The Defense Department will likely have to make significant changes to a much-anticipated IT services contract known as ENCORE III following a legal decision that upheld challenges by two prospective bidders.

The Government Accountability Office ruled Wednesday that the Defense Information Systems Agency failed to come up with a reasonable basis for comparing various vendors’ prices when it issued the final solicitation on March 2.

The entire source selection has been on hold since late April, when CACI and Booz Allen Hamilton filed GAO protests challenging DISA’s intention to award spots on the multiple award contract on a low-price technically acceptable (LPTA) basis.

GAO did not release the full text of its decision Wednesday, saying it needed time to consult with the protesters to determine whether any sensitive information needed to be redacted. In a statement about its ruling, the office did not explicitly address whether DISA could or couldn’t use LPTA for ENCORE III, but said the solicitation was defective on at least two counts.

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“First, although the [request for proposals] contemplates awarding some portion of the task orders on a cost reimbursement basis — perhaps as many as half of the orders, according to the record developed during the protest — the solicitation does not seek any information for, or provide for the evaluation of any of these costs,” said Kenneth Patton, GAO’s managing associate general counsel for procurement law.

That ruling is in accord with several of the legal arguments the protesters made in their written arguments to GAO. CACI complained, for example, that it and other vendors couldn’t possibly price their services accurately in their bids since DISA refused to provide estimates of how much it intended to buy in each of the 19 ENCORE III categories, even though the agency planned to use its own, undisclosed quantity estimates in deciding which vendors should get spots on the IDIQ contract.

“To be sure, ascertaining probable cost to the government in an IDIQ context is challenging,” CACI’s attorneys wrote. “This places even greater importance on the government providing reasonable quantity estimates, a sample task, or some other reasonable basis to assess the realism of rates and other costs. The agency has done none of that here.”

Secondly, GAO found some aspects of DISA’s plan to decide which vendors offered the most reasonable prices didn’t have a reasonable basis.

The agency said in the RFP that it would automatically disqualify the cheapest 10 percent and most expensive 10 percent of the bids it received. Then, it would winnow out more vendors by cutting out bids that were 50 percent below or above the average prices of the vendors still in contention.

In its protest, Booz Allen called that scheme “irrational,” because the Federal Acquisition Regulation explicitly requires agencies to award contracts to companies that can do the necessary work at lowest evaluated price once they’ve decided to use LPTA as their criteria.

GAO agreed.

“The solicitation establishes a cost/price evaluation scheme that mandates the elimination of an offeror’s proposal if the total proposed price falls below a pre-defined level.  GAO concluded that the evaluation scheme was arbitrary, and thus inconsistent with procurement law and regulations,” the office said in its statement Wednesday.

GAO recommended that DISA revise and reissue its RFP to fix the problems its procurement arbiters identified.

DISA did not immediately respond to a request for comment on GAO’s decision.

The ENCORE III contract — valued at up to $17.5 billion during a five year base period plus five more option years — is a follow-on to DISA’s existing ENCORE II vehicle. In the lead-up to the final RFP, several industry groups openly complained about the agency’s plan to award spots on an LPTA basis, arguing that it was virtually impossible to forecast what the IT industry would be able to offer the government over the next decade, let alone what its labor rates would be.

In a letter to Frank Kendall, the undersecretary of Defense for acquisition, technology and logistics, the Professional Services Council and the IT Alliance for Public Sector argued that DISA’s plans directly contravened his own edicts to the Defense acquisition workforce to only use LPTA when the government has firm, well-understood requirements.

“As part of the Joint Information Environment, the ENCORE III contract will help the military, the Department, federal agencies, policymakers, and others rapidly and securely communicate and share information,” the industry groups wrote at the time. “For that reason alone, it is troubling that a contract used to procure such complex IT services intended to support ‘information superiority’ is being awarded on price and not the qualities that would deliver a technological edge to our warfighters.”

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