Agreement on Treasury contract altered basis for award, GAO finds

Senior government officials materially altered the basis upon which the Treasury Department awarded a major telecommunications contract, potentially worth up to $1 billion, according to the Government Accountability Office, which released a decision Thursday on six protests filed against the contract. The government watchdog also found that the officials' plans to determine whether to renew the contract in future years didn't comport with federal regulations.

In December, the Treasury Department chose AT&T Corp. to manage its telecommunications systems, under a contract called the Treasury Communications Enterprise. TCE has a base period that expires in 2008, and allows for multiple one-year extensions. However, before the contract award was announced publicly, Treasury officials signed a memorandum of understanding with the General Services Administration, agreeing to consider moving Treasury's systems to a GSA-managed contract called Networx, set to be awarded next year.

Officials didn't tell companies bidding on TCE about the memorandum, GAO stated in a redacted version of its decision. "The [memorandum] significantly changed the approach to determining whether to exercise the TCE options in ways that, in total, made it significantly less likely that the TCE options would be exercised," GAO stated. "Treasury thus was required to advise offerors of the new approach…and provide them an opportunity to submit revised proposals on a common basis that reflects the agency's actual needs."

Treasury only accepted one round of offers, an unusual move for a procurement of this size. GAO recommended that Treasury obtain revised proposals and terminate the AT&T award if other companies offer a better value. A Treasury spokeswoman said the department "is reviewing the decision and assessing our options."

GAO's report reveals high-level negotiations among Treasury, GSA and Bush administration officials that haven't previously been disclosed. In June 2004, Treasury's new chief information officer, Ira Hobbs, learned from GSA's Sandra Bates of the agency's "disappointment" that Treasury planned to buy telecom services on its own, not through Networx, GAO found. Bates was commissioner of the Federal Technology Service, the GSA division that manages Networx. Treasury would be a large customer of the Networx contract if it signed on.

Hobbs also learned there was a "great deal of consternation" at the Office of Management and Budget about Treasury's TCE plans, according to GAO. Officials had urged agencies to buy telecom and technology services from single contracts, in order to pool the government's buying power. Members of Congress also worried that by acting alone, "Treasury was diluting the government's buying power in the marketplace and undercutting GSA's Networx contract," GAO reported.

In light of those concerns, Hobbs met in September with the administrator of the Office of Federal Procurement Policy, David Safavian, GAO found. At the meeting, Hobbs suggested that when TCE came up for renewal in 2008, it would "be a good time for us to look at and consider whatever it is that GSA has on the table." To that, Safavian responded, "We think we can live with that, but we want something in writing."

About one week later, Hobbs and Bates assigned teams to come up with an agreement, which became the memorandum.

Procurement experts and former government officials have noted that it's unusual for an OFPP administrator to become involved with individual procurements. When the existence of the memorandum was disclosed, following the TCE award, an administration official said, "OFPP's role here is not with regard to the specifics of this particular contract."

According to the law establishing the OFPP administrator's position, the official cannot "interfere with the determination by executive agencies of specific actions in the award or administration of procurement contracts." Safavian signed the memorandum, along with Bates, Hobbs, and Karen Evans, the OMB administrator for electronic government.

In an e-mail response to questions, Safavian said of the law, "This language does not limit OMB's (as opposed to OFPP's) organic authority to review budget impacts of agencies' activities or to exercise OMB's separate authorities under the Clinger-Cohen or E-Government Acts. For example, the Clinger-Cohen Act provides the e-government administrator with the authority to review specific acquisitions and the business cases supporting them. OMB's collective interest in this was to advance a policy of strategic sourcing in the telecom arena."

Both Safavian and Bates thought it was in the government's best interest to concentrate federal buying power, as Networx proposes to do, GAO stated. Under the terms of the memorandum, Treasury and GSA would decide whether to extend TCE based on a "best value analysis" that would be applied to the government as a whole, not exclusively to Treasury's needs. If they couldn't agree, OMB would "adjudicate" the matter.

This arrangement deviated from federal acquisition regulations and the terms of the TCE contract, GAO found. By including GSA and OFPP in the decision-making process, "the [memorandum] made the exercise of the options significantly less likely," since officials from the agencies "were of the view that the best interest of the government" lay in concentrating buying power under Networx, GAO stated.

The companies bidding on TCE could have expected that any renewal decision would be based the vendor's performance, since those were the terms of the contract, GAO decided. The agency added that broadening the evaluation criteria to include governmentwide or Networx considerations was a deviation.

GSA officials also pushed to ensure Treasury's move to Networx, the GAO report shows. The agency wanted to exclude the cost of transitioning Treasury systems over to Networx from the best-value analysis. Telecom transitions are often time-consuming and expensive, GAO noted. Officials managing the TCE initiative said they were concerned about the difficulty of transition.

But according to Hobbs, GSA "argued strenuously" that transition costs should not be included in the best value analysis, GAO found. Excluding them was a "concession" to GSA, he said. A TCE manager said officials felt that "what we needed to do--I hate to use this word--but was to appease GSA to get on with it, so we could award this contract."

The director of the Internal Revenue Service's procurement division, which oversaw the TCE contract, stated that not considering transition costs "served to 'placate OMB,' " GAO stated. The report concluded that those costs "clearly would have weighed in favor of" extending TCE and not moving to Networx.

GAO also determined that the Treasury Department's evaluation of the price proposals from bidders was "unreasonable" and that it "understated" the cost of the winning proposal from AT&T. Portions of GAO's decision on price evaluation were redacted, but the document does state that "several of the protesters challenged the evaluated costs attributed to their proposals."