TITLE: B-298266, Serco, Inc., August 9, 2006
BNUMBER: B-298266
DATE: August 9, 2006
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B-298266, Serco, Inc., August 9, 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: Serco, Inc.

   File: B-298266

   Date: August 9, 2006

   Claude P. Goddard, Jr., Esq., Stephen B. Hurlbut, Esq., J. Michael
   Littlejohn, Esq., and Daniel J. Donohue, Esq., Akerman Senterfitt Wickwire
   Gavin, for the protester.

   James J. McCullough, Esq., Deneen J. Melander, Esq., and Steven A.
   Alerding, Esq., Fried, Frank, Harris, Shriver & Jacobson LLP, for AMSEC
   LLC, an intervenor.

   Michael S. Roys, Esq., Space and Naval Warfare Systems Command, Department
   of the Navy, for the agency.

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

   DIGEST

   Protest is sustained where the agency rejected the awardee's rationale for
   proposed staffing levels under sample tasks, which led the agency, as part
   of a cost realism analysis, to more than double the hours proposed by the
   awardee to correspond with the government estimate, but the
   contemporaneous record did not demonstrate that the agency, in light of
   its cost realism adjustment, reviewed the awardee's understanding of the
   contract requirements, as required by the solicitation.

   DECISION

   Serco, Inc. protests the award of a contract to AMSEC LLC under request
   for proposals (RFP) No. N65236-05-R-0501, issued by the Department of the
   Navy, Space and Naval Warfare Systems Command, for program management,
   engineering design, industrial work, operational verification and other
   installation support services necessary to accomplish the Navy's command,
   control, communications, computer, intelligence, surveillance, and
   reconnaisance maintenance, modernization, and new system installation for
   requirements on the West Coast.[1] Serco objects that the Navy failed to
   consider the potential impact of the Navy's cost adjustments in the
   technical evaluation of AMSEC's proposal.

   We sustain the protest.

   BACKGROUND

   The RFP contemplated the award of a single
   indefinite-delivery/indefinite-quantity, cost-plus-incentive-fee and
   fixed-fee, performance-based contract for all West Coast requirements.[2]
   The RFP specified that the non-price evaluation factors were significantly
   more important than price.[3] When issued, the RFP specified two non-price
   evaluation factors (specifically, professional employee compensation plan
   and small business subcontracting plan) that would be evaluated on an
   "acceptable/unacceptable" basis, while the remaining non-price evaluation
   factors (as relevant here, understanding of work--sample tasks, and
   management plan) would be assigned points. Offerors also were required to
   provide responses to three sample tasks,[4] including pricing each task,
   and offerors were advised that the cost/price evaluation would be based on
   the total cost proposed for the sample tasks. The RFP specified that award
   would be made to the offeror whose proposal was determined to provide the
   "best value" to the government. RFP at 125.

   Both AMSEC and Resource Consultants, Inc. (RCI)[5] submitted timely
   proposals to perform the West Coast portion of the RFP. Upon evaluating
   the proposals, the Navy "determined that it was not possible to perform a
   proper cost realism evaluation on the offerors['] proposals."
   Pre-Negotiation Business Clearance Memorandum at 8. Among the reasons for
   that conclusion were that some offerors had assumed that other vendors
   (such as shipyards) would perform some elements of the sample tasks, some
   offerors' amounts for other direct costs appeared flawed, and "none of the
   offerors appeared to have enough hours to perform the taskings in
   comparison with the [independent government estimate (IGE)]," which had
   not been disclosed to offerors. Id. at 8-9.

   The Navy then determined that it would disclose the IGE, amend the RFP,
   hold discussions, and ultimately obtain revised proposals. The Navy issued
   amendment No. 5 to the RFP on December 14, 2005. The amendment now
   included the IGE staffing levels for the sample tasks[6] and, as relevant
   here, instructed offerors as follows:

     Factor F -- Cost/Price Proposal, the instructions in the pricing model
     for the sample task cost proposal submissions are revised to include the
     following additional information:

       * The IGE hours for each sample task and subtask will be provided.
       * Offerors will be directed to provide data to substantiate any
         deviations from the IGE hours.
       * Insufficient substantiation will result in cost realism adjustments
         to proposed hours using the average hourly rate as the multiplier.

   RFP amend. 5, at 2.

   Amendment No. 5 also removed two of the four subfactors within the
   understanding of work evaluation factor, and modified this factor from the
   assignment of points to a pass/fail evaluation. Pre-Negotiation Business
   Clearance Memorandum at 14. The deleted subfactors had provided for an
   evaluation of sample task staffing and sample task project critical path
   schedules and milestones. After revision, the understanding of work factor
   read, in relevant part, as follows:

     The sample tasking is intended to review each offeror's ability to
     perform tasks set forth in the Statement of Work. This information shall
     demonstrate that offerors fully understand the specific and unique
     requirements of the efforts. . . .

     On each Sample Task, the following two subfactors shall be submitted for
     review:

     Subfactor D1 -- Detailed Statement of Work based on government provided
     Statement of Objectives (SOO) (at time of formal RFP release) outlining
     all contractor and government responsibilities.

     Subfactor D2 -- Offeror shall address all foreseeable changes in
     assumptions and cost impacts of those changes should they occur (i.e.,
     compressed work schedule, planning ship yard drawing quality, etc.)

   Id. at 3.

   In implementing this change, the amendment reiterated that the
   understanding of work evaluation factor would be "used to evaluate each
   offeror's depth of understanding and knowledge of the solicitation
   requirements and [the offeror's] demonstrated ability to perform tasks set
   forth in the Solicitation Statement of Work." Id. at 7.

   Amendment No. 5 also reconfirmed that the Navy would consider the link
   between an offeror's pricing of the sample tasks and the offeror's
   technical approach by stating the following:

     Cost realism pertains to the offeror's ability to project costs which
     are reasonable and which indicate the offeror's understanding of the
     nature and scope of the work to be performed. The purpose of this
     evaluation shall be: (1) to verify the offeror's understanding of the
     requirements; (2) to assess the degree to which the cost/price reflects
     the approaches and/or risk assessments made in the technical proposal as
     well as the risk that the offeror will provide the supplies or services
     for the offered prices/cost; and (3) to assess the degree to which the
     costs included in the cost/price proposal accurately represent the work
     efforts included in the proposal and/or other cost-related information
     available to the Contracting Officer.

   Id. at 7-8.

   Amendment No. 5 further noted, as follows:

     In addition to easily identifiable cost adjustments, unrealistic cost
     proposals may result in a re-evaluation and concurrent rescoring of
     technical proposals. Such re-evaluation based on the cost realism
     analysis could negatively impact the technical rating and ranking of the
     proposal.

   Id. at 8.

   It also cautioned offerors, as follows:

     Proposals which are unrealistic in terms of technical or schedule
     commitments, or unrealistically high or low in terms of cost, may be
     deemed reflective of an inherent lack of technical competence, or
     indicative of a failure to comprehend the complexity of risks of the
     proposed work and may be grounds for rejection of the proposal.

   Id. at 7.

   Both RCI and AMSEC submitted FPRs addressing issues raised in discussions
   and responding to the sample task pricing instructions in amendment No. 5.
   RCI submitted sample task pricing [deleted] Navy's IGE. However, AMSEC
   provided an explanation that the IGE did not reflect AMSEC's performance
   and, thus, AMSEC would rely on its own much lower staffing estimate, as it
   had in its initial proposal. AMSEC FPR, Sea Enterprise Basis of Estimate,
   at 1. This "Sea Enterprise Basis of Estimate," along with accompanying
   documentation, was an effort by AMSEC to provide the persuasive
   explanation, as required by amendment No. 5, for its decision not to
   utilize the IGE for the pricing of the sample tasks.

   Notwithstanding AMSEC's attempts at justifying its lower staffing, the
   Navy rejected those justifications, finding that "there was insufficient
   substantiating rationale to support the alternate proposed hours." Source
   Selection Decision at 9. With respect to AMSEC's claim to be able to
   perform tasks at significantly reduced levels of effort, as compared with
   the Navy's historical experience, the Navy found that AMSEC's claims "rest
   on an unsubstantiated assumption that contractor hours are substantially
   lower for work customarily performed by shipyards." Post-Negotiation
   Business Clearance Memorandum at 39, 59. For example, some of the Navy's
   "concerns regarding AMSEC's rationale" included the following:

     * While AMSEC may have performed some taskings at a level of effort
       comparable to their proposed hours, they have, by their own admission,
       proposed hours that do not take into account changes that historically
       occur on such installations and are relying on "word of mouth" to
       support proposing hours that are less than shipyards.

     * AMSEC provided no substantiation to support their claim that support
       contractors required less hours than shipyards for the same tasking.

   Source Selection Decision at 10.

   After finding that AMSEC's deviations from the IGE were unsupported, the
   Navy determined that it would increase AMSEC's evaluated cost to reflect
   the level of effort represented by the IGE. To do so, the Navy multiplied
   the average hourly rate[7] for AMSEC by the difference in labor hours
   between the IGE (118,248 hours) and AMSEC's proposed level of effort
   ([deleted] hours), resulting in a [deleted] percent increase in AMSEC's
   overall evaluated price. Affidavit of Navy Cost and Price Analyst at 2.

   The Navy's source selection decision observed that "AMSEC achieved a total
   technical rating of 82.3 (Exceptional), and RCI achieved a total technical
   rating of 81.9 (Exceptional)" and that both firms had received a "pass"
   rating for the understanding of work evaluation factor. Although listing
   the factors and subfactors, with their respective point scores and
   corresponding adjectival ratings, which showed some differences, the
   source selection authority stated as follows:

     Within each of the Factors/Subfactors, AMSEC and RCI have demonstrated
     comparable strengths. Each of these offerors has the capability to
     perform the planned tasking with little risk and [they] are, therefore,
     considered technically equal.

   Source Selection Decision at 14-15.

   After noting the significant cost realism adjustments made to AMSEC's
   proposal, as well as the Navy's concerns with AMSEC's proposed staffing,
   as quoted above, the source selection authority stated, without
   elaboration, that "[e]ven with these adjustments, the Government has
   determined that an award to AMSEC does not propose any significant risk."
   She concluded, "Therefore, I have determined that award to AMSEC--the
   technically equal, lower proposed and evaluated cost offeror--represents
   the `best value' to the Government." Id. at 16.

   ISSUE AND ANALYSIS

   Serco protests that the significance of the Navy's cost realism
   adjustments should have led the Navy to conclude that AMSEC's proposal
   "reflect[ed] an inherent lack of technical competence." Alternatively,
   Serco argues that the cost adjustments should have caused the Navy to find
   AMSEC's proposal unacceptable under the understanding of work evaluation
   factor, or should have resulted in the Navy downgrading AMSEC's proposal
   under the management plan evaluation factor. Protest at 8-9.

   The Navy argues that the technical evaluation factors identified by
   Serco--understanding of work and management plan (particularly, the
   staffing plan subfactor)--had no significant relationship to the sample
   task staffing. Legal Memorandum at 17-19. The Navy also argues that "[t]he
   fact the Government did not accept AMSEC's justification for using fewer
   hours in its cost proposal and increased AMSEC's hours and cost as it said
   it would in Amendment 0005, did not alter the fact that AMSEC's proposal
   was compliant with the solicitation." Navy Supplemental Comments at 4.
   Finally, the Navy argues that there was no requirement in the revised RFP
   to reassess the initial technical evaluation in light of the FPRs. Legal
   Memorandum at 20.[8]

   Typically, where an agency concludes in the course of a cost realism
   analysis that an offeror's proposed staffing levels are unrealistically
   low, but the corresponding technical approach is evaluated as appropriate,
   the agency must reconcile those conclusions. See Information Ventures,
   Inc., B-297276.2 et al., Mar. 1, 2006, 2006 CPD para. 45 at 6. Here,
   however, although the Navy cost realism analysis concluded that the
   awardee's proposed staffing levels were unrealistically low, the Navy had
   removed from the evaluation scheme, through amendment No. 5, the
   subfactors that were most directly relevant to assessing the awardee's
   understanding of the RFP's requirements. Nonetheless, the RFP retained the
   broader assessment of whether an offeror's sample task responses evidenced
   a full understanding of the specific and unique requirements of the sample
   task efforts. In addition, the amendment retained and reiterated a
   requirement to review the impact of any cost realism adjustments on the
   offeror's technical evaluation. As reflected in the discussion below, the
   Navy failed to reevaluate AMSEC's technical understanding of the RFP
   requirements, or explain why no reevaluation was needed, in light of the
   cost realism adjustments made to AMSEC's proposal.

   In its FPR, AMSEC declared that it "stands by the hours originally
   proposed" in its initial proposal which, as discussed above, the Navy
   concluded it could not properly evaluate. As one example of the types of
   understaffing that Serco argues should have caused the Navy to revise the
   technical ratings assigned to AMSEC's proposal, Serco points to AMSEC's
   response to sample task No. 5, subtask No. 6, for installation of
   Navigation Sensor System Interface equipment on a surface ship. For that
   subtask, the IGE estimated 4,155 hours, while AMSEC proposed to perform
   the subtask in [deleted] hours--less than [deleted] of the IGE effort.
   AMSEC FPR, Sea Enterprise Basis of Estimate, at 20; Serco Supplemental
   Comments at 7. In its FPR explaining its lower staffing for the subtask,
   AMSEC emphasized that "[t]he basis for the IGE must vary greatly from the
   scope of the sample task." AMSEC FPR, Sea Enterprise Basis of Estimate, at
   20. More generally, the AMSEC FPR stated five separate times that "Raising
   our hours to that of the IGE is inappropriate." Id. at 6, 8, 10, 13, 20.
   As noted previously, the Navy's cost realism evaluation found AMSEC's
   deviations rested on unsubstantiated assumptions and AMSEC's explanation
   lacked a "substantiating rationale." Source Selection Decision at 9.

   While the Navy adjusted AMSEC's costs upward as part of its cost realism
   analysis, the contemporaneous record provides no evidence that the Navy
   considered the potential effect of AMSEC's dramatically lower proposed
   hours in the technical evaluation, particularly in the evaluation of
   AMSEC's proposal under the understanding of work and management plan
   evaluation factors. Despite having listed concerns with the approach
   proposed by AMSEC in its sample task responses, and ultimately concluding
   that AMSEC's sample task hours should be more than doubled to correspond
   to the IGE, the Navy's business clearance memorandum did no more than
   summarily conclude that "[e]ven with these adjustments, the Government has
   determined that an award to AMSEC does not propose any significant risk."
   Post-Negotiation Business Clearance Memorandum at 59.

   In this regard, the record appears to show that prior to holding
   discussions and prior to receiving revised sample task responses in the
   FPRs, the Navy had already determined that all offerors would receive a
   "pass" rating under the planned revision to the evaluation methodology for
   the understanding of work evaluation factor (that is, deleting two
   subfactors and changing from a points-based to a pass/fail-based
   evaluation scheme). Pre-Negotiation Business Clearance Memorandum at
   15.[9] Further, the Navy's contemporaneous explanation is that "[b]ecause
   the resultant adjustment did not cause AMSEC's price to become the higher
   price[d] offer, no further analysis was performed on [AMSEC's] rationale
   for proposing alternate hours." Post-Negotiation Business Clearance
   Memorandum at 39. Thus, the record confirms that the Navy gave no
   meaningful consideration to reviewing its earlier technical evaluation in
   light of the concern that arose that AMSEC had substantially
   underestimated--by more than 50 percent--the level of effort needed to
   perform the contract.

   An agency is obligated to conduct an evaluation consistent with the
   evaluation scheme set forth in the RFP. Federal Acquisition Regulation
   sect. 15.305(a); Dismas Charities, Inc., B-292091, June 25, 2003, 2003 CPD
   para. 125 at 9. In our view, the Navy's failure to reevaluate AMSEC's
   technical proposal in light of its cost realism adjustments was contrary
   to the RFP. As relevant here, under the RFP cost realism language, the
   Navy was required "to verify the offeror's understanding of the
   requirements." In addition, the amended RFP requesting FPRs stated that
   the Navy would require offerors to "demonstrate that offerors fully
   understand the specific and unique requirements of the efforts" in their
   sample task responses, and that the Navy would "evaluate each offeror's
   depth of understanding and knowledge of the solicitation requirements and
   [the offeror's] demonstrated ability to perform tasks set forth in the
   Solicitation Statement of Work." Notwithstanding this RFP language, the
   record reflects, as described above, that the Navy never meaningfully
   reviewed technical proposals after the evaluation of initial proposals in
   light of the agency's conclusion, after reviewing the FPR, that AMSEC had
   underestimated the level of effort to perform the sample task requirements
   by more than 50 percent.[10]

   On this record, we cannot determine what, if any, revisions the Navy
   evaluators would have made to the technical ratings of AMSEC's proposal,
   particularly under the pass/fail evaluation scheme for the understanding
   of work evaluation factor and for the technical evaluation aspects of the
   cost realism evaluation described in amendment No. 5, given the magnitude
   of the cost realism adjustments made to AMSEC's proposal. However, the
   facts set forth above raise a substantial chance that, because of the very
   close technical ratings here, such a review could have resulted in an
   award to RCI. We conclude, therefore, that RCI was competitively
   prejudiced by the Navy's failure to demonstrate a reasonable consideration
   of the impact of the conclusions of the cost realism evaluation on AMSEC's
   technical evaluation. Accordingly, we sustain the protest.

   RECOMMENDATION

   We recommend that the Navy reevaluate the FPR of AMSEC and adequately
   document whether the cost realism adjustments made by the Navy require
   revision to AMSEC's technical evaluation ratings.[11] The Navy should then
   make a new source selection decision. If, after the new evaluation, the
   Navy determines that RCI's proposal represents the best value to the
   government, the Navy should terminate AMSEC's contract and make an award
   to RCI.

   We further recommend that the agency reimburse the protester the
   reasonable costs of filing and pursuing its protest, including reasonable
   attorneys' fees. The protester's certified claim for costs, detailing the
   time expended and the costs incurred, must be submitted to the agency
   within 60 days of receiving this decision. Bid Protest Regulations, 4
   C.F.R. sect. 21.8(f)(1) (2006).

   The protest is sustained.

   Gary L. Kepplinger

   General Counsel

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

   [1] The solicitation also resulted in the award of a separate contract for
   requirements on the East Coast which is not at issue in this protest.

   [2] The Navy estimates that it will place over $312 million in orders with
   the awardee of the contract for West Coast requirements.

   [3] The evaluation factors were as follows: (A) corporate experience; (B)
   past performance; (C) management plan; (D) understanding of work--sample
   tasks; (E) small business participation; (F) cost/price; (G) professional
   employee compensation plan; and (H) small business subcontracting plan.
   While price was listed among the evaluation factors, under the RFP, price
   was not to be scored. Pre-Negotiation Business Clearance Memorandum at 10.

   [4] While the RFP contained six sample tasks, only three of the sample
   tasks were applicable to proposals for the West Coast work at issue here.

   [5] The Navy initially argued that Serco was not an interested party to
   pursue the protest because RCI, not Serco, submitted a proposal. After
   further development of this issue, the Navy conceded that Serco had
   standing to protest. In this regard, the Navy stated that "Serco has
   provided evidence that it is the `parent' firm for protest `standing'
   purposes, having purchased 100% of RCI Holdings' stock." Legal Memorandum
   at 30. Accordingly, we have no basis on this record to question Serco's
   standing to protest on behalf of RCI. In this decision, we identify the
   protester's proposal submissions as those of RCI.

   [6] Prior to the deadline for submission of final proposal revisions
   (FPR), the Navy issued additional amendments that made revisions to the
   IGE staffing model.

   [7] Amendment No. 5 provided that in the case of unrealistic pricing, the
   Navy would adjust the unrealistic offeror's pricing by utilizing the
   offeror's average hourly rate.

   [8] In fact, the technical evaluators completed their evaluation of the
   understanding of work evaluation factor (Factor D) before the Navy
   concluded that AMSEC's deviations from the IGE in pricing the sample tasks
   were unsubstantiated, resulting in the upward adjustment of AMSEC's
   evaluated cost. Post-Negotiation Business Clearance Memorandum at 39 ("no
   further analysis was performed on [AMSEC's] rationale for proposing
   alternate hours" beyond increasing its evaluated cost).

   [9] This pre-FPR document included a table labeled "Technical Evaluation
   Summary with Removal of Factor D Points" that already showed all offerors
   rated "PASS" for the understanding of work evaluation factor (Factor D).

   [10] As an example, Serco points out that AMSEC's supporting rationale for
   sample task No. 5, subtask No. 6, referenced similar work performed by
   AMSEC on the USS Shiloh, but that AMSEC explicitly acknowledged that the
   structural work on the USS Shiloh had been performed by another
   contractor. In its FPR, AMSEC expressly stated that "[w]e need another
   example other than SHILOH to compare the effort for the structural work."
   Nevertheless, AMSEC then essentially reiterated its lower estimate for the
   structural portion of the subtask without providing another example to
   explain how it could perform the work on the basis of its lower staffing.
   AMSEC FPR, Sea Enterprise Basis of Estimate, at 19. The Navy did not
   pursue an explanation of how AMSEC would perform such a requirement in
   light of the firm's low staffing for this task.

   [11] Serco also challenges the Navy's position that, contrary to AMSEC's
   FPR, the Navy could require AMSEC to issue only fixed-price subcontracts
   to one subcontractor, in order to control the risk posed by that
   subcontractor. The risk arose from the inability of the Defense Contract
   Audit Agency to verify the subcontractor's indirect rates (which had been
   "significantly lowered" in AMSEC's FPR, while that subcontractor's share
   of the work had increased to nearly 25 percent). Affidavit of Navy Cost
   and Price Analyst at 2; Post-Negotiation Business Clearance Memorandum at
   37. The record is not clear about how the Navy ultimately resolved this
   cost issue. In implementing our recommendation for corrective action, the
   Navy should consider AMSEC's proposal for this subcontractor and the
   significance of the subcontractor's unverified indirect rates.