B-133956, OCTOBER 22, 1957, 37 COMP. GEN. 268

B-133956: Oct 22, 1957

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CONTRACTS - AWARDS - SMALL BUSINESS CONCERNS OFFERED LARGER PROGRESS PAYMENTS A PROCUREMENT DIRECTIVE UNDER WHICH LARGER PROGRESS PAYMENTS ARE OFFERED TO SMALL BUSINESS CONCERNS CREATES A POTENTIAL INEQUALITY AMONG BIDDERS AND IS. FOR SET-ASIDES MAY NOT BE CONSTRUED AS REPEALING OR MAKING INAPPLICABLE STATUTORY RESTRICTIONS OTHERWISE APPLICABLE TO ADVERTISED PROCUREMENTS SO AS TO JUSTIFY THE ISSUANCE OF A PROCUREMENT DIRECTIVE UNDER WHICH LARGER PROGRESS PAYMENTS ARE OFFERED TO SMALL BUSINESS CONCERNS IN A FORMALLY ADVERTISED COMPETITIVE PROCUREMENT. 1957: REFERENCE IS MADE TO LETTER DATED OCTOBER 1. IS LEGALLY OBJECTIONABLE AS APPLIED TO FORMALLY ADVERTISED PROCUREMENTS. ASKS WHETHER THIS PREFERENCE TO SMALL BUSINESS IS CONTRARY TO THE PRINCIPLES RELATING TO EQUALITY AMONG BIDDERS UNDER FORMAL ADVERTISING PROCEDURES.

B-133956, OCTOBER 22, 1957, 37 COMP. GEN. 268

CONTRACTS - AWARDS - SMALL BUSINESS CONCERNS OFFERED LARGER PROGRESS PAYMENTS A PROCUREMENT DIRECTIVE UNDER WHICH LARGER PROGRESS PAYMENTS ARE OFFERED TO SMALL BUSINESS CONCERNS CREATES A POTENTIAL INEQUALITY AMONG BIDDERS AND IS, THEREFORE, INVALID AS APPLIED TO FORMALLY ADVERTISED PROCUREMENTS. THE DECLARATION OF CONGRESSIONAL POLICY WITH RESPECT TO SMALL BUSINESS CONTAINED IN VARIOUS PROCUREMENT STATUTES WITHOUT SPECIFIC IMPLEMENTATION SIMILAR TO THAT PROVIDED IN SECTION 214 OF THE SMALL BUSINESS ACT OF 1953, 15 U.S.C. 643, FOR SET-ASIDES MAY NOT BE CONSTRUED AS REPEALING OR MAKING INAPPLICABLE STATUTORY RESTRICTIONS OTHERWISE APPLICABLE TO ADVERTISED PROCUREMENTS SO AS TO JUSTIFY THE ISSUANCE OF A PROCUREMENT DIRECTIVE UNDER WHICH LARGER PROGRESS PAYMENTS ARE OFFERED TO SMALL BUSINESS CONCERNS IN A FORMALLY ADVERTISED COMPETITIVE PROCUREMENT.

TO THE SECRETARY OF DEFENSE, OCTOBER 22, 1957:

REFERENCE IS MADE TO LETTER DATED OCTOBER 1, 1957, FROM THE ASSISTANT SECRETARY OF DEFENSE ( COMPTROLLER), REQUESTING OUR DECISION WHETHER DEPARTMENT OF DEFENSE DIRECTIVE 7800.5, DATED AUGUST 10, 1957, IS LEGALLY OBJECTIONABLE AS APPLIED TO FORMALLY ADVERTISED PROCUREMENTS.

THE DIRECTIVE DEALS WITH THE MAXIMUM PROGRESS PAYMENTS WHICH NORMALLY MAY BE MADE TO DEFENSE DEPARTMENT CONTRACTORS. SUCH PAYMENTS THERETOFORE HAD BEEN LIMITED TO 75 PERCENT OF TOTAL COSTS OR 90 PERCENT OF DIRECT LABOR AND MATERIAL COSTS. DIRECTIVE 7800.5 REDUCES THESE PERCENTAGES TO 70 AND 85 RESPECTIVELY, EXCEPT FOR CONTRACTS WITH SMALL BUSINESS CONCERNS AS TO WHICH THE GREATER PERCENTAGES CONTINUE TO APPLY. THE LETTER OF OCTOBER 1, 1957, ASKS WHETHER THIS PREFERENCE TO SMALL BUSINESS IS CONTRARY TO THE PRINCIPLES RELATING TO EQUALITY AMONG BIDDERS UNDER FORMAL ADVERTISING PROCEDURES. THE ANSWER TO THIS QUESTION DEPENDS UPON WHETHER THE GRANTING OF LARGER PROGRESS PAYMENTS DOES IN FACT GIVE AN ADVANTAGE IN BIDDING TO SMALL BUSINESS OVER OTHER BIDDERS. IF SO, IT IS CLEARLY CONTRARY TO THE PRINCIPLES OF FORMAL ADVERTISING, AND MUST BE CONSIDERED LEGALLY OBJECTIONABLE UNLESS AUTHORIZED BY STATUTE.

AS IS STATED IN THE ASSISTANT SECRETARY'S LETTER, WHEN BID INVITATIONS PROVIDE FOR PROGRESS PAYMENTS, ALL BIDS ARE EVALUATED EQUALLY WHETHER THEY ASK FOR SUCH PAYMENTS OR NOT. A BIDDER'S FAILURE TO ASK FOR PROGRESS PAYMENTS WHEN THEY ARE AVAILABLE IS PROOF THAT THAT BIDDER HAS NOT BEEN PLACED AT A DISADVANTAGE BY OTHER BIDDERS' ACCEPTANCE OF SUCH PAYMENTS. THIS WAS THE SITUATION INVOLVED IN THE DECISION AT 35 COMP. GEN. 282. IT WERE CERTAIN THAT PROGRESS PAYMENTS OFFERED TO ALL BIDDERS WOULD BE REQUESTED ONLY BY SMALL BUSINESS, RESTRICTION OF THEIR AVAILABILITY TO SMALL BUSINESS WOULD CREATE NO INEQUALITIES AMONG BIDDERS. ON THE OTHER HAND, UNDER AN INVITATION OFFERING PROGRESS PAYMENTS TO ALL BIDDERS, A REFUSAL TO GRANT SUCH PAYMENTS TO A BIDDER MERELY BECAUSE HE DID NOT QUALIFY AS SMALL BUSINESS WOULD BE AN UNWARRANTED DEVIATION BY THE GOVERNMENT FROM THE ADVERTISED TERMS OF THE PROCUREMENT. SEE PFOTZER V. UNITED STATES, 77 F.1SUPP. 390, 393, 111 C.1CLS. 184, CERT. DENIED 335 U.S. 885.

WHILE IT PROBABLY IS TRUE IN THE GREAT MAJORITY OF CASES THAT THE AVAILABILITY AND SIZE OF PROGRESS PAYMENTS IS OF LESS CONSEQUENCE TO LARGE THAN TO SMALL FIRMS, IT IS INDISPUTABLE THAT EARLIER PAYMENT OF MONEY HAS A VALUE WHICH IS OFTEN RECOGNIZED BY OFFERS OF PROMPT PAYMENT DISCOUNTS. IT IS ENTIRELY POSSIBLE THAT ANY CONTRACTOR'S WORKING CAPITAL POSITION AT A PARTICULAR TIME MAY BE SUCH THAT LARGER PROGRESS PAYMENTS WOULD AVOID THE NECESSITY FOR BORROWING MONEY AND THE INCIDENTAL INTEREST CHARGES. OBVIOUSLY, IT IS IMPOSSIBLE TO KNOW IN ADVANCE WHETHER ANY PARTICULAR PROSPECTIVE BIDDER ON A GOVERNMENT PROCUREMENT, REGARDLESS OF SIZE, WOULD BE ABLE TO OFFER A BETTER PRICE IF GIVEN PROGRESS PAYMENTS. FOR THESE REASONS, WE BELIEVE IT IS TOO CLEAR TO REQUIRE FURTHER DISCUSSION THAT AN INVITATION WHICH OFFERS LARGER PROGRESS PAYMENTS TO A CERTAIN CLASS OF BIDDERS CREATES A POTENTIAL INEQUALITY AMONG BIDDERS WHICH IS INCOMPATIBLE WITH THE FREEDOM FROM DISCRIMINATION AND PARTIALITY NECESSARY UNDER THE STATUTES REQUIRING ADVERTISING FOR THE NEEDS OF THE GOVERNMENT. CF. UNITED STATES V. PAN-AMERICAN PETROLEUM CO., 6 F.2D 43, AT P. 68. AS WAS STATED BY THE COURT IN UNITED STATES V. BROOKRIDGE FARM, 111 F.2D 461, 463,

THE PURPOSE OF THESE STATUTES AND REGULATIONS IS TO GIVE ALL PERSONS EQUAL RIGHT TO COMPETE FOR GOVERNMENT CONTRACTS; TO PREVENT UNJUST FAVORITISM, OR COLLUSION OR FRAUD IN THE LETTING OF CONTRACTS FOR THE PURCHASE OF SUPPLIES; AND THUS TO SECURE FOR THE GOVERNMENT THE BENEFITS WHICH ARISE FROM COMPETITION. IN FURTHERANCE OF SUCH PURPOSE, INVITATIONS AND SPECIFICATIONS MUST BE SUCH AS TO PERMIT COMPETITORS TO COMPETE ON A COMMON BASIS. * * *

THE PREFERENTIAL EXCEPTION IN DIRECTIVE 7800.5 MUST, THEREFORE, BE DEEMED INVALID AS APPLIED TO FORMALLY ADVERTISED PROCUREMENTS UNLESS STATUTORY AUTHORITY EXISTS FOR SUCH DISCRIMINATION AMONG BIDDERS. THE ASSISTANT SECRETARY'S LETTER REFERS SPECIFICALLY TO THE SMALL BUSINESS ACT OF 1953. SECTION 202 OF THAT ACT, 67 STAT. 232, 15 U.S.C. 631, DECLARES IT TO BE THE POLICY OF THE CONGRESS THAT THE GOVERNMENT SHOULD --

* * * AID, COUNSEL, ASSIST, AND PROTECT INSOFAR AS IS POSSIBLE THE INTERESTS OF SMALL-BUSINESS CONCERNS IN ORDER * * * TO INSURE THAT A FAIR PROPORTION OF THE TOTAL PURCHASES AND CONTRACTS FOR SUPPLIES AND SERVICES FOR THE GOVERNMENT BE PLACED WITH SMALL-BUSINESS ENTERPRISES * * *.

A SIMILAR POLICY HAS BEEN ANNOUNCED IN OTHER STATUTES. SEE SECTION 714 (F) (2) OF THE DEFENSE PRODUCTION ACT OF 1950, AS AMENDED, 65 STAT. 143, 50 U.S.C. 2163A (F) (2); SECTION 2 (B) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947, NOW 10 U.S.C. 2301; SECTION 302 (B) OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 40 U.S.C. 252 (B). ALSO, SECTION 609 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1957, 71 STAT. 324-25, PROVIDES THAT THE SECRETARY OF DEFENSE SHALL, INSOFAR AS PRACTICABLE,

* * * ASSIST AMERICAN SMALL BUSINESS TO PARTICIPATE EQUITABLY IN THE FURNISHING OF COMMODITIES AND SERVICES FINANCED WITH FUNDS APPROPRIATED UNDER THIS ACT BY MAKING AVAILABLE * * * INFORMATION * * * WITH RESPECT TO PURCHASES PROPOSED * * *, AND BY MAKING AVAILABLE * * * INFORMATION AS TO COMMODITIES AND SERVICES PRODUCED AND FURNISHED BY SMALL INDEPENDENT ENTERPRISES * * *, AND BY OTHERWISE HELPING TO GIVE SMALL BUSINESS AN OPPORTUNITY TO PARTICIPATE IN THE FURNISHING OF COMMODITIES AND SERVICES FINANCED WITH FUNDS APPROPRIATED BY THIS ACT.

IT APPEARS TO BE THE POSITION OF THE ASSISTANT SECRETARY THAT THESE STATUTORY DECLARATIONS OF CONGRESSIONAL POLICY AND OTHER STATUTES SUCH AS SECTION 609 OF THE CURRENT DEFENSE DEPARTMENT APPROPRIATION ACT ARE BROAD ENOUGH TO AUTHORIZE THE PREFERENCE TO SMALL BUSINESS AFFORDED UNDER DIRECTIVE 7800.5. WE ARE UNABLE TO AGREE WITH THIS POSITION.

IT IS PERTINENT TO NOTE THAT THE SMALL BUSINESS ACT ITSELF PROVIDES IN SECTION 204 THEREOF, 15 U.S.C. 643, THAT IN ORDER TO EFFECTUATE THE PURPOSES OF THE ACT, SMALL BUSINESS SHALL RECEIVE THOSE PROCUREMENTS DETERMINED BY THE SMALL BUSINESS ADMINISTRATION AND THE PROCURING AGENCY TO BE "SET ASIDE" FOR SMALL BUSINESS. TO THIS EXTENT, AND BY THIS SPECIFIC MEANS, THE CONGRESS HAS AUTHORIZED A DISREGARD OF THE STATUTES REQUIRING FORMAL ADVERTISING PROCEDURES. A MERE DECLARATION OF CONGRESSIONAL POLICY, WITHOUT IMPLEMENTATION THEREOF BY SPECIFIC LANGUAGE, SHOULD NOT IN OUR OPINION BE CONSTRUED AS REPEALING OR MAKING INAPPLICABLE DEFINITE STATUTORY RESTRICTIONS OTHERWISE* APPLICABLE. SEE, IN THIS CONNECTION, OUR DECISIONS AT 22 COMP. GEN. 1018; 28 ID. 662; 31 ID. 431.

THE LETTER FROM THE ASSISTANT SECRETARY REQUESTS ADVICE WHETHER, IN THE EVENT DIRECTIVE 7800.5 BE FOUND OBJECTIONABLE, WE WOULD OBJECT TO THE ESTABLISHMENT OF A PROCEDURE BY YOUR DEPARTMENT WHEREBY EQUAL PROGRESS PAYMENT PERCENTAGES WOULD BE OFFERED ALL BIDDERS UNDER FORMALLY ADVERTISED PROCUREMENTS, WITH PROVISION FOR THE ALLOWANCE OF HIGHER PERCENTAGES IN UNUSUAL CASES. AUTHORIZATION BY DEPARTMENTAL HEADQUARTERS WOULD BE REQUIRED FOR THE ALLOWANCE OF HIGHER PERCENTAGES, EXCEPT THAT IN THE CASE OF SMALL BUSINESS CONTRACTING OFFICERS WOULD BE AUTHORIZED TO ALLOW LIMITED HIGHER PERCENTAGES.

THE SUGGESTED PROCEDURE WOULD THUS PROVIDE AN ADMINISTRATIVE PROCESS FOR SMALL BUSINESS DIFFERENT FROM THAT TO BE FOLLOWED BY OTHERS. THE REASONS JUSTIFYING THE ADOPTION OF A DIFFERENT PROCEDURE FOR SMALL BUSINESS ARE NOT STATED, AND OUR COMMENTS MUST, THEREFORE, BE GENERAL IN NATURE. THE DIFFERENCE IN TREATMENT IS MERELY PROCEDURAL AND DOES NOT CREATE A DIFFERENCE IN SUBSTANTIVE RIGHTS, WE WOULD NOT OBJECT. IF, ON THE OTHER HAND, THE SUGGESTED PROCEDURE IS DESIGNED TO ACCOMPLISH INDIRECTLY THE SAME PURPOSE AS DIRECTIVE 7800.5, IT WOULD BE SUBJECT TO THE SAME OBJECTIONS.