Matter of: DZS/Baker LLC; Morrison Knudsen Corporation

File:B-281224; B-281224.2; B-281224.3; B-281224.4; B-281224.5; 
B-281224.6                                                  
        
Date:January 12, 1999

Joan K. Fiorino, Esq., Donald E. Barnhill, Esq., Valinda J. Astoria, 
Esq., and Edgar Garcia, Esq., Douglas & Barnhill, for DZS/Baker LLC; 
and Jacob B. Pompan, Esq., Gerald H. Werfel, Esq., and John P. Walsh, 
Esq., Pompan, Murray, Ruffner & Werfel, for Morrison Knudsen 
Corporation, the protesters. 
Gregory H. Petkoff, Esq., and William D. Cavanaugh, Esq., Department 
of the Air Force, for the agency. 
David A. Ashen, Esq., and John M. Melody, Esq., Office of the General 
Counsel, GAO, participated in the preparation of the decision.

DIGEST

In a cost comparison study pursuant to Office of Management and Budget 
Circular No. A-76, where 14 of 16 agency evaluators held positions 
under the study and thus subject to being contracted out, a conflict 
of interest that could not be mitigated was created, and protests 
challenging the evaluators' conclusion that all private-sector offers 
were unacceptable are therefore sustained.

DECISION

DZS/Baker LLC and Morrison Knudsen Corporation protest the decision of 
the Department of the Air Force to cancel solicitation No. 
F33601-98-B-9002 and to retain performance of civil operations and 
maintenance services in-house (rather than contracting out) at 
Wright-Patterson Air Force Base (AFB), Ohio.  The agency canceled the 
solicitation, a two-step sealed bid procurement issued as part of a 
cost comparison study pursuant to Office of Management and Budget 
(OMB) Circular No. A-76, after finding all step-one technical 
proposals unacceptable.  DZS/Baker and Morrison Knudsen challenge both 
the conduct of the competition and the evaluation of proposals.

We sustain the protests.

The solicitation, issued on May 29, 1998, requested the submission of 
initial technical proposals to perform maintenance, operation, repair, 
and minor construction services with respect to facilities, utility 
systems, grounds, and infrastructure at Wright-Patterson AFB and 
specified off-base sites.  Offerors submitting acceptable technical 
proposals then would be furnished an invitation for bids.  The 
solicitation provided that compliance with, and demonstration of a 
"complete understanding" of, the performance work statement 
requirements would be evaluated in five areas--technical plan, 
organization and management plan, quality control plan, transition 
plan, and past performance--and that "[a]ny factor or sub-factor 
judged to be unacceptable will render the entire area unacceptable."  
Solicitation Attachment 2, Technical Proposal Evaluation Criteria,  sec.  
1.4.

Two technical proposals, DZS/Baker's and Morrison Knudsen's (in a 
joint venture teaming arrangement with Parsons Brinckerhoff), were 
received by the closing time on July 14.  After advising each offeror 
of the initial evaluation results, the Air Force requested revised 
technical proposals.  Based upon its evaluation of the revised 
technical proposals, the agency determined that both were severely 
deficient and thus technically unacceptable.  Accordingly, the 
contracting officer advised offerors on September 25 that "[s]ince no 
offerors have exhibited sufficient expertise to perform the required 
services, the ASC Executive Steering Group and I, after considering 
the options outlined in [Air Force Pamphlet 26-12, Guidelines for 
Implementing the Air Force Commercial Activities Program (AFP), 
September 25, 1992], have determined that the solicitation will be 
canceled and the Government's Most Efficient Organization (MEO) will 
be implemented."  Air Force Letters, Sept. 25, 1998; Contracting 
Officer Statement (B-281224), Oct. 27, 1998, at 3-4.  Following a 
debriefing by the agency, DZS/Baker and Morrison Knudsen filed these 
protests with our Office.[1]

DZS/Baker and Morrison Knudsen argue that the determination that their 
proposals were technically unacceptable--that is, the determination on 
which cancellation of the solicitation was based--resulted from a 
failure to conduct meaningful discussions, and an unreasonable 
evaluation of technical proposals by evaluators with an improper 
conflict of interest.  In this latter regard, the protesters note that 
14 of 16 evaluators--4 of 6 core evaluators (5 designated core 
evaluators and 1 evaluator considered by the evaluation team to be a 
core evaluator) responsible for evaluating the entire proposals, plus 
all 10 technical advisers responsible for evaluating specific portions 
of the proposals--held positions that were under study as part of the 
A-76 study.  Air Force Statements, Nov. 24, Nov. 30 and Dec. 2, 1998.

We agree with the protesters that the evaluation process was 
fundamentally flawed as a result of a conflict of interest.[2]

OMB Circular No. A-76 describes the executive branch policy on the 
operation of commercial activities that are incidental to performance 
of government functions.  It outlines procedures for determining 
whether commercial activities should be operated under contract by 
private companies or in-house using government facilities and 
personnel.  While our Office does not review internal agency decisions 
regarding matters not the subject of a solicitation, where, as here, 
an agency has conducted an A-76 competition, thus using the 
procurement system to determine whether to contract out or perform 
work in-house, we will consider a protest alleging that the agency has 
not complied with the applicable procedures or has conducted an 
evaluation that is inconsistent with the solicitation criteria or 
otherwise unreasonable.  See NWT, Inc.; PharmChem Labs., Inc., 
B-280988, B-280988.2, Dec. 17, 1998, 98-2 CPD  para.  158 at 5-6; Alltech, 
Inc., B-237980, Mar. 27, 1990, 90-1 CPD  para.  335 at 3-4.

In setting out the standards of conduct that apply to government 
business, Federal Acquisition Regulation (FAR)  sec.  3.101-1 states:

     Transactions relating to the expenditure of public funds require 
     the highest degree of public trust and an impeccable standard of 
     conduct.  The general rule is to avoid strictly any conflict of 
     interest or even the appearance of a conflict of interest in 
     Government-contractor relationships.

The standards contained in FAR subpart 3.1 are explicitly applicable 
to the actions of government personnel.[3]  Id.

FAR subpart 3.1 does not provide specific guidance regarding 
situations in which government employees, because of their job 
positions or relationships with particular government organizations, 
may be unable to render impartial advice to the government.  However, 
as we noted in our decision in Battelle Memorial Inst., B-278673, Feb. 
27, 1998, 98-1 CPD  para.  107 at 6-7, and as discussed below, FAR subpart 
9.5 addresses analogous situations involving contractor organizations.  
Accordingly, although FAR subpart 9.5, by its terms, does not apply to 
government agencies or employees, we believe that in determining 
whether an agency has reasonably met its obligation to avoid conflicts 
under FAR  sec.  3.101-1, FAR subpart 9.5 is instructive in that it 
establishes whether similar situations involving contractor 
organizations would require avoidance, neutralization or mitigation.  
Id.  

FAR  sec.  9.501(d) provides that a conflict of interest exists when, 
"because of other activities or relationships with other persons, a 
person is unable or potentially unable to render impartial assistance 
or advice to the Government, or the person's objectivity in performing 
the contract work is or might be otherwise impaired."  Likewise, FAR  sec.  
9.505-3 generally prohibits a contractor from evaluating its own 
products or services, or those of a competitor, without proper 
safeguards to ensure objectivity to protect the government's 
interests.

In addition, FAR  sec.  9.504 provides general direction to contracting 
officers, stating:  

     (a) Using the general rules, procedures, and examples in this 
     subpart, contracting officers shall analyze planned acquisitions 
     in order to--

        (1) Identify and evaluate potential organizational conflicts 
        of interest as early in the acquisition process as possible; 
        and

        (2)  Avoid, neutralize, or mitigate significant potential 
        conflicts before contract award.[4] 

Where, as here, a private-sector offeror submits a technical proposal 
as part of an A-76 cost comparison study for work currently performed 
in-house by an agency, and agency personnel holding positions under 
the study and thus subject to being contracted out are involved in 
evaluating the commercial offeror's proposal, it seems self-evident 
that, as addressed in FAR  sec.  9.501(d), the agency evaluators are 
potentially unable to render impartial assistance or advice to the 
contracting officer--their objectivity in performing the evaluation 
may be impaired.  Indeed, as addressed analogously in FAR  sec.  9.505-3, 
in this situation agency evaluators are in effect evaluating a 
competitor's proposal.  Accordingly, a conflict of interest exists 
which calls for the agency to take appropriate remedial action.  Our 
conclusion in this regard appears to be consistent with that of the 
contracting officer, who reports that "[i]n my opinion, the potential 
for an inherent conflict of interest by the technical evaluation team 
performing the evaluation required extra surveillance of the process 
on my part."  Contracting Officer's Statement (B-281224), Oct. 27, 
1998, at 10; see Contracting Officer's Statement (B-281224>.2), Oct. 
27, 1998 at 3.

We note that, according to the contracting officer, although "I could 
not help but be aware of the potential for a conflict of interest from 
the Technical Evaluation Team," nevertheless, "due to the requirement 
for expertise in the performance requirements, there was no one else 
available and qualified to perform as part of the technical evaluation 
team."  Contracting Officer's Statement (B-281224.2), Oct. 27, 1998 at 
3.  Notwithstanding the contracting officer's  statement, for which no 
support was offered, it seems implausible that there were no other 
personnel available in the Department of the Air Force who were 
qualified to evaluate proposals for installation civil operations and 
maintenance services.  

The Air Force argues that it took reasonable precautions to ensure the 
integrity of the evaluation process in light of this conflict, 
including the appointment of a procurement analyst whose position was 
not subject to the A-76 study as the technical evaluation team chief; 
physical segregation of the evaluators; and  increased training and 
surveillance by the contracting officer.  Contracting Officer's 
Statement (B-281224), Oct. 27, 1998 at 10-11; Contracting Officer's 
Statement (B-281224.2), Oct. 27, 1998, at 3-5; Memorandum of Law 
(B-281224.2), Oct. 27, 1998, at 6.  We do not agree that these steps 
were adequate to eliminate or mitigate the conflict.  Notwithstanding 
these actions, 14 of 16 agency evaluators, including 4 of 6 core 
evaluators, continued to hold positions that were under study and at 
risk of being contracted out in the event that a private-sector 
contractor's proposal was determined acceptable.  This represented a 
substantial conflict for all but two of the evaluators, and draws into 
question the objectivity of their individual and collective evaluation 
findings.  

In our view, given the breadth and severity of the conflict of 
interest here, the conflict could not be mitigated by any action short 
of reconstituting the evaluation team.  Aetna Gov't Health Plans, 
Inc.; Foundation Health Fed. Servs., Inc., B-254397.15 et al., July 
27, 1995, 95-2 CPD  para.  129 at 17.  So long as contracting officials 
relied on the evaluators for their expertise and input, we fail to see 
how, in this situation, mere additional oversight of the evaluation 
process would be adequate to mitigate a conflict of interest.  
Accordingly, in this context, assigning an individual without a 
conflict to be the evaluation team chief, while a step in the right 
direction, is insufficient to mitigate the conflict.  Finally, while 
segregation may resolve a conflict of interest relating to an 
offeror's unfair access to information, it is virtually irrelevant to 
a conflict of interest involving potentially impaired objectivity.  
Id. at 16.[5]

The Air Force contends that there is no evidence that evaluators 
holding positions under the A-76 study were more inclined to find the 
proposals unacceptable than those not under it.  This argument is 
unpersuasive.  As an initial matter, we note that there is a 
presumption of prejudice to competing offerors--here, the 
private-sector offerors--where a conflict of interest, other than a de 
minimis or insignificant matter, is not resolved.  Id. at 19.  
Moreover, while it may well be that the ratings of the two evaluators 
suggest that a team of impartial evaluators would arrive at the same 
evaluation judgments as the team here, this can only be confirmed by 
actually having an evaluation performed by an impartial team.  In 
light of the potential adverse impact on the integrity of the process, 
we think all offerors are entitled to such an evaluation instead of 
mere speculation that the evaluation may have been objective.[6]

We conclude that, in light of this significant conflict of interest on 
the part of the evaluators, the evaluation was invalid and did not 
furnish a proper basis for cancellation of the solicitation.[7]  We 
therefore sustain the protests.  We recommend that the agency rescind 
the cancellation of the solicitation, constitute a new technical 
evaluation team, the composition of which is consistent with this 
decision, and reevaluate the step-one technical proposals.  We also 
recommend that DZS/Baker and Morrison Knudsen be reimbursed their 
costs of filing and pursuing the protests, including reasonable 
attorneys' fees.  4 C.F.R.  sec.  21.8(d)(1) (1998). DZS/Baker and Morrison 
Knudsen should submit their certified claims for costs, detailing and 
certifying the time expended and costs incurred, to the Air Force 
within 60 days of receiving this decision.  4 C.F.R.  sec.  21.8(f)(1).

The protests are sustained.

Comptroller General
of the United States

1. Where there is an established appeals process available for review 
of an A-76 cost comparison, our Office will consider a protest 
alleging deficiencies in the cost comparison only where the protester 
has exhausted the agency's appeals process, and we will not review any 
objections to a cost comparison not specifically appealed to the 
agency.  Madison Servs., Inc., B-277614, Nov. 3, 1997, 97-2 CPD  para.  136 
at 9; Professional Servs. Unified, Inc., B-257360.2, July 21, 1994, 
94-2 CPD  para.  39 at 3.  Here, however, the Air Force has determined that 
its actions with respect to the cost comparison study are not subject 
to review under the agency appeals procedure.  In this regard, the Air 
Force notes that OMB Circular No. A-76, Revised Supplemental Handbook, 
Mar. 1996, provides that "[f]ollowing a tentative waiver or A-76 cost 
comparison decision, the A-76 Administrative Appeals process is 
invoked," Part I, Ch. 3,  sec.  K.1; according to the agency there was no 
waiver, and the agency was unable to perform a cost comparison due to 
the lack of any acceptable technical proposals from commercial 
offerors.  Air Force Administrative Appeals Decisions, Nov. 2, 1998; 
Contracting Officer Statement (B-281224), Oct. 27, 1998, at 3; see 
Omni Corp., B-281082, Dec. 22, 1998, 98-2 CPD  para.  159 at 4 (A-76 
administrative appeal procedures do not apply to questions concerning 
the selection of a private-sector offer for comparison with the 
government's cost estimate).

2. In light of our conclusion, we need not address the arguments 
concerning the conduct of discussions or the evaluation of proposals.

3. We note as well that, when "Source Selection or negotiated 
procurement techniques" are used for an A-76 cost comparison, the OMB 
Circular A-76, Revised Supplemental Handbook provides the following 
guidance:

     As required by the FAR, the Government should establish a Source 
     Selection Authority, including assurances that there are no 
     potential conflicts of interest in the membership of the 
     Authority.

Part I, Ch. 3,  sec.  H.3.b.

4. FAR  sec.  9.505 further provides that:  

     Each individual contracting situation should be examined on the 
     basis of its particular facts and the nature of the proposed 
     contract.  The exercise of common sense, good judgment, and sound 
     discretion is required in both the decision on whether a 
     significant potential conflict exists and, if it does, the 
     development of an appropriate means for resolving it. 

5. In this regard, we note that in January 1996 Air Force commercial 
activities program managers were furnished with a background paper 
advising them that "[t]o ensure a clean and pure technical evaluation 
is conducted in negotiated acquisitions, have individuals from outside 
the function (from [Headquarters] and possibly other bases) sit on the 
evaluation team."  Supplemental Guidance for AFI [Air Force 
Instruction] 38-203, Commercial Activities Program, and AFP 26-12, 
Guidelines for Implementing the Air Force Commercial Activities 
Program, and Miscellaneous Background Information, Jan. 3 1996, 
Attachment 12, at 2. 

6. Indeed, given the fact that, according to the agency, "both the 
initial evaluation rating and the final evaluation rating were by 
consensus," Supplemental (Legal) Memorandum (B-281224.2), Nov. 10, 
1998, at 4, it is not apparent how the effects on the agency's overall 
evaluation judgments of the conflict of interest on the part of 14 of 
16 evaluators could be reliably determined.

7. DZS/Baker protests the Air Force's refusal to disclose, outside of 
the protective order issued by our Office, the agency's management 
plan, MEO and all supporting documentation.  However, the failure to 
release documents does not state a basis for protest.