TITLE: B-295959, International Outsourcing Services, LLC, May 25, 2005
BNUMBER: B-295959
DATE: May 25, 2005
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B-295959, International Outsourcing Services, LLC, May 25, 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: International Outsourcing Services, LLC
File: B-295959
Date: May 25, 2005
Richard L. Moorhouse, Esq., Dorn C. McGrath III, Esq., David T. Hickey,
Esq., and Joe R. Reeder, Esq., Greenberg Traurig, for the protester.
Richard P. Rector, Esq., and Christine E. Trew, Esq., DLA Piper Rudnick
Gray Cary, for NCH Marketing Services, the intervenor.
Elliot J. Clark, Esq., Defense Commissary Agency, for the agency.
John L. Formica, Esq., and James A. Spangenberg, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
The elimination of the protester's proposal from the competition for the
award of a fixed-price contract is unobjectionable where the agency
reasonably determined under the solicitation's price realism evaluation
factor that the protester's proposed price was unrealistically low and the
agency was reasonably concerned that the protester's contract performance
may therefore be adversely affected.
DECISION
International Outsourcing Services, LLC (IOS) protests the rejection of
its proposal and the award of a contract to NCH Marketing Services under
request for proposals (RFP) No. HDEC08-04-R-0019, issued by the Defense
Commissary Agency (DeCA), for coupon redemption services. The protester
argues that the agency's evaluation of its proposed price as unrealistic,
and the resultant rejection of its proposal, were unreasonable.
We deny the protest.
DeCA commissaries provide "for the resale of groceries and household
supplies at the lowest practical price (consistent with quality) to
members of the military services, their families and other authorized
patrons" at locations worldwide. Contracting Officer's Statement at 1. In
performing this mission, the RFP here estimates that the commissaries will
receive 160,000,000 coupons for merchandise, which DeCA "must redeem for
cash from the manufacturer who issued the coupon." Id. at 1-2. The
successful contractor here will be required to provide all management,
supervision, labor, equipment, materials, supplies, facilities and
transportation necessary to audit, count, sort, and forward coupons and
invoices to the issuing manufacturers.
The RFP provided for the award of a fixed-price indefinite-quantity
contract, with a base period of 1 year and four 1-year option periods, to
the offeror submitting the proposal determined to represent the "best
value" to the government based upon the evaluation factors of "performance
capability" and "price." RFP at 15. The RFP specified that the performance
capability and price factors would be considered equal in importance, and
that the performance capability factor was comprised of the following
three subfactors: technical capability, personnel, and past
performance.[1] The RFP (at 16) also provided that proposals would be
evaluated under the price factor as follows:
Proposals will be evaluated to determine whether offered prices are
realistic in relation to the work to be performed, reflect a clear
understanding of the requirements, and are consistent with other portions
of the offeror's proposal. The PRICE factor will not be scored. Price will
be evaluated by adding the total price of all line items, base year plus
four one year options.
The solicitation required that proposals include, among other things, a
technical capability and personnel proposal, and a past performance
proposal. Offerors were informed that their technical capability and
personnel proposals were to include plans for accomplishing the coupon
redemption services, staffing, and subcontracting, as well as narratives
regarding the qualifications of key personnel. Past performance proposals
were to include information regarding contracts performed in the past 3
years and references.
With regard to price, offerors were to complete the schedule set forth in
the RFP as amended. In order to complete the schedule, offerors were to
insert a unit price per thousand coupons for the services required, as
well as an extended price based upon the agency's estimate of 160,000,000
coupons per year, for each of the five contract periods (base plus four
options). Although the schedule included line items for each contract
period for the reimbursement of shipping and handling fees incurred by the
contractor, the RFP explained that the successful contractor would be
reimbursed only "the amount reimbursed from the manufacturers," and that
offerors thus were not to insert prices for the shipping and handling line
items. RFP at 4; see RFP at 45 ("DeCA shall only reimburse the contractor
for payments received from manufacturers for postage/special shipping and
handling fees invoiced. If manufacturers do not pay the postage/special
shipping and handling fees invoiced, then DeCA does not reimburse the
contractor").
The agency received proposals from only NCH and IOS. NCH's proposal
received a rating of "very good" under the performance capability factor
with a total evaluated price of $5.76 million, and IOS's proposal received
a rating of "satisfactory" under the performance capability factor with a
total evaluated price of $2.25 million.[2] Both proposals were included in
the competitive range. AR, Tab 1, Initial Evaluation Summary, at 5.
Discussions were conducted, during which the agency posed written
questions to IOS regarding its technical capability, past performance, and
price, and IOS submitted a revised proposal.[3] With regard to price, the
agency informed IOS that its "price seems extremely low" and "do[es] not
seem to be realistic for the work to be performed." The agency requested
that IOS "explain and provide backup documentation as to how [IOS] arrived
at the price and how [IOS] can successfully perform in accordance with the
Statement of Work (SOW) at that price." AR, Tab 6, Agency Discussion
Letter to IOS (July 14, 2004), at 1.
IOS responded by providing a relatively detailed explanation of the costs
comprising its price. Specifically, IOS explained that its "bid was based
on the incremental cost of processing DeCA coupons," and that IOS had used
this approach because "the plant where we will process DeCA has excess
installed capacity that will be more than adequate to process the
estimated DeCA volume." The protester included a chart as part of its
explanation that provided a "simplified version of [IOS's] cost analysis
adding only the incremental cost associated with the additional DeCA
volume." The chart included, among other things, various personnel costs
[DELETED] and costs for [DELETED], as well as costs associated with
[DELETED]. The chart provided, for example, total labor costs of [DELETED]
per year, and costs associated with [DELETED]. The chart provided an
estimated total annual cost of performance of [DELETED], and total fees to
be collected annually for performance of the contract of [DELETED]. AR,
Tab 6, IOS's Response to Discussions (July 24, 2004).
IOS indicated that the [DELETED] in fees it anticipated collecting
consisted of fees collected from DeCA for the performance of the contract
and "special handling" fees IOS anticipated that DeCA would collect from
manufacturers whose coupons IOS redeemed. IOS stated that it had
calculated the collection of an average of [DELETED] per year in fees from
DeCA based upon its average price to the agency of [DELETED] per 1,000
coupons processed, and the agency's then-estimated total number of coupons
of 200,000,000 per year.[4] IOS also stated that it anticipated collecting
an additional [DELETED] in fees from manufacturers for coupons that
required "special handling." In this regard, IOS explained as follows:
Coupons that do not comply with industry UPC [Universal Product Code]
codes, don't have codes, or have the wrong codes increase our processing
costs. Special handling fees have become common as a way to recover some
of the increases associated with processing these hard to handle coupons.
Based on our experience with other accounts, the average amount of special
handling fees that will be paid by manufacturers is [DELETED]. The billing
of special handling fees will be only on coupons not scanned. For
calculation purposes, we estimate that 10% of DeCA coupons will not be
scanned and therefore will have special handling added to these invoices.
AR, Tab 6, IOS's Response to Discussions (July 24, 2004). Consistent with
this explanation, IOS's chart provided for the collection of [DELETED] in
special handling fees based upon 20,000,000 coupons requiring special
handling at the price of [DELETED] per 1,000 coupons. IOS's response also
provided other reasons in support of its anticipated costs and proposed
price, including, among other things, its "investment in technology,"
including its "high-speed automated sorting machines" and "new scanning
equipment." Id.
The agency evaluated IOS's response, and informed IOS during a second
round of discussions that the agency was "still concerned with [IOS's]
ability to successfully perform at the unit prices proposed, based on
historical prices [DeCA has] experienced in the last 10 years." The agency
proceeded to raise a number of specific concerns with IOS. For example,
the agency informed IOS that "[a]lthough DeCA has estimated an annual
number of coupons to be processed for the base year through the option
years, industry is showing a decrease in volume of coupons redeemed," and
that because of this, the agency was concerned "that in the option years
[IOS's] prices decrease, with the volume of coupons potentially decreasing
the amounts of revenue may be less than [IOS] anticipate[s]." The agency
also noted that "[i]t appears that IOS is also counting on special
handling fees and potential postage reimbursements to cover overall cost
of performance," and pointed out that as set forth in the RFP "[t]he line
items for Postage and Shipping/Handling Fees [are] not guaranteed and
should not be considered when determining [IOS's] cost." The agency thus
requested that IOS "acknowledge that [it] understand[s] that postage
reimbursements and special handling fees are only reimbursed to IOS for
the amount that the manufacturers pay to DeCA." AR, Tab 6, Agency
Discussion Letter to IOS (Sept. 8, 2004), at 1.
The protester responded to each of the specific concerns raised by the
agency, noting, for example, that it watches "redemption trends throughout
North America very closely," and that "[a]lthough redemptions are on the
decline we know the decline is very retailer specific." The protester
provided further explanation regarding its views of redemption trends, and
stated that in preparing its proposal it had "accommodated for a slight
drop in annual volume of between 5 -- 10%." With regard to the agency's
concerns regarding IOS's anticipated receipt of shipping and handling fees
during performance of the contract, the protester explained that while it
understood that the shipping and handling reimbursements were not
guaranteed, it could not "ignore what the facts have shown us over the
past years," and included certain information in support of its position.
The protester concluded by stating that it had "made a conscious effort to
put forth the best pricing available to DeCA for processing its retail
coupons," and that IOS has "a proven track record of providing the best
service at the lowest price." The protester pointed out in this regard
that it is the "processor of choice for over 75% of all retailers who
accept coupons in the United States representing over 60% of all coupons
redeemed." AR, Tab 6, Protester's Discussions Response (Sept. 17, 2004).
The contracting officer ultimately determined that NCH's proposal
represented the best value to the government, and met with the cognizant
DeCA contract review board (CRB) to discuss the contracting officer's
determination, as well as the fact that in the contracting officer's view
she "had not been able to determine that IOS's price was reasonable and
therefore had the ability to successfully perform the work at the proposal
price." Contracting Officer's Statement at 10. The CRB informed the
contracting officer that in the CRB's view "a best value trade-off
determination was between two qualified offerors," and that because the
contracting officer had not "been able to conclude that [IOS's] price was
reasonable . . . a best value trade-off could not be made." Id. at 11. The
CRB thus "would not approve the selection of NCH on the basis of a best
value award determination," and recommended that "the Contracting Officer
review [IOS's] proposal to determine if it should be eliminated from the
competitive range because it no longer had a reasonable chance of being
selected for award." Id.
The contracting officer states that "[a]fter further review of IOS'[s]
proposal and explanations it provided concerning its price, [she] was
unable to conclude that IOS's price was reasonable." Contracting Officer's
Statement at 10. She concluded that IOS's continued reliance on
reimbursement for special shipping and handling fees that were not
guaranteed "place[d] an unacceptable risk on DeCA that as IOS['s] costs
exceed its reimbursement income that it will not be able to continue
contract performance." AR, Tab 6, Contracting Officer's Determination to
Eliminate IOS from the Competition, at 3. The contracting officer noted in
another section of the determination that "DeCA's analysis of historical
data indicates that DeCA's volume of special handled coupons and the
payments received from manufacturers varies between manufacturers and
amounts paid," and "that many companies disallow any additional costs for
special handling according to their coupon redemption policies." Id. at 4.
Because of this, the agency determined that IOS's estimate regarding its
anticipated reimbursement for special handling fees "could not be
verified" and that IOS's position was "unrealistic." Id. The contracting
officer also commented here that IOS's proposed costs for [DELETED] were
"unrealistic" because, in the contracting officer's view, "there should be
costs for equipment replacement and maintenance over the life of the
contract." Id. at 3. The contracting officer ultimately concluded "that
award to IOS would pose an unacceptable risk" because the agency could not
determine that IOS's price was realistic, and eliminated IOS's proposal
from the competition on that basis. Id. at 5. After being informed of
this, IOS requested and received a debriefing. This protest followed.
IOS protests the agency's rejection of its proposal. IOS contends that the
agency's determination that its proposed price was unrealistically low was
not reasonably based, and that, in any event, its proposal should not have
been eliminated from the competition.[5]
Although agencies are required to perform some sort of price or cost
analysis on negotiated contracts to ensure that proposed prices are 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. However, an
agency may provide in the solicitation for a price realism analysis 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., B-281287.12, B-281287.13, Nov. 15, 2000, 2001 CPD para.
6 at 4-5. In reviewing protests challenging price realism evaluations, our
focus is whether the agency acted reasonably and in a way consistent with
the terms of the solicitation.
The protester first argues that under the solicitation its proposal cannot
be rejected as unacceptable because its price was considered
unrealistically low. However, as indicated, the solicitation expressly
provided that "[p]roposals will be evaluated to determine whether offered
prices are realistic," and specifically informed offerors that the
analysis would include the distinct queries of whether the prices were
realistic "in relation to the work to be performed, reflect a clear
understanding of the requirements, and are consistent with other portions
of the offeror's proposal." RFP at 16. Accordingly, this is not an
instance, such as pointed to by the protester in Possehn Consulting,
B-278759, Jan. 9, 1998, 98-1 CPD para. 10, where the rejection of a
proposal because its pricing was found to be unrealistic was determined to
be a matter of responsibility due to the solicitation's lack of any
evaluation factor or criterion related to price realism. See also CSE
Constr., B-291268.2, Dec. 16, 2002, 2002 CPD para. 207 at 4-5 (where there
is no relevant evaluation criterion pertaining to price realism or
understanding, a determination that an offeror's price on a fixed-price
contract is too low generally concerns the offeror's responsibility). In
our view, given the RFP's specific provision regarding the performance of
a price realism analysis, as well as the remainder of the RFP's terms, the
agency could reject a proposal that lacked price realism, or consider a
proposal's lack of price realism in its source selection.
The protester also argues the agency's price realism determination was
flawed, given that IOS's revised proposal was evaluated as "very good"
under the performance capability factor, and that the record of the
agency's evaluation does not indicate that the agency had any concerns
regarding IOS's understanding of the agency's requirements. This argument
provides no basis to find the evaluation unreasonable or improper here.
This is so because, as indicated above, although one aspect of the
solicitation's announced price realism analysis focused on whether the
offerors' pricing reflected a clear understanding of the agency's
requirements, the first of the announced aspects concerned whether the
proposed prices were realistic "in relation to the work to be performed."
Turning to the reasonableness of the agency's evaluation under the price
realism evaluation factor, the parties acknowledge that the propriety of
this aspect of the agency's evaluation hinges upon whether the agency had
a reasonable basis for discounting IOS's claim that it would be able to
recover a significant portion of its costs through the billing of
manufacturers for special handling fees for an estimated 10 percent of
coupons redeemed. In this regard, we note that the record reflects, and
IOS does not deny, that its proposed price to the agency for the
processing of the coupons is below cost. Specifically, IOS's responses
during discussions establish that IOS's proposed price to the agency of,
on average, [DELETED] per 1,000 coupons for a total annual price of
[DELETED], was not sufficient to recover IOS's estimated costs of
[DELETED]. IOS's position is that it would recover its costs and make a
profit in performing the contract with its below-cost price for the
services because IOS would derive additional revenue from the
manufacturers' payment of special handling fees.
As detailed above, the issue of the protester's planned recovery of these
fees was raised during discussions. In this regard, because the agency was
unaware of special handling fees in the amount proposed by IOS being paid
by manufacturers, it requested that the protester provide "the name and
price per 1,000 coupons for at least three (3) references that are similar
to DeCA" in support of IOS's claim that its "bid [was] consistent with
other retailers [IOS] process[es] of similar volume and program
requirements," and that "[b]ased on [IOS's] experience with other
accounts, the average amount of special handling fees that will be paid by
manufacturers is [DELETED]/1000." AR, Tab 6, Agency Discussion Letter to
IOS (Sept. 8, 2004); IOS's Response to Discussions (July 23, 2004).
The protester responded by providing a letter that listed for each of four
retailers (identified as retailers "A", "B," "C," and "D") an approximate
annual volume of coupons processed, and a total dollar amount comprised of
"Processing Fee + Shipping Reimbursement" per thousand coupons processed.
For example, the letter provided that for retailer "A" IOS processed
approximately [DELETED] million coupons per year, for [DELETED] per
thousand coupons, with the [DELETED] representing a total of the
processing fee charged plus IOS's recovery of shipping and handling fees.
AR, Tab 6, IOS's Response to Discussions (Sept. 17, 2004).
This letter did not, however, identify in any manner what amount or
percentage of the dollar amount listed as recovered by IOS was
attributable to the collection of IOS's processing fee, and what amount or
percentage was attributable to IOS's recovery of shipping and handling
fees. As such, the agency understandably could not verify from the
information provided by IOS that its proposed collection of a [DELETED]
special handling fee for 10 percent of the coupons processed for DeCA was
in fact consistent with IOS's commercial contracts, or consistent with
IOS's claim that manufacturers had previously paid special handling fees
at this rate. Given that the agency was unaware from its experience that
the collection of [DELETED] in special handling fees either had occurred
in the past or was probable, and the protester's failure to allay the
agency's concerns here with any specific information other than the
protester's claim that based on its "experience . . . the average amount
of special handling fees that will be paid by manufacturers is [DELETED],
we cannot find the agency's skepticism and ultimate determination that
this aspect of IOS's proposed pricing was unrealistic to be unreasonable.
In determining to therefore reject IOS's proposal, the contracting officer
was concerned that because of IOS's reliance on the special handling fees
for a significant percentage of its revenue, and that the collection of
those fees, particularly in the amount anticipated by IOS, was not
guaranteed, that "IOS's costs would exceed its revenue" and that this
would "place[] successful contract performance at risk." AR, Tab 6,
Contracting Officer's Determination to Eliminate IOS from the Competition,
at 2. The contracting officer added that "as IOS['s] costs exceed its
reimbursement income . . . it will be unable to continue contract
performance," and that this would "adversely effect DeCA's ability to
operate." Id. at 3. The contracting officer concluded that because of this
an "award to IOS would pose an unacceptable risk" to the agency. Id. at 5.
We have found that the risk of poor performance when a contractor is
forced to provide services at little or no profit under a fixed-price
contract is a legitimate concern that can be considered under a price
realism evaluation. Ameriko, Inc., B-277068, Aug. 29, 1997, 97-2 CPD para.
76 at 3; GEC-Maconi Electronic Sys. Corp., B-276186, B-276186.2, May 21,
1997, 97-2 CPD para. 23 at 5. Here, the agency reasonably found IOS's
price to be unrealistic, and because of this, determined that there was a
significant risk that IOS's performance under the contract may be so
unprofitable that the performance of this contract--which is considered
extremely important to
DeCA--would be adversely affected.[6] Under the circumstances, we find the
agency had a reasonable basis to reject IOS's proposal.
The protest is denied.
Anthony H. Gamboa
General Counsel
------------------------
[1] The RFP also listed evaluation "elements" under each of the evaluation
subfactors, and stated that the technical capability subfactor was
significantly more important than the personnel and past performance
subfactors, which were approximately equal in importance.
[2] NCH proposed unit prices of [DELETED] for the base and first option
periods, [DELETED] for the second and third option periods, and [DELETED]
for the fourth option period, and IOS proposed unit prices of [DELETED]
for the base period, [DELETED] for the first option period, and [DELETED]
for each of the remaining three option periods. Agency Report (AR), Tab 1,
Initial Evaluation Summary, at 3.
[3] IOS's final revised proposal received a rating of "very good" under
the performance capability factor.
[4] The RFP initially estimated that DeCA would receive 200,000,000
coupons per year, and was subsequently amended to provide for the receipt
of an estimated 160,000,000 coupons per year.
[5] IOS also argued in its initial protest to our Office that the agency
had failed to engage in meaningful discussions with IOS regarding the
agency's concerns with IOS's proposed price and its reliance in part on
its reimbursement of the special handling fees. In its report, the agency
responded to IOS's argument and provided numerous documents detailing its
conduct of discussions with IOS. Because the protester did not respond in
its comments to the agency's position that its discussions with IOS were
meaningful, we consider IOS to have abandoned this aspect of its protest.
Uniband, Inc., B-289305, Feb. 8, 2002, 2002 CPD para. 51 at 5 n.3.
Additionally, IOS argued for the first time in its comments on the agency
report that the agency acted improperly in performing its price realism
analysis because, in the protester's view, the agency requested that IOS
provide more information than was necessary to perform the price realism
analysis. Protester's Comments at 3; see Federal Acquisition Regulation
(FAR) sect. 15.402(a), 15.403-3 (in establishing the reasonableness of
proposed prices or determining cost realism, the agency "should not obtain
more information than is necessary"). Because the protester was clearly
aware during the discussions process what information the agency was
requesting, this argument, raised by the protester for the first time in
its comments on the report, is untimely and will not be considered. 4
C.F.R. sect. 21.2(a)(2) (2005).
[6] The agency explains that "DeCA pays for the merchandise it orders from
a revolving fund (Defense Working Capital) fund and is required to
reimburse the fund and does so with the proceeds from the sale of the
merchandise." Contracting Officer's Statement at 1. The coupons DeCA
receives from customers "are an accountable item" and are thus treated by
DeCA "as cash equivalent and the redemption of the coupons is required to
reimburse the revolving fund." Id. Given the RFP's estimate as to the
number of coupons to be redeemed, and the average face value of the
coupons, DeCA estimates that the annual value of the coupons redeemed
totals $115.2 million. DeCA thus concludes that "[a]s can be seen from the
coupon volume and dollars they represent, the successful performance of
the coupon redemption contract is extremely important to the financial
health of [DeCA]." Id. at 2.