B-145136, MARCH 3, 1961, 40 COMP. GEN. 489

B-145136, MARCH 3, 1961, 40 COMP. GEN. 489

CONTRACTS - AWARDS - LABOR SURPLUS AREAS - PRICE DIFFERENTIAL PROHIBITION IN DEFENSE DEPARTMENT APPROPRIATION ACTS THE PROHIBITION IN SECTION 523 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1961, 74 STAT. 353, AGAINST THE EXPENDITURE OF APPROPRIATED FUNDS FOR THE PAYMENT OF PRICE DIFFERENTIALS ON CONTRACTS MADE FOR THE PURPOSE OF RELIEVING ECONOMIC DISLOCATIONS, PRECLUDES THE EXPENDITURE BY THE MILITARY ESTABLISHMENT OF APPROPRIATED FUNDS UNDER ANY CONTRACT AWARDED ON BASIS OF A LABOR SURPLUS AREA SITUATED AT A PRICE IN EXCESS OF THE LOWEST OBTAINABLE PRICE ON AN UNRESTRICTED SOLICITATION OF BIDS OR PROPOSALS. AWARD OF CONTRACTS BY THE MILITARY ESTABLISHMENT ON THE BASIS OF TOTAL SET-ASIDES ONLY WHERE THERE WAS A REASONABLE EXPECTATION THAT BIDS OR PROPOSALS WOULD BE OBTAINED FROM A SUFFICIENT NUMBER OF RESPONSIBLE SURPLUS AREA CONCERNS TO INSURE FAIR AND REASONABLE PRICES, SO THAT NO EXPENDITURE OF A PRICE DIFFERENTIAL WOULD BE INVOLVED, WOULD BE A SUBSTITUTION OF FAIR AND REASONABLE PRICES FOR THE LOWEST PRICE OBTAINABLE AND COULD NOT BE SANCTIONED IN THE ABSENCE OF FREE AND UNRESTRICTED COMPETITION AND IN VIEW OF THE PROHIBITION IN ANNUAL DEPARTMENT OF DEFENSE APPROPRIATION ACTS WHICH PRECLUDES THE EXPENDITURE OF APPROPRIATED FUNDS UNDER CONTRACTS AWARDED ON THE BASIS OF A LABOR SURPLUS AREA SITUATION AT A PRICE IN EXCESS OF THE LOWEST OBTAINED ON UNRESTRICTED SOLICITATIONS.

TO THE SECRETARY OF DEFENSE, MARCH 3, 1961:

WE HAVE A LETTER DATED FEBRUARY 25, 1961, FROM THE ASSISTANT SECRETARY (1INSTALLATIONS AND LOGISTICS), ASKING TO BE ADVISED WHETHER OUR OFFICE WOULD OBJECT TO THE USE OF TOTAL SET-ASIDES OF CERTAIN PROCUREMENTS FOR AWARD TO FIRMS IN LABOR SURPLUS AREAS, IN THE LIGHT OF THE PROHIBITION CONTAINED IN SECTION 523 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1961, 74 STAT. 353, AGAINST THE PAYMENT OF PRICE DIFFERENTIAL ON CONTRACTS MADE FOR THE PURPOSE OF RELIEVING ECONOMIC DISLOCATIONS.

THE LETTER REFERS TO A PRESIDENTIAL REQUEST TO YOU, THE SECRETARY OF LABOR, AND THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, FOR RECOMMENDATIONS AS TO IMPROVED MEANS FOR CHANNELING CONTRACTS TO AREAS OF LABOR SURPLUS. IT IS STATED TO BE THE CONSENSUS OF ALL AGENCIES CONCERNED THAT TO INCREASE MEASURABLY THE VOLUME OF CONTRACT AWARDS TO SUCH FIRMS TOTAL SET-ASIDES OF APPROPRIATE PROCUREMENTS FOR AWARD EXCLUSIVELY TO SUCH FIRMS SHOULD BE MADE. IN YOUR DEPARTMENT, SUCH SET ASIDES WOULD BE MADE UNDER CRITERIA SIMILAR TO THOSE CURRENTLY APPLICABLE TO SMALL BUSINESS FIRMS.

BOTH THE SMALL BUSINESS AND LABOR SURPLUS AREA PREFERENCES IN AWARD OF GOVERNMENT CONTRACTS HAD THEIR ORIGIN IN THE POLICIES DECLARED IN THE DEFENSE PRODUCTION ACT OF 1950, 64 STAT. 798, 50 U.S.C. 2062, AND AMENDMENTS THERETO, AND IN VARIOUS EXECUTIVE ORDERS AND SUPPLEMENTARY DIRECTIVES ISSUED TO IMPLEMENT THOSE POLICIES. AT AN EARLY STAGE IN THE DEVELOPMENT OF THESE PROGRAMS THIS OFFICE HAD OCCASION TO CONSIDER LEGAL QUESTIONS PRESENTED AS TO THE PROPRIETY OF PAYMENT OF APPROPRIATED FUNDS UNDER CONTRACTS AWARDED THEREUNDER. THE POSITION TAKEN WAS THAT WHEN ADVERTISING OF PUBLIC CONTRACTS WAS REQUIRED BY LAW AWARDS SHOULD BE MADE ONLY TO RESPONSIBLE BIDDERS WHOSE BIDS, CONFORMING TO THE INVITATIONS, WOULD BE MOST ADVANTAGEOUS TO THE GOVERNMENT, PRICE AND OTHER FACTORS CONSIDERED, AND THAT AWARDS TO OTHER THAN THE LOW BIDDERS COULD NOT PROPERTY BE MADE SOLELY ON THE BASIS OF SMALL BUSINESS STATUS OR SURPLUS LABOR AREA LOCATION. SEE 28 COMP. GEN. 662; 31 ID. 279; 31 ID. 347. HOWEVER, IN VIEW OF THE AUTHORITY TO ENTER INTO CONTRACTS BY NEGOTIATION DURING THE PERIOD OF A NATIONAL EMERGENCY PROCLAIMED BY THE PRESIDENT, CONTAINED IN SECTION 2 (C) (1) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947 (NOW 10 U.S.C. 2304 (A) (1) (, AND IN THE CORRESPONDING SECTION OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 41 U.S.C. 252 (C), IT WAS STATED THAT THIS OFFICE WOULD NOT OBJECT TO PAYMENTS UNDER CONTRACTS NEGOTIATED PURSUANT TO THAT AUTHORITY WITH SMALL BUSINESS FIRMS OR BIDDERS IN LABOR SURPLUS AREAS UPON ADMINISTRATIVE DETERMINATION THAT SUCH AWARDS WERE NECESSARY IN THE PUBLIC INTEREST.

THE SMALL BUSINESS PREFERENCE WAS THEREAFTER GIVEN MORE EXPRESS LEGISLATIVE SANCTION BY THE ENACTMENT OF THE SMALL BUSINESS ACT OF 1953, 67 STAT. 232. THE PROCEDURES ADOPTED WITH RESPECT TO AWARDS TO LABOR SURPLUS AREA FIRMS, HOWEVER, BECAME THE SUBJECT OF CONTROVERSY IN CONGRESS, WHICH RESULTED IN THE ENACTMENT, IN SECTION 644 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1954, 67 STAT. 357, OF THE LIMITATION, IDENTICAL TO THAT APPEARING AS SECTION 523 OF THE 1961 APPROPRIATION ACT, PROHIBITING THE EXPENDITURE OF APPROPRIATED FUNDS THE PAYMENT OF PRICE DIFFERENTIALS ON CONTRACTS MADE FOR THE PURPOSE OF RELIEVING ECONOMIC DISLOCATIONS.

THE LANGUAGE OF THE PROVISO LEAVES LITTLE ROOM FOR DOUBT, AND EXAMINATION OF THE LEGISLATIVE HISTORY CONFIRMS, THAT THE INTENT OF THE CONGRESS WAS THAT THE PRACTICE OF NEGOTIATING CONTRACTS WITH LABOR SURPLUS AREA FIRMS WHICH WOULD MEET THE LOWEST PRICE OFFERED BY ANY OTHER BIDDER ON A DESIGNATED PROCUREMENT MIGHT BE CONTINUED, BUT THAT NO SUCH CONTRACT COULD BE AWARDED AT A PRICE IN EXCESS OF THE LOWEST AVAILABLE. THE PROHIBITION ORIGINATED AS A SENATE COMMITTEE AMENDMENT TO THE HOUSE BILL. (SEE S. REPT. NO. 601, 83D CONG., ST SESS. P. 11), AND IN THE FORM PROPOSED BY THAT COMMITTEE WAS APPARENTLY INTENDED TO PROHIBIT THE PAYMENT OF APPROPRIATED FUNDS ON ANY CONTRACT NEGOTIATED FOR THE PURPOSE OF CORRECTING OR PREVENTING ECONOMIC DISLOCATIONS. ON THE FLOOR OF THE SENATE A STRENUOUS EFFORT WAS MADE TO ELIMINATE THE PROVISO, BUT IT WAS ADOPTED IN THE FORM PROPOSED BY THE COMMITTEE. SEE 99 CONG. REC. 9499- 9508. THE HOUSE REJECTED THE SENATE AMENDMENT, AND IN CONFERENCE THE PROVISO AS FINALLY ENACTED WAS SUBSTITUTED. SEE H. REPT. NO. 1015, 83D CONGRESS, ST SESSION. THE INTENT OF THE PROVISION IS FURTHER CLARIFIED BY DEBATE WHICH OCCURRED IN BOTH HOUSES UPON ADOPTION OF THE CONFERENCE REPORT. SEE 99 CONG. REC. 10252-10258; 10342-10348.

ON THE RECORD WE MUST CONSTRUE THE LIMITATION IN QUESTION AS PRECLUDING THE EXPENDITURE BY THE DEFENSE ESTABLISHMENT OF APPROPRIATED FUNDS UNDER ANY CONTRACT AWARDED ON THE BASIS OF A LABOR SURPLUS AREA SITUATION AT A PRICE IN EXCESS OF THE LOWEST OBTAINABLE ON AN UNRESTRICTED SOLICITATION OF BIDS OR PROPOSALS.

IN THE REFERENCED LETTER IT IS SUGGESTED THAT IF TOTAL SET-ASIDES WERE MADE ONLY WHERE THERE WAS A REASONABLE EXPECTATION THAT BIDS OR PROPOSALS WOULD BE OBTAINED FROM A SUFFICIENT NUMBER OF RESPONSIBLE LABOR SURPLUS AREA CONCERNS TO INSURE FAIR AND REASONABLE PRICES, NO QUESTION OF A PRICE DIFFERENTIAL WOULD BE INVOLVED.

THE FALLACY OF THAT SUGGESTION IS THAT IT WOULD SUBSTITUTE FAIR AND REASONABLE PRICES FOR THE LOWEST PRICE OBTAINABLE.

IN THE LIGHT OF THE CLEARLY EXPRESSED INTENT OF THE CONGRESS, WHICH HAS BEEN REPEATED WITHOUT CHANGE IN EACH ANNUAL APPROPRIATION SINCE 1954, WE DO NOT FEEL THAT WE COULD, WITH PROPER REGARD FOR OUR OBLIGATIONS TO THE CONGRESS, ACCEPT ANY SHOWING OR DETERMINATION OF A "FAIR AND REASONABLE" PRICE AS ESTABLISHING THAT SUCH PRICE WAS THE LOWEST OBTAINABLE, IN THE ABSENCE OF FREE AND UNRESTRICTED COMPETITION.