B-180414, SEP 3, 1974, 54 COMP GEN 169

B-180414, SEP 3, 1974, 54 COMP GEN 169

CONTRACTS - NEGOTIATION - COMPETITION - DISCUSSION WITH ALL OFFERORS REQUIREMENT - TECHNICAL TRANSFUSION OR LEVELING PROCURING AGENCY DID NOT ACT IMPROPERLY IN NOT ADVISING PROTESTER OF PREFERENCE FOR "REFINEMENTS" DESIGN APPROACH OF SUCCESSFUL OFFEROR SINCE AGENCY'S STATEMENT IN RESPONSE TO PROTEST CONCERNING LACK OF MEANINGFUL TECHNICAL NEGOTIATIONS, THAT IT WOULD HAVE "VIOLATED ASPR" IF IT HAD INFLUENCED CHANGE IN PROTESTING OFFEROR'S DESIGN APPROACH INDICATES THAT "TECHNICAL TRANSFUSION" OF COMPETING OFFEROR'S SUPERIOR DESIGN APPROACH WOULD HAVE OCCURRED. CONTRACTS - NEGOTIATION - EVALUATION FACTORS - SUPERIOR PRODUCT OFFERED ABSENT CLEAR SHOWING OF LACK OF RATIONAL BASIS FOR TECHNICAL JUDGMENT REACHED BY PROCUREMENT ACTIVITY THAT PROPOSED DESIGN IS STATE-OF-ART ADVANCEMENT WITHIN DESIGN-TO-PRODUCTION COST LIMITATION OF REQUEST FOR PROPOSALS, GENERAL ACCOUNTING OFFICE, ON RECORD, AS SUPPLEMENTED BY COMMENTS FROM INTERESTED PARTIES, FINDS NO REASON TO QUESTION JUDGMENT EXERCISED BY ACTIVITY. CONTRACTS - RESEARCH AND DEVELOPMENT - EVALUATION FACTORS - DESIGN - SUPERIORITY, DEFICIENCIES, ETC. PROCURING AGENCY IN SOURCE SELECTION PROCESS DID NOT DISREGARD PROCUREMENT GUIDELINE DIRECTING OFFERORS TO DESIGN SYSTEM FOR PROTECTION AGAINST CERTAIN THREATS WHERE AWARD WAS MADE TO OFFEROR RECEIVING EXCELLENT RATING FOR PROTECTION AGAINST THREATS IN QUESTION RATHER THAN TO PROTESTING CONCERN WHICH RECEIVED RATING OF "ADEQUATE" FOR SAME THREATS. CONTRACTS - RESEARCH AND DEVELOPMENT - COSTS - ANALYSIS - MINIMUM STANDARDS ON PROCUREMENT RECORD SHOWING THAT PROTESTING OFFEROR'S COST PROPOSAL, ENCOMPASSING COST ELEMENTS THAT ARE REQUIRED TO BE EXAMINED UNDER PROCEDURES FOR COST ANALYSIS SET FORTH IN ARMED SERVICES PROCUREMENT REGULATION 3-807.2(C), WAS ANALYZED BY EVALUATORS IN ARRIVING AT OFFEROR'S RATING IN COST AREA; THAT DURING COURSE OF NEGOTIATIONS SEVERAL INQUIRIES WERE MADE OF PROTESTING CONCERN ABOUT COST PROPOSAL; AND THAT CONSIDERATION WAS GIVEN TO REPORTS SUBMITTED BY FIELD PRICING SUPPORT ACTIVITIES, GENERAL ACCOUNTING OFFICE CANNOT CONCLUDE THERE WAS FAILURE TO ACHIEVE MINIMUM STANDARD OF COST ANALYSIS UNDER CITED REGULATION. CONTRACTS - NEGOTIATION - FIELD PRICING SUPPORT REPORTS - CONTRACTS IN EXCESS OF $100,000 REQUIREMENT IN ARMED SERVICES PROCUREMENT REGULATION (ASPR) 3 801.5(B) THAT FIELD PRICING SUPPORT REPORT BE REQUESTED PRIOR TO NEGOTIATION OF CONTRACT IN EXCESS OF $100,000 WAS COMPLIED WITH IN PRODUCTION COST AREA EVEN THOUGH PROCUREMENT CONTRACTING OFFICER ONLY REQUESTED REVIEW OF OFFEROR'S PROPOSED ESCALATION RATE FOR THE PERIOD IN QUESTION, THE LEARNING CURVE TO BE APPLIED IN PRODUCTION, AND THE MAKE-UP OF THE PRODUCTION UNIT COST ESTIMATE, SINCE ASPR 3-801.5(B)(3) PROVIDES THAT CONTRACTING OFFICER HAS RIGHT TO STIPULATE "SPECIFIC AREAS FOR WHICH INPUT (FIELD PRICING SUPPORT) IS REQUIRED." CONTRACTS RESEARCH AND DEVELOPMENT - COSTS - ANALYSIS - EVALUATION FACTORS PRIMARY RELIANCE ON INDEPENDENT "PARAMETRIC" COST ANALYSIS IN EVALUATING PROJECTED PRODUCTION UNIT COSTS OF OFFERORS IN DETERMINING SUCCESSFUL OFFEROR FOR AWARD OF DEVELOPMENT CONTRACT UNDER "DESIGN-TO PRODUCTION-UNIT COST" CONCEPT WAS NOT UNREASONABLE SINCE: (1) DEPARTMENT OF DEFENSE GUIDELINES FOR AWARD OF DEVELOPMENT CONTRACT TERMS PROPOSED PRODUCTION UNIT COST ESTIMATES OF OFFERORS "INCONCLUSIVE" AT DEVELOPMENT STATE; (2) EACH COMPETING OFFEROR'S COST PROPOSAL WAS EQUALLY AND THOROUGHLY ANALYZED WITH "PARAMETRIC" ESTIMATE; AND (3) SUBSTANTIAL COST ADDITIONS TO EACH OFFEROR'S PROPOSAL WERE MADE. CONTRACTS - NEGOTIATION - EVALUATION FACTORS - PRICE ELEMENTS FOR CONSIDERATION - COST ESTIMATES NEGOTIATIONS WITH UNSUCCESSFUL OFFEROR AS TO SYSTEM WEIGHT DISCREPANCY SHOULD HAVE, AT LEAST, INDIRECTLY MADE IT AWARE THAT COST ESTIMATE WAS QUESTIONABLE; NEVERTHELESS IT WOULD HAVE BEEN PREFERABLE TO HAVE ADVISED OFFERORS THAT SUBMITTED COST PROPOSALS WERE CONSIDERED GENERALLY UNREALISTIC AND TO CONVEY SPECIFICS OF COST ESTIMATE DISCREPANCIES SO LONG AS ANOTHER OFFEROR'S UNIQUE TECHNICAL AND COST APPROACH WOULD NOT BE DISCLOSED. CONTRACTS - NEGOTIATION - COST-PLUS INCENTIVE-FEE CONTRACTS - EVALUATION FAILURE OF PROCURING AGENCY TO RESOLVE BEFORE AWARD DISCREPANCY BETWEEN AWARD PRICE ON COST-PLUS-INCENTIVE-FEE BASIS OF DEVELOPMENT CONTRACT AND GOVERNMENT COST ESTIMATE FOR DEVELOPMENT WORK WAS INCONSISTENT WITH ARMED SERVICES PROCUREMENT REGULATION 3-405.4(B) CONTEMPLATING NEGOTIATION OF REALISTIC TARGET COST TO PROVIDE INCENTIVE TO CONTRACTOR TO EARN MAXIMUM FEE THROUGH INGENUITY AND EFFECTIVE MANAGEMENT. CONTRACTS - NEGOTIATION - COST, ETC., DATA - "REALISM" OF COST ELIMINATION, WITHOUT FORMAL ADVICE TO OFFERORS, OF COST REALISM STANDARD AS APPLIED TO PREPRODUCTION DEVELOPMENT COSTS, DOES NOT REQUIRE CONCLUSION THAT SELECTION OF TECHNICALLY SUPERIOR OFFEROR, WHOSE EVALUATED UNIT PRODUCTION COST WAS WITHIN REQUEST FOR PROPOSALS (RFP) DESIGN-TO- PRODUCTION-COST LIMITATION BUT WHOSE DEVELOPMENT COSTS WERE HIGH, WAS IMPROPER UNDER COST EVALUATION SCHEME OF RFP. CONTRACTS - NEGOTIATION - EVALUATION FACTORS - CRITERIA - ADMINISTRATIVE DETERMINATION LACKING INDEPENDENT TECHNICAL AND COST ANALYSIS OF RELATIVE MERITS OF COMPETING PROPOSALS IN "BAND 8" APPROACHES AND OPERATIONAL EFFECTIVENESS OF SYSTEM WITHOUT BAND 8 REQUIREMENT, GENERAL ACCOUNTING OFFICE CANNOT QUESTION AGENCY'S DECISION TO ELIMINATE BAND 8 REQUIREMENT IN ORDER TO PRESERVE DESIGN-TO-PRODUCTION COST CONSTRAINT OR SUBSEQUENT DECISION, BASED ON POSSIBLE FUTURE IMPORTANCE OF REQUIREMENT TO PARTIALLY RESTORE BAND 8 COVERAGE VIA OPTION TECHNIQUE. CONTRACTS - RESEARCH AND DEVELOPMENT - OPTIONAL TECHNIQUE PROCEDURAL VALIDITY OF OPTION TECHNIQUE IN DEVELOPMENT CONTRACT IS UNQUESTIONABLE, SINCE ARMED SERVICES PROCUREMENT REGULATION (ASPR) 1 1501 SPECIFICALLY PROVIDES FOR USE OF APPROPRIATE OPTION PROVISION IN RESEARCH AND DEVELOPMENT CONTRACTS, AND ASPR 1-1504(C), (D), AND (E), CONTRARY TO CONTENTION OF PROTESTING CONCERN, PROVIDE THAT OPTIONS ARE TO BE EVALUATED ONLY IF, UNLIKE THE SUBJECT PROCUREMENT, THE GOVERNMENT INTENDS TO EXERCISE OPTION AT TIME OF AWARD OR IF CONTRACT IS FIXED PRICE. CONTRACTS - NEGOTIATION - COMPETITION - CHANGES IN PRICE, SPECIFICATIONS, ETC. SO LONG AS OFFERORS WERE ADVISED TO BASE PRODUCTION UNIT COSTS ESTIMATES ON CUMULATIVE AVERAGE COSTS FOR 241 PRODUCTION UNITS, THERE WAS NO UNFAIR ADVANTAGE IN PERMITTING ONE OFFEROR, BY INSERTION OF SPECIAL CLAUSE, TO MAKE ITS PROPOSED COST CONTINGENT ON ACCURACY OF PROJECTED PRODUCTION FIGURE, SINCE CLAUSE MAKES EXPLICIT WHAT IS ALREADY IMPLICIT IN PROPOSAL INSTRUCTIONS. ALSO, MODEL CONTRACT PROVISION FURNISHED TO OFFERORS SPECIFICALLY STATES THAT EQUITABLE ADJUSTMENT WILL BE MADE IN PRODUCTION UNIT PRICE FOR ANY GOVERNMENT CHANGE IN PRODUCTION QUANTITY AFFECTING PRODUCTION UNIT COST.

IN THE MATTER OF THE RAYTHEON COMPANY, SEPTEMBER 3, 1974:

THIS PROTEST QUESTIONS THE TECHNICAL AND FINANCIAL RATIONALE SUPPORTING AN AIR FORCE SELECTION OF A DEVELOPMENT CONTRACTOR UNDER A "DESIGN-TO- PRODUCTION-COST" LIMITATION OF $1.4 MILLION. FOR THE REASONS DISCUSSED AT LENGTH BELOW, WE CANNOT CONCLUDE THAT THE SELECTION IN QUESTION WAS UNREASONABLE OR THAT IT WAS MADE WITHOUT BENEFIT OF A "BEST BUY" ANALYSIS, ENCOMPASSING COST AND TECHNICAL CONSIDERATIONS.

IN NOVEMBER 1971 A REQUEST FOR PROPOSALS WAS ISSUED BY THE AERONAUTICAL SYSTEMS DIVISION, AIR FORCE LOGISTICS SYSTEMS COMMAND, WRIGHT-PATTERSON AIR FORCE BASE, FOR THE RADIO FREQUENCY SURVEILLANCE/ELECTRONIC COUNTERMEASURES SUBSYSTEM (SYSTEM) (RFS/ECMS) FOR THE B-1 AIRCRAFT.

AFTER PROPOSALS FOR THE SYSTEM WERE RECEIVED IN JANUARY 1972, AN AGENCY REVIEW PANEL RECOMMENDED CHANGING THE REQUIREMENTS BECAUSE THE DEPARTMENT HAD "OVER-STATED REQUIREMENTS THAT WERE TECHNICALLY BEYOND THE STATE-OF- ART" AND BECAUSE THE PROPOSED SYSTEM WOULD COST IN EXCESS OF THAT WHICH "THE GOVERNMENT COULD AFFORD."

A REVISED APPROACH FOR THE SYSTEM WAS APPROVED IN MAY 1972. THE APPROACH REQUIRED THE AWARD OF TWO FIXED-PRICE DEFINITION AND RISK REDUCTION DEVELOPMENT CONTRACTS OVER A 10-MONTH PERIOD. THE DEPARTMENT REASONED THAT "IF, AT THE COMPLETION OF THE RISK-REDUCTION DEVELOPMENT EFFORT, THE AIR FORCE DETERMINED THAT ONE OF THE TECHNICAL APPROACHES WAS ACCEPTABLE, AN AWARD COULD BE MADE TO ONE OF THE CONTRACTORS FOR THE FULL SCALE ENGINEERING DEVELOPMENT EFFORTS." ULTIMATELY, A PRODUCTION CONTRACT (PHASE III EFFORT) FOR ENOUGH SYSTEMS TO PROTECT THE ENTIRE PROPOSED B-1 FLEET WAS CONTEMPLATED.

TWO FIXED-PRICE CONTRACTS WERE AWARDED TO CUTLER-HAMMER, INC. (AIL DIVISION), AND THE RAYTHEON COMPANY UNDER THE REVISED APPROACH. EIGHT MAJOR TASKS, REFERRED TO AS PHASE I EFFORT, WERE SET FORTH IN THE CONTRACTS. ONE TASK WAS TO DEFINE A SYSTEM WHICH COULD BE PRODUCED FOR A PRODUCTION UNIT COST OF $1.4 MILLION OR LESS, PREDICATED ON THE AVERAGE PRODUCTION COSTS FOR ALL THE SYSTEMS NEEDED FOR THE B-1 FLEET; ANOTHER TASK WAS TO FABRICATE AND DEMONSTRATE CRITICAL HARDWARE COMPONENTS OF THE PROPOSED SYSTEM. THE FINAL TASK OF THE PHASE I EFFORT WAS THE SUBMISSION OF A PROPOSAL FOR THE PHASE II DEVELOPMENT EFFORT (THE FULL SCALE ENGINEERING DEVELOPMENT OF THE SYSTEM, INCLUDING FABRICATION, GROUND AND FLIGHT TEST) BASED ON PROPOSAL INSTRUCTIONS (PI) TO BE ISSUED SUBSEQUENTLY BY THE DEPARTMENT.

TO PROVIDE A BACK-UP APPROACH IN THE EVENT THAT THE PHASE I CONTRACTORS COULD NOT DEMONSTRATE A WORKABLE SYSTEM, THE AIR FORCE STARTED AN IN-HOUSE STUDY FOR A MORE CONVENTIONAL SYSTEM.

IN JUNE 1973 THE AIR FORCE ISSUED THE PI FOR THE DEVELOPMENT WORK TO THE CONTRACTORS. THE TYPE OF CONTRACT ANTICIPATED BY THE PI WAS COST PLUS- INCENTIVE-FEE (CPIF) HAVING A STANDARD INCENTIVE FEE PROVISION, WITH THE EXCEPTION THAT THE FEE WOULD NOT INCREASE IF COSTS INCURRED WERE BELOW THE COST TARGET, AND A UNIQUE DESIGN-TO-PRODUCTION-UNIT-COST INCENTIVE CLAUSE. AS EXPLAINED BY THE CONTRACTING OFFICER:

THE COST SHARING (ARRANGEMENT) STATES THAT THERE WILL BE NO SHARE (BY THE AIR FORCE) OF DOLLARS IF THE CONTRACTOR UNDERRUNS HIS DEVELOPMENT TARGET COST. THIS IS TO ENCOURAGE THE CONTRACTOR TO INVEST FUNDS IN THE DEVELOPMENT PHASE SO HE CAN PRODUCE A LOW COST SUBSYSTEM DURING THE PRODUCTION PHASE. WE DID NOT WANT TO INCENTIVIZE HIM TO UNDERRUN AT THE EXPENSE OF DEVELOPING A LOWER PRODUCTION UNIT COST. ***.

THE DESIGN-TO-COST INCENTIVE FEE IS IN ADDITION TO THE TARGET FEE ON DEVELOPMENT COST. THE CONTRACTOR MAY EARN ADDITIONAL FEE DOLLARS UNDER THE PHASE II CONTRACT, UP TO $4.8 MILLION, FOR NEGOTIATING A PRODUCTION UNIT COST ON THE PRODUCTION CONTRACT AT LOWER VALUES ***.

IN SUMMARY, THE PHASE II INCENTIVE STRUCTURE TELLS THE CONTRACTOR TO INVEST IN THE DEVELOPMENT CONTRACT BY SPENDING ALL OF THE DOLLARS OF HIS TARGET, OR EVEN MORE, IF HE WILL BE ABLE TO REDUCE THE PRODUCTION UNIT COST DURING PHASE III ***.

OFFERORS WERE REQUIRED TO SUBMIT COMPLETE COST ESTIMATES FOR COSTS NOT ONLY ASSOCIATED WITH THE DEVELOPMENT WORK, BUT FOR THE PROPOSED PRODUCTION UNIT COST UNDER THE CONTEMPLATED PRODUCTION CONTRACT FOR THE SYSTEMS AND FOR "LIFE CYCLE" COSTS ENVISIONED FOR THE SYSTEMS. OFFERORS WERE SPECIFICALLY WARNED TO SUBMIT COST DATA WHICH "ARE SUFFICIENT TO ESTABLISH THE REASONABLENESS, REALISM, AND COMPLETENESS OF THE PROPOSED COST/PRICE."

THE PI ADVISED OFFERORS THAT PROPOSALS WOULD BE EVALUATED IN THREE AREAS, LISTED IN DESCENDING ORDER OF IMPORTANCE AS FOLLOWS: DESIGN-TO COST (THIS STANDARD WAS TO HAVE "PRIMARY CONSIDERATION"); TECHNICAL (CONCEPT AND TECHNICAL APPROACH); AND DEVELOPMENT PROGRAM (THE FIRST LISTED CONSIDERATION HERE WAS A MINIMUM DEVELOPMENT COST CONSISTENT WITH DESIGN- TO-COST REQUIREMENTS).

TO FURNISH GUIDANCE TO OFFERORS IN DESIGNING TECHNICAL APPROACHES, THE PI INSTRUCTED OFFERORS, IN EFFECT, TO DESIGN A SYSTEM WITH GREATEST EFFECTIVENESS WHICH INCLUDED DEFENSIVE CAPABILITIES ON AS MANY RADIO FREQUENCY BANDS AS POSSIBLE WITHIN THE DESIGN TO COST LIMIT OF $1.4 MILLION AND THE ESSENTIAL PERFORMANCE PARAMETERS SET FORTH ELSEWHERE IN THE PI. FURTHER, THE PI DIVIDED THE ENTIRE RADIO FREQUENCY SPECTRUM INTO EIGHT FREQUENCY BANDS. THE AIR FORCE REPORTS THAT THE REASON THIS WAS DONE WAS TO GROUP THE RADIO FREQUENCIES OF THE KNOWN AND POSTULATED THREATS INTO CERTAIN BANDS, THUS ENABLING IT TO PUT AN IMPORTANCE FACTOR, OR PRIORITY, ON THE BANDS. BAND 1 COVERS A RELATIVELY NARROW RANGE OF FREQUENCIES AT THE LOWER END OF THE ENTIRE FREQUENCY SPECTRUM; BAND 8 COVERS A VERY WIDE RANGE OF FREQUENCIES AT THE UPPER END OF THE SPECTRUM. THE EIGHT BANDS WERE LISTED IN DESCENDING ORDER OF PRIORITY IN THE PI AS FOLLOWS:

PRIORITY BAND

1 7 R/T (DEFENSIVE CAPABILITY IN BOTH RECEPTION AND TRANSMISSION)

2 6 R/T

3 5 R

4 4 R/T

5 5 T

6 8 R

7 8 T (AFT SECTION ONLY)

8 2 R/T

9 8 T (FWD SECTORS)

10 1 AND 3 R/T

IN CONJUNCTION WITH THE LISTING, OFFERORS WERE INFORMED THAT THE BANDS WERE SET FORTH IN DECREASING ORDER TO ALLOW DELETION OF THE BANDS IN THE EVENT THE COST LIMITATION COULD NOT BE MET. CONSEQUENTLY, IT WAS STATED THE SYSTEM MUST BE OF MODULAR DESIGN, THAT IS, CAPABLE OF WITHSTANDING ADDITION OR DELETION OF BAND CAPABILITY WITH LITTLE OR NO IMPACT ON OVERALL PERFORMANCE.

BOTH RAYTHEON AND AIL SUBMITTED THEIR PROPOSALS FOR THE PHASE II WORK IN JULY 1973. IN ADDITION THE AIR FORCE REPORT ON THE IN-HOUSE CONVENTIONAL BACK-UP SYSTEM WAS SUBMITTED.

THE RECORD DISCLOSES THAT THE DETAILED EVALUATION APPROACH OF THE EVALUATORS IN THE COST AREA (DEVELOPMENT COST, PRODUCTION UNIT COST AND LIFE CYCLE COSTS) INCLUDED THE FOLLOWING SCHEME AS PERTINENT:

AREA: 4.0 COST

ITEM 4.1 REASONABLENESS

ITEM 4.2 REALISM

ITEM 4.3 COMPLETENESS

ITEM 4.4 RISK

THE LEVEL OF RISK IN THIS EVALUATION WILL BE BASED ON THE EXTENT TO WHICH EACH BIDDER DEVIATED FROM THE REALISM, REASONABLENESS, AND COMPLETENESS STANDARDS AS ESTABLISHED FOR SOURCE SELECTION. THE CLOSER THE BIDDER'S ESTIMATE COMES TO SATISFYING THE PI REQUIREMENTS, THE LESS THE RISK.

THE EVALUATORS, USING A COLOR-CODED, ADJECTIVE RATING SYSTEM, DETERMINED THAT ALL THREE PROPOSED SYSTEMS HAD MODERATE TECHNICAL AND COST RISK BECAUSE OF THE SHORT DEVELOPMENT TIME AVAILABLE AND "OVER AMBITIOUS SYSTEMS DESIGNS." AIL PROPOSED A SYSTEM FOR PRIORITIES 1 THROUGH 7; RAYTHEON PROPOSED A SYSTEM FOR PRIORITIES 1 THROUGH 8; AND THE AIR FORCE IN-HOUSE GROUP PROPOSED A SYSTEM FOR PRIORITIES 1 THROUGH 10.

IN AUGUST 1973 THE OVERALL DEVELOPMENT PLAN FOR THE B-1 PROGRAM WAS CHANGED. THIS CHANGE, IN TURN, REQUIRED THAT THE PI BE MODIFIED. CONSEQUENTLY, ON AUGUST 22, 1973, BOTH OFFERORS WERE ISSUED A MODIFICATION REQUEST (MR) WHICH, AMONG OTHER THINGS, GRANTED AN EXTENSION OF THE SCHEDULE TIME TO ACCOMPLISH THE DEVELOPMENT EFFORT.

AFTER THE OFFERORS RESPONDED TO THE MODIFICATION, THE AIR FORCE DETERMINED THAT THERE WAS A SUBSTANTIAL REDUCTION IN THE TECHNICAL RISK OF BOTH PROPOSALS - PRIMARILY DUE, IN AIR FORCE'S JUDGMENT, TO THE EXTENSION OF TIME. THE COST RISK, HOWEVER, WAS STILL CONSIDERED MODERATE IN BOTH OFFERORS' PROPOSALS DUE TO THE NUMBER OF PRIORITIES PROPOSED. THEREAFTER, A DECISION WAS MADE TO REDUCE THE REQUIREMENTS TO A PRIORITY 1 THROUGH 5 SYSTEM.

THE AIR FORCE DECISION CAME AS A RESULT OF SEVERAL FACTORS. CRITICAL TO THE DECISION WAS THE RESULT OF AN INDEPENDENT COST ANALYSIS OF EACH OFFEROR'S PROPOSAL. THIS ANALYSIS, UNLIKE THE STANDARD PROCEDURES FOR COST ANALYSIS, WAS COMPLETELY INDEPENDENT OF THE OFFEROR'S COST DATA. INSTEAD, THE OFFEROR'S TECHNICAL DATA WAS USED TO DETERMINE WHAT THE SYSTEM SHOULD COST. THEN, AND ONLY THEN, WAS THE OFFEROR'S COST DATA COMPARED WITH THE INDEPENDENT ANALYSIS.

IN THIS COST EVALUATION PROCESS, THE INDEPENDENT COST ANALYZING GROUP ALSO COMPARED THE DEVELOPMENT AND PRODUCTION COSTS OF ANALOGOUS SYSTEMS WITH ITS INDEPENDENT COST ESTIMATE FOR THE PROPOSAL OF EACH OFFEROR. THE RESULTS OF THE INDEPENDENT COST ANALYSIS, VALIDATED BY THE ANALYSIS OF ANALOGOUS SYSTEMS, INDICATED THAT THE PROPOSED SYSTEMS OF BOTH OFFERORS WOULD EXCEED THE DESIGN TO COST LIMITATION OF $1.4 MILLION.

AMONG THE OTHER FACTORS INFLUENCING THE DECISION TO DELETE PRIORITIES 6 THROUGH 10 WERE REVIEWS MADE BY THE DESIGNATED EVALUATORS FOR THE PROCUREMENT (THE SOURCE SELECTION EVALUATION COMMITTEE (SSEC)) AND AN AIR FORCE GROUP INDEPENDENT OF THE PROCUREMENT (THE MCCOLL COMMITTEE).

THE SSEC MADE EXTENSIVE COST/EFFECTIVENESS TRADE STUDIES TO DETERMINE HOW MANY PRIORITIES IN EACH OFFEROR'S SYSTEM COULD BE ACHIEVED WITH ACCEPTABLE RISK FOR $1.4 MILLION, AND WHETHER THAT SYSTEM WOULD BE ACCEPTABLE IN TERMS OF OPERATIONAL EFFECTIVENESS. THE SSEC DECIDED SUBSEQUENTLY THAT BOTH OFFERORS' SYSTEMS, INCORPORATING PRIORITIES 1 THROUGH 5, COULD BE ACHIEVED WITH ACCEPTABLE RISK OF $1.4 MILLION OR LESS, AND THAT BOTH SYSTEMS WOULD BE OPERATIONALLY EFFECTIVE.

THE RESULTS OF THE SSEC'S COST/EFFECTIVENESS STUDIES WERE THEN PRESENTED TO THE MCCOLL COMMITTEE WHICH CONCURRED IN THE APPROACH OF LIMITING THE DEVELOPMENT EFFORT TO PRIORITIES 1 THROUGH 5.

ON NOVEMBER 8, 1973, MR'S WERE ISSUED TO THE OFFERORS (MR NO. D.3.0.2.65 TO RAYTHEON) STATING THAT "DUE TO COST CONSIDERATIONS, (SYSTEM) DEVELOPMENT WILL BE LIMITED TO PRIORITIES 1 THROUGH 5 AND THE DEVELOPMENT PROGRAM SCHEDULE MUST BE REPHASED." THE MR'S FURTHER STATED THAT THE OFFERORS' PROPOSED REVISED SYSTEMS SHOULD RETAIN "INHERENT GROWTH CAPABILITY TO MODULARLY AND GRACEFULLY GROW FROM A FIVE PRIORITY (SYSTEM) BACK TO YOUR EARLIER PROPOSED BASELINE (SYSTEM) ***." OFFERORS WERE ALSO ADVISED THAT DECEMBER 14, 1973, WAS THE CONTEMPLATED DATE FOR OFFERORS TO SUBMIT BEST AND FINAL OFFERS.

DURING NOVEMBER AND DECEMBER 1973, DISCUSSIONS WERE HELD WITH BOTH OFFERORS. THE AIR FORCE STATES THAT ALL QUESTIONS AND SUGGESTIONS BROUGHT UP BY THE OFFERORS WERE ENTERTAINED. THE DISCUSSIONS ALSO INCLUDED EXAMINATION OF THE CONTRACTORS' PROPOSALS AS WELL AS CONTRACT DOCUMENTS, CLARIFICATION OF ANY AREAS HERETOFORE UNCLEAR, AND IDENTIFICATION OF ANY POTENTIAL AREAS REQUIRING RESEARCH OR FUTURE DISCUSSIONS. AT THE CONCLUSION OF NEGOTIATIONS BOTH OFFERORS WERE PRESENTED WITH COPIES OF THE PROPOSED CONTRACT.

ON DECEMBER 12, 1973, OFFERORS WERE INFORMED BY LETTER THAT "IN ACCORDANCE WITH ASPR 3-805.1(B), THREE PROPERLY EXECUTED COPIES OF THE SUBJECT DOCUMENT (THE PROPOSED CONTRACT) MUST BE RECEIVED BY THIS OFFICE NO LATER THAN 1700 HOURS ON 18 DECEMBER 1973." BOTH OFFERORS RESPONDED BY THAT TIME AND DATE. ON DECEMBER 19, 1973, THE SSEC BRIEFED THE MCCOLL COMMITTEE ON THE FINAL EVALUATION RESULTS. AT THAT TIME A DECISION WAS MADE TO ADD AN OPTION FOR PRIORITIES 6 AND 7 (BAND 8) TO THE PI. THE MCCOLL COMMITTEE HAD PREVIOUSLY SUGGESTED, NOTWITHSTANDING ITS CONCURRENCE IN LIMITING DEVELOPMENT WORK TO PRIORITIES 1 THROUGH 5, THAT A WAY SHOULD BE FOUND TO INSURE THAT THE SUCCESSFUL OFFEROR WOULD RETAIN A SYSTEMS CAPABILITY TO ADD BAND 8 WHEN THESE PRIORITIES COULD BE AFFORDED AND WHEN THEY WERE ABSOLUTELY REQUIRED TO MEET A THREAT. THE METHOD FINALLY CHOSEN WAS AN OPTION TECHNIQUE.

THE PRIMARY REASON FOR USING AN OPTION TECHNIQUE RATHER THAN ISSUING A NEW REQUEST FOR PROPOSALS (PRESUMABLY ON A SOLE-SOURCE BASIS AT SOME LATER DATE TO THE SUCCESSFUL CONTRACTOR FOR PHASE II) WAS TO OBTAIN "THE PROPOSALS (FOR THE OPTION) FROM EACH OF THE CONTRACTORS DURING THE COMPETITIVE PERIOD, THEREBY RECEIVING THE BENEFITS OF LOWER COST PROPOSALS."

TO CARRY OUT THE OPTION TECHNIQUE, PROPOSAL INSTRUCTION CHANGE NOTICE (PICN) NO. 5 WAS ISSUED BY THE AIR FORCE ON DECEMBER 21, 1973. THE NOTICE STATED THAT IT WAS THE GOVERNMENT'S INTENT TO INCORPORATE IN THE AWARDED CONTRACT AN OPTION (TO BE EXERCISED WITHIN 24 MONTHS AFTER THE DATE OF CONTRACT IN THE EVENT BAND 8 BECAME NECESSARY) FOR DEVELOPMENT OF THE OFFERORS' EARLIER PROPOSED 8 APPROACHES. HOWEVER, THE NOTICE EXPRESSLY ADVISED OFFERORS THAT THE RESPONSE TO THE NOTICE SHOULD BE INDEPENDENT OF, AND ADDITIVE TO, THE PROGRAM PROPOSED IN THE BEST AND FINAL OFFERS SUBMITTED ON DECEMBER 18 AND THAT THE RESPONSES WOULD NOT BE EVALUATED AS A PART OF THE SOURCE SELECTION ACTIVITY.

ON DECEMBER 31, 1973, BOTH OFFERORS SUBMITTED THEIR PROPOSALS FOR THE BAND 8 OPTION. THE CONTRACTING OFFICER STATES THAT NEITHER OFFEROR TOOK EXCEPTION TO THE OPTION TECHNIQUE. BY SEPARATE LETTER DATED DECEMBER 31, 1973, RAYTHEON ALSO SUBMITTED A SEPARATE OFFER TO PERFORM THE PHASE II WORK UNDER A FIXED-PRICE INCENTIVE OR CPIF BASIS WITH A CEILING PRICE OF $29,498,749. WITH THE INCLUSION OF THE BAND 8 OPTION, RAYTHEON PROPOSED A HIGHER CEILING PRICE OF $32,111,264.

ACCORDING TO THE INDEPENDENT COST ESTIMATE, AIL'S PROPOSED PRODUCTION UNIT AND DEVELOPMENT COSTS WERE SLIGHTLY HIGHER THAN RAYTHEON'S PROPOSED COSTS. FROM THIS DATA THE AIR FORCE CONSIDERED THAT BOTH AIL AND RAYTHEON HAD HIGH PROBABILITIES OF SUCCESS IN COMPLETING PRIORITIES 1 THROUGH 5 WITHIN THE DESIGN-TO-COST LIMITATION DURING THE PRODUCTION CONTRACT AND LOW PROBABILITIES OF SUCCESS IN COMPLETING THE DEVELOPMENT WORK WITHIN THE COSTS PROPOSED.

BECAUSE PROJECTED COSTS OF THE OFFERORS WERE ESSENTIALLY EQUAL, BUT SINCE AIL'S SYSTEM WAS CONSIDERED TECHNICALLY SUPERIOR, THE AIR FORCE DECIDED AIL'S OFFER HAD SUPERIOR MERIT AND AWARDED THE PHASE II CONTRACT TO AIL ON JANUARY 8, 1974, AT AN ESTIMATED COST AND FEE OF $31,608,697 FOR PRIORITIES 1 THROUGH 5. THE PRICE OF THE OPTION FOR BAND 8 WAS NOT NEGOTIATED PRIOR TO AWARD.

RAYTHEON'S PROTEST RAISES SIX MAJOR ISSUES. THE AIR FORCE'S RESPONSES TO THE ISSUES AND OUR CONCLUSIONS ARE SET FORTH UNDER THE CAPTIONS LISTED BELOW. RAYTHEON BELIEVES THE ISSUES SHOULD BE RESOLVED IN ITS FAVOR. CONSEQUENTLY, THE COMPANY REQUESTS THAT WE DIRECT THE AIR FORCE TO TERMINATE AIL'S CONTRACT AND AWARD THE CONTRACT TO RAYTHEON.

I. THE AIR FORCE FAILED TO CONDUCT MEANINGFUL NEGOTIATIONS

THIS ISSUE RELATES TO THE TECHNICAL DIFFERENCES IN DESIGN APPROACH PROPOSED BY AIL AND RAYTHEON FOR PHASE II AND THE AIR FORCE'S JUDGMENT THAT AIL'S APPROACH WAS MORE EFFECTIVE WITHIN THE DESIGN-TO-COST LIMITATION. RAYTHEON URGES THAT THE AIR FORCE HAD A FIXED PREFERENCE, DETERMINED PRIOR TO THE CONCLUSION OF NEGOTIATIONS, FOR THE AIL DESIGN APPROACH. BECAUSE OF THIS FIXED PREFERENCE, RAYTHEON ASSERTS THAT THE AIR FORCE HAD A DUTY TO INFORM IT OF THIS PREFERENCE, VIA AN AMENDMENT TO THE PI UNDER ARMED SERVICES PROCUREMENT REGULATION (ASPR) 3-805.4(A) SO THAT RAYTHEON, TOO, COULD PROPOSE SUCH APPROACH. SINCE THE AIR FORCE DID NOT SO AMEND THE PI, RAYTHEON CONTENDS THAT THE AIR FORCE FAILED TO CONDUCT MEANINGFUL NEGOTIATIONS WITH IT IN VIOLATION OF THE PRINCIPLE SET FORTH IN SEVERAL DECISIONS OF OUR OFFICE WHICH REQUIRE "MEANINGFUL DISCUSSIONS" IN ORDER TO FULFILL THE STATUTORY REQUIREMENT FOR NEGOTIATIONS WITH ALL OFFERORS IN THE COMPETITIVE RANGE.

THE AIR FORCE DENIES THAT IT HAD A FIXED PREFERENCE FOR THE AIL SYSTEM BEFORE THE COMPLETION OF THE SOURCE SELECTION PROCESS. ITS REPORT ON THESE MATTERS, AS THE PROTESTER KNOWS, IS CLASSIFIED.

WHAT CAN BE REPORTED IS THAT, ALTHOUGH THE AIR FORCE DECIDED THAT AN EFFECTIVE SYSTEM WOULD HAVE CERTAIN CHARACTERISTICS COMMON TO BOTH OFFERORS' BASIC APPROACHES, IT SAYS THAT IT DID NOT DECIDE BETWEEN THE RELATIVE MERITS OF THE REFINEMENTS OF THE BASIC APPROACHES UNTIL EVALUATION WAS COMPLETE. THUS THE AIR FORCE REPORTS THAT ALTHOUGH IT CONSIDERED AIL HAD DEMONSTRATED A SIGNIFICANT ADVANCEMENT IN STATE-OF THE- ART DEVELOPMENT LATE IN PHASE I WORK, IT DID NOT KNOW UNTIL WELL INTO THE PROPOSAL EVALUATION PROCESS WHETHER THE "TOTAL SYSTEMS APPROACH" AND THE COST OF THE AIL APPROACH WOULD SATISFY THE DESIGN-TO COST LIMIT. ITS INTEREST WAS IN GETTING A BALANCED SYSTEM THAT COULD BE AFFORDED, WAS TECHNICALLY SOUND AND OFFERED GREATEST EFFECTIVENESS. ON THIS POSITION, THE AIR FORCE REJECTS THE VIEW THAT IT HAD A FIXED PREFERENCE FOR AIL'S APPROACH.

IMPLICIT IN THE AIR FORCE RESPONSE IS AN ADMISSION THAT, PRIOR TO THE CLOSE OF NEGOTIATION, IT WAS IMPRESSED WITH THE AIL "REFINEMENTS" APPROACH AS A STATE-OF-THE-ART ADVANCEMENT. GIVEN THE AIR FORCE PREFERENCE FOR THE AIL APPROACH, WE CANNOT AGREE, HOWEVER, THAT THE DECISIONS OF OUR OFFICE, CITED BY RAYTHEON, REQUIRED THE AIR FORCE TO DISCLOSE THIS FACTOR TO RAYTHEON.

THE GENERAL PRINCIPLE THAT NEGOTIATIONS MUST BE MEANINGFUL IS WELL ESTABLISHED. THIS PRINCIPLE IS RECOGNIZED IN 51 COMP. GEN. 431 (1972), CITED BY RAYTHEON, WHEN WE OBSERVED:

*** DISCUSSIONS MUST BE MEANINGFUL AND FURNISH INFORMATION TO ALL OFFERORS WITHIN THE COMPETITIVE RANGE AS TO THE AREAS IN WHICH THEIR PROPOSALS ARE DEFICIENT SO THAT COMPETITIVE OFFERORS ARE GIVEN AN OPPORTUNITY TO FULLY SATISFY THE GOVERNMENT'S REQUIREMENTS.

FOLLOWING OUR OBSERVATION IN THE CITED CASE AND IN SEVERAL OTHER DECISIONS OF OUR OFFICE (SEE, FOR EXAMPLE, 47 COMP. GEN. 336 (1967); 50 ID. 117 (1970)), ASPR 3-805.3(A) REQUIRES THAT "ALL OFFERORS SELECTED TO PARTICIPATE IN DISCUSSIONS SHALL BE ADVISED OF DEFICIENCIES IN THEIR PROPOSALS."

AT THE SAME TIME WE HAVE RECOGNIZED THAT INFERIOR ASPECTS OF TECHNICALLY SOPHISTICATED PROPOSALS MAY NOT BE EASILY AMENABLE TO MEANINGFUL NEGOTIATIONS WITHOUT IMPROPERLY DISCLOSING THE INNOVATIVE APPROACH OF A SUPERIOR PROPOSAL. AS WE STATED IN 51 COMP. GEN. 621 (1972):

ANY DISCUSSION WITH COMPETING OFFERORS RAISES THE QUESTION AS TO HOW TO AVOID UNFAIRNESS AND UNEQUAL TREATMENT. OBVIOUSLY DISCLOSURE TO OTHER PROPOSER'S INNOVATION OR INGENIOUS SOLUTION TO A PROBLEM IS UNFAIR. AGREE THAT SUCH "TRANSFUSION" SHOULD BE AVOIDED.

IN 52 COMP. GEN. 870 (1973) WE FURTHER CONFIRMED OUR OPPOSITION TO THE DISCLOSURE DURING NEGOTIATIONS OF AN OFFEROR'S INDEPENDENT APPROACH TO SOLVING A COMPLEX RESEARCH AND DEVELOPMENT PROBLEM. WE NOTED THAT THE "SPECIFICATIONS" OF THE RFP IN QUESTION WERE PRIMARILY PERFORMANCE ORIENTED IN ORDER TO OBTAIN INDEPENDENT, INNOVATIVE APPROACHES TO ATTAIN THE PERFORMANCE DESIRED.

THIS RESTRICTION ON THE REQUIREMENT FOR MEANINGFUL DISCUSSIONS IS ALSO RECOGNIZED IN SEVERAL RECENT DECISIONS OF OUR OFFICE, CITED BY RAYTHEON FOR THE PROPOSITION THAT THE AIR FORCE IMPROPERLY FAILED TO ADVISE IT OF THE PREFERENCE FOR AIL'S REFINEMENTS APPROACH. THUS IN B 179030, JANUARY 24, 1974, ALTHOUGH WE QUESTIONED WHETHER TECHNICAL NEGOTIATIONS LIMITED TO CLARIFICATIONS DISCUSSION OF AN OFFEROR'S PROPOSED MANHOURS AND SUBCONTRACTING WOULD HAVE RUN THE RISK OF TECHNICAL TRANSFUSION OR DIVULGENCE OF ANOTHER OFFEROR'S CONCEPTS, WE AGAIN RECOGNIZED THE POTENTIAL IN RESEARCH AND DEVELOPMENT PROCUREMENTS FOR THE DISCLOSURE TO OTHER COMPETITORS OF THE "FRUITS OF AN OFFEROR'S INNOVATIVE EFFORTS." SIMILARLY, IN B-178989, MARCH 6, 1974, WE POINTED OUT THAT SOLUTIONS BASED ON THE INGENUITY OF GOVERNMENT TECHNICAL PERSONNEL OR DERIVED FROM COMPETING PROPOSALS SHOULD NOT BE CONVEYED DURING DISCUSSIONS, ALTHOUGH WE COULD NOT SEE HOW ADVISING THE PROTESTING OFFEROR THAT HIS PROPOSAL WAS DEFICIENT IN LOW TEMPERATURE PERFORMANCE OR THAT A 50-SECOND TIME DELAY APPROACH IMPROPER CONSTITUTED TECHNICAL TRANSFUSION.

IN THE PRESENT CASE, THE AIR FORCE STATES THAT IT NEVER ATTEMPTED TO "INFLUENCE OR OTHERWISE CAUSE EITHER AIL OR RAYTHEON TO MODIFY, CHANGE, OR DEVIATE FROM THEIR *** DESIGN APPROACH ***. TO DO SO WOULD HAVE BEEN IN DIRECT VIOLATION OF ASPR ***."

WE THINK THIS STATEMENT INDICATES, IN THE AIR FORCE'S VIEW, THAT TECHNICAL TRANSFUSION WOULD HAVE OCCURRED HAD IT ADVISED RAYTHEON THAT IT PREFERRED THE AIL "REFINEMENTS" APPROACH. INDEED, THE CIRCUMSTANCES OF THE PROCUREMENT RESEMBLE THOSE IN 52 COMP. GEN., SUPRA, WHERE WE AGREED WITH THE AGENCIES INVOLVED THAT THE POSSIBILITY OF TECHNICAL TRANSFUSION PREVENTED MEANINGFUL TECHNICAL DISCUSSIONS OF THE DESIGN APPROACHES. THEN, AS NOW, THE GOVERNMENT'S REQUIREMENTS WERE STATED PRIMARILY IN PERFORMANCE TERMS; THE OFFEROR'S INNOVATIVE APPROACH TO THE TECHNICAL QUESTION INVOLVED WAS THE ESSENCE OF THE PROCUREMENT; THE WEAKNESSES IN THE PROPOSAL OF THE OFFEROR CLAIMING THE LACK OF MEANINGFUL DISCUSSIONS WERE RELATIVE ONLY; AND THE WEAKNESS RELATED TO GENERAL DESIGN APPROACH RATHER THAN TO NONTECHNICAL MATTERS, TECHNICALLY UNSOPHISTICATED MATTERS, OR MINUTE DESIGN DEFICIENCIES.

THE FACTS OF THIS CASE ARE THEREFORE DISTINGUISHABLE FROM B-174492, JUNE 1, 1972, CITED BY RAYTHEON, WHICH INVOLVED A NEGOTIATED SOLICITATION CONTAINING DETAILED DESIGN SPECIFICATIONS FOR PRINTING PRESSES OF A TECHNICALLY UNSOPHISTICATED CHARACTER. WE HELD THAT THE PROCURING AGENCY'S PREFERENCE FOR A SPECIAL TYPE OF AUTOMATIC PRESS TO BE FURNISHED BY A SUBCONTRACTOR SHOULD HAVE BEEN CONVEYED TO ALL COMPETING OFFERORS. THE INNOVATIVE DESIGN APPROACH FOR WHICH RAYTHEON CLAIMS AIR FORCE HAD A FIXED PREFERENCE CANNOT, IN OUR VIEW, BE CONSIDERED ANALOGOUS TO THE APPROACH PROPOSING THE PRESS IN THE CITED CASE.

UNDER THESE CIRCUMSTANCES, AND GIVEN THE AIR FORCE VIEW THAT AIL'S APPROACH WAS A SIGNIFICANT ADVANCEMENT IN THE STATE-OF-THE-ART WITHIN THE LIMITS OF THE DESIGN-TO-COST CONSTRAINT, WE MUST CONCLUDE THE POSSIBILITY OF TECHNICAL TRANSFUSION WAS REAL. CONSEQUENTLY, WE CANNOT CONCLUDE THAT THE AIR FORCE IMPROPERLY FAILED TO ADVISE RAYTHEON OF THE AIL "REFINEMENTS" APPROACH.

II. AIL'S APPROACH IS NOT A STATE-OF-THE-ART ADVANCEMENT

RAYTHEON DISPUTES THE IDEA THAT AIL'S APPROACH IS A STATE-OF-THE-ART ADVANCEMENT. IT SAYS THAT IT, TOO, PURSUED AN APPROACH SIMILAR TO AIL'S APPROACH UNTIL IT WAS FORCED TO GIVE IT UP BECAUSE OF THE DESIGN TO-COST LIMIT AND THAT IT WILL USE SUCH AN APPROACH UNDER A CONTRACT IT RECENTLY RECEIVED FROM THE NAVY.

RAYTHEON URGES THAT SPEED OF DETECTION OF ENEMY RADAR PULSES (WHICH RAYTHEON ADMITS IS FASTER WITH THE AIL SYSTEM) IS NOT AS CRITICAL IN DENYING INFORMATION ON THE LOCATION OF THE B-1 AS "SIGNAL MEASUREMENT ACCURACY" (WHICH RAYTHEON URGES IS MORE PRECISE WITH ITS SYSTEM). THE DEFICIENCY IN ACCURACY WITH THE AIL SYSTEM CAN BE OVERCOME WITH ADDITIONAL "SPECIALIZED HARDWARE" BUT THAT RESULTS IN ADDITIONAL DELAY WHICH MORE THAN OFFSETS THE FASTER RATE OF DETECTION OF THE AIL SYSTEM.

THE AIR FORCE INSISTS THAT THE AIL APPROACH IS AN ADVANCEMENT OF THE STATE-OF-THE-ART WITHIN THE FUNDING CONSTRAINT AND THAT RAYTHEON'S COST AND TECHNICAL EXPERIENCE WITH AN APPROACH SIMILAR TO THAT OF AIL'S UNDER PHASE I WORK AND UNDER THE NAVY CONTRACT CANNOT BE CONSIDERED THE STANDARD AGAINST WHICH THE MERITS OF AIL'S SYSTEM ARE DETERMINED.

CONCERNING RAYTHEON'S ARGUMENT THAT THE AIR FORCE HAS MISPLACED TECHNICAL EMPHASIS ON SPEED (OF DETECTION) RATHER THAN ACCURACY OF SIGNAL MEASUREMENT, THE AIR FORCE HAS SUBMITTED A CLASSIFIED RESPONSE. WE CAN REPORT, HOWEVER, THAT THE AIR FORCE TECHNICAL ADVISERS DISAGREE WITH RAYTHEON'S ASSERTION THAT ITS SYSTEM EXCELS AIL'S SYSTEM IN FREQUENCY MEASUREMENT RESOLUTION (WHICH WE ASSUME TO BE IDENTICAL TO "SIGNAL MEASUREMENT ACCURACY"). FURTHER, THE AIR FORCE DENIES THAT RAYTHEON'S SYSTEM HAS AN ADVANTAGE IN REACTION TIME.

BASED ON OUR REVIEW OF THE RECORD, AS SUPPLEMENTED BY COMMENTS FROM THE INTERESTED PARTIES, WE CANNOT CONCLUDE THAT THE AIR FORCE'S TECHNICAL JUDGMENT ON THESE ISSUES HAS BEEN CLEARLY DEMONSTRATED TO LACK A RATIONAL BASIS.

III. THE AIR FORCE DISREGARDED THE PROCUREMENT GUIDELINES DIRECTING OFFERORS TO DESIGN AGAINST CERTAIN THREATS (OUR TREATMENT OF THIS ISSUE IS SERIOUSLY RESTRICTED BECAUSE OF THE CLASSIFIED NATURE OF THE TECHNICAL MATERIAL IN QUESTION.)

RAYTHEON CONTENDS THAT SELECTION OF THE AIL TECHNICAL APPROACH VIOLATED CERTAIN GUIDELINES FOR THE TECHNICAL RISK DEFINITION INVOLVED IN PHASE I WITH RESPECT TO DESIGNING FOR CERTAIN THREATS. RAYTHEON BELIEVES THAT DESIGN TO THESE THREATS WAS THE PRIMARY REQUIREMENT OF THE PHASE II PROCUREMENT. IT STATES THAT IT WAS TOLD IN A DEBRIEFING THAT ITS SYSTEM ADEQUATELY RESPONDED TO THESE THREATS BUT IN OTHER "THREAT ENVIRONMENTS" THE RAYTHEON SYSTEM EFFECTIVENESS WAS RATED MARGINAL. THUS RAYTHEON BELIEVES THE SELECTION OF AIL WAS PRIMARILY BASED ON THAT SYSTEM'S ALLEGED ADVANTAGE IN PROTECTING AGAINST THESE OTHER THREATS.

WE HAVE REVIEWED THE RECORD OF THE TECHNICAL EVALUATION OF RAYTHEON'S PROPOSAL. RAYTHEON RECEIVED A RATING OF ADEQUATE FOR PROTECTION AGAINST THE THREATS IN QUESTION. AIL RECEIVED A RATING OF EXCELLENT FOR PROTECTION AGAINST THESE SAME THREATS. CONSEQUENTLY, WE CANNOT AGREE THAT THE SELECTION OF AIL DISREGARDED THE PROCUREMENT GUIDELINE CITED BY RAYTHEON OR THAT IT WAS PRIMARILY BASED ON AIL'S ALLEGED ADVANTAGE IN PROTECTING AGAINST THE "OTHER THREATS" IN QUESTION.

IV. THE AIR FORCE IMPROPERLY EVALUATED COST CONSIDERATIONS

RAYTHEON ALLEGES THAT THE AIR FORCE PROCEDURES ON COST EVALUATION DID NOT COMPLY WITH ASPR 3-801.5(B) AND 3-807.2(C) WHICH PROVIDE AS PERTINENT:

3-801.5(B)(1)

PRIOR TO NEGOTIATION OF A CONTRACT *** IN EXCESS OF $100,000 *** WHEN PRICE IS BASED ON COST OR PRICING DATA *** SUBMITTED BY THE CONTRACTOR, THE CONTRACTING OFFICER SHALL REQUEST A FIELD PRICING SUPPORT REPORT (WHICH INCLUDES AN AUDIT REVIEW BY THE CONTRACT AUDIT ACTIVITY) UNLESS INFORMATION IS ADEQUATE TO DETERMINE THE REASONABLENESS OF THE PROPOSED COST OR PRICE ***.

3-807.2(C)(1)

COST ANALYSIS IS THE REVIEW AND EVALUATION OF A CONTRACTOR'S COST OR PRICING DATA *** AND OF THE JUDGMENTAL FACTORS APPLIED IN PROJECTING FROM THE DATA TO THE ESTIMATED COSTS, IN ORDER TO FORM AN OPINION ON THE DEGREE TO WHICH THE CONTRACTOR'S PROPOSED COSTS REPRESENT WHAT PERFORMANCE OF THE CONTRACT SHOULD COST, ASSUMING REASONABLE ECONOMY AND EFFICIENCY ***. RAYTHEON CONTENDS THAT THE AIR FORCE DID NOT REQUEST A FULL AUDIT REVIEW ON ITS PROPOSAL AND DID NOT EXAMINE THE DATA IN ITS PRODUCTION UNIT COST VOLUME IN VIOLATION OF THE ABOVE REGULATIONS. THE EFFECT OF THIS FAILURE, AND THE PRIMARY RELIANCE BY THE AIR FORCE ON INDEPENDENT COST ESTIMATES, RAYTHEON INSISTS, EXAGGERATED RAYTHEON'S PROPOSED COSTS AND UNDERSTATED AIL'S PROPOSED COSTS, ESPECIALLY CONSIDERING THE COST IMPACT OF THE ADDITION OF BAND 8. RAYTHEON FURTHER SUGGESTS THAT THE REAL EFFECT OF THE COST IMPACT OF THE ADDITION OF BAND 8 TO THE AIL CONTRACT WILL CAUSE THE DESIGN-TO COST LIMITATION TO BE EXCEEDED - THUS ABROGATING THE LIMITATION WHICH WAS OF PRIMARY IMPORTANCE IN THE EVALUATION CRITERIA.

RAYTHEON NOTES THAT THE CONTRACTING OFFICER REPORTED THAT RAYTHEON'S PROPOSED PRODUCTION UNIT COST WAS REASONABLE AND ACCEPTABLE SO FAR AS RAYTHEON'S ESTIMATING METHODOLOGY WAS CONCERNED, BUT THAT HE DOES NOT EXPLAIN WHY EFFORT WAS NOT MADE TO INVESTIGATE THE REASONS FOR THE "DISPARITY BETWEEN THE INDEPENDENT COST ESTIMATE RESULTS AND THE DCAA/DCAS FINDINGS." CONTRARY TO THE CONTRACTING OFFICER'S STATEMENT, DISCUSSED AT LENGTH BELOW, THAT ANALYSIS OF PROPOSED PRODUCTION COST DATA PRIOR TO AWARD OF THE ENGINEERING DEVELOPMENT CONTRACT, RATHER THAN THE PRODUCTION CONTRACT, HAS SEVERE LIMITATIONS BECAUSE DATA AVAILABLE FOR EXAMINATION IS ONLY OF A FORECAST NATURE, RAYTHEON MAINTAINS THAT EXTENSIVE DATA WAS IN FACT AVAILABLE AT RAYTHEON.

COLLATERAL TO RAYTHEON'S ARGUMENT THAT THE AIR FORCE IMPROPERLY EVALUATED COST CONSIDERATIONS, BUT PRESENTED IN CONNECTION WITH THE COMPANY'S ARGUMENT THAT AIR FORCE IMPROPERLY DETERMINED THAT RAYTHEON'S DECEMBER 31, 1973, REVISED PROPOSAL WAS "LATE," IS RAYTHEON'S POSITION THAT ITS DECEMBER 31 OFFER OF A CEILING ON DEVELOPMENT COSTS OF $29,498,749 SHOULD HAVE BEEN CONSIDERED MOST ADVANTAGEOUS TO THE GOVERNMENT.

THE AIR FORCE INSISTS THAT IT DID USE PROPER COST ANALYSIS ON THE OFFERORS' PROPOSALS. IT POINTS OUT THAT ASPR 3-807.2(A) ALLOWS THE METHOD AND DEGREE OF COST ANALYSIS TO BE DEPENDENT ON THE FACTS OF THE PARTICULAR PROCUREMENT AND PRICING SITUATION.

ANALYSIS OF THE PROPOSED PRODUCTION UNIT COST DATA FOR A DEVELOPMENT CONTRACT, IN THE AIR FORCE'S VIEW, HAS SEVERE LIMITS. NEVERTHELESS, THE AIR FORCE SAYS THAT IT DID OBTAIN A REPORT, PREPARED BY AN INDUSTRIAL ENGINEER FROM THE APPROPRIATE DEFENSE CONTRACT ADMINISTRATIVE SERVICES REGIONAL OFFICE ON RAYTHEON'S PRODUCTION UNIT COST AND THAT ITS EVALUATORS DID EXAMINE THE VOLUME 10 OF RAYTHEON'S COST PROPOSAL CONCERNING PRODUCTION UNIT COST DATA. THE REPORT EXPRESSED THE VIEW THAT THERE WAS A "HIGH DEGREE OF CONFIDENCE IN THE ESTIMATES MADE AND PROPOSED FOR THE PRODUCTION OF 241 SYSTEMS." THE REPORT ALSO NOTED THAN AN INDEPENDENT COST ESTIMATE WAS MADE BY RAYTHEON WHICH WAS WELL WITHIN " OR - ONE SIGMA VALUES OF $27.3 MILLION AND $35.6 MILLION." THE REPORT CAUTIONED, HOWEVER, THAT "NO ANALYSIS WAS MADE NOR IS ANY JUDGMENT AS TO REASONABLENESS OF THE DOLLARS IMPLIED." THE SSEC ALSO CONSIDERED A DCAA REPORT ON THE CONTRACTOR'S COST ESTIMATING METHODS, SUPPORT LABOR RATIOS, AND ESCALATION FACTORS USED IN PREPARATION OF THE PRODUCTION UNIT COST ESTIMATE.

BECAUSE OF THE SEVERE LIMITATIONS IT PERCEIVED IN RELYING ON THE PROPOSED PRODUCTION UNIT COST OF THE OFFERORS, THE AIR FORCE FELT THE INDEPENDENT COST ESTIMATING TECHNIQUE WAS CRITICAL TO ENSURING ADHERENCE TO DESIGN TO COST CONSTRAINTS.

PRIMARY RELIANCE ON THIS TECHNIQUE, WHICH THE AIR FORCE REPORTS IS SENSITIVE TO SYSTEM WEIGHT, RESULTED IN CONCLUSIONS THAT BOTH OFFERORS' INITIAL PROPOSALS EXCEEDED THE DESIGN-TO-COST CONSTRAINT AND FINAL CONCLUSIONS THAT BOTH OFFERORS' REVISED APPROACHES WERE WITHIN THE CONSTRAINT, ALTHOUGH THE TECHNIQUE FINALLY PROJECTED THAT THERE WAS A LOW PROBABILITY OF EITHER OFFEROR COMPLETING THE DEVELOPMENT WORK WITHIN THE COSTS PROPOSED.

CONSIDERATION OF BOTH THE INDEPENDENT COST ANALYSES AND THE CITED FIELD REPORTS COMPLIED, IN THE AIR FORCE'S VIEW, WITH ASPR REQUIREMENTS FOR COST ANALYSIS AND ALL REQUIREMENTS IN THE DOD "JOINT DESIGN-TO-COST GUIDE" WHICH WAS NOT EFFECTIVE UNTIL OCTOBER 3, 1973, AFTER THE PI HAD BEEN ISSUED.

THE AIR FORCE STATES THAT IT DID COMPARE ITS INDEPENDENT COST ESTIMATE WITH RAYTHEON'S INDEPENDENT COST ESTIMATE. BOTH ESTIMATES, AS RAYTHEON IS AWARE, ARE BASED ON THE SAME MODEL. THE RAYTHEON ESTIMATE, WHICH TENDED TO CONFIRM ITS PRODUCTION COST ESTIMATE, WAS CONSIDERED FAULTY IN SEVERAL RESPECTS. IT DID NOT REFLECT THE AIR FORCE VIEW THAT RAYTHEON HAD FAILED TO ADEQUATELY EXPLAIN INCONSISTENCIES IN SYSTEM WEIGHT DESPITE REPEATED INQUIRIES. FURTHER, THE RAYTHEON ESTIMATE DID NOT EVALUATE FOUR "LINE REPLACEABLE UNITS" WHICH THE COMPANY CONSIDERED OFF-THE-SHELF, NOR DID IT EVALUATE THE INTEGRATION AND TEST SUPPORT SUBROUTINE OF THE MODEL FOR PRODUCTION COSTS. IN ANALYZING THESE DIFFERENCES, THE AIR FORCE DISCOVERED THAT THE GREATEST DISCREPANCIES BETWEEN RAYTHEON'S COST ESTIMATE AND THE AIR FORCE'S COST ESTIMATE WERE THE "LINE REPLACEABLE UNITS" WHICH WERE CURRENTLY UNDER DEVELOPMENT OR BEING PRODUCED. EXTENSIVE DATA, THE AIR FORCE REPORTS, WAS AVAILABLE FOR THESE UNITS WHICH SHOWED RAYTHEON'S COSTS WERE UNDERESTIMATED. FINALLY, THE AIR FORCE BELIEVED THAT RAYTHEON'S PRODUCTION COST ESTIMATES FOR CERTAIN MINIATURE COMPONENTS WAS AT LEAST 100 PERCENT LOW.

IN SPECIFIC RESPONSE TO THE RAYTHEON SUGGESTION THAT THE COST IMPACT OF THE ADDITION OF BAND 8 TO AIL'S CONTRACT WILL EXCEED THE DESIGN-TO COST LIMIT, THE AIR FORCE REPLIES THAT, IF THE ADDITION OCCURS, THE TARGET PRODUCTION UNIT COST IN THE CONTRACT WILL STILL BE WELL BELOW THE $1.4 MILLION CEILING. IT ADDS THAT DURING THE 24-MONTH PERIOD DURING WHICH THE OPTION MAY BE ADDED TO AIL'S CONTRACT THE AIR FORCE WILL BE ABLE TO DETERMINE WHETHER THE TARGET COST, INDEPENDENT COST ESTIMATE, OR SOME OTHER COST IS COMING TRUE AND THAT IF THE REASSESSED COST VALUE SHOWS THAT A SYSTEM WITH BAND 8 INCLUDED CAN BE ACHIEVED FOR $1.4 MILLION, THE OPTION WILL BE EXERCISED ONLY IF THE THREAT DICTATES THAT IT IS REQUIRED.

THE AIR FORCE ALSO MAINTAINS THAT, CONTRARY TO RAYTHEON'S ALLEGATION THAT AIL'S "REFINEMENTS" TECHNICAL APPROACH, INCLUDING ITS BAND 8 APPROACH, MUST NECESSARILY BE MORE EXPENSIVE THAN RAYTHEON'S "REFINEMENTS" APPROACH, BOTH THE OFFERORS' PROPOSALS AND THE AIR FORCE'S INDEPENDENT COST ESTIMATE SHOW THAT RAYTHEON'S REFINEMENTS APPROACH IS APPROXIMATELY 34 PERCENT MORE COSTLY THAN THE AIL "REFINEMENTS" APPROACH, AND THAT AS TO BAND 8 THE AIR FORCE'S COST ESTIMATE SHOWED RAYTHEON (ALTHOUGH LOWER IN PROPOSED COSTS) TO BE 16 PERCENT HIGHER THAN AIL.

FINALLY, THE CONTRACTING OFFICER INSISTS THAT RAYTHEON'S PROPOSALS OF A CEILING ON DEVELOPMENT COSTS WAS NOT CONSIDERED ADVANTAGEOUS TO THE GOVERNMENT GIVEN THE PRIMARY FOCUS ON ACHIEVING THE PRODUCTION UNIT COST CONSTRAINT. IF THE CONTRACTOR WERE TO HOLD DEVELOPMENT COSTS TO A PREDETERMINED FIXED LEVEL OF DOLLAR EFFORT, THIS MIGHT HAMPER, IN THE CONTRACTING OFFICER'S VIEW, HIS SUCCESS IN ACHIEVING THE PRODUCTION UNIT COST GOAL.

OUR REVIEW OF THE RECORD SHOWS THAT THE SAME APPROACH WAS USED TO EVALUATE THE COST PROPOSALS OF BOTH OFFERORS. PRIMARY RELIANCE WAS PLACED ON THE GOVERNMENT'S INDEPENDENT COST ESTIMATE AS A METHOD OF DETERMINING AND THE REASONABLENESS AND REALISM OF THE PROPOSED DEVELOPMENT AND PRODUCTION COSTS RATHER THAN ON AN ANALYSIS OF THE OFFEROR'S OWN COST DATA.

CONTRARY TO RAYTHEON'S ALLEGATION, WE FIND THAT THE CONTRACTING OFFICER DID REQUEST A FIELD PRICING SUPPORT REPORT UNDER ASPR 3 801.5(B). WITH RESPECT TO PRODUCTION UNIT COST CONSIDERATIONS, THE CONTRACTING OFFICER REQUESTED ANALYSIS OF: THE PROPOSED ESCALATION RATE FOR THE PERIOD; THE LEARNING CURVE TO BE APPLIED IN PRODUCTION; AND THE MAKE-UP OF THE PRODUCTION UNIT COST ESTIMATE, INCLUDING DEFINITION OF COST CATEGORIES, EQUIPMENTS INCLUDED, AND THE CONTRACTORS' RATIONALE SUPPORTING THE PRODUCTION COST ESTIMATE.

WE CANNOT QUESTION THE RIGHT OF THE PROCURING CONTRACTING OFFICER TO STIPULATE SPECIFIC AREAS FOR WHICH INPUT (AUDIT) IS REQUIRED. SEE ASPR 3- 801.5(B)(3).

THE RECORD ALSO SHOWS THAT VOLUMES 9 AND 10 OF RAYTHEON'S COST PROPOSAL, ENCOMPASSING COST ELEMENTS THAT ARE REQUIRED TO BE EXAMINED IN COST ANALYSIS UNDER ASPR 3-807.2(C), WERE ANALYZED BY THE SSEC IN ARRIVING AT RAYTHEON'S RATING IN THE COST AREA. SEVERAL INQUIRES WERE MADE OF RAYTHEON ABOUT ITS COST PROPOSAL AS A RESULT OF THIS EXAMINATION. CONSIDERATION WAS ALSO GIVEN TO THE DCAA AND THE INDUSTRIAL ENGINEER'S REPORTS ON RAYTHEON'S PROPOSAL ON PRODUCTION COST. ON THIS RECORD, WE CANNOT CONCLUDE THAT THERE WAS A FAILURE TO ACHIEVE MINIMUM STANDARDS OF COST ANALYSIS UNDER ASPR 3-807.2(C).

THE PROPRIETY OF USING INDEPENDENT GOVERNMENT COST ESTIMATES AS AN AID IN DETERMINING THE REASONABLENESS AND REALISM OF COST AND TECHNICAL APPROACHES HAS BEEN APPROVED IN SEVERAL OF OUR DECISIONS. SEE 53 COMP. GEN. 800 (1974); B-176311(2), OCTOBER 26, 1973; 52 COMP. GEN. 358 (1972); AND 50 ID. 390 (1970). AS WE STATED IN 52 COMP. GEN. 870, 874 (1973):

*** IN VIEW OF THE FACT THAT THE CONTRACT WILL BE PERFORMED ON COST PLUS- FIXED-FEE BASIS, EVALUATED COSTS RATHER THAN PROPOSED COSTS PROVIDE A SOUNDER BASIS FOR DETERMINING THE MOST ADVANTAGEOUS PROPOSAL.

THIS POSITION REFLECTS THE VIEW IN ASPR 4-106.5, CONCERNING THE EVALUATION OF COST LEADING TO THE AWARD OF A DEVELOPMENT CONTRACT. SECTION (A) OF THE REGULATION PROVIDES THAT (PROPOSED) COST SHOULD NOT BE THE CONTROLLING FACTOR IN SELECTING A CONTRACTOR FOR A DEVELOPMENT CONTRACT; SECTION (C) STATES THAT A "GOVERNMENT COST ESTIMATE MAY *** DEVELOP THE EXPECTED INCIDENCE OF VARIOUS COST FACTORS IN RELATION TO PERFORMANCE PHASES ***."

FURTHER, WE HAVE OBSERVED THAT THE PROCURING AGENCY'S JUDGMENT AS TO THE METHODS USED IN DEVELOPING THE GOVERNMENT'S COST ESTIMATE AND THE CONCLUSIONS REACHED IN EVALUATING THE PROPOSED COSTS ARE ENTITLED TO GREAT WEIGHT SINCE THE AGENCIES ARE IN THE BEST POSITION TO DETERMINE REALISM OF COSTS AND CORRESPONDING TECHNICAL APPROACHES AND MUST BEAR THE MAJOR CRITICISM FOR ANY DIFFICULTIES EXPERIENCED BY REASON OF DEFECTIVE ANALYSIS. B-176311(2), SUPRA; 50 COMP. GEN., SUPRA.

AT THE SAME TIME, WE HAVE CAUTIONED AGAINST ABSOLUTE RELIANCE ON THE VALIDITY OF GOVERNMENT COST ESTIMATES, IN VIEW OF THE PERFORMANCE UNCERTAINTIES INHERENT IN COST-TYPE CONTRACTING IN A CASE WHEN MEANINGFUL COST NEGOTIATIONS WERE NOT CONDUCTED WITH OFFERORS WHO WERE RATED EQUAL IN TECHNICAL MERIT. 47 COMP. GEN. 336 (1967). AND WE HAVE CRITICIZED USE OF A GOVERNMENT COST ESTIMATE TO EXCLUDE OFFERORS WHOSE PRICES EXCEEDED THE GOVERNMENT COST ESTIMATE BY MORE THAN 10 PERCENT FROM PRICE DISCUSSIONS. SEE 50 COMP. GEN. 16 (1970). HOWEVER, FROM OUR REVIEW, WE CANNOT CONCLUDE THAT THE AIR FORCE USED THE INDEPENDENT COST ESTIMATES IN AN UNREASONABLE FASHION IN THIS CASE.

THE "JOINT DESIGN-TO-COST GUIDE," WHICH BECAME EFFECTIVE AFTER THE ISSUANCE OF THE PI, SPECIFICALLY PROVIDES FOR USE OF PARAMETRIC COST ESTIMATES IN ARRIVING AT DECISIONS ABOUT PRODUCTION UNIT COST ESTIMATES. FURTHER, IN DESCRIBING CONTRACTORS SELECTION PROCEDURES FOR THE DEVELOPMENT CONTRACT, THE GUIDE NOTES THE INCONCLUSIVENESS, FOR EVALUATION PURPOSES, OF ACTUAL PRODUCTION COST FIGURES INCURRED IN PROTOTYPE FABRICATION DURING THE PRE-DEVELOPMENT PHASE OF THE ACQUISITION PROCESS. THE INCONCLUSIVENESS IS CAUSED, THE GUIDE NOTES, BY THE SMALL QUANTITY OF UNITS AND THE LIKELIHOOD THAT NEITHER PROTOTYPE DESIGN NOR FABRICATION TECHNIQUES ARE LIKELY TO BE FULLY REPRESENTATIVE OF THE PRODUCTION ITEM. IN THIS CONTEXT, WE MUST CONCLUDE THAT THE AIR FORCE WAS ENTITLED TO PLACE GREAT EMPHASIS ON ITS INDEPENDENT COST ESTIMATING TECHNIQUE IN EVALUATING PRODUCTION UNIT COST PROPOSALS.

FURTHER, THE AIR FORCE USED THIS TECHNIQUE WITH EQUAL EMPHASIS AND THOROUGHNESS ON BOTH OFFERORS' COST PROPOSALS. ALTHOUGH THE TECHNIQUE ASSESSED A RELATIVELY HIGHER COST RISK PENALTY ON RAYTHEON'S PROPOSAL FOR ITS SYSTEM WEIGHT INCONSISTENCY, AIL'S COST PROPOSAL WAS ALSO FINALLY EVALUATED AT PRODUCTION AND DEVELOPMENT COST FIGURES SUBSTANTIALLY HIGHER THAN PROPOSED. ON THIS RECORD, WE CANNOT CONCLUDE THAT THE AIR FORCE UNREASONABLY ESTIMATED RAYTHEON'S PROPOSED COST OR UNREASONABLY UNDERSTATED AIL'S COST IN THE MANNER SUGGESTED BY RAYTHEON. NEITHER CAN WE DISPUTE THE AIR FORCE'S POSITION THAT THE ADDITION OF BAND 8 TO THE AIL CONTRACT WILL ONLY BE MADE, UNDER CURRENT BUDGETARY LIMITATIONS, IF THE ESTIMATED PROJECTED COST OF BAND 8 IS WITHIN THE DESIGN-TO-COST LIMIT.

THE DISPARITY IN PROJECTED COSTS BETWEEN THE AIR FORCE'S PARAMETRIC COST ANALYSIS AND RAYTHEON'S PARAMETRIC COST ANALYSIS SHOULD, IN OUR VIEW, HAVE BEEN EXPLORED IN MORE DEPTH DURING NEGOTIATIONS WITH RAYTHEON. WE AGREE WITH THE AIR FORCE VIEW THAT IT DID CONDUCT NEGOTIATIONS WITH RAYTHEON ON THE COMPANY'S SYSTEM WEIGHT DISCREPANCY, WHICH EXPLAINS TO A SIGNIFICANT DEGREE, IN THE AIR FORCE'S ESTIMATION, THE DIFFERENCES IN ANALYZED COSTS. BECAUSE THIS NEGOTIATION WAS HAD, WE CANNOT CONCLUDE THAT RAYTHEON WAS NOT, AT LEAST INDIRECTLY, MADE AWARE THAT ITS COST ESTIMATE WAS QUESTIONABLE. IN ANY EVENT, WE SEE NO EVIDENCE THAT COST NEGOTIATIONS WITH AIL WERE MORE EXTENSIVE THAN THOSE WITH RAYTHEON OR THAT THE AIR FORCE PINPOINTED SPECIFIC AREAS WHERE THE AIL PROPOSAL WAS CONSIDERED UNREALISTICALLY LOW.

WE THINK IT WOULD HAVE BEEN PREFERABLE FOR THE AIR FORCE TO HAVE ADVISED THE OFFERORS IN GENERAL TERMS THAT THE COST PROPOSALS WERE CONSIDERED UNREALISTIC AND IN DETAILED TERMS THE SPECIFICS OF THE COST ESTIMATE DISCREPANCIES, SO FAR AS ANOTHER OFFEROR'S UNIQUE TECHNICAL AND COST APPROACH WOULD NOT BE DISCLOSED. THE GENERAL UNCONCERN OF THE AIR FORCE ABOUT EXPLORING, THROUGH MEANINGFUL NEGOTIATIONS, THE DISPARITY BETWEEN THE OFFERORS' PROPOSED COSTS AND THE AIR FORCE'S PROJECTED COSTS, AS DETERMINED BY THE PARAMETRIC ESTIMATES, IS SHOWN, IN OUR VIEW, BY THE UNRESOLVED DISCREPANCY BETWEEN THE ACTUAL PRICE (TARGET COST AND FEE OF $31.6 MILLION) OF AIL'S AWARDED CONTRACT FOR THE DEVELOPMENT WORK AND THE PARAMETRIC COST ESTIMATE FOR THE WORK ($40.4 MILLION). WE NOTE THAT AT THE AIR FORCE'S COST ESTIMATE LEVEL AIL WOULD NOT EARN ANY OF THE TARGET FEE.

THE FAILURE TO RESOLVE THIS DISCREPANCY RESULTED IN A AWARD WHICH, AT LEAST IN ITS DEVELOPMENT COST ASPECTS, WAS INCONSISTENT WITH ASPR 3 405.4(B) WHICH CONTEMPLATES THE NEGOTIATION OF REALISTIC TARGET COSTS TO PROVIDE AN INCENTIVE TO THE CONTRACTOR TO EARN UP TO THE MAXIMUM FEE THROUGH HIS INGENUITY AND EFFECTIVE MANAGEMENT. SEE 47 COMP. GEN., SUPRA, AT 346. FURTHER, WE THINK THE AWARD ELIMINATED, IN EFFECT, THE PI DIRECTION FOR OFFERORS TO ESTABLISH THE REALISM OF THEIR PROPOSED DEVELOPMENT COSTS.

THE AIR FORCE POSITION ON THE UNRESOLVED DISCREPANCY IS THAT IT IS INSIGNIFICANT, COMPARED TO THE SAVINGS, INSTEAD OF A COST OVERRUN, THAT MAY BE HAD IF AIL SUCCESSFULLY ACHIEVES ITS PRODUCTION UNIT COST GOAL ON THE POSSIBLE PRODUCTION CONTRACT WHICH HAS AN ULTIMATE COST POTENTIAL OF $300 TO $400 MILLION. THUS AIL, IN THE AIR FORCE VIEW, SHOULD BE ENCOURAGED TO SPEND CONSIDERABLY IN EXCESS OF THE AWARDED PRICE ON THE DEVELOPMENT CONTRACT, IF THAT IS NECESSARY, TO ACHIEVE ULTIMATE COST SUCCESS (WHICH IS HIGHLY PROBABLE ACCORDING TO THE ESTIMATE) IN THE PRODUCTION CONTRACT. THIS POSITION EXPLAINS, WE THINK, WHY THE AIR FORCE, FIRMLY BELIEVING IN THE TECHNICAL SUPERIORITY OF AIL'S SYSTEM, DID NOT CONSIDER RAYTHEON'S PROPOSED DEVELOPMENT COST CEILING TO BE ADVANTAGEOUS.

THE AIR FORCE, IN OUR VIEW, ELIMINATED, WITHOUT FORMALLY ADVISING THE OFFERORS, THE COST REALISM STANDARD AS IT APPLIED TO DEVELOPMENT COSTS. NEVERTHELESS, WE ARE UNABLE TO CONCLUDE THAT THE SELECTION OF AIL, WHOSE EVALUATED PRODUCTION UNIT COST FOR ITS TECHNICALLY SUPERIOR OFFER WAS WITHIN $1.4 MILLION, WAS INCONSISTENT WITH THE "DESIGN-TO PRODUCTION-UNIT- COST" EVALUATION CRITERION WHICH WAS OF PARAMOUNT IMPORTANCE. NOR CAN WE CONCLUDE THAT HAD THE GOVERNMENT ADVISED OFFERORS OF THE DELETION OF THE DEVELOPMENT COST REALISM STANDARD, RAYTHEON WOULD HAVE SUBMITTED A REVISED TECHNICAL PROPOSAL AND CLOSED THE WIDE TECHNICAL GAP IN THE RATING OF THE PROPOSALS.

WE NOTE, IN THIS CONNECTION, THAT PRODUCTION COST LIMITATIONS, RATHER THAN DEVELOPMENT COST LIMITATIONS, RESTRICTED RAYTHEON'S TECHNICAL EFFORT. AS RAYTHEON STATED AT PAGE II-10 OF ITS MAY 2 REBUTTAL TO GAO:

THOSE FAMILIAR WITH COMPUTERS (THE RFS/ECMS PROCESSER IS A COMPUTER SYSTEM) KNOW THAT SIZE AND EXPENSE OF A COMPUTER IS DETERMINED IN LARGE PART BY THE *** DATA TO BE PROCESSED ***. THIS FACT WAS FUNDAMENTAL TO RAYTHEON'S DECISION TO ELIMINATE THE (REFINEMENTS APPROACH). RAYTHEON CONSIDERED IT PRUDENT BECAUSE OF COST TO LIMIT THE AMOUNT OF DATA *** AND THUS BE *** WITHIN THE $1.4 MILLION PRODUCTION UNIT COST.

FURTHER, WE RECOGNIZE THAT RAYTHEON HAS REQUESTED ONLY THAT WE TERMINATE AIL'S CONTRACT AND DIRECT THE AWARD TO RAYTHEON RATHER THAN REQUESTING CANCELLATION OF THE AWARD AND FURTHER NEGOTIATIONS WITH BOTH OFFERORS AS A PRELUDE TO A NEW AWARD. WE THINK RAYTHEON IMPLICITLY RECOGNIZES, BY THE LIMITED REQUEST, THAT FURTHER NEGOTIATIONS ARE IMPOSSIBLE, AS A PRACTICAL MATTER, GIVEN THE DISCLOSURE BY ALL PARTIES OF CONSIDERABLE TECHNICAL AND COST DATA DURING THE COURSE OF THE PROTEST.

ON THIS ANALYSIS WE MUST CONCLUDE THAT NEITHER A DIRECT AWARD TO RAYTHEON GIVEN AIL'S PRESENT TECHNICAL SUPERIORITY NOR FURTHER NEGOTIATIONS WITH BOTH OFFERORS WOULD BE APPROPRIATE TO CORRECT THE DEFECTS NOTED. WE ARE, HOWEVER, RECOMMENDING THAT THE AIR FORCE TAKE ACTION TO PREVENT A REPETITION OF THESE DEFICIENCIES IN THE FUTURE.

IN VIEW OF OUR CONCLUSION THAT THE AIR FORCE ELIMINATED COST REALISM WITH RESPECT TO DEVELOPMENT COSTS, WE FIND IT UNNECESSARY TO CONSIDER WHETHER THE SSEC SHOULD HAVE CONSIDERED AND EVALUATED RAYTHEON'S COST CEILING PROPOSAL FOR DEVELOPMENT COSTS, EVEN ASSUMING IT SHOULD NOT HAVE BEEN CONSIDERED "LATE."

V. THE DELETION OF BAND 8 AND ITS PARTIAL RESTORATION BY NOTICE 5 WAS IMPROPER

RAYTHEON URGES THAT THE DELETION OF BAND 8 IMPROPERLY ELIMINATED A KNOWN ESSENTIAL REQUIREMENT. INDEED, RAYTHEON MAINTAINS THAT THE ESSENTIALITY OF BAND 8 COVERAGE IS DEMONSTRATED BY THE AIR FORCE'S CURRENT ACTION IN FITTING CERTAIN PLANES WITH EQUIPMENT OPERATING AT BAND 8 FREQUENCIES.

RAYTHEON ALSO ASSERTS THAT THE DELETION OF BAND 8 PERMITTED THE SSEC TO MAINTAIN ILLUSIONS THAT THE DESIGN-TO-COST CEILING HAD NOT BEEN BREACHED AND THAT THE ABBREVIATED SYSTEM WAS STILL EFFECTIVE. FURTHER, THE DELETION RESULTED, IN RAYTHEON'S VIEW, IN A "TAILORING" OF THE PROCUREMENT TO AIL BY ELIMINATING FROM CONSIDERATION AIL'S BAND 8 APPROACH WHICH RAYTHEON BELIEVES WAS HIGHER IN TECHNICAL RISK THAN RAYTHEON'S BAND 8 APPROACH.

RAYTHEON ALSO CLAIMS THAT THE DELETION OF BAND 8 CAPABILITY COULD NOT BE SOLD TO THOSE RESPONSIBLE FOR OPERATIONAL REQUIREMENTS. BECAUSE THE DELETION COULD NOT BE SOLD, BAND 8 COVERAGE WAS PARTIALLY RESTORED VIA THE OPTION TECHNIQUE. THIS PARTIAL RESTORATION, RAYTHEON BELIEVES, STILL DID NOT CURE THE IMPROPER DELETION OF BAND 8 SINCE BAND 8 OPTION APPROACHES WERE STILL NOT EVALUATED IN DETERMINING THE SUCCESSFUL OFFEROR, THUS DEFERRING THE ALLEGED TECHNICAL SHORTCOMINGS OF AIL'S BAND 8 PROPOSAL FOR FUTURE CONSIDERATION.

RESPONDING TO RAYTHEON'S CLAIM THAT THE DELETION OF BAND 8 WAS DESIGNED TO TAILOR THE REQUIREMENT TO AIL'S APPROACH BECAUSE OF THE HIGHER TECHNICAL RISK ASSOCIATED WITH THAT APPROACH, THE AIR FORCE STATES, TO THE CONTRARY, THAT RAYTHEON HAD A HIGHER TECHNICAL RISK IN ITS APPROACH FOR BAND 8 THAN AIL HAD IN ITS APPROACH FOR THE FREQUENCY. AIR FORCE FURTHER STATES THAT AIL DEMONSTRATED CERTAIN COMPONENTS OF ITS APPROACH DURING PHASE I; THAT CERTAIN TUBES SIMILAR TO THOSE REQUIRED BY AIL IN ITS BAND 8 APPROACH HAD BEEN DELIVERED UNDER "ANOTHER DOD PROGRAM;" AND THAT, WHILE THERE WAS A PROBLEM WITH EFFICIENCY IN CERTAIN OTHER COMPONENTS, THE TUBES OFFERED LOW RISK IN SYSTEM DEVELOPMENT AND OPERATIONS.

BY CONTRAST, THE AIR FORCE TECHNICAL ADVISERS, SERVING AS ADVISERS TO THE SSEC, CONCLUDED THAT FUNDAMENTAL PROBLEMS REMAINED TO BE SOLVED IN THE RAYTHEON APPROACH WITHOUT CONSIDERABLE DEVELOPMENT. NOTWITHSTANDING THE GREATER CONFIDENCE IN THE AIL APPROACH, THE AIR FORCE STILL FELT CONSTRAINED TO DELETE THE BAND 8 REQUIREMENT BECAUSE THE GOVERNMENT'S ESTIMATE OF COST RISK FOR THE SYSTEMS WITH BAND 8 COVERAGE HAD TOO GREAT A RISK OF EXCEEDING THE DESIGN-TO-COST CONSTRAINT.

IN THIS PERSPECTIVE, THE AIR FORCE MAINTAINS THAT THE DELETION OF BAND 8 APPROACHES FROM PROPOSAL EVALUATION SERVED TO STRENGTHEN RAYTHEON'S PROPOSAL RATHER THAN DETRACT FROM ITS OVERALL RATING AS RAYTHEON BELIEVES. CONSEQUENTLY, THE AIR FORCE REJECTS THE VIEW THAT THE PARTIAL RESTORATION OF BAND 8 VIA THE OPTION TECHNIQUE PREJUDICED RAYTHEON OR THAT IT WAS AN INDIRECT WAY OF DEFERRING THE ALLEGED SHORTCOMINGS OF AIL'S APPROACH FOR FUTURE CONSIDERATION.

REGARDING BAND 8, THE AIR FORCE AGREES THAT IT IS IMPORTANT, BUT THAT TECHNICAL AND COST RISK REQUIRED ITS DELETION. NOTWITHSTANDING ITS STATEMENT ABOUT THE IMPORTANCE OF BAND 8, THE AIR FORCE STILL CONSIDERS A SYSTEM WITH ONLY BAND 1 THROUGH 5 COVERAGE TO BE OPERATIONALLY EFFECTIVE. FURTHER, THE BAND 8 APPROACH GOING INTO CERTAIN PLANES, THE FORCE POINTS OUT, HAS BEEN FLIGHT TESTED AND DOES NOT PRESENT THE SAME RISKS AS THE BAND 8 APPROACH BY RAYTHEON IN THE SUBJECT PROCUREMENT.

LACKING AN INDEPENDENT TECHNICAL AND COST ANALYSIS OF THE RELATIVE MERITS OF THE OFFERORS' BAND 8 APPROACHES, OF THE EFFECTIVENESS OF A SYSTEM WITH ONLY BAND 1 THROUGH 5 COVERAGE, AND OF THE STATED DIFFERENCE BETWEEN THE BAND 8 APPROACHES BEING INSTALLED IN CERTAIN PLANES AND CONTEMPLATED FOR THE SUBJECT SYSTEM, WE ARE NOT IN A POSITION TO QUESTION THE AIR FORCE TECHNICAL JUDGMENT ON THESE ISSUES. NOR CAN WE QUESTION THE VALIDITY OF THE AIR FORCE STATEMENT THAT BAND 8 WILL ONLY BE EXERCISED IF THE DESIGN TO COST CONSTRAINT WILL NOT BE EXCEEDED AND THE "THREAT" REQUIRES IT.

CONSEQUENTLY, AND SINCE THE RECORD CONTAINS "RAW" TECHNICAL AND COST SOURCE DATA WHICH, TAKEN AT FACE VALUE, SUPPORTS THE AIR FORCE'S CONCLUSIONS ON THESE ISSUES, WE CANNOT QUESTION ITS POSITION.

GIVEN OUR ACCEPTANCE OF THE AIR FORCE'S CONCLUSIONS, WE CANNOT QUESTION THE RIGHT OF THE AIR FORCE TO DELETE BAND 8 COVERAGE FROM THE BASIC SYSTEM DESIGN IN ORDER TO PRESERVE THE DESIGN-TO-COST CONSTRAINT AND TO PARTIALLY RESTORE BAND 8 VIA THE OPTION TECHNIQUE (EVEN ASSUMING THAT THIS TECHNIQUE WAS DICTATED BY AIR FORCE OFFICIALS WHO REVERSED THE PREVIOUS DECISION TO COMPLETELY DELETE BAND 8).

IT IS AXIOMATIC THAT PROCURING AGENCIES HAVE THE RIGHT TO DETERMINE THEIR MINIMUM REQUIREMENTS AT EVERY STAGE OF THE PROCUREMENT PROCESS SUBJECT ONLY TO THE QUALIFICATION THAT THERE BE A RATIONAL BASIS FOR THEIR DETERMINATION. WE THINK THE RECORD SUPPORTS CONCLUSIONS THAT THE AIR FORCE HAD A RATIONAL BASIS FOR ITS DECISIONS TO DELETE BAND 8 BASED ON TECHNICAL/COST CONSIDERATIONS, AND TO PARTIALLY RESTORE BAND 8 VIA THE OPTION TECHNIQUE GIVEN THE IMPORTANCE OF BAND 8 COVERAGE FOR POSSIBLE FUTURE THREATS AND THE POSSIBILITY THAT THE PRODUCTION UNIT COST ESTIMATES DURING THE PHASE II CONTRACT WILL PERMIT THE ADDITION OF BAND 8 WITHOUT EXCEEDING THE DESIGN-TO-COST CONSTRAINT.

AS TO THE PROCEDURAL VALIDITY OF THE OPTION TECHNIQUE, ASPR 1-1501, CONCERNING OPTION PROVISIONS FOR SUPPLIES AND SERVICES, SPECIFICALLY PROVIDES THAT THE USE OF APPROPRIATE OPTION PROVISIONS IN RESEARCH AND DEVELOPMENT CONTRACTS ARE NOT PRECLUDED. USING ASPR 1-1504(C), (D), AND (E) AS GUIDELINES FOR DECIDING WHETHER THE SUBJECT OPTION SHOULD HAVE BEEN EVALUATED IN DETERMINING THE SUCCESSFUL OFFEROR, AS RAYTHEON CONTENDS, WE FIND THAT OPTIONS MAY BE EVALUATED ONLY IF THE GOVERNMENT MAY EXERCISE THE OPTION AT TIME OF AWARD OR IF THE CONTRACT IS FIXED PRICE. SINCE THE AIR FORCE DID NOT CONTEMPLATE EXERCISING THE OPTION AT THE TIME OF AWARD AND THE CONTRACT HERE WAS A COST RATHER THAN A FIXED-PRICE TYPE, WE CANNOT QUESTION THE PROCEDURAL VALIDITY OF THE OPTION TECHNIQUE.

VI. AIL WAS ALLOWED TO PROPOSE ON A BASIS NOT GRANTED RAYTHEON

RAYTHEON FINALLY URGES THAT AIL WAS IMPROPERLY ALLOWED TO PROPOSE A PRODUCTION UNIT COST WHICH WAS CONTINGENT ON A PRODUCTION BUY OF 24 UNITS AT A RATE OF 4 PER MONTH. RAYTHEON STATES THAT IT WAS NOT ALLOWED TO PROPOSE ON THIS BASIS AND, THUS, WAS DENIED EQUAL NEGOTIATION OPPORTUNITY.

THE AIR FORCE AGREES WITH RAYTHEON'S CHARGE THAT THE TERMS OF AIL'S CONTRACT, UNLIKE THE TERMS RAYTHEON WAS ALLOWED TO PROPOSE ON, STIPULATE THAT THE PRODUCTION COST LIMIT IS CONTINGENT ON THE AIR FORCE BUYING 24 SYSTEMS AT THE RATE OF 4 SYSTEMS PER MONTH. THE AIR FORCE MAINTAINS, HOWEVER, THAT THE TERMS DO NOT CONFLICT WITH THE STATEMENT SET FORTH IN BOTH OFFEROR'S PROPOSALS THAT THE DESIGN-TO-COST LIMIT OF $1.4 MILLION IS BASED ON THE CUMULATIVE AVERAGE COST OF 241 SYSTEMS DELIVERED TO THE AIR FORCE. IT SAYS IT PERMITTED THIS WORDING AT AIL'S INSISTENCE SINCE A MINIMUM BUY WAS OF CONCERN TO THE COMPANY, UNLIKE RAYTHEON. FURTHER, IT SAYS THAT THE PRODUCTION SCHEDULE IN RAYTHEON'S REFERENCED PROPOSAL IS THE SAME AS THAT PROVIDED IN AIL'S CONTRACT, NAMELY: 4 PER MONTH IN ACCORDANCE WITH "ANNEX A TO THE B-1 RFS/ECM STATEMENT OF WORK." THUS IT DENIES THAT AIL WAS PERMITTED AN UNFAIR ADVANTAGE IN PROPOSING ON THIS BASIS.

WE AGREE WITH THE AIR FORCE DENIAL. SO LONG AS OFFERORS WERE TOLD TO BASE THEIR PROPOSED PRODUCTION UNIT COSTS ON THE CUMULATIVE AVERAGE COSTS FOR 241 PRODUCTION UNITS, WE DO NOT SEE ANY UNFAIR ADVANTAGE IN PERMITTING AN OFFEROR, IF THAT WAS ITS EXPRESSED CONCERN, TO MAKE ITS PROPOSED COST CONTINGENT ON THE ACCURACY OF THE PROJECTED QUANTITY.

INDEED, WE THINK IT IS IMPLICIT IN THE DIRECTIVE TO PROPOSE ON THE BASIS OF 241 UNITS THAT REVISION IN PROPOSED COSTS WOULD BE ALLOWED IF THE PROJECTION IS INCORRECT, AS RAYTHEON SUGGESTS. OUR VIEW IS STRENGTHENED BY THE PRESENCE OF CLAUSE "K" IN SECTION (J) OF THE "MODEL CONTRACT" PROVISIONS OF THE PI WHICH SPECIFICALLY PROVIDES THAT:

*** AN EQUITABLE ADJUSTMENT *** WILL BE MADE *** IN THE PRODUCTION UNIT PRICE AMOUNT *** AT THE TIME *** OF ANY GOVERNMENT CHANGE IN *** PRODUCTION QUANTITY, SCHEDULE OR SPECIFICATIONS *** WHICH IMPACTS THE PRODUCTION UNIT COST, AND IS INCORPORATED PRIOR TO NEGOTIATION OF THE INITIAL PRODUCTION CONTRACT.

THIS CASE IS THEREFORE DISTINGUISHABLE FROM 49 COMP. GEN. 156 (1969), CITED BY RAYTHEON, IN WHICH THERE WAS CONSIDERED A SITUATION WHERE AN ACTUAL CHANGE IN THE GOVERNMENT REQUIREMENTS WAS NOT PROPERLY COMMUNICATED TO OFFERORS. HERE, WE FIND NO CHANGE IN REQUIREMENTS THAT HAD TO BE COMMUNICATED.

THE PROTEST IS DENIED.