B-141577, JANUARY 8, 1960, 39 COMP. GEN. 503

B-141577: Jan 8, 1960

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CONTRACTS - AWARDS - ERRONEOUS - TAX INCLUSION OR EXCLUSION - GOVERNMENT LIABILITY - LABOR SURPLUS AREA AWARD A NET BID WHICH DID NOT CONTAIN ANY REFERENCE TO THE INCLUSION OF AN AMOUNT REPRESENTING THE FEDERAL MANUFACTURERS EXCISE TAX BECAUSE THE BIDDER LEARNED THAT THE TAX WAS INAPPLICABLE BUT WHICH. WAS ERRONEOUSLY EVALUATED ON THE BASIS THAT THE TAX WAS APPLICABLE IS A BID WHICH CONFORMED TO THE INVITATION. EVEN THOUGH SUBSEQUENT TO AWARD THE PROCUREMENT AGENCY LEARNED THAT THE TAX WAS INAPPLICABLE SO THAT THE AWARD WAS MADE TO OTHER THAN THE LOW BIDDER. WHICH WAS MADE TO OTHER THAN THE LOW BIDDER AS THE RESULT OF A MISTAKE IN EVALUATION. ON THE BASIS THAT A FEDERAL MANUFACTURERS EXCISE TAX WAS APPLICABLE TO THE PROCUREMENT.

B-141577, JANUARY 8, 1960, 39 COMP. GEN. 503

CONTRACTS - AWARDS - ERRONEOUS - TAX INCLUSION OR EXCLUSION - GOVERNMENT LIABILITY - LABOR SURPLUS AREA AWARD A NET BID WHICH DID NOT CONTAIN ANY REFERENCE TO THE INCLUSION OF AN AMOUNT REPRESENTING THE FEDERAL MANUFACTURERS EXCISE TAX BECAUSE THE BIDDER LEARNED THAT THE TAX WAS INAPPLICABLE BUT WHICH, ALONG WITH THREE OTHER BIDS WHICH SPECIFIED SEPARATE AMOUNTS FOR THE TAX, WAS ERRONEOUSLY EVALUATED ON THE BASIS THAT THE TAX WAS APPLICABLE IS A BID WHICH CONFORMED TO THE INVITATION, AND ITS ACCEPTANCE IN GOOD FAITH BROUGHT INTO EXISTENCE A VALID OBLIGATION BINDING ON THE PARTIES, EVEN THOUGH SUBSEQUENT TO AWARD THE PROCUREMENT AGENCY LEARNED THAT THE TAX WAS INAPPLICABLE SO THAT THE AWARD WAS MADE TO OTHER THAN THE LOW BIDDER; BUT SINCE THE GOVERNMENT WOULD BE LIABLE FOR THE CONTRACTOR'S EXPENSES IN PREPARATION FOR PRODUCTION, CANCELLATION WOULD NOT BE IN THE BEST INTEREST OF THE GOVERNMENT. AN AWARD FOR THE UNRESERVED PORTION OF A SET-ASIDE PROCUREMENT FOR LABOR SURPLUS AREA CONCERNS AND SMALL BUSINESS CONCERNS, WHICH WAS MADE TO OTHER THAN THE LOW BIDDER AS THE RESULT OF A MISTAKE IN EVALUATION, ON THE BASIS THAT A FEDERAL MANUFACTURERS EXCISE TAX WAS APPLICABLE TO THE PROCUREMENT, DOES NOT REQUIRE THAT THE SET-ASIDE PORTION BE AWARDED TO THE CONTRACTOR WHO ERRONEOUSLY RECEIVED THE NON-SET-ASIDE AWARD AND AT A PRICE HIGHER THAN THAT BID BY THE CONCERN ENTITLED TO THE AWARD.

TO THE SECRETARY OF THE ARMY, JANUARY 8, 1960:

REFERENCE IS MADE TO A LETTER DATED DECEMBER 28, 1959, WITH ENCLOSURES, FROM LIEUTENANT COLONEL CARL P. BLAKELY, ACTING CHIEF, CONTRACTS BRANCH, PROCUREMENT DIVISION, OFFICE OF THE DEPUTY CHIEF OF STAFF FOR LOGISTICS, REQUESTING OUR DECISION RESPECTING THE AWARD OF A CONTRACT TO THE JOHN JOHNSON COMPANY UNDER INVITATION FOR BIDS NO. QM (CTM/-36-243-60-18, DATED JULY 14, 1959, INVOLVING THE PROCUREMENT OF 3,000 PAULINS.

THE RECORD SHOWS THAT BY THE CITED INVITATION THE MILITARY CLOTHING AND TEXTILE SUPPLY AGENCY REQUESTED BIDS TO BE OPENED ON AUGUST 14, 1959, FOR FURNISHING 3,000 PAULINS, WITH AN ADDITIONAL 3,000 SET ASIDE FOR POSSIBLE PLACEMENT WITH CONCERNS LOCATED IN LABOR SURPLUS AREAS. UNDER THE TERMS OF PARAGRAPH 46 OF THE GENERAL PROVISIONS OF THE INVITATION, BIDDERS WERE REQUIRED TO INCLUDE ALL APPLICABLE FEDERAL, STATE, AND LOCAL TAXES, EXCEPT THOSE FROM WHICH THE SUPPLIES WERE EXEMPT. SIX BIDS WERE RECEIVED IN RESPONSE TO THE INVITATION; HOWEVER, OUR DECISION CONCERNS ONLY THE FOLLOWING TWO BIDS:

CHART FIRM DESTINATION PRICE DISCOUNT CAMEL MANUFACTURING A

$55.52) (1/2 OF 1 PERCENT. COMPANY, KNOXVILLE, B 55.72) PLUS $4.38 (1/2 OF 1 PERCENT. TENNESSEE C 55.07) FEDERAL (1/2 OF 1 PERCENT.

D 56.97) EXCISE TAX, (1/2 OF 1 PERCENT.

IF APPLICABLE JOHN JOHNSON A-D 58.68----------------NET. COMPANY, DETROIT, MICHIGAN

THE CAMEL MANUFACTURING COMPANY THUS SPECIFICALLY PROVIDED IN ITS BID FOR AN AMOUNT OF $4.38 PER UNIT TO COVER THE FEDERAL MANUFACTURERS EXCISE TAX, IF APPLICABLE, AND IT IS REPORTED THAT TWO OTHER BIDDERS DID LIKEWISE. SINCE, AT THE TIME OF THE BID OPENING, THIS TAX WAS CONSIDERED BY THE CONTRACTING OFFICER TO BE APPLICABLE TO THIS PROCUREMENT, IT WAS CONCLUDED THAT THE BIDS SUBMITTED BY THE "REMAINING THREE CONCERNS," INCLUDING THE JOHN JOHNSON COMPANY, INCLUDED IN THEIR BID PRICES AN APPROPRIATE AMOUNT TO COVER THE TAX. IN THE EVALUATION OF THE BIDS, THE SUM OF $4.38 WAS ADDED TO EACH DESTINATION PRICE SUBMITTED BY THE CAMEL MANUFACTURING COMPANY, THUS RESULTING IN THE JOHNSON COMPANY'S BID OF $56.68 PER UNIT BEING THE LOWEST BID RECEIVED ON THE UNRESTRICTED PORTION OF THE PROCUREMENT.

IT IS REPORTED THAT SUBSEQUENT TO THE EVALUATION OF THE BIDS, THE CONTRACTING OFFICER DETERMINED THAT THE JOHNSON COMPANY WAS NOT A RESPONSIBLE BIDDER DUE TO POOR PAST PERFORMANCE. HOWEVER, FOLLOWING ISSUANCE OF A CERTIFICATE OF COMPETENCY BY THE SMALL BUSINESS ADMINISTRATION, THE UNRESTRICTED PORTION OF THE PROCUREMENT WAS AWARDED TO THE JOHN JOHNSON COMPANY AS THE LOWEST BIDDER AT ITS BID PRICE OF $58.68 PER UNIT UNDER DATE OF NOVEMBER 18, 1959. UNDER DATE OF OCTOBER 20, 1959, IT WAS ADMINISTRATIVELY CONCLUDED THAT THE FEDERAL MANUFACTURERS EXCISE TAX WAS NOT APPLICABLE TO PAULINS MANUFACTURED FROM GOVERNMENT-FURNISHED MATERIAL, THIS CONCLUSION BEING BASED ON THE FACT THAT THE FEDERAL RETAILERS EXCISE TAX HAD BEEN RULED INAPPLICABLE IN A PROCUREMENT OF DUFFLE BAGS INVOLVING GOVERNMENT-FURNISHED PROPERTY. THE CONTRACTING OFFICER THEREUPON ADVISED THE JOHNSON COMPANY THAT THE TAX WAS CONSIDERED TO BE INAPPLICABLE TO THE PROCUREMENT AND INFORMATION WAS REQUESTED AS TO THE AMOUNT OF THE TAX INCLUDED IN THE CONTRACT PRICE IN ORDER THAT THE CONTRACT PRICE COULD BE MODIFIED ACCORDINGLY. THE JOHNSON COMPANY REPLIED TO THE EFFECT THAT THE INTERNAL REVENUE SERVICE HAD RULED THAT THE FEDERAL MANUFACTURERS EXCISE TAX WAS NOT APPLICABLE TO THE SUPPLIES PURCHASED UNDER THE INVITATION INVOLVED HEREIN AND THAT NO AMOUNT TO COVER SUCH TAX WAS INCLUDED IN ITS BID PRICE.

THE OFFICER OF THE GENERAL COUNSEL, OFFICE OF THE QUARTERMASTER GENERAL, TAKES THE POSITION THAT THE AWARD TO THE JOHNSON COMPANY SHOULD BE CANCELED FOR THE REASON THAT THE AWARD WAS MADE TO OTHER THAN THE LOWEST RESPONSIBLE BIDDER. THAT OFFICE RECOMMENDED THAT IT BE GIVEN CLEARANCE TO (1) CANCEL THE AWARD TO THE JOHN JOHNSON COMPANY, (2) TO AWARD THE UNRESTRICTED PORTION OF THE PROCUREMENT TO THE CAMEL MANUFACTURING COMPANY, AND (3) TO NEGOTIATE THE SET-ASIDE PORTION WITH THE JOHNSON COMPANY.

IT APPEARS THAT THE JOHNSON COMPANY OBTAINED A RULING FROM THE INTERNAL REVENUE SERVICE TO THE EFFECT THAT THE FEDERAL MANUFACTURERS EXCISE TAX WAS NOT APPLICABLE TO THIS PROCUREMENT AND SUBMITTED ITS BID ACCORDINGLY. IN OTHER WORDS, IT WAS ENTIRELY PROPER, UNDER THE CIRCUMSTANCES, FOR THE JOHNSON COMPANY TO SUBMIT A NET BID WITHOUT ANY REFERENCE TO TAXES--- NONE BEING APPLICABLE. HOWEVER, SINCE THE BID OF THE JOHNSON COMPANY CONTAINED NO QUALIFICATION OR EXCLUSION OF THE TAX, IF APPLICABLE, A CONTRACT WAS AWARDED TO THAT CONCERN AS THE LOWEST RESPONSIBLE BIDDER ON THE BASIS OF THE CONTRACTING OFFICER'S UNDERSTANDING THAT THE TAX WAS APPLICABLE.

SINCE THE BID OF THE JOHNSON COMPANY CONFORMED TO THE INVITATION AND WAS OTHERWISE PROPER IN ALL RESPECTS, IT SEEMS LIKELY THAT A COURT WOULD HOLD THAT ITS ACCEPTANCE IN GOOD FAITH BROUGHT INTO EXISTENCE A VALID OBLIGATION BINDING ON THE PARTIES. ALSO, THERE ARE CERTAIN OTHER ASPECTS OF THIS MATTER WHICH REQUIRE CONSIDERATION. IT IS REPORTED THAT WHILE THE JOHNSON COMPANY HAS NOT STARTED PRODUCTION, IT HAS INCURRED COSTS IN THE ESTIMATED AMOUNT OF $14,500 IN PREPARING FOR PRODUCTION. IT IS REASONABLE TO ASSUME THAT IF THE PENDING CONTRACT WERE CANCELED THE GOVERNMENT WOULD BE FACED WITH A CLAIM FOR AT LEAST REIMBURSEMENT OF THE CONTRACTOR'S OUT- OF-POCKET EXPENDITURES. UPON CONSIDERATION OF ALL THE FACTS AND CIRCUMSTANCES IN THIS CASE, WE BELIEVE THAT IT WOULD BE IN THE INTEREST OF THE GOVERNMENT TO ALLOW THE CONTRACT WITH THE JOHNSON COMPANY TO STAND.

THERE REMAINS FOR CONSIDERATION THE QUESTION AS TO THE ACTION TO BE TAKEN WITH RESPECT TO THE SET-ASIDE PORTION OF THE PROCUREMENT. THE OFFICE OF THE GENERAL COUNSEL HAS POINTED OUT THAT THE INVITATION IN THIS CASE PROVIDED THAT THE SET-ASIDE PORTION WOULD BE NEGOTIATED FIRST WITH LABOR SURPLUS AREA CONCERNS, WHICH ARE ALSO SMALL BUSINESS CONCERNS; SECONDLY, WITH OTHER LABOR SURPLUS AREA CONCERNS; AND THEN WITH SMALL BUSINESS CONCERNS NOT IN LABOR SURPLUS AREAS; ALSO, THAT SECTION 1-804 OF THE ARMED SERVICES PROCUREMENT REGULATION PROVIDES THAT THE SET-ASIDE PRICE SHALL BE THE HIGHEST UNIT PRICE AWARDED ON THE NON-SET-ASIDE PORTION. IT IS REPORTED THAT THE JOHNSON COMPANY WOULD NOT BE INTERESTED IN THE SET-ASIDE PORTION AT ANY PRICE LESS THAN THE UNIT PRICE OF $58.68 WHICH IT SUBMITTED ON THE UNRESTRICTED PORTION.

IT IS OUR VIEW THAT BECAUSE OF THE SPECIAL CIRCUMSTANCES IN THIS CASE, A CONTRACT FOR THE SET-ASIDE PORTION SHOULD NOT BE REQUIRED TO BE AWARDED AT THE JOHNSON PRICE. THIS VIEW IS BASED UPON THE FACT THAT THE AWARD AT THE UNIT PRICE OF $58.68 WAS MADE AS THE RESULT OF A MISTAKE BY THE CONTRACTING OFFICER. IT WILL BE SEEN THAT IF THE REQUIREMENTS OF THE CITED REGULATION BE LITERALLY FOLLOWED WITH RESPECT TO THE SET-ASIDE PORTION AND AN AWARD MADE AT THE PRICE FIXED BY THE AWARD TO THE JOHNSON COMPANY, THE GOVERNMENT STANDS TO TAKE A LOSS OF APPROXIMATELY $8,800--- THE DIFFERENCE BETWEEN THE UNIT PRICE OF THE JOHNSON COMPANY AND THE TAX EXCLUSIVE PRICES QUOTED BY THE CAMEL MANUFACTURING COMPANY. WE BELIEVE THERE IS A REASONABLE BASIS FOR HOLDING THAT THE "HIGHEST UNIT PRICE" SHOULD REPRESENT A UNIT PRICE ARRIVED AT IN THE REGULAR COURSE OF CONTRACTING RATHER THAN A UNIT PRICE ARRIVED AT THROUGH ERROR, AS IN THIS CASE, AND SHOULD IN NO EVENT BE CONSTRUED TO REQUIRE AN AWARD AT A PRICE HIGHER THAN THAT BID BY THE PARTY ENTITLED TO THE AWARD. CERTAINLY, THE AWARD OF A CONTRACT FOR THE SET-ASIDE PORTION ON THE BASIS OF THE JOHNSON COMPANY PRICE WOULD NOT BE IN THE BEST INTERESTS OF THE GOVERNMENT; AND IT IS, OF COURSE, NOT OBLIGATORY THAT ANY AWARD BE MADE OF THE SET-ASIDE.