EDS on verge of losing $860m contract after probe

The US Congress' auditing arm has recommended a government contract with Electronic Data Systems, potentially worth roughly $860m, be overturned, another bit of bad news for the IT services giant.

The General Accounting Office (GAO) has upheld a protest from Lockheed Martin Information Systems, which had challenged the decision by the Department of Housing and Urban Development (HUD) to award the contract to EDS. Lockheed Martin offered a lower bid than EDS for the contract, which involves developing a nationwide IT infrastructure and telecommunications service.

The GAO found that HUD had misevaluated proposals from the two companies and had "unreasonably determined" that EDS met a requirement for farming out work to small businesses. The auditors called for HUD to reopen the bidding process for the contract, obtaining revised proposals. GAO posted a notice about the findings on its website on Monday.

A HUD representative said on Tuesday that HUD would probably take "a couple of weeks" before department officials decide how to respond. HUD does not have to comply with the GAO's recommendations. "We're taking a hard look at them because it's serious business what GAO has suggested," HUD spokesman Michael Fluharty said.

Fluharty said HUD had not told EDS to stop working on the contract, which includes a one-year base period and as many as 10 option years. The company began fulfilling the contract last year.

EDS did not immediately return a call for comment.

Lockheed Martin held the HUD contract preceding the IT services contract given to EDS. The GAO report is another setback for Plano, Texas-based EDS, one of the largest IT services companies in the world.

In December, the Inland Revenue in the UK decided to switch from EDS in awarding a 10-year IT outsourcing contract worth several billion dollars.

EDS has been trying to recover from a series of blows, including a drastic earnings shortfall in the latter part of 2002 and a US Securities and Exchange Commission probe.

Ed Frauenheim writes for CNET News.com.