(sections deleted)

IV. Defendant Failed to Comply with FAR § 17.207(f) in Exercising the ID/IQ Options

Turning to the merits, the parties have cross-moved for judgment upon the administrative record pursuant to RCFC 52.1. In a manner “akin to an expedited trial on the paper record,” the court will make findings of fact where necessary to resolve these motions. CHE Consulting, Inc. v. United States, 78 Fed. Cl. 380, 387 (2007). The Court will set aside agency action if it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A); 28 U.S.C. § 1491(b)(4); Banknote Corp. of Am. Inc. v. United States, 365 F.3d 1345, 1350 (Fed. Cir. 2004). In a bid protest, the protestor will succeed when “(1) the procurement official’s decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure.” Banknote Corp. of Am., 365 F.3d at 1351 (quoting Impresa Construzioni Geom. Domenico Garufi v. United States, 238 F.3d 1324, 1332 (Fed. Cir. 2001)). To show a violation of procurement regulation or procedure, the protestor bears a heavy burden and must show a “clear and prejudicial violation of applicable statutes or regulations.” Id.

The most significant alleged regulatory violation in this case is of FAR § 17.207(f). That provision mandates that for the Government to validly exercise an option, “the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract.” Id.

A. Defendant Cannot Satisfy FAR § 17.207(f) By Relying On the Price Analysis Done At the Time of Award

At the time of the initial award of these ID/IQ contracts, the Government evaluated the price of offerors’ proposals by “adding the total price of all Section B positions at all locations for each year of the base period, Option 1 and Option 2.” AR Tab 1 at 196. That is, the offerors proposed a base rate and an escalation rate that increased that base rate throughout the potential ten-year term of the contract. In awarding the contract, the Air Force considered this proposed pricing, including the option periods, for the positions contained in the upper half of Table 1 in calculating the total evaluated price for the proposal.20 Def.’s Reply at 6; AR Tab 1 at 196; see also Carl L. Vacketta & Gail D. Frulla, “Option” Clauses, 88-13 Briefing Papers 1 (Dec. 1988) (noting that options can be priced by modifying the contract unit price with an escalation rate).

The Government contends that “[t]he exercise of the option didn’t change the validity of the initial reasonableness analysis,” Oral Arg. Tr. at 55, but the Court cannot agree. After the contract modifications rendered the NTE rates in Table 1 non-binding, the price evaluation conducted at the time of the initial award was no longer useful. At the time the options were exercised, the NTE rates were only advisory, and the contractors could increase their labor rates at will. The relative costs to the Government of the various contractors’ options, therefore, was then entirely unknown.

The Government’s contention that it was merely reacting to changing market conditions does not assist it in showing regulatory compliance. In AAA Engineering & Drafting, Inc., B- 236034, 92-1 CPD ¶ 307, 1992 WL 70955 (Comp. Gen. March 26, 1992) and Banknote Corp. of America, B-250151, 92-2 CPD ¶ 413, 1992 WL 373640 (Comp. Gen. Dec. 14, 1992), the GAO found that once the Government acknowledged that the market had changed since its initial evaluation, it could not rely upon its evaluation at the time of the award to establish the reasonableness of pricing in exercising options. Both of these cases found that relying upon the price evaluation at the time of award despite changed market conditions violated FAR § 17.207(d); thus the Government’s position would merely move it from the frying pan to the fire. The upper Table 1 NTE rates, which were the only prices that were evaluated, were no longer binding at the time the options were exercised. Therefore, defendant may not rely upon the initial reasonableness determination to show the legality of the option exercise.

Although defendants make much of the fact that the escalation rates were still considered to be binding, Luke Reply Br. at 9; Oral Arg. Tr. at 48, if the underlying NTE rate was not binding, then the question is “escalating what?” An escalation rate must be applied to some other number; it is not clear how the escalation rate can be considered “binding” in the absence< of any prescribed base price to escalate. While the escalation rates may be binding, and they may play some role in determining the cost to the Government of performance, they alone are “too unreliable an indicator of a proposal’s relative cost to the government.” S.J. Thomas Co., 1999 WL 961750, at *3 (disapproving use of offerors’ mark-up rates as sole basis for determining relative costs of proposals); see West Coast Copy, B-254044, 93-2 CPD ¶ 283, 1993 WL 476970, at *5 (Comp. Gen. Nov. 16, 1993) (“Where competing proposals for indefinite quantity contracts are evaluated on the basis of unit prices without extending those prices by estimated quantities, there is no necessary relationship between the evaluated price of a particular offeror and the actual price of performance by that offeror.”); KISS Eng’g Corp., B-221356, 86-1 CPD ¶ 425, 1986 WL 60624, at *3 (Comp. Gen. May 2, 1986) (comparison of average labor rates is insufficient because there is “no necessary relationship between this rate and the likely actual cost of the contract”); see also Health Servs. Int’l Inc., B-247433, 92-1 CPD ¶ 493, 1992 WL 135371, at *2 (Comp. Gen. June 5, 1992) (same).

The Court cannot concur with defendants that “ongoing control of the escalation rates, in conjunction with the price lowering effects of competition, would ensure that pricing could not deviate substantially from the proposed rates that the Air Force found to be reasonable at the time of the Contract award.” Luke’s Reply at 9. Even if the escalation rates themselves continued to be binding, the lack of any control on the underlying price to be escalated deprived the rates of their essential meaning. The pricing of the options, as exercised, was not “evaluated as part of the initial competition.”

B. Defendant Fails to Satisfy the Second Clause of FAR § 17.207(f)

Defendants have, moreover, failed to satisfy the second clause of § 17.207(f), namely that the option was “exercisable at an amount specified in or reasonably determinable from the terms of the basic contract.” Defendant offers three reasons why the exercise of the contract options complied with FAR § 17.207(f)’s mandate: (1) the contract contained “points of reference” in the form of prices from historical task orders and the non-binding NTE rates, which remained in the contract; (2) competition for task orders provided the necessary price control; and (3) the contract set a total fixed price for the option period and thus the option was “priced” within the meaning of the FAR. Defendants argue that these factors, individually and in combination, provided the Air Force with sufficient pricing information that it could determine that the options were fairly and reasonably priced.

1. While There is Flexibility in Price Evaluation for ID/IQ Contracts, There Must be Some Binding Price

It is true that “the evaluation of price or cost in the award of an ID/IQ ‘umbrella’ contract can be challenging, particularly in the procurement of services, because the more meaningful price competition may take place at the time individual task or delivery orders are to be issued.” CW Gov’t Travel—Reconsideration, B-295530.2, 2005 CPD ¶ 139, 2005 WL 1805945, at *4 (Comp. Gen. July 25, 2005). But Congress requires the evaluation of price in making any contract award. See, e.g., 10 U.S.C. § 2305(a)(3)(A)(ii); FAR § 15.304(c)(1). Thus even when price is the least important factor for award, the agency must meaningfully consider price. The MIL Corp., B-294836, 2005 CPD ¶ 29, 2004 WL 3190217, at *5 (Comp. Gen. Dec. 30. 2004); AR Tab 1 at 190. It is therefore impermissible to evaluate relative cost based only upon nonbinding proposals, because such a comparison is not meaningful. CW Gov’t Travel— Reconsideration, 2005 WL 1805945, at *4.

The same is true when evaluating the price of an option in an ID/IQ contract, which is a doubly tricky proposition. As Professors Nash and Cibinic observe, the FAR contains a “lukewarm caveat against the use of options in IDIQ contracts.” Ralph C. Nash & John Cibinic, IDIQ Contracts and Options: Varied Guaranteed Minimums, 16 No. 9 Nash & Cibinic Report ¶ 43 (Sept. 2002) (“We have never been advocates of the use of options in indefinite delivery, indefinite quantity (IDIQ) contracts. A multiple-year IDIQ contract contains all of the advantages of an option with none of the disadvantages. One of the major disadvantages of options is that if they were not evaluated at the time of initial award, they must be competed.”). That is, FAR § 17.202(b) states that an option is “normally not in the Government’s interest when . . . [a]n indefinite quantity or requirements contract would be more appropriate than a contract with options.” The regulation goes on, however, to say “this does not preclude the use of an indefinite quantity contract . . . with options,” which Professors Nash and Cibinic characterize as authorizing the contracting officer “to do a dumb thing.” IDIQ Contracts & Options, 16 No. 9 Nash & Cibinic Report ¶ 43.

The Air Force argues that requiring compliance with FAR § 17.207 in the context of the exercise of an option in an ID/IQ contract “would essentially invalidate the exercise of a contract option in an ID/IQ context,” Def.’s Supp. Br. at 9 n.9, but including an option in an ID/IQ contract at all is perhaps an unwise decision. Professor Nash contends that “contracting for services raises issues that the policymakers have not addressed,” and that amendment of the laws or regulations may be required to eliminate problems caused by requiring binding prices in ID/IQ contracts. Ralph C. Nash, Evaluating Price or Cost in Task Order Contracts, 19 No. 11 Nash & Cibinic Report ¶ 52 (Nov. 2005). That may be so, but this Court’s mandate is to enforce the law as currently in effect. See Turtle Island Restoration Network v. Evans, 284 F.3d 1282, 1296-97 (Fed. Cir. 2002) (recognizing that judicial action must halt when reaching areas of legislative judgment). When an option is nonetheless included in an ID/IQ contract, the Government has set itself the challenge of complying with the applicable laws and regulations in exercising that option. That is, the agency must “make a written determination for the contract file that exercise [of the option] is in accordance with the terms of the option, the requirements of this section, and [FAR] part 6.” FAR § 17.207(f). And the regulations specify that “[t]o satisfy requirements of [FAR] part 6 regarding full and open competition, the option must have been evaluated as part of the initial competition and be exercisable at an amount specified in or reasonably determinable from the terms of the basic contract.” Id. As Mr. Boudreau, the Contracting Officer, himself observed, the Air Force had “to have some pricing in the contract, so [it] could never do away with all of [the] NTEs. . . . No question about that.” AR Tab 35 at 4506. The result of the TerraHealth settlement was, however, to do exactly what Mr. Boudreau said could not be done—all of the NTEs were declared non-binding. Although this was “not a contract about getting the cheapest doctor” but “getting value,” the law still requires valid pricing in the contract.22 Oral Arg. Tr. at 57.

In arguing that it nonetheless had a basis for evaluating the option pricing, the Air Force contends that it continued to apply “cost control measures,” Oral Arg. Tr. at 48, such as enforcing the escalation rates and utilizing the NTE rates, which remained in the contract, “for reference,” Oral Arg. Tr. at 55, along with the contracting officer’s knowledge of the historical evidence “about what types of prices these contractors would submit.” Oral Arg. Tr. at 56. At the same time, however, the Government admits that it does not “have [a] ceiling anymore,” Oral Arg. Tr. at 56, and thus is unable to compare the maximum costs of the offerors’ performance of the work covered by the options. But the manner in which the pricing was evaluated on this contract was to compare offerors’ proposals on the basis of NTE rates. This type of evaluation only permitted the Government to evaluate the relative maximum cost. The contract modifications thus removed the only basis the Air Force possessed for meaningfully comparing the cost to the Government of the contractors’ options. Notwithstanding these “cost control” measures, the price of the options was not “reasonably determinable” from the ID/IQ contracts. It is therefore unavailing for Luke to argue that the Government could (and did) waive these so-called “binding” rates, making the NTEs “far less important” than plaintiffs contend,23 Oral Arg. Tr. at 70, because this in essence argues that even if the NTEs were still in place, the price still may not have been reasonably determinable. Luke’s argument digs the hole deeper rather than providing a way out for defendants.

2. Competition for Task Orders is Not Sufficient to Establish Prices For the Options

The Government further relies on the competition among contractors at the task order level as establishing a sufficient control on prices that the exercise of the options was reasonable. Oral Arg. Tr. at 50; Luke Reply Br. at 3. It has been established, however, that “[t]he statutory requirement that cost to the government be considered in the evaluation and selection of proposals for award is not satisfied by the promise that cost or price will be considered later, during the award of individual task orders.” CW Gov’t Travel—Reconsideration, 2005 WL 1805945, at *4; MIL Corp., 2004 WL 3190217, at *7 (“[T]here is no exception to the requirement set forth in CICA that cost or price to the government be considered in selecting proposals for award because the selected awardees will be provided the opportunity to compete for task orders under the awarded contracts.”); see also Serco, Inc., 81 Fed. Cl. at 493 (rejecting the Government’s task order competition argument and finding that the agency “gave price neither the weight it was entitled to under the Solicitation nor that which it must be afforded under CICA and the FAR”). The Air Force may not substitute competition at the task order level for compliance with the applicable laws and regulations.

3. The Maximum Contract Value for the ID/IQ Contract Did Not Establish a “Price”

Defendants’ final argument is that the fixed prices of the overall contracts and each option period remain in effect, and therefore the price of the work to be performed in the option period was “reasonably determinable.” Oral Arg. Tr. at 43-45; id. at 44 (“[A]lthough the way the government gets to its dollar value has changed, the overall value has not changed. . . .”). For support, defendants point to AR Tab 10 at 3389-90, which is Magnum Medical’s ID/IQ contract. The prices set forth on these pages are the maximum orders to be placed under the contract. With respect to the first option period, the contract specifies a maximum, not-to-exceed order amount of $600,000,000.00. The total “Contract Minimum/Maximum Quantity and Contract Value” is a minimum of $500,000 and a maximum of $1,926,000,000. Id.

Defendants maintain these provisions set a fixed maximum contract value for the option period; thus the option is “priced” and the question is “how the government wants to use its dollars, not a matter of how much of the public fisc will be utilized by this contract.” Oral Arg. Tr. at 85. That is, defendants argue that all the Air Force did was reallocate an existing budget between line items within a contract, which is perfectly permissible. CCL, Inc., 39 Fed. Cl. at 792.

There are a number of flaws in this argument, the first being the idea that the maximum contract value was “evaluated” at the time of the initial award. Luke’s Supp. Br. at 10 n.9 (“Since the price of the options in the ID/IQ Contracts was evaluated as part of the initial competition, and the options were exercised in the amount specified in the Contract award, the exercise of those options was consistent with the FAR and should be upheld.”); Def.’s Supp. Br. at 10 n.10 (“Specifically, the contracting officer’s analysis indicated that the price at the time of award was considered fair and reasonable—which included the option periods—and those maximums are still present. AR 5221-24. Accordingly the ‘maximum amount’ for the option period is the same as it is on the contract line item at the time of award and therefore determinable by the contracting officer when following FAR § 17.207(f).”). The only indication how the $1.9 billion maximum total contract amount came to be divided, resulting in a maximum value for the first option period of $600 million, is in a footnote in defendant’s supplemental brief: “The amount listed on the SF-30 [sic] for the base or the options was determined by the contracting officer as an amount roughly equal to the overall $1.9 billion dollar value of the procurement over 10 years.” Def.’s Supp. Br. at 9 n.9. That is, the contracting officer looked at the total contract value and made a guess as to how to divide it between the base period and the two option periods. That is not an “evaluated” price within the meaning of CICA and the FAR.

Furthermore, if this argument were accepted, it would mean that every ID/IQ contract containing a maximum contract value would be “priced” and the Government would not be required to actually evaluate individual proposals to determine how quickly an awardee might reach this “fixed” cap. This would eviscerate § 17.207 and an untold number of other laws and regulations. Plaintiffs quite reasonably respond that “a maximum amount in a contract for an option period for six different ID/IQ holders is not a fixed price that was evaluated for the options at the time of award, so it would not satisfy the requirements of 17.207(f).” Oral Arg. Tr. at 72. The maximum contract value for an ID/IQ contract is not a “price” satisfying the statutory and regulatory requirements for evaluation of price. It is likewise futile to argue that “[t]here was a full year of performance after the NTE rate caps were removed, and they were still coming in under budget [that is, the maximum ID/IQ contract value] for this. So there was ample reason for them to determine that their initial price determination for the option period was still valid.” Oral Arg. Tr. at 62. The Government would have done an excessively poor job of contract management if it had come up against the maximum order amount of $600 million for the first option period in one year.  (Magnum Opus Technologies, Inc., v. U. S. and Luke & Associates, Inc. and TerraHealth, Inc., Nos. 10-106C, 10-127C; May 28, 2010) (pdf)