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NACF LTV Award Protest - Cost

LTV challenged the Navy's selection on the ground that the Navy did not properly evaluate cost. LTV asserted that by choosing the F-18 the Navy acted contrary to the selection criteria because the F-18 "will be billions of dollars more costly than the rejected YF-16 derivatives" as well as more costly than the F-16 and possibly even more costly than the F-14. In addition, LTV asserted its belief that the Navy increased LTV's proposed dollar figures "to arrive at an estimated price hundreds of millions of dollars higher than LTV's estimate" without increasing MDC's figures. LTV also questioned the escalation rate used by the Navy in evaluating 1)loposals.

The objective of this procurement was the developinent of a low cost fighter that would be an acceptable alternative to the F-14. However, in considering this protest it is not GAO's function to examine the various alternatives available to the Navy or the cost effectiveness of the alternative it selected. Rather, GAO was concerned solely with the legality and propriety of the Navy's selection decision in view of the applicable law and regulations. Accordingly, while GAO had not evaluated the cost effectiveness of the Navy's selection, GAO did review the Navy's actions to determine if the cost evaluation was conducted in accordance with proper procedures and the established selection criteria.

The solicitation indicated that the equally weighted areas of cost and performance would be the paramount evaluation items. With regard to cost, credibility of proposed costs was listed as the primary concern. The solicitation further imidicated that the evaluation would take into account all costs related to design, development and production.

In evaluating proposed costs, the Navy developed its own independent estimates for the MDC entry and each of the LTV entries. In arriving at its estimates, the Navy utilized both parametric pricing and analogous systeni techniques. Parametric cost estimating involves a process in which the cost of an iteiii is estimated by relating its cost to specific physical and/or pemforimiance. characteristics. The relationship is based on empirical data observed on similar items. The analogous technique. relies on cost. experience with analogous systems. In addition, the Navy considered each offerors "business base and organizational structure, the anticipated higher costs of the increased reliability and maintainability requirements in the NACF program over prior aircraft programs, and those lower costs which would flow from ACF 'commonality.'"

The Navy estimates for development of the LTV designs were substantially higher than LTV's proposed costs, while the Navy estimate for the MDC entry was only slightly higher than MDC's proposed costs. Thus, while the estimated costs of the MDC design were somewhat higher than the estimulated costs of each of the LTV designs, the Navy regarded the MDC proposal as the mote acceptable one, particularly in view of the technical superiority of the MDC design. As the Navy put its, "... while cost was of equal importance, it was not determinative due to the F-18's vast superiority in performance over all of the F-16 derivatives."

The Navy's use of estimates in this case was consistent with sound procurement practices. GAO had repeatedly observed "that the award of cost-reimbursement contracts requires procurement personnel to exercise informed judgments as to whether submitted proposals are realistic concerning the proposed costs and technical approach involved," and that it is proper to use independent Government cost estimates as an aid in determining the reasonableness and realism of cost and technical approaches. Furthermore, although LTV suggestd that the use of parametric pricing techniques is inappropriate, GAO had recognized that it is an acceptable method for estimating costs, and GAO was of the view that the decision to utilize such a technique is within the sound discretion of the procuring activity.

The fact that the MDC design was estimated to cost more than any of the LTV designs did not indicate that the Navy acted improperly in selecting the MDC proposal. Under the evaluation criteria, cost was not to be controlling, but was to be considered along with performance and certain other, less important, factors. The record established that the Navy considered the estimated cost differences among the proposals, but regarded the cost difference between the MDC proposal and the LTV proposals to be completely offset by the technical difference between LTV's designs and the MDC design. It was, of course, well established that agencies have the discretion to award a negotiated contract on the basis of a proposal's technical superiority notwithstanding that proposal's higher cost. The Navy regarded each of LTV's designs to be unsuitable, and could have treated LTV's proposals as unacceptable for technical reasons alone, thereby negating any requirement to consider cost. Accordingly, in light of the evaluation criteria applicable to this procurement, the Navy's selection of the higher-priced proposal was not improper, according to GAO.

With regard to LTV's claim that the Navy increased LTV's proposed costs, it was clear that the Navy did not revise LTV's costs, but relied on its own estimates of what those costs would actually be. GAO had no basis for challenging the Navy's estimating techniques. With regard to the escalation factors, the proposals of both offerors reflect the escalation rates used by the Air Force in evaluation of the F-16 and F-17. However, the Navy felt that those rates were too low and devised its own inflation rates. GAO's review indicated that the Navy applied these rates uniformly to both the MDC proposal and the LTV proposals. Thus, while the Navy's evaluation apparently resulted in higher estimated costs for the proposals than would have been computed by using Air Force rates, it is clear that both offerors were treated equivalently by the Navy in this regard and that neither off eror was prejudiced thereby.

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