TITLE: B-298651, 2B Brokers et al., November 27, 2006
BNUMBER: B-298651
DATE: November 27, 2006
**********************************************
B-298651, 2B Brokers et al., November 27, 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: 2B Brokers et al.

   File: B-298651

   Date: November 27, 2006

   Richard D. Gluck, Esq., Benjamin J. Lambiotte, Esq., Robert A. Boraks,
   Esq., Harold G. Bailey, Jr., Esq., and Amy Morton, Esq., Garvey Schubert
   Barer, for the protesters.

   Lary W. Mohl, Esq., and Peter Ries, Esq., U.S. Transportation Command,
   Department of Defense, and Kenneth Dodds, Esq., Small Business
   Administration, for the agencies.

   Guy R. Pietrovito, Esq., and James A. Spangenberg, Esq., Office of the
   General Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Protest that solicitation for the Defense Transportation Coordination
   Initiative that consolidated transportation coordination and freight
   transportation services was unduly restrictive of competition and was an
   impermissible bundling of requirements under the Small Business Act is
   denied, where the agency reasonably determined that consolidation would
   result in substantial cost savings and efficiencies and was necessary to
   meet the agency's needs.

   DECISION

   2B Brokers and 89 other firms[1] protest the terms of request for
   proposals (RFP) No. HTC711-06-R-0001, issued by the United States
   Transportation Command, Department of Defense (DoD), for freight
   transportation and transportation coordination services within the
   continental United States (CONUS) in support of the agency's Defense
   Transportation Coordination Initiative (DTCI).[2] The agency describes
   DTCI as

     a CONUS freight initiative aimed at increasing operational
     effectiveness and at the same time obtaining efficiencies. The 
     premise is that DoD will increase operational effectiveness by
     reducing cycle times and improving predictability through the use
     of more dedicated truck schedules and cross docking operations. This
     premise also includes obtaining efficiencies through best business
     practices such as increased consolidations and mode conversions.
     The DTCI coordinator would have the visibility of freight movement
     requirements across the CONUS and access to a network of 
     transportation providers to schedule and fulfil[l] those
     requirements.

   Agency Report (AR), Tab 44, DTCI Information Paper, May 3, 2004, at 1.

   The protesters complain that the RFP improperly bundles requirements, is
   unduly restrictive of competition, and provides for the performance of
   services that are inherently governmental in nature.

   We deny the protest.

   BACKGROUND

   Currently, DoD transports freight from more than 600 sites using hundreds
   of commercial freight transportation providers to move the freight to
   thousands of destinations within CONUS. AR, Tab 25, Acquisition Plan, at
   2; Contracting Officer's Statement of Facts (COSF) at 1. This freight
   transportation is managed by more than 600 transportation officers, who
   are assigned to various components of DoD, such as the Defense Logistics
   Agency, the Army, the Navy, and the Air Force, and accorded the authority
   to place orders under the Tailored Transportation Contract (TTC) or to
   issue tenders for freight shipment. Hearing Transcript (Tr.), day 1, at
   21-22, 40; Agency's Post-Hearing Comments at 2.[3] According to the
   agency, "[m]ultiple information systems are employed to execute and manage
   this shipment activity; but there is no centralized planning,
   coordination, or control. DoD shippers act unilaterally by independently
   selecting the mode, level of service, and transportation provider." AR,
   Tab 10, DTCI Market Research, July 2005, at 1-1. In this regard,
   transportation officers act in a decentralized fashion focusing on
   satisfying local shipper requirements rather than DoD-wide efficiency or
   expense. Tr., day 1, at 40. The agency states that, as a result of this
   lack of planning, coordination, and control, shipment predicability is
   inconsistent and transportation costs are higher because enterprise-wide
   efficiencies are not employed. COSF at 2.

   In 1997, the agency initiated a review of its transportation documentation
   and financial processes to explore "reengineering" its freight shipment
   system; as part of this effort, DoD studied logistics processes used by
   the commercial sector and discovered that some commercial companies were
   using third-party logistics (3PL) firms to manage their transportation
   needs.[4] See AR, Tab 5, 3PL Prototype Test, Management Reform Memorandum
   #15 Final Report, Aug. 15, 2002, at 2. In 2001, DoD conducted a prototype
   test with a 3PL firm, Eagle Global Logistics (EGL), to manage
   transportation of selected commodities outbound from the southeast region
   of the United States.[5] The agency tasked the University of Tennessee's
   National Transportation Research Center to "act as an independent observer
   and provide comments and analysis during the Prototype Test of the 3PL
   concept." AR, Tab 7, University of Tennessee 3PL Prototype Test Report,
   Sept. 15, 2002, at 2. From this test, DoD concluded that a 3PL firm could
   successfully integrate with DoD shipping processes:

     The prototype did highlight a number of valuable lessons for DoD. The
     most notable was the fact the concept could work if designed and
     implemented correctly. The 3PL prototype was not without its problems
     and challenges. Some glitches overshadowed the success of the test. For
     example, the implemented concept of operation relegated the 3PL provider
     to a transportation brokerage relationship rather than a fully
     integrated supply chain business partner. Another lesson was learned
     that the 90 days (from the date of the award) allotted for
     implementation was not sufficient to accomplish the automated system
     interfaces, training, and change management tasks commonly required in
     such startups.

   AR, Tab 10, DTCI Market Research, July 2005, at 1-1. Although the
   prototype test did not show any cost savings, the University of Tennessee
   found that the prototype contract "was not structured to allow the 3PL to
   optimize shipment consolidations and therefore reduce DoD's transportation
   costs," and recommended the intregration of coordination services with
   freight transportation to achieve cost savings. AR, Tab 7, University of
   Tennessee 3PL Prototype Test Report, Sept. 15, 2002, at 3.

   In addition, the agency performed market research with the assistance of
   Logistics Management Institute (LMI), a nonprofit government consulting
   group, and GENCO, a 3PL firm that provides, among other things,
   transportation services.

     The primary objective of the DTCI market research was to gain a general
     understanding of commercial logistics business practices in which a
     third-party service provider performs at least some of a client's
     logistics management services. The research also was to determine if
     there are providers in the commercial marketplace that can meet or
     exceed the quantitative and qualitative requirements of the DTCI
     initiative.

   AR, Tab 10, DTCI Market Research, July 2005, at 1-2. This reseach included
   a review of trade journals and academic studies and interviews and surveys
   of industry and academia. Based upon this research, DoD concluded that
   there were several companies that could "address the specific concerns and
   requirements of DoD." Id. at 1-3.

   A business case analysis (BCA) was performed to "determine whether a
   world-class 3PL [firm] could increase operational effectiveness and
   improve shipment efficiency by lowering costs and improving predictability
   through better utilization of available rates and increased shipment
   consolidations through cross docking,[6] mode shifting, and
   scheduling."[7] COSF at 4. Based on this analysis, the agency concluded
   that selection of a 3PL firm to centrally manage DoD's freight
   transportation within the CONUS "would improve effectiveness, gain
   efficiencies, and achieve cost savings." Id.; AR, Tab 8, BCA, Apr. 2006.
   In this regard, the agency estimated that such an approach would realize
   estimated net savings of approximately $[Deleted] million, which was about
   [Deleted] percent of the agency's historical operation and maintenance
   costs, after considering "the phased in/safe start approach and
   implementation/life-cycle costs (to include management services costs,
   award fee costs, and Program Management Office (PMO) costs)." AR, Tab 8,
   BCA, Apr. 2006, at 4-18; Agency Memorandum of Law at 4. The cost savings
   were calculated using a cost model, under which the agency's historic
   transportation costs were compared to optimized, weighted average rates
   the government could hope to achieve by leveraging volume and optimizing
   freight movements to obtain the lower rates.[8] See AR, Tab 8, BCA, Apr.
   2006, app. A, Savings Analysis Method, at A-1-4.

   DoD also analyzed whether the DTCI requirement represented a "bundled
   acquisition and, if so, whether sufficient justification exists to proceed
   with the project" under the Small Business Act. AR, Tab 9, DTCI Bundling
   Analysis, Apr. 12, 2006, at 1. The Small Business Act states that "to the
   maximum extent practicable" agencies "avoid unnecessary and unjustified
   bundling of contract requirements that precludes small business
   participation in procurements as prime contractors." 15 U.S.C.
   sect. 631(j)(3) (2000). The Small Business Act defines bundling as
   consolidating two or more procurement requirements for goods or services
   previously provided or performed under separate smaller contracts into a
   solicitation of offers for a single contract that is likely to be
   unsuitable for award to a small-business concern due to (a) the diversity,
   size, or specialized nature of the elements of the performance specified;
   (b) the aggregate dollar value of the anticipated award; (c) the
   geographical dispersion of the contract performance sites; or (d) any
   combination of the factors described in subparagraphs (a), (b), and (c).
   15 U.S.C. sect. 632(o)(2). The Act also provides that an agency may
   determine that consolidation of requirements is "necessary and justified
   if, as compared to the benefits that would be derived from contracting to
   meet those requirements if not consolidated, the Federal Government would
   derive from the consolidation measurably substantial benefits," including
   such benefits as cost savings, quality improvements, reductions in
   acquisition cycle times, and/or better terms and conditions. 15 U.S.C.
   sect. 644(e)(2)(B); see 13 C.F.R. sect. 125.2(d) (2006).

   The agency concluded that because the transportation coordination function
   was a new requirement, rather than one previously provided, the DTCI
   solicitation did not result in a bundled requirement, as defined by the
   Small Business Act. See COSF at 11. Nevertheless, because the
   transportation services had previously been acquired from both small and
   large businesses, DoD analyzed whether bundling the transportation
   coordination and transportation services was justified under the Small
   Business Act. DoD concluded that, even if the DTCI acquisition was
   considered to be a bundled requirement under the Act, it would save more
   than 5 percent of the new contract's estimated 7-year value of
   approximately $1.5 billion--"which meets the [Act's] `measurably
   substantial benefits test'" that would justify bundling.[9] AR, Tab 9,
   DTCI Bundling Analysis, Apr. 12, 2006, at 18. DoD also concluded that
   there would be a number of non-monetary benefits, such as improved
   delivery times, increased on-time delivery, and improved in-transit
   visibility (ITV).[10] See COSF at 12.

   DoD coordinated its planning for this procurement with the Small Business
   Administration (SBA), transmitting copies of DoD's Bundling Analysis and
   BCA to SBA, see, e.g., AR, Tab 23, Transportation Command Letter to SBA,
   Apr. 12, 2006, and published a notice on the Federal Business
   Opportunities website, notifying small businesses of the agency's intent
   to bundle its requirements under the RFP. See AR, Tab 29, Notice to Small
   Business. DoD states that SBA concurred with DoD's acquisition approach,
   and the record shows that SBA did not contemporaneously object to the
   agency's bundling of the requirements.[11]

   SOLICITATION

   The RFP, issued June 22, 2006, provides for the award of an
   indefinite-delivery, requirements contract with fixed-price, cost
   reimbursable, and award fee items, and includes an award term option
   provision for a 3-year base period and up to 4 option years.[12] For the
   base period, offerors were requested to provide a fixed-price for
   transportation coordination services and to propose estimated costs with a
   "not-to-exceed" (NTE) ceiling rate for the transportation services.[13]
   With respect to the proposed NTE costs for transportation services, the
   RFP provides for adjustments in the NTE rates for the option years based
   upon a "pre-priced methodology" to be proposed by the offerors and
   evaluated in making award,[14] see RFP sect. H, at 94, and for interim
   adjustments of the NTE costs for orders placed within sites designated by
   the Transportation Command as an "exigency area." See id. at 94-96.

   The RFP includes a detailed performance work statement (PWS) that informed
   offerors that the DTCI would be "implemented through a spiral phased
   approach" and that "Spiral I, the only spiral to be implemented under this
   contract" would include three phases. Phase I includes 18 identified
   Defense Distribution Centers, phase II includes another 33 identified DoD
   shippers and aerial ports, and phase III includes 16 additional,
   identified shipper locations. RFP sect. C, at 23. The RFP also informs
   offerors that the government may add, and the contractor would be required
   to implement, additional sites, to a maximum number of 260 sites, during
   contract performance.[15] Id. at 30. Even if all 260 sites were added
   under the DTCI contract, the DTCI acquisition represents only slightly
   more than a third of all DoD's shipping locations, although the DTCI
   contract will include the larger shipping sites. Tr., day 1, at 65-66,
   162-63.

   Under the contract, the DTCI contractor would be responsible for handling
   all aspects of freight shipment from receiving notification from DoD
   shippers that shipments are ready for transportation to selecting and
   subcontracting with carriers for the transportation of freight. The RFP
   provides that requests for transportation would be electronically
   submitted to the contractor and the contractor would be required to
   electronically respond to the request. RFP sect. G, at 77. The contractor
   will be required to provide tracking and tracing capabilities and
   electronic recordkeeping, and to handle and facilitate the resolution of
   claims for loss or damage. In this regard, the contractor is required to
   provide a central information technology system meeting certain
   requirements. Id. sect. C, at 46-55.

   With respect to the transportation services, the RFP requires the
   contractor to "establish, maintain, and manage all necessary subcontracts
   with carriers that move freight under this contract." Id. sect. C, at 33.
   Among the contract requirements is that the contractor support "surge"
   requirements, that is, that the contractor support transportation needs
   associated with mobilization, wartime, natural disaster, humanitarian
   assistance, or other contingencies. Id. sect. C, at 45. In addition, the
   contractor is required to report its actual cost savings on a semi-annual
   basis, and offerors were informed that the agency expected cost savings of
   19.1 percent by the end of the base contract term from an historical
   baseline to be established at award and cost savings of 23.2 percent by
   the end of the first option year. Id., sect. C, at 32.

   The RFP identifies a number of performance thresholds, such as the
   requirements for on-time pickup, on-time delivery, and loss and damage
   free shipments in 98 percent of the contract shipments; for resolution of
   loss and damage claims within 120 days for 99 percent of the claims; for
   an information technology system that was available for use 99 percent of
   the time; and for meeting or exceeding various small business, HUBZone
   business, service-disabled-veteran-owned business, small disadvantaged
   business, and women-owned small business subcontracting goals. See RFP
   sect. C, Table 7, at 57-58. The solicitation provides for reductions in
   the contractor's fixed price for services that fail to satisfy the
   performance thresholds identified in the RFP. Id. sect. G, at 81-90.

   DISCUSSION

   Consolidation of Requirements

   The protesters complain that, by consolidating the transportation
   coordination services and freight transportation services, the RFP unduly
   restricts competition under the Competition in Contracting Act of 1984
   (CICA), 10 U.S.C. sect. 2305(a)(1) (2000), and is an unnecessary and
   unjustified bundling of requirements in violation of the Small Business
   Act, 15 U.S.C. sect. 631(j)(3).

   The applicable Small Business Act requirements are set out above. In
   addition, CICA requires that solicitations generally permit full and open
   competition and contain restrictive provisions only to the extent
   necessary to satisfy the needs of the agency. 10 U.S.C. sect. 2305(a)(1).
   Because bundled or consolidated procurements combine separate and multiple
   requirements into one contract, they have the potential for restricting
   competition by excluding firms that furnish only a portion of the
   requirement; we therefore review challenges to such solicitations to
   determine whether the approach is reasonably required to satisfy the
   agency's needs. Aalco Forwarding, Inc. et al., B-277241.12, B-277241.13,
   Dec. 29, 1997, 97-2 CPD para. 175 at 6. We have recognized that bundling
   may serve to meet an agency's needs where the agency reasonably determines
   that consolidation will result in significant cost savings or operational
   efficiencies. See B.H. Aircraft Co., Inc., B-295399.2, July 25, 2005, 2005
   CPD para. 138 at 7; Teximara, Inc., B-293221.2, July 9, 2004, 2004 CPD
   para. 151 at 6. Administrative convenience, however, does not in and of
   itself provide a reasonable basis for an agency's consolidating or
   bundling of requirements. See Vantex Serv. Corp., B-290415, Aug. 8, 2002,
   2002 CPD para. 131 at 4.

   DoD disagrees that the RFP reflects either bundling or a restriction upon
   competition; rather, the agency argues that the solicitation does not
   preclude any offeror from competing and therefore provides for full and
   open competition.[16] See COSF at 7-8. This argument, however, is
   inconsistent with the agency's own recognition that the "overall
   management of a CONUS-wide domestic freight operation [under the DTCI
   contract] is beyond a small business's capabilities." See AR, Tab 9,
   Bundling Analysis, at 7-8. It is thus apparent that the agency's
   consolidation/bundling of its coordination and freight transportation
   requirements restricts competition to some degree. The fact that the
   agency expects to receive some competition under the RFP does not relieve
   an agency of the burden under CICA of justifying restrictions to full and
   open competition. See National Customer Eng'g, B-251135, Mar. 11, 1993,
   93-1 CPD para. 225 at 6.

   DoD argues nevertheless that the RFP, as structured, is the least
   restrictive means to obtain the substantial cost savings estimated by its
   cost model and to satisfy its other legitimate needs. See Agency Legal
   Memorandum at 2. As noted above, DoD determined that the decentralized and
   disorganized manner in which its freight transportation is managed and
   shipped does not satisfy the government's requirements for shipment
   reliability, predictability and efficiency; for reduced cycle times (time
   from request for shipment to freight delivery); for visibility over
   movements across the DoD enterprise; and for cost savings. See id. at 3-4;
   COSF at 1-5. In addition, under its current system, the agency's freight
   volume is not leveraged to enable it to get the best possible rates, and
   that even when the agency obtains fixed rates for a specific lane or
   point-to-point movement there is no practical guarantee by a carrier that
   its capacity will be available at that rate when DoD needs it. Agency
   Legal Memorandum at 5-6. In contrast to DoD's current system, the agency
   points to the commercial marketplace, in which, DoD states, the "current
   commercial trend is to leverage the services of a [3PL firm] to collect
   transportation requirements, perform shipment planning and optimization,
   and gain efficiencies through consolidation and mode shift." Id. at 6.
   Commercial 3PL firms, DoD notes, use their aggregate volume to reduce
   transportation costs and, unlike DoD's current system, contract for
   guaranteed capacity at set rates. Id. In short, the agency believes that
   it is necessary to consolidate the coordination services and
   transportation services in the DTCI solicitation to fix or reengineer the
   agency's current decentralized and disorganized freight transportation
   system.

   The protesters agree with the agency that DoD's freight shipment system
   needs to be reengineered. See Supplemental Protest at 6 ("We agree that
   the nation's warfighters and taxpayers would benefit from centralization
   and improvement of those [management, coordination, and information
   technology] functions, as opposed to having them performed by hundreds of
   DoD shippers [that is, transportation officers] that are now performing
   them"). In this regard, the protesters describe the agency's current
   freight shipment system as having a

     core dysfunctionality resulting in the inefficiency and less than
     optimal costs that define DTCI's stated goals. . . . [The transportation
     officers] are a decentralized corps, disbursed across many different
     shipping locations. They make traffic management and load planning
     decisions, including carrier and mode selection decisions, on an
     independent, uncoordinated, and localized basis, without regard to the
     needs and activities of other, even nearby shipping locations within the
     DoD enterprise, with the sole focus of "getting their freight off the
     dock," without regard to overall cycle time from pickup to delivery.

   Protesters' Post-Hearing Comments at 6 (Tr. citations omitted). The
   protesters also agree that the RFP, as structured, will provide the cost
   savings and non-monetary benefits ascribed to it by the agency.[17] Tr.,
   day 2, at 7-9.

   The protesters now primarily argue that the agency could receive the same
   cost savings and non-monetary benefits under a less restrictive approach
   that does not consolidate the coordination/management services with the
   transportation services. See Protester's Comments at 4-5; Protester's
   Post-Hearing Comments at 9. In this regard, the protesters contend that
   the problems associated with the decentralized nature of DoD's freight
   transportation could be resolved by awarding a contract for a coordinator
   that would provide centralized traffic management, freight optimization
   recommendations, and an information technology system. Protester's
   Comments at 4-5. The agency responds that it determined that it could only
   achieve the cost savings and non-monetary benefits, such as more reliable,
   efficient, and timely transportation, by consolidating the coordination
   and transportation functions. Agency's Post-Hearing Comments at 2.

   The protesters complain, however, that the agency failed to
   contemporaneously perform an analysis of whether such an "unbundled"
   approach, which did consolidate the coordination and transportation
   functions, would provide cost savings and other benefits. Protester's
   Supplemental Response (Oct. 19, 2006) at 2. While it is true that the
   record does not contain a detailed analysis of an "unbundled" approach, as
   discussed below, the record confirms that the agency in fact considered
   whether its needs could be satisfied by an approach that did not
   consolidate the coordination function with the actual provision of the
   transportation services, and concluded that this approach would not
   satisfy all of its needs. See Tr., day 2, at 58, 78-80, 134-35, 142-44;
   AR, Tab 25, Acquisition Plan, at 5; Agency's Post-Hearing Comments at
   12-14.

   As indicated, the protest now focuses on the reasonableness of the
   agency's determination that it can only achieve the cost savings estimated
   in its cost model, if the DTCI coordinator performs both the coordination
   and transportation functions under which it would provide a centralized
   structure, information technology system, management, and shipping volume
   to allow for the optimization of freight shipments (that is, consolidation
   of loads, better mode and carrier selection, and avoidance of "empty
   miles"[18]) that results in lower shipping rates. In questioning this
   determination, the protesters assert that, because the cost model was
   based only upon DoD's own shipping volume (and did not include any
   estimate of commercial volume that a 3PL could bring to the contract) and
   rates, see Tr., day 1, at 235-36, the reported cost savings indicated by
   the model are only a reflection of obtaining optimized shipments, which
   could also be achieved if the DTCI coordinator was merely a consultant
   providing management and optimization advice to the agency's
   transportation officers.[19] See Protester's Post-Hearing Comments at
   22-23.

   We find that both the contemporaneous record and the testimony received at
   the hearing supports the agency's conclusion that the estimated savings to
   be derived from optimizing freight shipments can only be achieved from an
   approach that provides for consolidating the coordination and
   transportation functions, including a centralized information technology
   and freight management system.[20] We first note in this regard that the
   record supports the agency's judgment that a 3PL firm brings to the
   contract an existing carrier network and information technology system
   that allows the 3PL the ability to optimize DoD freight movements both
   before and after the pickup of freight.[21] See Tr., day 2, at 26, 38, 40;
   AR, Tab 7, University of Tennessee 3PL Prototype Test Report, Sept. 15,
   2002, at 17. Although the protesters argue that the coordinator could
   perform the same services while the government continued to award and
   administer the transportation contracts, they have not provided a
   persuasive basis to challenge the agency's belief that such an unbundled
   approach would be operationally inefficient, given that the coordinator
   would be supporting the more than 600 transportation officers located
   throughout the agency's various components. In this regard, the agency was
   reasonably concerned that using the coordinator as a consultant to the
   agency's scattered transportation officer corps would bifurcate
   responsibility and contribute to operational inefficiency. Finally,
   contrary to the protesters' assertions, the agency had reasonable concerns
   that if the coordination and transportation functions are not consolidated
   the agency would be required to bear greater time, expense and risk to
   obtain and/or develop a central information technology capability that the
   agency currently does not have and which the coordinator would be expected
   to provide as part of its carrier network.[22] See Tr., day 2, at 99-100.

   In addition, the record supports the agency's judgment that obtaining
   optimization of freight shipments after pickup and a means to share in
   subsequent rate savings are important agency needs. Although it is true
   that the agency's cost model did not specifically address when freight
   optimization would occur and that commercial freight volumes were not
   included in the model's analysis, the agency believed that having a
   mechanism, such as DTCI's use of cost-reimbursable NTE rates, would allow
   the agency to share in cost savings generated by after pickup
   optimization.[23] That is, this approach would enable the DTCI contractor
   to leverage both government and commercial volume and consolidate freight
   after pickup to achieve additional cost savings.[24] This is one of the
   reasons that the agency believed that the model's estimated cost savings
   represented a "conservative" estimate that could be realized by the agency
   and that therefore its need for cost savings would be satisfied by the
   RFP, whereas an unbundled approach posed risks that costs savings would
   not be achieved. See Tr., day 1, 94-95, 236-38; day 2, at 42-43. Although
   the protesters suggest that the agency's expressed need to share in cost
   savings after freight pickup could be satisfied by "the transportation
   provider . . . agreeing, in advance as a part of its contract, that its
   initial task order and rate is subject to change after issuance in the
   event the Coordinator can find additional optimization/coordination
   opportunities after pickup," see Protesters' Post-Hearing Comments at 16,
   the protesters have failed to explain this proposed approach or show it
   would be practical and/or feasible.

   Moreover, the record supports the reasonableness of the agency's
   conclusions that contracting with a 3PL firm for coordination and
   transportation services would satisfy other core agency needs, such as
   reducing cycle times, improving the reliability and predictability of
   freight shipments, and increasing the agency's capacity guarantees to
   address daily and surge requirements. Testimony at the hearing explained
   how a 3PL firm's larger carrier and customer network and freight volume
   provided greater shipping capacity than that available to the agency under
   its contracts and that it was this greater capacity that allows 3PL firms
   to meet the agency's shipping needs generally and surge requirements. See
   e.g., Tr., day 1, at 179-80; day 2, at 23-26, 28. Other testimony
   explained the agency's view that an unconsolidated approach would not
   satisfy the agency's needs for improved reliability, predictability and
   cycle times, given that such an approach would, among other things, not
   result in a centralized transportation management system supported by an
   information technology system. See, e.g., Tr., day 2, at 100-04. Again,
   although the protesters argue that all of the agency's needs would be met
   in some fashion by an unconsolidated approach, they have failed to show
   that the agency's judgments to the contrary are unreasonable.

   In sum, the agency reasonably concluded that consolidating the
   coordination function and transportation services extends beyond mere
   administrative convenience and would provide the agency with substantial
   monetary benefits and increased operational efficiency, as well as a
   number of other non-monetary benefits. Further, DoD reasonably decided
   that an approach that did not consolidate these functions would likely not
   satisfy the agency's needs for cost savings and reengineering its
   transportation system to obtain operational efficiency and other benefits.
   Here, the record reasonably supports DOD's judgments.

   Inherently Governmental Functions

   The protesters also complain that the RFP provides for the performance of
   a number of inherently governmental functions in violation of 10 U.S.C.
   sect. 2383 (Supp. IV 2004) and FAR Part 7.5. Specifically, the protesters
   argue the DTCI contractor will be required to select carriers; negotiate,
   execute, and manage subcontracts; ensure subcontractor compliance with
   federal regulations regarding public liability and cargo liability
   insurance; facilitate the resolution of government claims for loss or
   damage to cargo; and "[i]nterpreting and enforcing cargo liability terms."
   Protesters' Comments at 14.

   Implementing Office of Federal Procurement Policy Letter 92-1, Sept. 23,
   1992, the FAR provides that agencies will not award contracts for the
   performance of inherently governmental functions, and includes as examples
   of inherently governmental functions in federal procurement activities
   "with respect to prime contracts" the awarding, administering and/or
   terminating contracts. FAR sect. 7.503(a), (c)(12). In this regard, the
   FAR defines an "inherently governmental function" as one that is so
   intimately related to the public interest as to mandate performance by
   government employees, and notes that governmental functions fall into two
   categories: the act of governing (that is, the discretionary exercise of
   government authority), and monetary transactions and entitlements. FAR
   sect. 2.101. Section 2383 of Title 10 of the United States Code further
   provides that an agency may award a contract "for the performance of
   acquisition functions closely associated with inherently governmental
   functions" only where there are no appropriate DoD personnel available to
   perform the functions; that the contractor will be supervised by DoD
   personnel who will perform "all inherently governmental functions
   associated with the functions to be performed under the contract"; and any
   potential organizational conflict of interest of the contractor in the
   performance of the functions under the contract has been addressed.

   We find from our review of the solicitation here that the RFP does not
   provide for either the "performance of acquisition functions closely
   associated with inherently governmental functions" or for the performance
   of "inherently governmental functions" themselves. The RFP's coordination,
   management, and transportation requirements are all services that are
   routinely performed in the commercial sector by 3PL firms, such as GENCO.
   See AR, Tab 7, University of Tennessee 3PL Prototype Test Report, Sept.
   15, 2002, at 16-17. In addition, the DTCI contract requirements do not
   provide for the performance of inherently governmental functions involving
   the inherent exercise of government discretionary authority or directly
   obligating government funds. Instead, the contract tasks of selecting,
   awarding, and managing subcontracts reflect routine subcontract
   administration requirements. While the contract requires the DTCI
   contractor to facilitate the resolution of government claims for loss or
   damage to cargo and requires the contractor to include in its subcontracts
   terms that "name the government as a third party beneficiary" and
   "authorize[s] the government to enforce cargo liability terms," see RFP
   sect. C, at 41-43, these provisions do not require the contractor to
   perform any tasks that are inherently governmental in nature because it
   remains the government's responsibility to "determine the final resolution
   of government claims [for loss or damage to cargo]," see id. at 44, and,
   in this regard, the DTCI contractor remains liable to the government for
   the actions of its subcontractors. See id. at 43.

   The protest is denied.

   Gary L. Kepplinger

   General Counsel

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

   [1] The other protesters are A&A Transportation; ACE Transportation; Acme
   Trucklines; Alan Farmer; American Freight; American Road Lines; American
   World Forwarders, Inc.; Anita Howard; America Trans-Freight; Available
   Shippers; Big Rock Transportation; Blackhawk Transport, Inc.; Britton
   Transportation; C2 Freight Resources, Inc.; Callie Transport; Cargo
   Master; Carr Trucking; Cheetah Transportation; CL Services; Combined
   Transportation; Cowboy Trucking; CrossRoad Carriers; D and H Trucking;
   Daily Express; Dallas Mavis; Dalton Trucking; Daystar Transportation;
   Diamond Transportation System, Inc.; Diedes Transport; Dispatch Services;
   DTS Logistics; Durrett Trucking Inc.; Dynasty Transportation; E9
   Logistics; Easton Transportation; Economy Transport; Encore Forwarding;
   Family Affair Trucking; Federal Freight Systems; Frontline; General
   Freight; GMR Logistics; Great American; Green Valley; Hi-Ball Trucking;
   International CC; J.H. Rose Logistics; Jameson Enterprises, Inc.; Kansa
   Transport, Inc.; Kenneth Clark; Keystone Lines; KL Logistics; L&M
   Transportation; Louisiana Transportation, Inc.; Maverick Transport;
   McClellan Trucklines; Meadowlark; MEGATRUX; Midwest Specialized
   Transportation, Inc.; Norseman Transportation; Northern Dispatch; NorWest
   Express, Inc.; NYP & Associates; Overdrive Transportation; Owen Kennedy;
   P. Carter Trucking; Packard; Parker Trucking; Picks Logistics; Prompt
   Shippers, Inc.; R.K. Jackson; Ready Transportation; Rockhill Transport;
   Sheridan Transportation; Southern Ag Carriers; Speed Logistics; Sunteck
   Transport; Teresi Trucking; Trans Tech; Trinity Transport; TTI, Inc.;
   Tucker Company; Universal Am-Can; US Transport; Utley, Inc.; Virginia
   Highway; Watson Trucking; Wilson Transfer; and Wiedmeyer Express.

   [2] The mission of the Transportation Command is to provide air, land and
   sea transportation for the DoD. GAO/NSIAD-98-99, "Defense Transportation:
   Status of U.S. Transportation Command Savings Initiatives, May 1998, at 2.

   [3] The TTC is an indefinite-delivery, indefinite-quantity contract
   awarded and subject to the Federal Acquisition Regulation (FAR). According
   to the agency, a tender is an unsolicited rate provided by a carrier that
   an agency can use to offer freight shipment services to carriers; a
   contract based upon a tender is created only when the agency and carrier
   agree to the shipment of services and a bill of lading has been issued.
   Tr., day 1, at 26-27. DoD moves far more freight, both by volume and
   value, using tenders rather than by issuing orders under the TTC. Tr., day
   1, at 28-31.

   [4] A 3PL firm is one that provides outsourced or "third party" logistics
   services to companies for part or all of a company's supply chain
   management functions, such as transportation or warehousing. See AR, Tab
   7, University of Tennessee 3PL Prototype Test Report, Sept. 15, 2002, at
   2.

   [5] EGL was awarded a fixed-price contract for a base year with 2 option
   years to manage transportation at 28 shipping or transportation offices
   located within Alabama, Florida and Georgia. After the base year, EGL
   continued to perform at four Defense Logistics Agency depots. AR, Tab 7,
   University of Tennessee 3PL Prototype Test Report, Sept. 15, 2002, at 2.

   [6] "Cross-dock" is defined as a "distribution system in which merchandise
   received at the warehouse or distribution center is not put away, but
   instead is readied for shipment," which the BCA states "can significantly
   reduce distribution costs." AR, Tab 8, BCA, Apr. 2006, app. D, Glossary,
   at D-1.

   [7] The BCA was prepared by LMI and GENCO.

   [8] The cost model used was GENCO's proprietary ShipIO^TM modeling
   software, a linear programming-based freight optimization tool that uses
   the well-accepted "Farthest First" algorithm. Agency's Reply to
   Protesters' Comments at 13; AR, Tab 8, BCA, Apr. 2006, app. A, Savings
   Analysis Method, at A-1.

   [9] SBA's regulations implementing the Small Business Act define
   "measurably substantial benefits" to include "[b]enefits equivalent to 5
   percent of the contract or order value (including options) or $7.5
   million, whichever is greater, where the contract or order value exceeds
   $75 million." 13 C.F.R. sect. 125.2(d)(5)(i)(B); see FAR sect.
   7.107(b)(2).

   [10] ITV refers to the "ability to track the identity, status, and
   location of DoD unit and nonunit cargo . . . from origin to consignee or
   destination established by the combatant commanders, the Services, or DoD
   agencies during peace, contingencies, and war." Understanding the Defense
   Transportation System, USTRANSCOM Handbook 24-2, 4^th ed., Sept. 1, 2004,
   at GL-7.

   [11] In response to our request, SBA provided a report in which it states,
   contrary to DoD's views, that the RFP reflects a bundled requirement under
   the Small Business Act, and that this bundled requirement "will not be
   good for small business." SBA Report, Sept. 18, 2006, at 2. SBA also
   states, however, that DoD, as required, properly coordinated this
   acquisition with SBA and that, given the substantial cost savings
   reflected in the agency's analysis, the bundled requirement does not
   violate the Small Business Act. Id.

   [12] As indicated above, the estimated value of the contract, including
   all option and award terms, is approximately $1.5 billion. AR, Tab 9,
   Bundling Analysis, Apr. 12, 2006, at 18.

   [13] The RFP excludes accessorial and fuel surcharge costs from the NTE
   costs to be proposed by offerors. RFP sect. M, at 170. Accessorial Service
   is defined by the Defense Transportation Regulation (DTR) as a "service
   performed by a carrier in addition to the [transportation of cargo over
   carrier routes from point of origin to destination]." DTR, DoD 4500.9-R,
   Part II, Cargo Movement, Definitions, at xxiv.

   [14] The successful offeror's pre-priced methodology for option-year NTE
   rate adjustments will be incorporated into the contract. RFP sect. H, at
   94.

   [15] To the extent that additional sites are added to the DTCI contract,
   the contractor may be entitled to an equitable adjustment under the
   contract's changes clauses. RFP sect. C, at 30.

   [16] Also, as noted above, DoD believes that, because the transportation
   coordination services are a new requirement, combining this function with
   the transportation services in the RFP did not constitute bundling, as
   defined by the Small Business Act. The protesters and SBA disagree with
   DoD's belief. We do not address this issue because we find that, even
   assuming this is a bundled requirement under the Small Business Act, the
   record shows that the consolidation of the coordination and transportation
   functions will result in a substantial monetary benefit as defined by
   SBA's regulations. See 13 C.F.R. sect. 125.2(d)(5)(i)(B).

   [17] The protesters initially challenged the agency's cost analysis and
   methodology as incorrect, incomplete, and unsupported. See, e.g.,
   Supplemental Protest at 13. The protesters, however, had the opportunity
   for a full review of the record supporting the agency's cost model and
   analysis, and had the support of an expert consultant, who received access
   to protected material under the protective order issued in connection with
   this protest. See Protesters' Consultant's Final Report. Following this
   review, the protesters' view of the cost model and its estimated cost
   savings changed. Although the protesters agree that the model's estimated
   cost savings can be achieved, see Tr., day 2, at 7-8, they continue to
   complain that the model looked at all of DoD's shipping locations within
   CONUS without regard to whether the locations would ultimately be part of
   the DTCI acquisition. As noted in testimony, however, at the time of the
   cost analysis, the agency had not determined what shipping locations would
   become part of the DTCI acquisition and, in fact, the cost analysis was
   used to make that determination. See Tr., day 1, 263-65. In any event, the
   protesters fail to show what difference this would make in the agency's
   analysis. The protesters also complain that the agency's cost analysis
   used rates from the TTC I contracts, which were awarded based upon a
   cost/technical tradeoff, and did not consider the rates from the newer TTC
   II contracts, which were awarded based upon low price and technical
   acceptability. However, the performance of the TTC II contracts did not
   begin until after the agency had completed the business case analysis,
   which as noted above, was based upon the agency's historical data.
   Agency's Response to Protesters' Comments at 14. Under such circumstances,
   the agency was not required to account for the rates included in the TTC
   II contracts. See American Artisan Prods., Inc., B-292380, July 30, 2003,
   2003 CPD para. 132 at 6.

   [18] "Empty miles," also known as "deadhead miles," refers to the
   situation where a carrier after delivering a freight shipment does not
   have cargo to return and is thus traveling empty. In this situation the
   costs associated with the empty miles must be borne by the first shipment,
   and thus the shipping rates are higher. See Tr., day 2, at 35-37.

   [19] In its pre-hearing statement, the protesters stated that the DTCI
   coordinator, in the protesters' unbundled alternative, "would determine
   and select the optimum route, mode, and carrier rate, and order the
   transportation from the Government-contracted carrier." Protesters'
   Submission (Oct. 31, 2006) at 5 (emphasis added). The agency contends that
   allowing a contractor to place orders against other government prime
   contracts, and thus obligate government funds, would appear to provide for
   the DTCI coordinator to perform inherently governmental functions contrary
   to FAR Part 7.5. In their post-hearing comments, the protesters no longer
   assert that the DTCI coordinator, under their proposed unbundled approach,
   would place orders; rather, the coordinator would serve as a consultant to
   the transportation officers, who would be placing orders for
   transportation services. See, e.g., Protesters' Post-Hearing Comments at
   10-12.

   [20] In fact, as discussed above, the protesters do not dispute that DoD
   needs to reengineer its freight transportation system, and the protesters'
   consultant testified that, despite having access to all of the protest
   record and having heard all of the hearing testimony, he could not
   conclusively say whether DoD would achieve the same monetary and
   non-monetary benefits if the coordination and transportation services were
   not bundled. Tr., day 2, at 185-87. The protesters argue, however, that it
   should not be their obligation in these protests to perform the analysis
   that they assert the agency did not perform to demonstrate that an
   unconsolidated acquisition approach would provide the monetary and
   non-monetary benefits that DoD hopes to obtain in this procurement.
   Although we agree with the protesters that they need not perform such an
   analysis nor conclusively demonstrate what benefits, if any, the agency
   would achieve from the protesters' argued-for approach, the protester has
   the burden of showing that the agency's analysis and explanation
   supporting the bundling of the requirements are unreasonable. See Phoenix
   Scientific Corp., B-286817, Feb. 22, 2001, 2001 CPD para. 24 at 12. As
   explained in this decision, the protesters have failed to satisfy this
   burden.

   [21] 3PL firms also employ volume purchasing of fuel, maintenance, parts
   and equipment for their carrier network, which reduces its carriers' costs
   for these items; this aids small business carriers and tends to improve
   the carriers' rates. See Tr., day 2, at 34.

   [22] While it is true that the agency can contract for the provision of a
   new information technology system by a transportation
   coordinator/consultant, the protesters' arguments ignore the agency's and
   its 3PL consultant's arguments that 3PL firms would not simply provide the
   agency with access to its existing information technology system that was
   expensive to create and is intertwined with its commercial carrier
   network. The agency's 3PL consultant basically questioned the feasibility
   of a 3PL firm providing access to its information technology system to
   carriers with which it was not in a contractual relationship. The
   reliability of the information technology system is dependent upon
   carriers being trained to use the system, investing in the "hookup," and
   complying with contract requirements to provide information to the system,
   all of which the agency believed would be difficult, if not impossible, to
   achieve where the government continued to award and administer its own
   transportation service contracts. See Tr., day 2, at 52-55; see also Tr.,
   day 1, at 171-74.

   [23] The agency found that cost savings were not achieved under its 3PL
   prototype test in 2001, where, among other things, a 3PL firm was awarded
   a fixed-price service contract and there were no incentives for the firm
   to generate cost savings. See COSF at 3; AR, Tab 7, University of
   Tennessee 3PL Prototype Test Report, Sept. 15, 2002, at 44-45.

   [24] While the protesters contend that the DTCI will not have sufficient
   incentive to ensure cost savings for the government will be obtained, the
   proposed contract includes a variety of terms, for example, award fees,
   award term option, and provisions providing for reductions in contract
   price if the performance thresholds are not satisfied.