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Inconsistent Decisions?

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Don Mansfield

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In TYBRIN Corporation, B-298364.6; B-298364.7, March 13,2007, the GAO held that an offeror's cost estimate that indicated that it would not perform 51% of the contract work on a small business set-aside rendered the offer unacceptable, even though the offeror did not explicitly take exception to the solicitation's limitation on subcontracting clause (FAR 52.219-14) and the SBA granted the offeror a certificate of competency. The GAO reasoned as follows:

[T]he issue here does not concern whether a bidder or offeror can or will comply with the subcontracting limitation requirement during performance of the contract (where we recognize that the matter is one of responsibility (or in certain cases, contract administration, see, e.g., Raloid Corp., B‑297176, Nov. 10, 2005, 2005 CPD para. 205 at 4)), but rather, whether the bidder or offeror has specifically taken exception to the subcontracting limitation requirement on the face of its bid or proposal. Given that the determination in this latter, limited circumstance involves the evaluation of a bid or proposal for compliance with a material term of the solicitation, the determination is one of responsiveness or acceptability, rather than responsibility.

As a result, the Air Force reopened discussions with offerors and sought revised proposals. This action was unsuccessfully challenged in the Court of Federal Claims (see The Centech Group, Inc., v. U. S. and Tybrin, Inc., 07-513C, Filed December 7, 2007, Refiled December 13, 2007) and unsuccessfully appealed to Court of Appeals for the Federal Circuit (The Centech Group, Inc., v. U. S. and Tybrin Corporation, No. 08-5031, February 3, 2009).

Thus, it would seem that we have a general rule that if information in a cost estimate indicates that an offeror will not comply with a material term of a solicitation, then the offeror has implicitly taken exception to that term of the solicitation, which would make their offer unacceptable (or nonresponsive).

However, in Group GPS Multimedia, B-310716, January 22, 2008, the opposite conclusion was reached. In that case, the successful offeror submitted a cost estimate that contained a proposed labor rate that was below the labor rate stated in the Department of Labor Wage Determination (the contract would be subject to the Service Contract Act). The protester argued that this gave the awardee an unfair price advantage. The GAO held as follows:

On a fixed-price contract, as here, under which the awardee is required to pay the actual SCA wages and benefits out of whatever price it offers, and where the proposal contains no indication that the company will not meet its statutory obligations in this regard, labor rates or benefits that are less than the SCA-required rates or benefits may constitute a below-cost offer but one which is legally unobjectionable. Biospherics, Inc., B-285065, July 13, 2000, 2000 CPD para. 118 at 12. That is, regardless of what wage rates K-MAR used in calculating its proposed price, it will still be required to compensate its employees at the appropriate prescribed SCA wage rates. Free State Reporting Inc., B-259650, Apr. 4, 1995, 95-1 CPD para. 199 at 7. Further, the determination of prevailing wages and fringe benefits, and the issuance of appropriate wage determinations under the SCA, are matters for the Department of Labor (DOL). Concerns with regard to establishing proper wage rate determinations or the application of the statutory requirements should be raised with the Wage and Hour Division in DOL, the agency that is statutorily charged with the implementation of the Act. See 41 U.S.C. sections 353(a); 40 U.S.C. sect. 276a; SAGE Sys. Techs., LLC, B-310155, Nov. 29, 2007, 2007 CPD para. 219 at 3. Thus, to the extent the protester?s contention is that K-MAR may not properly categorize its employees under the SCA or compensate some of its employees at the required SCA wage rate, it is not a matter for our consideration, since the responsibility for the administration and enforcement of the SCA is vested in DOL, not our Office, and whether contract requirements are met is a matter of contract administration, which is the function of the contracting agency. SAGE Sys. Techs., LLC, supra; Free State Reporting Inc., supra, at 7 n.7.

This raises several questions. Why wouldn't a cost estimate that contains proposed labor rates below the SCA-minimum labor rates render an offer unacceptable, but a cost estimate that shows an offeror performing less than 51% of the contract work on a small business set-aside would? In neither circumstance does the cost estimate indicate compliance with a material term of the solicitation (the Limitation on Subcontracting clause and the Service Contract Act, respectively). Yet, we have different results. Is compliance with the Limitation on Subcontracting clause a special case? If so, why? Or is proposed compliance with the SCA (as evidenced in a cost proposal) a special exception to the rule? If so, why?

Any ideas?

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Interesting... I had a similar issue on a T&M contract; where I had asked for a breakdown of labor and fringe, along with their indirect rates. I had requested the info to ensure both compliance with the SCA and the limitation on sub-contracting.

To me, it made perfect sense to determine that the vendor had taken exception to a material requirement of the solicitation (Pay the rates required by the SCA). The vendor clearly demonstrated that they did not know what the WD rate and fringe requirements were (even though the WD was included in the solicitation, referenced numerous times in the amendments, and the issue was specifically addressed during discussions with the firm).

After the protest was filed, someone pointed out to me that a company is free to take a loss on a contract and that we would be able to drop the hammer on them after the first invoice (contract administration) if they weren't paying the correct rates.

Fortunately the protest was dismissed for being late; otherwise you may have had another case to cite.

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Guest Vern Edwards

Posted

Don, I think you have mischaracterized the facts of the case and the GAO's decision. You said:

[T]he GAO held that an offeror's cost estimate that indicated that it would not perform 51% of the contract work on a small business set-aside rendered the offer unacceptable, even though the offeror did not explicitly take exception to the solicitation's limitation on subcontracting clause... .

That is not what happened. According to the decision:

TYBRIN argued, among other things, that CENTECH?s proposal should have been found unacceptable by the agency because the proposal provided that approximately 44 percent of the cost of contract performance incurred for personnel would be for CENTECH personnel, with the remaining 56 percent of the cost of contract performance for personnel being incurred for CENTECH?s subcontractors.

In response, the Air Force conceded that CENTECH?s proposal provided that only 43.2 percent of the cost of contract performance incurred for personnel would be for CENTECH personnel. The Air Force noted, however, that two of CENTECH?s proposed subcontractors were also small businesses, and that an additional 23 percent of the cost of contract performance incurred for personnel would be for the personnel of these two small businesses. The Air Force concluded that because CENTECH?s proposal provided that the ?collective efforts? of CENTECH and its small business subcontractors would amount to ?66.2% of the cost of contract performance for personnel,? the proposal evidenced compliance with the Limitation on Subcontracting clause.

As support for this conclusion, the Air Force pointed to a memorandum issued by the Air Force Materiel Command (AFMC) on August 17, 2004, entitled ?Policy Coverage and Rationale for Interpretation to Allow Small Business Prime Contractors and First Tier Small Business Subcontractors to Perform the Minimum Work in the ?Limitation on Subcontracting? Rule.? This memorandum provided an analysis of the Limitation on Subcontracting clause, FAR sect. 52.219-14(B)(1), and essentially concluded that the performance of work requirement imposed by that clause could be ?met by the cooperative efforts of the small business prime contractor and the small business members of the subcontractor group.?...

T]he record reflects that CENTECH submitted its proposal with the understanding that it would be found to meet or exceed the subcontracting limitation requirement, given the AFMC [Air Force Materiel Command] memorandum that allowed for the performance of work requirement imposed by the Limitation on Subcontracting clause to be met by the ?cooperative efforts? of CENTECH and its small business subcontractors.

The decision then says:

Our Office solicited the views of the United States Small Business Administration (SBA) on this matter. The SBA advised that, contrary to the AFMC Memorandum, ?in general, a small business receiving a prime contract award as a result of a solicitation set aside for [small business concerns] must meet the subcontracting limitation set forth in statute and regulations itself.?

In any case, AFMC had rescinded the memo.

This was more than a matter of the contents of a "cost estimate." This was a matter of an express provision of a proposal, which the Air Force understood, yet accepted nevertheless because of its own misinterpretation of the rule about limitations on subcontracting. The selectee's proposal was expressly contrary to the terms of FAR 52.219-14, which says in part:

(B) By submission of an offer and execution of a contract, the Offeror/Contractor agrees that in performance of the contract in the case of a contract for -- (1) Services (except construction). At least 50 percent of the cost of contract performance incurred for personnel shall be expended for employees of the concern.

I see no inconsistency between GAO's position in this case and its position concerning compliance with the Service Contract Act, which you quoted as follows:

On a fixed-price contract, as here, under which the awardee is required to pay the actual SCA wages and benefits out of whatever price it offers, and where the proposal contains no indication that the company will not meet its statutory obligations in this regard, labor rates or benefits that are less than the SCA-required rates or benefits may constitute a below-cost offer but one which is legally unobjectionable.

What is especially interesting about this GAO decision is that this is the second time within the last year or so that the GAO has ruled against the SBA's attempt to interpret its own regulations in favor of an agency. See International Program Group, Inc., Comp. Gen. Dec. B-400278, 2008 CPD para. 172 (Sept. 19, 2008), esp. footnote 5. We are being enveloped by chaos in the small business program arena. See, too, Delex Systems, Inc., Comp. Gen. Dec. B-400403, 2008 CPD para. 181 (Oct. 8, 2008).

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Vern,

You wrote:

This was more than a matter of the contents of a "cost estimate." This was a matter of an express provision of a proposal, which the Air Force understood, yet accepted nevertheless because of its own misinterpretation of the rule about limitations on subcontracting.

Do you mean that there was a part of the proposal (other than the cost estimate) that stated that the offeror did not intend to perform 51% of the work, and that part of the proposal became part of the contract? If so, then I don't know how you reached that conclusion based on the passage you cited from the case. If that's not what you mean, then I don't know what you mean.

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Guest Vern Edwards

Posted

Hi Don,

The GAO decision says:

[T]he Air Force conceded that CENTECH?s proposal provided that only 43.2 percent of the cost of contract performance incurred for personnel would be for CENTECH personnel. The Air Force noted, however, that two of CENTECH?s proposed subcontractors were also small businesses, and that an additional 23 percent of the cost of contract performance incurred for personnel would be for the personnel of these two small businesses. The Air Force concluded that because CENTECH?s proposal provided that the ?collective efforts? of CENTECH and its small business subcontractors would amount to ?66.2% of the cost of contract performance for personnel,? the proposal evidenced compliance with the Limitation on Subcontracting clause.

Note: "CENTECH's proposal provided... ." "Provided," not suggests or indicates. The decision then says:

[T]he record establishes that it was clear to the Air Force that CENTECH?s proposal as submitted and as evaluated provided that 43.2 percent of the cost of contract performance incurred for personnel would be expended for CENTECH employees and, accordingly, that ?the CENTECH GROUP did not meet the subcontracting limitation requirements set forth in statute and regulation.?

Note: "proposal as submitted... provided... ."

The phrase "cost estimate" does not appear anywhere in the decision. I take the decision at face value: CENTECH proposed to meet the limitation through the "collective efforts" of itself and its subcontractors, rather than by doing 51 percent itself. According to the decision it did so based on the policy in the AFMC memo, which was wrong. The language of the decision clearly indicates that there was more to this than a conclusion derived from the analysis of numbers in a cost estimate.

I don't see the inconsistency that you see in the GAO's decisions, for the reasons I've stated. If I haven't convinced you, then we must disagree. Maybe you can call the GAO attorneys for clarification, or the contracting officer, or the agency's lawyer, and let us know what you find out.

Take care, Vern

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I don't agree that "The language of the decision clearly indicates that there was more to this than a conclusion derived from the analysis of numbers in a cost estimate." However, I will take your advice and contact someone knowledgable about the decision. I'll let you know what I find out.

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I contacted the chief of the contracting office that received the protest to clarify the facts of the TYBRIN case. He told me that CENTECH's proposal did not contain an express provision stating that it intended to perform less than 50% of the cost of the contract work. This was inferred from information contained in their cost proposal. Further, the work percentages that would be performed by the prime and subcontractors were not "accepted" by the Air Force in the sense that they became part of the contract (i.e., they were informational, not promissory).

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Guest Vern Edwards

Posted

Don,

That's interesting. Have you tried to contact the GAO attorneys who handled the case? The decision is quite specific about the proposal, and seems inconsistent with what you were told. It would be interesting to hear another point of view.

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