TITLE:  B.H. Aircraft Company, Inc., B-295399.2, July 25, 2005
BNUMBER:  B-295399.2
DATE:  July 25, 2005
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   Decision

   Matter of: B.H. Aircraft Company, Inc.

   File: B-295399.2

   Date: July 25, 2005

   Daniel V. Kearns for the protester.

   Michael P. Chiffolo, Esq., and Benjamin G. Perkins. Esq., Defense
Logistics Agency; and John W. Klein, Esq,. and Laura Mann Eyester, Esq.,
Small Business Administration, for the agencies.

   Richard P. Rector, Esq., and Eliza P. Nagle, Esq., DLA Piper Rudnick Gray
Cary US LLP, for General Electric Company, an intervenor.

   Paul N. Wengert, Esq., and Michael R. Golden, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Protest that agency's bundling of requirements for spare parts for
aircraft engine violated the Small Business Act and Competition in
Contracting Act of 1984 is denied where agency has established measurably
substantial benefit to government from consolidating spare part purchases
under a single contract, and established that the single contract
otherwise is necessary to meet agency needs. 

   DECISION

   B.H. Aircraft Company, Inc. (BHA), a small business, protests the
consolidation of consumable parts for the F404 engine into a single
performance-based logistics (PBL) supply chain management contract
covering more than two thousand national stock numbers (NSN), under
request for proposals (RFP) No. SP0412-05-R-0181, issued by the Defense
Logistics Agency (DLA).  BHA holds a current contract to supply parts that
will be covered by the PBL, and seeks to compete for additional F404
parts.  BHA contends that the bundling involved in the PBL contract
violates the Competition in Contracting Act of 1984 (CICA) and the Small
Business Act.

   We deny the protest.

   As described by DLA, the procurement will allow the agency to "reunite the
currently fragmented F404 consumable parts supply chain and improve
support to the warfighter."  DLA Post-Hearing Comments at 1.  The
anticipated contract with General Electric is valued at $300 million. [1]
     There is no dispute that this procurement concerns bundling of
requirements that will affect many small businesses, including the
protester.[2]  Specifically, the protester holds an existing contract for
consumable parts that will be consolidated under the PBL contract. 
Protest at 5. 

   Federal Acquisition Regulation (FAR) Section 7.107 states that "[b]undling
may provide substantial benefits to the Government.  However, because of
the potential impact on small business participation, . . . the agency
must conduct market research to determine whether bundling is necessary
and justified."  Under the FAR, market research may indicate that bundling
is necessary and justified if an agency or the Government would derive
measurably substantial benefits.  As relevant here, the FAR provides that
the measurably substantial benefits must be equivalent to 5 percent of the
estimated contract value or $7.5 million, whichever is greater.  FAR
Section 7.107(b)(2).  In this case, the threshold would be $15 million
based on 5 percent of the $300 million estimated value of the contract
with General Electric.

   The FAR further provides that when the proposed acquisition strategy
involves substantial bundling, the acquisition strategy must:

   (1) Identify the specific benefits anticipated to be derived from
bundling;

   (2) Include an assessment of the specific impediments to participation by
small business concerns as contractors that result from bundling;

   (3) Specify actions designed to maximize small business participation as
contractors, including provisions that encourage small business teaming;

   (4) Specify actions designed to maximize small business participation as
subcontractors (including suppliers) at any tier under the contract, or
order, that may be awarded to meet the requirements;

   (5) Include a specific determination that the anticipated benefits of the
proposed bundled contract or order justify its use; and

   (6) Identify alternative strategies that would reduce or minimize the
scope of the bundling, and the rationale for not choosing those
alternatives.  

   FAR Section 7.107(e)

   As a part of acquisition planning specified in FAR Section 7.107, DLA
prepared a "rough order of magnitude"[3] business case analysis (ROM BCA),
comparing the status quo to a PBL contract.  Under the PBL contract, the
contractor would draw down DLA's parts inventory to a target of a 120-day
parts reserve by providing required logistical support, sourcing, and
supply.  The ROM BCA anticipated that parts demand would remain constant,
the contractor's prices would be comparable to historical pricing obtained
by DLA, the contractor would charge 3 percent for its services, that
obsolescence would run at 3.7 percent, and that the cost of money would be
3.7 percent, for a total inventory carrying cost of 7.4 percent annually. 
AR, Tab 6, ROM BCA, at 9-10.  Based on the anticipated reduction in
inventory from current levels to a 120-day parts reserve made feasible by
the contractor's knowledge of the F404 engine, control of the supply chain
and efficiencies made possible by the PBL contract, the DLA analysis
concluded that DLA would produce a measurably substantial benefit of $28.3
million over 5 years, an amount well above the amount necessary to justify
bundling the parts consolidation under a single contract.  Additionally,
the ROM BCA anticipated a one-time inventory drawdown savings of $147.9
million.[4]  Contracting Officer's (CO) Statement at 4.  The ROM BCA was
based on an analysis of data for 2,639 NSNs because historical data on the
remaining NSNs was not available.  AR, Tab 6, ROM BCA, at 9. 

   DLA reports that the planned consolidation of consumable parts
requirements under the PBL will generate other important benefits to the
government by increasing the availability of needed parts, reducing the
incidence of inventory obsolescence, and reducing the volume of purchases
for stock by reducing the inventory to a smaller size--a 120-day parts
reserve level.  Id. 

   Although DLA initially identified 3,431 NSNs as F404 consumable parts to
be covered under the contract, DLA has since determined that 665 of those
NSNs were already being provided under a separate Navy PBL contract,
leaving 2,766 NSNs for which the contractor will provide logistical
support services.  Of those, DLA indicates that it will source and supply
312 "mainly competitive small business NSNs," for which General Electric
will supply only logistical support, leaving 2,454 NSNs for which General
Electric will provide logistical support, sourcing, and supply.  CO
Statement at 11. 

   The record shows that prior to proceeding with the solicitation, DLA
fulfilled its obligation to seek the views of the Small Business
Administration (SBA), through its procurement center representative,
regarding the anticipated bundling.  See 15 U.S.C. Section 644 (2000); FAR
Section 7.107.  Initially the SBA objected to the bundling as unjustified,
and pursued an appeal to reverse the bundling.  Ultimately, however, the
SBA withdrew its appeal and agreed to the bundling with certain conditions
intended to promote and preserve small business participation for these
parts, which were memorialized in writing between the SBA and DLA.[5]  AR,
Tab 14, Defense Department Form 70, at 2. 

   BHA first objects that the assumptions made in the ROM BCA are
unreasonable and that the savings are overstated.  Principally, BHA argues
that the obsolescence factor used by DLA is too high because the F404
engine is relatively mature.[6]  Protester's Comments at 3.  The agency
responds that it uses the figure of 3.7 percent obsolescence as "an
agency-wide rule of thumb or grand average that we use for this sort of
assessment.  We don't have an obsolescence rate specific to any program." 
Hearing Testimony of DLA Senior Operations Research Analyst at 1:42
p.m.[7]  DLA indicates that, based on historical experience agency-wide,
an obsolescence rate of 6 to 8 percent is the norm, so its use of the 3.7
percent rate was conservative and thus lowered the savings estimate,
potentially to the protester's benefit.  Declaration of DLA Operations
Research Analyst, at 3.  The record shows that the agency used the most
accurate obsolescence figure available at the time of acquisition
planning, which it believed to be a conservative figure.  The protester
has failed to identify a more reliable number that DLA should have used in
its analysis. 

   BHA also objects that the transition from competitive procurement of many
NSNs to the sole source PBL contract will result in higher pricing, making
reliance on historical pricing unreasonable.  BHA compares historical cost
for one NSN, on which BHA competes directly with General Electric, to make
the argument that DLA has generally paid between 21 and 30 percent less
for particular NSNs when competition was held, than under sole source
procurement from General Electric.  Protester's Comments at 3.  BHA
objects that DLA's analysis fails to appropriately consider the benefits
of competition. 

   DLA explains that it believes that for purposes of the ROM BCA, the only
pricing data on which it could base its decision was the historical data,
since the analysis was required to be part of acquisition planning. 
Testimony of DLA Senior Operations Research Analyst at 1:48 p.m.  The
agency also points out that BHA's contention that prices will increase
under the bundled contract is based on competition for only one NSN, and
does not establish that prices of the larger pool of parts will rise under
the PBL.  Further, DLA expects that General Electric should be able to
obtain better pricing on many parts because it will be able to project the
military's needs for a particular part over a longer period of time
compared to DLA's shorter term buying approach.  The DLA Senior Operations
Analyst for this program testified that his experience under similar
programs was that pricing patterns stay "within line" and are "comparable"
to historical pricing.  Id. at 1:35 p.m.  DLA also advises that General
Electric has a competitive process to determine which subcontractor will
receive a contract award from General Electric to manufacture a part. 
Testimony of Supervisory CO at 12:16 p.m.  To help ensure that the overall
prices paid under the PBL are reasonable, the agency reports that it will
analyze prices during negotiations with General Electric to ensure price
reasonableness and will examine pricing for "cost drivers," such as demand
for individual items and "outliers," items that have a significant,
unexplained pricing difference compared to historical pricing.[8]  DLA
Post-Hearing Comments at 1; Hearing Testimony of Supervisory CO at 12:15
p.m.  In short, DLA believes that it has mechanisms in place that will
ensure that the overall price General Electric charges for supplies will
not increase significantly from historical pricing.  Based on the record,
we conclude that the agency has demonstrated a reasonable basis for
relying on historical pricing in its analysis, notwithstanding the
protester's objections, especially since the analysis that the agency is
required to conduct occurs at the acquisition planning stage, before
pricing has been obtained from the contractor.  

   BHA also objects that, even if DLA has justified the decision to bundle
the requirements, DLA has failed to reasonably accommodate small
businesses through other means, as required by FAR Section 7.107(e); see
also 13 C.F.R. Section 125.2(d)(7) (2005).  In these circumstances, the
acquisition strategy must specifically consider and adopt means by which
the agency could maximize small business participation as prime
contractors in a manner consistent with its need for cost savings and
efficiency.  Teximara, Inc., B-293221.2, July 9, 2004, 2004 CPD Paragraph
151 at 12.  BHA objects that the SBA and DLA agreed to a small business
subcontracting goal that is less than the DLA overall goal, and that the
alternative of having General Electric provide logistical support while
DLA procured the parts, would result in more small business contracting
opportunities.  Protester's Comments at 4-5.  DLA responds that it did
address small business concerns.  The record shows that DLA has agreed to
retain sourcing of some small business-suitable NSNs in order to
accommodate small businesses.  CO Statement at 8; Hearing Testimony of
Supervisory CO at 10:39 a.m.  Further, the record shows that DLA and the
SBA have agreed to a number of specific actions to promote and preserve
small business opportunities in this program.  These include requiring
General Electric to meet a higher small business subcontracting goal than
DLA has historically met for these parts and to remove certain parts that
were procured from 8(a) contractors from the General Electric contract. 
SBA Comments at 4.  Finally, DLA explains that the PBL contract represents
a comprehensive and unified logistics support package that will result in
economies of scale and efficiency that is not available if DLA were to
retain significant portions of the procurement responsibilities.  AR, Tab
8, Market Research Memorandum, at 5; Hearing Testimony of Supervisory CO
at 10:38 a.m.  The record reasonably supports the conclusion that the
acquisition planning process reasonably addressed the need to accommodate
small businesses; the protester has failed to show that DLA could go
further without affecting its ability to achieve savings and efficiency.

   BHA next argues that the real motivation for bundling is in violation of
CICA because it is, in essence, a failure by DLA to properly plan for its
requirements, and that this failure does not justify a restriction on
competition.  BHA maintains that the NSNs for which DLA has properly
planned are the ones for which DLA has retained sourcing, while bundling
those that it has not planned properly, along with other NSNs for which
DLA has no anticipated requirements during the term of the PBL contract. 
Protester's Comments at 6.  The agency explains that the essence of the
PBL is to unify the supply chain for F404 consumable parts to an extent
that DLA cannot, and also explains that General Electric, by virtue of
being the original equipment manufacturer, is able to achieve savings
through efficiency and planning that DLA currently cannot expect to
achieve.  AR, Tab 8, Market Research Memorandum, at 4-5; Hearing Testimony
of Supervisory CO at 11:42 a.m. 

   CICA generally requires that solicitations permit full and open
competition and contain restrictive provisions and conditions only to the
extent necessary to satisfy the needs of the agency.  10 U.S.C. Section
2305(a)(1) (2000).  Since "bundled" (or "consolidated") procurements
combine separate, multiple requirements into one contract, they have the
potential for restricting competition by excluding firms that can furnish
only a portion of the requirement.  Phoenix Scientific Corp., B-286817,
Feb. 22, 2001, 2001 CPD Paragraph 24 at 5.  Because of the restrictive
impact of bundling, we will sustain a protest challenging a bundled
solicitation, unless the agency has a reasonable basis for its contention
that bundling is necessary.  Id. at 10; National Customer Eng'g, B-251135,
Mar. 11, 1993, 93-1 CPD Paragraph 225 at 5.  CICA and its implementing
regulations require that the scales be tipped in favor of ensuring full
and open competition, whenever concerns of economy or efficiency are being
weighed against ensuring full and open competition.  EDP Enters., Inc.,
B-284533.6, May 19, 2003, 2003 CPD Paragraph 93 at 4.  Nevertheless,
bundling may serve to meet an agency's needs where the agency reasonably
determines that consolidation will result in significant cost savings or
efficiencies.  Teximara, Inc., supra, at 6. 

   Here, the agency reasonably explains that the bundled PBL is the only
means by which it can alleviate shortages of parts, increase availability
of needed parts, and maintain the military readiness of the aircraft.  AR,
Tab 18, Justification for Other than Full and Open Competition, at 2, 6. 
The agency explains that the PBL represents a comprehensive logistics
support package--a single contractor will control the various logistical
support elements including multiple suppliers and producers, production
lines, and transportation resources to ensure that the consumable parts
needed by the military are available when needed.  Id.  We find the
agency's justification reasonably supported by the record.[9] 

   The protest is denied.

   Anthony H. Gamboa
   General Counsel

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

   [1] DLA issued a sole-source justification on the basis that only General
Electric, which is the original equipment manufacturer of the F404 engine,
could provide the needed supplies and services.  Agency Report (AR), Tab
18, Justification for Other than Full and Open Competition, at 1. 

   [2] The agency provided notice of the planned bundling to small business
concerns, each of which had supplied DLA with one or more of the NSNs
covered by the PBL within the preceding 3-year period.  Contracting
Officer Statement at 6.  The agency indicates 1,349 NSNs were purchased
from small businesses, and that 259 small businesses had supplied at least
one NSN during a recent 3-year period.  AR, Tab 8, Market Research
Memorandum, at 4. 

   [3] Although DLA used the term "rough order of magnitude" in the analysis,
it explains that the term reflects the use of estimates because "that's
generally the term within the agency, DLA, that we use to distinguish
where you have most of the data you need versus where you have to rely on
estimates and judgments."  Hearing Testimony of DLA Senior Operations
Research Analyst at 1:36 p.m. 

   [4] DLA emphasizes that this one-time savings, while quantifiable, was not
considered in determining whether the bundling met the threshold. 
Declaration of DLA Senior Operations Research Analyst, at 2. 

   [5] Our Office invited the SBA to provide its views regarding the
protest.  Since the protester was not represented by counsel, our Office
did not issue a protective order.  Our discussion here is, therefore,
necessarily general.  DLA submitted a copy of the initial proposal that
had been received from General Electric to our Office in camera, and
provided a copy to the SBA.  In its submissions to our Office, the SBA
objected that the proposal from General Electric showed that DLA might not
be intending to satisfy the conditions upon which the SBA agreed to the
bundling.  The SBA did not, however, reinstitute its appeal. 
Nevertheless, any potential breach of the SBA conditions is outside the
purview of our Office, and is a matter to be resolved between the two
executive agencies.

   [6] The significance of obsolescence to the savings is that under the PBL,
DLA will have a smaller inventory to which obsolescence would occur, thus
the cost of obsolescence of a smaller inventory is correspondingly less,
and that difference then results in a savings to DLA in purchasing fewer
parts that will ultimately become obsolete before they are used. 

   [7] In resolving this protest, our Office conducted a hearing during which
testimony was provided by various agency witnesses familiar with the
procurement decisions at issue in this protest.  The testimony was
recorded and the references in the decision are to the time of the
testimony.

   [8] The procurement is being conducted as a commercial item acquisition
under FAR Part 12.  Hearing Testimony of Supervisory CO at 10:18 a.m..

   [9] Although BHA also objects to the inclusion of NSNs in the PBL contract
for which DLA does not expect to have a requirement during the 5-year term
of the contract, the protester does not allege that any of the NSNs that
it seeks to supply is so classified, and therefore BHA is not an
interested party because it would not be in line for an award of a
contract even if we were to sustain its protest on this basis.  Four Winds
Servs., Inc., B-280714, Aug. 28, 1998, 98-2 CPD Paragraph 57.