B-170269, DEC 21, 1970, 50 COMP GEN 418

B-170269, DEC 21, 1970, 50 COMP GEN 418

CONTRACTS - NEGOTIATION - EVALUATION FACTORS - INFLATION AND ESCALATION RECOVERY COSTS AN AWARD UNDER A SOLICITATION FOR CLASS DESTROYERS THAT PROVIDED FOR THE INCLUSION IN PRICE EVALUATION OF INFLATION AND ESCALATION RECOVERY FACTORS, TO THE OFFEROR WHOSE HIGH INITIAL TARGET COST WAS REDUCED BY EVALUATING ESTIMATED ESCALATION RECOVERY COSTS AS GREATER THAN ESTIMATED INFLATION COSTS RATHER THAN TO THE LOW BASE COST OFFEROR DISPLACED BY THE INCLUSION IN THE EVALUATION OF ESTIMATED INFLATION COSTS THAT EXCEEDED ESTIMATED ESCALATION RECOVERY FACTORS, AND OF HIGHER TARGET PROFITS, WAS PROPER. AN AWARD ON THE BASIS OF INITIAL LOW TARGET COSTS IS NOT REQUIRED WHERE THE GOVERNMENT IS PROTECTED FROM THE POSSIBILITY OF OFFERORS MANIPULATING INFLATION AND ESCALATION RECOVERY FACTORS, AND RECOUPING LOSSES UNDER THE RESET PROVISION OF THE CONTRACT. CONTRACTS - NEGOTIATION - AUDIT REQUIREMENTS THE FAILURE TO AUDIT THE FOURTH AND FINAL ROUND OF PROPOSALS UNDER A SOLICITATION FOR CLASS DESTROYERS DID NOT VIOLATE PARAGRAPHS 3-101, 3 807.2(A), AND 3-809(B)(1) OF THE ARMED SERVICES PROCUREMENT REGULATION (ASPR), WHERE NOT ONLY WERE THE PROPOSED PRICES IN EACH OF THE FIRST THREE ROUNDS OF NEGOTIATIONS AUDITED AND FOUND TO BE BASED ON SOUND BUSINESS JUDGMENT, BUT THE ASPR PROVISIONS DO NOT REQUIRE THE AUDIT OF PROPOSALS ON EACH AND EVERY ROUND OF A NEGOTIATED PROCUREMENT, AND PARAGRAPH 3- 809(B)(1) PROVIDES THAT AUDITS MAY BE WAIVED WHENEVER IT IS CLEAR THAT INFORMATION ALREADY AVAILABLE IS ADEQUATE FOR THE PROPOSED PROCUREMENT, AND THE DETERMINATION OF "ADEQUATE" IS WITHIN THE DISCRETION OF THE PROCURING ACTIVITY AND WILL NOT BE QUESTIONED UNLESS CLEARLY ERRONEOUS.

TO VON BOWER, COBURS, SIMMONS & TUTTLE, DECEMBER 21, 1970:

REFERENCE IS MADE TO THE LETTERS OF SEPTEMBER 1, SEPTEMBER 3, 1970, AND SUBSEQUENT CORRESPONDENCE, INCLUDING THE LETTERS OF OCTOBER 19, 1970, AND NOVEMBER 12, 1970, WITH ATTACHED MEMORANDUMS OF LAW, CONCERNING THE PROTEST BY BATH IRON WORKS CORPORATION (BATH) AGAINST THE AWARD OF A CONTRACT TO LITTON SYSTEMS, INCORPORATED (LITTON), BY THE DEPARTMENT OF THE NAVY FOR THE CONSTRUCTION OF DD-963 CLASS DESTROYERS.

IN A LETTER DATED AUGUST 26, 1970, OUR OFFICE REPORTED TO SENATOR MARGARET CHASE SMITH CERTAIN FINDINGS CONCERNING THE AWARD OF THIS DD 963 CONTRACT, AND THIS REPORT HAS BEEN MADE PUBLIC BY SENATOR SMITH. ON PAGE 4 OF ATTACHMENT I TO THE LETTER OF AUGUST 26, OUR OFFICE MADE THE FOLLOWING COMPARISON OF BATH'S AND LITTON'S PROPOSALS OF FEBRUARY 2 (THE 3RD PROPOSALS) AND MARCH 26 (4TH AND "FINAL" PROPOSALS): (CHART OMITTED)

INCLUDED IN THE PRICES OF THE PROPOSALS SUBMITTED BY BATH AND LITTON WERE THE OFFERORS' ESTIMATES OF INFLATION AND ESCALATION RECOVERY, AND THESE FACTORS WERE CONSIDERED IN THE PRICE EVALUATIONS. THE SIGNIFICANCE OF THE INFLATION AND ESCALATION FACTORS IN THE SELECTION OF THE SUCCESSFUL OFFEROR WAS DISCUSSED IN THE AUGUST 26, 1970, LETTER TO SENATOR SMITH AS FOLLOWS:

LITTON, IN ITS FINAL PROPOSAL, ESTIMATED THAT ITS ESCALATION RECOVERY BASED ON THE NAVY TABLES WOULD BE $143.7 MILLION MORE THAN THE ESCALATION THEY WOULD ACTUALLY EXPERIENCE, AND REDUCED THEIR FINAL PROPOSAL BY THIS AMOUNT. LITTON'S ESTIMATES OF THEIR RECOVERY OF ESCALATION ON THE THIRD AND FOURTH PROPOSALS ARE SHOWN BELOW IN MILLIONS OF DOLLARS. (CHART OMITTED)

BATH, IN ITS FINAL PROPOSAL ESTIMATED THAT ITS ESCALATION RECOVERY FROM THE NAVY TABLES WOULD BE $146.3 MILLION LESS THAN IT WOULD INCUR. BATH'S PROJECTED UNDER-RECOVERY FROM THE TABLES IS SHOWN BELOW IN MILLIONS OF DOLLARS. (CHART OMITTED)

IN EFFECT, BECAUSE LITTON ANTICIPATED AN OVER-RECOVERY FROM THE TABLETS AND BATH AN UNDER-RECOVERY, THE DISPARITY BETWEEN THE TWO BIDS IN TOTAL DOLLARS WAS APPROXIMATELY $290 MILLION. THE IMPACT OF ESCALATION WAS, THEREFORE, A SIGNIFICANT FACTOR IN THE PRICE COMPETITION FOR THE 30 DD 963 DESTROYERS.

ATTACHMENT 1 TO THE LETTER OF SEPTEMBER 3, 1970, FROM YOUR COUNSEL, IS A CHART ENTITLED "COMPARISON OF LITTON AND BATH PRICE PROPOSALS OF FEB. 2, 1970 AND MARCH 26, 1970" EXPRESSED IN THOUSANDS OF DOLLARS AND THIS CHART IS SET FORTH BELOW: (CHART OMITTED)

BATH'S POSITION IS THAT ITS OFFER WAS THE TRUE LOW OFFER SINCE EVALUATION SHOULD HAVE BEEN PURSUANT TO 1969 BASE COSTS ONLY AND THAT, THEREFORE, THE AWARD TO LITTON SHOULD NOT BE PERMITTED TO STAND. THE FOLLOWING REPRESENT SUMMARIES OF THE ARGUMENTS AND CONTENTIONS WHICH HAVE BEEN MADE BY BATH'S COUNSEL IN SUPPORT OF ITS POSITION:

(1) IT IS BATH'S VIEW THAT BY MANIPULATION OF THE INFLATION AND ESCALATION RECOVERY FACTORS, A PROSPECTIVE CONTRACTOR COULD REDUCE HIS INITIAL TARGET COST BY UNDERESTIMATING INFLATION AND OVER-ESTIMATING ESCALATION RECOVERY WITH THE EXPECTATION THAT ANY RESULTING LOSSES COULD BE RECOUPED AFTER THE RESET DATE WHEN EITHER THE FIRM TARGET FIGURE OR THE FIXED-PRICE AMOUNT, WHICHEVER IS AGREED UPON, WILL BE SUBSTITUTED FOR THE INITIAL TARGET FIGURES AND WILL BECOME THE BASIS FOR THE APPLICATION OF THE INDICES.

(2) IT IS ARGUED BY BATH THAT, IN VIEW OF THE FLOOR ON PROFIT, ANY OVERRUN DIFFERENCE BETWEEN INITIAL TARGET COST AND FIRM TARGET COST COULD NOT HAVE ANY SUBSTANTIAL EFFECT ON THE FIRM TARGET PROFIT TO BE ESTABLISHED AT THE RESET POINT.

(3) BATH CONTENDS THAT PRIOR TO 1962 NAVY'S METHOD OF EVALUATION OF INFLATION AND ESCALATION RECOVERY WAS DIFFERENT FROM THAT USED IN THIS CASE.

(4) BATH CONTENDS THAT THE INCLUSION OF INFLATION AND ESCALATION RECOVERY FOR EVALUATION IS CONTRARY TO THE WAY THESE FACTORS ARE EVALUATED IN ADVERTISED PROCUREMENTS.

(5) ANOTHER CONTENTION MADE BY COUNSEL FOR BATH IS THAT, BY FAILING TO MAKE AN AUDIT OF THE FINAL PROPOSALS, NAVY VIOLATED ARMED SERVICES PROCUREMENT REGULATION (ASPR) SECS 3-101, 3-807.2(A), AND 3-809(B)(1) WHICH REQUIRES CANCELLATION OF THE AWARD TO LITTON. IT IS URGED THAT THERE WAS NO BASIS FOR WAIVER OF AN AUDIT UNDER ASPR 3-809(B)(1), SINCE IT WAS NOT CLEAR THAT THE INFORMATION ALREADY AVAILABLE WAS ADEQUATE FOR THE PROPOSED PROCUREMENT. IN CONNECTION WITH THIS ARGUMENT COUNSEL FOR BATH HAS CITED SCHOENBROD V UNITED STATES, 187 CT. CL. 627 (1969), AND 47 COMP. GEN. 252 (1967).

(6) BATH ARGUES THAT THE INFORMATION OBTAINED DURING THE AUDIT OF THE FIRST THREE ROUNDS COULD NOT BE USED IN ANALYZING LITTON'S PROPOSAL FOR THE FINAL ROUND, SINCE THE CONTRACT STRUCTURE WAS CHANGED BETWEEN THE THIRD AND FOURTH ROUNDS FROM FIXED-PRICE INCENTIVE TO FIXED-PRICE INCENTIVE WITH SUCCESSIVE TARGETS AND THE RESET PROVISION.

WITH RESPECT TO BATH'S FIRST ARGUMENT, WE AGREE THAT THE OPERATION OF THE RESET PROVISION IS SUCH THAT THERE MAY BE A POSSIBILITY OF RECOUPMENT OF LOSSES AFTER THE RESET DATE. HOWEVER, THIS DOES NOT MEAN THAT IT WAS OPEN TO OFFERORS TO OFFER UNREALISTIC TARGETS BASED ON MANIPULATED INFLATION AND ESCALATION RECOVERY FACTORS, SINCE THERE ARE OTHER FEATURES OF THE CONTRACT WHICH PROTECT AGAINST SUCH MANIPULATION.

ONE FEATURE OF THE CONTRACT WHICH WOULD AFFORD SOME PROTECTION TO THE GOVERNMENT AGAINST MANIPULATED INFLATION AND ESCALATION RECOVERY ESTIMATES IS THE FACT THAT IF THERE IS AN OVERRUN DIFFERENCE BETWEEN THE INITIAL TARGETS AND THE AMOUNTS AGREED TO AT THE RESET POINT, THIS WILL HAVE A NEGATIVE IMPACT ON THE PROFIT NEGOTIATED AT THE RESET POINT.

ANOTHER FEATURE OF THE CONTRACT WHICH WOULD AFFORD SOME PROTECTION AGAINST MANIPULATION OF THE TARGET PRICE BY INCLUSION OF UNREALISTIC ESTIMATES FOR INFLATION AND ESCALATION RECOVERY IS THE CEILING PRICE AND THE TARGET PRICE IS A CUSHION FOR THE CONTRACTOR AGAINST UNANTICIPATED COSTS THAT MAY ARISE IN THE PERFORMANCE OF THE CONTRACT. LITTON'S CEILING PRICE IS SOME $8.4 MILLION PER SHIP LOWER THAN BATH'S CEILING PRICE. THE CEILING PRICE IN LITTON'S PROPOSAL OF $71.3 MILLION DOLLARS PER SHIP WILL REMAIN FIRM THROUGHOUT THE LIFE OF THE CONTRACT AND WILL NOT BE AFFECTED BY ANY CHANGES IN THE TARGETS WHICH MAY COME ABOUT AS THE RESULT OF NEGOTIATIONS UNDER THE RESET PROVISION. IT IS TRUE THAT RECOVERY UNDER THE ESCALATION PROVISION IS OUTSIDE THE OPERATION OF THE CEILING PRICE AND WILL NOT BE CONSIDERED IN COMPUTING WHETHER THE CONTRACTOR'S COSTS HAVE EXCEEDED THE CEILING. IN THIS REGARD, LITTON'S CONTRACT STATES IN PARAGRAPH (H) OF ARTICLE VI AS FOLLOWS:

(H) NO ADJUSTMENT SHALL BE MADE IN THE INITIAL OR FIRM TARGET COST, TARGET PRICE, OR CEILING PRICE ON ACCOUNT OF UPWARDS OR DOWNWARDS ADJUSTMENT IN COMPENSATION MADE IN ACCORDANCE WITH THIS ARTICLE AND HENCE SAID ADJUSTMENTS ARE OUTSIDE THE INCENTIVE PRICE REVISION FORMULAE PROVIDED FOR IN ARTICLE XXI, "INCENTIVE PRICE REVISION (SUCCESSIVE TARGETS)." ACCORDINGLY, EVEN IF THE CEILING PRICE IS EXCEEDED, AMOUNTS OTHERWISE PAYABLE TO THE CONTRACTOR IN ACCORDANCE WITH THIS ARTICLE SHALL CONTINUE TO BE PAID.

HOWEVER, DESPITE THIS PROVISION, THE CEILING PRICE STILL WOULD OPERATE AS A LIMIT WHICH AN OFFEROR HAD TO TAKE INTO CONSIDERATION BEFORE DECIDING TO UNDERCUT HIS TARGETS BY MANIPULATING ESTIMATES OF INFLATION AND ESCALATION RECOVERY SINCE, AS INDICATED, THESE FACTORS ENTERED INTO THE COMPUTATION OF THE CEILING PRICE AND THUS AFFECTED AN OFFEROR'S CUSHION AGAINST UNANTICIPATED EXPENSES. IT SEEMS, THEREFORE, THAT THE OPERATION OF THE CEILING AFFORDED SOME PROTECTION TO THE GOVERNMENT AGAINST AN OFFEROR'S SUBMITTING AN UNREALISTIC TARGET PRICE BASED ON MANIPULATED ESTIMATES OF INFLATION AND ESCALATION RECOVERY.

WITH RESPECT TO BATH'S SECOND ARGUMENT WE AGREE THAT THERE IS A FLOOR ON PROFIT AS URGED BY BATH. HOWEVER, THE OPERATION OF THE CEILING AS PREVIOUSLY DESCRIBED WOULD TEND TO OFFSET THE RISK THAT THE FLOOR ON PROFIT MIGHT TEMPT AN OFFEROR TO QUOTE UNREALISTIC INITIAL TARGETS.

WITH RESPECT TO BATH'S THIRD CONTENTION, WE AGREE THAT THE INFLATION ESCALATION ARRANGEMENT IN THIS PROCUREMENT WAS NOT IN USE IN NAVY'S FIXED- PRICE-TYPE SHIP CONSTRUCTION AND CONVERSION CONTRACTS BEFORE 1962. HOWEVER, SINCE 1962 THE NAVY HAS ENTERED INTO FIRM FIXED-PRICE CONTRACTS WITH BATH AGGREGATING OVER $100 MILLION DOLLARS ON THE SAME BASIS AS THE ARRANGEMENT IN THIS PROCUREMENT. WHILE THERE MAY HAVE BEEN A DIFFERENT PROCEDURE WITH RESPECT TO INFLATION AND ESCALATION EVALUATION PRIOR TO 1962, THIS WOULD NOT BE A BASIS FOR CONCLUDING THAT THE EVALUATION IN THIS CASE SHOULD HAVE BEEN PURSUANT TO PRE-1962 PROCEDURES WHICH WOULD HAVE BEEN CONTRARY TO THE GROUND RULES ESTABLISHED FOR THIS PROCUREMENT.

IN REGARD TO BATH'S FOURTH CONTENTION, WE DO NOT AGREE THAT NAVY'S APPROACH IN INCLUDING THE OFFERORS' ESTIMATES OF INFLATION AND ESCALATION RECOVERY FACTORS AS PART OF THE PRICE EVALUATION IS INCONSISTENT WITH WHAT WOULD BE DONE IN A FORMALLY ADVERTISED PROCUREMENT IN A SIMILAR SITUATION WHEN ESCALATION PROVISIONS ARE TO BE INCLUDED IN THE CONTRACT. IN SUCH CASE, A BIDDER CALCULATES WHAT HIS RECOVERY WILL BE UNDER THE ESCALATION PROVISION AND HOW INFLATION WILL AFFECT HIS COST OF OPERATION, AND THE BIDDER CAN ADJUST HIS PRICE UPWARD OR DOWNWARD BASED ON HIS JUDGMENT OF HOW HIS PRICE WILL BE AFFECTED BY THESE FACTORS. SEE ASPR 2-104.3 AND THE CLAUSE IN ASPR 7 106.2. IN ADVERTISED PROCUREMENTS, THE PROPOSED PRICE MAY INCLUDE THE BIDDER'S OWN ESTIMATES OF THE IMPACT OF INFLATION ON HIS COSTS OF OPERATION AND THE BIDDER'S ESTIMATES OF HOW MUCH WILL BE RECOVERED UNDER THE ESCALATION CLAUSE. AWARD IS MADE ON THE LOW BID, WHICH PRESUMABLY INCLUDES THE BIDDER'S ESTIMATES OF THE TWO FACTORS. RECOGNIZE THAT GREATER UNCERTAINTIES AS TO THE FINAL COST TO THE GOVERNMENT INHERE IN CONTRACTS OF THE TYPE HERE UNDER CONSIDERATION THAN IN FIRM FIXED-PRICE CONTRACTS. NEVERTHELESS, THE FACT THAT CIRCUMSTANCES DICTATE THE USE OF THE LESS CERTAIN TYPE OF CONTRACT DOES NOT MEAN THAT A PROPOSED PRICE, REASONABLY EVALUATED, SHOULD NOT REMAIN A SIGNIFICANT FACTOR IN THE SELECTION OF A CONTRACTOR.

A FURTHER CONSIDERATION WITH REGARD TO THE OVERALL QUESTION WHETHER INFLATION AND ESCALATION RECOVERY SHOULD BE INCLUDED IN THE PRICE EVALUATION IS THAT AN OFFEROR APPARENTLY CAN THROUGH INGENUITY AND JUDGMENT EXERCISE SOME MEASURE OF CONTROL OVER HOW INFLATIONARY FACTORS WILL AFFECT ITS COSTS OF PRODUCTION. SOME OF LITTON'S INFLATIONARY CONTROL MEASURES WERE SET FORTH IN OUR AUGUST 26 LETTER TO SENATOR SMITH. NAVY'S VIEW IS THAT IF ONE OFFEROR HAS BETTER CONTROL OVER THE IMPACT OF INFLATION THAN ANOTHER OFFEROR, THIS SHOULD BE REFLECTED IN THE OFFEROR'S PRICE AND SHOULD BE CONSIDERED IN EVALUATING PROPOSALS. PURSUANT TO OUR REVIEW, WE FIND WE MUST AGREE WITH NAVY ON THIS POINT.

BATH'S FIFTH AND SIXTH CONTENTIONS ARE INTERRELATED AND WILL BE CONSIDERED TOGETHER.

PURSUANT TO THE AUDITS OF THE FIRST THREE ROUNDS OF NEGOTIATIONS, IT WAS DETERMINED THAT LITTON'S PROPOSED PRICES IN EACH OF THESE ROUNDS WAS BASED ON SOUND BUSINESS JUDGMENT. THE AUDITS OF EACH OF THE FIRST THREE ROUNDS APPARENTLY WOULD HAVE DISCLOSED WHETHER AN OFFEROR INCLUDED UNREALISTIC ESTIMATES IN ITS PROPOSED PRICES. AS STATED IN ATTACHMENT I TO THE LETTER OF AUGUST 26, A COMPARISON OF BATH'S AND LITTON'S "BEST AND FINAL" OFFERS WITH NAVY'S OWN ESTIMATES SHOWED A HIGH DEGREE OF SIMILARITY IN THE REQUIRED ENGINEERING AND LABOR HOURS ESTIMATES AND THE PROPOSED MATERIAL COSTS; CONSEQUENTLY, NAVY CONCLUDED FROM THIS COMPARISON THAT LITTON'S PRICES WERE CREDIBLE AND THAT AN AUDIT OF LITTON'S FINAL PROPOSAL WAS NOT NECESSARY.

LITTON HAS ASSERTED THAT THE MATERIAL AND LABOR COSTS, INCLUDING ADJUSTMENTS FOR INFLATION AND ESCALATION RECOVERY, SET FORTH IN ITS SUPPLEMENTAL SUPPORT DATA FOR THE FOURTH ROUND WERE TRACEABLE TO CORRESPONDING FIGURES IN LITTON'S THIRD ROUND PRICE PROPOSAL ON WHICH, AS INDICATED, AN AUDIT WAS MADE. THE DEFENSE CONTRACT AUDIT AGENCY (DCAA) IN ITS POST AWARD AUDIT REVIEWED THE DATA ON WHICH LITTON'S INFLATION AND ESCALATION ADJUSTMENTS WERE BASED AND CONCLUDED THAT THIS DATA WAS TRACEABLE TO LITTON'S THIRD ROUND PRICE PROPOSAL. THERE WAS, OF COURSE, NO WAY OF AUDITING WHETHER THE EVENTS WHICH WERE THE BASES FOR LITTON'S PROJECTIONS, SUCH AS LITTON'S LHA MATERIAL COST EXPERIENCE AND LITTON'S PROJECTIONS OF AN UPWARD TREND IN MATERIAL AND LABOR INDICES BASED ON CURRENT INCREASES OF THE INDICES, WOULD ACTUALLY OCCUR UNDER THIS CONTRACT; AND IN DRAWING ITS CONCLUSION REGARDING INFLATION AND ESCALATION, DCAA ASSUMED THAT SUCH EVENTS WOULD OCCUR AS PROJECTED BY LITTON. WE UNDERSTAND NAVY AGREES THAT THE FIGURES IN LITTON'S FOURTH ROUND SUPPLEMENTAL SUPPORT DATA WERE TRACEABLE TO THE CORRESPONDING THIRD ROUND PRICES, AND NAVY CLAIMS THAT THIS FACTOR ENTERED INTO NAVY'S DETERMINATION NOT TO AUDIT LITTON'S FOURTH ROUND PROPOSAL.

THE CASE OF SCHOENBROD, SUPRA, CITED BY BATH'S COUNSEL, CONCERNED A SITUATION WHERE THE FACTOR OF PRICE WAS NOT CONSIDERED AT ALL IN THE EVALUATION OF PROPOSALS, AND IT WAS HELD THAT AN AWARD PURSUANT TO SUCH A PROCEDURE WAS INVALID. THE DECISION AT 47 COMP. GEN. 252 (1967), ALSO CITED BY COUNSEL FOR BATH, HELD THAT THE IMPROPER ADJUSTMENT OF PRICING PROPOSALS WHICH CONTAINED DISCREPANCIES WAS A DEFECTIVE NEGOTIATION TECHNIQUE. THE CITED CASES INVOLVED FACTUAL SITUATIONS WHICH WERE DIFFERENT FROM THE ONE PRESENTLY BEFORE OUR OFFICE AND ARE NOT APPLICABLE HERE. IT IS OUR VIEW THAT EVEN IF THERE HAD BEEN A FAILURE TO MAKE AN AUDIT REQUIRED BY THE ASPR SECTIONS CITED BY BATH, AN AWARD WOULD NOT NECESSARILY BE INVALID. MOREOVER, WE DO NOT FIND THAT THE ASPR PROVISIONS CITED BY COUNSEL FOR BATH REQUIRE THAT THERE BE AN AUDIT OF THE PROPOSALS SUBMITTED ON EACH AND EVERY ROUND OF NEGOTIATED PROCUREMENT. THE VERY REGULATION CITED BY BATH'S COUNSEL AT ASPR 3-809(B)(1) PROVIDES THAT AUDITS MAY BE WAIVED WHENEVER IT IS CLEAR THAT INFORMATION "ALREADY AVAILABLE" IS "ADEQUATE" FOR THE PROPOSED PROCUREMENT.

THE DETERMINATION WHETHER OR NOT "ALREADY AVAILABLE" INFORMATION IS "ADEQUATE" IS A MATTER PRIMARILY WITHIN THE DISCRETION OF THE PROCURING ACTIVITY, WHICH WILL NOT BE QUESTIONED BY OUR OFFICE UNLESS SHOWN TO BE CLEARLY ERRONEOUS. IN VIEW OF THE ABOVE ANALYSIS CONCERNING THE PROTECTION IN THE STRUCTURING OF THE CONTRACT TYPE PROPOSED IN THE FOURTH ROUND AGAINST AN OFFEROR'S INCLUDING UNREALISTIC ESTIMATES FOR INFLATION AND ESCALATION, AND THE TRACEABILITY ASPECTS OF LITTON'S THIRD AND FOURTH ROUND PRICE PROPOSALS, WE DO NOT FIND THAT NAVY'S DECISION NOT TO AUDIT LITTON'S FINAL PROPOSAL WAS SUCH AN ABUSE OF DISCRETION AS TO VIOLATE THE REGULATIONS.

BY LETTER OF DECEMBER 11, 1970, YOU ADVISED US OF ANOTHER ALLEGED DEFECT IN THE PROCUREMENT PROCEDURES FOLLOWED IN THIS CASE, NAMELY, THAT PRENEGOTIATION AND POST NEGOTIATION BUSINESS CLEARANCES HAD NOT BEEN OBTAINED FOR THE CONTRACT AWARD AS REQUIRED BY SECTION 1-403.50 OF NAVY PROCUREMENT DIRECTIVES (NPD). SECTION 1-403.50 OF NPD STATES THAT BUSINESS CLEARANCE IS THE REQUIRED APPROVAL BY THE CHIEF OF NAVAL MATERIAL OF THE BUSINESS ASPECT OF PROPOSED CONTRACTUAL ACTIONS. WE HAVE BEEN ADVISED INFORMALLY BY THE NAVY THAT THE SOURCE SELECTION AUTHORITY IN THIS CASE WAS THE CHIEF OF NAVAL MATERIAL HIMSELF, SO THAT THE APPROVAL CONTEMPLATED BY NPD 1-403.50 WAS OBTAINED. YOUR LETTER OF DECEMBER 11 ALSO ADVISES THAT YOU HAVE BEEN INFORMED THAT LITTON HAS CONCLUDED THAT IT IS NOT FEASIBLE TO CONSTRUCT THE DD-963 SHIPS IN ACCORDANCE WITH THE LENGTH, WIDTH, AND TONNAGE ORIGINALLY SPECIFIED. IT IS OUR UNDERSTANDING THAT SOME MINOR CHANGES IN VESSEL CONFIGURATION HAVE BEEN SUGGESTED BY LITTON THROUGH AN ENGINEERING CHANGE PROPOSAL WHICH IS PRESENTLY UNDER CONSIDERATION BY THE NAVY. WE DO NOT CONSTRUE YOUR LETTER AS TAKING THE POSITION THAT APPROVAL OF SUCH CHANGES WOULD BE EITHER IMPROPER OR UNUSUAL.

WE HAVE CAREFULLY REVIEWED EACH OF THE CONTENTIONS RAISED BY COUNSEL FOR BATH, AND WE HAVE FOUND NO BASIS FOR CONCLUDING THAT THE EVALUATION SHOULD HAVE BEEN PURSUANT TO 1969 BASE COSTS ONLY. IN THE CIRCUMSTANCES, WE FIND THAT IT WAS NOT IMPROPER TO INCLUDE THE INFLATION AND ESCALATION RECOVERY FACTORS IN THE PRICE EVALUATION, AND THAT THERE IS NO BASIS TO QUESTION THE AWARD MADE BY NAVY.

FOR THESE REASONS YOUR PROTEST IS DENIED.