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MEMORANDUM FOR THE SECRETARY
 
FROM:                    John C. Layton
                         Inspector General
 
SUBJECT:                 INFORMATION:  Report on "Review of
                         Proposed Subcontract For Outsourcing 
                         Information Technology"
 
BACKGROUND
 
The subject final report is provided for your information.  An
allegation was made to the Office of Inspector General (OIG), and
also reported in the press, regarding possible kickbacks in
connection with a proposed Westinghouse Savannah River Company
(WSRC) subcontract with the Computer Sciences Corporation (CSC)
for outsourcing information technology (IT).  Our investigative
activity did not substantiate this allegation.  However, in the
course of investigating the allegation it came to the OIG's
attention that WSRC's selection of CSC for this proposed
subcontract had possibly involved significant deviations from
procurement rules and regulations.  Accordingly, the specific
objective of this review was to determine if the selection of CSC
as a proposed subcontractor was made in accordance with
appropriate procurement rules and regulations.  In the course of
our review, the Department of Energy's (DOE) Savannah River
Operations Office (SR) made the decision to disapprove WSRC's
proposed subcontract with CSC, taking this action on December 23,
1996.  Although SR disapproved the subcontract, we completed our
review, and have issued this report in order to address some
management and possible future procurement issues.
 
DISCUSSION:
 
We reviewed WSRC's selection of SCS as a proposed subcontractor
for outsourcing IT at the Savannah River Site (SRS).  Our review
found that WSR: (1) did not use effective competitive techniques
regarding both the solicitation and evaluation of bids for this
procurement; (2) failed to maintain adequate file documentation
appropriate to the value of the proposed procurement; and, (3)
had not ensured that the pricing of the proposed subcontract was
fair and reasonable.
 
Both WSRC and SR officials have stated that the requirements of
DEAR 970.7103 should be the basis for determining the propriety
of the CSC procurement process.  That regulation, provides, in
part, that a contractor's procurement system should ensure the
use of effective competitive techniques, adequate documentation,
and fair and reasonable pricing.  WSRC officials provided a legal
analysis to SR that concluded that the proposed CSC procurement
met the requirements of this regulation.  SR disagreed with
WSRC's conclusion, however, and on December 23, 1996, disapproved
WSRC's proposed subcontract with CSC.
 
We were told that CSC had up to 30 employees at SRS during the
negotiation process for the proposed subcontract.  We were also
told that the CSC employees' activities included reviewing the
scope of information technology operations and requirements at
SRS.  CSC also had some involvement in determining what areas
should be included in the proposed scope of work for the proposed
procurement.  Further, CSC was provided an opportunity to review
WSRC's Make-or-Buy analysis.  All of these activities, in our
opinion, could potentially provide CSC with an unfair competitive
advantage in the event of future procurements of IT services at
SRS.
 
We recommended that the Manager of the Savannah River Operations
Office direct WSRC to: (1) conduct any future procurements of IT
support services in accordance with the requirements of WSRC's
approved procurement procedures; and, (2) ensure that any
potential unfair competitive advantage provided to CSC in
competing for future information technology procurements at SRS
is considered and mitigated, as appropriate.
 
In commenting on this report, DOE management concurred with the
factual accuracy of the report, and with both recommendations.
 
Attachment
 
cc:  Deputy Secretary
     Under Secretary
 
 
 
 
 
 
                   U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
 
 
 
                   
 
                            REPORT ON
                                
               REVIEW OF PROPOSED SUBCONTRACT FOR
                                
               OUTSOURCING INFORMATION TECHNOLOGY
 
 
 
 
 
Report No:   DOE/IG-0406      Office of Inspections
Date Issued: June 2, 1997     Washington, DC  20585
                        
                        
                        
                        REPORT ON
            REVIEW OF PROPOSED SUBCONTRACT FOR
            OUTSOURCING INFORMATION TECHNOLOGY
                              
                              
                              
                      TABLE OF CONTENTS
                              
                                                       PAGE
 
 
I.    INTRODUCTION AND PURPOSE                            1
 
II.   SCOPE AND METHODOLOGY                               1
 
III.  SUMMARY RESULTS OF REVIEW                           2
 
IV.   BACKGROUND                                          3
 
V.    CONTRACTOR PURCHASING SYSTEM CRITERIA               5
 
VI.   RESULTS OF REVIEW                                   9
 
VII.  FUTURE INFORMATION TECHNOLOGY PROCUREMENTS         15
 
VIII. RECOMMENDATIONS                                    16
 
IX.   MANAGEMENT COMMENTS                                16
 
                  
                  
                  U.S. DEPARTMENT OF ENERGY
                 OFFICE OF INSPECTOR GENERAL
                    OFFICE OF INSPECTIONS
                    WASHINGTON, DC 20585
                              
                              
                          REPORT ON
             REVIEW OF PROPOSED SUBCONTRACT FOR
             OUTSOURCING INFORMATION TECHNOLOGY
                              
 
l.  INTRODUCTION AND PURPOSE
 
An allegation was made to the Office of Inspector General
(OIG), and also reported in the press, regarding possible
kickbacks in connection with a proposed Westinghouse
Savannah River Company (WSRC) subcontract with the Computer
Sciences Corporation (CSC) for outsourcing information
technology (IT).  OIG investigative activity did not
substantiate this allegation.  However, in the course of
investigating the allegation it came to the OIG's attention
that WSRC's selection of CSC for this proposed subcontract
had possibly involved significant deviations from
procurement rules and regulations.  Accordingly, the
specific objective of this review was to determine if the
selection of CSC as a proposed subcontractor was made in
accordance with appropriate procurement rules and
regulations.
 
In the course of our review, the Department of Energy's
(DOE) Savannah River Operations Office (SR) made the
decision to disapprove WSRC's proposed subcontract with CSC,
taking this action on December 23, 1996.  Although SR
disapproved the subcontract, we completed our review, and
have issued this report in order to address several
management issues and possible future procurement issues.
 
 
ll.  SCOPE AND METHODOLOGY
 
Our review activities were conducted during September 1996
through January 1997 by personnel within the Office of
Inspector General's Offices of Investigations, Audits, and
Inspections.
 
We reviewed relevant sections of Title 48, Code of Federal
Regulations, Chapter 9, the Department of Energy Acquisition
Regulation (DEAR), the Department of Energy's prime contract
with WSRC, various procurement-related documentation held by
WSRC in support of the proposed subcontract with CSC, and
WSRCs current procurement policies and procedures.  We
interviewed key management, legal, procurement, financial,
and computer personnel at the Department's Savannah River
Operations Office and WSRC, as well as a consultant hired by
WSRC.  We also interviewed key management officials with CSC
and four competing companies.
 
This review was conducted in accordance with the Quality
Standards for Inspections issued by the Presidents Council
on Integrity and Efficiency.
 
 
lll.  SUMMARY RESULTS OF REVIEW
 
We reviewed WSRCs selection of CSC as a proposed
subcontractor for outsourcing IT at the Savannah River Site
(SRS).  Our review found that WSRC:  (1) did not use
effective competitive techniques regarding both the
solicitation and evaluation of bids for this procurement;
(2) failed to maintain adequate file documentation
appropriate to the value of the proposed procurement; and
(3) had not ensured that the pricing of the proposed
subcontract was fair and reasonable.
 
Both WSRC and SR officials stated that the requirements of
DEAR 970.7103 should be the basis for determining the
propriety of the CSC procurement process.  That regulation
provides, in part, that a contractor's procurement system
should ensure the use of effective competitive techniques,
adequate documentation, and fair and reasonable pricing.
WSRC officials provided a legal analysis to SR that
concluded that the proposed CSC procurement met the
requirements of this regulation.  However, SR disagreed with
this conclusion.  On December 23, 1996, SR disapproved
WSRC's proposed subcontract with CSC.
 
We were told that CSC had up to 30 employees at SRS during
the negotiation process for the proposed subcontract.  We
were also told that the CSC employees' activities included
reviewing the scope of IT operations and requirements at
SRS.  CSC also had some involvement in determining what
areas should be included in the proposed scope of work for
the proposed procurement.  Further, CSC was provided an
opportunity to review WSRC's Make-or-Buy analysis.  All of
these activities, in our opinion, could potentially provide
CSC with an unfair competitive advantage in the event of
future procurements of IT services at SRS.
 
We recommended that the Manager of the Savannah River
Operations Office direct WSRC to:  (1) conduct any future
procurements of IT support services in accordance with the
requirements of WSRC's approved procurement procedures; and
(2) ensure that any potential unfair competitive advantage
provided to CSC in competing for future information
technology procurements at SRS is considered and mitigated,
as appropriate.
 
DOE management reviewed a draft of this report, and
concurred with the reports factual accuracy and both
recommendations.  DOE management, however, did not provide
actual or planned corrective actions with pertinent target
dates.  In commenting on this report, DOE management
requested that the following text be included within this
section of the report "to ensure complete accuracy and
understanding of the issues and events."
 
   "WSRC initially sought to have an information technology
   (IT) firm as a member of its 'bid team' for SR's
   management and operating contract competition.  However,
   during the IT selection process, WSRC elected to have
   the IT company as a subcontractor, as opposed to a
   member of its bid team (referred to in the SR
   solicitation as the 'performing entity').  There are no
   procurement procedures applicable to a firm choosing its
   rebid partners; however, the requirements of the SR
   solicitation precluded the selection of 'subcontractors'
   which were not members of the bid team (unless justified
   as a sole source or selected utilizing competitive
   procedures).  When the WSRC proposal team changed from
   having the IT company as a member of its bid team to a
   subcontractor, WSRC management failed to obtain
   assistance from WSRC legal and procurement personnel.
   As a result, the selection process employed did not meet
   the requirements of the approved purchasing system."
 
 
lV.  BACKGROUND
 
During 1994, Westinghouse Electric Corporation (WEC) was in
the process of assembling a team of contractors for the
purpose of rebidding WSRC's prime contract with DOE for
managing and operating the Savannah River Site.  During this
process, a decision was made to consider including a company
that would be responsible for providing IT services for SRS.
WEC contacted certain companies to explore their interest in
joining the rebid team as an IT supplier, and other
companies with IT experience contacted WEC to express their
interest in joining the team.
 
WEC's process for selecting a rebid partner responsible for
IT started in the Fall of 1994 and continued through August
1995.  During this time, WEC explored outsourcing
information technology, and went through a selection process
involving seven potential suppliers.  The outcome of this
process was that CSC was selected as a member of WEC's rebid
team responsible for providing IT services to SRS.
 
In September 1995, WSRC submitted and briefed its rebid
proposal, and identified its team, which included three
primary subcontractors and 16 other specialty
subcontractors, including CSC.  During November 1995 through
March 1996, SR requested additional information regarding
the use of the 16 specialty subcontractors and the manner in
which CSC had been selected.  We were told by an SR official
that WSRC had represented to SR that the selection and
evaluation process for CSC had been competitive and
consistent with WEC practices for commercial procurements.
 
On February 23, 1996, WSRC's Executive Vice President wrote
SR's Contracting Officer and requested approval to begin
negotiations with CSC for the outsourcing of IT at SRS.  In
the memorandum, this official stated that "CSC was selected
by WSRC following a six-month competitive solicitation
involving seven major U.S. industrial firms . . . ."
 
On March 15, 1996, the Chairman of SRs Source Evaluation
Board (SEB) wrote to WSRC and informed them of the SEB's
decision that WSRC's proposed secondary subcontractors had
not been accepted by the SEB as part of the prime contract
Request For Proposal (RFP) process.  The letter, in part,
stated:
 
   "The RFP did not provide a methodology for acceptance of
   any secondary subcontractors and, therefore, the Board
   has concluded that it cannot make any decision at this
   time as to the acceptability of proposed specialty or
   privatization subcontractors.  However, any subcontract
   solicited on a competitive basis  . . . which:  (1) is
   needed for mission accomplishment, (2) provides for fair 
   and reasonable prices, and (3) is in the Government's best 
   interest, may be awarded consistent with WSRC's approved 
   purchasing system. [Emphasis added.]"
 
On April 9, 1996, SR's Contracting Officer authorized WSRC
to proceed with discussions and negotiations with CSC toward
a mutually agreeable subcontract for IT services.  While
authorizing WSRC to proceed, however, SR's Contracting
Officer also specified that:  (1) the final decision and
subcontract must be approved by DOE, and (2) "CSC is to
receive no compensation whatsoever for their participation
in subcontract negotiations, including any pre-negotiation
situation assessments for SRS."  SR's Contracting Officer
told us that his authorization for WSRC to proceed with
negotiations with CSC had relied on WSRC's representations,
both written and oral, regarding the competitive process
used by WSRC in selecting CSC.
 
In April 1996, WSRC began negotiations with CSC, and CSC
personnel came to SRS to conduct survey activities to better
understand site IT operations and requirements.  In
commencing negotiations, WSRC had CSC sign a letter stating,
in part, that CSC was "to receive no compensation whatsoever
for their participation in subcontract negotiations,
including any pre-negotiation situation assessments at SRS."
WSRC also contracted with Gartner Group Consulting Services
(Gartner) to assist in writing a scope of work for the
subcontract, and to provide a pricing analysis of CSC's
proposal.  WSRC also constructed a Make-or-Buy analysis
comparing the cost of performing the work in-house versus
the cost of CSC performing the work.  These activities
extended into the Fall of 1996.
 
SR signed the new prime contract with WSRC on August 6,
1996.  That same month CSC proposed its pricing for the
subcontract; Gartner reviewed these initial prices and
expressed "grave concerns" that CSC's pricing would not
achieve certain cost-savings goals.  CSC revised its
proposed pricing for the subcontract in September 1996.
Applying CSC's pricing to a proposed statement of work
resulted in a five-year cost estimate for CSC totaling
$265,398,753, which was included in WSRC's Make-or-Buy
analysis dated October 3, 1996.  This was submitted to SR as
part of the subcontract approval package on October 7, 1996.
SR staff reviewed WSRC's Make-or-Buy analysis and had
concerns which were discussed with WSRC in a meeting in
early December 1996.  SR staff stated that the process used
by WSRC to construct the Make-or-Buy analysis was flawed,
and the results were invalid.  SR staff also had concerns
regarding the scope of work of the proposed CSC subcontract,
and WSRC's procurement process having met various
requirements of DEAR 970.7103.  As a result of these
concerns, on December 23, 1996, SR's Contracting Officer
wrote to the President of WSRC and disapproved WSRC's
proposed subcontract with CSC, citing the following reasons:
 
     "o  The basis for technical selection could not be
         adequately demonstrated.
    
     "o  The Make-or-Buy analysis did not identify any
         projected savings from outsourcing.
   
     "o  The reasonableness of the subcontract pricing
         could not be justified.
   
     "o  The subcontract baseline scope of work excludes
         strategic tasks previously approved by SR or 
         projected for future implementation.  Significant 
         incremental costs would be incurred to accomplish 
         these tasks."
   
   
V.  CONTRACTOR PURCHASING SYSTEM CRITERIA
 
Both WSRC and SR officials stated that the requirements of
DEAR 970.7103 should be the basis for determining the
propriety of the CSC procurement process.  That regulation
provides, in part, that a contractor's procurement system
should ensure the use of effective competitive techniques,
adequate documentation, and fair and reasonable pricing.
 
 
 
DEAR 970.71
 
Procurement rules for the Department's management and
operating (M&O) contractors are found in DEAR Subpart
970.71, "Management and Operating Contractor Purchasing."
This provision of the DEAR has been incorporated in both the
previous and current contracts with WSRC for managing and
operating the Savannah River Site.  The applicable contract
clause, 'Contractor Purchasing System,' states, in part,
that: "The contractor shall develop, implement, and maintain
formal policies, practices, and procedures to be used in the
award of subcontracts consistent with . . . 48 CFR (EAR)
[sic] 970.71."
 
In a November 26, 1996, letter to SR's Chief Counsel, WSRC's
Assistant General Counsel stated that: "WSRC's purchasing
system in place under its prime contract, DE-AC09-89SR18035,
was not used in the CSC selection and evaluation process."
However, WSRC's Assistant General Counsel further wrote
that: "The key legal questions regarding this subcontract
relate to the issue whether the subcontract satisfies the
requirements of 48 CFR 970.7103 . . . ."  The letter concluded: 
"We are satisfied that the subcontract meets the requirements 
of 48 CFR 970.7103 for contractor purchasing systems."
 
DEAR 970.7103 was revised effective June 2, 1995, while the
procurement process leading to the selection of CSC was
still ongoing.  Prior to this date, DEAR 970.7103 required
procurements to be made in a manner as to conform with the
"Federal norm."  After being revised effective June 2, 1995,
DEAR 970.7103 no longer referred to a "Federal norm," but
required, in part, the following:
   
   "The following shall apply to the purchasing systems of
    management and operating contractors:
   
                 *    *    *    *    *    *    *
     
    "(b) The purchasing systems and methods used by
     management and operating contractors shall be well-
     defined, consistently applied, and shall follow
     purchasing practices appropriate for the requirement
     and dollar value of the purchase.
     
               *    *    *    *    *    *    *
     
     "(d) Contractor purchasing systems shall identify and
     apply the best in commercial purchasing practices and
     procedures (although nothing precludes the adoption of
     Federal procurement practices and procedures) to
     achieve system objectives.  Where specific requirements
     do not otherwise apply, the contractor purchasing
     system shall provide for appropriate measures to ensure
     the:
     
     "(1)  Acquisition of quality products and services at
     fair and reasonable prices;
     
               *    *    *    *    *    *    *
     
     "(4)  Use of effective competitive techniques;
     
               *    *    *    *    *    *    *
     
     "(8)  Maintenance of file documentation appropriate to
     the value of the purchase and which is adequate to
     establish the propriety of the transaction and the
     price paid."
 
In the "RESULTS OF REVIEW" section of this report we discuss
our basis for concluding that WSRC's selection of CSC as a
proposed subcontractor failed to meet these three key
requirements of DEAR 970.7103.
 
WSRC Approved Procurement Procedures
 
WSRC's contract clause, "Contractor Purchasing System,"
states, in part, that: "The contractor shall develop,
implement, and maintain formal policies, practices, and
procedures to be used in the award of subcontracts
consistent with . . . 48 CFR (EAR) [sic] 970.71."
 
DEAR 970.71 requires, in part, the following:
 
   "The contracting procedures of the contractor's
   organization, therefore, form the basis for the
   development of a purchasing system and methods that 
   will comply with its contract with DOE and this 
   subpart.  [DEAR 970.7101]
   
   "In carrying out their overall responsibilities, HCA's
   [Heads of the Contracting Activity] shall:  (1) Require
   management and operating contractors to maintain written
   descriptions of their individual purchasing systems and
   methods and further require that . . . the entire
   written description be submitted to the contracting
   officer for review and  acceptance . . . ." [DEAR
   970.7102(b)(1)]
   
Our review identified only one set of approved procurement
procedures, WSRC's "Procurement Manual B13," which would
have been applicable to the proposed CSC procurement.  This
manual contains the procurement policies and procedures
approved by SR for use under both WSRC's previous and
current prime contracts with the Department.  WSRC had
submitted for approval one other set of procurement
procedures for a commercial procurement "pilot" program,
however, procurement officials in both WSRC and SR informed
us that these "pilot" procedures were to be initially used
for the purchase of materials, and would not be applicable
to the CSC procurement.
 
Although DEAR 970.71 encourages the Department's M&O
contractors to "identify and apply the best in commercial
purchasing practices and procedures" [DEAR 970.7103(d)], it
also requires that these commercial practices and procedures
be documented and submitted to the contracting officer for
review and acceptance [DEAR 970.7102(b)(1)].
 
In a November 26, 1996, letter to the SR Chief Counsel, a
WSRC Assistant General Counsel stated that: "The selection
and evaluation process [for CSC] was consistent with
Westinghouse Electric Corporation (Westinghouse) practices
for commercial procurements."  He also wrote that: "WSRC's
purchasing system in place under its prime contract, DE-AC09-
89SR18035, was not used in the CSC selection and evaluation
process.  Rather, Westinghouse and WSRC used a system it
believed to equate to best commercial practices for a best
value procurement."
 
Although we requested them, WSRC did not provide us in the
course of our review with a copy of WEC's written corporate
commercial procurement procedures.  We discussed WEC's
corporate procurement procedures with WSRC's Manager of the
Procurement & Materials Management Division.  This
individual indicated that he did not have these procedures,
nor did he have specific knowledge of what they required.
 
Even if WEC had documented its corporate commercial
procurement procedures, they had not been submitted for SR
contracting officer review and acceptance, as required by
DEAR 970.7102.  The only applicable written procurement
procedures that had been approved by the contracting
officer, were the procedures in WSRC's "Procurement Manual
B13."
 
We note that because CSC was proposed as a subcontractor to
WSRC, and because the WSRC purchasing system (as documented
in "Procurement Manual B13") was not used in the CSC
selection and evaluation process, then the proposed CSC
procurement technically did not conform with the
requirements of DEAR 970.71.  In addition to not meeting
this technical requirement of DEAR 970.71, we discuss in the
next section of this report WSRC's failure to meet key
substantive requirements for the contractor's purchasing
system found in DEAR 970.7103.
 
 
 
Vl.  RESULTS OF REVIEW
 
We reviewed WSRC's selection of CSC as a proposed
subcontractor for outsourcing IT at the Savannah River Site.
Our review found that:  (1) WSRC did not use effective
competitive techniques regarding both the solicitation and
evaluation of bids for this procurement;  (2) failed to
maintain adequate file documentation appropriate to the
value of the proposed procurement; and (3) had not ensured 
that the pricing of the proposed subcontract was fair and 
reasonable.
 
1.  Effective Competitive Techniques
 
DEAR 970.71 requires that the contractors approved
purchasing system ensure the use of effective competitive
techniques.  Although the current revision is silent on the
elements of effective competition, the previous version of
DEAR 970.71 discussed the competitive elements regarding
solicitation and evaluation in some detail.  Also, the
concepts of these elements are in WSRCs currently approved
procurement procedures, "Procurement Manual B13."  Our
review found that WSRC's proposed procurement of CSC was
deficient with regards to meeting the "solicitation" and
"evaluation" elements of effective competition.
Accordingly, we concluded that the proposed CSC procurement
did not meet the requirement of DEAR 970.7103 to ensure the
use of effective competitive techniques.
 
     Solicitation
 
The first element in ensuring effective competition,
according to the earlier DEAR 970.7103, was to have the
solicitation describe the requirements as completely as
possible.  Services should be purchased through the use of
specifications, standards, or descriptions which clearly and
accurately describe the services to be purchased.  Also,
according to the DEAR solicitation documents should be
prepared which set forth the contract terms and conditions,
and described the requirements clearly, accurately, and
completely.
 
We found that a specific solicitation document was not
prepared for this procurement.  WSRC informed SR that the
"solicitation" given to prospective bidders consisted of:
(1) the RFP for the prime contract, and (2) an information
package describing the current scope and organization of IT
operations at SRS.  Neither of these documents had a scope
of work pertaining to the IT work to be performed under the
proposed subcontract, nor informed the bidders what would be
required under this subcontract.  The only reference to
information technology in the draft RFP for the prime
contract was as one of 12 listed services ("Information
resources management, development, operation") in the Site
Services section of the scope of work.
 
We believe that one reason why a scope of work was not
provided to the bidders for the IT subcontract procurement
was because the original purpose of this procurement was to
find a rebid team partner who had IT expertise, and not to
accomplish specific work.  In fact, WSRC initially did not
have a clear idea of what the appropriate scope of work
should be, and was asking potential bidders to come forward
with their own ideas on how to run IT operations at SRS.
 
Due to the solicitation's unspecific nature, and much of the
procurement process being conducted through oral
discussions, there is no evidence that the bidders were
treated consistently.  In fact, our interviews of bidders
disclosed that the bidders had different understandings of
what they were being asked to bid on; some thought they were
to be a rebid team member, and others knew they were to be
an IT subcontractor.  The bidders also commented on the lack
of information provided by the "solicitation" on which to
prepare a bid.
 
With the "solicitation" being unspecific and without a scope
of work, the bidders' proposals we reviewed in the
procurement files were also very general in nature and
unspecific.  These proposals could be characterized as
marketing material regarding the general IT experience and
capabilities of the bidding company(s).  Very little of
these proposals addressed specific IT work at SRS.
Officials involved in preparing their companies' proposals
had indicated in interviews that because the solicitation
had no scope of work or other specifics, and they had not
been provided with adequate background information, they had
been unable to submit a specific proposal for outsourcing IT
at SRS.
 
Our review disclosed that it was unclear which companies had
actually submitted proposals, or in what form those
proposals were made.  One company did not have any written
proposal documentation in the file.  WSRC informed SR that
the companys proposal had been limited to an oral
presentation, but they were included as a "supplier" and
rated in the procurement evaluation process.  Another
company, on the other hand, had a "proposal" in the file,
yet an official of this company had told us that this
company had only provided WSRC with information, had not
submitted a proposal, and would not have submitted a
proposal even if WEC had requested them to do so.  Even
though this company never proposed, according to this
official, WSRC included this company in their supplier
evaluations.
 
Based upon the above information, we believe that WSRC's
solicitation process was deficient in that it did not
adequately define the requirements, and it relied too
heavily on an oral process which failed to treat bidders in
a consistent manner.
 
 
 
 
     Evaluation Process
 
Our review found that WSRC's evaluation process was
deficient in that the actual evaluation factors used were
not properly disclosed to the bidders.
 
One of the principles for ensuring effective competition,
according to the earlier DEAR 970.7103, was to state in the
solicitation the factors that would comprise the basis for
the award, and note any criteria that were of significantly
greater or lesser importance.  The DEAR also had required
conducting evaluations in accordance with these stated
factors, and the descriptions of their importance.  Our
review found that the bidders were provided with the
evaluation factors in the RFP for the prime contract, but
that they were evaluated using a different set of evaluation
factors/criteria.
 
The evaluation criteria given to the bidders, according to
WSRC, was the evaluation criteria in the RFP for the prime
contract.  For most bidders this would have been the
criteria in the draft RFP released on January 17, 1995.
This draft RFP evaluation criteria was changed somewhat when
the final RFP for the prime contract was released on July
26, 1995.
 
Having referred the bidders to the evaluation criteria in
the RFP, either draft or final, WSRC actually evaluated the
proposals using a different set of criteria.  In a November
26, 1996, letter to SR's Chief Counsel, WSRC's Assistant
General Counsel discussed the criteria used by WSRC as
follows:
 
  "As the competitive selection process drew to a close,
  the Westinghouse evaluation team used a set of detailed
  selection criteria to grade each of the potential
  suppliers.  This more detailed list of elements expanded
  upon the RFP criteria and were more specific to the IT
  environment.  This grading matrix was not sent to any of
  the seven participants, so there can be no confusion as
  to the fact that all offerors understood that they were
  being evaluated as a partner based upon their meeting the
  requirements of the RFP.  The Westinghouse evaluation
  matrix used to rate the suppliers supports and tiers
  directly from the RFP criteria."
 
A procurement official in SR performed a comparison of
WSRC's evaluation matrix, the criteria actually used in
evaluating the potential suppliers, with the criteria in the
final RFP.  This SR officials analysis indicated that, of
the 29 specific elements within WSRC's evaluation criteria
actually used, 13 were not represented at all in the final
RFP's criteria, and one was only partially represented.
This SR official's analysis further stated that the 14
elements which could not be crosswalked to the RFP criteria,
and which consequently had not been disclosed to the
bidders, represented 47.935 percent of the total possible
points in WSRC's evaluation criteria.
 
Based upon the above information, we believe that WSRC's
evaluation process was deficient in that the actual
evaluation factors used were not properly disclosed to the
bidders.
 
2.  Documentation of the Procurement Action
 
Our review found that WSRC had not adequately documented its
procurement process supporting the selection of CSC.
 
DEAR 970.7103(d) states, in part, that: "the contractor
purchasing system shall provide for appropriate measures to
ensure the: . . . (8) Maintenance of file documentation
appropriate to the value of the purchase and which is
adequate to establish the propriety of the transaction and
the price paid."
 
When we started the review and requested the documentation
supporting this procurement, we were informed that much of
the documentation had not been retained, and that bidders
proposals had been destroyed, per the bidders' instructions.
WSRC subsequently located various material and assembled a
procurement file."  Our review of the "file" found no
solicitation document; limited, and indications of missing,
correspondence; and boxes of bidder "proposals" which
principally consisted of generalized marketing material and
company IT capabilities.  Some of this material, we learned
through interviews, had not been submitted as "proposals"
but as "information."  We also noted one contractor
"presentation" in the file which contained material dated
months after the supposed date of the presentation.
 
Our interviews disclosed that a possible reason for the
inadequate documentation was that WSRC did not include WSRC
procurement officials in the procurement process up through
the selection of CSC.
 
In our opinion, the material that was presented to us did
not adequately document the procurement process.  Given the
magnitude of the proposed subcontract, we believe that
WSRC's "procurement file" did not meet the requirements of
DEAR 970.7103(d)(8) for adequate documentation of
procurement actions.
 
3.  Reasonable Pricing
 
Our review found that WSRC's pricing analysis was not
sufficient to determine that CSC's proposed subcontract
costs were fair and reasonable.
 
DEAR 970.7103(d) states, in part, that: ". . . the
contractor purchasing system shall provide for appropriate
measures to ensure the:  (1) Acquisition of quality products
and services at fair and reasonable prices . . . ."
 
WSRC did not use price as a factor in its source selection
process, and had not required the bidders to submit cost
proposals.  It was after CSC had been selected for
negotiations that CSC submitted a proposed "Fixed Unit
Price" subcontract for IT products and services.  WSRC
sought to determine the reasonableness of CSC's proposed
pricing by contracting with the Gartner Group Consulting
Services to perform a pricing analysis.  WSRC also did a
Make-or-Buy analysis which they said was not generally a
measure of price reasonableness, but was simply another
benchmark by which to gauge the competitiveness of CSC's
pricing.
 
     Pricing Analysis
 
In an undated letter, received by SR's Contracting Officer
in November 1996, a WSRC official wrote:
 
     "As stated in other documents previously transmitted,
  price was not a consideration in the selection process
  for this Subcontract [CSC], therefore, WSRC knew that
  another method of determining price reasonableness would
  have to be found.  In light of this, and considering new
  procurement streamlining, FASA etc., WSRC would proceed
  with obtaining CSC's proposal and justify the price of
  that proposal based upon industry/marketplace pricing.
  WSRC realized that we did not have the expertise or vast
  market/industry experience and pricing information to do
  this on our own.  WSRC therefore hired the Gartner Group
  not only to help us develop the Scope of Work, but also
  to provide a price reasonableness analysis of the CSC
  proposal based on Gartner's large I/T industry database
  . . . .
 
      "Our request to Gartner was to provide a price
  comparison of the final CSC proposal to both industry
  averages within a given category of work, and to the WSRC
  estimated 'make' cost to perform the same work.  Gartner
  did not perform a detailed due diligence at SRS, but
  rather analyzed financial information provided to them
  for both the CSC prices and WSRC costs for each category
  for FY97.  The comparison to WSRC cost is not generally a
  measure of price reasonableness, but simply another
  benchmark by which to gauge the competitiveness of CSC's
  pricing."
 
The WSRC official's letter also stated that Gartners
analysis concluded that CSC's pricing was below industry
average in four categories, and above in six categories; for
one other category Gartner did not have comparative data,
but CSC's pricing was 25 percent lower than WSRC's internal
cost for that category.  The official wrote that WSRC
considered CSC's pricing to be reasonable in all categories.
 
Our review of the Gartner study, and interviews with the
consultant who performed the work, confirmed that Gartner
did not perform a detailed study of SRS IT systems.  And due
to the wide ranges in industry pricing, we could not
determine if the generalized industry averages used by
Gartner were relevant to the operating conditions and
related costs of the effort to be performed by CSC.  We were
informed that Gartner did not evaluate the proposed prices
for certain functions where industry averages were not
available, such as for Cray computing services.  CSC's
proposed prices for these unevaluated functions amounted to
over $10 million, or approximately 20 percent of first-year
total costs.  Gartner's review also did not address costs
beyond the first year.  In view of the above, we believe
that the pricing analysis performed by Gartner was not
sufficient to determine the reasonableness of CSC's pricing.
 
Our review found that SR also did not accept WSRC's
assertion that Gartner's pricing analysis determined that
CSC's pricing was reasonable.  SR officials discussed with
Gartner their pricing analysis, and were informed that
Gartner had been asked by WSRC to provide a macro-level
comparison against industry averages, but had not been asked
to perform an overall assessment of price reasonableness.
SR officials were also told by Gartner that while Gartner
had contributed to authoring the Statement of Work, Gartner
had never been asked to price out the entire contract.  If
they had, Gartner told SR officials, then the results of the
price comparison might have differed.  Gartner told SR
officials that their analysis was not intended to, and
should not have been used to, justify CSC's overall contract
pricing proposal as fair and reasonable.
 
SR also hired an independent consultant to review selected
aspects of CSC's proposal.  The consultant reported that
prices on existing government contracts for equipment and
equivalent desk-top computing support were 5 to 10 percent
lower than CSC's proposed prices.  The consultant further
reported that for certain common labor categories,
"Government Wide Acquisition Contracts offered a 10 to 20
percent advantage over CSC's proposed prices.  SR's
consultant wrote to SR that: "the potential cost reductions
associated with the proposed subcontract are unclear."
 
     Make-or-Buy Analysis
 
WSRC also did a Make-or-Buy analysis.  Although WSRC said it
was not generally a measure of price reasonableness, they
said it was simply another benchmark by which to gauge the
competitiveness of CSC's pricing.
 
WSRC initially submitted a Make-or-Buy analysis, dated
October 3, 1996, which indicated that outsourcing the sites
information technology activities, rather than performing
the work in-house, would save $8.7 million over the life of
the five-year subcontract.  For the five years of operation,
the WSRC analysis indicated that it would cost $322,183,823
to outsource activities using the proposed CSC subcontract,
versus $330,884,519 for WSRC to perform the work in-house.
 
Our review found that this initial Make-or-Buy analysis was
based on CSC's proposed prices, the reasonableness of which
could not be determined without a technical evaluation to
compare the proposed scope of work to WSRC's in-house
efforts.  Also, the Make-or-Buy analysis did not consider
all increased costs that WSRC would incur as a result of
outsourcing this effort.  For example, telecommunications
expenses and maintenance costs for certain types of
computers were not considered.
 
SR staff reviewed WSRC's Make-or-Buy analysis and found that
the process used to construct the analysis was flawed, and
the results were invalid.  SR also concluded that the
proposed CSC subcontract would be more costly than
performing the work in-house.  SR discussed their concerns
with WSRC in a meeting on December 3, 1996.  WSRC agreed to
revise the "Make" portion of their analysis.
 
Subsequent to the December 3, 1996, meeting, WSRC
transmitted a revised Make-or-Buy analysis to SR, dated
December 12, 1996.  This new analysis showed that for the
five year period of the proposed subcontract, the cost of
performing the work in-house ("Make") would be $321,333,033,
or $4,429,377 less than the "Buy", which totaled
$325,762,410.  The "Buy" included an estimate for the CSC
subcontract of $267,472,258.
 
In an April 2, 1996, letter to SR, WSRC had written that its
number one priority in negotiating the IT outsourcing
subcontract with CSC was to achieve a 30 percent cost
savings in the first year of operations, and a further 10
percent savings (total) for the next four years.  The
results of this final Make-or-Buy analysis projected that
subcontracting with CSC would not have met this primary
objective.  We also note that because the Make-or-Buy
analysis compared CSC's proposed pricing with WSRC's
internal costs, and not with commercial market prices, the
Make-or-Buy analysis did not ensure the reasonableness of
CSC's pricing.
 
Based upon the above information, we have concluded that
WSRC had not adequately ensured that the pricing of the
proposed subcontract with CSC was fair and reasonable.
 
 
VII.  FUTURE INFORMATION TECHNOLOGY PROCUREMENTS
 
Our review found that CSC's involvement in certain
activities during the negotiation of this proposed
subcontract could potentially provide CSC with an unfair
competitive advantage in future IT procurements.
DEAR 970.7103(d)(4) requires that contractor purchasing
systems provide for appropriate measures to ensure the use
of effective competitive techniques.  We believe that one
principle of effective competition is to ensure that all
competitors are treated equally, and have access to the same
information for bidding purposes.
 
We noted in our review, however, certain activities by CSC
that could potentially provide CSC with an unfair
competitive advantage in future IT procurements at SRS.
Specifically, we were told by WSRC officials that CSC was
asked to work with WSRC's Information Resources Management
group and with various WSRC technical and engineering
functional areas which use IT support to determine areas
that should be included in the subcontract.  We were also
told by WSRC officials that CSC conducted survey activities
to better understand site IT operations and requirements.
These survey activities involved up to 30 CSC employees
during April to July 1996.  We were further told that WSRC
gave CSC the opportunity to review WSRC's Make-or-Buy
analysis after SR claimed to have found errors in the
analysis which showed that it was less costly for WSRC to
provide IT services internally ("Make") rather than to "Buy"
the services under contract with CSC.
 
We believe that CSC's involvement in the development of the
proposed subcontract's statement of work, its survey
activities, and its knowledge of WSRC's Make-or-Buy
analysis, could potentially provide CSC with an unfair
competitive advantage in future IT procurements.
 
 
VlIl.  RECOMMENDATIONS
 
We recommend that the Manager of the Savannah River
Operations Office:
 
1.  Direct WSRC to conduct any future procurements of
    computer support services according to the requirements
    of WSRC's approved procurement procedures, and
 
2.   Direct WSRC to ensure that any potential unfair
     competitive advantage provided to CSC in competing for
     future information technology procurements at SRS is
     considered and mitigated, as appropriate.
 
 
IX.  MANAGEMENT COMMENTS
 
DOE management reviewed a draft of this report, and
concurred with the report's factual accuracy and both
recommendations.  DOE management, however, did not provide
actual or planned corrective actions with pertinent target
dates.
 
In commenting on the report, DOE management also recommended
that an additional paragraph be included in the "SUMMARY
RESULTS OF REVIEW" section of the report "to ensure complete
accuracy and understanding of the issues and events."  We
have incorporated the suggested paragraph verbatim at the
end of that section, and have attributed the source of the
text to DOE management.
 
 
                         IG Report No.  DOE/IG-0406
                              
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