TITLE: B-297879.2, Metro Machine Corporation, May 3, 2006
BNUMBER: B-297879.2
DATE: May 3, 2006
**************************************************
B-297879.2, Metro Machine Corporation, May 3, 2006
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: Metro Machine Corporation
File: B-297879.2
Date: May 3, 2006
Michael R. Katchmark, Esq., Gary A. Bryant, Esq., Brett A. Spain, Esq.,
and Michael C. Laurence, Esq., Willcox & Savage P.C., for the protester.
Robert M. Tata, Esq., Carl D. Gray, Esq., and Kevin J. Cosgrove, Esq.,
Hunton & Williams LLP, for Earl Industries, LLC, an intervenor.
Rhonda L. Russ, Esq., Naval Sea Systems Command, for the agency.
Edward Goldstein, Esq., and Christine S. Melody, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
Agency's cost realism evaluation of awardee's proposal was unreasonable
where the awardee proposed to perform the solicitation requirements under
a teaming arrangement whereby its proposed team members would perform
almost [deleted] of the production work under the contract, but the agency
failed to consider the impact of the team members' higher rates in
determining the awardee's probable cost of performance under the contract.
DECISION
Metro Machine Corporation protests the award of a contract to Earl
Industries, LLC under request for proposals (RFP) No. N00024-05-R-4401,
issued by the Department of the Navy, Naval Sea Systems Command (NAVSEA),
for maintenance and modernization work on Dock Landing and Amphibious
Transport Dock class ships (i.e., LSD and LPD class ships) homeported in
Norfolk, Virginia. Metro alleges that the agency's cost evaluation of
Earl's proposal was improper and that the source selection decision was
flawed.[1]
We sustain the protest.
The RFP, issued on March 9, 2005, contemplated the award of a
cost-plus-award-fee contract for execution planning and accomplishment of
repair, maintenance, and alteration requirements of LSD 41/49 and LPD 4
class ships. The RFP provided for the award of a base contract including
execution planning for the first scheduled availability[2] for the USS
Gunston Hall, as well as non-scheduled repair and alteration requirements
between scheduled availabilities as ordered on various LSD and LPD class
ships. [3] In addition, the RFP provided for 31 option items--the first
option was for performance of the Gunston Hall availability, and the
remaining options were for 15 additional scheduled availabilities and
associated execution planning over a period of 7 years. RFP sect. B,
Schedule of Supplies or Services and Prices.
The RFP indicated that the agency would make award to the offeror whose
proposal represented the best value to the government based on a
consideration of two factors: technical and cost. Overall technical merit
was considered more important than cost; however, the importance of cost
would increase "as the differences in overall Technical merit among
competing proposals decreas[ed]." RFP at 171. Under the technical
category, the RFP listed three evaluation factors in descending order of
importance: (1) management capability; (2) resource capabilities; and
(3) past performance. RFP at 177-78. In evaluating proposals under the
management capability and resource capabilities factors, the agency
assigned adjectival ratings of outstanding, very good, satisfactory,
marginal, and unsatisfactory. The adjectival scheme used to rate offerors'
past performance differed slightly, with the agency assigning ratings of
outstanding, good, satisfactory, neutral, marginal, or unsatisfactory.
As it relates to the protest, under the management capability factor,
offerors were required to "provide a systematic approach that demonstrates
a comprehensive understanding and application of management techniques,
methods and procedures required to efficiently execute the requirements of
this solicitation." RFP at 172. In this regard, offerors were to describe
corporate management and organizations, the formation, function and
responsibilities of project teams, the proposed management organization
and functions, including all teaming partners and/or significant
subcontractors, a plan for managing subcontractors, and lines of
communication and authority with the Navy as well as significant
subcontractor key personnel. Offerors were also required to provide
resumes for key personnel. RFP at 172-73.
Under the past performance factor, the RFP identified the following four
subfactors (of equal weight) for evaluation: (1) technical (quality of
product); (2) schedule; (3) management; and (4) cost. With regard to the
cost subfactor, the RFP stated that the Navy would evaluate "the expected
risk that an Offeror will effectively forecast, manage and control cost
based upon an Offeror's past performance of previously awarded contracts,
relevant contracts, and the effectiveness of any implemented or proposed
corrective actions." RFP at 178. The solicitation indicated that the Navy
intended to evaluate past performance by reviewing "Contractor Performance
Assessment Reporting System ratings (CPARS) and other existing past
performance information on relevant contracts . . . " and that "[t]rends
showing improving or deteriorating performance will also be considered."
RFP at 173-74.
With regard to the cost evaluation, the RFP advised offerors to submit
proposed estimated cost data based on two notional work item packages (one
for LSD class ships and a second for LDP class ships) included within
section L of the solicitation. As clarified by the agency in response to
questions from the offerors, the notional work packages included sample
work items--not to be construed as actual work items under the contract.
See Request for Clarification, Ref. No. EC027, Mar. 21, 2005. The LSD
package consisted of 28 work items while the LPD package consisted of 9
work items.
In proposing their estimated costs, the RFP required offerors to use
government estimated labor hours and material costs for performance of the
notional work items. Offerors were permitted, however, to deviate from the
government's estimates, provided their proposed deviations were supported
by "clear and compelling evidence." RFP at 165. Specifically, the RFP
stated as follows:
Offerors are to use the Government-provided manhour and material estimates
for each notional package and propose these amounts. An Offeror may
provide evidence to support an adjustment to these amounts by proposing
and supporting revised man-hour and/or material dollar amounts per
individual work item. If an Offeror provides clear and compelling evidence
that an adjustment is warranted, the Government will adjust that Offeror's
man-hour and/or material dollar estimates for the individual work item(s)
addressed, to the extent it is determined that the offered rationale
supports such an adjustment. If support of an Offeror's proposed
adjustment to an individual work item is less than clear and compelling,
the Government estimate will be used to calculate an estimated cost to the
Government for that work item.
RFP at 165.
According to the RFP, the government would perform a cost realism analysis
of the offerors' cost proposals based on each offeror's proposed estimated
costs for performing the notional work. In performing the cost realism
analysis, the Navy would consider:
the Offerors' proposed labor hours, labor rates, material costs, burden
rates and other costs in light of information available to the Contracting
Officer, including Government estimates for: (1) direct labor hours; (2)
material costs; (3) direct labor costs; (4) overhead and G&A costs; and
(5) any other costs which are likely to be incurred by the Offeror in
performance of the requirements of the RFP.
RFP at 168.
Moreover, the RFP expressly provided that, if an offeror proposed to
deviate from the government's labor hour and material estimates, the
Navy's cost realism analysis would consider the evidence supporting the
proposed adjustment in determining the offeror's projected cost to
government. Specifically, the RFP stated as follows:
The government will analyze and review the Offerors' cost estimates and
supporting cost data, including comparison to the Government estimate for
the notional work items in Section L. This analysis will be performed for
work items defined in Section L, as well as on the Offeror's total
proposal, including all options. Also, if the Offeror submits evidence to
support an adjustment to the Government-provided estimates, the Government
will review such evidence in deriving the cost realism for the Offeror's
projected cost to the Government. As a result of this analysis, the
Government may make adjustments to the Offeror's proposed costs to develop
an estimate of the projected cost to the Government for each Offeror's
proposed approach.
Id.
On the basis of this analysis, the RFP stated that "the [cost analysis
panel] will develop a `projected cost to the Government' which represents,
in the Government's judgment, the overall cost . . . which will result
from the Offeror's actual performance of the contract requirements . . .
." Id.
Offerors were also warned not to propose unrealistically low estimated
costs. In this regard, the RFP stated as follows:
Unrealistically low cost estimates . . . may be grounds for eliminating a
proposal from competition either on the grounds that the Offeror does not
understand the requirement or that he has made an improvident proposal.
The burden of proof of cost credibility rests with the Offeror. If the
Government determines an Offeror's estimates to be inexplicably low, that
Offeror may be eliminated from the competition without further discussion.
RFP at 162-63.
Four offerors, BAE Systems Norfolk Ship Repair, Marine Hydraulics
International, Inc. (MHI), Earl, and Metro submitted proposals by the
April 18 closing date. In competing under the solicitation, [deleted] and
Earl had entered into a "resource agreement"--in essence, a teaming
agreement.[4] Metro was not party to the teaming agreement. As a general
matter, the resource agreement provided for [deleted] and Earl to each
independently submit a proposal for award, while drawing upon the
capabilities of the team members to act as subcontractors for varying
levels of effort depending upon which, if any, of the team members
received award as the prime contractor. According to the terms of the
resource agreement, [deleted] and Earl agreed to [deleted]. AR, Tab 8,
Earl Cost Proposal, Encl. P, at 3, 4.
Under the terms of the agreement, each team member will receive the
following percentages of "production work":
+------------------------------------------------------------------------+
| Assignment of Production Work |
|------------------------------------------------------------------------|
| Contractor | |[deleted]|[deleted]|[deleted]|
|--------------------------------+---------+---------+---------+---------|
| Percentage of Work Assigned |[deleted]|[deleted]|[deleted]|[deleted]|
| Subcontractor (and retained by |---------+---------+---------+---------|
| Contractor) |[deleted]|[deleted]|[deleted]|[deleted]|
| |---------+---------+---------+---------|
| |[deleted]|[deleted]|[deleted]|[deleted]|
| |---------+---------+---------+---------|
| |[deleted]|[deleted]|[deleted]|[deleted]|
+------------------------------------------------------------------------+
Id. at 4.
Specific work items would be assigned, [deleted]. Id. at 5.
A Navy technical evaluation review panel (TERP) evaluated offerors'
technical proposals, and a separate Navy cost analysis panel (CAP)
concurrently began evaluating the offerors' cost proposals. In its initial
evaluation of proposals, the TERP noted as a general matter that "[e]ach
offeror has a demonstrated history of maintenance and repair of Amphibious
warfare class ships" and that "[e]ach offeror was judged to have adequate
resources, facilities and skills to accomplish the requirements of this
solicitation." AR, Tab 17, Initial TERP Evaluation, at 2. As it relates to
the protest, in its initial evaluation of Earl's technical proposal under
the management capability factor, the TERP assigned Earl a rating of
[deleted] and noted several major weaknesses, including the fact that
while Earl proposed to [deleted] Earl failed to adequately explain how it
would integrate its teaming partners into the management organization and
functions, and failed to adequately explain the roles and responsibilities
of the team members and what they were to provide in support of the work
effort. AR, Tab 17, TERP Initial Evaluation of Earl, at 3.
With regard to its initial evaluation of Earl's past performance, under
the cost subfactor, the TERP had concerns with Earl's cost control on
cost-type contracts, and initially rated Earl as [deleted] under this
subfactor. This [deleted] rating was based in part on a past performance
report contained in the contractor performance assessment report system
(CPARS) regarding Earl's performance on a separate Navy contract in
connection with the USS Iwo Jima (LHD 7); in this CPARS report, Earl was
rated as "marginal" under cost control. The TERP rated Earl as [deleted]
for overall past performance, however, since Earl received ratings of
[deleted] under the three other past performance subfactors. AR, Tab 17,
Initial TERP Evaluation of Earl, at 2-3.
Following the initial evaluation of proposal evaluations, the Navy opened
discussions with all offerors, and requested revised proposals. On
August 4, the agency requested final proposal revisions, which were
received on August 18. Based on Earl's responses to the Navy's questions
in connection with the management capability factor, the TERP revised its
rating from [deleted] to "very good" with low risk. AR, Tab 18, Encl. 3,
at 4. The TERP also changed its rating under the past performance/cost
subfactor from [deleted] to [deleted] based on a change in the CPARS
report for Earl's performance under the USS Iwo Jima contract from
"marginal" to "satisfactory" and because Earl had proposed specific
corrective measures. AR, Tab 18, Encl. 3, at 10. Earl's overall rating
under the past performance factor remained "good."
In evaluating the offerors' cost proposals for realism, the Navy
principally compared the offerors' proposed labor hours and material costs
for performing the notional work items with the government estimates for
these cost elements, and reviewed the offerors' proposed direct and
indirect rates. AR, Tab 19, CAP Report, at 1. In comparing the offerors'
proposed hours and material costs to the government estimates, the Navy
denied virtually all proposed deviations from the government estimates. As
a consequence, the Navy's determination of probable cost to the government
was premised on each offeror using the same number of labor hours and
incurring the same material costs in performing the notional work.
Specifically, the Navy calculated each offeror's total cost based on the
government estimate of 939,452 labor hours and material costs of
$31,868,000.[5] In this regard, Earl's initial proposed cost, which was
based on substantial deviations from the government estimates, was
ultimately increased from [deleted] to $70,221,185.
With the total labor hours and material costs essentially fixed for all
offerors in connection with performing the notional work, the Navy's cost
realism evaluation focused on the offerors' rate information, e.g., an
offeror's direct composite weighted labor rate, general and
administrative, and subcontractor rates. The Navy reviewed the offerors'
proposed rates and made adjustments in order to establish what the agency
believed to be its best estimate of the rates that the offeror would
charge in performing the contract. Applying the adjusted rates to the
total labor hours and material costs for the notional work items, the
agency calculated each offeror's total cost to the government.
In evaluating the cost proposals and rate information for Earl [deleted]
the Navy considered the applicability of the resource agreement among
these firms. Because the members of the teaming arrangement were
competitors, they did not exchange rate information. Thus, while [deleted]
cost proposals allocated notional work items to each of the team members,
the Navy noted that [deleted] had only provided estimates of their team
members' rates. Rather than calculating [deleted] total costs based on the
estimated rates, the Navy instead calculated the rates based on
information contained in the competing offerors' own proposals, as well as
rate information it received from the Defense Contract Audit Agency
(DCAA). AR, Tab 19, CAP Report, Encl. 1, at 15, 24; AR, Tab 19, CAP
Report, Encl. 2, at 15, 19, 24. Thus, for example, in evaluating [deleted]
cost proposal, which estimated a direct labor rate for [deleted], the Navy
used the proposed direct labor rate information from [deleted] own
proposal "since that is based on more accurate information." AR, Tab 19,
CAP Report, Encl. 1, at 24.
Unlike [deleted] Earl did not assign any of the notional work to be
performed by [deleted] and, as a consequence, Earl did not include any
estimated rates for [deleted]. During its discussions with Earl, the Navy
questioned why Earl had prepared its proposal without identifying any
costs for work to be performed by its team members under the resource
agreement and specifically pointed to the portion of the resource
agreement stating that [deleted]. AR, Tab 19, Encl. 3, Cost Evaluation of
Earl's Proposal, at 7. Earl acknowledged the fact that its cost proposal
did not reflect any costs for [deleted] and stated as follows:
The strength of the Agreement is the core capabilities of the Agreement
members. The Notional Work Item Packages included in the solicitation
[deleted]. These core capabilities that, during the contract execution
[deleted] . . . . In addition, during contract execution, the efficient
use of Agreement members' labor resources will be utilized to achieve an
effective trade balance.
AR, Tab 10, Earl's Response to Discussion Questions, Encl. 1, at 6-7.
The final CAP report, prepared after receipt of Earl's response, takes
note of the resource agreement's assignment of production work, and
indicates a concern because Earl had not included labor hours or material
costs for [deleted] in connection with the notional work or received any
quotes from [deleted] for the individual work items. AR, Tab 21, Final CAP
Report for Earl, at 1.
Upon completion of the technical and cost evaluations, the TERP and CAP
provided their evaluations to the agency's best value advisory council
(BVAC). The following ratings resulted from these evaluations:
+------------------------------------------------------------------------+
|Offeror| Mgmt | Resource | Past | Overall | Final |
| |Capability|Capabilities|Performance|Technical Rating| Projected |
| | | | | | Cost |
|-------+----------+------------+-----------+----------------+-----------|
|Metro |[deleted] |[deleted] |[deleted] |[deleted] |[deleted] |
|-------+----------+------------+-----------+----------------+-----------|
|A |[deleted] |[deleted] |[deleted] |[deleted] |[deleted] |
|-------+----------+------------+-----------+----------------+-----------|
|Earl |Very good |Very good |Good |Very Good |$70,221,185|
|-------+----------+------------+-----------+----------------+-----------|
|B |[deleted] |[deleted] |[deleted] |[deleted] |[deleted] |
+------------------------------------------------------------------------+
AR at 8.
Considering the technical merits and evaluated cost of each proposal, the
BVAC completed a cost/technical trade-off among the various offers and
presented its findings to the agency's source selection authority (SSA).
In recommending the selection of Earl's proposal as the best value to the
government, the BVAC noted Earl's teaming partners to be a strength of its
proposal and concluded that because Metro only had a "slight technical
advantage" over Earl, the evaluated costs of the offerors were "very
important." AR, Tab 22, BVAC Report to SSA, at 7. After reviewing "all
source selection documentation relevant to this acquisition" and
concurring with the CAP's conclusion that Earl's proposal would result in
the lowest cost to the government, the SSA determined that Earl's proposal
represented the best value to the government. AR, Tab 24, Source Selection
Decision. Upon learning of the agency's decision, and after receiving a
debriefing, Metro filed its protest with our Office.
Metro alleges that the Navy's cost realism evaluation of Earl's cost
proposal was improper and that the best value determination was flawed.
According to Metro, in evaluating the proposals for cost realism, the Navy
mechanically applied the government estimates for labor hours and material
costs--normalizing these cost elements--without accounting for each
offeror's technical approach. Metro argues that, had the Navy properly
accounted for Earl's technical approach, it would have increased Earl's
evaluated cost since the government estimates were developed based on work
done in [deleted] and [deleted] ship yards, contractors which, according
to Metro, are technically superior and more efficient than Earl. Metro
also challenges the cost realism evaluation on the ground that the Navy
unreasonably failed to increase Earl's cost of performance to account for
[deleted] labor rates, which were higher than Earl's rates. In challenging
the Navy's best-value determination, Metro argues that the SSA was not
informed of relevant information concerning the evaluation of Earl's
technical and cost proposals.
Cost Realism Evaluation
When an agency evaluates proposals for the award of a cost-reimbursement
contract, an offeror's proposed estimated cost of contract performance is
not considered controlling since, regardless of the costs proposed by an
offeror, the government is bound to pay the contractor its actual and
allowable costs. Hanford Envtl. Health Found., B-292858.2, B-292858.5,
Apr. 7, 2004, 2004 CPD para. 164 at 9; PADCO, Inc.--Costs, B-289096.3, May
3, 2002, 2002 CPD para. 135 at 5; see Federal Acquisition Regulation (FAR)
sect. 16.301. As a result, a cost realism analysis is required to
determine the extent to which an offeror's proposed costs represent the
offeror's likely costs in performing the contract under the offeror's
technical approach, assuming reasonable economy and efficiency. FAR
sections 15.305(a)(1), 15.404-1(d)(1), (2); The Futures Group Int'l,
B-281274.2, Mar. 3, 1999, 2000 CPD para. 147 at 3. A cost realism analysis
involves independently reviewing and evaluating specific elements of each
offeror's cost estimate to determine whether the estimated proposed cost
elements are realistic for the work to be performed, reflect a clear
understanding of the requirements, and are consistent with the unique
methods of performance and materials described in the offeror's proposal.
FAR sect. 15.404-1(d)(1); Advanced Communications Sys., Inc., B-283650 et
al., Dec. 16, 1999, 2000 CPD para. 3 at 5. Based on the results of the
cost realism analysis, an offeror's proposed costs should be adjusted when
appropriate. FAR sect. 15.404-1(d)(2)(ii).
The evaluation of competing cost proposals requires the exercise of
informed judgment by the contracting agency. We review an agency's
judgment in this area only to see that the agency's cost realism
evaluation was reasonably based and not arbitrary. Jacobs COGEMA, LLC,
B-290125.2, B-290125.3, Dec. 18, 2002, 2003 CPD para. 16 at 26. An
agency's cost realism analysis need not achieve scientific certainty;
rather, the methodology employed must be reasonably adequate and provide
some measure of confidence that the agency's conclusions about the most
probable costs under an offeror's proposal are reasonable and realistic in
view of other cost information reasonably available to the agency as of
the time of its evaluation. See Metro Mach. Corp., B-295744, B-295744.2,
Apr. 21, 2005, 2005 CPD para. 112 at 10-11.
Application of Government Estimated Labor Hours and Material Costs
Metro challenges the Navy's cost realism analysis on the ground that the
Navy simply assumed all offerors could perform the notional work items at
the government- estimated labor hours and material costs without
considering whether those estimates were consistent with each offeror's
technical approach or how the offeror's technical capability affected
these cost elements in determining the offeror's total evaluated cost.[6]
According to Metro, this mechanical application of the government
estimates was inconsistent with the requirements of FAR sect. 15.404-1(d),
which states in part that a cost realism analysis is the process of
evaluating whether an offeror's cost elements "are consistent with the
unique methods of performance and materials described in the offeror's
technical proposal," as well as the terms of the RFP, which indicated that
the Navy would consider "other costs which are likely to be incurred by
the Offeror in performance of the requirements of the RFP." According to
Metro, had the Navy appropriately accounted for Earl's technical
capabilities, it would have upwardly adjusted Earl's proposed cost since
the government estimates were based on performance by contractors with
superior staffing, facilities, and greater efficiency than Earl's.
While an agency can utilize a reasonably derived estimate of labor hours
based on the government's experience as an objective standard to measure
realism of proposed costs, an agency may not mechanically apply its own
estimates for labor hours or costs--effectively normalizing cost elements
of an offeror's proposal to government estimates--without considering the
offeror's unique technical approach.[7] See, e.g., Information Ventures,
Inc., B-297276.2 et al., Mar. 1, 2006, 2006 CPD para. ___ at ___
(sustaining protest where agency normalized offerors' proposed labor hours
to government estimated levels under its cost realism analysis without
considering offerors' technical approach); Honeywell Tech. Solutions,
Inc.; Wyle Labs, Inc., B-292354, B-292388, Sept. 2, 2003, 2005 CPD para.
107 at 12 (sustaining challenge to agency's cost realism evaluation where
the agency mechanically adjusted offerors' staffing levels to government
estimates); The Jonathan Corp.; Metro Mach. Corp., B-251698.3, B-251698.4,
May 17, 1993, 93-2 CPD para. 174 at 10-11 (sustaining protest where
agency's cost realism evaluation failed to consider each offeror's
individualized technical approach and instead mechanically adjusted
proposed labor hours and material costs to government estimates).
Unlike in the cases cited above, however, the RFP in this case expressly
required offerors to base their cost proposals on the government-estimated
labor hours and material costs for accomplishing the notional work and
provided that any deviations from the estimates would only be accepted if
supported by clear and compelling evidence. Thus, offerors were on notice
that the government intended to use the government provided estimates in
calculating each offeror's cost to the government for the notional work
items. RFP at 165 ("Offerors are to use the Government-provided manhour
and material estimates for each notional package and propose those amounts
. . . . If support of an Offeror's proposed adjustment to an individual
work item is less than clear and compelling, the Government estimate will
be used to calculate an estimated cost to the Government for that work
item."). In explaining its decision to effectively normalize the labor
hour and material costs, the Navy stated as follows:
Here, NAVSEA preferred to focus its cost analysis on offerors' direct and
indirect rates, as well as any proposed significant subcontractor rates.
These are elements that can vary considerably among offerors. On the other
hand, NAVSEA expected less variance among the offerors with regard to the
manhours and material costs required to perform the work and had recent
data from availabilities performed to support its estimates. Accordingly,
the RFP made clear NAVSEA's intent to apply the Government estimates of
manhours and material costs to each offeror, unless clear and compelling
evidence, on a work item level, was provided to support proposed
deviation(s).
AR at 12.
Given the RFP's language advising offerors that the Navy would calculate
offerors' costs using the government's estimates for these cost elements,
it was reasonable for the Navy to calculate all offerors' probable cost of
performance, including Earl's, based on the government's labor hour and
material cost estimates for the notional work items. Cygnus Corp.,
B-275957, B-275957.2, Apr. 23, 1997, 97-1 CPD para. 202 at 11. To the
extent Metro now seeks to challenge the propriety of the solicitation's
cost evaluation scheme on the ground that it unfairly created an
artificial parity among offerors despite differing efficiencies, that
challenge is untimely since it concerns an alleged impropriety apparent
from the face of the solicitation, which Metro did not raised prior to the
closing time for submission of proposals. 4 C.F.R. sect. 21.2(a)(1)
(2005).
Cost of Resource Agreement
In challenging the Navy's cost realism evaluation of Earl's proposal,
Metro argues that the Navy failed to account for costs resulting from
Earl's resource agreement, which required Earl to subcontract [deleted]
percent of the production work to [deleted] which had higher direct labor
rates than Earl.[8] According to Metro, had the Navy accounted for these
costs by applying the expected subcontract percentages for performing the
work items under the notional packages, Earl's total cost of performance
would have been adjusted upward by nearly [deleted].[9]
As noted above, in evaluating Earl's costs, the Navy raised the question
of why Earl had not included any costs in its proposal associated with
work to be performed by its resource team members, [deleted] and Earl
responded [deleted].[10] While the final CAP report noted this missing
information as a concern, the Navy made no effort to capture the cost
associated with Earl's resource agreement, which the Navy considered to be
a strength in reaching its best-value determination. This cost element,
however, is clearly significant, given that the Navy effectively
normalized all cost elements other than the variable rates between
offerors. Specifically, as noted above, the Navy applied
government-estimated labor hours and material costs for the notional work
items to all the offerors, thus reducing the total cost calculation to a
comparison of the offerors' estimated direct and indirect rates in
performing the contract. In fact, in defending its normalization analysis,
as discussed above, the Navy itself asserted that its realism analysis
focused on offerors' rates, including proposed major subcontractor rates,
because the offerors' rates are the primary cost variables.
The goal of a cost realism evaluation is to determine, for each offeror, a
projected cost to the government in connection with an offeror's actual
performance under the contract. It involves evaluating whether an
offeror's costs are consistent "with the unique method of performance and
materials described in the offeror's technical proposal," in order to
determine the "probable cost of performance," which "should reflect the
Government's best estimate of the cost of any contract that is most likely
to result from the offeror's proposal." FAR sect. 15.404-1(d)(2).
Consistent with this concept, the RFP provided that the Navy would
consider "any other costs which are likely to be incurred by the Offeror
in performance of the requirements of the RFP." RFP at 168.
Given the Navy's emphasis on offerors' rates in its cost realism
evaluation, it was imperative for the Navy to consider [deleted] rates in
determining Earl's cost of performance since, as a result of the resource
agreement, these firms would be performing [deleted] percent of the
production work in the event Earl received award.[11] Thus, their rates
were a material element of Earl's actual performance. As the protester
aptly notes, the resource agreement, an evaluated strength in Earl's
proposal, came at a cost--the cost associated with having [deleted]
perform [deleted] percent of the production work. Because the Navy made no
effort to capture this cost, the Navy effectively ignored an actual cost
of Earl's proposal in performing the requirements of the RFP, rendering
the total calculated evaluated cost of Earl's proposal unrealistic and
therefore unreasonable.[12]
The Navy maintains that adjusting Earl's costs to account for [deleted]
rates would have been inconsistent with the terms of the RFP, which
required offerors to submit their cost proposals based on the notional
work items.[13] Any adjustment, the Navy argues, would be inconsistent
with Earl's approach in preparing its cost proposal based on the notional
work, and thus arbitrary. The Navy's argument, however, ignores the
purpose of the cost realism analysis. We recognize that accounting for the
cost of [deleted] performance would require the Navy to factor into Earl's
total projected cost, a cost that cannot be traced to a specific cost
element in connection with Earl's approach to the notional work packages,
given Earl's representation that [deleted]. We further recognize that by
the terms of the RFP, there was nothing inherently wrong with Earl's plan
[deleted] and that the solicitation did not include any assurances or
identify any percentages regarding the extent to which the notional work
reflected the actual total contract work.[14] Nonetheless, when faced with
notional work in excess of $70 million, and the disconnect between Earl's
resource agreement, which required Earl to allocate [deleted] percent of
the production work to [deleted], and Earl's cost proposal, [deleted], it
was unreasonable for the agency to take no action to resolve it.
The Navy was required by the terms of the RFP and the FAR, as noted above,
to perform a cost realism analysis to estimate Earl's cost of actual
performance. In estimating this actual cost, the notional work packages
served as a tool to reach an intelligent result. If used intelligently,
sample tasks can provide a reasonable basis to assess the relative cost of
the competing proposals, but only to the extent they are representative of
the contract work. See, e.g., S. J. Thomas, Inc., B-283192, Oct. 20, 1999,
99-2 CPD para. 73 at 5. Here, the Navy estimated Earl's cost of
performance solely for the notional work--ignoring another significant
cost in connection with Earl's actual performance, which was clearly
evident from Earl's proposal. Thus, to the extent the notional work
packages failed to accurately reflect Earl's true costs, the Navy was not
excused from its duty to account for an obvious and significant cost
element associated with the actual cost of performance by Earl.
Best Value Decision
Metro challenges the agency's best value decision, arguing that the SSA's
determination was not an informed judgment because the SSA was denied
material information concerning the evaluation of Earl's proposal. Insofar
as the cost evaluation was flawed as described above, we agree with
Metro's contention that the best value determination likewise was flawed.
We reject, however, Metro's allegation that the SSA was improperly denied
information with regard to the technical evaluation. Metro contends that
the BVAC had voiced concerns about Earl's plan to subcontract a
significant percentage of work to its teaming partners and specialty
subcontractors, yet this concern was never conveyed to the SSA. Metro's
protest relies on e-mail messages and a draft presentation for the SSA
which the BVAC circulated among its members, stating that "[Earl's] single
most important detractor is its plan to subcontract more than [deleted] of
work to its teaming partners and specialty subcontractors." Protester's
Comments, exh. D, at Navy E-mail 0363. In addition, with regard to Earl's
past performance, Metro challenges the BVAC's failure to include "bar
charts" of CPARS ratings in its final presentation to the SSA, which Metro
asserts had been included in a draft presentation showing Metro with an
18 percent advantage when compared with Earl.
Regarding the first issue, the agency explains that the statement relied
upon by Metro was derived from similar language in the TERP report
regarding Earl's lack of documentation regarding its teaming approach--a
concern ultimately resolved through discussions--and that it was raised in
a pre-decisional context solely for the purpose of beginning discussions
among members of the BVAC. Agency's Response to Protester's Comments at 16
and Encl. 5, Decl. of BVAC Chairman. Ultimately, the BVAC concluded, as
did the TERP, that Earl's subcontracting plan was not a weakness, and it
therefore did not include the comment in its final report or presentation
to the SSA. With regard to the "bar charts," while the agency states that
they were not presented to the SSA, the record reflects that the SSA was
provided with a report from the TERP as well as a final BVAC report and
presentation, which included a detailed discussion of the basis of the
offerors' adjectival past performance ratings. Because the comment and
charts relied upon by Metro were drafts and thus created in a
pre-decisional context, and because Metro does not challenge the
substantive aspects of the agency's final conclusions, Metro's arguments
in this regard are without merit.
Recommendation
We sustain the protest on the basis that the agency's cost realism
evaluation of Earl's proposal was improper because it failed to reasonably
capture the cost of Earl's teaming arrangement with [deleted]. We
recommend that the Navy hold discussions in order to more accurately gauge
the impact of the teaming agreement on offerors' actual costs and
reevaluate proposals to properly reflect this cost,[15] or, to the extent
the Navy believes it is necessary to alter the notional work packages in
order to more accurately capture the costs associated with the offerors'
proposals, we recommend that the Navy amend the solicitation and seek
revised proposals and conduct a new evaluation. Under either approach, the
Navy should make a new source selection decision. If, after the new
evaluation, the agency determines that another firm's proposal represents
the best value to the government, the agency should terminate Earl's
contract and make a new award.[16] We further recommend that the agency
reimburse the protester the reasonable costs of pursuing its protest,
including reasonable attorneys' fees. The protester's certified claim for
costs, detailing the time expended and the costs incurred on this
protest, must be submitted to the agency within 60 days of receiving this
decision. 4 C.F.R. sect. 21.8(f)(1).
The protest is sustained.
Anthony H. Gamboa
General Counsel
------------------------
[1] Metro withdrew its allegation that the Navy's award decision failed to
properly account for industrial mobilization considerations. See
Protester's Comments at 46.
[2] The agency explains that the availability work involves "relatively
short, labor-intensive Chief of Naval Operations (CNO) maintenance, repair
and modernization periods, generally scheduled at specific times
throughout a ship's operating cycle." Agency Report (AR) at 3 n.3.
[3] The solicitation indicated that the following LSD 41/49 and LPD 4
Class ships would be homeported in Norfolk, VA during all or part of the
contract: (1) USS Whidbey Island; (2) USS Gunston Hall; (3) USS Fort
McHenry; (4) USS Ashland; (5) USS Carter Hall; (6) USS Oak Hill; (7) USS
Nashville; and (8) USS Ponce. RFP at 48.
[4] [deleted] were parties to the resource agreement.
[5] There were two exceptions to the Navy's across-the-board use of the
government estimates. The Navy granted one of the offerors other than Earl
a deviation and evaluated that offeror's proposal based on a total of
[deleted] labor hours for performing the notional work. AR, Tab 19, CAP
Report, Encl. 2, at 32. In addition, the Navy granted Earl a deviation for
its material costs, resulting in a final evaluated cost to the government
for material of [deleted]. AR, Tab 19, CAP Report, Encl. 3, at 43.
[6] Metro also argues that in evaluating Earl's proposal for cost realism,
the Navy failed to account for its concerns regarding Earl's cost control
as evaluated under the past performance factor, as well as the fact that
Earl proposed extensive deviations from the government estimates, which
were uniformly denied by the agency. According to Metro, these factors
should have led the Navy to conclude that Earl would not be capable of
performing the notional work at the government estimated levels. However,
as discussed below, we conclude that the Navy reasonably applied the
government estimates to Earl's proposal. To the extent Metro is arguing
that Earl's initial proposal was unrealistically low and should have been
rejected, the Navy notes that Earl's final proposal revision did not
substantially deviate from the government estimates, and that the Navy did
not believe rejection of Earl's proposal was warranted. There is nothing
to suggest that this judgment was unreasonable.
[7] Normalization that involves the adjustment of offers to the same
standard or baseline is permissible where there is no logical basis for a
difference in approach or where there is insufficient information provided
with the proposals, leading to the establishment of common "should have
bid" estimates by the agency. See The Research Found. of State Univ. of
New York, B-274269, Dec. 2, 1996, 96-2 CPD para. 207 at 5. An agency's
normalization of costs is improper, however, where varying costs between
competing proposals result from different technical approaches that are
permitted by the RFP. See Dynalectron Corp.; Lockheed Elec. Co., Inc.,
B-181738, Jan. 15, 1975, 75-1 CPD para. 17 at 18-21.
[8] The record reflects that the rates the Navy calculated for [deleted]
as subcontractors, which the Navy utilized in calculating [deleted] total
costs of performance, were higher than the prime production rate
calculated for Earl. AR, Tab 23, BVAC Presentation to SSA, at 56, 58, 62.
[9] Metro also contends that the Navy improperly calculated each of the
team member's subcontractor rates. According to Metro, the Navy failed to
account for the reduction in each firm's business base associated with the
team member performing as a subcontractor under the contract, rather than
as a prime contractor. Accounting for this error results in an additional
increase of [deleted] (as calculated by Metro) to Earl's total calculated
cost of performance.
[10] While Metro contends that Earl sought to "game" the evaluation by not
including [deleted] in its cost proposal, there is nothing in the record
to support such a conclusion. Given that the members of the resource
agreement did not exchange their pricing information, Earl may not have
known that its rates were lower than those of [deleted].
[11] As noted above, unlike Earl, [deleted] had in fact allocated notional
work to each of the resource agreement team members in their cost
proposals, albeit at percentages somewhat different from the percentages
allocated under the resource agreement. [Deleted] proposed [deleted]
percent of the work, while the resource agreement allocated [deleted]
percent of production work to [deleted]. [Deleted] also proposed Earl to
perform approximately [deleted] percent of the work, while the resource
agreement allocated [deleted] percent of the work to Earl. AR, Tab 19, CAP
Report, Encl., 1 attach. B. Similarly, [deleted had proposed [deleted] for
approximately [deleted] percent of the production work, while the resource
agreement allocated [deleted] percent to [deleted]. [Deleted] cost
proposal also included approximately [deleted] percent of the work for
Earl, while the resource agreement allocated [deleted] percent of the
production work to Earl. AR, Tab 19, CAP Report, Encl. 2, attach. B.
[12] Unlike Metro's challenge to the Navy's decision to equalize all
offerors with respect to two cost variables--labor hours and material
costs--a determination which was apparent from the express terms of the
RFP, Metro could not have appreciated the inability of the notional work
items to reasonably capture Earl's true cost of performance until Earl
submitted its proposal based on the teaming arrangement with [deleted] and
the Navy reviewed Earl's proposal in connection with the notional work
items. Thus, to the extent one could view the solicitation as defective
because the chosen notional work items therein were incapable of
accurately reflecting Earl's actual cost of performance, that would
constitute a latent defect--not one apparent from the face of the
solicitation.
[13] While the notional packages here contained 37 work items, the Navy
explains that the average number of work items performed during a typical
availability is more than 100. Agency's Response to Protester's Comments
at 9. Moreover, the Navy indicates that while it seeks to include a
representative sampling, "the notional work packages in this case will
constitute only a relatively minor portion of the work anticipated" and
therefore "may not provide every offeror with the opportunity to capture
all aspects of its technical approach, i.e., . . . to allocate this
relatively minor portion of the total availability in accordance with a
proposed `teaming arrangement.'" Id.
[14] The total estimated value of the contract is not clear from the
record. See AR, Tab 25, Agency Business Clearance Memorandum, at 2
(indicating that the 7-year estimated value of the contract was in excess
of $430 million); AR, Tab 25, Small Business Coordination Record
(indicating that the total estimated contract value, including options,
was $239,584,590).
[15] Because the teaming agreement involved [deleted] as well, it may be
appropriate for the Navy to also reconsider the cost effect of the teaming
agreement with respect to these firms.
[16] During the course of the protest, the Navy notified our Office and
the protester that it had decided to proceed with performance of the
contract awarded to Earl on the basis that continued performance was
justified by "urgent and compelling circumstances" which significantly
affect the interest of the United States. Letter from Contracting Officer
to GAO (Jan. 27, 2006). Given that the contract requires performance with
respect to numerous scheduled availabilities over a 7-year period, we
believe that our recommendation can be implemented and meaningful relief
attained notwithstanding continued performance by the Navy.