B-139008, MAY 12, 1959, 38 COMP. GEN. 754

B-139008: May 12, 1959

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IS PROPER UNDER 10 U.S.C. 2388 WHICH AUTHORIZES LIQUID FUEL STORAGE CONTRACTS FOR PERIODS OF NOT MORE THAN FIVE YEARS. THE ACTION OF CONTRACTING OFFICER IN A NEGOTIATED PROCUREMENT UNDER 10 U.S.C. 2304 (A) (10) IN PROCEEDING TO NEGOTIATE WITH ONLY THE LOW OFFEROR AFTER REJECTION OF THE SECOND LOW BIDDER'S OFFER WHICH WAS ALMOST TWENTY- THREE PERCENT HIGHER IS PROPER UNDER PARAGRAPH 3-805 (A) (I) WHICH PERMITS EXCLUSIVE NEGOTIATION WITH THE OFFEROR WHO SUBMITS A RESPONSIVE PROPOSAL WHICH IS CLEARLY AND SUBSTANTIALLY MORE ADVANTAGEOUS TO THE GOVERNMENT THAN ANY OTHER PROPOSAL. THE AWARD OF A NEGOTIATED CONTRACT TO A NEWLY ORGANIZED CORPORATION UNDER A NAME WHICH WAS DIFFERENT FROM THE ONE PROPOSED BY THE SUCCESSFUL CORPORATE OFFEROR DURING NEGOTIATION BECAUSE OF THE SIMILARITY OF NAME TO AN EXISTING CORPORATE ENTITY AFFORDS NO BASIS FOR A PROTEST TO THE AWARD ON THE GROUND THAT THE CORPORATION DID NOT EXIST IN VIEW OF THE STATEMENT BY THE SUCCESSFUL OFFEROR THAT IT WOULD ORGANIZE A NEW CORPORATION TO PERFORM THE CONTRACT AND THE UNCONDITIONAL GUARANTEE BY THE OFFICERS OF THE NEW CORPORATION FOR THE PERFORMANCE OF THE CONTRACT.

B-139008, MAY 12, 1959, 38 COMP. GEN. 754

CONTRACTS - NEGOTIATION - LONG-TERM CONTRACTS WITH RENEWAL OPTIONS - EVALUATION - NEGOTIATION PROCEDURES EVALUATION OF PROPOSALS FOR A FIVE-YEAR CONTRACT FOR CONSTRUCTION OF LIQUID FUEL STORAGE FACILITIES, WITH OPTION IN THE GOVERNMENT TO RENEW FOR THREE ADDITIONAL FIVE-YEAR PERIODS, ON THE BASIS OF THE TOTAL COST FOR THE TWENTY-YEAR PERIOD RATHER THAN ON THE BASIS OF THE COST FOR THE INITIAL FIVE-YEAR PERIOD, IS PROPER UNDER 10 U.S.C. 2388 WHICH AUTHORIZES LIQUID FUEL STORAGE CONTRACTS FOR PERIODS OF NOT MORE THAN FIVE YEARS, WITH OPTIONS TO RENEW FOR ADDITIONAL PERIODS BUT NOT MORE THAN A TOTAL OF TWENTY YEARS AND UNDER THE INVITATION REQUEST WHICH REQUIRED BIDDERS TO INDICATE THE USE CHARGE FOR EACH RENEWAL PERIOD AS WELL AS THE INITIAL FIVE-YEAR TERM. THE ACTION OF CONTRACTING OFFICER IN A NEGOTIATED PROCUREMENT UNDER 10 U.S.C. 2304 (A) (10) IN PROCEEDING TO NEGOTIATE WITH ONLY THE LOW OFFEROR AFTER REJECTION OF THE SECOND LOW BIDDER'S OFFER WHICH WAS ALMOST TWENTY- THREE PERCENT HIGHER IS PROPER UNDER PARAGRAPH 3-805 (A) (I) WHICH PERMITS EXCLUSIVE NEGOTIATION WITH THE OFFEROR WHO SUBMITS A RESPONSIVE PROPOSAL WHICH IS CLEARLY AND SUBSTANTIALLY MORE ADVANTAGEOUS TO THE GOVERNMENT THAN ANY OTHER PROPOSAL. FOR A CONTRACTING OFFICER TO INDUCE A SECOND LOW OFFEROR TO REDUCE ITS PROPOSAL IN A PROCUREMENT NEGOTIATED PURSUANT TO 10 U.S.C. 2304 (A) (10) BY NEARLY TWENTY-THREE PERCENT TO EQUAL THE LOW PROPOSAL MIGHT BE REGARDED AS IN CONTRAVENTION OF PARAGRAPH 3-805 (A) OF THE ARMED SERVICES PROCUREMENT REGULATION WHICH PRECLUDES DISCLOSURE TO ANY OFFEROR OF A PRICE WHICH MUST BE MET ON THE BASIS THAT SUCH ACTION CONSTITUTES AN AUCTION TECHNIQUE. THE AWARD OF A NEGOTIATED CONTRACT TO A NEWLY ORGANIZED CORPORATION UNDER A NAME WHICH WAS DIFFERENT FROM THE ONE PROPOSED BY THE SUCCESSFUL CORPORATE OFFEROR DURING NEGOTIATION BECAUSE OF THE SIMILARITY OF NAME TO AN EXISTING CORPORATE ENTITY AFFORDS NO BASIS FOR A PROTEST TO THE AWARD ON THE GROUND THAT THE CORPORATION DID NOT EXIST IN VIEW OF THE STATEMENT BY THE SUCCESSFUL OFFEROR THAT IT WOULD ORGANIZE A NEW CORPORATION TO PERFORM THE CONTRACT AND THE UNCONDITIONAL GUARANTEE BY THE OFFICERS OF THE NEW CORPORATION FOR THE PERFORMANCE OF THE CONTRACT, WHICH GUARANTEE BECAME A PART OF THE NEGOTIATED CONTRACT.

TO THE ONEIDA TANKPORT, INC., MAY 12, 1959:

IN A LETTER DATED MARCH 16, 1959, YOU PROTESTED THE AWARD BY THE MILITARY PETROLEUM SUPPLY AGENCY ( MPSA) OF A CONTRACT DATED FEBRUARY 6, 1959, TO VERONA PETROLEUM STORAGE, INC.

ONE OF THE GROUNDS OF THE PROTEST IS THAT VERONA PETROLEUM STORAGE, INC., IS NOT A CORPORATION OF NEW YORK STATE. IN THAT REGARD, THE LOWEST PROPOSAL WAS SUBMITTED BY COPELAND TERMINALS, INC., OF PLATTSBURG, NEW YORK, WHICH STATED THAT IN THE EVENT OF AN AWARD TO THAT COMPANY A NEW CORPORATION TO BE KNOWN AS THE VERONA PETROLEUM STORAGE, INC., WOULD BE ORGANIZED TO CARRY OUT THE CONTRACT OBLIGATIONS. SINCE THE PROPOSED NAME WAS SIMILAR TO AN EXISTING CORPORATE ENTITY, THE NEW CORPORATION IS REGISTERED AS THE VERONA TERMINAL STORAGE, INC., AND THE AWARD WAS MADE TO THAT ORGANIZATION. FURTHERMORE, MORTIMER COPELAND AND BERT J. COPELAND, APPARENTLY OFFICERS OF COPELAND TERMINALS, INC., HAVE UNCONDITIONALLY GUARANTEED PERFORMANCE OF THE CONTRACT BY VERONA TERMINAL STORAGE, INC., AND SUCH GUARANTEE IS A PART OF THE NEGOTIATED CONTRACT. THE GOVERNMENT'S INTERESTS ARE ADEQUATELY PROTECTED UNDER THE CIRCUMSTANCES.

PURSUANT TO THE AUTHORITY OF 10 U.S.C. 2304 (A) (10), MPSA ISSUED A REQUEST FOR PROPOSAL NO. 59-N-108 ON OCTOBER 31, 1958, FOR THE CONSTRUCTION, OPERATION AND MAINTENANCE OF PETROLEUM STORAGE FACILITIES IN THE VICINITY OF ROME, NEW YORK. CONSTRUCTION COSTS OF THE PETROLEUM STORAGE FACILITIES WOULD BE RECOVERED BY A USE CHARGE. SINCE THE REQUEST FOR PROPOSAL CALLED FOR A 5-YEAR CONTRACT WITH THE OPTION OF THE GOVERNMENT TO EXTEND FOR THREE ADDITIONAL 5-YEAR TERMS OR 20 YEARS ALTOGETHER, EACH PARTY SUBMITTING A PROPOSAL WAS REQUIRED TO INDICATE THE USE CHARGE FOR EACH RENEWAL PERIOD AS WELL AS THE INITIAL 5-YEAR TERM. OTHER WORDS IT WAS CONTEMPLATED THAT EACH PROPOSAL WOULD SET FORTH A USE CHARGE FOR A TOTAL PERIOD OF 20 YEARS.

IN RESPONSE TO THE REQUEST FIVE FIRMS SUBMITTED PROPOSALS; YOUR PROPOSAL AND THE VERONA PROPOSAL WERE THE LOWEST TWO AS TO USE CHARGE. COMPARISON OF THESE PROPOSALS FOLLOWS:

CHART

VERONA ONEIDA TOTAL FOR 20 YEARS-------------------------- 4,568,589 5,616,150

AS A RESULT OF NEGOTIATION, VERONA AGREED TO $2,200,162.50 FOR THE FIRST 5-YEAR PERIOD, WHICH IS A REDUCTION OF $209,776.50 FROM ITS PROPOSAL. IS SELF-EVIDENT THAT IF ONLY THE FIRST 5-YEAR PERIOD IS CONSIDERED, YOUR PROPOSAL IS $243,939 LESS THAN VERONA, AND CONVERSELY FOR THE 20-YEAR PERIOD THE VERONA PROPOSAL RESULTS IN A SAVING OF $1,047,561 TO THE GOVERNMENT. YOU CONTEND THAT THE PROPOSALS SHOULD HAVE BEEN EVALUATED ON THE BASIS OF THE FIGURES FOR THE FIRST FIVE YEARS ONLY. IN ESSENCE, THE PRINCIPAL GROUND OF YOUR PROTEST GOES TO THE EVALUATION PROCESS; THAT IS, WHETHER THE CONTRACTING OFFICER MAY EVALUATE PROPOSALS BY TAKING INTO CONSIDERATION THE 20-YEAR PERIOD, CONSISTING OF FOUR 5-YEAR PERIODS, OR WHETHER HE IS RESTRICTED TO A CONSIDERATION OF ONLY THE FIRST 5-YEAR PERIOD.

IT SHOULD BE NOTED THAT THE SUBJECT PROCUREMENT WAS NEGOTIATED UNDER AUTHORITY OF 10 U.S.C. 2304 (A) (10). SECTION 2302, TITLE 10, U.S.C., DEFINES THE TERM "NEGOTIATE" AS MEANING TO "MAKE WITHOUT FORMAL ADVERTISING.' THEREFORE, WHEN NEGOTIATION IS AUTHORIZED BY SECTION 2304 (A), THE EXTENT AND METHOD OF NEGOTIATION IS LEFT ENTIRELY TO THE ADMINISTRATIVE AGENCY, AND THE RULES OF FORMALLY ADVERTISED COMPETITIVE BIDDING ARE NOT APPLICABLE. EVEN THOUGH THIS OFFICE MAY NOT OBJECT TO AN EXECUTIVE OFFICIAL'S PROPER EXERCISE OF ADMINISTRATIVE DISCRETION IN CONNECTION WITH NEGOTIATION OF CONTRACTS, THE INSTANT PROCUREMENT HAS BEEN REVIEWED BY US FOR ANY POSSIBLE MISUSE OF SUCH DISCRETION.

THE BASIC AUTHORITY FOR THE PROCUREMENT OF LIQUID FUELS BY LONG-TERM CONTRACT WAS ORIGINALLY CONTAINED IN PARAGRAPH 416 OF PUBLIC LAW 84 968, 70 STAT. 991, 1018. THAT PARAGRAPH HAS BEEN REENACTED AS 10 U.S.C. 2388, WHICH PROVIDES IN PART AS FOLLOWS:

(A) THE SECRETARY OF A MILITARY DEPARTMENT MAY CONTRACT FOR THE STORAGE, HANDLING, AND DISTRIBUTION OF LIQUID FUELS FOR PERIODS OF NOT MORE THAN FIVE YEARS, WITH OPTIONS TO RENEW FOR ADDITIONAL PERIODS OF NOT MORE THAN FIVE YEARS EACH, BUT NOT MORE THAN A TOTAL OF 20 YEARS.

IN HOUSE REPORT NO. 1890, 84TH CONGRESS, THE COMMITTEE ON ARMED SERVICES DISCUSSED THE VARIOUS PROVISIONS OF H.R. 9893, WHICH EVENTUALLY BECAME PUBLIC LAW 84-968. IN ITS ANALYSIS OF SECTION 416 OF THE BILL THE COMMITTEE COMMENTED IN PART AS FOLLOWS (PAGES 24-25):

THE COMMITTEE WAS INFORMED THAT A YEAR AGO IT WAS DETERMINED AFTER STUDY THAT A LARGE PERCENTAGE OF OUR RESERVE STOCKS OF PETROLEUM, PARTICULARLY AVIATION GASOLINE AND JET FUEL, ARE LOCATED IN HIGHLY VULNERABLE AREAS OF THE UNITED STATES. THE DEPARTMENT, BASED ON THIS DETERMINATION, HAS ATTEMPTED TO ACHIEVE A PROGRAM OF DISPERSING THAT STORAGE SO THAT IT WILL BE OUTSIDE THE VULNERABLE AREAS AND, THEREFORE, WILL BE AVAILABLE IN THE EVENT OF AN EMERGENCY. THE FUEL STOCKS REFERRED TO ARE THOSE INTENDED FOR USE IN IMPORTANT MISSIONS IMMEDIATELY FOLLOWING THE OUTBREAK OF HOSTILITIES. THEY ARE INTENDED ALSO FOR IMMEDIATE SHIPMENT TO OVERSEAS DESTINATIONS. THE STUDY WHICH THE DEPARTMENT MADE OF THE SITUATION IN WHICH IT FOUND ITSELF INDICATED THAT THERE WAS LITTLE OR NOTHING WHICH COULD BE DONE BY THE DEPARTMENT TO RECTIFY THE SITUATION. FOR EXAMPLE, IT FOUND THAT THE COMMERCIAL PETROLEUM STORAGE INDUSTRY WAS UNWILLING TO UNDERTAKE A PROGRAM OF DISPERSAL OUTSIDE OF NORMAL COMMERCIAL AREAS. THE PRINCIPLE (SIC) OBJECTION OF THE INDUSTRIES APPEARED TO SPRING FROM THE FACT THAT UNDER PRESENT LAWS THE LEASING OF SUCH DISPERSED FACILITIES BY THE DEPARTMENT OF DEFENSE WOULD BE LIMITED TO 1 YEAR. THE COST INVOLVED IN SUCH A DISPERSAL PROGRAM MADE IT FULLY UNATTRACTIVE TO THE INDUSTRIES UNDER THIS CIRCUMSTANCE. THIS SECTION, THEREFORE, HAS BEEN PROPOSED BY THE DEPARTMENT OF DEFENSE IN ORDER TO INDUCE INDUSTRIES TO ENGAGE IN THE STORAGE OF PETROLEUM OUTSIDE OF THEIR NORMAL STORAGE AREAS.

CONSTRUCTION FACILITIES UNDER THIS SECTION WILL BE IN CONTEMPLATION OF 5- YEAR CONTRACTS WITH OPTIONS IN THE GOVERNMENT TO RENEW FOR ADDITIONAL 5- YEAR PERIODS, FOR A TOTAL PERIOD NOT TO EXCEED 20 YEARS. THE CONTRACTS ALSO MAY CONTAIN, UNDER THE AUTHORITY GRANTED, AN OPTION IN THE GOVERNMENT TO PURCHASE THE FACILITY AT THE EXPIRATION OR TERMINATION OF THE CONTRACT.

SEE, ALSO, SENATE REPORT NO. 2364, 84TH CONGRESS, PAGES 28-29, AND ALSO BOUND VOLUME 102 CONGRESSIONAL RECORD 5995 (1956).

THE 20-YEAR PROVISION WAS THE SUBJECT OF CONSIDERABLE COMMENT DURING THE HEARINGS BEFORE A SENATE COMMITTEE. SEE MILITARY PUBLIC WORKS CONSTRUCTION, HEARINGS BEFORE THE SUBCOMMITTEE ON REAL ESTATE AND MILITARY CONSTRUCTION OF THE COMMITTEE ON ARMED SERVICES, 84TH CONGRESS, 2D SESSION, PAGES 788 THROUGH 794. SEE, ALSO, MILITARY PUBLIC WORKS, HEARINGS BEFORE THE FULL COMMITTEE OF THE COMMITTEE ON ARMED SERVICES, HOUSE OF REPRESENTATIVES, 84TH CONGRESS, 2D SESSION, PAGES 6807 THROUGH 6813. IN DISCUSSING THE 20-YEAR PROVISION, SENATOR CASE MADE THIS COMMENT ( SENATE HEARINGS, PAGE 702):

BEFORE YOU GO TO THAT, I THINK, ALSO, THAT FOR THE BENEFIT OF THE OTHER MEMBERS OF THE SUBCOMMITTEE, THAT THERE SHOULD BE THE MEMORANDUM SUBMITTED FOR THE RECORD ON THE SPECIFIC NEED FOR GOING FROM 1 YEAR TO 20 YEARS. THAT IS IN EFFECT WHAT THIS AUTHORITY WOULD BE.

YOU ARE NOT MERELY GETTING THE AUTHORITY HERE TO CONTRACT FOR 5 YEARS. YOU ARE GETTING IT FOR A PERIOD UP TO 20 YEARS, AND THAT IS A SUBSTANTIAL CHANGE IN THE PRESENT LAW. * * *

IT IS CLEAR FROM A REVIEW OF THE LEGISLATIVE HISTORY OF PUBLIC LAW 84-968 THAT THE PURPOSE OF THE STATUTE IS TO INDUCE INDUSTRY TO CONSTRUCT STORAGE FACILITIES BY OFFERING LONG-TERM CONTRACTS, WHICH, BY MEANS OF THE THREE SUCCESSIVE OPTIONS, WOULD EXTEND OVER A 20-YEAR PERIOD. IT IS ALSO CLEAR THAT THE FIRMS WHICH SUBMITTED PROPOSALS WERE AWARE OF THE 20-YEAR PROVISION. THE MERE FACT THAT EACH FIRM WAS REQUIRED TO GIVE QUOTATIONS FOR A 20-YEAR PERIOD CERTAINLY LEADS TO NO OTHER CONCLUSION. IF THE CONTRACTING AUTHORITY WERE RESTRICTED ONLY TO A CONSIDERATION OF QUOTATIONS FOR A 5-YEAR PERIOD, THERE WOULD BE NO NECESSITY, OR JUSTIFICATION, FOR QUOTATIONS OVER A 20-YEAR PERIOD. WE CONCLUDE, THEREFORE, THAT THE METHOD OF EVALUATING PROPOSALS BY CONSIDERING THE 20- YEAR PERIOD IS PROPER UNDER THE LAW.

YOU ALSO RAISE THE QUESTION IN YOUR LETTER OF MARCH 16, 1959, AS TO WHY YOUR COMPANY WAS NOT GIVEN AN OPPORTUNITY TO NEGOTIATE, SINCE VERONA WAS PERMITTED TO REVISE ITS PROPOSAL. PARAGRAPH 3-805 (A) OF THE ARMED SERVICES PROCUREMENT REGULATION ( ASPR) PROVIDES IN PART AS FOLLOWS:

(A) THE NORMAL PROCEDURE IN NEGOTIATED PROCUREMENTS, AFTER RECEIPT OF INITIAL PROPOSALS, IS TO CONDUCT SUCH WRITTEN OR ORAL DISCUSSIONS AS MAY BE REQUIRED TO OBTAIN AGREEMENTS MOST ADVANTAGEOUS TO THE GOVERNMENT. NEGOTIATIONS SHALL BE CONDUCTED AS FOLLOWS:

(I) WHERE A RESPONSIBLE OFFEROR SUBMITS A RESPONSIVE PROPOSAL WHICH, IN THE CONTRACTING OFFICER'S OPINION, IS CLEARLY AND SUBSTANTIALLY MORE ADVANTAGEOUS TO THE GOVERNMENT THAN ANY OTHER PROPOSAL, NEGOTIATIONS MAY BE CONDUCTED WITH THAT OFFEROR ONLY; * * *

IN THE INSTANT PROCUREMENT YOUR PROPOSAL WAS $1,047,561, OR ALMOST 23 PERCENT, HIGHER THAN THE LOW PROPOSAL OF VERONA. THE CONTRACTING OFFICER DID NOT ERR IN CONCLUDING THAT HE SHOULD PROCEED UNDER ASPR 3 805 (A) (I) IN VIEW OF THE WIDE DISPARITY BETWEEN THE LOWEST AND THE SECOND LOW PROPOSAL RECEIVED. EVEN A MODERATE CHANGE IN YOUR PROPOSAL COULD NOT RESULT, UNDER THESE CIRCUMSTANCES, IN A REVISED PROPOSAL WHICH WOULD NECESSITATE ITS CONSIDERATION UNDER ASPR 3-805 (A) (II).

MOREOVER, EVEN IF IT WERE CONCEDED THAT THE CONTRACTING OFFICERS SHOULD HAVE CONDUCTED NEGOTIATIONS WITH ALL OFFERORS PURSUANT TO ASPR 3 805 (A) (II), THE FURTHER PROVISIONS OF ASPR 3-805 (A) BECOME OPERATIVE. THAT PARAGRAPH ALSO STATES IN PART AS FOLLOWS:

* * * WHENEVER NEGOTIATIONS ARE CONDUCTED WITH MORE THAN ONE OFFEROR, NO INDICATION SHALL BE MADE TO ANY OFFEROR OF A PRICE WHICH MUST BE MET TO OBTAIN FURTHER CONSIDERATION, SINCE SUCH PRACTICE CONSTITUTES AN AUCTION TECHNIQUE WHICH MUST BE AVOIDED. * * *

IT WOULD APPEAR THAT TO INDUCE YOUR COMPANY TO LOWER ITS PROPOSAL BY NEARLY 23 PERCENT IN ORDER TO EQUAL THE LOWEST PROPOSAL, THE PROCURING AGENCY WOULD BE OPEN TO CRITICISM FOR NOT FOLLOWING THE ABOVE REGULATION, SINCE IT IS NOT TO BE EXPECTED THAT A WELL-CONSIDERED PROPOSAL IS SUBJECT TO SUCH A HIGH PERCENTAGE OF REDUCTION UNDER NORMAL CIRCUMSTANCES. SHOULD ALSO BE NOTED THAT TO HAVE BEEN SUCCESSFUL YOU WOULD HAVE BEEN REQUIRED TO REDUCE YOUR PROPOSAL BY OVER $1,257,337 (NEARLY 29 PERCENT), SINCE THE SUCCESSFUL FIRM LOWERED ITS BID BY $209,776.50. UNDER ALL THE CIRCUMSTANCES WE FIND NO REASON TO OBJECT TO THE ACTION OF THE CONTRACTING OFFICER IN THIS CASE.

ACCORDINGLY, THERE IS NO LEGAL BASIS FOR OBJECTING TO THE CONTRACT AWARDED TO VERONA TERMINAL STORAGE, INC. ..END :