_____________________________ DENIED: March 22, 1993 _____________________________ GSBCA 12261-P INNOVATIVE TECHNOLOGY SYSTEMS, INC., Protester, v. DEPARTMENT OF THE INTERIOR, Respondent. Pamela J. Bethel, Barbara E. Nicastro, and Robert F. Condon of Bethel & Nicastro, Washington, DC, counsel for Protester. Alton E. Woods and James L. Weiner, Office of the Solicitor, Department of the Interior, Washington, DC, counsel for Respondent. Before Board Judges PARKER, BORWICK, and HYATT. HYATT, Board Judge. Innovative Technology Systems, Inc. (ITS) has protested the actions of respondent, the Minerals Management Service (MMS) of the Department of the Interior, in connection with the procurement of certain automatic data processing equipment (ADPE) services. In particular, ITS has challenged the propriety of respondent's decision to request the Small Business Administration (SBA) to withdraw the nomination of ITS for award of a contract to support MMS's Environmental Studies Program Information System (ESPIS). For the reasons stated, we deny the protest. Findings of Fact The purpose of the ESPIS contract is to automate large quantities of research material that MMS has amassed over the years. This material consists of environmental information and data relevant to offshore leasing and management activities on the outer continental shelf. Under the ESPIS project, the contractor will provide the necessary ADP design, systems, applications, and services needed to develop a text-retrieval system for the MMS Environmental Studies Program. Protest File, Exhibit 5. In February 1992, MMS sent letters to four small business firms indicating its interest in contracting with a firm that had "experience developing on-line, multi-user, full text associative retrieval systems." It requested each firm to supply a capability statement describing its ability to provide the skills and talent needed to develop such a system. Protest File, Exhibit 1. One of the firms so contacted was ITS. Id.; Transcript at 93. ITS and another company responded with the requested information. Protest File, Exhibits 2-4. Based on an analysis of the information received from these two prospective contractors, MMS's technical evaluators concluded that ITS and its teaming partner, ITAC, appeared to be "far and away the most interested and qualified team to undertake such a contract." Id., Exhibit 4. See id., Exhibit 85 at 7. In a letter dated May 6, 1992, MMS informed the SBA that it had identified this effort as suitable for placement under Section 8(a) of the Small Business Act, 15 U.S.C.A. 637(a) (West Supp. 1992), and requested that the SBA authorize it to solicit a proposal from ITS and commence negotiations with that firm. Protest File, Exhibit 5. By letter dated May 20, 1992, the SBA responded, accepting the agency's offer and authorizing it to negotiate directly with ITS. Based on the draft statement of work provided by MMS to the SBA, the SBA concluded that the requirement was suitable for 8(a) contracting and that ITS had the requisite capabilities to perform. Id., Exhibit 6. Following ITS's nomination by SBA to perform the ESPIS project, the contracting officer contacted ITS to talk about the ESPIS contract and to obtain additional information. At that time, the contracting officer recalls that she indicated to ITS's president that it was possible that the award would involve a cost-reimbursement type of contract and inquired about whether ITS's accounting system had ever been audited by the Defense Contract Audit Agency (DCAA). Transcript at 284-85. See also Protest File, Exhibit 80 at 8-10. In fact, in late May, the contracting officer and an MMS cost analyst met with protester's president in person and discussed various issues pertinent to the potential award of the ESPIS contract. One such issue was the need for a DCAA-approved accounting system as a prerequisite to an award.[foot #] 1 Transcript at 288, 361; Protest File, Exhibit 80. During this meeting, ITS's president informed the contracting officer and the cost analyst that the firm's accounting system was currently undergoing such an audit in connection with a cost contract with the Treasury Department.[foot #] 2 Transcript at 99-109. In addition, she informed them that ITS had obtained Deltek accounting software, which has been approved by DCAA in numerous applications and which ITS expected would facilitate any DCAA audit.[foot #] 3 Transcript at 100-01. At the time that ITS was nominated by SBA, MMS had not yet obtained a delegation of procurement authority (DPA) from the Administrator of the General Services Administration (GSA) and was thus not in a position to institute negotiations with or request a proposal from ITS. Transcript at 293. Without a cost proposal from ITS, MMS was not able to request, on its own behalf, that an audit be performed by DCAA. Id. at 375-76. After discussing this issue with protester's president, MMS intended, instead, to assure itself of the adequacy of the ITS accounting system's tracking of costs by "piggybacking" onto the DCAA audit being conducted by the Treasury Department. Id. at 318-19. This was acceptable to MMS because a short time after the nomination of ITS for the ESPIS project, MMS determined that the ESPIS award would not be made until sometime after the start of fiscal year 1993. Id. at 291-93. Thus, the agency determined ----------- FOOTNOTE BEGINS --------- [foot #] 1 In addition to two days of testimony adduced at the hearing, for which cites to relevant portions of the transcript are provided, the parties put into evidence, by agreement, some seven depositions of witnesses such as the DCAA auditor and the agency cost analyst. These deposition transcripts are incorporated as Exhibits 80-86 of the protest file. [foot #] 2 There appears to be considerable disagreement among the witnesses as to precisely when protester's president was actually informed that the agency contemplated a cost- reimbursable contract. What is clear is that on June 1, 1992, protester's president wrote to the contracting officer, acknowledging that MMS had inquired about ITS's accounting system and the possibility of a DCAA audit, and provided information on that subject. Appeal File, Exhibit 7. It is indisputable that at that point ITS was certainly aware that this was the direction in which MMS was leaning. [foot #] 3 It appears that a reference to Deltek software in ITS's capability statement may have induced MMS to reach the erroneous conclusion that ITS already had a DCAA approved system prior to its selection as the initial nominee. Transcript at 390-91; Protest File, Exhibit 71. ----------- FOOTNOTE ENDS ----------- that it had time to await the outcome of the audit requested by Treasury. Id. The MMS cost analyst testified that DCAA is, in his experience, the recognized and widely accepted authority for performance of audits of contractor cost-accounting systems. Protest File, Exhibit 80 at 13-14. In the interim, MMS placed a small purchase order, in the amount of $24,000, to ITS for technical ADP support services required by MMS's Offshore System Center (OSC) located in New Orleans. Protest File, Exhibit 10; Transcript at 296. During the initial period of performance, the contracting officer became aware of complaints concerning performance problems under the small purchase contract. In addition, OSC and the contracting officer disagreed with certain charges on the initial invoice received from ITS in connection with that contract. Transcript at 122-24, 298-301; Protest File, Exhibit 13. It appears that the wrinkles in this effort were eventually ironed out, but the experience gave rise to some doubt on the part of MMS's contracting officer as to the ability of ITS's accounting system to properly segregate costs.[foot #] 4 Transcript at 298-301. This issue, however, was not the determinative factor in the decision to seek permission from SBA to proceed with a different 8(a) contractor. Id. at 294. The contracting officer testified in this regard: "The one pivotal issue was the lack of a . . . verified, adequate cost-accounting system." Id. at 295; see id. at 302. In September 1992, protester's president contacted the MMS contracting officer to inform her that ITS had filed for Chapter 11 bankruptcy; the filing was explained as having been made solely to protect ITS against a default judgment obtained by a former landlord. Transcript at 305; Protest File, Exhibit 14. Shortly after she informed MMS of the reorganization proceeding, protester's president presented a letter from the Bankruptcy Court dismissing that proceeding. Transcript at 308. This issue, as well, while perhaps disconcerting to MMS, was not the dispositive factor in MMS's decision not to proceed with ITS. Id. at 295-96. ----------- FOOTNOTE BEGINS --------- [foot #] 4 ITS's president explained at the hearing that the OSC selected the individual initially sent to perform as a backup after their first choice became unavailable due to delay in processing this contract. When MMS expressed concern about the qualifications held by this individual, ITS was responsive about replacing him. In addition, invoice problems perceived by MMS were as a result of misunderstandings between MMS and ITS about what could be billed. As soon as MMS made its position clear, the invoices were rectified. Thus, ITS's president explained, the accounting system was not the problem -- it was the underlying premises of the parties that needed to be clarified. Transcript at 113-30. ----------- FOOTNOTE ENDS ----------- Also in September 1992, MMS learned that the DCAA had cancelled its audit, on behalf of the Treasury Department, of ITS's accounting system. Transcript at 397.[foot #] 5 The contracting officer spoke with the Treasury Department's contracting officer concerning ITS's efforts on that contract and was told that Treasury had awarded the contract to ITS anyway, under pressure of the loss of funds at the end of the fiscal year. She received the impression that the Treasury contracting officer was unhappy with the situation, at least at that time. Id. at 397-98. Thereafter, the contracting officer telephoned SBA and expressed reservations about proceeding with award of a contract to ITS. The principal reason given for these reservations was that ITS's accounting system had not been successfully audited by DCAA. Transcript at 294. In early December, the contracting officer drafted a letter, for her supervisor's signature, requesting that ITS confirm whether or not an audit had been performed on its accounting system. Protest File, Exhibit 22; Transcript at 314. This was a final effort to determine whether the requisite audit might have been performed. Transcript at 314. In early December 1992, MMS received a capability statement from another small business concern in response to a different procurement. MMS thereafter asked this company for a targeted capabilities statement. Transcript at 380. This company had a DCAA-audited accounting system. Id. at 383. By letter dated December 17, 1992, MMS wrote to SBA asking to withdraw the nomination of ITS and seeking authority to negotiate with and award to the alternate company instead. Protest File, Exhibit 26. Neither MMS nor SBA formally notified ITS that its nomination was in danger of being withdrawn. ITS first learned of this possibility in a meeting with SBA, attended by two ITS vice presidents. Despite efforts by ITS to prevent the withdrawal of its nomination for the ESPIS contract, SBA, by letter dated January 13, 1993, authorized MMS to conduct negotiations with the second nominee. Protest File, Exhibit 29. ----------- FOOTNOTE BEGINS --------- [foot #] 5 This is another area where the parties have adduced conflicting testimony. The conduct of the DCAA auditor assigned to review ITS's cost proposal for Treasury, however, while offering interesting background information, is simply not determinative of the outcome of this protest. The DCAA auditor claimed in deposition that ITS was uncooperative. Protest File, Exhibit 81. ITS's president testified that the DCAA auditor repeatedly lost or misplaced documents provided by ITS and then complained that ITS was at fault. Transcript at 108-10. If this is so, ITS may well feel appropriately aggrieved at the treatment it has received from this DCAA auditor. The only important fact genuinely relevant to the resolution of this protest, however, is undisputed -- the DCAA audit was not completed. ----------- FOOTNOTE ENDS ----------- The SBA officials who testified at the hearing indicated that SBA's concurrence in the withdrawal of ITS's nomination, and the substitution of another 8(a) company, was premised upon its understanding that ITS did not satisfy the requirement for a DCAA- approved accounting system. SBA did not, in permitting the substitution of another contractor, make a determination that ITS was in any way financially unable to perform the contract. To the contrary, it was the testifying official's view that ITS had the requisite financial resources to perform the ESPIS effort. Transcript at 242-44. That official had so advised the contracting officer upon receiving her inquiry about the Chapter 11 bankruptcy proceeding. Id. at 264. SBA's concurrence in the withdrawal of the ITS nomination was premised solely on the lack of a DCAA-approved accounting system, which SBA understood MMS to consider to be a prerequisite to an award. Id. at 247. The SBA official also testified that nomination for award of a noncompetitive 8(a) contract merely opens the door for the agency to negotiate. It does not establish entitlement to the contract. Id. at 254-55. Discussion Section 8(a) of the Small Business Act authorizes the SBA to enter into contracts with other agencies and to let subcontracts for performing those contracts to eligible small firms, called 8(a) subcontractors. These contracts may be awarded on either a competitive or sole source basis -- the ESPIS contract will be awarded on a sole source basis. The applicable Federal Acquisition Regulation (FAR) provisions are set forth at 48 CFR Part 19.8. Under these regulations, one alternative for proceeding under the 8(a) program is for an agency to identify a suitable eligible small business to perform its needs and to make an offer to the SBA. 48 CFR 19.803(c) (1991). That is what MMS has done here -- MMS identified ITS and recommended it for a sole source award. As provided in the regulations, the SBA accepted the offer and authorized MMS to negotiate directly with the nominated firm. 48 CFR 19.804-2, 19.804-3 (1991). Thereafter, MMS returned to SBA and requested that the nomination of ITS be withdrawn and a substitute 8(a) company be nominated in the place of ITS. SBA approved this request. Upon learning that it was no longer being considered for award, ITS protested, alleging that the agency improperly abandoned negotiations with it in favor of the other small business. The gravamen of ITS's protest is that MMS acted improperly in requesting SBA to replace ITS with another company. Specifically, in its amended protest complaint, ITS alleges the following: (1) that MMS's failure to consider fairly ITS's capabilities in accordance with criteria described in the request for capability statements violated sections 2(a) and 2(f)(2) of the Small Business Act, 15 U.S.C. 631(a), (f)(2) (1988) and 48 C.F.R. 19.805-2, (c)(1) (1991); (2) That MMS violated sections 2(a) and 2(f)(2) of the Small Business Act . . . and 48 C.F.R. 19.805-2(a), by evaluating ITS's capability to perform the ESPIS contract against criteria not provided in the proposal request; (3) that MMS violated 48 C.F.R. 19.809 (1991) by failing to negotiate the ESPIS contract with ITS; (4) that MMS violated 48 C.F.R. 19.809 (1991) by knowingly providing false information to the SBA about ITS. (5) that MMS violated sections 2(a) and 2(f)(2) of the Small Business Act . . . and 48 C.F.R. 19.808-2 by providing false and misleading information to SBA regarding ITS; (6) that the award of the ESPIS contract to any contractor other than ITS would be based upon an unpublished evaluation scheme and in violation of sections 2(a) and 2(f)(2) of the Small Business Act . . . and 48 C.F.R. 19.805-2. ITS has not succeeded in proving these allegations. The record does not substantiate that the agency supplied SBA with any false information. Both agency and SBA witnesses confirm that MMS requested replacement of ITS solely because ITS did not have a DCAA-audited accounting system in place at the time that MMS was prepared to proceed with negotiation and award of a contract. MMS had expected that such an audit would be available based on the information supplied by protester respecting the progress of the DCAA audit requested by Treasury. The fact that this audit was ultimately discontinued by DCAA and Treasury cannot be attributed to any misdeeds of MMS. The SBA deferred to the agency's decision to specify such an audit as a prerequisite to award of the contract. ITS does not dispute that, at the time its nomination was withdrawn, its accounting system had not been the subject of a completed DCAA audit. Furthermore, the Board is at a loss to understand the basis for ITS's position that sections 631(a) and (f)(2) of the Small Business Act have been violated. These statutory provisions state the overall policy of promoting awards of Government contracts and subcontracts to small business concerns generally and to small business owned by socially and economically disadvantaged individuals under the 8(a) program. We find it compelling that the substitute proposed for ITS is also a small disadvantaged business that has been certified under the 8(a) program. It would thus appear that, while ITS may believe it has been wronged individually, MMS has nonetheless adhered to the general policy of assisting small disadvantaged business concerns. ITS also disputes the propriety of MMS's position that it would not award a cost-reimbursable contract to ITS in the absence of a DCAA-audited accounting system. ITS insists that this is not a legitimate requirement -- arguing that the request for capability statements, termed the "proposal request" by ITS, does not indicate that a DCAA-audited accounting system is necessary. Once again, ITS places too much emphasis on the "proposal request" and its import. The proposal request does not purport to be a statement of work or a contract vehicle -- indeed, it would not have been appropriate for MMS to make ITS privy to such information in seeking a capability statement. Cf. James W. Collins & Associates, Inc. v. Department of Commerce, GSBCA 12205-P (Jan. 7, 1993) (protest involving unauthorized, premature disclosure of section of work under 8(a) program). Thus, we do not think that MMS is precluded from imposing this requirement by reason of its absence in the proposal request. Indeed, it appears from the record that MMS had valid reason to believe, when it selected ITS for nomination, that ITS's accounting system had already been audited by DCAA. The requirement for a DCAA-audited system to ensure that costs, under a cost-reimbursable contract involving a significant dollar amount, can be properly tracked does not appear to the Board to be unreasonable or unwarranted. In addition, although we recognize that the FAR provisions pertaining to cost- reimbursement contracts do not expressly require a DCAA-audited accounting system,[foot #] 6 neither do these provisions preclude this from being imposed as a requirement. The MMS cost analyst indicated that DCAA is the agency that MMS, and other Government entities, customarily rely upon to verify the adequacy of a contractor's accounting practices; the contracting officer indicated that in her experience, MMS has always required a contractor to have a DCAA-audited accounting system to be eligible for award of a cost-reimbursement contract. The substitute 8(a) firm met this requirement at the time its nomination was accepted by SBA. Neither can we acquiesce in protester's position that MMS was obligated, as a result of its inability to piggyback the Treasury audit, to request that DCAA perform an audit for MMS. Rather, MMS's contention that it was not in a position to request such an audit in connection with the ESPIS project because it lacked a DPA and could not request a cost proposal is entirely convincing. The evidence of record is also persuasive that MMS was depending on the availability of the DCAA audit of the Treasury contract to permit it to proceed with ITS. ITS rebuts this point by asserting, for the first time in the post-hearing brief, that MMS should have requested that DCAA audit the small purchase contract or another recent contract award within a different Interior Department service. The Board has no evidence before it on whether such an audit would have been either appropriate or feasible. Nor is there any evidence that ----------- FOOTNOTE BEGINS --------- [foot #] 6 The FAR provides that a "cost-reimbursement contract may only be used when . . . [t]he contractor's accounting system is adequate for determining costs applicable to the contract." 48 CFR 16.301-3 (1991). ----------- FOOTNOTE ENDS ----------- demonstrates that such an audit could have been performed in a sufficiently timely manner once MMS learned that the Treasury audit results would not be available. Given the dearth of evidence on the point, the Board is simply not prepared to second-guess MMS's actions in this regard. Relying on the Board's recent decision in Corporate Systems Resources, Inc. v. Tennessee Valley Authority, GSBCA 11938-P, 1992 BPD 267 (Sept. 25, 1992), MMS asserts that ITS's protest must be denied in the absence of proof that ITS was unfairly treated by MMS. In CSR, the protester similarly challenged an agency decision to withdraw its nomination of the protester to receive an award of a noncompetitive 8(a) contract. There, the agency had progressed to negotiations, and was concerned that the proposal received by the small business would not "add value" to a software package of a large business supplier. The Board, recognizing that acceptance into the 8(a) program did not automatically guarantee the eventual award of a contract, ruled on the basis of a fully developed record that TVA's actions did not depart from the applicable standard of affording "fair consideration" to protester's proposal. Id., 1992 BPD 267 at 10-12. In our decision denying respondent's motion to dismiss for failure to state a valid basis of protest, we noted that unless ITS could show that the concerns expressed by MMS in seeking SBA's withdrawal of the ITS nomination were unfounded and unjustifiable, it did not appear that the protest could succeed. Innovative Technology Systems, Inc. v. Department of the Interior, GSBCA 12261-P (Feb. 22, 1993), citing Symbiont, Inc., GSBCA 11123-P, 91-2 BCA 23,876, 23,931, 1991 BPD 72, 86; KOH Systems, Inc./ Transaction Response Management, Inc. Joint Venture, GSBCA 9388-P, 88-2 BCA 20,664, 1988 BPD 38. With the benefit of a fully developed record, it appears that the overriding reason for the request to substitute another 8(a) contractor for ITS was the agency's strong desire to deal with a company that had in place an accounting system that had been audited and approved by the DCAA. Regardless of whether another agency might have been willing to proceed without such an audit prior to award, we cannot say that MMS's decision that it required a DCAA-audited accounting system was unreasonable or unduly unfair to ITS. Nor does the record establish that the requirement was imposed because of an improper motivation to avoid contracting with ITS. Under the circumstances, protester has not met its burden to prove that the agency's actions were violative of statute or regulation. Decision The protest is DENIED. _____________________________ CATHERINE B. HYATT Board Judge We concur: ___________________________ ______________________________ ROBERT W. PARKER ANTHONY S. BORWICK Board Judge Board Judge