22:0656(72)AR - HQ, 97th Combat Support Group (SAC), Blytheville AFB, AR and AFGE Local 2840 -- 1986 FLRAdec AR

 22 FLRA No. 72
 
 HEADQUARTERS, 97th COMBAT SUPPORT
 GROUP (SAC), BLYTHEVILLE AIR FORCE
 BASE, ARKANSAS
 Activity
 
 and
 
 AMERICAN FEDERATION OF GOVERNMENT
 EMPLOYEES, AFL-CIO, LOCAL 2840
 Union
 
                                            Case No. 0-AR-435
 
                                 DECISION
 
                         I.  STATEMENT OF THE CASE
 
    This matter is before the Authority on exceptions to the award of
 Arbitrator Preston J. Moore filed by the Department of the Air Force
 (the Agency) under section 7122(a) of the Federal Service
 Labor-Management Relations Statute and part 2425 of the Authority's
 Rules and Regulations.  /1/
 
                  II.  BACKGROUND AND ARBITRATOR'S AWARD
 
    The dispute before the Arbitrator concerned the Activity's
 determination to contract out certain aircraft maintenance functions.
 The grievance alleged that the decision to contract out was not made in
 accordance with applicable law and regulation governing determinations
 to contract out commercial and industrial activities in the Department
 of Defense.  Compliance with such law and regulation was required by the
 parties' collective bargaining agreement.  The Arbitrator first ruled
 that the grievance was arbitrable.  On the merits of the grievance, the
 Arbitrator ruled that the Activity's procurement action was not in
 accordance with the procedures and standards provided by law and
 regulation in a number of respects.  Consequently, the Arbitrator
 sustained the grievance and directed the procurement action be
 cancelled.
 
                           III.  FIRST EXCEPTION
 
                              A.  Contentions
 
    In its first exception the Agency contends that by finding the
 grievance arbitrable, the award is contrary to management's right
 pursuant to section 7106(a)(2)(B) of the Statute to make determinations
 with respect to contracting out.
 
                       B.  Analysis and Conclusions
 
    The Authority has previously addressed the grievability and
 arbitrability of a grievance claiming that a procurement action failed
 to comply with applicable law and regulation pertaining to contracting
 out as required by the parties' collective bargaining agreement.  The
 Authority specifically held that such a grievance was not contrary to
 section 7106(a)(2)(B) of the Statute and was grievable and arbitrable.
 American Federation of Government Employees, Local 1904, AFL-CIO and
 United States Army Communications and Electronics Materiel Readiness
 Command, 16 FLRA 358 (1984).  Similarly, the Authority has held that
 even in the absence of a specific negotiated contract provision, a
 grievance over whether a procurement action complies with OMB Circular
 A-76 is within the broad scope grievance procedure prescribed by the
 Statute and is not precluded by management's right under section
 7106(a)(2)(B) to make determinations with respect to contracting out.
 American Federation of Government Employees, AFL-CIO, National Council
 of EEOC Locals and Equal Employment Opportunity Commission, 10 FLRA 3
 (1982) (proposal 1), enforced sub nom. EEOC v. FLRA, 744 F.2d 842 (D.C.
 Cir. 1984), cert. dismissed, 106 S. Ct. 1678 (1986) (per curiam).  /2/
 Consequently, the Authority concludes that the Arbitrator's ruling on
 the arbitrability of the grievance is not contrary to section
 7106(a)(2)(B) of the Statute, and therefore this exception is denied.
 
                           IV.  SECOND EXCEPTION
 
                              A.  Contentions
 
    In its second exception the Agency contends that the Arbitrator's
 cancellation of the procurement action is contrary to law.  In support
 of this exception, the Agency argues that the procurement action could
 not be cancelled by the Arbitrator absent a finding that but for the
 alleged errors by management in the procurement process, the decision to
 contract out could not have properly been made.
 
                       B.  Analysis and Conclusions
 
    This exception provides the Authority with an opportunity to address
 for the first time the remedial authority of an arbitrator in resolving
 grievances disputing determinations by agencies to contract out agency
 work.
 
    General laws and regulations governing contracting out, and specific
 laws and regulations governing contracting out of commercial and
 industrial activities in the Department of Defense, evidence a clear
 intent that their application result in the most cost-effective
 performance of commercial and industrial activities.  Pub. L. No.
 96-342, Section 502(a)(2)(B), 10 U.S.C. Section 2304 note (1982);  OMB
 Circular A-76 (Revised August 1983), para. 5.  The longstanding policy
 of the Federal Government has been to rely on private enterprise to
 supply commercially available products and services it needs except when
 comparative cost analysis indicates that procurement from a private
 source is not as cost effective as in-house performance.  AFGE Local
 2017 v. Brown, 680 F.2d 722, 724 (11th Cir. 1982), cert. denied, 459
 U.S. 1104 (1983).  This policy is designed to achieve economy and
 enhance productivity through competition between in-house and commercial
 sources for performance of commercial activities.  OMB Circular A-76,
 para. 5.  The procurement process established to effectuate this policy
 accords to agency officials substantial discretion in "the application
 of technical, and often esoteric, regulations to the complicated
 circumstances of individual procurements." M. Steinthal & Co. v.
 Seamens, 455 F.2d 1289, 1301 (D.C. Cir. 1971);  see Local 2855, AFGE v.
 U.S., 602 F.2d 574, 580-83 (3d Cir. 1979).
 
    In conjunction with the provisions of procurement law and regulation,
 section 7106(a)(2)(B) of the Statute expressly reserves to management
 officials the right, in accordance with applicable laws, to make
 determinations with respect to contracting out.  The Authority has
 repeatedly recognized that the plain language of section 7106(a) of the
 Statute provides that "nothing" in the Statute, including an award of an
 arbitrator, shall "affect the authority" of an agency to exercise the
 rights enumerated in that section.  American Federation of Government
 Employees, Local 3258 and U.S. Department of Housing and Urban
 Development, 21 FLRA No. 56 (1986).  More specifically, the Authority
 has recognized that management's right under section 7106(a)(2)(B)
 encompasses not only the right to act, but also the right to deliberate
 concerning the relevant factors on which a determination to contract out
 will be made.  National Federation of Federal Employees, Local 1167 and
 Department of the Air Force, Headquarters, 31st Combat Support Group
 (TAC), Homestead Air Force Base, Florida, 6 FLRA 574, 578 (1981),
 enforced sub nom. NFFE Local 1167 v. FLRA, 681 F.2d 886 (D.C. Cir.
 1982).  In addition, with the strong public interest in a Federal
 Government procurement process which is efficient and economical and
 which proceeds without disruption, the Authority must be mindful of
 Congress' admonition in section 7101 of the Statute that the provisions
 of the Statute "should be interpreted in a manner consistent with the
 requirement of an effective and efficient Government." See Sea-Land
 Service, Inc. v. Brown, 600 F.2d 429 (3d Cir. 1979).
 
    In recognition of the substantial discretion accorded agency
 officials under procurement law and regulation and the many decisions
 made as a part of the procurement process that necessarily are a matter
 of judgment and managerial choices, the scope of review of procurement
 actions by courts and administrative bodies has been narrow and limited.
  See Local 2855, AFGE v. U.S., 602 F.2d 574 (3d Cir. 1979).
 
    In the administrative review of disputed procurement actions, the
 Comptroller General will review an action only to determine whether it
 conforms to mandatory provisions of procurement laws and regulations and
 will not review matters reserved to agency discretion.  Thus, the
 protester must establish that the disputed action violated requirements
 of law or regulation and that the violation materially affected the
 result of the procurement action.  Matter of:  Video Visions, Inc.,
 Decision of the Comptroller General B-210010.2, June 26, 1984.
 
    Judicial review of disputed procurement actions is also narrow and
 limited.  The most common articulation by the courts of the standard of
 review of a procurement action is that of a rational or reasonable
 basis.  See Sea-Land Service, Inc. v. Brown;  Kinnett Dairies v. Farrow,
 580 F.2d 1260 (5th Cir. 1978);  M. Steinthal & Co. v. Seamens;  Robert
 E. Derecktor of Rhode Island v. Goldschmidt, 516 F. Supp. 1085 (D.R.I.
 1981).  As indicated above, the courts also recognize that there must be
 respect for public interest considerations in the efficient procurement
 of goods and services and the avoidance of excessive procurement costs.
 Sea-Land Service, Inc. v. Brown, 600 F.2d at 434.  In short, the courts
 generally hold that a procurement decision may not be overturned unless
 it is demonstrated that there is no rational basis for the agency's
 decision and that no public interest considerations override cancelling
 the procurement.  M. Steinthal & Co. v. Seamens, 455 F.2d at 1301.  It
 has been held that the absence of a rational basis may be established by
 a demonstration that the procurement process involved a clear and
 prejudicial violation of mandatory provisions of applicable procurement
 laws or regulations.  Kentron Hawaii v. Warner, 480 F.2d 1166, 1169
 (D.C. Cir. 1973).  However, courts have stressed that the provisions
 alleged to have been violated must contain discernible requirements and
 meaningful criteria against which the determination to contract out may
 be analyzed and reviewed.  In other words, there must be rules or
 specifications that permit adjudication of disagreements and amply
 specific standards against which agency conduct can be measured.  See
 AFGE Local 2017 v. Brown, 680 F.2d at 726;  Local 2855, AFGE v. U.S.,
 602 F.2d at 582-83.  Courts will not review matters within an agency's
 judgment and discretion because the courts stress that there must be
 respect for the substantial discretion permitted by, and the judgment to
 be exercised under, procurement laws and regulations on the part of
 procurement officials.  Kinnett Dairies v. Farrow, 580 F.2d at 1272;  M.
 Steinthal & Co. v. Seamens, 455 F.2d at 1298-99.  Courts therefore will
 not cancel a procurement action just because it seems ill-advised or a
 less desirable alternative than performing the work in-house.  It is
 regularly stated that the courts must be diligent not to substitute
 their judgment for that of responsible agency officials in the
 administration and application of procurement statutes and regulations.
 See International Association of Firefighters, Local F-100 v. Department
 of the Navy, 536 F. Supp. 1254 (D.R.I. 1982).
 
    The Authority believes that these analytical approaches provide sound
 guidance for arbitral review of procurement actions.  In view of the
 substantial discretion vested in agency procurement officials, the
 paramount public interest in the efficient procurement of goods and
 services, and the avoidance of excessive costs recognized by both the
 courts and the Comptroller General, the Authority has determined that an
 arbitrator may not substitute his or her judgment for that of an agency
 with respect to the agency's ultimate decision whether to contract out.
 Similarly, any intermediate decision in the procurement process
 concerning a matter reserved to agency judgment and discretion also may
 not be set aside.  Thus, the Authority holds that an arbitrator is
 without authority to order cancellation of a procurement action or to
 review an agency decision in the procurement process concerning a matter
 of agency judgment or discretion.
 
    There are, nevertheless, certain permissible remedies available to an
 arbitrator in resolving a grievance concerning an agency's determination
 whether to contract out.  In particular, with respect to the disputed
 procurement action, we hold that an arbitrator may, in certain
 circumstances, direct an agency to reconstruct the procurement action.
 In order for an arbitrator to direct an agency to undertake such a
 reconstruction, the arbitrator must find the following:
 
          (1) The arbitrator must expressly find that in determining to
       contract out, the agency violated mandatory provisions of
       applicable procurement laws or regulations.  Furthermore, these
       provisions must contain sufficiently specific standards to
       objectively analyze and review the agency's actions and permit an
       objective conclusion that the agency failed to comply with the
       requirements;  and
 
          (2) The arbitrator must find that the agency's failure to
       comply with those requirements materially affected the final
       procurement decision and harmed unit employees.  The Authority
       cautions that arbitrators must distinguish between permissible
       challenges based on material defects in aspects of the procurement
       process specifically prescribed by law or regulation and improper
       challenges attacking the exercise of managerial discretion.
 
    In sum, arbitrators are not authorized to cancel a procurement action
 and are authorized to consider only grievances challenging a decision to
 contract out on the basis that the agency failed to comply with
 mandatory and nondiscretionary provisions of applicable procurement law
 or regulation.  These provisions must be sufficiently specific to permit
 the arbitrator to adjudicate whether there has been compliance with such
 provisions.  When presented with such a grievance, an arbitrator on
 finding a failure to comply may sustain the grievance.  In sustaining
 the grievance, the arbitrator as a remedy may properly order a
 reconstruction of the procurement action when the arbitrator finds that
 an agency's noncompliance materially affected the final procurement
 decision and harmed unit employees.  An agency in taking the action
 required by such an award must reconstruct the procurement process in
 accordance with the provisions which were previously not complied with
 and must determine on reconstruction whether the decision to contract
 out is now in accordance with law and regulation.  If the decision to
 contract out can no longer be justified, the agency must determine
 whether considerations of cost, performance, and disruption override
 cancelling the procurement action and take whatever action is
 appropriate on the basis of that determination.  For example, an agency
 could determine that immediate cancellation is warranted, or an agency
 could determine that cancellation is not warranted, but that an
 improperly granted contract should not be renewed.  Additionally, an
 agency may use its discretion to fashion other remedies appropriate to
 the circumstances.
 
    In applying that test in this case, the Authority concludes that the
 Arbitrator's award insofar as it directed the Activity to cancel the
 procurement action involved is deficient and must be set aside.  We
 note, however, that the Arbitrator expressly found that the Activity
 violated certain specific requirements of applicable law and regulation
 in the development and comparison of costs in reaching its decision.
 The Arbitrator specifically found that the methodology used in
 estimating in-house labor costs violated the requirements of Department
 of Defense Directive 4100.33-H, which provides procedures and standards
 to assist and guide agencies in cost comparisons.  The Arbitrator ruled
 that the estimate used an incorrect wage inflation factor and improperly
 accounted for the grade of a temporary position.  The Arbitrator also
 found that contrary to OMB Circular A-76, the Activity failed to account
 for the costs of obtaining security clearances for contractor employees.
  We also note that the Arbitrator based his award on the conclusion that
 the defective procurement action would displace employees and that the
 violations of procurement law and regulation all favored the decision to
 contract out.  In these circumstances, we conclude that the Arbitrator
 effectively found that the Activity's violations harmed the employees
 involved and that the violations materially affected the Activity's
 final decision.  Thus, the Arbitrator established a sufficient basis for
 directing the Activity to reconstruct the procurement action.
 
                            C.  Reconstruction
 
    The Agency asserts in its exceptions that a cost analysis revised in
 accordance with the Arbitrator's findings shows that contracting out is
 still more economical than in-house performance.  In support of this
 assertion, the Agency offers only wage rate schedules and other
 computation worksheets which have been revised in part.  The Agency does
 not explain how these attachments demonstrate that reconstruction favors
 contracting out.  In these circumstances, we believe application of the
 approaches set forth in this decision requires that such a
 reconstruction be specifically conducted pursuant to the order of the
 Authority and in accordance with the guidance which has now been
 provided.
 
                               V.  DECISION
 
    Accordingly, for the above reasons, the Arbitrator's award is
 modified to direct the Activity to reconstruct the disputed procurement
 action in accordance with the requirements of applicable law and
 regulation and to make a determination and take appropriate action based
 upon the results of such reconstruction.
 
    Issued, Washington, D.C., July 23, 1986.
                                       /s/ Jerry L. Calhoun, Chairman
                                       /s/ Henry B. Frazier III, Member
                                       FEDERAL LABOR RELATIONS AUTHORITY
 
 
                ---------------  FOOTNOTES$ ---------------
 
 
 
    (1) The National Federation of Federal Employees filed a brief as an
 amicus curiae.
 
    (2) Although this determination was affirmed by the U.S. Court of
 Appeals for the D.C. Circuit, with the U.S. Supreme Court dismissing the
 agency's subsequent appeal, this same approach was rejected by the U.S.
 Court of Appeals for the Ninth Circuit in Defense Language Institute,
 Presidio of Monterey, California v. FLRA, 767 F.2d 1398 (9th Cir. 1985),
 denying enforcement of National Federation of Federal Employees, Local
 1263 and Defense Language Institute, Presidio of Monterey, California,
 14 FLRA 761 (1984).