TITLE:  Aberdeen Technical Services, B-283727.2, February 22, 2000
BNUMBER:  B-283727.2
DATE:  February 22, 2000
**********************************************************************
Aberdeen Technical Services, B-283727.2, February 22, 2000

Decision

Matter of: Aberdeen Technical Services

File: B-283727.2

Date: February 22, 2000

Ruth Y. Morrel, Esq., DynCorp, for the protester.

Vera Meza, Esq., and David H. Scott, Esq., U.S. Army Materiel Command, for
the agency.

Aldo A. Benejam, Esq., and Christine S. Melody, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

DIGEST

1. Protest challenging a cost comparison conducted pursuant to Office of
Management and Budget Circular No. A-76 is sustained, where in-house
estimate failed to include the full costs for a program manager and other
key personnel positions required by the solicitation.

2. Protest that agency improperly disallowed a price reduction offered by
the protester in its final proposal revision is sustained where the
solicitation contemplated the award of a fixed-price contract, and any risks
associated with performance thus will be borne by the contractor, not the
government.

3. Allegation that in performing a cost comparison pursuant to Office of
Management and Budget Circular No. A-76, agency improperly failed to follow
the requirements for comparing a "best value" private-sector offer with the
government's Most Efficient Organization/Management Study (MEO) is
sustained, where the record shows that agency failed to determine whether
the MEO offered the same level of performance or performance quality as the
"best value" private-sector offer.

DECISION

Aberdeen Technical Services (ATS) protests the decision of the Department of
the Army, pursuant to Office of Management and Budget (OMB) Circular No.
A-76, that it would be more economical to manage and operate base industrial
operations in-house at the Aberdeen Proving Ground (APG), Maryland, rather
than to contract for these services under request for proposals (RFP) No.
DAAD05-98-R-0565. ATS challenges the cost comparison on numerous grounds,
arguing that the Army failed to include all of the costs required for
in-house performance in its estimate and made improper upward adjustments to
ATS's proposal. The protester also contends that the agency improperly
failed to follow the requirements contained in the Circular and the Revised
Supplemental Handbook (March 1996) for comparing a "best value"
private-sector offer with the government's Most Efficient
Organization/Management Study (MEO).

We sustain the protest.

Background

The Army issued the RFP on August 4, 1998, as part of a cost comparison
pursuant to OMB Circular No. A-76. Contracting Officer (CO) Statement at 1.
The RFP contemplated the award of a fixed-price contract. RFP sect. L.7. The
services required under the RFP include logistics, operations and
maintenance, risk management, organizational support, and community and
family activities. Id. sect. C-1.1. The RFP listed management, technical, past
performance, and cost/price as evaluation areas. The RFP stated that
selection of a private sector proposal would be based on a "best value"
determination. Id. sect. C-5.4, at 1.

On December 17, the government submitted its MEO to the CO; on January 4,
1999, the agency received three proposals from private-sector firms in
response to the RFP. CO Statement at 1. The Army evaluated the proposals,
held discussions, and received final proposal revisions from the two
offerors within the competitive range, including ATS. Based on the results
of the final evaluation, ATS's proposal was selected as the "best value"
offer for purposes of the cost comparison. Agency Report (AR), tab 5, Source
Selection Authority, Cost/Technical Tradeoff Analysis,

at 5.

On May 27, the agency conducted a cost comparison between the government's
MEO and ATS's proposal. The results of that cost comparison showed that
ATS's proposal ($129,559,970) was less expensive than the government's
estimate ($130,062,726) to perform the services in-house. AR, exh. 13A, Cost
Comparison of In-House vs. Contract or ISSA Performance.

On June 3, the CO received a memorandum from the Department of Labor (DOL),
instructing all federal contracting agencies to increase prevailing health
and welfare fringe benefits in accordance with the methodology described in
the memorandum. AR, exh. 14A, Memorandum No. 192, from Deputy Administrator,
Wage Determination No. 94-2247 (Rev. 15) (May 24, 1999). In addition, three
employees and an employee association filed administrative appeals of the
tentative selection of ATS as a result of the cost comparison. ATS itself
also filed an appeal, stating that in light of challenges it anticipated
would be filed by non-prevailing parties, it believed that correction of
certain alleged errors in the government cost estimate would strengthen its
position as the tentative awardee. AR, exh. 19, Letter from DynCorp
Technical Services to the CO 1 (July 8, 1999).

On July 12, the agency convened an administrative board to review the
appeals. The Army also requested that the Defense Contract Audit Agency
(DCAA) assist the board by reviewing the appeals and expressing an opinion
with respect to the issues raised by the appellants. The board then
temporarily suspended its review pending DCAA's assessment of the appeals.
In response to the Army's request, DCAA performed an audit of the issues
raised in the appeals and their impact on the in-house estimate and on ATS's
price.

On August 27, DCAA issued its report on the appeals. DCAA found that of all
of the issues raised, four had merit, but only one of the four had a
significant impact on the cost comparison. AR, exh. 34, DCAA Audit Report
No. 6201-99C17900002, Aug. 27, 1999, at 2. Specifically, DCAA concluded that
an employee appeal regarding the rate ATS used to compute health and welfare
benefits would result in an increase of approximately $925,516 to ATS's
price (to reflect application of DOL's updated fringe benefits
determination). Id.

On August 31, following issuance of DCAA's report, the board reconvened to
complete its review and provide its findings to each appellant. The board
issued its findings and directed the CO to correct certain errors in the
cost comparison form as identified in the appeals, and to recalculate the
in-house cost estimate accordingly. AR, exh. 40, Administrative Appeals
Board Report to [Commercial Activities] Manager, Sept. 1, 1999.

The CO states that all upheld appeal issues were implemented as the board
directed. CO Statement at 2. After the adjustments were made in accordance
with the board's direction, ATS's price for purposes of the cost comparison
was $131,183,324, while the in-house cost estimate was $129,401,287, a
difference of $1,782,037 in favor of in-house performance. AR, exh. 41B,
Cost Comparison of In-House vs. Contract or ISSA Performance, Sept. 13,
1999. On September 14, the CO notified ATS of the results of the new cost
comparison. This protest followed.

The Selection Process under OMB Circular No. A-76 and GAO's Review

OMB Circular No. A-76 describes the executive branch's policy on the
operation of commercial activities that are incidental to the performance of
governmental functions. It outlines procedures for determining whether
commercial activities should be operated under contract by private
enterprise or in-house using government facilities and personnel.

Circular No. A-76 and the Supplemental Handbook set out the steps of the
cost comparison process. Supplemental Handbook, Part I, Ch. 3. First, a
performance work statement (PWS) is drafted, which establishes performance
standards and measures common to the MEO and the private-sector offerors. In
that regard, the Supplemental Handbook alerts agencies to the need to ensure
that the PWS does not reduce competition. Id. para. C. Once the PWS has been
established, the management study leading to the drafting of the MEO can be
conducted, and the competition among private-sector offerors can be held.
The Supplemental Handbook was amended in 1996 to permit a "best value" (that
is, a cost/technical tradeoff) approach in selecting the private-sector
proposal. See 61 Fed. Reg. 14,338, 14,339, 14,345 (1996). Once a "best
value" private-sector offer has been selected, the CO is to submit to a
reviewing authority the government's MEO, which must comply with the
technical requirements of the solicitation. Supplemental Handbook, Part I,
Ch. 3, para. H.3.d. The reviewing authority then evaluates the MEO and assesses
whether or not the same level of performance and performance quality will be
achieved under the in-house plan. [1] Id. The government then makes changes
if necessary to ensure that the MEO meets the performance standards of the
selected private-sector offer, revises its in-house cost estimates, and
submits the revised estimates to an "independent review officer" for
acceptance. Id. para. H.3.e. Finally, after these steps have been taken to
ensure that the private-sector proposal and the MEO are comparable in terms
of the performance standards, the CO opens the government's in-house cost
estimate for comparison with the private-sector offeror's proposed price.
Id. para. J.3; see also Federal Acquisition Regulation (FAR) sect. 7.306(b).

Protest Issues

ATS raises numerous objections to the cost comparison conducted here,
arguing that the Army's cost estimate does not include the total cost to the
government of in-house performance for certain key personnel, and that the
agency made improper adjustments to ATS's proposed price. For example, ATS
argues that the Army's MEO does not include the cost of a full-time project
manager (PM), which ATS included in its proposal as, it contends, was
required by the RFP. In addition, ATS argues that the MEO improperly omitted
the cost of other key personnel responsible for performing essential
functions such as quality assurance/control, safety and health oversight,
environmental compliance, procurement, and project controls--all of which
ATS proposed as full-time employees in its proposal. ATS estimates that the
impact of these omissions alone would increase the cost of in-house
performance by nearly $11 million. [2] ATS further contends that the Army
improperly adjusted ATS's price upward to add back into its proposal certain
"lapse rate" savings that ATS had deducted from its final proposal. ATS also
argues that the agency improperly failed to follow the requirements
contained in OMB Circular No. A-76 and the Supplemental Handbook for
comparing its "best value" proposal with the MEO.

Discussion

Where, as here, an agency has conducted an A-76 competition, thus using the
procurement system to determine whether to contract out or perform work in-
house, our Office will consider a protest alleging that the agency has not
complied with the applicable procedures in its selection process or has
conducted an evaluation that is inconsistent with the solicitation criteria
or otherwise unreasonable. See Alltech, Inc., B-237980, Mar. 27, 1990, 90-1
CPD para. 335 at 3-4; Base Servs., Inc., B-235422, Aug. 30, 1989, 89-2 CPD para. 192
at 2. To succeed in its protest, a protester must demonstrate not only that
the agency failed to follow established procedures, but also that its
failure could have materially affected the outcome of the cost comparison.
Dyneteria, Inc., B-222581.3, Jan. 8, 1987, 87-1 CPD para. 30 at 2. This is
consistent with our position that our Office will not sustain a protest
unless the protester demonstrates a reasonable possibility that it was
prejudiced by the agency's actions, that is, unless the protester
demonstrates that, but for the agency's actions, it would have had a
substantial chance of receiving the award. McDonald-Bradley, B-270126, Feb.
8, 1996, 96-1 CPD para. 54 at 3; see Statistica, Inc. v. Christopher, 102 F.3d
1577, 1581 (Fed. Cir. 1996).

In this decision, we address certain issues raised by ATS which, when
considered together, clearly could have a material impact on the outcome of
the cost comparison. Those issues relate to the RFP's requirement for the PM
and other key personnel to be proposed on a full-time basis; the agency's
decision to add back into the protester's price ATS's "lapse rate"
reduction; and the agency's approach to comparing ATS's proposal with the
MEO. As noted above, using the figures provided by ATS--and undisputed by
the agency-- adjusting the MEO to reflect the key personnel positions could
result in an upward adjustment to the government's estimate of as much as
$11 million, resulting in a total in-house estimate as high as $140,401,287.
In addition, restoring the "lapse rate" reduction in the protester's final
proposal results in a downward adjustment to ATS's price of $[DELETED],
resulting in a total price of $130,070,543, a difference of more than $10
million in favor of contracting for the services based on these adjustments
alone. [3]

Program Manager and Other Key Personnel

The agency does not dispute that the "performance-based requirement"
included in section C of the RFP (essentially, the PWS) applied to the MEO
as well as to private-sector offers. [4] The agency contends, however, that,
because the RFP contemplated a "performance-based" contract, it did not
require offerors to identify specific, full-time, key personnel. Hearing
Transcript (Tr.) at 8-9. Rather, according to the agency, the RFP merely
described required functions and left it up to the offerors to decide how
those functions would be performed. The Commercial Activities (CA) manager,
who headed the team that prepared the PWS, explained at the hearing convened
on this matter that with respect to several essential functions, "[the
team's] intent was never to have several individuals just working full-time
on let's say, for example, quality assurance, quality control, [and] safety.
And some of the key positions that [are] part of this protest were never
intended to be dedicated people." Tr. at 10. This approach was reflected in
the MEO. For example, the responsibility for performing environmental
compliance was added to the duties of an individual currently responsible
for "safety and health" at APG, which the government considered to be a
"multidisciplinary" position. Tr. at 55. The agency took the same approach
with respect to other key personnel positions identified in the RFP.
Specifically with respect to the PM position, the agency added project
management functions to the duties assigned to the Director of Installation
Operations (IO); further, the MEO included only 25 percent of the cost of a
PM because, according to the CA Manager, "the [PM's] duties only require
that many hours." Id. at 16.

Section L of the RFP contained detailed instructions to offerors on how to
prepare their proposals. With respect to key personnel, offerors were
required to:

Describe by name and position title, those personnel that are considered to
be key to this program. Key personnel shall be dedicated to the [Performing
Activity (PA)] and are responsible for essential functions, including, but
not limited to, project management, safety and health, environmental
compliance, procurement, quality assurance/control, and project controls.
Provide resumes for each Key Personnel proposed to be dedicated to the PA. .
. . Letters of commitment and agreements for Key Personnel to be located
full time at [Aberdeen Proving Ground] shall be included and signed by each
of the proposed key personnel.

RFP sect. L.2, vol. I--Management, tab 3: Key Personnel (emphasis added).

With respect to the PM position, the RFP stated as follows:

The PA shall provide an on-site [PM] physically present during normal
operating hours. This individual shall be responsible for the overall
management and coordination of the Award and shall act as the central point
of contact with the Government. The PA's [PM] shall be available for
discussion with the [contracting officer's representative (COR)] during
normal operating hours. When Award work is being performed at times other
than normal operating hours, an individual shall be designated by the PA to
act for the [PM]. Two weeks prior to the commencement of work under the
provisions of this Award, the PA shall furnish to the COR, a copy of the PA
organizational chart as proposed for the performance of this PBR. The PA
chart shall include names, addresses and telephone numbers of the [PM] and
supervisory and key management personnel who shall serve as a focal point
between the PA and the Government to resolve problems and emergency
situations. The PA shall keep this list updated and shall notify the COR
immediately, in writing, whenever changes are made.

RFP sect. C.1.3.1.3, Project Manager and Key Personnel, sect. C-5.4, at 7.

The agency takes the position that this provision does not require a
full-time PM (or any other key person), but only calls for an individual to
be "on-site" to act as PM when needed. According to the agency, requiring a
PM to be "on-site" should not be interpreted to mean "full-time." The agency
explains that the MEO meets this requirement by providing that another
individual (i.e, the Director of IO) will already be "on site," full-time,
and will be available to perform the duties of a PM in addition to his other
existing duties. CO Statement at 3. The agency further states that the
responsibilities of the PM are "minimal," and that many of the duties of a
contractor PM would not be relevant if the work is retained in-house. For
instance, there would not be a need for discussions between the PM and a COR
concerning contract performance. In addition, if the services are provided
in-house, there would be little if any need for "coordination" of the award.
The government thus included only 25 percent of the cost of a PM in its MEO,
because, according to the CA Manager, "the duties [of a PM] only require
that many hours." Tr. at 16. The agency further states that, if the RFP were
interpreted as requiring a "full-time" PM, the agency would "realign" the
MEO PM's responsibilities with other positions within the MEO so as to
eliminate the need to allocate any cost for a PM, reducing the costs of this
position for the government to zero.

To preserve the integrity of the cost comparison, private-sector offerors
and the government must compete on the basis of the same scope of work. See
Supplemental Handbook, Part I, Ch. 3, para. H.3.e. See also DynCorp, B-233727.2,
June 9, 1989, 89-1 CPD para. 543 at 4; Aspen Sys. Corp., B-228590, Feb. 18,
1988, 88-1 CPD para. 166 at 3; EC Servs. Co., B-218202, May 23, 1985, 85-1 CPD
para. 594 at 3. As explained in greater detail below, we conclude that the Army
did not meet this standard here.

Section L.2 of the RFP specifically listed program management, safety and
health, environmental compliance, procurement, quality assurance/control,
and project controls, as "essential functions." The RFP further stated that
essential functions are the responsibility of key personnel, and required
that key personnel be "dedicated to the PA." [5] In our view, the RFP thus
not only required offerors to propose a separate individual, devoted
exclusively to carrying out the functions of PM, but also required
dedicated, full-time employees to perform the other essential functions
listed in the RFP. We further find that the RFP required that key personnel,
such as the PM, be located "full-time" at APG. In this connection, the
agency concedes that the PM is a "key person," who is to be "on site"
full-time. CO Statement at 3. Further, with respect to the PM position,
rather than having "minimal responsibilities," as the agency suggests, the
RFP clearly required offerors to provide a PM responsible for "the overall
management and coordination of the Award" and to act as a single, central
point of contact with the government. RFP sect. C.1.3.1.3, Project Manager and
Key Personnel, at C-5.4, at 7.

The Army's argument that the PM position is irrelevant if performance of the
services is retained "in-house" (because there would be no need for
coordination or management functions) is unpersuasive. The RFP specifically
listed program management as an essential function, and retaining the
services "in-house" neither immunizes the government from problems that may
arise during performance, nor reduces the risk of emergencies, the
resolution of which the PM (or other key personnel) is specifically
responsible for handling. See Aspen Sys. Corp., supra, at 3-4. The overall
significance of having a full-time, dedicated PM is further highlighted by
the fact that the RFP required offerors to designate an individual to act
for the PM to resolve performance problems or handle emergencies when work
is performed outside normal operating hours. Having such management and
coordination responsibilities, in our view, can hardly be considered
"minimal" or as insignificant to the overall successful performance of the
contract as the agency suggests.

The source selection plan (SSP) provides further support for our conclusion
that the RFP contemplated that offerors would propose full-time PM and other
key personnel, and that failure to do so could have resulted either in
severely downgrading the proposal or rejecting it as technically
unacceptable. [6] Specifically, with respect to key personnel in general,
evaluators were instructed to determine if the offeror's proposal reflected
that responsibility and authority for commitment of resources are located
on-site at APG. SSP, Appendix 7, Management Evaluation Criteria, para. I.1.1(d).
The SSP further instructed that in evaluating each offeror's management
organization, evaluators were to consider whether offerors included a
statement in their proposals that all key positions are located at APG, and
that the personnel in those key positions are dedicated, full-time
employees. Id. para. I.1.1(c). In this connection, the source selection
evaluation board (SSEB) Chairman testified that with respect to personnel,
the evaluators focused on whether ATS proposed key personnel located
full-time at APG, and whether ATS had provided signed statements from key
personnel in that regard. Tr. at 108. The SSP's instructions to evaluators
and the SSEB's approach are thus consistent with our interpretation that the
RFP called for offerors to propose full-time key personnel responsible for
performing the essential functions listed in the RFP.

Given the requirement in the RFP for a dedicated PM, and in light of the
RFP's specific designation of other essential functions as the
responsibility of dedicated key personnel, we find the agency's position
that the RFP did not require a dedicated full-time PM or any other key
employee, to be an unreasonable interpretation of the RFP. Moreover, we find
that the RFP required that all key personnel be full-time employees. The
agency's solution, therefore, to simply task several existing positions with
the additional responsibilities the RFP assigns to a PM--thereby eliminating
the PM position altogether--or combining essential functions into
"multidisciplinary" positions, is simply contrary to the terms of the RFP.

Accordingly, we find reasonable ATS's interpretation that the RFP required a
dedicated, full-time PM and other key personnel to perform the essential
functions listed in the RFP (e.g., safety and health, environmental
compliance, procurement, quality assurance/control and project controls).
Further, in light of the Army's explanation in response to ATS's protest of
its actual intent with respect to the PM position--in particular, that the
PM's functions could either be performed by another individual or eliminated
altogether, and that the other essential functions could be combined--we
find that ATS was misled to its competitive prejudice. See DynCorp, supra,
at 7-8; Aspen Sys. Corp., supra, at 4. Essentially, ATS had to comply with
performance requirements that did not apply to the MEO. The severity of the
prejudice to ATS is evident from a comparison of ATS's estimate of more than
$11 million to reflect the time (and therefore the cost) of a full-time PM
and other key personnel, with the MEO including far fewer hours (and
therefore lower costs) for those personnel.

Lapse Rate

In its final proposal revision, ATS reduced its direct labor costs to
reflect savings from what the firm termed a "lapse rate." In this regard,
ATS explained in its final revised proposal as follows:

Net productive hours for non-exempt personnel have been reduced by
application of a [DELETED]% lapse rate. This lapse rate reflects the fact
that vacant positions are not filled instantly. There is normally some
period of time where a position is vacant and thus there are no wages paid
for that position during that period.

To obtain accurate lapse rates, ATS analyzed rates involving 12 similar
contracts over the last seven years--a total of 54 contract performance
years. The average lapse experienced was [DELETED]%.

AR, exh. 12, ATS Volume IV--Cost/Price Final Proposal--May 7, 1999,
at IV-4.0-1. Accordingly, in its final proposal revision, ATS reduced its
costs to reflect a "lapse rate" of [DELETED] percent for the base and option
periods. [7] Id.

In reviewing one of the employee appeals that questioned ATS's "lapse rate"
reduction, DCAA found that the appeal did not warrant making any adjustments
to ATS's final proposed price. Specifically, DCAA explained as follows:

The appellant cites no regulation or guidance that prohibits ATS from
including a lapse factor in its proposal. We discussed this issue with the
[Army Audit Agency (AAA)] and CA Cost Team to determine if they were aware
of any regulation or guidance relating to this issue. The AAA and CA Cost
Team were not aware of any such regulation or guidance. AAA stated that
[Department of the Army] PAM 5-20 costing procedures require that the MEO
and thus the in-house cost estimate to cost all staffing for all performance
periods. Our discussion with CA Cost Team indicated that the MEO could have
included a lapse factor for costing the in-house cost estimate but did not.
Lacking any definitive regulation or guidance prohibiting ATS from proposing
a lapse factor, we do not consider the appellant's issue warrants an
adjustment to ATS's BAFO.

AR, exh. 34, DCAA Audit Report No. 6201-99C17900002, Aug. 27, 1999, at 16.

DCAA's assessment notwithstanding, the board directed that ATS's proposed
costs be adjusted upward to add back into ATS's proposal the savings from
the [DELETED] percent lapse rate. The board's entire analysis of this issue
stated as follows:

A review of the contractor's proposal describing the development of their
net productive hours per year for hourly employees included a [DELETED]%
reduction due to the lapse resulting from vacancies and turnover. This
[DELETED]% reduction allows the contractor to reduce their bid by
approximately [DELETED] hours per hourly employee per year. The hours worked
are the basis for the contractor's labor costs and should reflect all the
hours to be charged to the contract effort. Make this adjustment adding back
the [DELETED]% where reduced and recalculate on the Cost Comparison Form.

AR, exh. 40, Administrative Appeals Board Report to CA Manager, Sept. 1,
1999, at 3. Following the board's direction, the CO states that she added
$[DELETED] to ATS's proposal.

The protester challenges the agency's decision to add back into ATS's
proposal the lapse rate reduction due to anticipated vacancies and
attrition. In particular, the protester argues that nothing in the costing
procedures or the Supplemental Handbook authorizes the agency to make such
an adjustment to its fixed-priced proposal.

In response to this protest issue, the agency has provided no evidence or
convincing argument in support of its action. In particular, when asked at
the hearing to explain the basis for the decision to add the lapse rate
amount back to ATS's proposal, the board Chairperson testified that "[i]t
seemed to me to be a ploy to arbitrarily reduce" ATS's total price, and that
the reduction was not "on solid ground." Tr. at 174-75. The Chairperson
further testified that he believed that in proposing the "lapse rate"
reduction, ATS deviated from established costing procedures. In this
connection, the Chairperson testified that although he understood that ATS
would be obligated to perform all of the work required by the RFP, he did
not "see how that's possible" given the "lapse rate" reduction. Tr. at
181-82. The Chairperson could, however, point to no procurement law,
regulation, Circular A-76, or the Supplemental Handbook provision that
prevented ATS from proposing the "lapse rate" reduction in its final revised
proposal. Tr. at 185.

The RFP anticipated award of a fixed-price contract, with offerors proposing
a lump-sum amount for each month's work. As a result, an offeror's decision
to reduce its final price, while it may raise concerns about the firm's
understanding, technical approach, or capability, could not properly lead
the agency to adjust the price up again. Such an evaluated-cost adjustment
may be appropriate under a cost-reimbursement solicitation, but is
inappropriate in the evaluation of proposals when a fixed-price contract is
to be awarded, since the government's liability is fixed, and the risk of
cost escalation is borne by the contractor. See Cardinal Scientific, Inc.,
B-270309, Feb. 12, 1996, 96-1 CPD para. 70 at 4. That is, under a fixed-price
contract, as contemplated by the RFP here, the risks associated with
performance are to be borne by the contractor, not the government. Harris
Corp., B-274566, B-274566.2, Nov. 27, 1996, 96-2 CPD para. 205 at 5. We
recognize that the fixed-price nature of the private-sector proposals under
the RFP here differs from the MEO, whose in-house cost estimate is more akin
to a cost proposal in a cost-reimbursement context. That is, even if the
expectation of vacancies (the premise of the price reduction) were found to
be unreasonable, ATS would still be permitted to reduce its price, although,
in a cost-reimbursement context, and in the calculation of MEO costs, a
corresponding cost reduction might be rejected. While it may have appeared
to the agency that ATS was thus benefiting from a flexibility denied the
MEO, that benefit corresponds to ATS's assumption of the risk inherent in a
fixed-price contract.

Since the RFP contemplated the award of a fixed-price contract, and in the
absence of any persuasive argument or rationale for its action, we conclude
that the Army acted unreasonably in adding the "lapse rate" reduction
($[DELETED]) back into ATS's price.

Supplemental Protest

In a supplemental protest, ATS argues that the agency improperly failed to
follow the requirements contained in OMB Circular No. A-76 and the
Supplemental Handbook for comparing its "best value" proposal with the MEO.
In this connection, ATS argues that the agency erred by not ensuring that
the MEO offered the same level of performance or performance quality as
ATS's "best value" offer. According to ATS, had the agency followed these
requirements, the Army would have been required to make changes to the
government's MEO, resulting in significantly increasing the estimated cost
of in-house performance over contracting out for these services.

The agency takes the position that the proposal evaluation team (PET) that
evaluated the private-sector proposals reviewed the MEO and "a consensus was
reached that the Government's proposal met the requirements of the [PWS],
and therefore offered the same level of performance and performance quality
offered by ATS, the offeror selected to compete against the Government
offer." Supplemental CO Statement at 1 (emphasis added). The agency focuses
on the fact that the RFP stated that technical proposals would be evaluated
on a pass/fail basis and that no additional merit credit would be given for
technical proposals exceeding the government's minimum requirements. The
agency's view thus seems to be that, since the technical factor covered the
performance standards in the RFP and the technical factor was evaluated on a
pass/fail basis, rules governing "best value" procurements do not apply
here. The SSEB Chairman explicitly stated, at the hearing conducted by our
Office, that after selecting ATS's proposal, the evaluators did not compare
ATS's proposal to the MEO to determine whether the MEO offered the same
level of performance or quality as ATS proposed. Tr. at 116-17. It is thus
undisputed that the agency did not compare ATS's proposal with the MEO to
assess whether or not the same level of performance and performance quality
will be achieved under the in-house plan.

Where a "best value" approach is taken in the evaluation of private-sector
offers, it is critical to the integrity of the A-76 process that the agency
follow the procedures discussed earlier in this decision to ensure that the
MEO offers the same performance level and quality proposed by the selected
private-sector offer. "Best value" here means simply that the solicitation
sets out evaluation criteria allowing a price/technical tradeoff, so that
other than the low-priced offer may be selected. If an agency fails to
compare the performance and quality levels of the private-sector offer and
the MEO and follow the A-76 procedures to correct any inequality in that
regard, a private-sector offeror risks discovering that the technical
superiority that helps it win the private/private competition will, because
of its higher price, cause it to lose the public/private cost comparison.

Here, the RFP explicitly stated that selection of a private-sector proposal
would be based on a "best value" determination. RFP sect. C-5.4, at 1. The RFP,
as noted above, listed management, technical, past performance, and
cost/price as areas for evaluation. The agency is correct in pointing out
that the technical area was to be evaluated on a pass/fail basis; it is thus
true that in the technical area proposals would be reviewed only to
determine whether they met the RFP's minimum technical requirements. If that
were the only nonprice evaluation factor, we would agree with the agency
that no comparison between the performance level and quality of ATS's
proposal and those of the MEO would be required. However, there were other
nonprice factors, and they were not evaluated on a pass/fail basis.
Specifically, the RFP explained that the management and past performance
areas were of equal importance, and when combined were slightly more
important than the price area. The management area was to be evaluated by
assigning adjectival ratings (unacceptable, acceptable, good, or excellent),
and the past performance area was to evaluated for risk (high, moderately
high, moderate, moderately low, low, or neutral).

We focus on the management area, since there offerors clearly could improve
their ratings--and thus their chances of being selected for the
public-private cost comparison--by offering superior, even though more
expensive, solutions. We note that the agency agrees that the management
area was evaluated on a "best value" basis. Tr. at 103. The management
factor included, among other subfactors, management approach and key
personnel. According to the RFP, in order to earn a management rating of
"good," which is the rating that ATS's proposal was assigned, a proposal had
to meet the following standard:

When the solicitation requirements are addressed and the proposal offers
some advantages, some innovation, above average personnel, or overall
thorough understanding and good approach; and are coupled with below average
risks and/or manageable disadvantages.

RFP sect. M, Rating Methodology for Evaluation Area I.

In the selection of the private-sector proposal that would compete with the
MEO in the final cost comparison, the agency conducted a price/technical
tradeoff. In that analysis, the agency determined that the ATS proposal's
"good" management rating and "moderately low risk" past performance rating
made it equal to the other private-sector proposal's "excellent" management
rating and "moderate risk" past performance rating, so that the lower price
of ATS's proposal became the deciding factor. AR, tab 5, Source Selection
Authority, Cost/Technical Tradeoff Analysis, at 2. While ATS's lower price
played a key role, its selection was also premised on its "good" management
score--a score presumably justified by the evaluators' conclusion that its
proposal offered the agency advantages, innovation, above-average personnel,
or an overall thorough understanding and good approach.

In these circumstances, we believe that the agency was required to compare
the proposed performance level and quality, including in the management
area, in ATS's proposal and in the MEO to be sure that they were comparable.
Supplemental Handbook, Part I, para. H.3.d. The most obvious area that needed
comparative analysis was ATS's offer to provide full-time key personnel, in
contrast to the MEO's reliance on shared-time ("multidisciplinary")
employees, as discussed above. Yet, while the agency makes reference in its
written submissions to our Office to having ensured that the MEO and ATS
were offering the same level of performance, see, e.g., Supplemental CO
Statement at 2, that appears to be in the context of its view that "the
Government's proposal met the requirements of the [PWS], and therefore
offered the same level of performance and performance quality offered by
ATS." Supplemental CO Statement at 1. In our view, the agency's conclusion
that the MEO met the minimum RFP requirements has no bearing on the question
of whether the MEO was premised on the same level of performance and quality
as ATS's proposal. The record does not indicate that the agency properly
addressed that question, as required by Circular A-76. Because of the risk
that the cost comparison was skewed due to unequal levels of performance or
quality, the Army's failure to follow the A-76 procedures prejudiced ATS.
Accordingly, we sustain the protest on this basis as well.

Recommendation

Given our conclusion that the in-house cost estimate improperly omits the
full costs associated with the key personnel called for by the RFP, we
recommend that the Army's costs for these positions be calculated,
documented, and included in the estimate. With respect to the "lapse rate"
issue, we recommend that the Army deduct ATS's proposed reduction
($[DELETED]) from its price for purposes of the cost comparison. In
addition, we recommend that the agency follow the requirements in the
Circular and the Supplemental Handbook for comparing a "best value"
private-sector offer with the MEO and, if necessary, adjust the MEO to match
the performance level and quality offered by ATS's "best value" proposal,
including its management proposal. The agency should then conduct a new cost
comparison in accordance with this decision. See Supplemental Handbook, Part
I, para. J.3; FAR sect. 7.306(b).

We recognize that the Army's position in response to the protest is that it
did not intend to require that offerors include full-time, dedicated
personnel in their proposals. If that remains the Army's position, we
recommend that it issue a revised RFP accurately reflecting its intention
and reopen the competition among the private-sector offerors on the basis of
the revised RFP, after which it should conduct a new cost comparison between
the successful private-sector offer and the MEO.

We also recommend that the protester be reimbursed the reasonable costs of
filing and pursuing the protest, including attorneys' fees. 4 C.F.R.
sect. 21.8(d)(1) (1999). The protester's certified claim for costs, detailing
the time spent and costs incurred, 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.

Comptroller General
of the United States

Notes

1. As we have previously noted, while the Supplemental Handbook does not
explicitly require that the reviewing authority document the assessment of
whether the same level of performance and performance quality will be
achieved in-house, we believe that the reviewing authority's decision should
be documented contemporaneously with that decision. See NWT, Inc.; PharmChem
Labs., Inc., B-280988, B-280988.2, Dec. 17, 1998, 98-2 CPD para. 158 at 5 n.3.

2. According to ATS, the impact of the correction as a result of the
exclusion from the MEO of a full-time PM is to increase the government's
estimate by as much as $936,323. In addition, according to ATS's
calculations, the impact of correcting the MEO to include quality assurance
staff (an increase of between $1,467,459 and $4,150,185, depending on the
precise number of staff added), and other key personnel costs ($1,859,716),
could increase the government's estimate by as much as $6,009,901, for a
grand total increase to the MEO of more than $11 million ($936,323 +
$4,150,185 + $6,009,901) for these key personnel costs alone. Protest, Sept.
24, 1999, at 3-7. The agency does not take issue with or otherwise dispute
any of the protester's calculations.

3. ATS also argues that the MEO significantly overestimated one-time
conversion costs (related to health benefits, real property
inventory/inspection, relocation of personnel, retraining, severance, and
unemployment benefits). According to ATS the agency overestimated these
costs by approximately $7 million. The protester also maintains that the
Army improperly adjusted ATS's proposal upward to reflect DOL's revised
health and welfare benefit rate. In view of our conclusion and
recommendation based on consideration of the key personnel and lapse rate
issues,

we need not address these other issues.

4. Indeed, since the performance requirements set out in section C of the
RFP would apply to both the selected private-sector offer and the MEO, the
requirements consistently used the term "Performing Activity," instead of
"contractor." See RFP sect. C-5.4, at 1.

5. Webster's Ninth New Collegiate Dictionary (1988) defines the term
"dedicated" as a person "devoted to a cause, ideal or purpose," or an
individual "given over to a particular purpose." This definition comports
with our understanding of the term in the RFP to require the individuals to
be exclusively devoted to the work at issue. Accordingly, we fail to see,
and the agency has provided no convincing argument, how either the MEO or a
private-sector offeror could be permitted to propose key personnel who would
spend a significant part of their time on other projects.

6. Key personnel was to be evaluated within the management area. RFP sect. M, at
1-2.

7. We note that there is disagreement in the record as to the actual amount
of the "lapse rate" reduction. According to the agency, the "lapse rate"
reduction added back into ATS's proposal was $[DELETED]. CO Statement at 11.
According to ATS's calculation, however, the correct figure should be
$[DELETED]. Protester's Comments, Dec. 17, 1999, at 3 n.1. The difference
between these amounts, however, is immaterial to this decision.