on November 13. 
This protest followed on November 15.
    
SRS alleges that the agency's most probable cost adjustment associated
with its proposed use of uncompensated overtime in calculating its
proposed labor rates was unreasonable.  We agree and sustain the protest
on this basis.
    
When an agency evaluates proposals for the award of a cost reimbursement
contract, an offeror's proposed estimated costs of contract performance
are not considered controlling, since an offeror's estimated costs may not
provide valid indications of the final actual costs that the government is
required, within certain limits, to pay.  Consequently, a cost realism
analysis must be performed by the agency to determine the extent to which
an offeror's proposed costs represent what the contract should cost,
assuming reasonable economy and efficiency.  Because the contracting
agency is in the best position to make this cost realism determination,
our review is limited to determining whether the agency's cost realism
analysis is reasonably based and not arbitrary.  General Research Corp.,
B‑241569, Feb. 19, 1991, 91-1 CPD P: 183 at 5.
    
The agency determined, in upwardly adjusting SRS's probable costs to
remove the value of uncompensated overtime from its proposed costs, that
both offerors *would deliver the same amount of [uncompensated overtime]
in providing the level of effort specified by the Government* and that
both offerors' accounting practices treated uncompensated overtime in an
identical manner.  Agency Report, Tab D‑15, Contracting Officer's
Memorandum, Oct. 15, 2002, at 1, see Tab D‑23, Source Selection
Decision, at 2.  In our view, this determination was unreasonable and not
supported by the record, and does not provide a basis for not crediting
SRS's proposed costs with the savings attributable to its lower labor
rates resulting from its use of uncompensated overtime. 
    
The record establishes that SRS's proposed labor rates were based on the
use of uncompensated overtime and Sparta's were not.  Nothing in the RFP
prohibited or limited proposals based upon the use of uncompensated
overtime.  SRS's proposal incorporated proposed savings from uncompensated
overtime directly into its labor rates, and thus each productive hour
billed would include a proportional share of the proposed uncompensated
overtime.  This is one of the *acceptable accounting methods* established
by the Defense Contract Audit Agency (DCAA).  DCAA Contract Audit Manual
S: 6-410.4 (Jan. 1998).  The agency does not contend that this aspect of
the proposal of SRS--an incumbent contractor that assertedly performed
that contract using uncompensated overtime, see Protester's Comments at
22-23--was unacceptable or unrealistic, or that SRS's proposed rates were
unrealistically low. [7] 
    
Under the circumstances, in the absence of a reasonable basis to determine
that SRS's proposed use of uncompensated overtime was unacceptable or
unreasonable, or question whether the agency would in fact receive the
savings attributable to SRS's proposed use of uncompensated overtime, the
agency, in its cost realism analysis, was required to accept SRS's
proposed labor rates based on its use of uncompensated overtime.[8]  See
General Research Corp., supra at 7-9.  There was no reasonable basis for
the agency to equate the cost proposals of SRS and Sparta in terms of
uncompensated overtime, and to normalize the proposed costs in the cost
realism analysis by eliminating from SRS's most probable cost the value of
proposed uncompensated overtime from SRS's proposed labor costs.  Id. at
9.  The record shows that if this adjustment had not been made to SRS's
proposed costs, the evaluated cost difference between the proposals would
have been $[DELETED] rather than $[DELETED].  Thus, the source selection
decision was unreasonable.  We sustain SRS's protest on this basis.
    
The predominate basis for SRS's other protest contentions stem from an
allegation that Sparta's proposal misrepresented the key personnel in its
staffing plan.  While we have recognized that an offeror's
misrepresentation could provide a basis for disqualifying the proposal and
canceling a contract award, in order to sustain a protest alleging
misrepresentation, the record must show that the misrepresentation was
material, i.e., that the agency relied upon the misrepresentation and it
had a significant impact on the evaluation.  AVIATE L.L.C., B-275058.6,
B-275058.7, Apr. 14, 1997, 97-1 CPD P: 162 at 11.  The only evidence
presented by the protester in support of this contention is an affidavit
stating a second-hand account of Sparta allegedly contacting SRS's
employees and subcontractors seeking to fill employment and subcontract
opportunities with Sparta.  We see nothing out of the ordinary, however,
in the alleged actions of Sparta, and we do not believe that they alone
establish a misrepresentation or *bait and switch.*  See Veda Inc.,
B-278516.2, Mar. 19, 1998, 98-1 CPD P: 112 at 16-17.  We also note that
Sparta has not replaced any of its proposed staff, and has not notified
the agency that it intends to do so, as required by the terms of the
contract.[9]  Agency Report at 11.
    
SRS also alleges that its proposed staff should have been rated superior
to that of Sparta's because it had the larger incumbent contract. 
However, SRS has not otherwise supported this allegation by showing that
the qualifications of its proposed staff are superior to Sparta's, nor has
SRS substantively challenged the primary reason for its lower rating under
the technical expertise factor, i.e., that its proposal relied [DELETED]. 
See Agency Report, Tab D-22, SSA Briefing Minutes, at 3; Tab 23, Source
Selection Decision, at 1.  We conclude that this allegation does not
provide a basis to sustain the protest.
    
SRS protests the corporate experience evaluation, again asserting that,
since it performed the larger of the two incumbent contracts, its
experience should have been rated higher than Sparta's.  However, the
record shows that, even considering the differences in the sizes of the
incumbent contracts, Sparta had a greater number of relevant contracts and
a greater breadth of overall experience than did SRS.  While SRS asserts
that the agency did not consider its subcontractors' experience, the
record shows that this experience was properly not considered for either
offeror because these subcontractors were not considered *major* (defined
as performing 30 percent or more of the total proposed effort), consistent
with the RFP corporate experience evaluation criterion.  RFP at 63.
    
The protester finally alleges that the agency was required, but failed, to
give SRS an opportunity to address adverse past performance information. 
However, the agency asserts, and the protester does not substantively
respond, that there was no prejudice to SRS, even if clarifications or
discussions should have been conducted regarding its past performance,
because SRS's resulting [DELETED] rating, as compared to Sparta's
[DELETED] rating, under this lowest weighted evaluation criterion was not
considered by the SSA in making the source selection decision.  Agency
Report, Tab D-23, Source Selection Decision, at 2 (*[DELETED]*). 
    
We recommend that the agency conduct a new cost evaluation, perform a
cost/technical tradeoff, and make a new source selection decision,
conducting discussions with both offerors if appropriate.  If an offeror
other than Sparta is selected for award, the agency should terminate the
contract awarded to that firm.  We also recommend that the agency
reimburse the protester its costs of pursuing this protest, including
reasonable attorney's fees.  4 C.F.R. S: 21.8(d) (2002).  The protester
should submit its certified claim for costs, detailing the time expended
and the costs incurred, directly to the contracting agency within 60 days
of receipt of this decision.  4 C.F.R. S: 21.6(f)(1).
    
The protest is sustained.
    
Anthony H. Gamboa
General Counsel
    
    

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

   [1] The color rating scale was blue (exceptional), green (acceptable),
yellow (marginal), and red (unacceptable).  The proposal risk rating scale
was low, moderate and high.  The past performance risk rating scale was
low, moderate, high, and neutral.
[2] Contrary to the protester's contention, there is no evidence that this
adjustment was the result of discussions.
[3] The agency states that it adjusted SRS's proposed costs to reflect
*[DELETED] costs.*  Contracting Officer's Statement at 4.  In fact, SRS's
proposal included prices for all CLINs, including the ones for estimated
[DELETED] costs, and correctly stated a total estimated cost of $[DELETED]
that included all cost elements.  However, SRS's cost proposal provided
separate cost element summary tables for [DELETED] labor costs and
[DELETED] labor costs.  Agency Report, Tab B-2, SRS Proposal, vol. 2, at
2-2, 2-11.  The agency consolidated these two tables into a single cost
element summary table and identified the consolidation as a cost
adjustment.  The agency's action did not adjust either SRS's proposed
[DELETED] costs or its total estimated cost as stated in the proposal. 
The agency and SRS agree on the total costs proposed by SRS (i.e.,
$[DELETED]).
[4] While the agency initially characterized these exchanges as
discussions, we agree with the agency that these exchanges concerning the
offerors' accounting practices for uncompensated overtime, which did not
request, or lead to, proposal revisions, did not constitute discussions,
but were mere clarifications.  See Priority One Servs., Inc., B-288836,
B-288836.2, Dec. 17, 2001, 2002 CPD P: 79 at 5; Northeast MEP Servs.,
Inc., B-285963.9, Mar. 8, 2001, 2001 CPD P: 66 at 3-5.
[5] The record contains no documentation of the agency's cost evaluation
prior to the contracting officer's memorandum.
[6] While SRS did not timely protest the agency's determination that this
cost differential was not material (SRS first protested this after receipt
of the agency report, even though this determination was reasonably
disclosed at SRS's debriefing but not protested in SRS's initial protest),
the reasonableness of the agency's judgment that a $[DELETED] difference
in most probable costs is immaterial and should not be considered in the
award selection decision is, in our view, questionable and not supported
by the record.  While actual costs under cost reimbursement contracts may
indeed vary from estimated costs, there is nothing in the record here to
suggest that any variations would affect the two proposals differently so
that the cost difference would be eliminated here.  Since we recommend
below that a new source selection be made, the agency should perform a
cost/technical tradeoff in making its award selection.
[7] In contrast, Sparta's response to the agency's inquiry discussed a
methodology that would report direct productive hours by identifying
compensated and uncompensated hours, charge compensated hours at standard
labor rates, and not charge for uncompensated overtime hours.  This is not
one of the enumerated *acceptable accounting methods* enumerated in the
DCAA Contract Audit Manual.  The record thus does not support the agency's
determination that both proposals had identical accounting treatment of
uncompensated overtime.  Moreover, since neither offeror proposed costs
for hours beyond those solicited and there was no requirement that the
proposed personnel be dedicated to this contract cost objective, and
because Sparta did not propose the use of uncompensated overtime in any
case, the agency's assumption that both offerors would deliver the same
amount of uncompensated overtime under the contract was not reasonable. 
[8] By comparison, Sparta's labor rates did not reflect savings for
uncompensated hours, its method of accounting for uncompensated overtime
did not estimate the amount of uncompensated overtime hours contemplated,
and the agency had no contractual means of requiring Sparta to perform the
contract with uncompensated overtime hours.  Given Sparta's accounting
methodology, even assuming the reasonableness of the agency's apparent
belief that Sparta may in fact provide uncompensated overtime (which it
did not offer), the agency could not reasonably presume any cost savings
associated with such uncompensated overtime in evaluating Sparta's
proposal.  See Versar, Inc., B‑254464.3, Feb. 16, 1994, 94-1 CPD
P: 230 at 3-10.
[9] Performance under the contract has been stayed pending resolution of
this protest.