B-151247, DECEMBER 13, 1963, 43 COMP. GEN. 487

B-151247, DECEMBER 13, 1963, 43 COMP. GEN. 487

CONTRACTS - AWARDS - LABOR SURPLUS AREAS - OPTIONS. CONTRACTS - AWARDS LABOR SURPLUS AREAS - OPTIONS. CONTRACTS - AWARDS - LABOR SURPLUS AREAS - FREIGHT COSTS IN DETERMINING RELATIVE BID PRICES AN OPTION CLAUSE IN AN INVITATION PROVIDING FOR EQUAL NON-SET-ASIDE AND LABOR SURPLUS AREA SET-ASIDE PORTIONS AND RESERVING TO THE GOVERNMENT A 50 PERCENT QUANTITY INCREASE TO BE EXERCISED WITHIN 1 YEAR, WHICH WHEN EXERCISED INCREASED THE SET-ASIDE PORTION TO MORE THAN THE 50 PERCENT SET- ASIDE FOR AWARD TO A SMALL BUSINESS CONCERN, WAS NOT ONLY INAPPROPRIATELY USED, BUT SHOULD NOT HAVE BEEN INCLUDED IN THE INVITATION, THE PERCENTAGE OF THE QUANTITY INCREASE AND THE TIME FOR EXERCISING THE OPTION NOT HAVING BEEN SUFFICIENTLY LIMITED, AND THE INCREASE BEYOND 50 PERCENT OF THE AMOUNT SET ASIDE FOR THE LABOR SURPLUS AREA CONCERN, DECREASING TO LESS THAN 50 PERCENT THE AMOUNT ADVERTISED WITHOUT RESTRICTION INDICATING THE EFFECT OF OPTION CLAUSES IN SET-ASIDES FOR LABOR SURPLUS AREAS COULD SUBSTANTIALLY REDUCE THE AMOUNT OF COMPETITIVE PROCUREMENT OTHERWISE REQUIRED BY LAW AND CORRESPONDINGLY INCREASE THE AMOUNT OF NEGOTIATED PROCUREMENT UNDER 10 U.S.C. 2304 (A) (1). IN THE EXERCISE OF THE OPTION CLAUSE UNDER A LABOR SURPLUS AREA SET ASIDE PORTION OF A PROCUREMENT, NEGOTIATED AT A PRICE BELOW THE CONTRACT PRICE, WITHOUT CONDUCTING NEGOTIATIONS FOR A LIKE AMOUNT UNDER THE CONTRACT COVERING THE NON-SET-ASIDE, WHICH HAD BEEN INCREASED IN A LESSER AMOUNT, BOTH CONTRACTS CONTAINING AN OPTION CLAUSE RESERVING TO THE GOVERNMENT THE RIGHT TO INCREASE QUANTITIES AT LEAST 50 PERCENT, THERE IS NO ASSURANCE THAT THE PROHIBITION IN SECTION 523 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1963, (76 STAT. 332), AGAINST THE PAYMENT OF A PRICE DIFFERENTIAL ON CONTRACTS MADE FOR THE PURPOSE OF RELIEVING ECONOMIC DISLOCATIONS WAS NOT VIOLATED, AND PURSUANT TO PARAGRAPH 1-1505 OF THE ARMED SERVICES PROCUREMENT REGULATION, THE CONTRACTING OFFICER SHOULD HAVE SOLICITED PRICE PROPOSALS FROM BOTH CONTRACTORS AS THE BEST METHOD AVAILABLE FOR TESTING THE MARKET TO DETERMINE THAT THE EXERCISE OF THE OPTION UNDER THE LABOR SURPLUS AREA SET-ASIDE WOULD BE MOST ADVANTAGEOUS TO THE GOVERNMENT, PRICE AND OTHER FACTORS CONSIDERED. IN DETERMINING THE RELATIVE BID PRICES FOR BOTH THE NON-SET-ASIDE AND SET -ASIDE PORTION OF A PROCUREMENT, FREIGHT COSTS ARE FOR CONSIDERATION UNDER AN INVITATION PROVIDING THAT THE SET-ASIDE PORTION SHALL BE AWARDED AT THE HIGHEST UNIT PRICE AWARDED ON THE NON-SET-ASIDE PORTION, ADJUSTED TO REFLECT TRANSPORTATION AND OTHER COST FACTORS WHICH WERE CONSIDERED IN EVALUATING BIDS ON THE NON-SET-ASIDE PORTION.

TO THE SECRETARY OF THE ARMY, DECEMBER 13, 1963:

BY LETTER DATED SEPTEMBER 13, 1963, FROM THE ACTING DIRECTOR OF PROCUREMENT AND PRODUCTION, THERE WAS FURNISHED A REPORT WITH RESPECT TO THE PROTEST OF THE DERO RESEARCH AND DEVELOPMENT CORPORATION AGAINST THE AWARD OF 1,050 UNITS OF FREQUENCY METERS (AN/USM-159) ( ( TO THE LAVOIE LABORATORIES UNDER ITEM 1 OF THE LABOR SURPLUS AREA SET-ASIDE PORTION OF INVITATION FOR BIDS NO. AMC-36-039-63-341-A3 DATED NOVEMBER 15, 1962.

THE INVITATION PROVIDED THAT 1,671 UNITS OF ITEM 1 WERE TO BE PROCURED UNDER THE NON-SET-ASIDE AND THE SET-ASIDE PORTIONS. ALL BIDDERS WERE ADVISED TO LIMIT THEIR BIDS ON THE NON-SET-ASIDE PORTION TO 835 UNITS. ALSO, BIDDERS WERE ADVISED THAT ONLY THOSE "SUBMITTING BIDS IN THE DELIVERY SCHEDULE FOR WHICH AWARD OF THE NON-SET-ASIDE PORTION IS MADE WILL BE ELIGIBLE TO PARTICIPATE IN THE PROCUREMENT OF THE SET-ASIDE PORTION * * *" OF 836 UNITS IN ACCORDANCE WITH THE NOTICE OF LABOR SURPLUS AREA SET-ASIDE. AN OPTION CLAUSE WAS MADE A PART OF THE INVITATION AND READ AS FOLLOWS:

AN OPTION FOR INCREASED QUANTITY

A. THE GOVERNMENT MAY INCREASE THE QUANTITY OF SUPPLIES CALLED FOR HEREIN BY UP TO BUT NOT EXCEEDING 50 PERCENT OF THE QUANTITY OF ITEM NO. 1 AT THE UNIT PRICE SPECIFIED IN THE SCHEDULE. THE CONTRACTING OFFICER MAY EXERCISE THIS OPTION, AT ANY TIME AND FROM TIME TO TIME, WITHIN THE PERIOD OF 1 YEAR FROM THE DATE OF THE CONTRACT (UNLESS COMPLETED OR TERMINATED EARLIER) OR WITHIN THE LESSER PERIOD OF SPECIFIED BY THE CONTRACTOR (SUCH LESSER PERIOD DESIGNATED BY THE CONTRACTOR TO GOVERN), BY GIVING WRITTEN NOTICE TO THE CONTRACTOR.

B. DELIVERY OF THE ITEMS ADDED BY THE EXERCISE OF THIS OPTION SHALL CONTINUE IMMEDIATELY AFTER AND AT THE SAME RATE AS DELIVERY OF LIKE ITEMS CALLED FOR UNDER THIS CONTRACT, UNLESS THE PARTIES OTHERWISE AGREE BY MODIFICATION TO THE CONTRACT. IT IS AGREED THAT CONTRACTOR WILL NOT BE REQUIRED TO FURNISH ADDITIONAL PREPRODUCTION SAMPLES FOR ADDITIONAL ITEMS FURNISHED UNDER EXERCISE OF THIS OPTION.

C. IF BIDS OR OFFERS ARE SOLICITED IN LOT OR RANGE QUANTITIES AND THIS OPTION IS EXERCISED WITHIN THE PERIOD SET FORTH IN PARAGRAPH "A" HEREOF, THE UNIT PRICE OF EACH ARTICLE FURNISHED UNDER THIS CONTRACT SHALL BE THE UNIT PRICE IN THE CONTRACTOR'S BID OR PROPOSAL FOR THE TOTAL NUMBER SO FURNISHED, AND THE TOTAL SUM TO BE PAID UNDER THIS CONTRACT SHALL BE MODIFIED ACCORDINGLY.

EVALUATION

EVALUATION OF BIDS OR OFFERS RECEIVED WILL BE MADE ON THE BASIS OF PRICES QUOTED FOR THE QUANTITY EXCLUSIVE OF THE OPTION QUANTITY.

DERO WAS AWARDED THE NON-SET-ASIDE PORTION OF 835 UNITS AT $516 EACH, TOGETHER WITH ANCILLARY ITEMS 2, 3, 4 AND 5. ON APRIL 24, 1963, THE DERO CONTRACT WAS AMENDED TO INCREASE ITEM 1 BY 101 UNITS AT $516 PER UNIT OR FOR A NEW TOTAL CONTRACT CONSIDERATION OF $500,475.02. LAVOIE WAS AWARDED A CONTRACT FOR THE SET-ASIDE PORTION OF ITEM 1 (836 UNITS) ON JUNE 30, 1963, AT $519.67 PER UNIT, TOGETHER WITH ITEM 3, FOR A NET CONTRACT AMOUNT OF $434,405.38, AND ON THE SAME DAY THIS CONTRACT WAS AMENDED TO INCREASE THE QUANTITY BY 214 UNITS AT A PRICE OF $515.67 EACH, OR TO A NEW NET TOTAL CONTRACT CONSIDERATION OF $544,482.88. BOTH OF THE AMENDMENTS WERE ISSUED PURSUANT TO THE OPTION CLAUSE QUOTED ABOVE.

IT IS CONTENDED BY DERO THAT THE AWARD OF 1,050 UNITS TO LAVOIE, AS CONTRASTED TO THE 936 UNITS AWARDED TO DERO, CONSTITUTED A VIOLATION OF THE PROHIBITION IN THE DEPARTMENT OF DEFENSE APPROPRIATION ACT, 1963 (PUBLIC LAW 87-577, SECTION 523, 76 STAT. 332), AGAINST THE PAYMENT OF A PRICE DIFFERENTIAL ON CONTRACTS FOR THE PURPOSE OF RELIEVING ECONOMIC DISLOCATIONS.

BY DECISION OF MARCH 3, 1961, 40 COMP. GEN. 489, WE HELD THAT THE LANGUAGE OF SECTION 523 LEFT LITTLE ROOM FOR DOUBT, AND EXAMINATION OF THE LEGISLATIVE HISTORY CONFIRMED, 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 QUESTION OF JUST HOW MUCH OF A GIVEN PROCUREMENT MAY BE SET ASIDE WITHOUT VIOLATION OF THE PRICE DIFFERENTIAL PROHIBITION WAS CONSIDERED IN OUR DECISION B-146336, DATED AUGUST 18, 1961 (41 COMP. GEN. 121). THAT CASE INVOLVED A SITUATION WHERE A BIDDER PROTESTED THAT THE NON-SET-ASIDE PORTION OF 894 UNITS OUT OF THE TOTAL NUMBER OF 2,704 UNITS BEING PROCURED BY THE NAVY DEPARTMENT WAS NOT AN ECONOMIC PRODUCTION RUN. WE CONCLUDED AS FOLLOWS:

WHILE ON THE FACTS PRESENTED WE FIND NO VALID GROUND FOR OBJECTION TO THE PROCUREMENT INVOLVED, WE BELIEVE THAT FUTURE SET-ASIDES FOR SURPLUS LABOR AREAS OF MORE THAN 50 PERCENT OF PARTICULAR PROCUREMENTS CAN BE JUSTIFIED ONLY BY DEFINITE DETERMINATIONS, ON SUBSTANTIAL GROUNDS, THAT COSTS OR BID PRICES ON THE NON-SET-ASIDE PORTION OF THE PROCUREMENT COULD NOT REASONABLY BE EXPECTED TO BE GREATER THAN THEY WOULD BE FOR THE TOTAL QUANTITY OF THE PROCUREMENT.

ON THE BASIS OF A REQUEST TO RECONSIDER THAT DECISION, IN OUR SUBSEQUENT DECISION OF MAY 1, 1962, WE STATED IN EFFECT THAT, WHILE WE BELIEVE IT CAN BE ASSUMED THAT THE CONGRESS HAS SANCTIONED THE SET ASIDE PROCEDURE GENERALLY, IT WAS OUR OPINION THAT THE PRICE DIFFERENCE INHERENT IN DIVIDING A PROCUREMENT INTO TWO PORTIONS SHOULD NOT BE INCREASED BY SETTING ASIDE A QUANTITY GREATER THAN THE QUANTITY BEING PROCURED ON AN UNRESTRICTED BASIS.

THE NOTICE OF LABOR SURPLUS AREA SET-ASIDE ON PAGE 11 OF THE INVITATION PROVIDED THAT---

* * * THE SET-ASIDE PORTION SHALL BE AWARDED AT THE HIGHEST UNIT PRICE AWARDED ON THE NON-SET-ASIDE PORTION, ADJUSTED TO REFLECT TRANSPORTATION AND OTHER COST FACTORS WHICH WERE CONSIDERED IN EVALUATING BIDS ON THE NON -SET-ASIDE PORTION. * * *

USING EVALUATION FACTORS, SUCH AS DISCOUNT AND TRANSPORTATION COSTS, THE EVALUATED UNIT PRICE OF ITEMS 1 AND 3 AWARDED TO DERO WAS $521.36, AND THE EVALUATED UNIT PRICE AWARDED TO LAVOIE FOR AN EQUAL QUANTITY OF ITEMS 1 AND 3 WAS $521.35. WE HAVE HELD THAT IN DETERMINING THE ORDER OF PRECEDENCE FOR NEGOTIATION OF THE SET-ASIDE PORTION OF A PROCUREMENT, CONSIDERATION SHOULD BE GIVEN TO THE GOVERNMENT'S SHIPPING COSTS TO DESTINATION. 39 COMP. GEN. 38. ON THE SAME BASIS, IT IS OUR VIEW THAT IT IS PROPER ALSO TO CONSIDER FREIGHT COSTS IN DETERMINING THE RELATIVE BID PRICES FOR BOTH THE NON-SET-ASIDE AND SET ASIDE PORTION OF A PROCUREMENT. ALTHOUGH LAVOIE ORIGINALLY BID $545 EACH FOR ITEM 1, IT CONSENTED TO A REDUCTION TO $519.67 IN ORDER TO MEET THE EVALUATED UNIT PRICE OF $521.36 APPLICABLE TO DERO. IT IS THUS APPARENT THAT NO PRICE DIFFERENTIAL WAS PAID TO LAVOIE ON THE AWARD OF ITEMS 1 AND 3.

WHILE, ON THE RECORD BEFORE US, THE OPTIONS WERE EXERCISED IN ACCORDANCE WITH PARAGRAPH 1-1505 (D) (3), ARMED SERVICES PROCUREMENT REGULATION, WE HAVE SERIOUS DOUBTS WHETHER OPTION CLAUSES SHOULD BE INCLUDED IN INVITATIONS WHICH PROVIDE FOR AT LEAST A 50 PERCENT SET ASIDE FOR AWARDS TO LABOR SURPLUS AREA CONCERNS. THE EFFECT OF SUCH CLAUSE, WHEN EXERCISED, UNDER A CONTRACT COVERING THE LABOR SURPLUS AREA SET-ASIDE PORTION OF AN INVITATION, AS ILLUSTRATED BY THIS PROCUREMENT, IS TO INCREASE BEYOND 50 PERCENT THE AMOUNT SET ASIDE FOR LABOR SURPLUS AREAS AND TO DECREASE TO LESS THAN 50 PERCENT THE AMOUNT ADVERTISED WITHOUT RESTRICTION. CONCEIVABLY, THE EXERCISE OF OPTION CLAUSES IN CONTRACTS COVERING A LABOR SURPLUS AREA SET-ASIDE PORTION OF AN INVITATION COULD SUBSTANTIALLY REDUCE THE AMOUNT OF COMPETITIVE PROCUREMENT OTHERWISE REQUIRED BY LAW AND CORRESPONDINGLY INCREASE THE AMOUNT OF NEGOTIATED PROCUREMENT UNDER 10 U.S.C. 2304 (A) (1).

ADDITIONALLY, WE NOTE THAT THE SUBJECT OPTION CLAUSE PROVIDED FOR A 50 PERCENT INCREASE IN THE CONTRACT END ITEM WITHIN 1 YEAR FROM THE DATE OF THE CONTRACT. IN 41 COMP. GEN. 682, WE CONSIDERED THE PRACTICAL EFFECT OF OPTION CLAUSES IN ADVERTISED CONTRACTS AS THEY AFFECT BOTH THE GOVERNMENT'S AND BIDDER'S INTERESTS. IT WAS HELD IN THAT DECISION AT PAGE 688 THAT:

WE HAVE GIVEN APPROVAL TO THE USE OF OPTIONS IN PAST DECISIONS. THOSE CASES, HOWEVER, HAVE INVOLVED ADDITIONAL QUANTITIES FAR LESS THAN HERE INVOLVED, AND HAVE LIMITED THE TIME WITHIN WHICH THE OPTION MAY BE EXERCISED TO A MUCH SHORTER TIME THAN ONE YEAR. WE BELIEVE THAT THE QUANTITIES COVERED BY AN OPTION AND THE TIME WITHIN WHICH THE OPTION MAY BE EXERCISED SHOULD BE LIMITED. AS A PRACTICAL MATTER, IT SEEMS TO US THAT THE ADDITIONAL QUANTITIES TO BE PROCURED THROUGH THE EXERCISE OF AN OPTION SHOULD BE LIMITED TO 25 PERCENT OF THE BASIC QUANTITIES BEING PURCHASED SAVE IN EXCEPTIONAL CASES. WE FURTHER BELIEVE THAT SO FAR AS SUPPLIES TO BE SPECIALLY MANUFACTURED ARE CONCERNED, OPTIONS SHOULD NOT EXTEND MUCH MORE THAN 90 DAYS BEYOND THE DATE OF INITIAL AWARD.

IN VIEW OF THE FOREGOING AND THE CIRCUMSTANCES OF THIS PROCUREMENT, WE FEEL THAT IT WAS INAPPROPRIATE EITHER TO PROVIDE FOR AN OPTION OR TO EXERCISE IT WITH THE RESULT THAT LAVOIE RECEIVED MORE THAN 50 PERCENT OF THE TOTAL PROCUREMENT.

WHILE NOT ENTIRELY CLEAR FROM THE RECORD, IT APPEARS THAT THE PROCUREMENT AGENCY NEGOTIATED WITH LAVOIE FOR THE OPTION QUANTITY OF 214 UNITS. THIS APPEARS TRUE SINCE LAVOIE REDUCED ITS UNIT PRICE FROM $519.67 TO $515.67 FOR THE OPTION QUANTITY ONLY. CONSIDERING THAT BOTH THE DERO AND LAVOIE CONTRACTS CONTAINED OPTION CLAUSES, AND SINCE ASPR 1-1505 PROVIDES THAT OPTIONS SHOULD BE EXERCISED ONLY IF IT IS DETERMINED TO BE MOST ADVANTAGEOUS TO THE GOVERNMENT, PRICE AND OTHER FACTORS CONSIDERED, IT WOULD HAVE BEEN APPROPRIATE TO NEGOTIATE ALSO WITH DERO FOR THE 214 UNITS. ASPR 1-1505 PROVIDES METHODS FOR TESTING THE MARKET TO DETERMINE WHETHER THE OPTION (CONTRACT) PRICE IS MOST ADVANTAGEOUS TO THE GOVERNMENT. SURELY, THE BEST METHOD AVAILABLE TO THE CONTRACTING OFFICER HERE WAS TO SOLICIT PRICE PROPOSALS FROM BOTH DERO AND LAVOIE. OTHERWISE, THERE WAS NO ASSURANCE THAT EXERCISE OF THE LAVOIE OPTION ALONE WOULD NOT RESULT IN THE PAYMENT OF THE PRESCRIBED PRICE DIFFERENTIAL.

WHILE WE CONCLUDE THAT THE PROCUREMENT ACTIONS TAKEN HERE WERE QUESTIONABLE INSOFAR AS CONCERNS THE EXERCISE OF THE OPTION IN THE LAVOIE CONTRACT, IN THIS PARTICULAR CASE WE WILL NOT FURTHER QUESTION THE AWARDS MADE. HOWEVER, WE RECOMMEND THAT APPROPRIATE ACTION BE TAKEN TO PREVENT A RECURRENCE OF THE ACTIONS TAKEN HERE.