B-238505, May 30, 1990, 90-1 CPD 509

B-238505, May 30, 1990, 90-1 CPD 509

PROCUREMENT - Competitive Negotiation - Offers - Cost realism - Evaluation - Administrative discretion DIGEST: Where agency request for second best and final offer (BAFO) states that it is concerned about the realism of offerors' prices and states that any changes to a proposal must be explained in detail by the offeror, agency properly considered unacceptable an unexplained price reduction and change in proposal's pricing format in protester's second BAFO.

Attorneys

The EC Corporation:

The EC Corporation protests the award of a contract to Pacifica Services, Inc., under request for proposals (RFP) No. NOO123-89-R-0230, issued by the Naval Regional Contracting Center Detachment, Long Beach, California, for blue collar services for the Naval Electronic Systems Engineering Center, Vallejo, California. EC principally argues that the Navy improperly found EC's proposal to be unacceptable because it failed to obtain a top secret clearance as of the award date of the contract. deny the protest since we find that the protester's final price proposal contained significant unexplained pricing revisions which the agency reasonably determined to be unacceptable.

The RFP, which was issued December 3, 1988, contemplated award of a time and materials, delivery order contract. Offerors were required to propose single fixed hourly rates for various labor categories based on stated estimated manhours. The RFP contained minimum experience requirements for each labor category. Award was to be made to the offeror whose proposal conformed to the solicitation and was most advantageous to the government, cost and other factors considered. The RFP contained technical evaluation criteria (management, past company experience, and facilities) and a cost factor which was not as important as the aggregate of technical factors. The RFP provided further that cost would be evaluated on the basis of realism and reasonableness.

Three firms, including the protester, submitted initial offers. offered a price of $83,645,238. Following discussions with each of the offerors, the agency requested best and final offers (BAFOs). Pacifica submitted the low priced and highest technically rated proposal at $74,376,622. EC lowered its price to $82,606,734. However, the agency did not award the contract to Pacifica at that time because it found that the firm's pricing proposal was materially unbalanced.

After receipt of BAFOs, by letter dated July 21, 1989, the agency advised offerors that additional discussions would be held with all offerors in the competitive range to insure that instructions concerning cost proposal were not ambiguous. Attached to the letter was amendment 7 to the solicitation which provided that the contracting officer reserved the right to reject an offer where the offer indicated that one or more items were offered at prices substantially below the offeror's actual prospective cost for that line item or items. Included in this amendment was a new wage rate determination which generally increased the hourly rate that contractors were required to pay their workers.

In August 1989, the agency held discussions with EC. The Navy advised EC that it did not encourage offerors to propose unreasonably low unbalanced proposals. By letter dated August 16 to EC, the agency again emphasized that it did not encourage offerors to propose unreasonably low rates. Included with the letter was a memorandum which stated that contractors proposing unrealistically low rates will be required to: demonstrate an understanding of the requirement; address the ability to provide the caliber of labor required; demonstrate the capability to absorb the labor cost differential between the low rates proposed and the probable real cost of the labor to meet Navy requirements.

In response to the agency's letter and memorandum, the protester proposed to make price revisions, including a "management decision to include overtime cost as an element of cost of overhead." By letter dated October 10, the agency advised EC that this overtime approach was unreasonable and would not be acceptable. Finally, by letter to EC dated October 19, 1989, requesting second BAFOs, the contracting officer stated that "any revisions to your proposal should be explained and fully supported."

Following discussions, EC submitted two proposals: a basic second BAFO for $75,780,770 and an alternate second BAFO for $80,164,080. The basic proposal employed a two-tier pricing scheme which offered a certain rate for an initial portion of the hours to be delivered, and then another rate for the second portion of the hours for a given labor category. The alternate did not contain the two-tier pricing structure. However, the second alternate BAFO failed to provide any information about the extent to which EC would subcontract and had other unexplained cost revisions and cost reductions.

On December 5, the contracting officer contracted the Defense Industrial Security Clearance Office (DISCO) to ascertain whether EC had been granted a top secret security clearance. The agency was told that the application for clearance was still pending. The record shows that on December 7, the agency prepared a business clearance memorandum (BCM) justifying its decision to award to Pacifica. This document stated that the contracting officer for EC had not been granted, and that DISCO could not predict when or if approval would be granted. The BCM stated further, "based on this conclusion, the contracting officer determines EC's proposal to be unacceptable and concludes that further evaluation of its offers would be meaningless." The agency states that it contacted DISCO for the final time prior to contract award on December 29, and was again told that a top secret clearance had not yet been granted to EC. The BCM was approved by the Director of Contracts and Business Management for the Assistant Secretary of the Navy for Shipbuilding and Logistics on January 8, 1990.

The agency states that during the pendency of the approval of the BCM, the contracting officer discussed with other procurement officials what it considered to be EC's unsatisfactory price proposals (second BAFOs). The agency has provided our Office with a statement of the Officer in Charge indicating that he was aware of EC's pricing deficiencies at that time. However, rather than formally amending the BCM, he directed the contracting officer to prepare a memorandum to the file documenting the deficiencies in EC's cost proposal. With respect to EC's basic second BAFO, the contracting officer considered the two tier pricing scheme unacceptable. Concerning the alternate second BAFO, the contracting officer concluded that the method of structuring the pricing was unrealistic, that the alternate BAFO did not provide a detailed explanation of the changes made from the previous offer, and that the proposal lacked traceability in overhead, general and administrative expenses, and handling of subcontract expenses. Award was made to Pacifica. This protest followed.

The protester argues, with respect to its basic second BAFO, that it did not believe that a two-tier approach would be considered unacceptable, although it concedes that the contracting officer advised EC that such an approach could be considered a risk to the government and encouraged the protester to submit an alternate proposal if it decided to present a proposal using the two-tier approach. With respect to the alternate proposal, the protester asserts that the pricing methodology and structure employed in its alternate BAFO were identical to those used by EC in its first BAFO.

An agency is entitled to evaluate a technical proposal on the basis of changes or ambiguities introduced in a BAFO. An offeror assumes the risk that changes in its final offer might raise questions about its ability to meet the requirements of the solicitation and, thus, result in rejection or downgrading of its proposal. Cygna Project Management, B-236839, Jan. 5, 1990. 90-1 CPD Para. 21. Further, cost realism determinations are necessarily judgmental, and unless they are unreasonable they are not subject to objection. Industrial Maintenance Servs., Inc.; Logistical Support, Inc., B-235717; B-235717.2, Oct. 6, 1989, 89-2 CPD Para. 324.

We have reviewed the record and conclude that both of EC's second BAFOs were reasonably considered by the agency as unacceptable without further discussions. Since the RFP required a single fixed hourly rate, the agency, in our view, reasonably considered EC's two-tier pricing for each labor category in the basic second BAFO as unacceptable and in direct contravention of RFP terms. See Cajar Defense Support Co., B-237522, Feb. 23, 1990, 90-1 CPD Para. 213. We also agree with the agency that, contrary to the protester's assertion, the pricing methodology and structure proposed in the alternate second BAFO differed significantly from its earlier proposals which reasonably raised doubts about the realism of the prices offered.

Among other things, in addition to other unexplained price reductions in the alternate second BAFO, both EC's first BAFO and the alternate second BAFO indicated that EC intended to subcontract a portion of the labor to DynCorp. In the first BAFO, however, the estimated number of hours to be performed by the subcontractor and its wage rate for each labor category were provided. For example, for the base year labor category journeyman welder/blazer/electrician/painter, the first BAFO stated that of the total 37,260 estimated hours, EC would perform 16,580 at an hourly rate of $15.51, while DynCorp would perform 20,680 hours at an hourly rate of $23.32. The proposal also separately attributed $83,859 of fringe benefits to this labor category.

This pricing approach was abandoned by EC in the second BAFO. While the proposal continued to state that EC had entered into an intent to subcontract agreement with DynCorp, the second BAFO provided no further explanation of the extent to which it would use DynCorp. Rather, it merely listed the total hours to be performed for each labor category, provided EC's hourly rate, and indicated a dollar amount for total direct labor category mentioned above, the second BAFO indicated that 37,260 hours were estimated to be performed, that EC's hourly rate would be $15.51, and that the total direct labor and fringe benefit cost would be $722,378. Unlike the previous proposals, the second BAFO did not specify the number of hours that DynCorp would perform or DynCorp's hourly rate. Further, the proposal did not indicate the dollar amount attributable to fringe benefits, and the alternate second BAFO also did not include a statement of the profit or an escalation rate as it had done before. As a result, the agency had no way of determining what, it any, portion of the work would be performed by the subcontractor and at what rates. Moreover, since the previous offers showed that the subcontractor's rates were considerably higher than EC's, the agency, in our view, reasonably considered the absence of such information to be significant.

We conclude that the agency reasonably found that EC did not provide an adequate explanation of the significant changes made from its previous offer. In view of the repeated warnings the agency gave regarding price realism and the requirement that offerors explain changes in proposals, the agency was justified in considering EC's alternate second BAFO as unacceptable because of its changed pricing approach and unexplained reduced price. We also note that the unexplained reductions were more significant in light of the fact that, prior to its request for second BAFOs, the agency issued an amendment to the RFP which generally increased the minimum wage rates which contractors would be required to pay under the revised wage rate determination. Since the agency reasonably determined that EC's pricing was deficient, we need not address EC's allegation that it was improperly rejected for not possessing a security clearance at the time of award.

The protest is denied.