B-242052.2, May 7, 1991, 70 Comp.Gen. 473
B-242052.2: May 7, 1991
Protest on that ground is sustained. Where the imported facsimile machine underwent some manufacturing operations in the United States but the essential nature of the machine was not altered. That is. Digital fax machines that will be used with government-furnished cryptographic equipment. Award was to be made to the firm submitting a technically acceptable offer with the lowest overall evaluated cost. Unless the offer was otherwise qualified. That offers would be evaluated on the basis of the advantages and disadvantages of making more than one award. /1/ Five offers were received in response to the solicitation. One of which was rejected as technically unacceptable. DCA and Ricoh argue that Cryptek's protest of the evaluation of Ricoh's non-TEMPEST fax system is untimely under our Bid Protest Regulations.
B-242052.2, May 7, 1991, 70 Comp.Gen. 473
PROCUREMENT - Socio-Economic Policies - Preferred products/services - Domestic products - Compliance PROCUREMENT - Socio-Economic Policies - Preferred products/services - Foreign/domestic products distinctions Agency improperly evaluated proposed digital facsimile system as a domestic end product for Buy American Act purposes, and protest on that ground is sustained, where the imported facsimile machine underwent some manufacturing operations in the United States but the essential nature of the machine was not altered, so that it remained a foreign component.
General Kinetics, Inc., Cryptek Division:
General Kinetics, Inc., Cryptek Division, protests the Defense Communications Agency's (DCA) award of a contract to Ricoh Corporation under request for proposals (RFP) No. DCA200-90-R-0038, for secure digital facsimile (fax) machines. Cryptek contends that Ricoh offered a foreign end product for purposes of the Buy American Act, 41 U.S.C. Sec. 10a et seq. (1988), and that its proposed fax machines failed to meet mandatory solicitation requirements.
We deny the protest in part and sustain it in part.
The solicitation requested proposals for base and option quantities of two versions of secure digital fax machines -- that is, digital fax machines that will be used with government-furnished cryptographic equipment-- including schedule items for a version complying with the TEMPEST standard on limiting compromising emanations, and other schedule items for a second, non-TEMPEST version. In addition, the solicitation required offerors to propose TEMPEST and non-TEMPEST interconnecting cables, fax paper and supplies, installation, training, and maintenance. Award was to be made to the firm submitting a technically acceptable offer with the lowest overall evaluated cost.
The solicitation provided that the government could accept any item or group of items of an offer, unless the offer was otherwise qualified, and that offers would be evaluated on the basis of the advantages and disadvantages of making more than one award. /1/
Five offers were received in response to the solicitation, one of which was rejected as technically unacceptable. Following discussions, DCA found another two offers to be technically unacceptable as well, and then requested best and final offers (BAFO) from the remaining two offerors, Ricoh and Cryptek. DCA evaluated Ricoh's BAFO as offering a lower overall life-cycle cost, discounted to $5,557,100 current year dollars ($6,223,645 proposed), than Cryptek's BAFO, whose life-cycle cost as discounted totaled $6,822,200 ($7,613,651 proposed). When DCA thereupon made award to Ricoh, Cryptek filed this protest contending that DCA improperly evaluated Ricoh as offering a domestic end product.
As an initial matter, DCA and Ricoh argue that Cryptek's protest of the evaluation of Ricoh's non-TEMPEST fax system is untimely under our Bid Protest Regulations, 4 C.F.R. Sec. 21.2(a)(2) (1991), which require that protests based on other than alleged solicitation improprieties be filed within 10 working days after the protester knew or should have known the basis for protest, and under our decisions, which require that additional grounds of protest raised after the filing of the initial protest independently satisfy the timeliness requirements. See, e.g., Little Susitna Co., 65 Comp.Gen. 652 (1986), 86-1 CPD Para. 560. DCA and Ricoh point out that in its initial protest, filed on November 14, 1990, Cryptek alleged only that Ricoh's model No. R-2112T, the model which Cryptek "on information and belief" surmised had been offered and the model which in fact was offered to satisfy the TEMPEST requirement, was not a domestic end product. They note that the protest of the evaluation of Ricoh's model No. R-2110, proposed to satisfy the non-TEMPEST requirement, was not filed until December 28, approximately 6 weeks after Cryptek had filed its initial protest.
We find Cryptek's protest of the evaluation of Ricoh's non-TEMPEST fax machine timely. Cryptek's initial protest submission to our Office was filed 4 working days after the award to Ricoh. Cryptek indicated at the bid protest conference conducted by our Office, Conference Transcript (CT) at 25, and in a subsequently-submitted affidavit, that it was unaware of which fax machine Ricoh had offered to satisfy the non-TEMPEST requirement until it received the agency report; it then supplemented its protest in this regard on the next working day. According to Cryptek, it was able to surmise which model Ricoh was offering to satisfy the TEMPEST requirement because only one Ricoh model met the solicitation requirement that the machine be on the National Security Agency's (NSA) Preferred Products List (PPL) or on its Endorsed Tempest Products List (ETPL) of approved TEMPEST products "at time of response to the RFP." Cryptek explains that it was unable similarly to surmise which fax machine Ricoh had proposed to meet the non-TEMPEST requirement since only limited changes were required to conform a commercial fax machine to the non-TEMPEST requirement, and Ricoh therefore could have offered any number of fax machines for this requirement. In these circumstances, we find that Cryptek was not on notice of the basis for its protest with respect to Ricoh's non-TEMPEST fax machine prior to receipt of the agency report, and that its protest on this ground therefore was timely filed. See Arrow Gear Co., B-238936, July 12, 1990, 69 Comp.Gen. ***, 90-2 CPD Para. 28 (General Accounting Office will resolve doubts over when a protester first becomes aware of its basis for protest in the protester's favor).
NSA LISTING REQUIREMENT
Cryptek first contends that Ricoh's proposed TEMPEST digital fax system failed to comply with the solicitation requirement that "the DF digital fax device" be listed on either NSA's PPL or ETPL lists as of the time of proposal submittal. Ricoh, unlike Cryptek, offered a separate, external protocol converter to satisfy the solicitation requirement that the proposed TEMPEST digital fax machine comply with Military Standard MIL-STD -188-161B, governing interoperability among digital fax machines. Ricoh's TEMPEST protocol converter was not listed on either NSA list of approved TEMPEST products until after award.
We need not resolve this issue. Even if we agreed with Cryptek, acceptance of a proposal that deviates from RFP specifications warrants sustaining a protest only if there is resulting prejudice to the protester, e.g., if the protester would have altered its proposal to its competitive advantage had it been given the opportunity to respond to relaxed requirements. See Astro-Med, Inc.-- Recon., B-232131.2, Dec. 1, 1988, 88-2 CPD Para. 545; see generally Federal Computer Corp., B-239432, Aug. 29, 1990, 90-2 CPD Para. 175. Here, we have no basis for finding a reasonable possibility of prejudice. Cryptek does not assert, and the record does not indicate, that it would have altered its proposal to its competitive advantage had it been given the opportunity to respond to the relaxed requirement. In this regard, there would be no apparent reason for Cryptek to alter its proposal since the listing requirement concerned the status of the offered item and Cryptek's item had that status, whether or not listing was required. DCA's waiver of the requirement therefore would not provide a basis for sustaining the protest. See CryoMed, B-241605, Feb. 22, 1991, 91-1 CPD Para. 202.
Cryptek also challenges DCA's acceptance of Ricoh's certification that, as required by the specifications, its proposed fax systems comply with MIL-STD-188-161B, governing interoperability among digital fax machines. Although it is unclear from the record whether DCA had any basis upon which to question Ricoh's certification, again, there is no assertion or indication that Cryptek was prejudiced by any relaxation of the specifications in this regard.
BUY AMERICAN ACT
We find that DCA did not properly evaluate Ricoh's proposal for purposes of the Buy American Act. The solicitation included the clause set forth at Department of Defense Federal Acquisition Regulation Supplement (DFARS) Sec. 252.225-7001, which implements the Buy American Act and provides for the addition of an evaluation differential to offers proposing to furnish foreign end products when they are in competition with offers of domestic end products. The differential to be applied ranges from 6 percent of the offered price inclusive of duty, to 50 percent of the offered price exclusive of duty, whichever results in the greater evaluated price. DFARS Sec. 252.225 7001(d). A domestic end product is defined as an "end product manufactured in the United States if the costs of its ... components which are mined, produced or manufactured in the United States exceeds fifty percent (50%) of the cost of all its components." DFARS Sec. 252.225-7001(a)(6)(ii). Components are defined by the DFARS as "those articles, materials, and supplies directly incorporated into end products." DFARS Sec. 252.225-7001(a)(1). /2/
The RFP required offerors to certify whether the end products that would be furnished were domestic. While Cryptek certified its proposed fax machines as domestic end products, Ricoh certified in its initial proposal that both its TEMPEST (Model No. R-2112T) and non-TEMPEST (Model No. R- 2110) fax machines were non-domestic end products of Japanese origin. However, when asked during discussions to furnish an import duty unit price for each machine, Ricoh responded by revising its proposal to claim that its fax machines were domestic end products. When the contracting officer then warned that a 50 percent evaluation factor could be added to its evaluated price should it later be determined that the fax machines were not domestic, Ricoh furnished a detailed analysis in support of its assertion of domestic end product status.
Specifically, Ricoh explained that it was offering a TEMPEST fax system comprised of only three components, all of domestic origin, including: (1) a "Mitek (Systems, Inc.) Tempestized Fax" machine; (2) a shielded "pedestal" enclosure containing certain electronic subassemblies which had been removed from the FAX machine, insulated and then installed in the pedestal; and (3) a protocol converter, which permits the fax machine to satisfy the solicitation requirement for compliance with the applicable Military Standard-- MIL-STD-188-161B - governing interoperability among digital fax machines. Ricoh further explained that the manufacturing process for the TEMPEST fax machine includes: (1) import into the United States from Japan of a Ricoh commercial fax machine; (2) disassembly of the unit; (3) removal of certain printed circuit boards; replacement of programmable read only memory chips on the boards; (5) reassembly of the fax machines and shipment to Mitek, an independent subcontractor; (6) disassembly; (7) the addition of insulation to electronic subassemblies to conform with the TEMPEST standards governing the control of compromising emanations; (8) incorporation of insulated electronic subassemblies into the pedestal; and (9) integration of the fax machine and pedestal.
As for the non-TEMPEST fax, Ricoh explained to DCA that its proposed system is comprised of only two components, both of domestic origin, including: (1) a commercial fax machine; and (2) a protocol converter. With respect to the fax machine, Ricoh further explained that "although this machine is based upon equipment initially manufactured by Ricoh Japan, it is substantially transformed by Ricoh in San Jose, California, in the process of meeting the specifications." Ricoh furnished a production process flow chart indicating that it imports into the United States from Japan the same commercial fax machine used for the TEMPEST version, disassembles the unit, removes a printed circuit board and replaces programmable read only memory chips, and then reassembles the unit.
Ricoh maintains that the manufacturing operations performed in the United States on the Japanese commercial fax machine and pedestal in the case of the TEMPEST system, and on the Japanese commercial fax machine in the case of the non-TEMPEST system, constitute a "manufacture" of the components, rendering them of domestic origin for purposes of the Buy American Act. Since the protocol converters also are manufactured in the United States, Ricoh maintains, all components of both systems-- the fax machine, pedestal, and protocol converter of the TEMPEST system and the fax machine and protocol converter of the non-TEMPEST system-- are of domestic origin, and the systems therefore are domestic end products. Based on Ricoh's explanation, DCA accepted its revised certification of the fax systems as domestic end products and therefore did not add an evaluation differential to Ricoh's proposed price. Without the differential, Ricoh's price was low, and it was awarded the contract on this basis.
Cryptek questions DCA's acceptance of Ricoh's rationale for domestic end product status for the TEMPEST and non-TEMPEST units; it argues that the end product being procured is the fax machine itself, with the protocol converter and pedestal serving merely as accessories. According to Cryptek, the term "components" as defined in DFARS Sec. 252.225-7001(a)(i) -- "articles, materials, and supplies directly incorporated into end products"-- for purposes of calculating whether the cost of the components manufactured in United States exceeds 50 percent of the cost of all components, encompasses the components of the fax machine itself, that is, its subassemblies. Cryptek also argues that if the system itself is the end product, i.e., including a domestic protocol manufactured subcomponents of the fax machine against the total cost of the system. This percentage, Cryptek asserts is 56.1 percent of the cost of the TEMPEST version and 74.6 percent of the non TEMPEST version. In addition, Cryptek questions whether Ricoh's proposed fax machines satisfy the other prerequisite for domestic status, namely, manufacture in the United States; Cryptek argues that the Japanese commercial fax machines do not undergo any substantial change after import into the United States and that the therefore can not be considered to have been of domestic manufacture. As a general matter, a contracting agency should go beyond a firm's self certification for Buy American Act purposes, and not automatically rely on the validity of that certification, where the agency has reason to believe, prior to award, that a foreign end product will be furnished. See Cryptek, Inc., B-241354, Feb. 4, 1991, 91-1 CPD Para. 111; American Instrument Corp., B-239997, Oct. 12, 1990, 90-2 CPD Para. 287. Where an agency is required to investigate further, we will review the evaluation and resulting determination of country of origin to ensure that they were reasonable. See Autospin, Inc., B-233778, Feb. 23, 1989, 89-1 CPD Para. 197. Here, we find that DCA, based on the additional information available to it, reasonably concluded that Ricoh's proposed TEMPEST fax system qualified as a domestic end product. However, we find unreasonable the agency conclusion that Ricoh's proposed non-TEMPEST fax system qualified as a domestic end product.
TEMPEST Fax System
As indicated above, to qualify as domestic, an end product must be manufactured in the United States, and the cost of its components which are mined, produced or manufactured in the United States must exceed 50 percent of the cost of all its components. The term "manufacture" means completion of the article in the form required for use by the government, see Marbex, Inc., B-225799, May 4, 1987, 87-1 CPD Para. 468, and assembly of components necessary to transform an imported machine into a machine which meets the specifications can constitute manufacture, at least where a significant number of assembly operations are performed in the United States. See Rolm Corp., B-200995, Aug. 7, 1981, 81-2 CPD Para. 106. have rejected the argument that it is necessary for the process performed in the United States to result in a substantial or fundamental change to the physical character of an imported machine in order for it to constitute manufacture. Saginaw Mach. Sys., Inc., B-238590, June 13, 1990, 90-1 CPD Para. 554.
We find that Ricoh's proposed TEMPEST fax system as described in its proposal will undergo sufficient transformation to be considered manufactured in the United States. The Japanese commercial fax machine will only conform to the specifications after the replacement of programmable read only memory chips, addition of TEMPEST-required insulation to certain electronic sub-assemblies, removal of insulated electronic subassemblies to the newly-added pedestal, and the addition and integration of a protocol converter. These steps seem to us significant and clearly are necessary to make the system conform to the TEMPEST specifications. While Cryptek appears to question including the protocol converter and the pedestal in this analysis, they clearly are components of the ultimate end-item, a fax system, that is to be furnished to the government.
We find that the TEMPEST fax system also satisfies the 50-percent plus domestic component requirement. Our finding in this regard is based on an analysis similar to that used above to determine whether the TEMPEST fax system satisfied the domestic manufacture requirement. The cost of the fax machine component is over 50 percent of the cost of the end product, and most of the significant manufacturing operations-- replacement of programmable read only computer chips, addition of insulation, and removal of certain electronic subassemblies-- were performed on the fax machine component. The significance and necessity of those operations in making the fax machine conform to the specifications renders the fax machine a domestic component.
The agency also concluded that the costs of the fax machine component are largely domestic. This analysis reflects, to a great extent, the contribution of Mitek, an independent subcontractor, which insulated the electronic subassemblies to conform with the TEMPEST standards. Cryptek believes these cost are overstated and therefore distort the total domestic cost content. However, the agency determined that Mitek's costs reflected an "arms-length negotiated 'off the shelf' price," and in the absence of any evidence of fraud, we think it was proper for the agency to weigh these costs in its analysis. Thus, we find no basis in the record for questioning the agency's overall determination that cost of the domestic components of Ricoh's proposed TEMPEST fax system will amount of more than 50 percent of the cost of all components.
Non-TEMPEST Fax System
With respect to Ricoh's non-TEMPEST fax system, we find that the system fails to satisfy the second prong of the Buy American Act test, that is, the 50-percent-plus domestic component requirement. Notwithstanding the domestic manufacturing operations performed on it-- disassembly, removal of a circuit board and replacement of memory chips, and reassembly-- the Japanese commercial fax machine, the most significant, costly element of the end product (i.e., the non-TEMPEST fax system), remains a foreign- manufactured component of the overall system which, because its cost exceeds 50 percent of the cost of all the components of the system, renders the system a foreign end item.
Although assembly of components can constitute manufacture, we have recognized that limited domestic assembly or manufacturing operations which do not alter the essential nature of a component which is the core or essence of the end product being procured may not be used to circumvent the plain requirement of the Buy American Act that the end product be manufactured substantially all from domestic articles, material or supplies. 48 Comp.Gen. 727 (1969); Ampex Corp., B-203021, Feb. 24, 1982, 82-1 CPD Para. 163. For example, in 48 Comp.Gen. 727, we addressed a case where boring, plating and machining operations were performed on an unfinished foreign-made cylinder lining forging in order to make it into the finished liner required by the specifications. We held that although such machining operations might reasonably be regarded as adequate to establish that the end product was an article manufactured in the United States, they did not transform the liner into a domestic component for Buy American Act evaluation purposes. Likewise, in our decision in Ampex Corp., B-203021, supra, we considered a case where a foreign-made video recorder base unit was disassembled into five basic sub-assemblies and then was reassembled after the addition of three subassemblies and the deletion of one. We held that the disassembly, substitution of parts, and reassembly of the base unit did not change the fact that the base unit was a foreign-made component of the overall video recorder system being procured by the agency.
We reach a similar conclusion here. The essential nature of the Japanese commercial fax machine is unchanged by the relatively limited domestic manufacturing operations performed on it; although necessary to make the machine conform to the specifications, the disassembly, removal of a circuit board and replacement of memory chips, and reassembly in the United States do not change its essential function as a basic fax machine, nor do they appear significant with respect to the level of effort and materials required. Thus, we think the fax machine, the core of the end product being procured, remains a foreign manufactured component. The Japanese commercial fax machine would render Ricoh's non-TEMPEST fax system other than a domestic end product because the cost of the domestic components would total less than 50 percent of the cost of all the components. See generally Autospin, Inc., B-233778, supra. That being the case, DCA was required to add an evaluation differential amounting to 50 percent of Ricoh's offered item price (exclusive of duty) for the non- TEMPEST fax system to Ricoh's proposed price.
The addition of the evaluation differential to Ricoh's price for non TEMPEST fax machines renders Cryptek the low offeror for those items on the schedule. DCA believes that the 50 percent evaluation differential should be calculated without considering the cost of the domestically manufactured protocol converter. We disagree. Ricoh offered a single unit price for its complete non-TEMPEST fax system and did not break out from that price any allowance for a protocol converter. The regulations specifically provide that "each non-qualifying country offer of defense equipment shall be adjusted for the purpose of evaluation by ... adding 50% of the offer, exclusive of duty" (emphasis added) as an evaluation differential. DFARS Sec. 252.225 7001(d). The agency therefore is obliged to calculate the evaluation differential based on Ricoh's unit price for its complete non-TEMPEST fax system.
Cryptek's offer when properly evaluated was low with respect to the non- TEMPEST schedule items, while Ricoh's offer was low with respect to the TEMPEST items. Since the solicitation provided for the possibility of multiple awards, the low overall cost to the government will result from awarding Cryptek the non-TEMPEST requirement, while continuing Ricoh's contract for the TEMPEST requirement. Therefore, by letter of today to the Director of DCA, we are recommending that Ricoh's contract be terminated for the convenience of the government with respect to the schedule items for non-TEMPEST fax machines, and that a contract for those items be awarded to Cryptek, if otherwise appropriate. Further, we find Cryptek to be entitled to reimbursement of the costs of pursuing this protest, including attorneys' fees. 4 C.F.R. Sec. 21.6(d)(1); see Falcon Carriers, Inc., 68 Comp.Gen. 206 (1989), 89-1 CPD Para. 96.
The protest is denied in part and sustained in part.
/1/ The acquisition plan adopted by DCA stated that "multiple awards will be allowable and are possible since some contractors may be able to provide only the TEMPEST secure facsimile and others may only be able to provide the Non-TEMPEST secure facsimile."
/2/ The Trade Agreements Act generally provides that the President may waive, with respect to eligible products of designated countries, the application of any law, regulation, procedureor practice that would result in treatment less favorable than that accorded to United States products and supplies of such products. 19 U.S.C. Sec. 2511 (1988). The regulations implementing the Act provide that when the value of a proposed acquisition of an eligible product is estimated to be at or over a specified dollar threshold, agencies shall evaluate offers for an eligible product without regard to the restrictions of the Buy American Act. Federal Acquisition Regulation Sec 25.402(a)(1). With respect to the Department of Defense, however, the implementing regulations provide that items within Federal Supply Classification group 58, the classification under which this procurement was synopsized, are not subject to the Trade Agreement Act. DFEARS Sec. 225.403. Accordingly, this procurement was subject to the Buy American Act.