TITLE:  SAMS El Segundo, LLC, B-291620.3, February 25, 2003
BNUMBER:  B-291620.3
DATE:  February 25, 2003
**********************************************************************
SAMS El Segundo, LLC, B-291620.3, February 25, 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:   SAMS El Segundo, LLC
    
File:            B-291620.3
    
Date:              February 25, 2003
    
William A. Roberts III, Esq., David M. Southall, Esq., Jonathan L. Kang,
Esq., and Phillip H. Harrington, Esq., Wiley Rein & Fielding, for the
protester.
Eric J. Marcotte, Esq., and Scott A. Schipma, Esq., Winston & Strawn; and
Mark R. Hartney, Esq., Allen Matkins Leck Gamble & Mallory, for LA Air
Force Base SMC, LLC, an intervenor.
John D. Inazu, Esq., and James A. Harley, Esq., Department of the Air
Force, for the agency.
Louis A. Chiarella, Esq., and Christine S. Melody, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
    
1.  Reasonableness of agency's evaluation of offerors' proposed costs or
prices is governed by the type of contract to be awarded.
    
2.  Protester's challenge that contracting agency improperly evaluated the
prices proposed by the selected offeror is denied where the record shows
that the evaluation was reasonable and consistent with the stated
evaluation criteria.
DECISION
    
SAMS El Segundo, LLC (SES) protests the selection of LA Air Force Base
SMC, LLC (Kearny) under a request for proposals (RFP) issued by the Space
and Missile Systems Center (SMC), Air Force Space Command, Department of
the Air Force, for the Systems Acquisition Management Support (SAMS)
project.[1]  SES argues that the agency's evaluation of Kearny's cost
proposal was improper.
We deny the protest.
    
BACKGROUND
    
Section 2861 of the Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001 (the Act), Pub. L. No. 106-398, 114 Stat. 1654 (2000),
authorizes the Secretary of the Air Force to convey, by sale or lease, all
or part of the real property at Los Angeles Air Force Base (LAAFB),
California; the Act also provides that the only consideration that the Air
Force can receive for the conveyed real estate is *the design and
construction on [unconveyed] property . . . of one or more facilities to
consolidate the [SMC] mission and support functions.*  As originally
enacted, the statute also established that if the consideration received
by the Air Force (i.e., the value of the facility constructed) exceeded
the value of the real property conveyed, then the agency could *lease
back* the facility from the developer for a period up to 10 years, with
the Air Force taking title to the facility at the end of the lease
period.  Id. S: 2861(c).
    
On July 17, 2001, the Air Force issued an RFP for the SAMS project.  The
initial RFP stated, in broad terms, the agency's desire to exchange up to
57 acres of LAAFB real property for approximately 580,000 square feet of
office space. [2]  Phase I RFP at 3.  The RFP also informed offerors that
the selection process for the SAMS project would occur in three phases. 
In Phase I, the Air Force intended to select no more than five offerors
who demonstrated the highest probability of success.[3]  In Phase II, in
which offerors were to submit detailed business and technical proposals
for the actual execution of the SAMS project, the Air Force intended to
select the offeror proposing the best value to the agency.  Phase I RFP,
app. D, SAMS Source Selection Process, at 4.  In Phase III, the agency
planned to conduct final negotiations with the selected offeror to
finalize the remaining financial contingencies and to complete the
administrative details of implementing all agreements for award to the
selected offeror.  The solicitation established that the Phase III
negotiations would be *administrative in nature and [would] not encompass
issues that affect the basis for the [Phase II] source selection
decision.*[4]  Id.
    
Six offerors submitted proposals in response to the Phase I RFP.  Among
the Phase I offerors selected by the Air Force for participation in Phase
II were SES and Kearny.[5]
    
On January 24, 2002, the Air Force issued the Phase II RFP for the SAMS
project, with its modified objective of exchanging up to 57 acres of LAAFB
real property for approximately 560,000 square feet of office space at no
additional cost.  It is the competition under this solicitation that is
the subject of this protest.  The solicitation notified offerors that the
basis for the Phase II selection decision would be *best value,* based on
the integrated assessment of the evaluation factors, and could involve the
tradeoff of cost and noncost factors.  Phase II RFP at 9.  The RFP
identified the following evaluation factors, in descending order of
importance, and subfactors, of equal importance within each factor:
    

   +------------------------------------------------------------------------+
|1.  Cost to the Air Force[6]                                            |
|------------------------------------------------------------------------|
|2.  Financial Strategy                                                  |
|------------------------------------------------------------------------|
|3.  Facility Capability                                                 |
|------------------------------------------------------------------------|
|                     |A.  Building Core and Shell                       |
|                     |--------------------------------------------------|
|                     |B.  Tenant Improvements                           |
|                     |--------------------------------------------------|
|                     |C.  Integration with Area B Facilities            |
|------------------------------------------------------------------------|
|4.  Project Management                                                  |
|------------------------------------------------------------------------|
|                     |A.  Project Execution Plan                        |
|                     |--------------------------------------------------|
|                     |B.  Project Management Team                       |
|------------------------------------------------------------------------|
|5.  Proposal Risk                                                       |
|------------------------------------------------------------------------|
|6.  Past Performance                                                    |
+------------------------------------------------------------------------+

    
Id. at 9-10.  The solicitation expressed the relative importance of the
cost factor by stating:
Affordability of the project is a major consideration of this source
selection.  The goal is to achieve no additional cost to the Air Force. 
Therefore, affordability is defined as the combination of *cost to the Air
Force* and *financial strategy* employed by an offeror, which minimizes
the additional funds the Air Force would have to provide.
    
NOTE:  Funding for the SAMS project is not currently available; neither
has it been programmed in the Air Force budget.  Any requirement for
funding, in addition to the land to be conveyed, is unattractive from a
budgetary perspective.
    
Id. at 13.
    
Although termed *cost to the Air Force,* the agency contemplated that the
cost gap set forth in an offeror's Phase II proposal would in fact become
the basis of a fixed-price contract between the selected offeror and
agency for the construction of the proposed SAMS facility through Phase
III administrative negotiations.  The solicitation informed offerors that
resolution of the Phase III administrative details and execution of the
real estate agreements were contingent upon satisfactory evidence that the
successful offeror had, among other things, *[o]btained a firm commitment
for both construction and permanent financing, on the terms set forth in
the Successful Offeror's [Phase II] proposal . . . .*  Phase II RFP, app.
D, SAMS Source Selection Process, at 16.  Additionally, at a hearing that
our Office conducted on the protest, the person who served as both the Air
Force chief evaluator and SAMS project manager testified that the Phase
III negotiations would result in a fixed-price relationship between the
parties, such that the agency's liability was limited to the selected
offeror's Phase II cost gap.  Hearing Transcript (Tr.) at 76-81.
    
Kearny and SES also both understood that an offeror's proposed Phase II
cost gap would subsequently become the basis of a fixed-price contract
between the selected offeror and the Air Force.  As part of its financial
plan for the SAMS project, Kearny's proposal was premised on the fact that
the Air Force's payment liability was limited to the offeror's proposed
cost gap.  See AR, Tab 7, Kearny Final Proposal Revision, Vol. I,
Executive Summary, at 4, Vol. II, Cost and Financial Strategy, at 2. 
Likewise, SES's proposal stated, *SES proposes a Guaranteed Maximum Price
format to offer the Air Force the benefits of a fixed-price contract as
required under the solicitation  . . . .* and *SES agrees to undertake the
project at the specified price, and agrees that subject to [various land
use and financing contingencies], SES guarantees the project performance
at the stipulated cost.*[7]  Supplemental AR, Tab 3, SES Final Proposal
Revision, Executive Summary, at I-2.
SES and Kearny each submitted initial Phase II proposals by the March 25
closing date, and final proposal revisions by the August 6 closing date. 
An Air Force source selection evaluation team (SSET) evaluated and rated
the proposals as to the financial strategy, facility capability, project
management, and past performance factors utilizing a color-coded
descriptive rating system:  blue (exceptional, or high confidence), green
(very good, or significant confidence), yellow (satisfactory, or
confidence), and red (marginal, or little confidence).  Phase II RFP, app.
D, SAMS Source Selection Process, at 9-12.  The RFP also established that
the proposal risk factor would be rated as high, moderate, or low, and
that the cost factor would be evaluated for *completeness,*
*reasonableness,* and *realism.*  Id. at 12-14.
    
As set forth above in the discussion of the unique statutory framework of
the SAMS project transaction, the Act established that if the value of the
office facility to be constructed exceeded the value of the LAAFB real
property conveyed, then one means by which the Air Force could overcome
the cost gap was to *lease back* the facility from the developer for a
period up to 10 years.[8]  During Phase II, the Air Force observed that
SES had submitted an alternate proposal in which the offeror's financial
strategy was contingent upon a 30-year leaseback period.  On July 26, the
Air Force formally suggested to the congressional representative for the
district in which LAAFB is located certain *technical corrections* to the
original Act, to include permitting a leaseback period of up to 30 years. 
AR, Tab 39, Letter from Air Force to Offerors Regarding Proposed
Legislative Changes, at 2.  At the time of both the agency's final
evaluation of proposals and the Phase II selection decision, however, the
statutory changes sought by the Air Force for the SAMS project had yet to
be enacted into law.[9]
On August 20, the SSET briefed the agency source selection advisory
council (SSAC) as to its evaluation and ratings of the proposals of Kearny
and SES, which were as follows:
    

   +------------------------------------------------------------------------+
|      |Factor                                                           |
|------+-----------------------------------------------------------------|
|      |Cost[10]  |Financial|Facility Capability|Project    |Past        |
|      |(in       |Strategy |                   |Management |Performance |
|      |millions) |         |                   |           |            |
|------+----------+---------+-------------------+-----------+------------|
|SES   |$29 (10 yr|Blue     |Blue               |Blue       |Blue        |
|      |lease)    |         |                   |           |            |
|      |$13 (30 yr|         |                   |           |            |
|      |lease)    |         |                   |           |            |
|-----------------+---------+-------------------+-----------+------------|
|    |Risk (10 yr |Moderate |Low                |Low        |N/A         |
|    |lease)      |         |                   |           |            |
|----+------------+---------+-------------------+-----------+------------|
|    |Risk (30 yr |High     |Low                |Low        |N/A         |
|    |lease)      |         |                   |           |            |
|-----------------+---------+-------------------+-----------+------------|
|      |          |         |                   |           |            |
|------+----------+---------+-------------------+-----------+------------|
|Kearny|$13 (10 yr|Green    |Blue               |Blue       |Blue        |
|      |lease)    |         |                   |           |            |
|-----------------+---------+-------------------+-----------+------------|
|    |Risk        |Moderate |Low                |Low        |N/A         |
|----+------------+---------+-------------------+-----------+------------|
+------------------------------------------------------------------------+

    
AR, Tab 9, Briefing to the SSAC, at 15.
    
The SSET chairman informed the SSAC of his view that both offerors had
submitted exceptional proposals that were substantially equal in terms of
non-cost factors.  AR, Nov. 27, 2002, at 7, Contracting Officer's
Statement at 7; Tr. at 72.  At the conclusion of the briefing, the SSET
recommended that the agency's selection decision be based on existing
statutory authorization, and therefore, that Kearny should be selected, as
its cost gap was manageable and not contingent on potential legislative
amendments.  AR, Tab 9, Briefing to the SSAC, at 20-21.
    
On August 23, the SSAC (and SSET) briefed the agency source selection
authority (SSA).  While accepting the SSET's evaluations and ratings of
the offerors' proposals, the SSAC chairman recommended the selection of
SES contingent on enactment of 30-year leaseback authority (by the end of
fiscal year 2002), and the selection of Kearny if the legislation did not
pass.[11]  AR, Tab 10, Briefing to the SSA, at 31, 33, 35.  The SSA did
not immediately make a decision, believing that the selection of the
recommended proposal, SES's 30-year leaseback proposal, would be premature
and unsupportable based on existing legislation.  AR, Tab 43, SSA E-Mail
Messages,
at 1-2; Tr. at 217-18.
    
Subsequent to the briefing and prior to a source selection decision being
made, certain events transpired.  SES's proposal had included the idea of
*swapping* a portion of one LAAFB-conveyed parcel for a slightly larger
adjacent tract of land occupied by the Federal Aviation Administration
(FAA).[12]  On September 13 and 24, SES notified the contracting officer
that the FAA land swap had fallen through, in whole or in part, because of
the FAA's security concerns.  AR, Tab 48, SES Letter Regarding FAA Land
Swap; Tab 50, SES Clarification Letter Regarding FAA Land Swap. 
Consequently, the Air Force determined that the cost gap for SES's
alternative proposals had increased to $14.4 - $14.9 million for the
30-year leaseback option, and $30.9 million for the 10-year leaseback
option.  Additionally, as of the end of fiscal year 2002, Congress had yet
to enact any change in SAMS project leaseback authority.  As a result of
the revision to SES's cost gap, and the fact that amended statutory
authorization for the SAMS project had yet to be obtained, the SSAC
chairman informed the SSA that he had changed his recommendation and now
recommended the selection of Kearny.  Tr. at 460-61.
    
On September 30, the SSA determined that the proposals of Kearny and SES
were essentially equal as to all noncost factors, and that Kearny's
proposal represented a lower overall cost to the Air Force.  Based on an
integrated assessment of all evaluation factors, the SSA determined that
Kearny's proposal represented the best value to the Air Force.  AR, Tab
12, Source Selection Decision, at 4.  SES then protested to our Office.
    
EVALUATION OF KEARNY'S PROPOSAL AS TO COST
    
In its original and first supplemental protests, SES raised numerous
issues that could be grouped into two categories.  First, SES alleged in
various ways that the agency's evaluation of Kearny's proposal, other than
as to cost-related factors, was improper.  Second, SES alleged that the
agency's source selection decision was unreasonable and not in accord with
the RFP's stated award scheme.  We recently issued a decision denying
these protests.  SAMS El Segundo, LLC, B-291620, B-291620.2, Feb. 3, 2003,
2003 CPD P: __.  In a second supplemental protest, SES argued that the
agency's evaluation of Kearny's proposal as to cost-related factors was
unreasonable and inconsistent with the RFP's stated evaluation criteria. 
It is this second supplemental protest that is the subject of this
decision.
    
The evaluation of proposals, including the evaluation of an offeror's
proposed cost or price, is a matter within the contracting agency's
discretion, since the agency is responsible for defining its needs and the
best method for accommodating them.  See U.S. Textiles, Inc., B-289685.3,
Dec. 19, 2002, 2002 CPD P: 218 at 2.  In reviewing a protest against an
agency's evaluation of proposals, our Office will not reevaluate
proposals, but instead will examine the record to determine whether the
agency's judgment was reasonable and consistent with the stated evaluation
criteria and applicable procurement statutes and regulations.  See
Shumaker Trucking & Excavating Contractors, Inc., B-290732, Sept. 25,
2002, 2002 CPD P: 169 at 3; Hydraulics Int'l, Inc., B-284684, B-284684.2,
May 24, 2000, 2000 CPD P: 149 at 14.  A protester's mere disagreement with
the agency's judgment does not establish that the evaluation was
unreasonable.  C. Lawrence Constr. Co., Inc., B-287066, Mar. 30, 2001,
2001 CPD P: 70 at 4.
    
The reasonableness of an agency's cost or price evaluation is directly
related to the financial risk that the government bears because of the
contract type it has chosen.  When an agency evaluates proposals for the
award of a fixed-price contract, in which the government's liability is
fixed and the contractor bears the risk and responsibility for the actual
costs of performance, see Federal Acquisition Regulation (FAR)
S: 16.202-1, the analysis of an offeror's price need only determine that
the price offered is fair and reasonable to the government  (i.e., price
reasonableness), and focuses primarily on whether the offered price is
higher--as opposed to lower--than warranted.  See CSE Constr., B-291268.2,
Dec. 16, 2002, 2002 CPD P: 207 at 4; WorldTravelService, B-284155.3, Mar.
26, 2001, 2001 CPD P: 68 at 4 n.2.  By contrast, when an agency evaluates
proposals for the award of a cost-reimbursement contract, in which the
government bears the risk and responsibility to pay the contractor its
actual allowable costs regardless of the costs proposed by the offeror,
see FAR S: 16.301-1, the agency's analysis must also determine the realism
of the offeror's proposed costs and what the costs are likely to be under
the offeror's technical approach, assuming reasonable economy and
efficiency (i.e., cost realism).[13]  See Pueblo Envtl. Solution, LLC,
B-291487, B-291487.2, Dec. 16, 2002, 2003 CPD P: 14
at 13; PADCO, Inc.--Costs, B-289096.3, May 3, 2002, 2002 CPD P: 135 at 5.
    
Our review of the record, including the written proposals, the pleadings,
and testimony taken during the hearing in this matter, provides us no
basis to find the agency's evaluation here was unreasonable or otherwise
objectionable.  We preface our discussion by briefly describing the
contractual nature of the SAMS transaction and Kearny's proposal as to
cost-related factors.
    
As set forth above, the SAMS project solicitation contemplated a
three-phase selection process in which the cost gap set forth in an
offeror's Phase II proposal would become the basis of a fixed-price
contract between the selected offeror and the agency for the construction
of the proposed SAMS facility through Phase III administrative
negotiations.  Specifically, during the Phase III *due diligence* period
the selected offeror would determine if the various assumptions and
contingencies encompassed within its proposal (e.g., obtaining
entitlements for the specified uses of the conveyed properties, finalizing
tax allocation and financing agreements with local municipalities) would
be achieved.[14]  Tr. at 78.  Additionally, if the selected offeror
determined that the land values and/or financing mechanisms it proposed in
Phase II would not result in the anticipated overall funding amount,
thereby creating a larger cost gap in comparison to the costs of
construction, the offeror could either *absorb* the increased cost
difference by increasing its equity contribution to the SAMS project or
withdraw from the arrangement; the solicitation did not permit
renegotiation of the cost gap.  Id. at 79, 87; Phase II RFP, app. D, SAMS
Source Selection Process, at 16.  How the selected offeror attained the
overall funding amount and cost gap as proposed in Phase II was solely the
responsibility and the risk of the offeror.  Tr. at 129-30.  Quite simply,
while the agency's Phase II source selection decision essentially
constituted no more than *an agreement to agree,*
Tr. at 81, the Air Force's financial liability for the SAMS transaction
project became determined (i.e., fixed) with the Phase II selection
decision.
    
The Phase II RFP established three criteria for the evaluation of
offerors' cost proposals--*completeness,* *reasonableness,* and
*realism*--which the solicitation defined as follows:
    
Completeness:  All information/data required to support the proposed
financial strategy has been provided.  Assumptions and estimates on which
the strategy is based are clearly identified.
    
Reasonableness:  Cost estimates, financing terms, and financial
projections are fully justified and supported and are considered fair
under current market conditions.
    
Realism:  Cost estimates and financial projections are compatible with
proposed scope of effort and operations reflect reasonable economy and
efficiency.
    
Phase II RFP, app. D, SAMS Source Selection Process, at 13-14.  The RFP
did not require the agency to perform a probable cost analysis or
otherwise adjust an offeror's proposed cost gap as part of its
evaluation.  Id.  Additionally, given the unique nature of the SAMS
transaction--the simultaneous conveyance of real property in exchange for
the acquisition of an office facility--the agency's evaluation here
extended to *both sides* of an offeror's cost gap and examined not only an
offeror's proposed construction costs, but also the various funding
sources that the offeror contemplated as part of its financial strategy.
    
Kearny's final proposal revision included a 10-page cost and financial
strategy, together with approximately 25 supporting exhibits, that
described the amounts, assumptions, terms, conditions, contingencies, and
calculations for its financial plan.  In addition to the estimated value
of the land which the agency would convey as part of the SAMS project
transaction, the funding of Kearny's financial strategy was based on
benefiting from tax increment financing, in the form of a Department of
Housing and Urban Development (HUD) Section 108 loan, as well as a
Brownfields Economic Redevelopment Initiative grant.[15]  The SSET
evaluated the individual elements as proposed in Kearny's financial
strategy in determining that the offeror's overall cost gap was $13
million, which was computed as follows:
    

   +------------------------------------------------------------------------+
|Costs & Funding Sources                               |Amounts  (in     |
|                                                      |millions)        |
|------------------------------------------------------+-----------------|
|Total Project Costs                                   |$115.5           |
|------------------------------------------------------+-----------------|
|Funding Sources-- Land Values                         |         $54.7   |
|------------------------------------------------------+-----------------|
|                              --Tax Increment         |         $47.7   |
|Financing                                             |                 |
|------------------------------------------------------+-----------------|
|                              --Brownfields Grant     |           $2    |
|------------------------------------------------------+-----------------|
|                              --Total                 |$104.4           |
|------------------------------------------------------+-----------------|
|Cost Gap (Project Costs minus Funding Sources)        |         $11.1   |
|------------------------------------------------------+-----------------|
|AF Management Reserve                                 |           $2    |
|------------------------------------------------------+-----------------|
|Gap with AF Management Reserve                        |         $13.1   |
+------------------------------------------------------------------------+

   AR, Tab 9, Briefing to the SSAC, at 13.
    
As set forth above, following the evaluation of proposals, the SSA
determined that Kearny's proposal represented the best value to the Air
Force because of its lower overall cost among technically equal
proposals.  In his source selection decision, the SSA stated, *For the
Cost factor, I evaluated the realism and reasonableness of the proposed
amounts and established a probable cost for each offeror.*  AR, Tab 12,
Source Selection Decision, at 1.  The SSA acknowledges that he adopted the
SSET's evaluation of Kearny's cost proposal and did not conduct his own
independent assessment.[16]  Tr. at 476, 493.
    
SES argues that the Air Force's evaluation of Kearny's cost proposal was
both unreasonable and an improper departure from the stated evaluation
criteria.  Specifically, SES argues that, contrary to the RFP's cost
evaluation criteria, the Air Force failed to conduct a proper evaluation
of the realism and reasonableness (and as represented in the source
selection decision, the probable cost) of Kearny's proposed cost.  SES
also argues that the Air Force improperly gave Kearny cost evaluation
credit for various *artificially inflated* gap closure initiatives and
simultaneously failed to assign a proposal risk rating of *high* to
Kearny's financial strategy.  According to SES, had the Air Force properly
adjusted Kearny's cost gap upwards, then SES would have been selected as
the best value offeror because of its lower cost gap.  We disagree.
    
Nature of the SAMS Contractual Transaction
    
We are unpersuaded by the assertion underlying protester's various
arguments--that because the Phase II selection decision did not itself
create a fixed-price contract, the agency was required to perform cost
realism and reasonableness analyses here.  Protester's Comments, Jan. 23,
2003, at 1, 4-7.  As previously detailed, the SAMS project transaction was
to result in a fixed-price contract between the Air Force and the selected
offeror, and it was the Phase II source selection decision that would
determine the amount of the government's financial liability. 
Notwithstanding the *cost* and *cost gap* terminology, the agency's
analysis of the amounts proposed by the offerors was, appropriately, in
the nature of a price analysis, which, as defined by the RFP, was tailored
to the unique nature of the SAMS project.
    
Again, when contemplating the award of a fixed-price contract, an agency
need only analyze an offeror's price for reasonableness, see CSE Constr.,
supra, which the solicitation here defined as *fair under current market
conditions.*  Phase II RFP, app. D, SAMS Source Selection Process, at 14. 
As applied to the SAMS transaction, the purpose of a price reasonableness
review was to determine whether the offeror's *total project costs* were
higher than warranted, and conversely, whether the offeror's planned
funding sources were lower than warranted.  Similarly, while the agency
made a discretionary decision to conduct a realism analysis in its
solicitation for the award of a fixed-price contract, see OMNIPLEX World
Servs. Corp., B-291105, Nov. 6, 2002, 2002 CPD P: 199 at 9, the Phase II
RFP stated that the agency's analysis here would focus on whether the
*cost estimates, financing terms, and financial projections [were]
compatible with [the] proposed scope of effort and operations reflect
reasonable economy and efficiency.*
    
We also find that the agency's *price* evaluation criteria, as defined by
the RFP, were consistent with the multi-stage source selection process for
the SAMS project transaction.  It is important to reiterate that the Phase
II evaluation of proposals would itself not result in a contract between
the selected offeror and the Air Force.  Instead, it was to be followed by
the Phase III due diligence period in which the selected offeror would
determine if the various contingencies within its proposal, when it was
but one of several potential developers for the project, were achievable
when it became the exclusive offeror selected by the Air Force. 
Therefore, the purpose of the agency's analysis of the amounts proposed by
the offerors, especially with regard to planned funding sources, was to
guard against the selection of an offeror whose unrealistic financial
proposal subsequently prevented the offeror from successfully concluding
the Phase III due diligence period.[17]  Tr. at 82.  For that reason, the
agency's analysis of the amounts proposed by both Kearny and SES in Phase
II was to determine if the individual elements comprising each offeror's
financial strategy were also reasonable and achievable.
    
Reasonableness of Agency's Evaluation
    
SES contends that the agency's analysis of Kearny's proposed amounts,
specifically, the $47.7 million HUD Section 108 loan and $2 million
Brownfields grant, was unreasonable in light of various artificially
inflated gap closure initiatives:  (1) the unrealistic assumption that the
City of El Segundo would agree to forgo all incremental tax revenue; (2)
the total proposed HUD Section 108 loan amount which both the overall
number of jobs and the actual number of new jobs planned by Kearny did not
support; and (3) the proposed Brownfields grant as a gap-closing measure
when it would be used for the repayment of the HUD loan.  Based on our
review of the record, including testimony by the agency evaluators at the
hearing on the protests conducted by our Office,[18] we find the agency's
analysis of Kearny's proposal unobjectionable.
    
Created by the Housing and Community Development Act of 1974 and
administered by HUD, the Community Development Block Grants (CDBG) program
is a major source of federal financial aid to cities and urban counties. 
42 U.S.C. S: 5301(c) (2000).  The broad purpose of the CDBG program is to
improve the quality of urban life, particularly for people of modest
financial means, through better housing and enhanced economic
opportunity.  One specific aspect of the CDBG program is the HUD Section
108 loan guarantee program.  42 U.S.C. S: 5308(a); 24 C.F.R. S: 570.700 et
seq. (2002).  It allows local governments to transform a small portion of
their CDBG funds into federally guaranteed loans large enough to pursue
physical and economic revitalization projects that can renew entire
neighborhoods.  HUD Section 108 loans provide communities with a source of
financing for economic development, housing rehabilitation, public
facilities, and large-scale physical development projects.  See
http://www.hud.gov/offices/cpd/communitydevelopment/programs/108/index.cfm.
    
The size of a HUD Section 108 loan that an eligible applicant (e.g.,
cities and urban counties) may apply for and receive is dependent upon
numerous variables and qualifications.  Among the variables, the ones
relevant to this protest are (1) the amount of incremental taxes that
would be generated by Kearny's proposed development project and available
for repayment of the HUD Section 108 loan, and (2) the number of new jobs
that Kearny's development project would generate for low- and
moderate-income individuals.
    
As part of its tax increment financing plan (the $47.7 million HUD Section
108 loan), Kearny estimated that the amount of incremental tax revenue
that would be generated from the planned commercial and residential
development of the conveyed properties was a total of $4.3 million
annually.  AR, Tab 7, Kearny Final Proposal Revision, Vol. II, Cost and
Financial Strategy, at 6.  In determining this amount, Kearny analyzed the
sales projections per square foot of retailers who expressed interest in
opening stores on the conveyed property (e.g., Ikea, Fry's Electronics,
Kohl's Department Store), the sales taxes that would result therefrom, and
*expanded* these numbers into future values when the sales taxes would
actually occur.[19]  Kearny's proposal explained that a pledge of the
incremental property, sales, and utility taxes by Los Angeles County and
the cities of El Segundo and Hawthorne in support of a HUD Section 108
loan would generate net bond proceeds of $47.7 million.  Id. at 7. 
Kearny's proposal also stated that while it had previously taken into
consideration a deduction of $300,000 from incremental tax revenues by the
City of El Segundo for services, it deleted the City of El Segundo *hold
back* from its final proposal.  Id.
    
In evaluating Kearny's proposal as to cost and financial strategy factors,
the SSET realized that Kearny's tax increment financing plan included the
assumption that the City of El Segundo would forgo all incremental tax
revenues.  The SSET in fact noted, *The El Segundo City staff is not
comfortable with the city reimbursements dropping from $300K to 0. 
Although this may be feasible, El Segundo needs to make this decision, and
$3-4 [million] of the $47.7 [million HUD Section 108 loan] may be in
jeopardy.*  Supplemental AR, Tab 4, Evaluation Assessment 240, Sept. 4,
2002.  At the same time, the person who served as both the SSET chief
evaluator and SAMS project manager met with the mayor of the City of El
Segundo, who expressed his willingness to forgo all incremental tax
revenues in order to enhance the viability of the SAMS project.[20]  Tr.
at 122-23.  The mayor also determined that no hold back of incremental tax
revenue was necessary because the proposed development would not
necessitate additional municipal services (e.g., fire protection, police
protection).  Tr. at 122, 127.  As the El Segundo mayor, *being the one
who runs the city,* had essentially overruled the city staff here, the
SSET determined that Kearny's assumption that all incremental tax revenue
was available to support repayment of the HUD Section 108 loan was a
reasonable one.  Tr. at 125, 127-28.  We see no reason to conclude that
the agency's determination in this regard was unreasonable.[21]
Also as part of its tax increment financing plan, Kearny's proposal set
forth how it would meet the job creation and benefit tests applicable to
HUD Section 108 loans.  See 24 C.F.R. S: 570.208(a)(4), S: 570.209(b)(2),
(3).  Kearny estimated that a total of 1,322 new jobs primarily benefiting
low- and moderate-income persons would be created as part of its
development plan.  Supplemental AR, Tab 21, Briggs Letter to Kearny, Aug.
15, 2002, at 1.  In making this determination Kearny examined national
standards for job creation for retail businesses such as the ones that had
expressed interest in opening stores on the conveyed property.  Kearny's
proposal also explained how its planned HUD Section 108 loan met the
applicable benefit test.  Specifically, based upon an overall loan amount
of $47.7 million and the estimated 1,322 new jobs, the loan amount per new
job created averaged $36,082.  This amount met the regulation's
*individual activity standards* of not more than $50,000 per new job
created, and *virtually met* the regulation's *aggregate standards* for
all Los Angeles County CDBG projects of not more than $35,000 per job
created.  Id. at 2.
    
The SSET also examined this aspect of Kearny's proposal in assessing the
offeror's proposed tax increment financing amount.  In its evaluation
worksheets the SSET noted:
    
HUD will grant $35,000[] for every 1 job generated in the project.  The
Offeror projects 1322 jobs will be created which will only generate $46.3
[million].  So already their HUD projection [of $47.7 million] is too
high, but it could be even lower if their estimate of the number of jobs
created is too high.  After talking with HUD officials, they are concerned
that such companies as Fry's and Ikea may just be transferring jobs when
closing down their stores at their current location, instead of creating
new jobs.  A job transfer contributes little if any money available for
the grant.
    
Supplemental AR, Tab 4, Evaluation Assessment 240, Sept. 4, 2002.  The
agency evaluators in fact met with and talked to both HUD and Los Angeles
County officials on multiple occasions to aid in the agency's evaluation
of Kearny's proposed HUD Section 108 loan.  Tr. at 273, 428.  While the
Air Force had consultants with some relevant experience here, the SSET
relied heavily on the opinions of HUD officials involved in the actual
review and approval of Section 108 loans as proposed by Kearny.  Id. at
282-83.  Notwithstanding their concerns regarding new (versus transferred)
jobs, HUD officials informed the SSET of their belief that both Kearny's
estimated job creation and the resulting $47.7 million HUD Section 108
loan amount appeared reasonable.[22]  Id. at 274, 277.  The SSET then
determined that while there was risk associated with Kearny's tax
increment financing strategy (thereby resulting in a *moderate* risk
rating as to Kearny's financial strategy), there were also many different
combinations that would result in the overall amount proposed, and found
Kearny's proposal in this regard reasonable.  Id. at 274-75, 280-81.  Once
again, while SES may disagree with the agency's judgment regarding this
aspect of Kearny's proposal, we see no basis to question it.  The agency's
decision was based on a full consideration of information relevant to the
assumptions underlying Kearny's proposal, and, in an appropriate exercise
of its judgment, the agency concluded that this aspect of the proposal was
reasonable.[23]
    
In addition to the HUD Section 108 loan, Kearny's financial strategy also
included a $2 million Brownfields grant.  A *brownfield site* refers to
*real property, the expansion, redevelopment, or reuse of which may be
complicated by the presence or potential presence of a hazardous
substance, pollutant, or contaminant.*  42 U.S.C.A. S: 9601(39)(A)
(2002).  Administered by HUD, Brownfields Economic Redevelopment
Initiative grants are federal funds whose general purpose is to assist
states and local communities with the economic redevelopment and reuse of
brownfield sites.  Brownfields grants can be used in a number of ways: 
they can be used to pay various predevelopments costs (e.g., demolition
expenses) of a HUD Section 108-funded project, as a loan loss reserve in
lieu of CDBG funds, to reduce the loan's interest rate, or to establish a
debt service reserve.  AR, Tab 7, Kearny Final Proposal Revision, Vol. II,
Cost and Financial Strategy, exh. S, Briggs Letter to Kearny;
http://www.hud.gov/offices/cpd/communitydevelopment/programs/108/index.cfm.
    
As part of the initial Phase II proposal, Kearny's cost and financial
strategy stated, generally, that up to $2 million of Brownfields grant
funds were available and could be used by local municipalities to provide
a *cushion* for the interest payments on HUD Section 108 loans.  AR, Tab
7, Kearny Initial Proposal, Vol. II, Cost and Financial Strategy, at 6. 
The imprecise nature of Kearny's proposal here was a subject of the
discussions that the agency held with the offeror.  Tr. at 311-13, 321. 
The SSET was also aware that how the $2 million Brownfields grant would be
utilized would affect the offeror's cost gap.  Specifically, if the grant
was used as a reserve for the project's HUD Section 108 loan, then it
should not be used in computing the offeror's cost.  By contrast, if the
grant was used by the offeror to pay predevelopment costs, then it could
be counted in computing the offeror's cost gap.
    
While Kearny's final proposal revision did not alter its original
proposal's narrative language, the exhibits attached to the offeror's cost
and financial strategy indicated that the $2 million Brownfields grant
would not be used for the repayment of the HUD Section 108 loans but
instead would be used by Kearny to pay predevelopment expenses.  AR, Tab
7, Kearny Final Proposal Revision, Vol. II, Cost and Financial Strategy,
at 7, exh. T, Kearny Detailed Sources and Uses of Funds, exh. V, Kearny
Statement of Operating Sources and Uses of Funds.  Additionally, during
discussions the offeror informed the agency of its intent to use the
Brownfields grant for the demolition of existing structures on the
conveyed LAAFB parcels.  Tr. at 314.  Based both on Kearny's
representations during discussions and the exhibits included with the
offeror's final proposal revision, the SSET determined that Kearny's
financial strategy planned on the use of the Brownfields grant for
predevelopment costs.  Id. at 313-14, 321.
    
Based on its consideration of Kearny's proposal as a whole, we think it
was reasonable for the agency to interpret the proposal as offering to use
the Brownfields grant for predevelopment costs.  Consequently, we find the
agency's subsequent determination to count Kearny's $2 million proposed
Brownfields grant in the computation of the offeror's cost gap was also
reasonable and consistent with the RFP's evaluation criteria.
    
In sum, having determined that the agency's evaluation of Kearny's
proposal as to the cost factor (as well as financial strategy risk) was
reasonable and consistent with the stated evaluation criteria here, we
find no basis to disturb the resulting Air Force source selection decision
for Phase II of the SAMS project.
    
The protest is denied.
    
Anthony H. Gamboa
General Counsel
    

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

   [1] SES was alternatively known and referred to during the selection
process as *Mar Ventures.*  Likewise, LA Air Force Base SMC, LLC, a joint
venture comprised of Kearny Real Estate Company, Catellus Development
Corp., and Morgan Stanley Real Estate Fund, was alternatively known and
referred to during the selection process as *Team SMC,* or *Kearny.*
[2] The RFP specified the parcels of real property that the Air Force
planned to convey:  approximately 42 acres in El Segundo, California
(known as Area A); approximately 13 acres in Hawthorne, California (known
as the Lawndale Annex); and approximately 3.7 acres in Sun Valley,
California (known as the Armed Forced Radio and Television Service
Broadcast Center).  In return, the successful offeror would construct the
new SAMS facilities on the remaining portion of LAAFB--approximately 52
acres in El Segundo, California (known as Area B).  Phase I RFP at 4; see
also Pub. L. No. 106-398, S: 2861(a).
[3] The Phase I selection decision was based on two evaluation factors, in
descending order of importance:  past performance and preliminary project
concept.  Phase I RFP at 14.
[4] If, for whatever reason, the Air Force and the selected offeror were
unable to complete Phase III negotiations within 90 days, then the agency
could either reschedule the milestones or select a new offeror.  Id.
[5] A third offeror selected by the agency for participation in Phase II,
Lennar/Barker Pacific LLC, withdrew from the competition prior to the
Phase II selection decision.
[6] The cost factor did not evaluate the total cost of the SAMS project,
but rather, the additional cost to the Air Force (i.e., the possible need
to expend appropriated funds) over and above the value of the conveyed
land in order to acquire the required facility.  Agency Report (AR), Nov.
27, 2002, at 5; Contracting Officer's Statement at 1.  Accordingly, the
parties also refer to cost as *cost gap,* or *gap.*
[7] While the proposals of both SES and Kearny use the expression
*guaranteed maximum price (G-Max),* a construction industry term that
refers to the maximum (or ceiling) cost for performing a specified
project, see Agency's Post-Hearing Comments at 5, the parties agree that
the cost gap set forth in an offeror's Phase II proposal would become the
basis of a fixed-price contract between the selected offeror and agency as
a result of Phase III administrative negotiations.  Tr. at 85-86;
Protester's Comments, Jan. 23, 2003, at 16; Intervenor's Post-Hearing
Comments,
Jan. 17, 2003, at 2, 5.  The possibility that the agency would benefit
from any actual contract performance cost savings would thus arise only if
such an arrangement were set out in an offeror's proposal, and was not
required by the terms of the solicitation.
[8] Although not expressed in the Act, other options available to the Air
Force to overcome a cost gap were to make total payment using appropriated
funds to the selected offeror upon the completion of construction, or to
reduce the size of the SAMS facility to be built.
[9] On December 2, subsequent to both the Air Force's selection of Kearny
and SES's filing of its protest, the president signed into law the Bob
Stump National Defense Authorization Act for Fiscal Year 2003, Pub. L. No.
107-314, 116 Stat. 2458 (2002), section 2841 of which revised the Act so
as to permit leasebacks for up to 30 years for the SAMS project.
[10] The overall cost gaps for each proposal were rounded down to the
nearest whole number as part of the SSET's briefing.  Tr. at 191-94. 
Specifically, the cost gaps, which included a $2 million management
reserve, were $13.1 million for Kearny's proposal, $13.3 million for SES's
30-year lease proposal, and $29.9 million for SES's 10-year lease
proposal.
[11] The SSAC chairman believed that SES's superior design aesthetics for
the SAMS facility, particularly a stand-alone conference center, made SES
the best value among offerors that were otherwise equal as to cost and
noncost factors.
Tr. at 60-62, 244.
[12] SES planned to exchange 2 acres of conveyed LAAFB land, improved by
SES with a single level 250-stall parking deck, to the FAA in return for 4
acres of FAA land, for a net value increase of $1.6 million.  Supplemental
AR, Tab 3, SES Final Proposal Revision, Cost and Financial Strategy, at
II-7.
[13] Likewise, a realism analysis is not ordinarily part of an agency's
price evaluation because of the allocation of risk associated with a
fixed-price contract.  AST Envtl., Inc., B-291567, Dec. 31, 2002, 2002 CPD
P: 225 at 2.  To the extent an agency elects to perform a price realism
analysis in the competition for a fixed-price contract, its purpose is not
to evaluate an offeror's price but to assess an offeror's risk or to
measure an offeror's understanding of the solicitation's requirements. 
Id.; ENMAX Corp., B-281965, May 12, 1999, 99-1 CPD P: 102 at 9.
[14] If the contingencies specified in its proposal could not be achieved,
then the offeror had the right to withdraw from the arrangement.  Tr. at
78.
[15] Tax increment financing refers to use of incremental, or additional,
tax revenue (e.g., sales taxes, property taxes) that a development project
would generate as the method by which to repay the loans used to finance
the project's initial development.  HUD Section 108 loans and Brownfields
grants are explained later in this decision.
[16] The Air Force also acknowledges that, contrary to the language of the
source selection decision, no probable cost analysis was conducted as part
of the evaluation of proposals.  Tr. at 253-54.  We find that there was
neither a requirement nor a need for the agency to perform a probable cost
analysis here; as discussed below, the SAMS project transaction was
fixed-price in nature and the solicitation did not call for a probable
cost analysis.
[17] The risk to the Air Force if the selected offeror's financial plan
proved unworkable was not that it would have to accept a larger cost gap;
the risk to the agency was the loss of time associated with having to then
conduct Phase III negotiations with a second offeror.  Tr. at 81-82,
129-30.
[18] Post-protest explanations that provide a detailed rationale for
contemporaneous conclusions, as is the case here, simply fill in
previously unrecorded details, and will generally be considered in our
review of the rationality of evaluation and selection decisions, so long
as those explanations are credible and consistent with the contemporaneous
record.  Jason Assocs. Corp., B-278689 et al., Mar. 2, 1998, 98-1 CPD P:
67 at 6.
[19] SES does not challenge Kearny's gross incremental tax revenue
estimates.
[20] The City of El Segundo mayor also made similar comments publicly; to
the Homeowners Association of El Segundo, he stated that *we need to do
what we have to do to make this project viable and save our Air Force
Base, and if that means giving up the revenue, I'm willing to give up all
the revenues.*  Tr. at 126.
[21] SES also protests the agency's unequal treatment of offerors with
respect to the evaluation of the amount of incremental tax revenue that
the City of El Segundo would withhold or forgo: while Kearny's final
proposal assumed that the city would forgo all incremental taxes, SES's
proposal estimated that the city would withhold $330,000 of incremental
taxes annually.  We find SES's protest on this ground untimely because SES
knew or should have known of this basis for protest when it received the
initial agency report on November 27, and failed to protest this issue
within 10 days thereof.  4 C.F.R. S: 21.2(a)(2) (2002).  In any event, the
fact that competing offerors made different assumptions about an aspect
common to their proposals does not by itself constitute unequal treatment
by the contracting agency.
[22] HUD officials also mentioned that the SAMS project would probably
qualify for Section 108 loans based on job retention of Air Force and
aerospace jobs within the South Los Angeles Bay area.  Tr. at 274, 281.
[23] While SES also protests that the Air Force failed to evaluate an
alternative tax increment financing plan (consisting of revenue bonds)
proposed by Kearny, we need not address this challenge in light of our
conclusion that the agency's evaluation of Kearny's HUD Section 108 loan
financing plan was reasonable.