McKissack+Delcan JV II

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: McKissack+Delcan JV II

File: B-401973.2; B-401973.4

Date: January 13, 2010

DIGEST

Agency improperly rejected the proposal of a joint venture offeror for a cost reimbursement contract because the indirect cost rate structure included in the joint venture's accounting system was considered unacceptable, where the agency has provided no supportable or reasonable bases for its determination.

McKissack+Declan JV II (MD-JV) of Vienna, Virginia protests the Department of Transportation (DOT), Federal Transit Administration's (FTA) rejection of its proposal for failing to provide an adequate accounting system under request for proposals (RFP) No. DTFT60-08-R-00010 for program management oversight (PMO) services.

We sustain the protest.

On June 26, 2008, FTA issued a RFP soliciting proposals for PMO services to provide support for select capital projects with continuous review and evaluation of grantee and FTA processes to ensure compliance with statutory, administrative, and regulatory requirements, and to monitor the projects to determine whether the projects are progressing on time, within budget, and in accordance with approved grantee plans and specifications. AR at 2. The solicitation contemplated the award of multiple (approximately 15 to 25) cost'reimbursement, indefinite-delivery, indefinite-quantity (ID/IQ) task order type contracts. RFP at 2, 94. Award was to be made to responsible offerors whose proposals contained the combination of criteria offering the best value to FTA, considering the following the evaluation criteria, listed in descending order of importance: Technical and Management, Cost/Price, and Socioeconomic Status. Id. at 95.

MD-JV[1] submitted a timely proposal to FTA on September 3, 2008. The agency evaluated MD-JV's technical proposal, determined it was among the most "highly rated" technical proposals, and invited MD-JV to participate in oral presentations on December 15. Agency Report, Tab 6D-3, FTA Request to Attend Oral Presentations (Dec. 15, 2008), at 1. MD-JV's oral presentation took place on January 7, 2009. Id. After oral presentations, the agency rated MD-JV's technical proposal as technically acceptable. AR, Tab 4B, Source Selection Decision, at 8.

The RFP also requested that offerors complete and submit a cost proposal utilizing Attachment J-6, Contract Pricing Summary, included in the RFP. RFP at 87. Offerors were further required to state whether or not the federal government currently approves their accounting systems without conditions and whether proposed indirect rates have been "audited and accepted by any Federal Audit Agency." RFP at 89, 93. Additionally, all offerors had to "make [their] records available for pre-award or post-award audits." RFP at 89.

MD-JV included a completed Attachment J-6 with its cost proposal. The completed attachment identified the various direct labor rates for required personnel, listing alongside each labor rate the joint venture partner from which the employee would be assigned--Delcan Corporation or The McKissack Group--and calculated a total direct labor cost for each partner. In the "Labor Overhead" section of Attachment J'6, MD-JV provided a labor overhead rate for each joint venture partner that was applied to each of the joint venture partner's total direct labor costs. Additionally, MD-JV's Attachment J-6 provided costs for various subcontracted consultant services. MD-JV's Attachment J-6.

On March 18, 2009, FTA sent MD-JV's cost proposal for a pre-award audit to the Defense Contract Audit Agency (DCAA). As part of the audit, DCAA reviewed MD'JV's direct labor, escalation, and indirect rates to determine if they provided an acceptable basis for negotiation of a fair and reasonable price and issued its report to FTA on September 21. AR, Tab 4C, DCAA Audit Report (Sept. 21, 2009), at 1. DCAA determined that there were "significant issues effecting [DCAA's] examination" as follows:

The Joint Venture Agreement states that Delcan will maintain the accounting records. Delcan maintains its computerized accounting system in Ontario, Canada and maintains its financial records in accordance with Canadian generally accepted accounting principles (GAAP). FAR 31.201-2 -- Determining Allowability, states that "generally accepted accounting principles and practices appropriate to the circumstances" are used to determine allowability. . . . Since the accounting system is located at Delcan's facility in Ontario Canada, there is no assurance that the joint venture will follow U.S. GAAP as required by the FAR.

The proposal submitted to the Government does not show that the joint venture is an independent entity. An independent joint venture for Government contracting purposes would have employees committed from each company and the indirect rate structure would be unique to the joint venture. . . . In addition, the indirect rate structure proposed is Delcan's; the proposal should contain an indirect rate structure specific to McKissack & Delcan Joint Venture II.

The contractor has not prepared budgetary forecasts for the entire proposed period of contract performance. The contractor proposed the same indirect [rates] for all years of the proposed effort. . . .

Id. at 2. Thus, the DCAA concluded:

We do not believe the proposal is an acceptable basis for negotiation of a fair and reasonable price. . . . To make the cost or pricing data adequate, the offeror must have an accounting system that incorporates U.S. GAAP located at the princip[al] place of business in Vienna, Virginia; commit specific employees to the joint venture and compute average labor rates that are representative of each company in the joint venture; develop an indirect rate structure specific to the joint venture; and develop a comprehensive budget to facilitate the preparation of reliable cost estimates during the entire period of contract performance.

Id. at 3.[2]

Based on the DCAA audit, the contracting officer determined that MD-JV's proposal was unacceptable. AR, Tab 5, Contracting Officer (CO) Determination and Findings. Id. at 5. On September 22, the contracting officer advised MD-JV of the rejection of its proposal for the following reasons:

Issue 1: . . . Since the accounting system is located at Delcan's facility in Ontario, Canada, there is no assurance that the joint venture would follow the U.S. GAAP guidelines as required by the FAR.

Issue 2: The proposal as submitted by the Joint Venture (JV) does not show that the JV is an independent entity, which for Government contracting purposes would have employees committed from each company and the indirect rate structure would be unique to the JV. It is noted that the JV proposal did not contain an indirect rate structure specific to [MD-JV].

Issue 3: The JV has no prepared budgetary forecasts for the entire proposed period of contract performance but has proposed the same indirect rate for each year of the proposal contract effort.

AR, Tab 1B, FTA Letter to MD-JV (Sept. 22, 2009), at 2.[3]

MD-JV received this letter on September 24, and filed a protest with our Office on October 5, specifically challenging each of the three reasons given in FTA's rejection letter; providing documentation to support its claim that MD-JV is an independent entity;[4] and explaining why its proposed overhead rate structure was proper, particularly considering that it is a newly formed joint venture. Protest at 7. After receiving a copy of DCAA's report, MD-JV supplemented its protest on October 19, arguing that FTA's reliance on DCAA's report was unreasonable because DCAA's report contained numerous factual errors and DCAA's audit did not conform to Generally Accepted Government Auditing Standards (GAGAS) as it was required to do.[5]

On November 4, the agency submitted its agency report and relevant documents in response to the initial protest.[6] In response to MD-JV's allegations, FTA stated that exclusion notice issues "(1) and (3) were not the reason for Protestor's exclusion from the competitive range and elimination from further consideration for contract award. . . . Even if true, they would be minor correctable errors on the part of the Protester which would be acceptable to the contracting officer when corrected. . . . [Issue] (2) in the Protests is an un-correctable error on the part of the Protestor, one that does form the sole basis for this protest." AR at 4. In the report, the agency also provides further explanation regarding "Issue 2." In this regard, FTA explains that while FTA's exclusion notice provides that MD-JV was excluded because "[t]he proposal as submitted by the Joint Venture (JV) does not show that the JV is an independent entity, which for Government contracting purposes would have employees committed from each company and the indirect rate structure would be unique to the JV," the agency no longer disputes that there is substantial evidence that MD-JV is an independent entity. AR at 7. Instead, FTA now states "None of the arguments presented in the Protest or the Protest Amendment address the real issue in this case, and that is, MD'JV's failure to submit a single overhead rate in their Cost Proposal. The basic failure of MD-JV is compliance with Cost Accounting Standard (CAS) 401."[7] AR at 6.

MD-JV filed comments noting that the agency had abandoned its contemporaneous basis for rejecting MD-JV's proposal, CAS 401 had not been previously mentioned as the basis for rejection, CAS 401 would not be applicable to it under this procurement, and CAS 401 did not prohibit a joint venture offeror from proposing the type of dual overhead rate approach included in MD-JV's accounting system. The GAO attorney handling this case for our office, after a complete review of the entire record, conducted an outcome prediction alternate dispute resolution (ADR) conference, during which she stated that the agency had not provided a reasonable basis for excluding MD-JV's proposal based on the documentation in the record. The agency did not initiate corrective action in response to the outcome prediction ADR, but provided further argument as to the applicability of CAS 401 and submitted a statement from a DCAA representative addressing this issue.

We first note that FTA's rejection of MD-JV's proposal due to evaluated problems in its accounting system concerns a matter of a prospective contractor's responsibility, not technical acceptability. See Pacificon Productions, Inc., B-196371, July 22, 1980, 80-2 CPD para. 58 at 4. In this regard, Federal Acquisition Regulation (FAR) sect. 9.104(e) provides that "to be determined responsible, a prospective contractor must . . . have the necessary organization, experience, accounting and operational controls, and technical skills, or the ability to obtain them." FAR sect. 16.301-3(a)(1) requires that cost-reimbursement contracts are only used when a contractor's accounting system is adequate for determining costs applicable to the contract.

Responsibility is to be determined based on any information received by the agency up to the time award is proposed to be made. FAR sect. 9.105-1(b)(3); American Tech. & Analytical Servs., Inc., B-282277.5, May 31, 2000, 2000 CPD para. 98 at 3. The determination of a prospective contractor's responsibility rests within the broad discretion of the contracting officer, who, in making that decision, must necessarily rely on his or her business judgment. We therefore will not question a negative determination of responsibility unless the determination lacked any reasonable basis. Oertzen & Co. GmbH, B-228537, Feb. 17, 1988, 88-1 CPD para. 158 at 3. In this respect, while a contracting officer has significant discretion in this area, a negative responsibility determination will not be found to be reasonable where it is based primarily on unreasonable or unsupported conclusions.[8] Decker and Co.; Baurenovierungsgesellschaft, m.b.H., B'220807 et al., Jan. 28, 1986, 86-1 CPD para. 100 at 7. Moreover, an agency's reliance upon the advice of DCAA does not insulate the agency from responsibility for error on the part of DCAA. See ASRC Research & Tech. Solutions, LLC, B-400217, B-400217.2, Aug. 21, 2008, 2008 CPD para. 202 at 11 n.12.

As noted, during the development of this protest, FTA has abandoned many of the reasons it previously advanced regarding why it believed MD-JV's accounting system was inadequate. FTA now asserts that MD-JV's accounting system is inadequate because MD-JV's failure to submit a unique indirect rate for the joint venture violates CAS 401.

CAS 401 states:

(a) A contractor's practices used in estimating costs in pricing a proposal shall be consistent with his cost accounting practices used in accumulating and reporting costs.

(b) A contractor's cost accounting practices used in accumulating and reporting actual costs for a contract shall be consistent with his practices used in estimating costs in pricing the related proposal.

(c) The grouping of homogeneous costs in estimates prepared for proposal purposes shall not per se be deemed an inconsistent application of cost accounting practices under paragraphs (a) and (b) of this section when such costs are accumulated and reported in greater detail on an actual cost basis during contract performance.

48 C.F.R. sect. 9904.401-40 (2009). That is, CAS 401 requires a contractor's accounting practices in estimating costs for a proposal to be consistent with cost accounting practices used by the contractor in accumulating and reporting costs. 48 C.F.R. sect. 9904.401-20. This requirement is imposed because "[c]onsistency in the application of cost accounting practices is necessary to enhance the likelihood that comparable transactions are treated alike," so that, among other things, there is "financial control over costs during contract performance." Id.

FTA has provided a DCAA memorandum from the Branch Manager of DCAA's Reston, Virginia branch office in support of its argument that MD-JV's failure to submit a unique indirect rate for the joint venture violates CAS 401. DCAA simply states that "the contractor's proposal did not comply with CAS 401 because the contractor's proposal did not contain a unique rate structure, which an independent and professional operated organization would have in the regular course of business. . . . The CAS/FAR noncompliance issue is not the number of indirect rates," but rather that "MD-JV does not have its own indirect rate structure for allocating costs to Government contracts." DCAA Memorandum (Dec. 15, 2009) at 2.

Except for the foregoing conclusory statements, neither FTA nor DCAA has provided any analysis or legal authority as to why the MD-JV indirect rate structure, which adopts the individual overhead rates of the joint venture partners for MD-JV's own use and describes how the rates will be applied, violates CAS 401.[9] Nor is it apparent to our Office why this would violate CAS 401, given that neither agency has explained why the particular dual overhead rate structure proposed by MD-JV would lead to an inconsistency in the application of cost accounting practices or a loss of financial control over costs during contract performance. In this regard, it is notable that DCAA's audit report and FTA's determination and findings supporting the rejection of MD-JV's proposal because of its unacceptable accounting system did not make any mention of a CAS 401 violation.[10] Moreover, we have found no other authority that prohibits MD-JV's proposed dual overhead rate structure.[11]

While the agency acted properly in choosing to investigate whether or not MD-JV had an adequate accounting system to support this cost-reimbursement contract, FTA has not provided on this record a reasonable explanation why MD'JV's accounting system was unacceptable, and we sustain the protest on this basis.[12]

We recommend that FTA reevaluate MD-JV's accounting system to determine whether it is adequate. In so doing, we note that if the agency has problems with MD-JV's accounting system, it may open a dialogue to resolve these issues without such dialogue necessarily being considered discussions, given that this is a matter relating to MD-JV's responsibility, so long as MD-JV does not change its proposed cost or otherwise materially modify its proposal. If MD-JV's accounting system is found adequate, the agency should determine whether MD-JV's proposal is otherwise in line for award and if so award should be made to that firm. We also recommend that the agency reimburse the protester for the reasonable costs of filing and pursuing the protest, including reasonable attorneys' fees. Bid Protest Regulations, 4 C.F.R. sect. 21.8(d)(1)(2009). The protester's certified claims for cost, detailing the time expended and costs incurred, must be submitted directly to the agency within 60 days of receiving this decision. 4 C.F.R. sect. 21.8(f)(1).

The protest is sustained.

Lynn H. Gibson
Acting General Counsel