TITLE: B-311245.2; B-311245.4, MCT JV, May 16, 2008
BNUMBER: B-311245.2; B-311245.4
DATE: May 16, 2008
********************************************
B-311245.2; B-311245.4, MCT JV, May 16, 2008
DOCUMENT FOR PUBLIC RELEASE
The decision issued on the date below was subject to a GAO Protective
Order. This redacted version has been approved for public release.
Decision
Matter of: MCT JV
File: B-311245.2; B-311245.4
Date: May 16, 2008
Terence Murphy, Esq., Patrick H. O'Donnell, Esq., and J. Bradley Reaves,
Esq., Kaufman & Canoles, P.C., for the protester.
Michael Katchmark, Esq., Michael C. Laurence, Esq., Gary A. Bryant, Esq.,
and Brett A. Spain, Esq., Willcox & Savage, P.C., for Metro Machine Corp.,
the intervenor.
Rhonda L. Russ, Esq., Naval Sea Systems Command, for the agency.
Edward Goldstein, Esq., and Christine S. Melody, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
1. Where, due to concerns about their negative effect on contract
performance, the solicitation instructed offerors not to propose
unrealistically low costs, and the awardee capped its indirect rates at
levels that the agency concluded were significantly below its costs,
protest is sustained because the agency failed to consider performance
risk associated with the awardee's decision to cap its indirect rates.
2. Discussions with protester regarding allocation of labor hours in its
cost proposal were not meaningful where the discussions did not
communicate that the agency was concerned about the protester's
inconsistent allocation of labor hours between its technical proposal and
cost proposal.
DECISION
MCT JV protests the award of a contract to Metro Machine Corp. under
request for proposals No. N00024-07-R-4006, issued by the Department of
the Navy, Naval Sea Systems Command (NAVSEA), for maintenance and
modernization work on LSD 41/49 Class ships (Navy amphibious assault
ships, commonly referred to as Dock Landing Ships) homeported in Norfolk,
VA. MCT JV challenges NAVSEA's cost realism and technical evaluations of
its own proposal and of the proposal submitted by Metro.
We sustain the protest.
Background
On December 15, 2006, NAVSEA issued the RFP, providing for the award of a
cost-plus-award-fee "multi-ship, multi-option (MSMO)" contract for
planning and performance of extended drydocking work, referred to as
"availabilities," in support of the "Midlife Sustainment Program" for LSD
Class ships homeported in Norfolk, VA.[1] Agency Report (AR) at 1, 3.
Generally, under an MSMO contract, each ship availability is a separate
option under the contract. In this case, the RFP provided for the award of
a base contract for the planning for the first scheduled availability, the
USS Gunston Hall (LSD-44)--the actual maintenance and modernization work
was an option under the base contract. In addition, the RFP provided for
options for six additional availabilities and the associated execution
planning for these availabilities over a 6-year period. RFP sect. B,
Schedule of Supplies or Services and Prices. In addition, as it relates to
the protest, the RFP included a 40 percent small business subcontracting
requirement for each availability and further specified that a "small
business offeror" is "not exempt" from the subcontracting requirement. RFP
at 68.
Offerors were informed that NAVSEA would make award to the offeror whose
proposal represented the best value to the government based on its
evaluation of offerors' proposals under two categories, technical and
cost, with overall technical merit being more important than cost. Within
the technical category, the RFP listed three factors in descending order
of importance: (1) management capability, (2) resource capabilities, and
(3) past performance. The past performance factor was further divided into
four equally important subfactors: (1) technical, (2) schedule, (3)
management, and (4) cost. In evaluating proposals under the management
capability and resource capabilities factors, the agency assigned
adjectival ratings of outstanding, very good, satisfactory, marginal, and
unsatisfactory. The adjectival scheme used to rate offerors' past
performance differed slightly, with the agency assigning ratings of
outstanding, good, satisfactory, neutral, marginal, or unsatisfactory.
Regarding its evaluation under the resource capabilities technical factor,
as it relates to the protest, the RFP required offerors to describe the
facility resources available to the offeror to accomplish the RFP
requirements as well as "manpower" and workload estimates in support of
the requirement established by the RFP.
Specifically, the RFP provided as follows:
1. Describe the total facility resources available to the organization.
Clearly indicate which facility resources, production and
administrative, are committed to the work effort, which facility
resources are committed to or proposed for other work efforts, and any
residual facility resources available. The Offeror must clearly
demonstrate that it has access to facilities required to execute this
contract. The Offeror must demonstrate how it will obtain required
production and administrative facilities, as well as permits and
certifications necessary to operate these facilities and perform the
work by contract award for the period of performance of this contract.
2. Describe the plan for phasing and allocation of facility resources
(piers, cranes, shops, lay down areas, parking etc).
3. Describe and provide consolidated manpower charts to support the work
projected from this MSMO solicitation.
4. Provide current and projected workload for all team members and/or
significant subcontractor(s).
5. Using consolidated manpower charts displaying total shipyard and
subcontractor workload, provide a plan to accommodate any peaks or
valleys in workload.
RFP at 116-17.
Under the past performance factor, the RFP provided that NAVSEA would
review "Contractor Performance Assessment Reporting System ratings (CPARS)
and other existing past performance information on relevant contracts . .
. " and that "[t]rends showing improving or deteriorating performance will
also be considered." RFP at 136-37. With regard to the past performance
cost subfactor, the RFP stated that the Navy would evaluate "the expected
risk that an Offeror will effectively forecast, manage and control cost
based upon an Offeror's past performance of previously awarded, relevant
contracts, and the effectiveness of any implemented or proposed corrective
actions." RFP at 137. The RFP further indicated that in evaluating past
performance, greater consideration would be given to contracts requiring
"the same or similar type and complexity of work required by the
solicitation" and expressly stated that past performance with "CNO [Chief
of Naval Operations] scheduled availabilities and continuous maintenance
contracts for Amphibious Warfare Class Ships" was considered to be "most
relevant." RFP at 136.
With respect to the evaluation of cost, because the actual defined work
for each availability is variable and will not be developed until after
award, the RFP instructed offerors to submit proposed estimated cost data
based upon a "notional work package." The notional work package included
"a sampling of specific work items expected to be performed under the
contract." AR at 4. In addition, offerors were required to submit proposed
estimated cost data based upon a non-specific work item, referred to as
"999-99-999," consisting of 635,916 labor hours for "other work." RFP at
127. NAVSEA included this work item to capture "the difference between the
number of [labor hours] included in a typical availability and the
Government estimate of [labor hours] for all other work items in the
notional work package." RFP at 124. Regarding this item, the RFP warned
offerors to ensure that "their cost proposals are in accordance with
proposed technical approaches, including any current or proposed work
sharing agreements. For example, if company `X' has an agreement that [it]
will subcontract 25% of the production effort to company `Y', the proposal
shall demonstrate that proposed costs accurately reflect this percentage."
RFP at 124-25.
The RFP indicated that NAVSEA would review each offeror's cost proposal in
order to assess and evaluate the realism of the offeror's estimated costs,
considering "proposed labor hours, labor rates, material costs, burden
rates and other costs . . . including Government estimates for: (1) direct
labor hours; (2) material costs; (3) direct labor costs; (4) overhead and
G&A [general and administrative] costs; and (5) any other costs which are
likely to be incurred by the Offeror in performance of the requirements of
the RFP." RFP at 137. The RFP provided that, on the basis of its
evaluation, NAVSEA's cost analysis panel (CAP) "will develop a `projected
cost to the Government' which represents, in the Government's judgment,
the overall cost . . . which will result from the Offeror's actual
performance of the contract requirements . . . ." Id. at 138.
Offerors were also warned not to propose unrealistically low estimated
costs. Specifically, the RFP stated as follows:
Experience in Navy programs indicates a contract awarded to a contractor
submitting an unrealistically low cost/price proposal (whether resulting
from a decision on the part of the contractor to submit a price below
anticipated costs . . . or other circumstances) may cause problems for
the Navy as well as the contractor during contract performance. . . .
Accordingly, Offerors are cautioned that SHOULD THE GOVERNMENT, IN THE
EXERCISE OF ITS JUDGMENT, DETERMINE THAT A COST PROPOSAL SUBMITTED IN
RESPONSE TO THIS SOLICITATION IS UNREALISTICALLY LOW, THE GOVERNMENT MAY
REJECT THE PROPOSAL, REGARDLESS OF ITS TECHNICAL MERIT AND/OR EVALUATED
COST TO THE GOVERNMENT.
Id.
NAVSEA received proposals from four offerors, including Metro and MCT
JV,[2] which were evaluated by the agency's technical evaluation review
panel (TERP) and CAP. Metro's and MCT JV's initial proposals were
evaluated as follows:
+------------------------------------------------------------------------+
| |Metro |MCT JV |
|---------------------------+----------------------+---------------------|
|Management Capability |[Deleted] |[Deleted] |
|---------------------------+----------------------+---------------------|
|Resource Capabilities |[Deleted] |[Deleted] |
|---------------------------+----------------------+---------------------|
|Past Performance |[Deleted] |[Deleted] |
|---------------------------+----------------------+---------------------|
|Proposed Cost |[Deleted] |[Deleted] |
|---------------------------+----------------------+---------------------|
|Projected Cost |[Deleted] |[Deleted] |
+------------------------------------------------------------------------+
AR at 6-7.
In rating MCT JV's proposal [Deleted] under the resource capabilities
factor, the TERP identified three major weaknesses. One of the major
weaknesses concerned the Colonna's dry-dock, which was proposed by MCT JV.
According to the TERP, the Colonna's "dry-dock [did] not appear to meet
the minimum requirements for dry-docking an LSD class ship." AR, Tab 4,
TERP Report, Mar. 22, 2007, encl. 4 at 6. In this regard, the TERP was
concerned that the Colonna's dry-dock was not certified to a high enough
capacity to lift LSD Class ships. A second major weakness concerned the
fact that MCT JV's proposal stated that [Deleted] percent of the
production work would be performed by MHI, but did not explain who would
be performing the remaining [Deleted] percent. Id. at 2.
Discussions were then conducted with the offerors. During discussions
NAVSEA identified its concerns regarding the Colonna's dry-dock and asked
MCT JV to explain how it intended to meet the dry-docking requirements. In
addition, NAVSEA asked MCT JV to "provide a breakdown for who will be
performing the [Deleted] percent of the production work that remains with
MHI performing [Deleted] percent." AR, Tab 7, MCT JV Technical Discussion,
at 1.
NAVSEA also raised several issues during discussions regarding MCT JV's
cost proposal. Among other things, NAVSEA questioned MCT JV's distribution
of work among the members of the joint venture. In this regard, NAVSEA
indicated that it calculated a distribution of labor hours among the three
members of MCT JV as follows: MHI [Deleted], Colonna's [Deleted], and
Tecnico [Deleted]. NAVSEA then asked MCT JV to explain why it did not
allocate work in accordance with a "resource agreement" which was part of
a separate proposal submitted under the solicitation by MHI as a prime
contractor, with Colonna's and Tecnico identified as subcontractors.
According to NAVSEA, under that resource agreement, MHI proposed the
following work assignments among its team members:
Targeted Work Assigned: MHI [Deleted], Colonna's [Deleted], Tecnico
[Deleted]
Minimum Work Assigned: MHI [Deleted], Colonna's [Deleted], Tecnico
[Deleted]
AR, Tab 7, MCT JV Cost Discussions, at 4-5.
The record reflects that MCT JV provided a copy of its joint venture
agreement with its proposal. This agreement established that ownership in
the joint venture would be apportioned with MHI having a majority stake of
[Deleted] percent, Colonna's owning [Deleted] percent, and Tecnico owning
[Deleted] percent. Regarding the allocation of work, the joint venture
agreement provided as follows:
[Deleted]
AR, Tab 39, MCT JV Cost Proposal, attach. E.1-1, at 4.
MCT JV submitted a revised proposal responding to the issues raised by
NAVSEA during discussions. As part of its response, MCT JV addressed the
CAP's question regarding its failure to allocate labor hours according to
the "resource agreement." In this regard, MCT JV explained that the
resource agreement did not apply to the joint venture; rather, it was part
of MHI's separately submitted proposal as a prime contractor. In contrast
to the resource agreement, MCT JV explained that the joint venture
agreement does not require the assignment of a specific percentage of work
to each partner; instead, it sets goals, requires that the dry-dock
related work be assigned to Colonna's, and defines the allocation of
profits based partially on work percentage assigned and partially on
ownership percentage in the joint venture. The CAP agreed with MCT JV's
answer, noting that the resource agreement did not apply to the joint
venture. AR, Tab 17, CAP Evaluation of Cost Proposal Discussions with MCT
JV at 22.
Regarding MCT JV's responses to the technical discussion questions, the
TERP determined that MCT JV adequately addressed its question regarding
the work allocation percentage in its technical proposal, where MCT JV
identified an allocation of [Deleted] percent for MHI, [Deleted] percent
for Colonna's, and [Deleted] percent for Tecnico, with the remaining
workload ([Deleted] percent) performed primarily by "specialty
subcontractors." AR, Tab 15, Final TERP Report for MCT JV, at 3. The
TERP's concerns regarding the adequacy of the Colonna's dry-dock, however,
remained. While MCT JV stated that its proposed dry-dock "has more than
enough lift capacity and reserve buoyancy to lift an LSD 41/LSD 49 Class
ship" and indicated that LSD class ships "can be safely docked in the
Colonna's dock with a margin of safety of 123% [Deleted]," NAVSEA found
the premise underlying MCT JV's conclusion to be erroneous and raised this
issue again with MCT JV. AR, Tab 8, MCT JV Response to Discussions at 13.
Specifically, in its second round of discussions with MCT JV, NAVSEA
stated:
Although acknowledging the fact that the MIL-STD-1625C(SH) Certificate
for Colonna's dry dock identifies a [Deleted] LT/ft. limit, MCT JV
contends that this is the "buoyancy rating" that applies to a ship
taking up the full length of the dock. Since the length of LSD Class
ships is less than the full length of the Colonna's dock, MHI believes
"the maximum structural loading of [Deleted] LT/ft. should be the basis
for acceptability."
MCT JV's analysis is not correct. The certified rating of [Deleted]
LT/ft. is based on buoyancy, but it is based on available buoyancy over
the length of the dock's keel block length that supports the ship. The
total lift capacity of [Deleted] Long Tons divided by the dock's keel
block length of 499 feet = [Deleted] LT/ft. The [Deleted] Long Tons lift
capacity is based on how much the dock can lift at a freeboard required
by MIL-STD-1625C(SH). Accordingly, the Colonna's dry dock does not meet
the solicitation's requirements.
AR, Tab 9, MCT JV's 2^nd Technical Discussions, at 2.
In responding to this second round of technical discussions, MCT JV was
able to demonstrate that the Colonna's dry-dock satisfied the required
lift capacity. In this regard, the TERP noted that additional information
provided by Colonna's, "including a different loading condition . . .
results in a linear load on the dock that is just under the NAVSEA
certified capacity of the dock." AR, Tab 15, Final TERP Report for MCT JV,
at 6. Colonna's also indicated that it would seek to have the limit of its
dry-dock raised in the future, thereby providing "more of a cushion in
case future ships come in heavier or with a different loading condition."
Id. As a consequence, the TERP revised MCT JV's rating under the resource
capabilities technical factor from unsatisfactory to satisfactory.
While the TERP found the Colonna's dry-dock to be acceptable, it noted
that the dry-dock presented a "moderate" degree of risk. This risk was
based on the lack of flexibility associated with the TERP's conclusion
that the dock provided a low "load lifting margin [of] [Deleted] percent."
Id. at 5.
As it relates to the protest, in its evaluation under the past performance
factor, the TERP considered CPARS reports regarding performance by the
offerors and their major subcontractors. With regard to Metro, the TERP
considered various CPARS reports, finding Metro's cost-reimbursable
contracts involving dry-docking work for amphibious warfare class ships to
be highly relevant. AR, Tab 15, TERP Report for Metro, Nov. 13, 2007,
encl. 3 at 6. As a general matter, the CPARS reports provided detailed
discussions of Metro's performance and under the technical subfactor,
Metro was rated in the reports overall as either "good" or "outstanding."
AR, Tab 22, Metro's CPARs. Considering these reports, NAVSEA noted several
strengths and weaknesses with Metro's past performance under the technical
subfactor. Specific weaknesses identified by the TERP included problems
during Metro's performance of a contract in connection with the USS
Shreveport in fiscal year (FY) 2005. The CPARS report indicated that Metro
had "improperly built keel blocks" and improperly moved three keel blocks
after a block check by the Navy. Notwithstanding these incidents, the
CPARS report in connection with this contract rated Metro's overall
technical performance as "good." Id. On one of the contracts identified as
of "high" relevance (USS Nashville FY 2004), the CPARS report reflected an
overall technical score for Metro of "outstanding." Id. In addition,
regarding the cost subfactor, the CPARS reports reflected ratings for
Metro of "good" and "outstanding." Id.
Prior to the submission of final proposals, NAVSEA amended the RFP to
require offerors to cap their indirect rates for at least the first 3
years of contract performance at the rates in their cost proposals. RFP
amend. 8. This change had significant consequences in NAVSEA's cost
evaluation. In its final cost proposal, Metro capped its indirect rates
[Deleted]. Specifically, with regard to its overhead rate, Metro proposed
a capped rate of [Deleted]. For [Deleted], Metro proposed uncapped rates
of [Deleted]. For its G&A rate, Metro proposed a capped rate of [Deleted].
The CAP found Metro's rates to be low since they were "significantly lower
than [Metro's] current provisional billing rates of [Deleted] overhead and
[Deleted] G&A"; however, because the rates were capped, the CAP limited
its adjustments to those years where the rates were not capped. AR, Tab 16
Final CAP Report at 13. In adjusting Metro's uncapped overhead rates, the
CAP utilized Metro's higher FY 2008 forward pricing rate agreement (FPRA)
rates.
In its report the CAP noted that Metro "may experience greater indirect
cost[] rates than projected that could result in an operating loss. This
is a risk that the Government may have to deal with after contract award
if Metro is the successful offeror." Id.
NAVSEA took the additional step of requesting an audit on Metro's
financial condition and capability from the Defense Contract Audit Agency
(DCAA). DCAA's audit opinion indicated as follows:
[Deleted]
AR, Tab 16, DCAA Audit Report of Metro's Financial Capability, at 3-4.
In its audit report, DCAA also noted various efforts identified by Metro
to reduce its costs and indirect rates, to include, among other things:
[Deleted]. DCAA indicated that it was unable to determine what, if any,
impact these changes would have on Metro's financial condition. Id. at 6.
The final CAP report also addressed issues concerning MCT JV's final
proposed allocation of work among the members of the joint venture.
Regarding MCT JV's allocation of work among its partners for the notional
work packages and item 999-99-999, NAVSEA noted that, in its final
proposal, MCT JV allocated total labor hours as follows: [Deleted] percent
to MHI, [Deleted] percent to Colonna's, and [Deleted] percent to Tecnico,
with [Deleted] percent to other subcontractors. NAVSEA revised MCT JV's
cost in a "manner to produce a result more closely aligned with the [joint
venture] agreement, also taking into consideration the response to
technical discussions regarding work percentages provided by MCT JV." AR,
Tab 16, Final CAP Report, at 24. In reallocating MCT JV's labor hours,
NAVSEA specifically noted the fact that during discussions, MCT JV had
indicated that MHI would provide [Deleted] percent of the direct execution
of the labor, Colonna's would provide [Deleted] percent, and Tecnico would
provide [Deleted] percent, with the remaining [Deleted] percent performed
by "specialty subcontractors." In addition, NAVSEA considered that under
the terms of the joint venture agreement, work would be distributed to the
owners pro-rata based on their ownership interests (MHI [Deleted],
Colonna's [Deleted], and Tecnico [Deleted]). Based on its analysis, NAVSEA
allocated [Deleted] percent of the total projected labor hours to MHI,
[Deleted] percent to Colonna's, [Deleted] percent to Tecnico, and
[Deleted] percent to other subcontractors.
This reallocation differed drastically from MCT JV's allocation for item
999-99-999, where MCT JV proposed [Deleted] hours (approximately [Deleted]
percent) of the 635,916 hours for the members of the joint venture at
their respective labor rates,[3] with the remaining [Deleted] hours
(approximately [Deleted] percent) allocated to subcontractors with a
significantly lower hourly labor rate of [Deleted]. AR, Tab 40, MCT JV
Final Cost Proposal, encl. E-1.
In evaluating offerors' final proposal revisions, NAVSEA assigned Metro
and MCT JV the following technical scores and projected costs:
+------------------------------------------------------------------------+
| |Metro |MCT JV |
|---------------------------+-----------------------+--------------------|
|Management Capability |Very Good |[Deleted] |
|---------------------------+-----------------------+--------------------|
|Resource Capability |Outstanding |[Deleted] |
|---------------------------+-----------------------+--------------------|
|Past Performance |Outstanding |[Deleted] |
|---------------------------+-----------------------+--------------------|
|Proposed Cost |$288,159,874 |[Deleted] |
|---------------------------+-----------------------+--------------------|
|Projected Cost |$298,056,509 |[Deleted] |
+------------------------------------------------------------------------+
AR at 8.
As part of its best value decision process, NAVSEA established a best
value advisory counsel (BVAC), which analyzed and compared the evaluations
of the various proposals. In its report, the BVAC concluded that, as
compared with the proposal submitted by MCT JV, Metro's proposal was
stronger "by far" in terms of technical merit since MCT JV "lack[ed] many
of the strengths found in the Metro proposal." AR, Tab 26, BVAC Report, at
9. The BVAC expressly found that Metro's proposal reflected "low risk"
based on various identified strengths, without any weaknesses. Id. The
BVAC further highlighted Metro's "extensive experience working on
amphibious warfare class ships, in performing availabilities of the size
and scope contemplated under this contract as a prime contractor, and in
performing under cost-reimbursable MSMO type contracts" as compared with
MCT JV's relative lack of experience. Id. In addition, the BVAC indicated
that MCT JV's proposed use of the Colonna's dry-dock increased the risk of
unsuccessful completion and mitigated any potential evaluated cost
savings. Specifically, the BVAC indicated that LSD Class ships [Deleted],
which "can potentially cause some disruption of schedule, increased cost
or degradation of performance." Id. at 7.
Based on this assessment, the BVAC recommended selection of Metro's
proposal as the best value. In addition, the BVAC noted that the evaluated
costs for MCT JV were based in part upon NAVSEA's reallocation of hours
between the joint venture partners. According to the BVAC, even assuming
the allocation proposed by MCT JV, which would result in a lower projected
cost of [Deleted] for MCT JV, Metro's proposal would remain the best
value. The source selection authority (SSA) agreed with the findings of
the BVAC and selected Metro for award. Upon learning of the agency's
decision, and after obtaining a debriefing, MCT JV filed its protest with
our Office.
Analysis
In its protest, MCT JV argues that NAVSEA's cost evaluation was flawed
because NAVSEA: (1) failed to consider, as required by the solicitation,
the implications of Metro capping its indirect rates at unrealistically
low levels; and (2) unreasonably reallocated MCT JV's proposed allocation
of 635,916 labor hours under work item 999-99-999.[4] Regarding NAVSEA's
technical evaluation, the protester argues that, under the resource
capabilities factor, the agency improperly determined that the Colonna's
dry-dock presented moderate risk. Under the past performance factor, MCT
JV asserts that NAVSEA's evaluation of Metro was flawed because it failed
to consider Metro's history of dry-docking problems, which resulted in the
decertification of Metro's dry-dock, as well as Metro's record of
"substantial cost overruns." Protester's Comments, Mar. 31, 2008, at 17.
The protester also argues that NAVSEA's discussions with MCT JV were not
meaningful regarding its proposed allocation of labor hours and its
concerns regarding Colonna's dry-dock. In light of these alleged errors,
the protester also challenges the agency's best-value decision.
Cost Evaluation
When an agency evaluates proposals for the award of a cost-reimbursement
contract, an offeror's proposed estimated cost of contract performance is
not considered controlling since, regardless of the costs proposed by an
offeror, the government is bound to pay the contractor its actual and
allowable costs. Hanford Envtl. Health Found., B-292858.2, B-292858.5,
Apr. 7, 2004, 2004 CPD para. 164 at 9; PADCO, Inc.--Costs, B-289096.3, May
3, 2002, 2002 CPD para. 135 at 5; see Federal Acquisition Regulation (FAR)
sect. 16.301. As a result, a cost realism analysis is required to
determine the extent to which an offeror's proposed costs represent the
offeror's likely costs in performing the contract under the offeror's
technical approach, assuming reasonable economy and efficiency. FAR
sections 15.305(a)(1), 15.404-1(d)(1), (2); The Futures Group Int'l,
B-281274.2, Mar. 3, 1999, 2000 CPD para. 147 at 3. A cost realism analysis
involves independently reviewing and evaluating specific elements of each
offeror's cost estimate to determine whether the estimated proposed cost
elements are realistic for the work to be performed, reflect a clear
understanding of the requirements, and are consistent with the unique
methods of performance and materials described in the offeror's proposal.
FAR sect. 15.404-1(d)(1); Advanced Commc'ns. Sys., Inc., B-283650 et al.,
Dec. 16, 1999, 2000 CPD para. 3 at 5. Based on the results of the cost
realism analysis, an offeror's proposed costs should be adjusted when
appropriate. FAR sect. 15.404-1(d)(2)(ii).
The evaluation of competing cost proposals requires the exercise of
informed judgment by the contracting agency. We review an agency's
judgment in this area only to see that the agency's cost realism
evaluation was reasonably based and not arbitrary. Jacobs COGEMA, LLC,
B-290125.2, B-290125.3, Dec. 18, 2002, 2003 CPD para. 16 at 26. An
agency's cost realism analysis need not achieve scientific certainty;
rather, the methodology employed must be reasonably adequate and provide
some measure of confidence that the agency's conclusions about the most
probable costs under an offeror's proposal are reasonable and realistic in
view of other cost information reasonably available to the agency as of
the time of its evaluation. See Metro Mach. Corp., B-295744, B-295744.2,
Apr. 21, 2005, 2005 CPD para. 112 at 10-11.
The protester argues that NAVSEA unreasonably accepted Metro's
unrealistically low capped indirect rates and failed to consider the risk
presented by these low capped rates in determining that Metro's proposal
represented the best value to the government. According to the protester,
this was contrary to the terms of the solicitation, which expressly stated
that the agency would perform a cost realism evaluation and admonished
offerors not to submit unrealistically low costs. In support of this
allegation, the protester highlights the fact that Metro proposed indirect
rates (overhead and G&A) at levels below its forward pricing rates, as
well as the then-current information the agency had regarding Metro's
indirect rates. Because Metro capped its indirect rates at such
unrealistically low levels, the protester alleges that Metro will be
operating at a loss under the contract and that the agency failed to
properly consider this risk in its selection of Metro for award.
The agency essentially argues that because Metro capped its indirect
rates, upward adjustment to Metro's rates was not warranted; any decision
about Metro's ability to perform at the rates capped below actual costs is
solely a matter concerning Metro's responsibility; and it in fact
considered Metro's ability to perform at the capped rates as part of its
affirmative responsibility determination.
As a general matter, the contractor bears the risk of cost overruns for a
particular category or type of work in a cost-reimbursement contract when
the contractor agrees to a cap or ceiling on its reimbursement for that
category or type of work. Thus, when offerors propose such caps, and no
other issue calls into question the effectiveness of the cap, upward
adjustments to capped costs are improper. Vitro Corp., B-247734.3, Sept.
24, 1992, 92-2 CPD para. 202 at 7. Here, there is nothing in the record to
suggest that the rate caps proposed by Metro were in any way illusory;
thus, we agree with the agency's contention that it was not required to
upwardly adjust Metro's capped indirect rates, notwithstanding the fact
that the agency itself found Metro's capped rates to be "significantly"
lower than its then-current rates.[5]
Nevertheless, the agency could not simply ignore the risk presented by
these capped rates in concluding that Metro's proposal was the best value.
As noted previously, the solicitation expressly admonished offerors not to
propose unrealistically low costs because of NAVSEA's concern that a
proposal with unrealistically low costs due to an offeror's decision to
submit a proposal below its anticipated costs "may cause problems for the
Navy as well as the contractor during contract performance." RFP at 138.
Recognizing that the capped indirect rates proposed by Metro shifted the
risk of cost overruns for those rates entirely to Metro, the imposition of
the cap in fact exacerbated the issues identified by DCAA regarding
Metro's financial condition [Deleted], and thereby further hampering its
ability to perform under its government contracts--the very concern
articulated in the RFP. While NAVSEA was clearly aware of the concerns
regarding Metro's financial situation, and the fact that the rate caps
would potentially place Metro [Deleted], thereby potentially affecting its
performance under the contract, the agency failed to consider the risks
posed by Metro's low rates.
NAVSEA argues that the issue of Metro's ability to perform at its capped
rates was solely a matter concerning Metro's responsibility, a matter
which the protester did not challenge, and was expressly considered as
part of that determination. While we agree that, as a general matter, a
decision about an awardee's ability to perform a contract at rates capped
below actual costs is a matter of an offeror's responsibility, see, e.g.,
Vitro Corp., supra, at 7; Halifax Tech. Serv., Inc., B-246236.6 et al.,
Jan. 24, 1994, 94-1 CPD para. 30 at 9, where, as here, the solicitation
expressly instructs offerors not to submit unrealistically low costs or
prices, the risk stemming from an offeror's decision to propose
unrealistically low capped rates is a matter for the agency's
consideration in the context of its evaluation of proposals and source
selection decision process. The agency's failure to consider Metro's
capping of its rates in that context was inconsistent with the terms of
the solicitation.[6] We therefore sustain the protest in this regard.
Turning to NAVSEA's evaluation of the cost proposal submitted by MCT JV,
while we find that the agency had reasonable concerns about MCT JV's
allocation of labor hours in its cost proposal, we conclude that the
agency's discussions regarding this matter were not meaningful.
Specifically, the record reflects a wide disparity between MCT JV's
proposed allocation of labor hours in its technical proposal and the
allocation of labor hours in its cost proposal. As noted above, in its
technical proposal MCT JV allocated [Deleted] percent of the labor hours
to MHI, [Deleted] percent to Colonna's, [Deleted] percent to Tecnico, and
the remaining [Deleted] percent to other specialty subcontractors. NAVSEA,
however, determined that MCT JV's final cost proposal reflected an
allocation of [Deleted] percent of the total labor hours to MHI, [Deleted]
percent to Colonna's, [Deleted] percent to Tecnico, and [Deleted] percent
to other subcontractors. The [Deleted] percent allocation to other
subcontractors had the effect of significantly reducing MCT JV's estimated
cost since MCT JV proposed a significantly lower labor rate for those
subcontractors.
In its protest, MCT JV specifically complains that NAVSEA's reallocation
of its labor hours under item 999-99-999--where the disparity between
MCT-JV's allocation of labor hours between its technical proposal and cost
proposal is even greater--was unreasonable. As noted above, under item
999-99-999, MCT JV allocated only [Deleted] percent of the work to its
partners and [Deleted] percent to "other subcontractors." Because item
999-99-999 represented approximately [Deleted] percent of the total
projected labor hours used to estimate MCT JV's total cost, by allocating
[Deleted] percent of these labor hours to a category of other
subcontractors with a significantly lower labor rate, MCT JV was able to
significantly reduce its estimated cost.[7] This extensive reliance on
subcontractors for the purpose of calculating its total estimated cost,
however, was clearly at odds with MCT JV's technical proposal, which
indicated that MCT JV would allocate a much smaller percentage [Deleted]
of the work to specialty subcontractors.
NAVSEA was thus presented with a situation similar to the one it faced in
Metro Mach. Corp., B-297879.2, May 3, 2006, 2006 CPD para. 80, where an
offeror attempted to reduce its total estimated cost by allocating all of
its labor hours for notional work items to its team member with the lowest
labor rate, notwithstanding the fact that the entire team would be
performing the actual work under the contract. In that case, we held that
the Navy's cost realism evaluation was unreasonable because the Navy
accepted the proposed allocation without further question and thus failed
to consider the impact of the team members' higher rates in determining
the offeror's probable cost of performance under the contract. In response
to our decision in Metro, NAVSEA included item 999-99-999 to capture the
total labor effort of a typical availability when combined with the
specific notional work items identified in the RFP, and instructed
offerors to ensure that their labor hour allocations for this item were
consistent with their proposed technical approaches. AR at 23-24; RFP at
124-25.
While we commend NAVSEA's efforts to adjust MCT JV's allocation of labor
hours to reflect a labor mix that was more consistent with its technical
proposal and MCT JV's joint venture agreement, and therefore reflective of
a more realistic total probable cost for MCT JV, given our conclusion,
discussed below, that NAVSEA's discussions with MCT JV regarding its
concerns in this regard were fundamentally flawed, any allegation
regarding the propriety of NAVSEA's reallocation is academic at this
juncture.
It is a fundamental precept of negotiated procurements that discussions,
when conducted, must be meaningful, that is, sufficiently detailed so as
to lead an offeror into the areas of its proposal requiring
amplification or revision. Smiths Detection, Inc., B-298838, B-298838.2,
Dec. 22, 2006, 2007 CPD para. 5 at 12; Symplicity Corp., B-297060, Nov. 8,
2005, 2005 CPD para. 203 at 8. Further, an agency may not mislead an
offeror--through the framing of a discussion question or otherwise--into
responding in a manner that does not address the agency's concerns, or
misinform the offeror concerning a problem with its proposal or about the
government's requirements. Multimax, Inc., et al., B-298249.6 et al., Oct.
24, 2006, 2006 CPD para. 165 at 12; Metro Mach. Corp., B-281872 et al.,
Apr. 22, 1999, 99-1 CPD para. 101 at 6.
Here, the record reflects that with respect to the allocation of labor
hours in MCT JV's cost proposal, NAVSEA asked MCT JV to explain why the
allocation was inconsistent with its "resource agreement." As noted above,
MCT JV responded that the resource agreement did not apply to its
proposal; rather, it was an agreement among MHI, Colonna's, and Tecnico
relating to a separate proposal submitted by MHI as the prime contractor.
The record further reflects that the CAP accepted MCT JV's response,
agreeing that the resource agreement did not apply to the joint venture.
Thus, by questioning MCT JV's allocation of labor hours in its cost
proposal solely by reference to a resource agreement that by its terms did
not apply to this proposal, NAVSEA never conveyed to MCT JV its actual
concern--that the labor hour allocation in the cost proposal appeared to
be inconsistent with its technical proposal and joint venture
agreement.[8] Accordingly, we find that the agency's discussions in this
regard were misleading and therefore not meaningful.
Technical Evaluation
MCT JV also challenges NAVSEA's findings regarding the Colonna's dry-dock
and argues that the agency failed to raise its dry-dock concerns in
discussions. The protester also argues that the evaluation of Metro's past
performance was flawed because the agency failed to consider Metro's
history of problems with its dry-dock and contract cost overruns. We find
the protester's contentions regarding these issues to be without merit.
In reviewing an agency's evaluation, we will not reevaluate technical
proposals or style='mso-bidi-font-size:12.0pt'> substitute our judgment
for reasonably based past performance ratings; rather, we will examine the
agency's evaluation to ensure that it was reasonable and consistent with
the solicitation's stated evaluation criteria. United Paradyne Corp.,
B-297758, Mar. 10, 2006, 2006 CPD para. 47 at 4; L-3 Commc'ns. Westwood
Corp., B-295126, Jan. 19, 2005, 2005 CPD para. 30 at 5. Here, MCT JV
argues that the Navy's concerns regarding the load lifting margin of the
Colonna's dry-dock are unfounded because NAVSEA failed to consider "the
benefits of using a stern tower to reduce the load per foot and the risk
of overloading." Protester's Comments, Mar. 31, 2008, at 9. MCT JV,
however, never proposed using stern towers as part of its technical
proposal to increase load lifting capacity and reduce the risk of
overloading, notwithstanding the fact that the solicitation required
offerors to "[d]escribe the total facility resources available to the
organization." RFP at 116. As a consequence, there was no basis for NAVSEA
to consider the use of stern towers as part of its evaluation.
MCT JV also faults NAVSEA for not raising its concerns regarding the risks
and lack of flexibility associated with the Colonna's dry-dock in
discussions. Having held several rounds of discussions to enable MCT JV to
establish that the Colonna's
dry-dock met minimum requirements for acceptability, the agency was not
required to continue to engage in additional rounds of discussions to
address its concerns stemming from the [Deleted] level of acceptability of
the Colonna's dry-dock achieved as a consequence of NAVSEA's prior rounds
of discussions. Metson Marine Servs., Inc., B-299705, July 20, 2007, 2007
CPD para. 159 at 5; Metro Mach. Corp., supra, 2005 CPD para. 112 at 19.
Regarding NAVSEA's evaluation of Metro's past performance, MCT JV argues
that NAVSEA failed to consider information concerning Metro's dry-dock
problems, which was close at hand. In this regard, the protester presented
information concerning the suspension of Metro's dry-dock certification
for a short period in 2005 and evidence that an advisor to the TERP was
aware of Metro's suspension and the underlying circumstances. The
protester alleges that the agency failed to consider this "close-at-hand"
information since the evaluation record is devoid of any mention of
Metro's suspension.
The protester's argument in this regard in an elevation of form over
substance. While the evaluation record does not specifically mention
Metro's suspension or the specific dry-docking issues identified by the
protester, it does reflect that by considering Metro's CPARS reports,
NAVSEA specifically considered the underlying facts that led to the
suspension. Based on the information in these reports NAVSEA noted as a
past performance weakness for Metro the specific incidents that led to the
suspension. NAVSEA also considered the fact that the overall CPARS rating
for Metro in connection with this report was in fact positive, reflecting
an overall technical rating of "good." AR, Tab 22, CPARS Reports for
Metro. We conclude that, having considered Metro's performance, in its
entirety, as reflected through the completed final CPARS reports regarding
Metro's performance, the agency's evaluation of Metro's past performance
was not unreasonable.
MCT JV raises a similar argument concerning Metro's alleged history of
cost overruns on its government contracts, noting that [Deleted]. The
protester argues that the agency failed to properly consider this
information in its evaluation of Metro's proposal under the past
performance subfactor for cost. While the applicable DCAA report did note
that Metro was [Deleted] for three contracts, the report did not in fact
establish that Metro would bill the government for those instances where
it had exceeded applicable funding limits, nor did the reports discuss any
of the underlying facts surrounding these limited overruns.[9] Given the
extensive CPARs information considered by NAVSEA--in the five most
relevant CPARS reports considered by NAVASEA, Metro was rated as either
"good" or "outstanding" for cost--we have no basis to conclude that the
agency's evaluation of Metro's proposal as "good" under the cost subfactor
was unreasonable.
Recommendation
We sustain the protest on the basis that the agency's evaluation of
Metro's proposal was improper because it failed in its source selection
decision to consider the risk of Metro's low capped indirect rates on its
ability to perform under the contract. In addition, we sustain the protest
because the agency failed to conduct meaningful discussions with the
protester regarding the agency's concerns about the protester's allocation
of labor hours in its cost proposal. We recommend that the Navy hold
discussions in order to more accurately gauge the impact of Metro's capped
indirect rates on its ability to perform the contract and to address its
concerns regarding the protester's allocation of labor hours in its cost
proposal, and reevaluate proposals in light of this information. The Navy
should also make a new source selection decision. If, after the new
evaluation, the agency determines that another firm's proposal represents
the best value to the government, the agency should terminate Metro's
contract and make a new award.[10] We further recommend that the agency
reimburse the protester the reasonable costs of pursuing its protest,
including reasonable attorneys' fees. The protester's certified claim for
costs, detailing the time expended and the costs incurred on this protest,
must be submitted to the agency within 60 days of receiving this decision.
4 C.F.R. sect. 21.8(f)(1) (2008).
The protest is sustained.
Gary L. Kepplinger
General Counsel
------------------------
[1] According to NAVSEA, during each midlife availability, in addition to
required maintenance and repairs, ship upgrades will be accomplished in
several areas, including "Hull, Mechanical & Electrical [] Systems;
Command, Control, Communications, Computers, Combat Systems and
Intelligence; Force Protection; Technology Insertion; Mission Support; and
Survivability." Agency Report (AR) at 3.
[2] MCT JV is a joint venture comprised of three firms: Marine Hydraulics
International, Inc. (MHI), Colonna's Shipyard, Inc., and Tecnico Corp.
[3] For FY 2007, MHI's proposed composite production labor rate was
[Deleted], Colonna's rate, [Deleted], and Tecnico's composite labor rate
was [Deleted]. AR, Tab 40, MCT JV's Final Cost Proposal Revision, encl.
E-1.
[4] The protester raised several other issues concerning the agency's cost
evaluation, which were subsequently conceded by the protester or
abandoned. With respect to other issues, the agency agreed that it erred
in estimating certain costs, but argued that the errors could not have
been prejudicial given the cost disparity between the two proposals. For
example, MCT JV challenged the agency's upward adjustment to the G&A rate
of the joint venture, arguing that it resulted in double-counting of G&A
costs. The agency conceded that its methodology double-counted G&A, but
argued, based upon a post-hoc revised analysis, that the cost impact was
less significant than that argued by the protester and was not
prejudicial. Given that we are sustaining the protest and recommending
that the agency make a new source selection decision, the agency should
address its admitted errors in evaluating the offerors' cost proposals as
part of the corrective action it takes in response to our decision.
[5] In addition, to the extent the protester argues that the agency failed
to properly evaluate Metro's indirect rates for the years that they were
not capped, we find the protest to be without merit since the protester
has not established that the agency acted unreasonably in adjusting
Metro's indirect rates for those years to those established under Metro's
FPRA. See Jonathan Corp., B-230971, Aug. 11, 1988, 88-2 CPD para. 133 at
9-10.
[6] In response to this issue, NAVSEA also argues that the risk to the
government of poor performance by Metro is low since each availability is
an option and the Navy can simply decide not to exercise an option if it
experiences problems with Metro's performance. Setting aside the fact that
this contention reflects NAVSEA's post-hoc judgment, which is not
reflected in the contemporaneous evaluation record, it is fundamentally
inconsistent with the RFP's evaluation scheme, which required NAVSEA to
evaluate "all options," and NAVSEA's stated desire to avoid performance
problems resulting from offerors submitting unrealistically low cost
proposals. RFP at 138.
[7] NAVSEA projected a total of [Deleted] labor hours for MCT JV based on
the notional work items and item 999-99-999 (MCT JV proposed [Deleted]
labor hours). AR, Tab 16, Final CAP Report for MCT JV, at 24. As noted
above, item 999-99-999, by the terms of the RFP, comprised 635,916 of the
total labor hours. Given that item 999-99-999 represented a relatively
large percent of the total labor hours, MCT JV's disparate allocation for
this item had the effect of skewing NAVSEA's calculation of MCT JV's
allocation of the total-labor hour effort. If one were to exclude item
999-99-999, and consider only MCT JV's allocation of labor hours for the
notional work items, MCT JV's allocation reflects a subcontractor
allocation of approximately [Deleted] percent, which is more consistent
with the [Deleted] percent allocation in its technical proposal.
[8] NAVSEA argued that the resource agreement was in fact relevant to and
considered as part of its reallocation analysis. This argument, however,
is inconsistent with the contemporaneous record, which shows that the CAP
concluded that the resource agreement did not apply to the joint venture
and that the reallocation analysis only discusses MCT JV's technical
proposal and the joint venture agreement. Moreover, it is simply
unreasonable to conclude that the agreement was relevant, given that it
was submitted as part of a separate proposal and did not apply to the
joint venture.
[9] DCAA indicated that on one contract Metro had [Deleted]. AR, Tab 16,
DCAA Audit Report of Metro, Oct. 15, 2007, at 6.
[10] During the course of the protest, the Navy notified our Office and
the protester that it had decided to proceed with performance of the
contract awarded to Metro on the basis that continued performance was
justified by "urgent and compelling circumstances" which significantly
affect the interest of the United States. Letter from NAVSEA to GAO, Feb.
27, 2008. Given that the contract requires performance with respect to
numerous scheduled availabilities over a 7-year period, we believe that
our recommendation can be implemented and meaningful relief attained
notwithstanding the Navy's decision to allow Metro to proceed with
performance.