B-151459, JUL. 8, 1963

B-151459: Jul 8, 1963

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INC.: WE HAVE RECEIVED YOUR LETTER DATED MAY 3. THE RECORD ESTABLISHES THAT THE RECEIVED BIDS RELEVANT TO THE PROTEST WERE AS FOLLOWS: TABLE A. WHICH WAS CREATED IN 1962 TO DEVELOP AND PRODUCE DISPENSING EQUIPMENT. THE PARENT COMPANY ALLEGES THAT THE DIFFERENCE IN ITS BID AND ITS SUBSIDIARY'S BID IS EXPLAINABLE BY THE GREATER AMOUNT OF OVERHEAD AND INDIRECT COSTS WHICH ARE ASSOCIATED WITH ITS RESEARCH AND MARKETING FUNCTIONS. IS BASICALLY ENGINEERING. 120 OF WHICH ARE GRADUATE ENGINEERS. ASSOCIATED WITH THIS TYPE OF OPERATION ARE BURDEN RATES. - THAT ARE IN EXCESS OF THOSE NORMALLY ASSOCIATED WITH A PRODUCTION TYPE ORGANIZATION. INCLUDED ALSO IN THIS POOL ARE SUCH ITEMS AS BIDDING AND ESTIMATING EXPENSES AND REPRESENTATIVE AND MARKETING EXPENSES THAT ARE FAR IN EXCESS OF OR NOT NECESSARY FOR A PRODUCTION TYPE COMPANY.

B-151459, JUL. 8, 1963

TO WICKES INDUSTRIES, INC.:

WE HAVE RECEIVED YOUR LETTER DATED MAY 3, 1963, IN WHICH YOU PROTEST AGAINST THE PROPOSED AWARD OF A CONTRACT BY U.S. ARMY MUNITIONS COMMAND, FRANKFORD ARSENAL, PHILADELPHIA, PENNSYLVANIA, PURSUANT TO INVITATION FOR BIDS NO. AMC (A) 36-038-63-433 (M), TO CHEMICAL ELECTRONICS, INC.

THE RECORD ESTABLISHES THAT THE RECEIVED BIDS RELEVANT TO THE PROTEST WERE AS FOLLOWS:

TABLE

A. CHEMICAL ELECTRONICS, INC. $4,074.06 EACH

B. WICKES INDUSTRIES, INC. 4,350.00 EACH

D. AMERICAN ELECTRONIC

LABORATORIES, INC. 4,604.50 EACH

CHEMICAL ELECTRONICS, INC., A CONTROLLED SUBSIDIARY OF AMERICAN ELECTRONICS LABORATORY, INC., WHICH WAS CREATED IN 1962 TO DEVELOP AND PRODUCE DISPENSING EQUIPMENT, PROPOSES TO PERFORM THE CONTRACT BY USING PLANT FLOOR SPACE AND KEEP PERSONNEL OF ITS PARENT, AMERICAN ELECTRONIC LABORATORIES, INC. THE PARENT COMPANY ALLEGES THAT THE DIFFERENCE IN ITS BID AND ITS SUBSIDIARY'S BID IS EXPLAINABLE BY THE GREATER AMOUNT OF OVERHEAD AND INDIRECT COSTS WHICH ARE ASSOCIATED WITH ITS RESEARCH AND MARKETING FUNCTIONS.

YOU QUESTION THE PROPRIETY OF AND REASONS FOR THE DUAL BIDDING. CHEMICAL ELECTRONICS, INC., GIVES THE FOLLOWING REASONS, WHICH WE FIND PERSUASIVE, FOR BIDDING AGAINST ITS PARENT:

"AMERICAN ELECTRONIC LABORATORIES, INC. FORMED IN NOVEMBER 1950, IS BASICALLY ENGINEERING, RESEARCH AND DEVELOPMENT ORIENTED. WITH A STAFF OF 365 EMPLOYEES, 120 OF WHICH ARE GRADUATE ENGINEERS, AEL ENGAGES HEAVILY IN COST AND REDETERMINABLE TYPE RESEARCH AND DEVELOPMENT CONTRACTS. ASSOCIATED WITH THIS TYPE OF OPERATION ARE BURDEN RATES--- OVERHEAD AND G AND A--- THAT ARE IN EXCESS OF THOSE NORMALLY ASSOCIATED WITH A PRODUCTION TYPE ORGANIZATION. GENERAL AND ADMINISTRATIVE EXPENSES OF AEL INCLUDE SUPPORT BY THE GOVERNMENT OF THEIR COMPANY-SPONSORED RESEARCH PROGRAM NEGOTIATED PURSUANT TO THE TERMS OF ASPR 15-107, ASPR 15-205.35 AND DOD INSTRUCTION 4105.52. INCLUDED ALSO IN THIS POOL ARE SUCH ITEMS AS BIDDING AND ESTIMATING EXPENSES AND REPRESENTATIVE AND MARKETING EXPENSES THAT ARE FAR IN EXCESS OF OR NOT NECESSARY FOR A PRODUCTION TYPE COMPANY. FOR AMERICAN ELECTRONIC LABORATORIES, INC. TO HAVE BID THIS PROCUREMENT AT THE SAME PRICE AS ITS SUBSIDIARY WOULD HAVE RESULTED IN A LOSS OF APPROXIMATELY $53,000 CHARGEABLE TO PROFIT AND LOSS, SINCE THE AEL METHOD OF ACCOUNTING APPROVED BY THE GOVERNMENT AUDITORS REQUIRED THE ALLOCATION OF OVERHEAD AND G AND A ON AN "OVER-ALL" RATE BASIS FOR ALL ACTIVITIES.

"BECAUSE CHEMICAL ELECTRONICS, INC. WAS A RELATIVELY NEW ORGANIZATION, AND VERY SMALL AT THE TIME OF THE BID, IT WAS FELT THAT AMERICAN ELECTRONIC LABORATORIES, INC. SHOULD ALSO SUBMIT A BID USING ITS ESTABLISHED BIDDING, COSTING, AND PRICING PROCEDURES, IN CASE SOME TECHNICALITY, DISCLOSED BY A POSSIBLE PRE-AWARD SURVEY, PRECLUDED THE AWARD OF A CONTRACT TO CHEMICAL ELECTRONICS. SINCE IT WAS INDICATED IN THE CHEMICAL ELECTRONICS' BID THAT CERTAIN AMERICAN ELECTRONIC LABORATORIES' KEY PERSONNEL AND FACILITIES NECESSARY FOR PERFORMANCE WOULD BE TRANSFERRED TO CHEMICAL ELECTRONICS AT THE TIME OF AN AWARD, WE FELT THAT THE CHEMICAL ELECTRONICS' BID SHOULD BE ACCEPTABLE, BUT THERE WAS NO WAY OF DETERMINING THIS POSITIVELY PRIOR TO THE SUBMISSION OF THE BID.'

YOU ALSO QUESTION WHETHER GOVERNMENT AUDITING PROCEDURES ALLOW DIFFERENT OVERHEAD RATES FOR A PARENT COMPANY AND ITS WHOLLY OWNED SUBSIDIARY, WHICH WILL USE THE SAME FACILITIES AND PERSONNEL FOR THE PERFORMANCE OF THE INSTANT CONTRACT. IT SHOULD BE NOTED THAT THE SUBJECT AWARD INVOLVES A FIXED-PRICE, LUMP SUM CONTRACT LET UNDER COMPETITIVE ADVERTISING, WHICH WILL NOT ITSELF BE SUBJECT TO AUDIT SO FAR AS CONCERNS THE INDIVIDUAL ITEMS COMPRISING THE FIXED PRICE.

IN OUR DECISION 39 COMP. GEN. 892, WE TOOK COGNIZANCE OF THE FACT THAT IT IS NOT UNUSUAL FOR BIDS TO BE RECEIVED FROM A PARENT CORPORATION AND ONE OF ITS SUBSIDIARIES UNDER THE SAME IFB, AND THAT AN INDIVIDUAL MIGHT HAVE LEGITIMATE BUSINESS REASONS FOR SUBMITTING BIDS OF 2 OR MORE COMPANIES WHICH HE OWNS OR CONTROLS. IN ANY EVENT, THE GOVERNMENT IS GENERALLY REQUIRED TO ACCEPT THE LOWEST RESPONSIVE BID SUBMITTED BY A RESPONSIBLE BIDDER. 10 U.S.C. 2305. THEREFORE, WE MAY CONCLUDE THAT WHERE THE CONSIDERATION OF THE BIDS SUBMITTED FOR LEGITIMATE BUSINESS REASONS BY A PARENT AND SUBSIDIARY COMPANY, KNOWINGLY BIDDING AGAINST ONE ANOTHER AND INTENDING TO USE THE SAME FACILITIES AND EMPLOYEES IF AWARDED THE CONTRACT, WILL NOT PREJUDICE THE GOVERNMENT OR AFFORD THE PARENT OR ITS SUBSIDIARY ANY ADVANTAGE NOT ENJOYED BY OTHER BIDDERS, WE WILL TAKE NO EXCEPTION TO AN AGENCY'S AWARDING THE CONTRACT TO EITHER COMPANY, PROVIDED THAT IT IS A RESPONSIBLE BIDDER WHICH HAS SUBMITTED THE LOWEST RESPONSIVE BID.

IN THE INSTANT CASE, YOU HAVE NOT ESTABLISHED PRECISELY IN WHAT WAY YOU OR THE GOVERNMENT MAY HAVE BEEN PREJUDICED, OR PROVIDED ANY BASIS UPON WHICH THE CONTRACTING OFFICER COULD JUSTIFIABLY REJECT THE LOW BID OF CHEMICAL ELECTRONICS, INC. ACCORDINGLY, WE FIND NO OBJECTION TO AN AWARD BEING MADE AS PROPOSED.