B-240413, Nov 2, 1990, 90-2 CPD ***

B-240413: Nov 2, 1990

Additional Materials:

Contact:

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

 

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

Fixed-price solicitation for family housing maintenance services subjects contractor to unreasonable risk due to requirement for lump sum price with no limitation on amount of work that can be ordered under various tasks is sustained where lump sum pricing will serve stated government purpose only at unreasonable cost to both the contractor and the government and imposes unreasonable risk on the contractor. Four Star maintains that the RFP is defective because it imposes unnecessary risk on the contractor and thus unduly restricts competition. The solicitation was issued on April 9. Roof repair and major interior painting are priced per square foot as separate line items. Including whether there was any limit to the amount of work the agency could require under certain tasks included in the lump sum portion of the contract.

B-240413, Nov 2, 1990, 90-2 CPD ***

PROCUREMENT - Competitive Negotiation - Requests for proposals - Terms - Risks DIGEST: Protest that firm, fixed-price solicitation for family housing maintenance services subjects contractor to unreasonable risk due to requirement for lump sum price with no limitation on amount of work that can be ordered under various tasks is sustained where lump sum pricing will serve stated government purpose only at unreasonable cost to both the contractor and the government and imposes unreasonable risk on the contractor; pricing scheme thus unduly restricts competition.

Attorneys

Four Star Maintenance Corp.:

Four Star Maintenance Corp. protests the terms of request for proposals (RFP) No. F29651-90-R-0002, issued by the Department of the Air Force for military family housing maintenance at Holloman Air Force Base (AFB), New Mexico. Four Star maintains that the RFP is defective because it imposes unnecessary risk on the contractor and thus unduly restricts competition.

We sustain the protest.

The solicitation was issued on April 9, 1990, pursuant to Office of Management and Budget Circular No. A-76 in order to provide the agency with a cost comparison for the purpose of determining whether it would be more economical to perform the required work in-house or by contract. The RFP requires offerors to submit a single fixed monthly price for virtually all tasks related to maintenance of military family housing; however, flooring, wallcovering, roof repair and major interior painting are priced per square foot as separate line items. Although the performance work statement (PWS) initially provided "not to exceed" quantities for many of the required tasks under the lump sum portion of the pricing schedule, amendments to the RFP replaced the maximum quantities with estimated quantities, and provided that the contractor would be responsible for performing all of the work required whether or not the actual quantity exceeded the RFP estimate. Prior to submission of initial proposals, Four Star requested a number of clarifications, including whether there was any limit to the amount of work the agency could require under certain tasks included in the lump sum portion of the contract. Upon receiving the agency's confirmation that there is no such limit, Four Star filed this protest in our Office.

Four Star contends that the RFP exposes the contractor to unwarranted risk, particularly with regard to certain labor-intensive work items, as it places no limit on the quantity of work the government can order at a fixed price. For example, with regard to the requirement for maintenance of gas, water and sewer lines, the PWS provides that the contractor is responsible for:

"cutting through building foundations, slabs, sidewalks, streets, curb, driveways and gutters in order to excavate/trench lines, and in turn, to return surfaces and sub-surfaces to their original configuration (to include sod, shrubs, concrete, hot mix, and compacting). Initial investigation and digging shall be accomplished by the contractor ... at no additional cost to the government."

Four Star maintains that proper pricing is impossible when such potentially expensive work can be ordered without limit at a fixed price. Four star also cites the requirement for change of occupancy maintenance (COM), which is performed as units are vacated, as a potentially expensive work item due to the possibility of a change in mission at Holloman AFB that will necessitate a turnover of personnel far in excess of the RFP estimate, at no additional cost to the government. /1/ Finally, Four Star notes that service calls, another item included in the lump-sum price, are likely to exceed the RFP estimate; moreover, the contractor has no control over their frequency. Four Star concludes that the agency should either limit the amount of work that can be required for each task at the fixed monthly price, or request unit and extended prices for each task, and pay the contractor for work actually performed.

The agency states that it structured the solicitation in this manner to discourage the contractor from performing unnecessary work at the government's expense. The agency argues that, as it is primarily the responsibility of the contractor to determine what work needs to be done and then to do it, a contract priced on a per-unit basis would encourage the contractor to profit by doing work not absolutely necessary, and would require additional contract inspectors to ensure the contractor did not perform unnecessary work. The agency concludes that it has a legitimate need to impose the risk of quantity variations upon the contractor.

There is some amount of risk inherent in any procurement, and offerors are expected to use their professional expertise and business judgment in taking these risks into account in computing their offers. A solicitation thus is not defective merely because it may put contractors at risk in terms of, for example, the possibility that payments under the contract will not cover the cost of performance. S.P.I.R.I.T. Specialist Unlimited, Inc., B-237114.2, Mar. 8, 1990, 90-1 CPD Para. 257. On the other hand, it is our view that agencies may impose risks on contractors only to the extent necessary to reasonably limit the burdens on the government. See id.

We find that the pricing structure in the RFP here does not meet the test of reasonableness. While the need to insure that a contractor does not perform unnecessary work is a valid concern and might be a legitimate basis for imposing certain kinds of risks on offerors, the requirement for a lump sum price for most of the work under the contract may also deter the contractor from performing necessary work. Since the contractor will receive the same payment under the contract each month no matter how much work is required, the contractor profits by doing as little work as possible. The disincentive to perform necessary work becomes stronger once the contractor's costs for the month exceed the fixed monthly price, especially where, as here, the contractor is primarily responsible for determining what work needs to be done. We note in this regard that the requirement for service calls is not subject to cost incentives, as such calls presumably are not initiated by the contractor. We also note that four major work items-- flooring, wallcovering, roof repair and major interior painting-- are to be priced separately using unit prices, while other major work items, such as maintenance of water, sewer and gas lines, are to be included in the lump sum price. It is not clear why the agency's stated purpose of insuring against performance of unnecessary work applies to some tasks but not to others.

Moreover, we think that the requirement to perform most of the work under the contract at a fixed monthly price involves risks to the contractor and the government that outweigh any advantage it might offer by deterring some unnecessary work. First, if the contractor builds into its prices contingencies to cover the possibility that the work required will exceed the RFP estimates, and the agency ultimately requires less than the estimated work, the government will pay more for the work than if payment were based upon fixed quantities or unit prices. Under this scenario, the contract would not result in the lowest cost to the government. Conversely, if the contractor bids based on the cost of performing the estimated work, without including the cost of work in excess of the estimates, and the agency ultimately requires work in excess of the estimates, the contractor would be required to perform all additional work at no cost. We think this is unfair and unwarranted where not necessitated by some strong agency need. In addition, the RFP pricing structure affords the government an obvious advantage in the A-76 cost comparison. As Four Star notes, while the government is required to prepare its offer based upon the same estimated quantities as the other offerors, the government need not increase its price to provide for the contingency that the required work will exceed the RFP estimate. Thus, firms cannot effectively compete with the government under the lump sum pricing scheme.

In sum, it is our view that the RFP's lump sum pricing scheme will achieve the agency's desired goal of discouraging unnecessary work only at the cost of discouraging necessary work, and may not result in the lowest possible cost to the government. At the same time, the pricing scheme subjects the contractor to inordinate risk, and puts offerors at a competitive disadvantage versus the government in the cost comparison process. We have previously recommended to the Air Force that solicitations of this type include estimates of the amount of work expected and should provide for unit and extended prices rather than a single fixed price. Offers should be evaluated on the basis of extended prices, and the solicitation should state that payment will be based on the unit prices offered multiplied by the actual quantity of work required. AWD Mehle GmbH, B-225579, Apr. 16, 1987, 87-1 CPD Para. 416, recon. denied, B-225579.2, June 11, 1987, 87-1 CPD Para. 584. This format will help prevent offerors from including in their prices large contingencies to cover the possibility that they may be required to perform work greatly in excess of that listed in the RFP for the fixed price offered and, as a result, likely will reduce the cost to the government. Id.

Accordingly, we sustain the protest. By letter of today to the Secretary, we are recommending that the Air Force amend the solicitation in accordance with our decision. We also find Four Star entitled to reimbursement of the costs of filing and pursuing its protest. 4 C.F.R. Sec. 21.6(e) (1990).

The protest is sustained.

/1/ While the agency maintains that the possible change in mission at Holloman AFB is "still in question," the planned transfer of the Stealth fighter aircraft to Holloman has been widely reported in the press, and Four Star allegedly was informed by a contracting specialist that the transfer may take place.