The complexity of bidding for government contracts
The Scenario: A prominent agency of the U.S. federal government issued a Request for Solutions (RFS) for a high-profile, multi-year project in the agency’s historic office building in the District. The agency was seeking the design and installation of an integrated information technology network. Competing bids would be assessed for technical competency and price.
The building, a short walk from the White House, covered three city blocks and housed 4,000 employees. Because the various units of the agency operated independently, computer networks within the building were both physically and technically isolated from one another. With no shared information system, the units were forced to use the Internet to transmit data back and forth. Cabling and networking equipment were scattered throughout the building, snaking across open floors, sitting on desks, stacked in coat closets. Reassigning personnel often meant reinstalling cable at considerable expense.
The RFS sought firm fixed-price bids to address these problems. The RFS specified that contractors would have to take care to preserve the historic nature and character of the 1.8-million-square-foot building (e.g., the roof’s terra cotta tiles) while working around the staff.
The uncertainties surrounding the building and what would be necessary to preserve it cast a long shadow over the bidding process. Dragon’s best estimate was that it would probably cost about $11 million to do the work. It did, however, believe there was the potential for follow-on work that was outside the scope of the currently proposed contract. The exact extent of this work was unclear.
Each year, Dragon submitted anywhere from 50 to 100 competitive bids ranging from $500,000 to millions of dollars. Its win rate approached 30 percent. Most contracts were bid based on cost and generally included a 5 to 15 percent profit.
The Resolution: Dragon Systems bid aggressively. It lost money on the initial contract but made a considerable amount of money on the follow-on work, which was largely completed on a time-and-materials (non-bid) basis. It guessed correctly that once it got into the building, it would uncover a lot of other work that needed to be done and that because of its familiarity with the historic building it would be the preferred supplier.
Having successfully completed more than 60 such contracts, the firm had developed a solid reputation among government officials such as Tom Coolidge, director of a government computers and telecommunications station. Coolidge favored contracts with Dragon because it always provides “us with dependable people at a reasonable cost.”
The Lesson: Bidding on contracts requires an evaluation not only of the costs and margins of the specified work, but also a careful analysis of how it changes the probability that you will get future work. That is not easy to do, but it is necessary in order to make reasonable profits in the world of government contracting.
There are other lessons here as well.
One is the illustration that the more you do well in government contracting, the more you do well at government contracting. It's the incumbency effect, an effect which, if carried far enough, degrades the competitive spirit intended to be part of the US Competition in Contracting Act.
The Washington Post ran an article on this aspect of government contracting a few years ago, with a tone of disparaging aggravation:
Costs Skyrocket As DHS Runs Up No-Bid Contracts
The project started in 2003 with a $2 million contract to help the new Department of Homeland Security quickly get an intelligence operation up and running.
Over the next year, the cost of the no-bid arrangement with consultant Booz Allen Hamilton soared by millions of dollars per month, as the firm provided analysts, administrators and other contract employees to the department's Information Analysis and Infrastructure Protection offices.
By December 2004, payments to Booz Allen had exceeded $30 million -- 15 times the contract's original value. When department lawyers examined the deal, they found it was "grossly beyond the scope" of the original contract, and they said the arrangement violated government procurement rules. The lawyers advised the department to immediately stop making payments through the contract and allow other companies to compete for the work.
But the competition did not take place for more than a year. During that time, the payments to Booz Allen more than doubled again under a second no-bid arrangement, to $73 million, according to internal documents, e-mail and interviews.
When Booz Allen finally faced competition last year, Homeland Security had broken the work into five contracts. In total, those contracts were worth more than $50 million over a year's time.
Booz Allen won them all.
The arrangements with the McLean consulting firm, one of the nation's largest government contractors, illustrate a transformation in the way the federal government often gets its work done: by relying on private, sometimes costly consultants to fill staffing shortfalls in federal agencies.
Contracting specialists said companies are increasingly being called upon to handle duties once considered appropriate only for government workers. And because the number of federal procurement workers responsible for overseeing spending has not kept pace, the spending on such contracts often soars far beyond approved estimates, the specialists said.
Another lesson is that the usual limitation on offering no-bid work beyond the scope of the original contract is facing practical limitations in the new era of primarily service-oriented government contracts. As a practical matter, it is becoming apparent that the scrutiny of the scope of service contracts is not as strict as the scope of supply contracts.
In theory they should be treated the same, but the age-old reticence to second-guess contracting officers is leading to the point where, in practice, the scope of contract rule is being swallowed by a service contract exception. (I hasten to note that the deferential standard of review found in federal cases is not universal. For instance, the Guam Public Auditor has a de novo standard of review. See, also, 5 GCA § 5245 and discussion of that statute in the Guam Procurement Process Primer.)
The traditional use of the scope of contract limitation on so-called flow-on work is illustrated by the recent Court of Federal Claims case, as reported by the Wolter Kluwer website Federal contracts training center:
Order Was Beyond Scope of FSS Contract
An order for mobile medical units was improper, according to the Court of Federal Claims, because the order included items that were outside the scope of the awardee's Federal Supply Schedule contract.
The government issued an FSS request for quotes for mobile operation and procedure room trailers after conducting sole source negotiations with the protester, which did not hold an FSS schedule contract. After the closing date, but prior to award, the government allowed the awardee to add three types of mobile surgical trailers to its FSS contract.
The government maintained the modification involved in-scope changes to trailers already on the awardee's FSS contract. According to the government, so long as an item is on the FSS contract at the time of the order, the award is proper.
The court found this approach would "allow targeted pre-selection of contractors outside the FSS system, which is inconsistent with the FSS system, as well as the general goals of fair and open competition espoused in the [Competition in Contracting Act] ...." At a minimum, the government violated the spirit of CICA.
Further, a comparison of the original and modified trailers showed the modified trailers were new item
s that should have been added to the awardee's schedule before it submitted a quote. Unlike the original trailers, the modified trailers had integrated equipment necessary for performing surgery, taking x-rays, and sterilizing medical equipment. Also, the original trailers did not have air filtration systems, sterile environments, plumbing, or the internal wiring necessary for a surgical room. Further, the modified trailers required 240 days --as opposed to 125 days --of turnaround time, and the awardee's schedule modification request included more than 75 pages of technical specifications and design detail.
The "sheer volume" of the modification request, along with the awardee's concession it was adding a completely "new item" to the schedule, further illustrated the awardee had offered non-FSS items in response to the RFQ.
This case shows how prepared reviewing bodies are to count things, to measure them, to compare them. Other cases illustrate the failure to find bright lines in specifications and scope of work for services contracts.
The traditional statement of the tests use are in the Emergent BioSolutions Inc. GAO Comptroller General's decision, B-402576, June 8, 2010.
The case involved services (R&D)leading to development of a product: The RFP contemplated the award of one or more cost-plus-fixed-fee contracts for the continued advanced development, testing, and production of rPA anthrax vaccine. The RFP included Federal Acquisition Regulation (FAR) clause 52.243-2, Changes–Cost Reimbursement (Alternate V), applicable to research and development contracts. The RFP also stated that the purpose of the procurement was to continue the advanced development and production of an rPA vaccine, suitable for licensure, to protect the general United States population against inhalation anthrax when administered in an immunization series of not more than three doses.
In determining whether a modification triggers the competition requirements under CICA, we look to whether there is a material difference between the modified contract and the contract that was originally awarded. Engineering & Prof'l Servs., supra, at 4; AT&T Commc'ns, Inc. v. Wiltel, Inc., 1 F.3d 1201, 1205 (Fed. Cir. 1993). Evidence of a material difference between the modification and the original contract is found by examining changes in the type of work, costs, and performance period between the contract as awarded and as modified. Overseas Lease Group, Inc.,
B-402111, Jan. 19, 2010, 2010 CPD para. 34 at 3; Atlantic Coast Contracting, Inc.,
B-288969.2, June 21, 2002, 2002 CPD para. 104 at 4. We also consider whether the solicitation for the original contract adequately advised offerors of the potential for the type of changes found in the modification, and thus whether the modification would have materially changed the field of competition. See DOR Biodefense, Inc.; Emergent BioSolutions, supra; Atlantic Coast Contracting, Inc., supra.
The result in that case was a finding that modifications to the contract were not beyond the scope of the contract.
Other statements regarding the scope of contract rule are in WorldWide Language Resources, Inc., B-299315.7; B-299315.8, August 12, 2010:
MEP’s contract, as initially awarded, included a 5-year ordering period (through September 2012) with a total ordering ceiling of $703 million. At the time of award, the agency estimated that it would need approximately 3,000 linguists to support the military’s operations in Afghanistan.
In the years subsequent to MEP’s award, the military’s need for linguists has exceeded the numbers estimated by INSCOM. Presently, MEP’s contract supports approximately 6,826 linguists at up to 200 locations in Afghanistan. Id. at 3.
The agency identifies two specific events which have spurred the significant growth in the linguist requirement. The first was an August 2009 review of the U.S. Afghanistan strategy directed by the President. Based on this review, the estimated requirement increased to 5,000 linguists per year in anticipation of greater U.S. involvement in Afghanistan. Id. The second event was the “surge” decision of December 2009, which provided for sending an additional 30,000 U.S. forces to Afghanistan by the end of the summer in 2010. This surge of U.S. forces has driven the need for linguists to their current levels since they are an integral component of the expanding U.S. combat operations in Afghanistan.
Prior to the events of August and December 2009, INSCOM, in May 2009, initiated the process of planning for the competitive award of a new contract for the linguist requirements in Afghanistan. In August 2009, it became apparent to INSCOM that the funding needed under MEP’s current contract would exceed the contract ceiling sooner than originally planned due to the increasing need for linguists. INSCOM estimated that the ceiling would be reached in March 2010. Contracting Officer’s (CO) Statement at 2. INSCOM therefore began to plan for the competitive award using a streamlined schedule.
Because MEP’s contract was imminently reaching its $703 million contract dollar ceiling, on March 18, INSCOM modified the contract to increase the ceiling amount by $78.5 million. This modification was supported by a J&A stating that only MEP was in a position to provide the required linguist services in Afghanistan without interruption or degradation.
Upon learning of the agency’s modification of MEP’s contract to increase the contract ceiling by an additional $679 million, WorldWide filed this protest arguing that the modification is contrary to the competition requirements mandated by CICA.
Due to the criticality of the linguist services to U.S. operations in Afghanistan, the agency concluded that it needed to maintain the linguist services without interruption. INSCOM was also advised by the Chief of Intelligence for the International Security Assistance Force in Afghanistan that the method chosen to obtain the services should avoid any additional strain on military resources given the significant build-up of U.S. troops in Afghanistan in connection with the “surge,” which the J&A characterizes as “one of the largest movements of troops and material since World War II.”
Even assuming that there were in fact firms capable of meeting the agency’s needs, and that some form of limited competition could be held, INSCOM concluded that conducting such a competition and transitioning to a new contractor would not be practicable given the limited time until the anticipated March 2011 award. In this regard, INSCOM explained that the process of issuing a solicitation, obtaining proposals, conducting an evaluation, and making an award would take approximately 6 to 8 months. With the projected follow-on contract scheduled for award by March 2011, the bridge contract would have a performance period of only
3 to 5 months and would require a transition period with an estimated cost of
$30 million, if the contract were awarded to a firm other than MEP. INSCOM also indicated that conducting the limited competition would likely delay its implementation of the long-term solution--the award of the follow-on contract based on full and open competition--due to the need to conduct two procurements simultaneously using the same contracting personnel with the requisite expertise. Id. at 6. INSCOM also considered the disruption to the U.S. mission associated with a need for multiple linguist contractor transitions during “a period of high operational stress”--one for the bridge contract award and a separate transition for the March 2011 award--and concluded that the potential need for multiple transitions militated against conducting a limited competition.
WorldWide challenges the modification of MEP’s contract to increase the contract ceiling by $679 million, arguing that the modification was outside the scope of MEP’s underlying contract and therefore constitutes an improper noncompetitive award in contravention of the competition requirements established by CICA, specifically, 10 U.S.C. § 2304(f)(1)(C) (2006).
To the extent the agency has justified its actions based on a finding that only MEP can meet the agency’s interim need for linguists--a conclusion disputed by the protester--WorldWide asserts that the noncompetitive extension of MEP’s existing contract was attributable to a lack of advance procurement planning, which is also precluded by CICA. 10 U.S.C. § 2304(f)(5).
CICA requires that an agency obtain full and open competition in its procurements through the use of competitive procedures. 10 U.S.C. § 2304(a)(1)(A). Exceptions are provided under CICA, however, where (among other specified exceptions) there is only one responsible source able to meet the agency’s requirements, 10 U.S.C.
§ 2304(c)(1).
CICA also provides that noncompetitive procedures may not be used where agency contracting officials failed to perform advance planning. 10 U.S.C.
§ 2304(f)(5); HEROS, Inc., B-292043, June 9, 2003, 2003 CPD ¶ 111 at 6; New Breed Leasing Corp., B-274201, B-274202, Nov. 26, 1996, 96-2 CPD ¶ 202 at 6. Our Office has recognized that the requirement for advance planning does not mean that such planning must be completely error-free, but, as with all actions taken by an agency, the advance planning required under CICA must be reasonable. Barnes Aerospace Group, B-298864, B-298864.2, Dec. 26, 2006, 2006 CPD ¶ 204 at 4-5.
As a general rule, our Office will not consider protests against contract modifications, since they involve matters of contract administration and are beyond the scope of our bid protest function. See 4 C.F.R. § 21.5(a) (2010); DOR Biodefense, Inc.; Emergent BioSolutions, B-296358.3, B-296358.4, Jan. 31, 2006, 2006 CPD ¶ 35 at 6. An exception to this general rule is where a protester alleges that a modification is beyond the scope of the original contract, as WorldWide argues in this case, since, absent a valid sole-source justification, the work covered by the modification would be subject to the competition requirements established under CICA. Engineering & Prof’l Servs., Inc., B-289331, Jan. 28, 2002, 2002 CPD ¶ 24 at 3.
The agency and the intervenor argue that modifying MEP’s contract to increase the contract ceiling by $679 million is not outside the scope of MEP’s underlying contract. In this regard, they principally assert that the increase in the ceiling level does not change the type of work required under the contract and offerors could have reasonably anticipated a modification to increase the contract ceiling. WorldWide maintains that the magnitude of the increase in the dollar ceiling implicitly reflects a change in the nature of the agency’s original requirement and the basis of the original competition, and therefore renders the modification outside the scope of the original award.
As discussed below, we do not need to decide the question of whether the modification is within the scope of MEP’s contract because, even assuming that it was not, the agency properly supported the modification with a reasonably based J&A under 10 U.S.C. § 2304(c)(1).
In the business study presented above, there is a stunning admission (at least a representation) against interest that the contractor is bidding at or below cost, seeking work outside the scope of the original contract. That is undoubtedly a model adopted by many other contractors.
But simply because there is a trend toward eliminating the scope of contract restriction, most particularly emerging in the context of the responses to terrorism at home and in the Middle East, the rule has not be entirely abrogated, as the following Comptroller General decisions note, and as summarized by Wifcon.com:
Poly-Pacific Technologies, Inc., B-296029, June 1, 2005:
the agency states that in the absence of a viable recycling option, it modified the contract to allow for disposal consistent with EPA regulations. The agency argues that the government's ultimate need for plastic media and the obligation to comply with EPA regulations regarding the handling of the SBM have not changed and, thus, the modification was proper.
We disagree with the agency's view that the modification does not materially change the requirements of the contract or result in a fundamental change to the nature of the work. The original solicitation sought proposals that required offerors to both lease plastic media and recycle the resulting SBM in compliance with regulations, and offerors were thus required to propose technical solutions and pricing for both the lease and recycling components of the work. The fact that the agency still requires plastic media for its equipment needs and still requires removal of the SBM from its facilities does not afford the agency unlimited latitude to modify the way in which it contracts to meet those requirements.
An agency may not modify a contract by changing or relaxing requirements where the resulting work is fundamentally different from the work anticipated by the original solicitation. Marvin J. Perry & Assoc. , supra , at 4-5; Avtron Mfg., Inc. , supra , at 4-5.
Evidence suggesting that proposals submitted on the basis of a modified contract's relaxed requirements could result in more competition and lower prices generally weighs in favor of finding that the contract modification was improper. Avtron Mfg., Inc. , supra , at 5.
Saltwater Inc.--Reconsideration and Costs, B-294121.3; B-294121.4, February 8, 2005:
the competitive award to Saltwater was based upon a 1-year contract extending through June 30, 2004 with a 1-year option to June 30, 2005. However, the award to NWO was for a 6-month contract period from July 1, 2004 toDecember 31, 2004, with an option to extend the contract 1 year, i.e. , to December31, 2005, which Commerce has exercised. Because the period of performance under NWO's contract extends beyond June 30, 2005, it is inconsistent with the basis for the competition and therefore improper. See Tennessee Valley Serv. Co. , B188771, Dec. 8, 1977, 77-2 CPD 442. That is, the extension of NWO's contract beyond June30, 2005 constitutes an improper sole-source, since it was not supported by a J&A.
Wifcom.com collects a number of court as well as Comptroller General decisions concerning the scope of contract, and a read of all of them is suggested.
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