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The decision of the Authority follows:
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).