Matter of: PAE GmbH Planning and Construction File: B-250470 Date: January 29, 1993

Matter of: PAE GmbH Planning and Construction File: B-250470 Date: January 29, 1993

PROCUREMENT Competitive Negotiation Offers Cost realism Evaluation errors Allegation substantiation Protester's contention that contracting officer in effect did not perform a cost realism analysis because no adjustment was made to any offeror's proposed costs and because there was an inadequate basis in the record for such an analysis is denied where the contracting officer did, in fact, consider whether each offeror's proposed costs were realistic--and ultimately concluded that they were--based on material from the Army's Financial Services Branch and on a report from the Defense Contract Audit Agency regarding the realism of the offerors' proposed costs. PROCUREMENT Competitive Negotiation Offers Cost realism Adjustments Rates PROCUREMENT Competitive Negotiation Offers Evaluation Wage rates Protester's contention that the contracting officer acted unreasonably in failing to make an upward adjustment to the proposed labor costs of the awardee based on the possible application of a German labor statute that, if applied, would force the awardee to hire the protester's--i.e., the incumbent's--employees and to pay those employees the higher wages paid by the protester, is denied where the applicability of the statute is unclear; the agency has taken the position for more than 2 years, based on recent decisions of the German courts, that the statute does not apply; and the protester has not shown that the agency's settlement of a prior lawsuit involving this issue is contrary to this position.

Attorneys

DECISION PAE GmbH Planning and Construction (PAE) protests the award of a contract to Ogden Allied Services GmbH, under request for proposals (RFP) No. DAJA37-92-R-0092, issued by the Department of the Army for the operation and management of the Army's European Redistribution Facilities (ERF) at Nahbollenbach and Hanau-Grossauheim, Germany. PAE argues that the Army's cost realism analysis of Ogden's proposal was unreasonable because the Army failed to upwardly adjust Ogden's proposed labor costs, including the rates Ogden proposed to pay its German workers.

We deny the protest.

BACKGROUND

The Army issued this RFP on April 28, 1992, seeking offers for operation and management of the U.S. government-owned facilities. The RFP anticipated award of a cost-plus-award-fee contract, for 1 base year and 4 option years, to the offeror whose proposal was determined most advantageous to the government.

The RFP advised potential offerors that their scores in the technical merit area and in the management/past performance area were more important than proposed cost. The RFP further advised that even though cost was the least important of the three major evaluation criteria, it would "become the determinative factor in the source selection decision if competing proposals [were] judged to be essentially equivalent in terms of the management/past performance and technical areas." RFP Sec. M-4c.

The Army received four offers in response to the RFP, including the offers from Ogden and from the incumbent, PAE. Upon review of the initial technical proposals by the Source Selection Evaluation Board (SSEB), all four offerors received high technical scores and all were included within the competitive range. The results of this technical review--shown on a 100 point scale--together with the initial proposed costs, are set forth below:

Proposed Cost Technical (in millions ofScore deutsche marks)

Company A 97.6 DM 158.5 Ogden 90.2 74.3 PAE 86.5 86.0 Company B 83.8 61.4

While the SSEB was performing its technical review, the contracting officer also requested assistance in reviewing proposed costs from the Financial Services Branch (FSB) within the Army's Europe Contracting Center. The FSB, in turn, requested audit support from the Defense Contract Audit Agency (DCAA). Although time constraints placed on these reviews by the contracting officer resulted in very limited input regarding costs, the Army did make adjustments to each offeror's initial proposed costs.

After completing the initial review, the Army held discussions with all four offerors. During discussions, agency negotiators expressed concerns about Ogden's perceived inexperience in operating a commercial firm in Germany. The negotiators advised Ogden that if selected to perform the ERF contract, Ogden would be "subject to all laws and regulations of Germany." The agency explains that it so advised Ogden because Ogden's initial proposal suggested that it might be misinformed about the application of German commercial labor laws to its performance of the ERF contract.

After discussions, each offeror submitted its best and final offer (BAFO) by the August 20 deadline. In its BAFO, Ogden responded to the concerns voiced by the agency negotiators. With respect to its perceived inexperience in Germany, Ogden identified eight German airports and a German sports stadium where it was providing extensive operations services under contract. With respect to concerns that it might not be aware of applicable German labor laws, Ogden stated that it was cognizant of the requirements for operating a commercial firm in Germany and would be "following all of the laws and regulations associated with utilizing U.S. citizens in Germany and hiring local nationals to conduct the work." In addition, Ogden's BAFO identified the German labor lawyer it had hired "to provide guidance and direction in working within the labor laws of Germany."

Upon receipt of BAFOs, the Army again conducted an evaluation of the technical proposals. The resulting technical scores, together with each offeror's proposed BAFO costs, are set forth below:

Proposed Cost Technical (in millions ofScore deutsche marks)

Company A 97.7 DM 142.2 Ogden 94.6 84.6 PAE 90.2 90.3 Company B 89.7 164.6

As with the initial proposals, the FSB again reviewed each offeror's proposed BAFO costs. The resulting memorandum for the contracting officer- -produced just 4 days after receipt of BAFOs--suggests that the FSB did not believe sufficient time had been allocated for review, and offered no conclusions about the realism of each offeror's proposed costs. With respect to labor costs, the memorandum suggests further review:

"We recommend that the [contracting officer] assure himself of the reasonableness of labor due to the wide variation in [Company A and Company B] versus Ogden and PAE. We also recommend for the two lowest bidders, Ogden and PAE (with different labor structures and PAE the incumbent) that the [contracting officer] consider the labor issues (tariff agreements, severance pay, etc.) closely before making the award."

The FSB also forwarded to the contracting officer a review of Ogden's initial cost proposal by DCAA. This review, dated July 13, was performed by DCAA's New York Branch Office, and was limited to analysis of Ogden's initial proposal. In its report, DCAA took no exception to the proposed hourly rates offered by Ogden because they were "obtained from a logistics consultant of German labor law" and because they "were estimated based on Germany's Tariff Agreement with the Department of Defense which closely parallels the pay structure of Germany's Shop Agreements."

Based on the results of the technical evaluation, the contracting officer determined that the three highest-rated proposals were essentially equal, and decided to make award to the offeror among those three with the lowest proposed costs. To explain these decisions, the contracting officer created two documents. In the first, entitled the "Determination and Source Selection Decision Document" dated August 25, the contracting officer makes the following findings regarding cost:

"Cost analysis performed by [FSB], DCAA and the [c]ontracting [o]fficer, on all cost proposals indicate that [Ogden] proposed in [its] BAFO the lower estimated [cost-plus-award-fee] CPAF amount and therefor[e its] cost proposal has been evaluated as having the lowest probable and realistic CPAF amount. [Ogden's] proposal offers the greatest value to the [g]overnment, expressed in a lower probable cost of estimated DM 84,617,718 ($47,009,843) for the life of the contract. Although this proposal is approx[imately] 6.2 [percent] lower than the cost proposal of the competitor PAE GmbH, it has no questionable cost elements which would effect its validity and cost realism."

In the second document, entitled "Determination of Cost Realism and Responsibility" dated August 28, the contracting officer states that he has considered the labor costs and labor issues raised by each of the offerors. In addition, the contracting officer states that:

"Ogden's proposed labor rates were estimated and based on Germany's Tariff Agreement with [the Department of the Army] which closely parallels the pay structure of Germany's shop agreements. Based on a comparison of proposed rates with rates of the German tariff, the labor cost[s] are considered realistic, reasonable and comparable."

Thus, the contracting officer concluded that Ogden's proposed costs were realistic, and made no adjustment to them, or to the proposed costs of any other offeror.

On August 31, the contract was awarded to Ogden at its proposed costs of DM 84.6 million, estimated by the contracting officer as approximately $47,009,843. After a debriefing on September 11, PAE filed this protest on September 23.

DISCUSSION

PAE's protest raises only one challenge to the Army's conclusion that Ogden's proposal offered the greatest advantage to the government--i.e., that in deciding Ogden was the low cost offeror, the Army unreasonably failed to consider that Ogden's labor costs will be higher than those it proposed. PAE argues that the contracting officer did not perform the cost realism analysis he claims, and that the contracting officer could not reasonably ignore the possible application of a German labor statute that, if applied, would force Ogden to hire much of PAE's (the incumbent's) workforce and to pay those employees the higher wages paid by PAE. In PAE's view, since Ogden will be forced to hire PAE's German workforce and to compensate those workers at the same rate paid them by PAE, the conclusion that Ogden proposed the lowest realistic costs of any of the three offerors found "essentially equivalent" is unreasonable.

When agencies evaluate proposals for the award of a cost-reimbursement contract, an offeror's proposed estimated costs are not dispositive, because regardless of the costs proposed, the government is bound to pay the contractor its actual and allowable costs. Federal Acquisition Regulation Sec. 15.605(d). Consequently, a cost realism analysis must be performed by the agency to determine the extent to which an offeror's proposed costs represent what the contract should cost, assuming reasonable economy and efficiency. CACI, Inc.-Fed., 64 Comp.Gen. 71 (1984), 84-2 CPD Para. 542. Because the contracting agency is in the best position to make this cost realism determination, our review of an agency's exercise of judgment in this area is limited to determining whether the agency's cost evaluation was reasonably based and not arbitrary. General Research Corp., 70 Comp.Gen. 279 (1991), 91-1 CPD Para. 183, aff'd, American Mgmt. Sys., Inc.; Department of the Army-- Recon., 70 Comp.Gen. 510 (1991), 91-1 CPD Para. 492; Grey Advertising, Inc., 55 Comp.Gen. 1111 (1976), 76-1 CPD Para. 325.

We focus first on PAE's claim that the contracting officer in effect did not perform a cost realism analysis because no adjustments were made to any offeror's proposed costs and because there was an inadequate basis in the record for such an analysis.

As quoted above, the contracting officer's conclusion that Ogden's proposed costs are realistic purports to be based upon cost analyses performed by the FSB, DCAA and the contracting officer. With respect to the FSB review, PAE correctly points out that the FSB declined to reach any conclusion about the realism of each offeror's proposed costs. Instead, the FSB provided information and observations to the contracting officer to consider in making award, together with a specific recommendation that the contracting officer consider carefully the labor issues raised by the proposals of PAE and Ogden.

With respect to DCAA, on the other hand, its report expressly considered Ogden's proposed labor rates and took no issue with those rates. As stated above, DCAA explained that Ogden's rates had been obtained by a consultant in German labor law, and had been "based on Germany's Tariff Agreement with the Department of Defense which closely parallels the pay structure of Germany's Shop Agreements." In the "Determination of Cost Realism and Responsibility," the contracting officer repeats the language from the DCAA report almost verbatim. Thus, it appears that his decision to accept Ogden's proposed labor rates was based largely on the DCAA review.

Despite the limited analysis provided in support of the contracting officer's decision that Ogden's proposed labor rates are realistic, we find no basis for concluding that the decision was unreasonable. First, PAE's contention that the contracting officer failed to consider that Ogden's proposed labor costs were lower than PAE's is not supported by the record. In the "Determination and Source Selection Decision Document," the contracting officer acknowledges that Ogden's proposed costs are 6.2 percent lower than those of PAE but states that Ogden's proposal "has no questionable cost elements which would affect its validity and cost realism."

Second, even though the FSB memorandum on its face eschews conclusions about cost realism, PAE cannot claim that the memorandum from the FSB offers no information in support of the contracting officer's eventual conclusion. Although the analysis is substantially qualified, the FSB memorandum reviews several features of Ogden's proposed costs, such as: the size of the proposed escalation rate for option years; the consistency with which the escalation rate is applied to different elements of the cost proposal; and the proposed cap on the level of reimbursement for general and administrative expenses. We also note that the FSB memorandum expressly concludes that it recommends no adjustment to Ogden's BAFO.

In addition to the FSB memorandum, the contracting officer's decision is supported by the DCAA report. In its analysis, the DCAA reviewed Ogden's proposed direct labor rates, the method used to calculate those rates, fringe benefit costs, costs for vehicles and related equipment, costs of implementing a new software for accounting, and numerous other features of Ogden's cost proposal. The DCAA report expressly concluded that there was no basis to question Ogden's proposed labor rates.

Given that the contracting officer's decision was supported by these materials, we find unpersuasive PAE's contentions that the cost realism decision lacks an adequate basis because the contracting officer did not explicitly address whether Ogden's lower wages might present hiring difficulties or labor unrest, and its contention that the DCAA analysis was unreasonable. With respect to the issue of hiring difficulties and possible labor unrest, PAE correctly asserts that the contracting officer makes no mention of these issues in deciding to accept Ogden's lower labor costs. On the other hand, there is no requirement that a contracting officer consider such issues in every procurement. Although PAE argues that its employees are covered by a collective bargaining agreement--and even claims "the only reason that the union did not call a strike was because it was confident that it would prevail in its lawsuit that [the German labor statute] applied"--PAE offers no supporting information about the impact of such an agreement, or about the likelihood of a labor strike. Without such information, PAE has not established that the contracting officer acted unreasonably for failing to address these issues. Instead, as discussed below, the contracting officer properly raised the issue of applicable labor laws during discussions, and reasonably relied on the agency's position that the specific German statute which PAE cites would have no application to this contract.

With respect to PAE's contention that the contracting officer could not rely on the DCAA's conclusions that Ogden's proposed labor rates were realistic, PAE offers no support for its claim that the DCAA conclusion is unfounded. While the DCAA states that it compared Ogden's proposed rates with the rates of the German Tariff Agreement and reviewed Ogden's consultant's rationale for any adjustment from those rates, PAE complains that the DCAA should have made the Tariff Agreement available and should have provided any other materials it reviewed to reach its conclusion. PAE's complaint does not establish that the DCAA conclusions were unreasonable; rather, PAE simply wants the opportunity to review the DCAA records to ascertain whether it might have some basis to mount a more specific attack on DCAA's findings. Since the Tariff Agreement is a publicly available document; PAE had access to Ogden's proposal under the terms of a protective order; and PAE has failed to raise any specific challenge showing why the DCAA conclusions are unrealistic, we will not consider this issue further.

PAE contends that the contracting officer had other information available to him that should have caused him to make an upward adjustment to Ogden's proposed costs. In this regard, PAE focuses on the possible application of section 613a of the German Civil Code to this contract. PAE argues that since the contracting officer had personal knowledge of this statute, he could not ignore the fact that the statute's application might eliminate any perceived savings from award to Ogden.

Section 613a of the German Civil Code is a labor law designed to protect German citizens from losing their jobs, or a portion of their salary, when an establishment is transferred from one "possessor" to another. Section 613a states in part:

"In the event [an establishment] or part of [an establishment] is transferred to another possessor by virtue of a legal transaction, the latter assumes the rights and obligations with respect to the employment contracts existing at the time of transfer."

According to PAE, the contracting officer could not properly ignore the impact of this German statute on Ogden's proposed costs since he had recently been involved in a dispute about the applicability of the statute to a laundry services contract PAE performed for the Army in Germany.

The Army and Ogden respond that the application of section 613a to transfers of a service contract at a government-owned/contractor-operated facility such as an ERF is a controversial matter. In a telephone conference held on January 15 with all parties--including agency officials in Frankfurt and Heidelberg--the Army's expert on German labor law attempted to explain the application of section 613a to this contract, and the status of more than 100 lawsuits filed by former employees of PAE against Ogden. Each of these lawsuits has been filed against Ogden since the award of this contract, and each involves former PAE employees either asking to be hired by Ogden, or asking to be paid at the rate they were paid by PAE.

The Army's expert on German labor law stated that the highest court involved in the review of this statute (Germany's Federal Labor Court) has interpreted section 613a in an increasingly narrow fashion. As a result, the Army's expert stated that since a 1990 decision of the Federal Labor Court, the Army has taken the position that section 613a does not apply to its transfers of service contracts. Nonetheless, the Army's expert acknowledged that the lower court now considering these lawsuits pending against Ogden has ruled that the statute applies to this contract. If the employees prevail at the next level--the intermediate court, called the Labor Court of Appeals--Ogden will be required to comply with the statute unless and until the decision is overturned by the Federal Labor Court.

PAE's protest raises the issue of how much knowledge of foreign laws and practices will be imputed to a contracting officer evaluating proposals for award of a contract where performance will occur in a foreign country. While PAE does not suggest that contracting officers can be experts on foreign labor laws, PAE argues that this particular contracting officer was aware of the existence of the law and acted unreasonably in not making an upward adjustment to Ogden's proposed labor costs to bring them in line with the wages paid by PAE.

As the basis for imputing knowledge of section 613a to the contracting officer, PAE points to the dispute that arose from PAE's performance of a laundry services contract for the Army. At the expiration of PAE's period of performance, the Army had failed to award a new contract. During the period when no contract was in place, some entity--either PAE, the Army, or the new contractor--needed to take steps with regard to the continued employment or termination of the laundry employees. For reasons beyond the scope of this discussion, if section 613a was considered applicable to this situation, any termination benefits would have been much greater than the employees would have received otherwise. Rather than litigate the application of section 613a, the Army settled the dispute by agreeing to reimburse PAE for certain costs associated with terminating the employees. PAE argues, and the Army's counsel in Europe admits, that the benefits paid as a result of the settlement were closer to the level that would have been mandated if section 613a applied, than to the level that might have been paid if the statute did not apply.

Even though the contracting officer admittedly was aware of section 613a, we do not agree that he erred in failing to make an upward adjustment to Ogden's proposed labor costs based on the application of this statute.

As explained above, the Army states that it has been taking the position for more than 2 years that section 613a does not apply to the transfer of its service contracts. Since this position is based on its analysis of recent rulings of the highest labor court in Germany, we cannot say that it is unreasonable. In addition, we will not interpret the Army's settlement of the laundry services contract litigation as a tacit acknowledgement that the statute applies here. In any litigation there are many reasons why a party might choose to settle short of concluding that its own position has no merit, and, more specifically, there are several differences between that case and this one which limit the applicability of the settlement to this situation. Finally, the Army took steps during negotiations to ensure that Ogden was aware of, and considering the possible impact of, German labor laws. As a result of this action, Ogden's BAFO identified its German labor law specialist, and Ogden made its specialist available during discussions to address the agency's concerns that Ogden might be unaware of the possible impact of some of these laws.

Given that the applicability of the statute was at best unclear; that the Army's official position--based on a reasonable interpretation of the trend of the case law--is that the statute does not apply; and that the contracting officer recognized and raised the issue of the impact of German labor laws with Ogden during discussions, we find reasonable the agency's decision not to adjust Ogden's proposed labor costs as if the statute would apply.

The protest is denied.