TITLE: B-295345, Electronic Hardware Corporation, January 28, 2005
BNUMBER: B-295345
DATE: January 28, 2005
***********************************************************
B-295345, Electronic Hardware Corporation, January 28, 2005

   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: Electronic Hardware Corporation

   File: B-295345

   Date: January 28, 2005

   Devon E. Hewitt, Esq., Orest J. Jowyk, Esq., Daniel S. Herzfeld, Esq., and
   Jack Y. Chu, Esq., Shaw Pittman, for the protester.

   Marlene M. Surrena, Esq., and Marc L. Peterson, Esq., Defense Logistics
   Agency, for the agency.

   John L. Formica, Esq., and Guy R. Pietrovito, Esq., Office of the General
   Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   1. Agency reasonably evaluated proposals for price realism by comparing
   the line item prices proposed by each offeror to the other offerors'
   proposed prices and the agency's estimates, and requesting verification
   for each of the line item prices that appeared unrealistically low.

   2. Agency reasonably evaluated the protester's and awardee's proposals
   under the past performance factor as "good" where the agency considered
   the protester's more extensive history of relevant past performance, the
   "good" but not "outstanding" record of the protester's performance, and
   the positive comments made by the awardee's references regarding its past
   performance.

   DECISION

   Electronic Hardware Corporation (EHC) protests the award of a contract to
   Grauch Enterprises under request for proposals (RFP) No. SPO500-04-R-0062,
   issued by the Defense Logistics Agency (DLA), for certain Federal Stock
   Class (FSC) 5355 items. The protester objects to the agency's evaluation
   of its and Grauch's proposals and the selection of Grauch's proposal for
   award.

   We deny the protest.

   The RFP, issued as a total set-aside for small businesses, provided for
   the award of one or more indefinite-quantity fixed-price contracts for
   certain FSC 5355 items. RFP at 3, 14, 20-21. The solicitation requested
   unit prices and delivery terms for two lots of contract line item numbers
   (CLIN). Lot I, to which "source inspection applie[d]," consisted of 355
   CLINs of knobs, knob assemblies, knob dials, shafts and shaft assemblies,
   and Lot II, to which "destination inspection applie[d]," consisted of
   194 CLINs for knobs, knob assemblies, and dials, each of which was
   designated by a national stock number (NSN).[1] RFP at 3, 38-50. The RFP
   identified the estimated annual demand for each CLIN.

   Offerors were informed that awards would be made on an "all or none basis"
   by lot to the offeror whose proposal was determined to represent the best
   value to the government for that particular lot, considering past
   performance and price. RFP at 3, 65. Offerors were also informed that the
   past performance factor was significantly more important than price, and
   was comprised of the following three subfactors listed in descending order
   of importance: delivery, business relations/customer satisfaction, and
   quality. RFP at 65. The RFP added that the agency would evaluate proposals
   "to determine cost/price realism," and that "[c]ost/price realism means
   that the costs in the offeror's proposal are realistic for the work to be
   performed, reflect a clear understanding on the part of the offeror of the
   solicitation requirements, and are consistent with the various elements of
   the offeror's technical proposal." RFP at 66. The RFP did not, however,
   require the submission of any cost data.

   The offerors' proposals were required to include a past performance volume
   and a price volume. With regard to the past performance volume, the RFP
   explained that "[t]he offeror's performance record will be assessed to
   determine if it demonstrates a level of performance that provides a
   reasonable assurance that the solicitation requirements will be met." RFP
   at 67. The RFP requested that offerors provide "pertinent information,"
   such as that pertaining to the offeror's "on-time delivery record," for
   evaluation under the "delivery" subfactor to the past performance factor.
   Id. Offerors were also instructed that they were to "include a complete
   list of contracts that are past due, or were extended for the convenience
   of the Offeror." RFP at 61. Offerors were further instructed to provide
   past performance information "indicating the offeror's commitment to
   favorable business relations/customer satisfaction" for consideration
   under the business relations/customer satisfaction evaluation subfactor,
   and "applicable quality information" for consideration under the quality
   subfactor. RFP at 61-62.

   The agency received proposals from five offerors, including EHC and
   Grauch, by the RFP's closing date. Agency Report (AR), Tab 12, Competitive
   Range Determination, at 4. EHC's and Grauch's proposals received ratings
   of "good" under each of the subfactors comprising the past performance
   factor, and the past performance factor overall.[2] EHC and Grauch
   proposed total prices for Lot I (355 CLINs) of $2,768,716, and $1,604,456,
   respectively, and for Lot II (194 CLINs) of $1,070,876, and $836,895,
   respectively. AR at 8; Tab 17, Source Selection Decision, at 2.

   Discussions were conducted, during which the agency identified for EHC and
   Grauch certain CLINs where the "[p]rices offered appear too high," and
   "request[ed] price reductions." AR, Tab 14, Negotiation Letters to EHC and
   Grauch (Sept. 1, 2004). The agency also requested with respect to other
   CLINs that EHC and Grauch "[p]lease verify that these prices are correct
   for price realism." Id. Both EHC and Grauch submitted revisions to their
   proposals.

   EHC's and Grauch's revised proposals were evaluated by the agency as
   "good" under each of the subfactors comprising the past performance
   factor, and "good" overall under the past performance factor. EHC's
   revised proposal offered prices of $2,315,940 for Lot I and $985,350 for
   Lot II, and Grauch's proposal offered prices of $1,274,910 for Lot I and
   $606,508 for Lot II. AR, Tab 17, Source Selection Decision, at 2. Grauch
   received award of Lots I and II based upon the agency's determination that
   Grauch's lower-priced proposal represented the best value to the
   government with regard to these lots.[3] After requesting and receiving a
   debriefing, EHC filed this protest.

   EHC protests that the agency failed to conduct an adequate price realism
   analysis. Although agencies are required to perform some sort of price or
   cost analysis on negotiated contracts to ensure that the agreed-price is
   fair and reasonable, where, as here, the award of a fixed-price contract
   is contemplated, a proposal's price realism is not ordinarily considered,
   since a fixed-price contract places the risk and responsibility for
   contract costs and resulting profit or loss on the contractor. Federal
   Acquisition Regulation (FAR) sect. 15.404-1; Citywide Managing Servs. of
   Port Washington, Inc., B-281287.12, B-281287.13, Nov. 15, 2000, 2001 CPD
   para. 6 at 4-5. However, an agency may, as did DLA here, provide for a
   price realism analysis in the solicitation for such purposes as measuring
   an offeror's understanding of the solicitation requirements, or to avoid
   the risk of poor performance from a contractor who is forced to provide
   goods or services at little or no profit. The depth of an agency's price
   realism analysis is a matter within the sound exercise of the agency's
   discretion. Citywide Managing Servs. of Port Washington, Inc., supra.

   The agency performed its price analysis by first establishing a "minimum
   objective" price, a "target objective" price, and a "maximum objective"
   price, for each of the 355 Lot I CLINs and 194 Lot II CLINs. AR, Tab 13,
   Pre-Negotiation Briefing Memorandum, at 5-6, attach. A. The "minimum
   objective" price equated to the determined "Fair Market Price less 5 % to
   allow for negotiation flexibility." Id. at 5. The agency's "target
   objective" prices were "based on the previous procurement prices" adjusted
   by a set percentage for inflation and a "learning curve adjustment for
   quantity," and the agency's "maximum objective" prices equated to the
   determined fair market price "with 5% added to allow for unknown market
   conditions." Id.

   The agency then identified those CLINs in the offerors' proposals where
   the total prices proposed (unit price multiplied by the estimated
   quantity) were at least $7,000 less than the agency's minimum objective
   prices, 50 percent or more below the agency's maximum objective prices,
   and/or "out of line" with the other offerors' proposed prices. AR, Tab 13,
   Pre-Negotiation Briefing Memorandum, at 5. The agency provided each
   offeror with a pricing matrix identifying those CLINs where the prices
   proposed met the above criteria, and, as mentioned previously, requested
   that the offeror "verify that these prices are correct for price realism."
   AR, Tab 14, Negotiation Letters to EHC and Grauch (Sept. 1, 2004). The
   agency received proposal revisions from the offerors, and with regard to
   Grauch, "was satisfied with the price realism of [its] proposal[]." AR at
   13.

   EHC challenges the depth of DLA's price analysis, arguing that "there is
   no discussion in any of [the agency's] final evaluation documents
   regarding the cost realism of Grauch's offer." Protester's Comments at 12.
   The protester concludes that the agency "did nothing to investigate
   Grauch's significantly lower prices or to confirm that Grauch could
   deliver the requested items at these prices," and therefore "failed to
   conduct a proper price realism analysis." Protester's Supplemental
   Comments at 10. The protester notes that Grauch's proposed prices after
   negotiations were "still 32% below [the agency's] Minimum Objective for
   Lot I and 35% below [the agency's] Minimum Objective for Lot II."[4] Id.

   We find from our review of the contemporaneous record that the agency had
   concerns with the low prices proposed by the offerors for certain CLINs in
   Lots I and II, and that it handled these concerns in a reasonable manner.
   That is, the agency's price negotiation memorandum shows that the agency
   was aware and accurately calculated the number of CLINs on which Grauch's
   and EHC's proposed prices fell within the agency's criteria for requiring
   verification for price realism purposes, that the agency brought these
   CLINs to the offerors' attention during negotiations, and was satisfied
   with the responses it received. There is no requirement that the agency
   conduct a "cost realism" analysis in evaluating proposals for a
   fixed-price contract as asserted by the protester, nor is an agency
   required to "investigate" in the context of a price realism analysis
   whether Grauch can deliver the items for the prices proposed as required
   by the resultant contract.[5] See Citywide Managing Servs. of Port
   Washington, Inc., supra, at 6.

   EHC also protests the agency's evaluation of the firms' past performance,
   raising numerous specific complaints regarding the evaluation of its and
   Grauch's proposals, and arguing that at a minimum, its proposal should
   have been evaluated more favorably than Grauch's.

   In reviewing an agency's evaluation of past performance, we will not
   reevaluate proposals, but instead examine an agency's evaluation to ensure
   that it was reasonable and consistent with the solicitation and applicable
   statutes and regulations. Servizi Aeroportuali, Srl, B-290863, Oct. 12,
   2002, 2002 CPD para. 208 at 6.

   With regard to the delivery subfactor to the past performance factor, the
   protester, while not challenging the evaluation of its proposal as "good"
   under this subfactor, complains that Grauch's proposal (which was also
   rated as "good" under the delivery subfactor) should have received a less
   favorable rating. In this regard, the protester points out that EHC's
   "good" rating under this subfactor was based in large part upon EHC's
   extensive past performance history as a supplier of FSC 5355 items.
   Specifically, EHC notes that the evaluators commented that as "prime
   vendor" for the 5355 class items "for the past 5 years" EHC had "supplied
   a substantial number of [the] same items, as those solicited [here], on
   time on almost all occasions." Protester's Comments at 6; AR, Tab 10,
   Evaluation Report, at 2. The protester states that Grauch's proposal's
   "good" rating under this subfactor was based on comments received from
   three of Grauch's commercial customers, and upon the fact that Grauch had
   performed as a subcontractor under EHC's Prime Vendor contract. The
   protester argues that the references contacted by the agency regarding
   Grauch's past performance did not identify the type and volume of items
   supplied by Grauch, and that the record of Grauch's performance as a
   subcontractor to EHC reflects certain unfavorable performance, which was
   reported on a worksheet of the one of the agency evaluators. Protester's
   Comments at 8; AR, Tab 10, Delivery Subfactor Evaluator Worksheet (Aug.
   11, 2004). The protester contends that Grauch's "past performance
   credentials with regard to delivery are paltry" compared to EHC's, given
   that, according to EHC, it "had completed over 135,000 delivery orders
   under the [Prime Vendor] contract." Protester's Comments at 6, 7. The
   protester notes that the RFP provided that past performance information
   regarding previous contracts with the agency for the same or similar items
   would be given "priority" during the evaluation over information regarding
   commercial contracts. Id. at 6; RFP at 68.

   Although the record reflects that, as argued by the protester and
   recognized by the agency, EHC has more directly relevant past performance
   as the result of its performance on the Prime Vendor contract, we do not
   find the agency's rating of both EHC's and Grauch's proposals as "good"
   under the delivery subfactor to be unreasonable. With regard to the
   evaluation of Grauch's proposal under the delivery subfactor to the past
   performance factor, the commercial references contacted by the agency
   characterized Grauch's performance as generally "excellent" or "great,"
   with each reference adding that it had not had any problems with Grauch as
   a vendor and would do business with Grauch again. AR, Tab 10, Evaluation
   Reports, attach. In this regard, one of the references specifically
   commented that Grauch's "delivery is on time every month," with another of
   the references noting that "[d]elivery was great, they delivered . . .
   right on time when they promised." Id. Although we agree with the
   protester (and the agency) that, according to the record, Grauch does not
   have as extensive a performance history as does EHC, we cannot find the
   agency's evaluation of Grauch's more limited performance history under the
   delivery subfactor as "good" to be unreasonable, given, for example, the
   positive remarks made by Grauch's references regarding Grauch's record of
   deliveries.

   Although the protester does not specifically challenge the "good" rating
   it received under the delivery subfactor, we note that EHC's performance
   record reflects instances of unfavorable performance as found by the
   agency and conceded by the protester. For example, the agency reports that
   despite the RFP's requirement that proposals "include a complete list of
   contracts that are past due," and the protester's representation in its
   proposal that it "is currently past due on twenty 20 NSNs," the agency's
   records reflect that EHC is past due on deliveries regarding "78 distinct
   NSNs, with still over 700 open orders Past Due."[6] RFP at 61; AR at 9;
   Tab 8, EHC Proposal, at A-4; Tab 26, EHC Delinquent Delivery Orders. While
   noting that this "is still not a significant number when considered with
   the thousands of NSNs managed under the prime vendor contract," the
   evaluators, in our view, nevertheless reasonably considered EHC's
   delinquent deliveries as a "weakness," and evaluated EHC's proposal as
   "good" under the delivery subfactor.

   EHC also protests that its proposal should have been rated as
   "outstanding" under the business relations/customer satisfaction and
   quality subfactors to the past performance factor. In support of this
   position with respect to the business relations/customer satisfaction
   subfactor, the protester points out that it received DLA's "Innovative
   Business Performer of the year award" in 2000, and that EHC has provided
   "the same class of items set forth in the Solicitation . . . to the
   federal government for over 30 years." Protest at 8; Protester's Comments
   at 9. With regard to the quality subfactor to the past performance factor,
   the protester points out that "its items supplied to the Government are
   rarely returned for defects," and that it "included its ISO 2001
   certification in the proposal." Protest at 8.

   The source selection plan provided that a proposal would receive an
   "outstanding" rating under the business relations/customer satisfaction
   subfactor if, for example, "[c]ustomer complaints are nonexistent or
   negligible," and receive a "good" rating should the agency find, among
   other things, that "[c]ustomer complaints are few and relatively minor."
   AR, Tab 9, Source Selection Plan, attach., Evaluation Standards. With
   regard to the quality subfactor, the source selection plan provided that
   an "outstanding" rating was warranted if, for example, "[c]ustomers report
   that the offeror provided a quality product in conformance with the
   requirements without deviation on all or almost all orders," whereas a
   "good" rating would be justified should [c]ustomers report that the
   offeror provided a quality product in conformance with the requirements .
   . . on most orders." Id.

   With this in mind, the agency notes that in evaluating EHC's proposal
   under the business relations/customer satisfaction and quality subfactors,
   it reviewed "a sizeable group of Customer Depot Complaint System (CDCS)
   Reports which included complaints ranging from packaging and labeling
   discrepancies to significant Product Quality Deficiency Reports." AR at
   10; Tab 27, CDCS Reports. The agency states that it found "a group of 33
   CDCS complaints considered significant." Id. The agency adds in this
   regard that EHC had provided the agency with the same items as being
   solicited here under "the previous Prime Vendor contract," and that EHC's
   "inability to meet [Uniform Material Movement Issue Priority System]
   requirements and to establish a positive and productive relationship with
   FSC 5355 manufacturing community, in terms of Sole Source and other part
   numbered items, precipitated the change from a Prime Vendor Contract to an
   Indefinite Quantity Contract for stock requirements." AR, Tab 13,
   Pre-Negotiation Briefing Memorandum, at 4. Given this record, we find
   reasonable the agency's evaluation of EHC's past performance under the
   business relations/customer satisfaction and quality subfactors as "good."
   That is, while we agree with the protester (as well as the agency) that
   the record reflects EHC's generally favorable performance history, the
   record also includes, as noted above, certain customer complaints and
   other incidents of unfavorable performance that were properly considered
   under these subfactors.

   The protester argues that, in any event, its proposal should have received
   higher evaluation ratings than did Grauch's under the business
   relations/customer satisfaction and quality subfactors to the past
   performance factor.

   The record shows that the commercial references contacted by the agency
   again commented positively regarding Grauch as a contractor, with one
   vendor noting, for example, that "[t]he quality of the item was great,"
   and that they had "never had any problems with Grauch" and "definitely
   would do business with Grauch . . . again." AR, Tab 10, Evaluation
   Reports, attach. Another vendor, in addition to commenting that they
   "would do business with Grauch again," stated that they "never had a
   problem with Grauch in any way," noting that "Grauch's quality is good"
   and that "[n]othing has ever been rejected." Id. The third commercial
   reference's comments echo similar sentiments, providing, for example, that
   "Grauch's quality is excellent," that they have "never had a problem with
   Grauch" or "had to send anything back," and that they too would "continue
   doing business" with Grauch. Id.

   Again, although EHC clearly disagrees, we cannot find the agency's
   evaluation of Grauch's proposal as "good" under the business
   relations/customer satisfaction and quality subfactors to the past
   performance factor to be unreasonable. The conclusion drawn by the
   evaluators from the Grauch's record of past performance, that Grauch's
   "[c]ommercial customers are confident with [Grauch's] quality and
   reliability and are will[ing] to do business with [Grauch] again," is
   consistent with the record and supports the agency's adjectival rating of
   Grauch's proposal as "good" under these subfactors.[7]

   In sum, as the above examples and explanation indicate, while we agree
   with the protester (and agency) that EHC has a more extensive history of
   relevant past performance than Grauch, we cannot find the agency's
   evaluation of the offerors' proposals as "good" to be unreasonable, given
   that the agency recognized the disparate levels of past performance and
   adequately considered them while also considering the comments made by the
   Grauch past performance references contacted by the agency. Servizi
   Aeroportuali, Srl, supra, at 10. Consistent with this, we also find the
   agency's selection of Grauch's proposal for award to be reasonable, given
   that the Grauch's proposed price was significantly lower than EHC's, and
   both proposals received ratings of "good" under the past performance
   factor and its subfactors.

   The protest is denied.

   Anthony H. Gamboa

   General Counsel

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

   [1] The RFP also included 95 separate CLINs for dials, dial assemblies,
   pointers, pointer assemblies, and other miscellaneous items, each
   designated by an NSN, with award being made on an "all or none basis" by
   CLIN. The agency's awards for these 95 separate CLINs have not been
   challenged by EHC, and thus will not be discussed in this decision.

   [2] Proposals could be rated as either "outstanding," "good," "fair,"
   "poor," or "no record" under each of the subfactors to the past
   performance factor and under the past performance factor overall. AR, Tab
   9, Source Selection Plan, at 5-6.

   [3] According to the protester and agency, much of the reason for EHC's
   relatively high proposed unit prices is due to EHC's proposal of
   accelerated delivery of the items. As explained by the agency, EHC had
   previously provided FSC 5355 items to the agency under a Prime
   Vendor/Direct Vendor Delivery contract, where EHC "in many cases" shipped
   relatively small quantities of items in a relatively limited amount of
   time "to satisfy individual Government end user requisitions." Agency
   Supplemental Report at 3. Even though the solicitation here generally
   provided for a delivery period of 90 days to DLA stock depots, EHC
   apparently chose "[b]ased on its knowledge of [the agency's] needs for the
   FSC 5355 class of items," as well as its erroneous understanding that the
   delivery subfactor under the past performance factor related to the
   offerors's proposed future delivery schedule, to "propose[] relatively
   short delivery periods," which caused EHC's projected costs, and thus its
   price, to be higher. Protest at 10. In this regard, EHC was informed by
   the agency that "[i]t is in the best interests of the offer[or] to submit
   their best offer in relation to the terms of the solicitation" and that
   "future deliveries are not evaluated in [the] proposal." Protest at 10;
   AR, Tab 4, Notes of Agency Communication with EHC (May 5, 2004); Tab 22,
   Post-Award Debriefing of EHC, at 3.

   [4] The protester argues further that the agency, in defending the
   protest, misstates the number of CLINs for which the agency requested that
   Grauch verify its proposed prices for realism, and that the agency report
   incorrectly represents that the contracting officer addressed price
   realism during negotiations with Grauch, asserting that "[t]he notes taken
   during negotiations with both EHC and Grauch indicate that price realism
   was never discussed, verified or addressed." Protester's Supplemental
   Comments at 10.

   It does appear that the agency's statement--that Grauch was requested to
   verify 20 out of the 645 CLINs on which it offered for price realism--is
   incorrect. See AR at 13. From our review of the record, it appears that
   during negotiations the agency requested that Grauch and EHC verify their
   prices for realism on 100 and 24 CLINs, respectively. AR, Tab 16, Price
   Negotiation Memorandum, attach. However, this error in the agency report
   does not alter our view that, as explained below, the agency's
   contemporaneous price realism analysis was reasonable. We also note that
   in addition to conducting written negotiations with the offerors regarding
   price realism as discussed above, the agency's contemporaneous notes do
   indeed provide that price realism was addressed with Grauch orally,
   despite the protester's assertion to the contrary. AR, Tab 14, Agency
   Handwritten Notes of Negotiation with Grauch (Sept. 8, 2004).

   [5] To extent that EHC's is challenging the agency's responsibility
   determination, our Bid Protest Regulations generally preclude our review
   of a contracting officer's affirmative determination of an offeror's
   responsibility, absent certain exceptions not alleged here. See Bid
   Protest Regulations, 4 C.F.R. sect. 21.5(c) (2004); United Seguranca,
   Ltda., B-294388, Oct. 21, 2004, 2004 CPD para. 207 at 4.

   [6] The agency report includes a complete list of the NSNs for which the
   agency had determined that EHC was delinquent. AR, Tab 26, EHC Delinquent
   Delivery Orders. Although the protester "does not admit that this list is
   accurate," the protester has not provided any evidence to show that it is
   inaccurate. Protester's Supplemental Comments at 3. In any event, we note
   that the protester does not challenge the agency's evaluation of its
   proposal as "good" under the delivery subfactor to the past performance
   factor; rather, its protest is that Grauch's proposal should have received
   a rating less favorable than "good" under this same subfactor, given the
   protester's position that the offerors' records of past performance
   regarding delivery are not comparable.

   [7] The protester also argues that, in evaluating Grauch's proposal under
   the business relations/customer satisfaction and quality subfactors, the
   agency ignored unfavorable past performance information regarding Grauch's
   performance as a subcontractor to EHC under the Prime Vendor contract, and
   points out specifically with regard to the quality subfactor that it has
   "received ISO 9000 certification for its manufacturing processes," and
   Grauch, while pursuing such certification, has not. Protester's Comments
   at 10; AR, Grauch's Proposal, at 5. Contrary to the protester's assertion,
   the record reflects that the agency did not ignore the unfavorable past
   performance information regarding Grauch's performance as a subcontractor
   to EHC, but rather, reasonably considered this information in evaluating
   Grauch's proposal under the "delivery" subfactor as discussed previously.
   Additionally, although the protester does not explain why the fact that
   its manufacturing process have received ISO 9000 certification and
   Grauch's currently has not could properly be considered under the "past
   performance" factor, we note that the agency considered that EHC was
   currently ISO 9000 certified and Grauch was not during its evaluation of
   the offerors' proposals.