oversight

Review of Contracts Awarded to Raycomm, Inc., Freehold, New Jersey, by the Army Electronics Command, Fort Monmouth, New Jersey

Published by the Government Accountability Office on 1977-02-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME
01119 - [ao0751260]
(Review of Contracts Awarded to Raycomm, Inc., Freehold, New
Jersey, by the Army Electronics Coamand, Fort Monmouth, New
Jersey]. PSAD-77-64; B-173487. February 16, 1977. 8 pp,
Report to Sen. Edward M. Kennedy; Sen. Edward V. Brooke; by
Robert F. Keller, Deputy Comptroller General.
Issue Area: Federal Procurement of Goods and Services (1900).
Contact: Procurement and Systems Acquisition Div.
Budget Function: National Defense: Department of Defense -
    Procurement & Contracts (058).
Organization Concerned: Department of the Ary=: Army Electronics
    Command, Fort lonmouth, N1; TEB-HAR, Inc., Peabody, nA;
    Raycoam Industries, Inc., Freehold, NJ.
Congressional Relevance: Sen. Edward BE Kennedy; Sen. Edward U.
    Erooke.
Authority: #9 Coop. Gen. 330. 55 Coup. Gen. 231. B-186657
    (1s76).
         The validity of allegations that there were
irregularities in awarding three Army contracts to Raycoam,
Inc., was investigated. Requests for the proposals for the
contracts awarded in 1971, 1973, and 1975 listed the type of
software products and technical services required and contained
estimates of the number of hoers of labor by category required
to provide these products and services during the period of the
contracts. The best and final offers from each of the competing
firms were evaluated and preaward surveys were made at several
companies that submitted the lowest offers to ascertain their
competency to perform the required work. In each case, Bayconm
Industries, Inc., made the lowest final offer and was awarded
the contract. Findings/Conclusions: Review of the procedures
followed in awarding the three contracts did not disclose any
inconsistencies with the Armed Services Procurement Regulation.
The contracts were awarded to the lowest offeror in accordance
with criteria specified in the requests for proposals. Although
it is true that due to the labor mix and related pricing of the
orders actually placed subsequent to contract award, the total
work ordered would have cost less based on the price quotations
of the unsuccessful bidders, the contract was based on the
lowest dollar value for the total estimated hours for all
categories of labor to be provided, as shown in the
solicitations. (SC)
               CO0M"TROLER    GDERAL OF THE UWAIT.D S ATE
                             WASINSI   DC. RO




                                                    FEB 16 1977
B-173487

The Honorable Edward M. Kennedy
The Honorable Edward W. Brooke
United States Senate
    This is our report pursuant to your requests on behalf
of TEK-MAR, Inc., Peabody, Massachusetts, that we determine
the validity of allegations that there were irregularities in
awarding three Army contracts. TEK-MAR, who did not receive
any of the contract awards, stated in its May 10, 1976, letter
to you that irregularities in the three procurements prevented
them from obtaining the contracts. Also, they felt that the
regulations and procedures for Government procurements must be
improved to provide more equitable, open, realistic, and com-
petitive bidding for all firms. Generally, TEK-MAR's complaints
address the following areas:
    -- Unbalanced offers.
    -- Negotiation procedures and inflated Government
       estimates.
    -- Preaward surveys.
    -- Personnel qualifications.
    We reviewed contract files and interviewed cognizant
personnel at the Electronics Command, Fort Monmouth,
New Jersey. We also discussed the contracts with personnel
at the Defense Contract Administration Services District,
Springfield, New Jersey, and the Defense Contract Audit
Agency, Newark and Fort Monmouth, New Jersey.
    Our review of the procedures followed by the Electronics
Command in awarding the three contracts did not disclose any
inconsistencies with the Arned Services Procurement Regula-
tion. The contracts were awarded to the lowest offeror in
accordance with criteria specified in the requests for
proposal. Also ,reaward surveys were completed to ascertain
that the offerors were capable of performing the contracts.
    The results of our review follow.



                                                                  PSAD-7,;-64
B-173487


BACKGROUND

    The Electronics Command contracts for the technical
services and noncomputer software products which are
beyond its capacity to provide and has procured technical
services and software products since the 1950s. The three
most recent contracts were awarded in 1971, 1973, and 1975.
Each request for a proposal listed the type of software
products and technical services required and contained esti-
mates of the number ,' hours by labor category required to
provide these producL:s and services during the period of the
contract. The requests for proposal also stated that the
Government might elect not to order any work under the
contracts.

    The Electronics Command received six or moce initial
offers for each solicitat.on. Subsequently, they requested
and received a best and final offer from each competing firm.
These were evaluated and preaward surveys were made at several
companies that submitted the lowest offers to ascertain their
competence to perform the required work.

    In each case, Raycomm Industries, Inc., of Freehold,
New Jersey, made the lowest final offer and was awarded the
contract.

    After contract awards, delivery orders were issued re-
quiring the contractor Lo initiate technical services and
produce specific software products on a quick response basis.
The Electronics Command and Raycomm negotiated the estimated
manhours, by labor category (such as engineering, technical
writing, illustrating, and clerical), required to produce
the software product for each delivery order.

UNBALANCED OFFERS

    TEK-MAR's letter stated that for three contracts Raycomm
offered to provide certain categories of labor at $1.00 an
hour, $1.50 an hour, and some labor categories at no charge.
TEK-MAR further stated that less than 10 percent of the 'low
dollar" labor categories were actually purchased by the
Electronics Command, thus, providing a financial advantage
to Raycomm.

    We found that, in addition to the labor rates cited above,
Raycomm offered to provide other categories of labor at
various prices ranging up to $12.00 an hour for clerical ser-
vices and technical writers. This method of proposing, in
which some labor categories are offered at unrealistically
low rates and others at much higher rates, is referred to as


                              -2-
B-173487


unbalanced bidding. Other companies, including TEK-MAR,
have made unbalanced offerF to the Electronics Command.

    It is our position that while unbalanced bidding is not
illegal and does not per se require rejection of the un-
balanced bid, it is nevert-heless in the best interests of
the Government to discourage unbalanced bidding through
appropriate solicitation safeguards, 49 Comp. Gen. 330
(1969). Moreover, where the bid is materially unbalanced
there may be doubt that award results in the lowest price
to the Government due to the uncertainty attached to the
actual amount of services to be used, as opposed to the
amounts estimated for evaluation purposes. Edward B.
Priel, Inc., 55 Comp. Gen. 231 (1975), 75-2 CPD 164.

    With respect to the low dollar rate labor hours solicited
and actual hours procured under each contract, we found that
as of June 30, 1976, the Electronics Command had obtained
the following amounts of labor:

    -- Under the 1971 contract it had obtained 2,380 labor
       hours at $1.00 an hour and 149,^60 hours at rates
       substantially higher. The 2,380 hours represented
       1 percent of the total labor hours offered at $1.00
       an hour in the 1971 contract.    I

    -- Under the 1973 contract it had obtained 9,449 hours
       at $1.50 an ;iir and 456,270 hours at rates substan-
       tially higher. The 9,449 hours represented 21 percent
       of the total labor hours offered at $1.50 an hour in
       the 1973 contract.

    -- Under the 1975 contract it had obtained 68,550   hours
       without charge and 264,320 hours with charge.    The
       The 65,550 hours represented 17 pe cent of the   total
       labor hours offered without charge in the 1975   contract.

    Both the Electronics Command and Raycomm prepared their
own labor hour estimates for each proposed delivery order
and negotiated an acceptable quantity and labor category mix
for each purchase. Negotiation documents disclosed that, in
all instances, both estimates were similar and in no case did
Raycomm attempt to overuse high dollar labor categories and
avoid furnishing services in the low dollar labor categories.

    TEK-MAR also questioned the justification of paying
Raycomm $12.00 an hour for clerical services provided under
the 1975 contract when Raycomm had been paid only $3.75 an
hour for the same services under the 1973 contract.
                              -3-
B-173487

    TEK-MAR is correct in its statement that Raycomm was
paid $12.00 an hour for clerical services on the 1975
contract compared to $3.75 for the same services on the
1973 contract. However, this type of situation can occur
as long as unbalanced bids are legally permissible. Award
is made on the basis of total price, even though wide
fluctuations may exist between the hourly rates quoted for
a specific category (or categories) on a current offer and
those previously paid by thb Government on a prior
procurement.

    The Electronics Command made various changes in its
solicitations after the first procurement in 1971 in an
attempt to minimize unbalanced bidding. These included
(1) reducing labor categories from 18 to 5 and (2) re-
quiring solicitations to be made on a small business
set-aside basis. It was thought that the 1975 solicita-
tions would preclude unbalanced offers because most small
businesses cculd not tolerate losses which might occur
from unbalanced offers. Such losses could result if deli-
very orders required significantly more labor than was
anticipated in the .categories offered at unrealistically
low rates.

    The Electronics Command's changes did not produce the
desired results. Currently, the Command 4s studying a
suggestion, made by a contractor, to eliminate unbalanced
offers by further combining the five labor categories into
one composite labor category.

    Recently we concluded that a method of bidding on re-
quirements-type contracts used by the General Services
Administration to prevent unbalanced bidding was acceptable,
particularly where the agency had difficulty in forcasting
the estimated amounts of each item due to fluctuations in
actual usage. The method discussed in Michael O'Conner,
Inc., B-186657, November 30, 1976, 76-2 CPD 456, was for the
Government to state in the request for proposals a price  for
each type of building alteration service to be performed,
such as installation of a certain type of door. No estimate
was included in the request for proposals for the amount of
services to be ordered during the contract period. Bidders
were permitted to submit only a single discount (or premium)
percentage factor to be applied to each type service. We
recommended that, at a minimum, historical ordering data
should be included to provide potential bidders with some
idea of the magnitude of work that might be required.


                              -4-
B-173487


    We believe a 7ariation of the procurement method des-
cribed above might bu feasible at the Electronics Command.
The method we have in mind would entail the Government
inserting in requests for proposals prices for each labor
category. Offerors would be permitted to increase or
decrease these amounts by as large a percentage factor
as they wished; however, they could only submit one
percentage factor to cover a 1l labor categories. The
low offer would be the one with the largest percentage
discount, or in the event all offerors offered premium
factors, the company offering the lowest such factor.

    We recommend that the Secretary of Defense direct
the Electronics Command to explore the feasibility of
using the procurement method outlined above to contract
for services of the type discussed in this report.
    Another statement made by TEK-MAR in its letter was:

    "If you compute the prices of the 2nd and 3rd placed
     firms against the actual labor categories purchased
     by Ft. Monmouth in each of the three procurements,
     you will find that Raycomm, Inc., was not the true
     lower bidder in all cases."

    It is true that due to the labor mix and related pricing
of the orders actually placed subsequent to contract award,
the total work ordered would have cost less based on the price
quotations of the unsuccessful bidders. However, the contract
was based on the lowest dollar value for the total estimated
hours for all categories of labor to be provided, as shown in
the solicitation. Actual hours required were not known in
advance and were negotiated separately with the successful
contractor for each delivery order at the time of issue.
Also, the suggestion by TEK-MAR assumes that those firms would
have negotiated the same number of hours within each labor
category to do the same work. This assumption overlooks the
fact that the various companies may use different methods and
labor mixes to produce identical products.

INFLATED GOVERNMENT ESTIMATES
AND NEGOTIATION PROCEDUREĀ§

    TEK-MAR stated in its letter that:

    "There is a definite pattern whereby Ft. Monmouth
     personnel provided inflated estimates of certain
     labor categories in all three procurements and, in


                                -5-
B-173487

     effect, caused all offerors (except Raycomm, Inc.)
     to price themselves out of the bidding."

    In order to determine whether the Electronics Command's
past experience could be used as a basis for projecting
future contract requirements, we analyzed delivery orders
awarded through June 30, 1976, under each of the three
contracts. We found that software products ordered generally
differed from contract to contract. Therefore, we believe
that the Command did have difficulty in predicting realistic
manhour requirements for each contract. Further, we found no
evidence that Command personnel purposely inflated labor
estimates.

    TEK-MAR also stated thac, in response to each of the three
proposal requests, they submitted the lowest initial offer but
were never contacted by Command personnel to discuss the scope
of work, approach, prices, facilities, etc. Records show that
TEK-MAR did submit the lowest initial offers; however, when
the interested parties were asked to submit a best and final
offer, TEK-MAR no longer placed as the lowest offeror. Accord-
ding to the terms of the solicitation, which met the require-
ments of the Armed Services Procurement Regulation, the
Government did not have to enter into negotiations after
receipt of the initial offers.

PREAWARD SURVEYS

    TEK-MAR charged that the Electronics Command unnecessarily
performed a preaward survey of its company fo t:he 1975
solicitation because Raycomm was the lowest offeror and had
already performed two previous contracts.

     The Electronics Command requested the Defense Contract
Administration Services to perform preaward surveys to
determine the ability of the three lowest offerors to perform
the contract. This request was made (1) because Electronics
Command officials were not certain that Raycomm possessed the
financial capability to withstand the possible loss that night
result from its low offer, (2) because there was a very short
time available to award the contract (June 2, 1975, to June 30,
1975), and (3) to ascertain if the next two offerors, including
TEK-MAR, were capable of performing the contract.

    The preaward surveys found Raycomm and the next low offeror
to be capable of performing the contract. Defense Contract
Administration Services Region, Boston, Massachusetts, who
performed the preaward survey at TEK-MAR, recommended against
award to the company because it did not (1) have an adequate
accounting system, (2) show adequate resources of qualified
people to perform to the contract, (3) have sufficient working


                              -6-
B-173487



capital to finance the procurement, and (4) exhibit a full
understanding of the technical requirements of the bid package.

PERSONNEL QUALIFICATIONS

    TEK-MAR requested that we perform an indepth investi-
gation on the work experience and educational background of
the personnel employed by Raycomm.

    In its preaward survey of Raycomin for the 1975 procure-
ment the Defense Contract Administration Services District,
Springfield, New Jersey, stated:

    "A review of resumes of current personnel, anticipated
     for utilization on this procurement reveals that they
     meet or exceed the requirements delineated in the
     solicitation. It may be necessary for tne offeror to
     procure the services of additional draftsmen and
     illustrators; consequently, resumes of approximately
     12 applicants, received within the past 60 days, were
     reviewed and found to be satisfactory."

    We selected as our sample 29 out of 114 billings made
during the period July 1973 through September 1976 for the
last two contracts.  These billings included costs related to
services of 681 people; however, some were duplicates because
the individuals worked under more than one job classifi-
cation and/or on more than one contract. As a result, some
individuals' services were split and billed accordingly.

    Using a combination of sampling techniques, we examined
resumes for 133 employees and found that all had experience
and educational backgrounds to support their positions as
classified by Raycomm.

    This report contains a recommendation to the Secretary
of Defense on page 5. As you know, section 236 of the
Legislative Reorganization Act of 1970 requires the head of
a Federal agency to submit a written statement on actions
taken on our recommendations to the House and Senate
Committees on Government Operations not later than 60 days
after the date of the report and to the House and Senate
Committees on Appropriations with the agency's first request
for appropriations made more than 60 days after the date of
the report. Therefore, copies of the report are being sent
to the four committees and to the Secretary of Defense.



                           -7-
B-173487


We are also sending a copy to the Lieutenant
the Commonwealth of Massachusetts.           Governor of

                              Sincerely yours,




                        eputy Comptroller General
                              of the Jnited States