B-215829, JUN 24, 1985, 85-1 CPD 712

B-215829: Jun 24, 1985

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

CONTRACTING OUT - COST COMPARISON - AGENCY IN-HOUSE ESTIMATE - BASIS DIGEST: PROTEST CHALLENGING A-76 COST COMPARISON RESULTS IS SUSTAINED WHERE. THIS DETERMINATION WAS BASED ON A COMPARISON OF PAN AM'S COST PROPOSAL. THE RFP WAS ISSUED BY THE ARMY ON JULY 25. SEVEN PROPOSALS WERE RECEIVED BY THE ARMY. PAN AM'S TECHNICALLY ACCEPTABLE PROPOSAL ULTIMATELY WAS SELECTED FOR COMPARISON WITH THE IN-HOUSE COST ESTIMATE BASED ON THE FIRM'S BEST AND FINAL $43. THE GOVERNMENT'S IN-HOUSE COST ESTIMATE WAS BASED ON A MANAGEMENT STUDY SUBMITTED TO THE CONTRACTING OFFICER IN NOVEMBER 1983. THIS STUDY WAS AIMED AT DETERMINING THE MOST EFFICIENT. THE DIRECTIVE STATED THAT THIS 1983 HANDBOOK WAS TO BE UTILIZED FOR COST COMPARISONS CONDUCTED AFTER APRIL 30.

B-215829, JUN 24, 1985, 85-1 CPD 712

CONTRACTS - IN-HOUSE PERFORMANCE V. CONTRACTING OUT - COST COMPARISON - AGENCY IN-HOUSE ESTIMATE - BASIS DIGEST: PROTEST CHALLENGING A-76 COST COMPARISON RESULTS IS SUSTAINED WHERE, ALTHOUGH THE SOLICITATION AS AMENDED INCORPORATED REVISED COST COMPARISON GUIDELINES AS THE BASIS FOR DETERMINING THE COSTS OF IN HOUSE AND CONTRACTOR PERFORMANCE, THE AGENCY FAILED TO UTILIZE THE REVISED GUIDELINE FOR CONVERTING PERFORMANCE HOURS TO FULL-TIME EQUIVALENTS AND, AS A RESULT, THE COST COMPARISON INCORRECTLY INDICATED THAT CONTINUED IN-HOUSE PERFORMANCE WOULD BE MORE ECONOMICAL.

PAN AM WORLD SERVICES, INC.:

PAN AM WORLD SERVICES, INC., (PAN AM), PROTESTS THE DEPARTMENT OF THE ARMY'S DETERMINATION THAT THE ARMY COULD PERFORM FACILITIES ENGINEERING SUPPORT SERVICES AT FORT GORDON, GEORGIA IN-HOUSE AT A LOWER COST THAN PAN AM. THIS DETERMINATION WAS BASED ON A COMPARISON OF PAN AM'S COST PROPOSAL, SUBMITTED IN RESPONSE TO REQUEST FOR PROPOSALS (RFP) NO. DABT11- 83-R-0005, WITH THE ARMY'S COST ESTIMATE FOR IN-HOUSE PERFORMANCE. PAN AM TAKES ISSUE WITH MANY ELEMENTS OF THE COST COMPARISON, INCLUDING THE ARMY'S METHODOLOGY FOR CONVERTING PERFORMANCE HOURS TO FULL-TIME EQUIVALENTS (FTES), THE CALCULATION FOR DETERMINING THE NUMBER OF GOVERNMENT EMPLOYEES REQUIRED TO PERFORM THE CONTRACT IN-HOUSE. SUSTAIN THE PROTEST ON THIS GROUND.

THE RFP WAS ISSUED BY THE ARMY ON JULY 25, 1983, AND ESTABLISHED AN INITIAL CLOSING DATE OF OCTOBER 25, LATER EXTENDED BY AMENDMENT TO NOVEMBER 28. THE RFP AS ISSUED STATED THAT THE GOVERNMENT'S IN-HOUSE COST ESTIMATE WOULD BE PREPARED, AND THE COST COMPARISON CONDUCTED, IN ACCORDANCE WITH APPENDIX D OF ARMY CIRCULAR 235-1, WHICH, IN CONJUNCTION WITH THE COST COMPARISON HANDBOOK (MARCH 1979), IMPLEMENTS OMB CIRCULAR NO. A-76 BY PROVIDING GUIDANCE FOR DETERMINING COSTS OF IN HOUSE AND CONTRACTOR PERFORMANCE. SEVEN PROPOSALS WERE RECEIVED BY THE ARMY, AND PAN AM'S TECHNICALLY ACCEPTABLE PROPOSAL ULTIMATELY WAS SELECTED FOR COMPARISON WITH THE IN-HOUSE COST ESTIMATE BASED ON THE FIRM'S BEST AND FINAL $43,835,766 PROPOSED 5-YEAR COST.

THE GOVERNMENT'S IN-HOUSE COST ESTIMATE WAS BASED ON A MANAGEMENT STUDY SUBMITTED TO THE CONTRACTING OFFICER IN NOVEMBER 1983. THIS STUDY WAS AIMED AT DETERMINING THE MOST EFFICIENT, LEAST COSTLY APPROACH TO PERFORMING THE CONTRACT IN-HOUSE, AND INCLUDED CALCULATIONS OF THE TOTAL MANHOURS NECESSARY TO PERFORM EACH OF THE TASKS COVERED BY THE RFP. APRIL 3, 1984, PRIOR TO INITIATION OF THE COST COMPARISON, THE ASSISTANT SECRETARY OF DEFENSE ISSUED A DIRECTIVE IMPLEMENTING REVISED COST COMPARISON PROCEDURES SET FORTH IN A COST COMPARISON HANDBOOK DATED AUGUST 1983. THE DIRECTIVE STATED THAT THIS 1983 HANDBOOK WAS TO BE UTILIZED FOR COST COMPARISONS CONDUCTED AFTER APRIL 30. ON APRIL 12, IN RESPONSE TO THESE IMPLEMENTING INSTRUCTIONS, THE SOLICITATION WAS AMENDED TO PROVIDE THAT THE GOVERNMENT'S IN-HOUSE COST ESTIMATE WOULD BE PREPARED, AND THE COST COMPARISON CONDUCTED, IN ACCORDANCE WITH THE 1983 HANDBOOK.

THE ARMY MODIFIED ITS COST ESTIMATE TO COMPLY WITH THE 1983 HANDBOOK. PAN AM'S $43,835,766 BEST AND FINAL OFFER, SUBMITTED APRIL 27, WAS SELECTED FOR COMPARISON WITH THE GOVERNMENT'S REVISED ESTIMATE ON MAY 24, 1984. APPLICATION OF HANDBOOK COMPARISON PROCEDURES RESULTED IN AN UPWARD ADJUSTMENT OF PAN AM'S COST TOTAL TO $54,896,952, AND ULTIMATELY RESULTED IN AN IN-HOUSE COST ADVANTAGE OF $609,326. THE ARMY CONSEQUENTLY CONCLUDED THAT THE FUNCTIONS SHOULD CONTINUE TO BE PERFORMED IN-HOUSE. PAN AM INITIALLY APPEALED THE COST COMPARISON RESULTS TO THE ACTIVITY'S ADMINISTRATIVE APPEALS BOARD, BUT THE BOARD DENIED THE APPEAL. PAN AM THEREAFTER TIMELY PROTESTED THE MATTER TO OUR OFFICE.

WHEN AN AGENCY UTILIZES THE PROCUREMENT SYSTEM TO AID IN ITS DECISION WHETHER TO PERFORM WORK IN-HOUSE OR BY CONTRACT, SETTING FORTH THE CIRCUMSTANCES UNDER WHICH A CONTRACT WILL OR WILL NOT BE AWARDED, WE WILL REVIEW AN ALLEGATION THAT THE AGENCY DID NOT COMPLY WITH THE ESTABLISHED GROUND RULES. SEE GRIFFIN-SPACE SERVICES CO., B-214458.2, SEPT. 11, 1984, 84-2 CPD PARA. 281. WE BELIEVE IT WOULD BE DETRIMENTAL TO THE PROCUREMENT SYSTEM IF, AFTER THE AGENCY INDUCED THE SUBMISSION OF OFFERS, THERE WAS A FAULTY OR MISLEADING COST COMPARISON WHICH AFFECTED THE DECISION MATERIALLY. ID. WE THUS WILL REVIEW PROTESTS SUCH AS PAN AM'S, CONCERNING AGENCY DECISIONS THAT IN-HOUSE PERFORMANCE WILL BE MORE ECONOMICAL THAN CONTRACTING OUT, TO ASCERTAIN WHETHER THE AGENCY ADHERED TO THE PROCEDURES, OR GROUND RULES, SET FORTH IN THE SOLICITATION FOR DETERMINING THE COMPARATIVE COST OF IN HOUSE VERSUS CONTRACTOR PERFORMANCE. JOULE MAINTENANCE CORP., B-208684, SEPT. 16, 1983, 83-2 CPD PARA. 333.

OUR DECISION HERE TURNS ON THE QUESTION OF WHICH GROUND RULE WAS APPLICABLE IN DETERMINING HOW MANY EMPLOYEES WERE NECESSARY TO PERFORM THE CONTRACT IN-HOUSE. THE FTE CALCULATION IS THE MEANS FOR DETERMINING, GENERALLY, THE NUMBER OF EMPLOYEES NECESSARY TO PERFORM SPECIFIED WORK AND THUS, TO A LARGE EXTENT, THE PROJECTED COST OF DIRECT LABOR. THIS FTE NUMBER IS DERIVED BY DIVIDING THE TOTAL ESTIMATED MANHOURS NEEDED TO PERFORM THE WORK (DETERMINED BY THE MANAGEMENT STUDY) BY THE ANNUAL PRODUCTIVE HOURS (TOTAL HOURS LESS LEAVE AND HOLIDAY TIME) FOR A SINGLE EMPLOYEE. OBVIOUSLY, THE LARGER THE NUMBER OF ANNUAL PRODUCTIVE HOURS FOR AN EMPLOYEE, THE FEWER THE NUMBER OF EMPLOYEES NECESSARY TO PERFORM, AND THE LOWER THE DIRECT LABOR COST IN THE GOVERNMENT ESTIMATE.

THE 1979 HANDBOOK REFERENCED IN THE UNAMENDED RFP DID NOT SET FORTH A SPECIFIC NUMBER OF ANNUAL PRODUCTIVE HOURS TO BE USED IN THE FTE CALCULATION, LEAVING IT TO THE AGENCY TO DETERMINE THIS NUMBER ON ITS OWN. THE 1983 HANDBOOK INCORPORATED IN THE RFP BY THE APRIL 12 AMENDMENT, HOWEVER, SPECIFIED THAT 1,744 HOURS SHOULD BE USED FOR THIS PURPOSE (HANDBOOK AT P. 8). THE ARMY DID NOT USE 1,744 HOURS IN FIGURING FTES, BUT INSTEAD USED 1,807.2 HOURS BASED ON ITS OWN CALCULATIONS OF PRODUCTIVITY. PAN AM CONTENDS THAT THE ARMY WAS REQUIRED TO BASE ITS FTE CALCULATION ON THE 1,744 ANNUAL PRODUCTIVE HOURS FIGURE SET FORTH IN THE 1983 HANDBOOK AND CLAIMS THAT THE USE OF 1,807.2 PRODUCTIVE HOURS RESULTED IN AN UNDERSTATEMENT OF THE IN-HOUSE COSTS RELATED TO DIRECT LABOR BY MORE THAN $1,565,000. PAN AM RECOGNIZES THAT THE MANAGEMENT STUDY WAS CONDUCTED BEFORE THE 1983 HANDBOOK WAS IMPLEMENTED, BUT BELIEVES THE PRODUCTIVE HOUR FIGURE WAS REQUIRED TO BE UPDATED FOR THE COST COMPARISON.

THE ARMY DEFENDS ITS USE OF 1,807.2 HOURS ON THE GROUND THAT SINCE THE MANAGEMENT STUDY WAS COMPLETED BEFORE IMPLEMENTATION OF THE REVISED HANDBOOK, CALCULATIONS BASED ON THAT NUMBER DID NOT REQUIRE REVISION. SUPPORT OF THIS VIEW, THE ARMY POINTS OUT THAT WHILE THE APRIL 3 DIRECTIVE CALLED FOR RECOMPUTATION OF THE GOVERNMENT ESTIMATE, IT PROVIDED THAT THE SAME "BASELINE DATA" COULD BE USED IN THESE RECOMPUTATIONS. THE ARMY CLAIMS IT WOULD HAVE BEEN COSTLY TO REOPEN THE MANAGEMENT STUDY AND RECOMPUTE ALL OF THE DIRECT LABOR-RELATED NUMBERS USING 1,744 HOURS. THE ARMY ALSO ARGUES THAT 1,744 HOURS COULD NOT HAVE BEEN USED IN ANY EVENT SINCE DOING SO WOULD HAVE INCREASED THE NUMBER OF EMPLOYEES UNDER THE CONTRACT ABOVE THE NUMBER DETERMINED NECESSARY IN THE MANAGEMENT STUDY. THE ARMY EXPLAINS THAT DUE TO GENERAL ARMY MANPOWER RESTRICTIONS, IT WOULD NOT HAVE JUSTIFIED INCREASING THE NECESSARY MANPOWER ABOVE THE FIGURE SET BY THE MANAGEMENT STUDY.

WE FIND THAT THE ARMY WAS REQUIRED TO BASE THE FTE CALCULATION HERE ON THE 1983 HANDBOOK GUIDELINE CALLING FOR USE OF 1,744 PRODUCTIVE HOURS. THE APRIL 3 DIRECTIVE IMPLEMENTING THE 1983 HANDBOOK INSTRUCTED INSTALLATIONS TO APPLY THE REVISED GUIDELINES WHERE COST COMPARISONS WERE NOT YET COMPLETED AND, SINCE THE ARMY AT THAT POINT HAD NOT EVEN RECEIVED PAN AM'S BEST AND FINAL OFFER, IT AMENDED THE RFP SPECIFICALLY TO PROVIDE THAT THE NEW GUIDELINES WOULD BE FOLLOWED. AS THE 1,744 PRODUCTIVE HOURS FIGURE IS INCLUDED IN THESE NEW GUIDELINES, AND THE ARMY DID NOT SPECIFY IN THE RFP THAT IT WOULD NOT USE THIS FIGURE, WE BELIEVE THE ARMY WAS REQUIRED TO DETERMINE ITS MANPOWER NEEDS USING THIS FIGURE. BY INSTEAD USING THE 1,807.2 HOUR FIGURE, THE ARMY VIOLATED THE EXPRESS TERMS OF THE RFP AND, IN ESSENCE, ENGAGED IN THE SELECTIVE APPLICATION OF COST COMPARISON PROCEDURES.

IN THIS REGARD, THE RECORD SHOWS THAT WHILE THE ARMY CONSIDERED IT UNNECESSARY TO ADHERE TO THE 1983 HANDBOOK FOR THE FTE CALCULATION, THE ARMY AT THE SAME TIME CONSIDERED IT NECESSARY TO FOLLOW THE 1983 HANDBOOK FOR SEVERAL ITEMS WHICH RESULTED IN A GREATER IN-HOUSE COST ADVANTAGE THAN IF CALCULATED UNDER THE SUPERSEDED GUIDELINES. FOR EXAMPLE, THE ARMY STATES IT RELIED ON THE WAIVER PROVISION IN THE 1983 HANDBOOK IN ACHIEVING A WAIVER TO INCREASE THE CONTRACT ADMINISTRATION STAFF COST (ADDED TO PAN AM'S PROPOSAL AS A COST OF CONTRACTING OUT) FROM 4 PERCENT TO 10 PERCENT. PAN AM ESTIMATES THIS RELIANCE ON THE 1983 HANDBOOK FAVORED IN-HOUSE PERFORMANCE IN AN AMOUNT OF $3.4 MILLION.

AGAIN, AGENCIES MAY NOT DEVIATE MATERIALLY FROM THE COST COMPARISON PROCEDURES REFERENCED IN A SOLICITATION; CLEARLY IT IS UNFAIR, AND THUS DETRIMENTAL TO THE PROCUREMENT SYSTEM, TO ADVISE OFFERORS THAT ONE STANDARD WILL BE APPLIED IN DETERMINING THE GOVERNMENT'S COST OF IN HOUSE PERFORMANCE AND THEN APPLY A DIFFERENT, UNDISCLOSED STANDARD WHICH RESULTS IN A LOWER GOVERNMENT ESTIMATE. SEE JOULE MAINTENANCE CORP., B-208684, SUPRA.

THE ARMY'S JUSTIFICATIONS FOR NOT UPDATING THE IN-HOUSE ESTIMATE TO REFLECT 1,744 ANNUAL PRODUCTIVE HOURS ARE UNPERSUASIVE. THERE WELL MAY BE CERTAIN "BASELINE DATA" INCORPORATED IN A MANAGEMENT STUDY WHICH NEED NOT BE ALTERED TO REFLECT A LATER CHANGE IN APPLICABLE COST COMPARISON PROCEDURES, BUT WE DO NOT BELIEVE EMPLOYEE ANNUAL PRODUCTIVE HOURS CONSTITUTES SUCH DATA. THE PRODUCTIVE HOUR FIGURE BEARS A DIRECT, MATERIAL RELATION TO THE NUMBER OF WORKERS NECESSARY TO PERFORM THE WORK UNDER AN RFP, AND PRESUMABLY WAS SET AT 1,744 IN THE 1983 HANDBOOK BASED ON A WELL-REASONED EXECUTIVE BRANCH DETERMINATION REGARDING GOVERNMENT LABOR COSTS. IN OUR VIEW, WHEN THIS PROCUREMENT WAS MADE SUBJECT TO THE 1983 HANDBOOK, IT NECESSARILY ALSO BECAME SUBJECT TO THIS 1,744 ANNUAL PRODUCTIVE HOUR POLICY STANDARD.

WHILE APPLYING THE UPDATED 1,744 ANNUAL PRODUCTIVE HOUR FIGURE HERE WOULD HAVE REQUIRED THE ARMY TO RECALCULATE PORTIONS OF THE IN-HOUSE ESTIMATE RELATING TO DIRECT LABOR, THE ALTERNATIVE IS A COST COMPARISON BASED ON A GOVERNMENT ESTIMATE THAT, ACCORDING TO THE LABOR PRODUCTIVITY STANDARD IN THE APPLICABLE HANDBOOK, DOES NOT INCLUDE A LARGE ENOUGH WORK FORCE TO PERFORM THE SPECIFIED WORK.

MOREOVER, THE ARMY'S MANPOWER RESTRICTIONS ARE POLICY MATTERS THAT SHOULD HAVE NO BEARING ON THE ARMY'S IN-HOUSE LABOR COST ESTIMATE. UNDER BOTH THE 1979 AND 1983 HANDBOOKS, THE MINIMUM IN-HOUSE WORK FORCE MUST BE DETERMINED OBJECTIVELY, NAMELY, BY DIVIDING TOTAL PERFORMANCE HOURS (AS DETERMINED IN THE MANAGEMENT STUDY) BY ANNUAL PRODUCTIVE HOURS. THIS CALCULATION RESULTS IN THE MINIMUM NUMBER OF FTES NECESSARY TO PERFORM THE WORK DESCRIBED IN THE RFP, MANPOWER RESTRICTIONS NOTWITHSTANDING. ARMY MANPOWER POLICY DOES NOT JUSTIFY CONDUCTING A COST COMPARISON BASED ON A GOVERNMENT ESTIMATE THAT DOES NOT REFLECT LABOR PRODUCTIVITY STANDARDS EXPRESSED IN THE APPLICABLE HANDBOOK, AND THAT THUS DOES NOT INCLUDE THE FULL COST OF THE LABOR FORCE NECESSARY TO PERFORM THE SPECIFIED WORK.

IN VIEW OF OUR CONCLUSION, WE ARE RECOMMENDING THAT THE ARMY RECALCULATE ITS IN-HOUSE DIRECT LABOR AND RELATED COSTS USING THE 1,744 ANNUAL PRODUCTIVE HOUR FIGURE SPECIFIED IN THE REVISED HANDBOOK. IF THE ARMY THEN FINDS THAT THE IN-HOUSE COST ADVANTAGE IS NULLIFIED AND THAT PERFORMANCE BY PAN AM WILL BE LESS COSTLY, PAN AM SHOULD BE AWARDED A CONTRACT FOR THESE SERVICES.

WE NOTE THAT THE ARMY HAS NOT CHALLENGED PAN AM'S CLAIM THAT THIS RECALCULATION WILL INCREASE THE IN-HOUSE COST BY MORE THAN $1.5 MILLION. AS THE CURRENT $609,326 IN-HOUSE ADVANTAGE WOULD BE MORE THAN OFFSET BY THIS $1.5 MILLION COST INCREASE, THIS RECALCULATION WELL MAY BE DISPOSITIVE OF THE PROTEST. WE THEREFORE WILL NOT ADDRESS THE NUMEROUS ADDITIONAL ISSUES RAISED BY PAN AM.

THE PROTEST IS SUSTAINED.