United States Government Accountability Office 

Washington, DC 20548 

Comptroller General

of the United States

DOCUMENT FOR PUBLIC RELEASE 

The decision issued on the date below was subject to a 

GAO Protective Order. This redacted version has been 

approved for public release. 

Decision 

Matter of: McKissack+Delcan JV II 

File: B-401973.2; B-401973.4 

Date: January 13, 2010 

Daniel R. Forman, Esq., Richard W. Arnholt, Esq., and Gunjan R. Talati, Esq., Crowell 

& Moring LLP, for the protester. 

Stephen F. Pereira, Esq., Kerry L. Miller, Esq., and Michael L. Culotta, Esq., 

Department of Transportation, for the agency. 

Nora K. Adkins, Esq., and James A. Spangenberg, Esq., Office of the General 

Counsel, GAO, participated in the preparation of the decision. 

DIGEST 

Agency improperly rejected the proposal of a joint venture offeror for a cost 

reimbursement contract because the indirect cost rate structure included in the joint 

venture’s accounting system was considered unacceptable, where the agency has 

provided no supportable or reasonable bases for its determination. 

DECISION 

McKissack+Declan JV II (MD-JV) of Vienna, Virginia protests the Department of 

Transportation (DOT), Federal Transit Administration’s (FTA) rejection of its 

proposal for failing to provide an adequate accounting system under request for 

proposals (RFP) No. DTFT60-08-R-00010 for program management oversight (PMO) 

services. 

We sustain the protest. 

On June 26, 2008, FTA issued a RFP soliciting proposals for PMO services to provide 

support for select capital projects with continuous review and evaluation of grantee 

and FTA processes to ensure compliance with statutory, administrative, and 

regulatory requirements, and to monitor the projects to determine whether the 

projects are progressing on time, within budget, and in accordance with approved 

grantee plans and specifications. AR at 2. The solicitation contemplated the award 

of multiple (approximately 15 to 25) cost-reimbursement, indefinite-delivery, 

indefinite-quantity (ID/IQ) task order type contracts. RFP at 2, 94. Award was to be 

made to responsible offerors whose proposals contained the combination of criteria 

offering the best value to FTA, considering the following the evaluation criteria, 
listed in descending order of importance: Technical and Management, Cost/Price, 

and Socioeconomic Status. Id. at 95. 

MD-JV1 submitted a timely proposal to FTA on September 3, 2008. The agency 

evaluated MD-JV’s technical proposal, determined it was among the most “highly 

rated” technical proposals, and invited MD-JV to participate in oral presentations on 

December 15. Agency Report, Tab 6D-3, FTA Request to Attend Oral Presentations 

(Dec. 15, 2008), at 1. MD-JV’s oral presentation took place on January 7, 2009. Id. 

After oral presentations, the agency rated MD-JV’s technical proposal as technically 

acceptable. AR, Tab 4B, Source Selection Decision, at 8. 

The RFP also requested that offerors complete and submit a cost proposal utilizing 

Attachment J-6, Contract Pricing Summary, included in the RFP. RFP at 87. 

Offerors were further required to state whether or not the federal government 

currently approves their accounting systems without conditions and whether 

proposed indirect rates have been “audited and accepted by any Federal Audit 

Agency.” RFP at 89, 93. Additionally, all offerors had to “make [their] records 

available for pre-award or post-award audits.” RFP at 89. 

MD-JV included a completed Attachment J-6 with its cost proposal. The completed 

attachment identified the various direct labor rates for required personnel, listing 

alongside each labor rate the joint venture partner from which the employee would 

be assigned--Delcan Corporation or The McKissack Group--and calculated a total 

direct labor cost for each partner. In the “Labor Overhead” section of 

Attachment J-6, MD-JV provided a labor overhead rate for each joint venture partner 

that was applied to each of the joint venture partner’s total direct labor costs. 

Additionally, MD-JV’s Attachment J-6 provided costs for various subcontracted 

consultant services. MD-JV’s Attachment J-6. 

On March 18, 2009, FTA sent MD-JV’s cost proposal for a pre-award audit to the 

Defense Contract Audit Agency (DCAA). As part of the audit, DCAA reviewed 

MD-JV’s direct labor, escalation, and indirect rates to determine if they provided an 

acceptable basis for negotiation of a fair and reasonable price and issued its report 

to FTA on September 21. AR, Tab 4C, DCAA Audit Report (Sept. 21, 2009), at 1. 

DCAA determined that there were “significant issues effecting [DCAA’s] 

examination” as follows: 

 

The Joint Venture Agreement states that Delcan will maintain the 

accounting records. Delcan maintains its computerized accounting 

 

1

 MD-JV, a newly formed joint venture of Delcan Corporation and The McKissack 

Group, Inc., was formed as an unincorporated joint venture under the laws of the 

State of Delaware in order to perform this and other contracts with FTA. AR, Tab 

6D-2, MD-JV Joint Venture Agreement, at 3. 

Page 2 B-401973.2, B-401973.4 
system in Ontario, Canada and maintains its financial records in 

accordance with Canadian generally accepted accounting principles 

(GAAP). FAR 31.201-2 -- Determining Allowability, states that 

“generally accepted accounting principles and practices appropriate to 

the circumstances” are used to determine allowability. . . . Since the 

accounting system is located at Delcan’s facility in Ontario Canada, 

there is no assurance that the joint venture will follow U.S. GAAP as 

required by the FAR. 

The proposal submitted to the Government does not show that the 

joint venture is an independent entity. An independent joint venture 

for Government contracting purposes would have employees 

committed from each company and the indirect rate structure would 

be unique to the joint venture. . . . In addition, the indirect rate 

structure proposed is Delcan’s; the proposal should contain an indirect 

rate structure specific to McKissack & Delcan Joint Venture II. 

The contractor has not prepared budgetary forecasts for the entire 

proposed period of contract performance. The contractor proposed 

the same indirect [rates] for all years of the proposed effort. . . . 

Id. at 2. Thus, the DCAA concluded: 

We do not believe the proposal is an acceptable basis for negotiation of 

a fair and reasonable price. . . . To make the cost or pricing data 

adequate, the offeror must have an accounting system that 

incorporates U.S. GAAP located at the princip[al] place of business in 

Vienna, Virginia; commit specific employees to the joint venture and 

compute average labor rates that are representative of each company 

in the joint venture; develop an indirect rate structure specific to the 

joint venture; and develop a comprehensive budget to facilitate the 

preparation of reliable cost estimates during the entire period of 

contract performance. 

Id. at 3.2

 

 

2

 While the DCAA report states that it “discussed factual matters concerning” its 

findings with a Delcan representative on May 19, 2009, MD-JV’s denies that it was 

advised of the reasons now advanced by DCAA for finding its cost proposal 

unacceptable, and was notified only of an issue not regarded as “major.” AR, Tab 4C, 

DCAA Audit Report (Sept. 21, 2009), at 3; Tab 5A, MD-JV’s Comments on Audit 

Report (Oct. 9, 2009), at 7-9. DCAA does not rebut MD-JV’s assertion here. AR, 

Tab 5A, DCAA Comments Concerning MD-JV’s Comments on Audit Report, at 9. 

Page 3 B-401973.2, B-401973.4 
Based on the DCAA audit, the contracting officer determined that MD-JV’s proposal 

was unacceptable. AR, Tab 5, Contracting Officer (CO) Determination and Findings. 

Id. at 5. On September 22, the contracting officer advised MD-JV of the rejection of 

its proposal for the following reasons: 

Issue 1: . . . Since the accounting system is located at Delcan’s facility in 

Ontario, Canada, there is no assurance that the joint venture would follow the 

U.S. GAAP guidelines as required by the FAR. 

Issue 2: The proposal as submitted by the Joint Venture (JV) does not show 

that the JV is an independent entity, which for Government contracting 

purposes would have employees committed from each company and the 

indirect rate structure would be unique to the JV. It is noted that the JV 

proposal did not contain an indirect rate structure specific to [MD-JV]. 

Issue 3: The JV has no prepared budgetary forecasts for the entire proposed 

period of contract performance but has proposed the same indirect rate for 

each year of the proposal contract effort. 

AR, Tab 1B, FTA Letter to MD-JV (Sept. 22, 2009), at 2.3

 

MD-JV received this letter on September 24, and filed a protest with our Office on 

October 5, specifically challenging each of the three reasons given in FTA’s rejection 

letter; providing documentation to support its claim that MD-JV is an independent 

entity;4

 and explaining why its proposed overhead rate structure was proper, 

particularly considering that it is a newly formed joint venture. Protest at 7. After 

receiving a copy of DCAA’s report, MD-JV supplemented its protest on October 19, 

arguing that FTA’s reliance on DCAA’s report was unreasonable because DCAA’s 

report contained numerous factual errors and DCAA’s audit did not conform to 

Generally Accepted Government Auditing Standards (GAGAS) as it was required to 

do.5 

 

3

 The only communication that FTA had with MD-JV prior to the rejection of MD-JV’s 

proposal, which was in any way related to this matter, was its letter of February 3, 

where FTA requested that MD-JV provide a copy of the joint venture agreement and 

provide a revised representation and certification pertaining to its joint venture 

status. AR, Tab 6D-1, FTA Letter to MD-JV (Feb. 3, 2009). 

4

 MD-JV is registered in the Central Contractor Registration, and has a Tax 

Identification Number and a Data Universal Numbering System number. AR, 

Tab 6D-2, MD-JV Response to FTA Request, at 1. 

5

 For example, MD-JV asserts that DCAA failed to comply with the GAGAS 

requirements regarding disclosing audit findings to responsible officials of audited 

entities. 

Page 4 B-401973.2, B-401973.4 
On November 4, the agency submitted its agency report and relevant documents in 

response to the initial protest.6

 In response to MD-JV’s allegations, FTA stated that 

exclusion notice issues “(1) and (3) were not the reason for Protestor’s exclusion 

from the competitive range and elimination from further consideration for contract 

award. . . . Even if true, they would be minor correctable errors on the part of the 

Protester which would be acceptable to the contracting officer when corrected. . . . 

[Issue] (2) in the Protests is an un-correctable error on the part of the Protestor, one 

that does form the sole basis for this protest.” AR at 4. In the report, the agency also 

provides further explanation regarding “Issue 2.” In this regard, FTA explains that 

while FTA’s exclusion notice provides that MD-JV was excluded because “[t]he 

proposal as submitted by the Joint Venture (JV) does not show that the JV is an 

independent entity, which for Government contracting purposes would have 

employees committed from each company and the indirect rate structure would be 

unique to the JV,” the agency no longer disputes that there is substantial evidence 

that MD-JV is an independent entity. AR at 7. Instead, FTA now states “None of the 

arguments presented in the Protest or the Protest Amendment address the real issue 

in this case, and that is, MD-JV’s failure to submit a single overhead rate in their Cost 

Proposal. The basic failure of MD-JV is compliance with Cost Accounting Standard 

(CAS) 401.”7

 AR at 6. 

MD-JV filed comments noting that the agency had abandoned its contemporaneous 

basis for rejecting MD-JV’s proposal, CAS 401 had not been previously mentioned as 

the basis for rejection, CAS 401 would not be applicable to it under this 

procurement, and CAS 401 did not prohibit a joint venture offeror from proposing 

the type of dual overhead rate approach included in MD-JV’s accounting system. The 

GAO attorney handling this case for our office, after a complete review of the entire 

record, conducted an outcome prediction alternate dispute resolution (ADR) 

conference, during which she stated that the agency had not provided a reasonable 

basis for excluding MD-JV’s proposal based on the documentation in the record. The 

agency did not initiate corrective action in response to the outcome prediction ADR, 

but provided further argument as to the applicability of CAS 401 and submitted a 

statement from a DCAA representative addressing this issue. 

 

6

 The agency did not specifically respond to the supplemental protest (although a 

document contained in the report responded to some of the MD-JV comments on the 

DCAA report that were provided to the agency prior to the supplemental protest). 

Since we have otherwise sustained this protest, FTA and DCAA may want to 

consider these issues as the recommended corrective action are implemented. 

7

 This was the first time that CAS 401 was mentioned by FTA or DCAA as the basis 

for the rejection of MD-JV’s proposal. 

Page 5 B-401973.2, B-401973.4 
We first note that FTA’s rejection of MD-JV’s proposal due to evaluated problems in 

its accounting system concerns a matter of a prospective contractor’s responsibility, 

not technical acceptability. See Pacificon Productions, Inc., B-196371, July 22, 1980, 

80-2 CPD ¶ 58 at 4. In this regard, Federal Acquisition Regulation (FAR) § 9.104(e) 

provides that “to be determined responsible, a prospective contractor must . . . have 

the necessary organization, experience, accounting and operational controls, and 

technical skills, or the ability to obtain them.” FAR § 16.301-3(a)(1) requires that 

cost-reimbursement contracts are only used when a contractor’s accounting system 

is adequate for determining costs applicable to the contract. 

Responsibility is to be determined based on any information received by the agency 

up to the time award is proposed to be made. FAR § 9.105-1(b)(3); American Tech. & 

Analytical Servs., Inc., B-282277.5, May 31, 2000, 2000 CPD ¶ 98 at 3. The 

determination of a prospective contractor’s responsibility rests within the broad 

discretion of the contracting officer, who, in making that decision, must necessarily 

rely on his or her business judgment. We therefore will not question a negative 

determination of responsibility unless the determination lacked any reasonable 

basis. Oertzen & Co. GmbH, B-228537, Feb. 17, 1988, 88-1 CPD ¶ 158 at 3. In this 

respect, while a contracting officer has significant discretion in this area, a negative 

responsibility determination will not be found to be reasonable where it is based 

primarily on unreasonable or unsupported conclusions.8 Decker and Co.; 

Baurenovierungsgesellschaft, m.b.H., B-220807 et al., Jan. 28, 1986, 86-1 CPD ¶ 100 

at 7. Moreover, an agency’s reliance upon the advice of DCAA does not insulate the 

agency from responsibility for error on the part of DCAA. See ASRC Research & 

Tech. Solutions, LLC, B-400217, B-400217.2, Aug. 21, 2008, 2008 CPD ¶ 202 at 11 n.12. 

As noted, during the development of this protest, FTA has abandoned many of the 

reasons it previously advanced regarding why it believed MD-JV’s accounting system 

was inadequate. FTA now asserts that MD-JV’s accounting system is inadequate 

because MD-JV’s failure to submit a unique indirect rate for the joint venture violates 

CAS 401. 

CAS 401 states: 

(a) A contractor’s practices used in estimating costs in pricing a 

proposal shall be consistent with his cost accounting practices used in 

accumulating and reporting costs. 

 

8

 An agency can and should reverse a previous non-responsibility determination 

based on additional information brought to its attention prior to award. Henry Spen 

& Co., Inc., B-183164, Jan. 27, 1976, 76-1 CPD ¶ 46 at 4. Exchanges with an offeror 

that pertain to its responsibility are appropriate and reasonable attempts to address 

agency concerns about the offerors ability to perform do not constitute discussions. 

Luhr Brothers, Inc.--Recon., B-248423.2, Nov. 9, 1992, 92-2 CPD ¶ 328 at 3-4. 

Page 6 B-401973.2, B-401973.4 
(b) A contractor’s cost accounting practices used in accumulating and 

reporting actual costs for a contract shall be consistent with his 

practices used in estimating costs in pricing the related proposal. 

(c) The grouping of homogeneous costs in estimates prepared for 

proposal purposes shall not per se be deemed an inconsistent 

application of cost accounting practices under paragraphs (a) and (b) 

of this section when such costs are accumulated and reported in 

greater detail on an actual cost basis during contract performance. 

48 C.F.R. § 9904.401-40 (2009). That is, CAS 401 requires a contractor’s accounting 

practices in estimating costs for a proposal to be consistent with cost accounting 

practices used by the contractor in accumulating and reporting costs. 48 C.F.R. 

§ 9904.401-20. This requirement is imposed because “[c]onsistency in the application 

of cost accounting practices is necessary to enhance the likelihood that comparable 

transactions are treated alike,” so that, among other things, there is “financial control 

over costs during contract performance.” Id. 

FTA has provided a DCAA memorandum from the Branch Manager of DCAA’s 

Reston, Virginia branch office in support of its argument that MD-JV’s failure to 

submit a unique indirect rate for the joint venture violates CAS 401. DCAA simply 

states that “the contractor’s proposal did not comply with CAS 401 because the 

contractor’s proposal did not contain a unique rate structure, which an independent 

and professional operated organization would have in the regular course of business. 

. . . The CAS/FAR noncompliance issue is not the number of indirect rates,” but 

rather that “MD-JV does not have its own indirect rate structure for allocating costs 

to Government contracts.” DCAA Memorandum (Dec. 15, 2009) at 2. 

Except for the foregoing conclusory statements, neither FTA nor DCAA has provided 

any analysis or legal authority as to why the MD-JV indirect rate structure, which 

adopts the individual overhead rates of the joint venture partners for MD-JV’s own 

use and describes how the rates will be applied, violates CAS 401.9

 Nor is it apparent 

to our Office why this would violate CAS 401, given that neither agency has 

explained why the particular dual overhead rate structure proposed by MD-JV would 

lead to an inconsistency in the application of cost accounting practices or a loss of 

financial control over costs during contract performance. In this regard, it is notable 

that DCAA’s audit report and FTA’s determination and findings supporting the 

rejection of MD-JV’s proposal because of its unacceptable accounting system did not 

 

9

 There is some dispute between DCAA and MD-JV as to whether CAS 401 would be 

applicable to this procurement, which we need not resolve here because the 

agencies have not reasonably explained why MD-JV’s proposed indirect rate 

structure is inconsistent with CAS 401. 

Page 7 B-401973.2, B-401973.4 
Page 8 B-401973.2, B-401973.4 

 

make any mention of a CAS 401 violation.10 Moreover, we have found no other 

authority that prohibits MD-JV’s proposed dual overhead rate structure.11 

While the agency acted properly in choosing to investigate whether or not MD-JV 

had an adequate accounting system to support this cost-reimbursement contract, 

FTA has not provided on this record a reasonable explanation why MD-JV’s 

accounting system was unacceptable, and we sustain the protest on this basis.12

 

We recommend that FTA reevaluate MD-JV’s accounting system to determine 

whether it is adequate. In so doing, we note that if the agency has problems with 

MD-JV’s accounting system, it may open a dialogue to resolve these issues without 

such dialogue necessarily being considered discussions, given that this is a matter 

relating to MD-JV’s responsibility, so long as MD-JV does not change its proposed 

cost or otherwise materially modify its proposal. If MD-JV’s accounting system is 

found adequate, the agency should determine whether MD-JV’s proposal is otherwise 

in line for award and if so award should be made to that firm. We also recommend 

that the agency reimburse the protester for the reasonable costs of filing and 

pursuing the protest, including reasonable attorneys’ fees. Bid Protest Regulations, 

4 C.F.R. § 21.8(d)(1)(2009). The protester’s certified claims for cost, detailing the 

time expended and costs incurred, must be submitted directly to the agency within 

60 days of receiving this decision. 4 C.F.R. § 21.8(f)(1). 

The protest is sustained. 

Lynn H. Gibson 

Acting General Counsel 

10 While DCAA asserts that there are provisions in FAR Part 31--which was cited as 

the general authority for finding MD-JV’s indirect rate structure improper in DCAA’s 

audit report--that address the objectives of CAS 401, the fact is that CAS 401, unlike 

some other CAS provisions, has not been incorporated into FAR Part 31. See The 

Future Role of the Cost Accounting Standards Board, Cost Accounting Standards 

Board Review Panel Report to Congress, GAO SP-99-1, Apr. 2, 1999, at 106-107. 

11 It may be that there are legitimate legal or accounting reasons for questioning 

MD-JV’s indirect rate structure that have not been provided to our Office. 

12 As noted above, the agencies modified the reasons that MD-JV’s accounting system 

was regarded as unacceptable and did not contemporaneously advance CAS 401 as 

the reason why the agencies were concerned with MD-JV’s accounting system.