B-151992, OCT. 18, 1963

B-151992: Oct 18, 1963

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ESQUIRE: REFERENCE IS MADE TO YOUR LETTERS OF JULY 5. JOY MANUFACTURING COMPANY WAS SUCCESSFUL ON THIS PHASE OF THE PROCUREMENT LET THROUGH REGULAR FORMALLY ADVERTISED COMPETITIVE BID PROCEDURES. THE INVITATION FURTHER PROVIDED THAT ANOTHER 407 UNITS WERE SET ASIDE FOR AWARD THROUGH NEGOTIATION. AN ORDER OF PRIORITY IN WHICH BIDDERS WOULD BE GIVEN AN OPPORTUNITY TO NEGOTIATE FOR THE SET-ASIDE PORTION WAS STIPULATED. DAVEY COMPRESSOR COMPANY WERE THE ONLY CONCERNS IN PRIORITY GROUP 1. "PERSISTENT LABOR SURPLUS AREA CONCERNS WHICH ARE ALSO SMALL BUSINESS CONCERNS.'. POLAN INDUSTRIES WAS THE LOWEST BIDDER IN PRIORITY GROUP 1. IT FELT THAT POLAN WAS NOT A MANUFACTURER OF THE EQUIPMENT WITHIN THE CONTEMPLATION OF THE WALSH-HEALEY ACT AND IMPLEMENTING REGULATIONS.

B-151992, OCT. 18, 1963

TO JEROME ACKERMAN, ESQUIRE:

REFERENCE IS MADE TO YOUR LETTERS OF JULY 5, AND SEPTEMBER 30 AND OCTOBER 3, 1963, PROTESTING THE FAILURE OF THE CONTRACTING OFFICER TO AWARD TO POLAN INDUSTRIES, INC., A NEGOTIATED CONTRACT FOR THE SET ASIDE PORTION UNDER ARMY INVITATION FOR BIDS ENG-11-184-63-B-307- LS50.

THE SUBJECT INVITATION SOLICITED BIDS FOR FURNISHING 407 AIR COMPRESSOR UNITS TO THE ARMY. JOY MANUFACTURING COMPANY WAS SUCCESSFUL ON THIS PHASE OF THE PROCUREMENT LET THROUGH REGULAR FORMALLY ADVERTISED COMPETITIVE BID PROCEDURES.

THE INVITATION FURTHER PROVIDED THAT ANOTHER 407 UNITS WERE SET ASIDE FOR AWARD THROUGH NEGOTIATION. AN ORDER OF PRIORITY IN WHICH BIDDERS WOULD BE GIVEN AN OPPORTUNITY TO NEGOTIATE FOR THE SET-ASIDE PORTION WAS STIPULATED. POLAN INDUSTRIES, INC., AND DAVEY COMPRESSOR COMPANY WERE THE ONLY CONCERNS IN PRIORITY GROUP 1,"PERSISTENT LABOR SURPLUS AREA CONCERNS WHICH ARE ALSO SMALL BUSINESS CONCERNS.' THE INVITATION FURTHER PROVIDED THAT NEGOTIATION WITHIN A PRIORITY GROUP WOULD BEGIN WITH THE LOWEST RESPONSIVE BIDDER IN THE GROUP ON THE NON SET-ASIDE PORTION. POLAN INDUSTRIES WAS THE LOWEST BIDDER IN PRIORITY GROUP 1. DAVEY COMPRESSOR PROTESTED AGAINST AN AWARD BEING MADE TO POLAN INDUSTRIES BECAUSE, AMONG OTHER REASONS, IT FELT THAT POLAN WAS NOT A MANUFACTURER OF THE EQUIPMENT WITHIN THE CONTEMPLATION OF THE WALSH-HEALEY ACT AND IMPLEMENTING REGULATIONS.

THE CONTRACTING OFFICER FORMALLY ADVISED POLAN OF THE DAVEY PROTEST AND REQUESTED THAT THERE BE SUBMITTED PLANS AND PROGRAMMING SHOWING THE COMMITMENTS THAT HAD BEEN MADE FOR SPACE, EQUIPMENT AND PERSONNEL TO ACCOMPLISH THE WORK THAT WOULD BE REQUIRED BY THE CONTRACT. FURTHER, THE CONTRACTING OFFICER EXPRESSED AN OPINION THAT IF THE FOREGOING ARRANGEMENTS WERE CONTINGENT SOLELY UPON THE AWARD OF THE CONTRACT IT WOULD NOT BE SUFFICIENT TO QUALIFY POLAN AS A MANUFACTURER.

YOU ADVISED THE CONTRACTING OFFICER THAT POLAN HAD AVAILABLE 125,000 SQUARE FEET OF FLOOR SPACE SUITED TO THE PERFORMANCE OF THE CONTRACT, THAT IT OWNED THE EQUIPMENT THAT WOULD BE REQUIRED FOR THE PERFORMANCE OF THE CONTRACT AND THAT PERSONNEL REQUIRED TO PERFORM THE CONTRACT WERE EMPLOYED BY POLAN.

THE CONTRACTING OFFICER SOUGHT FURTHER CLARIFICATION OF YOUR LETTER. INQUIRED WHETHER POLAN WAS GOING TO ENTER INTO THE AIR COMPRESSOR BUSINESS INDEPENDENT OF THE SET-ASIDE CONTRACT. YOU RESPONDED THAT POLAN WAS NOT PLANNING TO ENTER THE AIR COMPRESSOR BUSINESS AS A MANUFACTURER IF IT DID NOT RECEIVE THE SET-ASIDE AWARD. YOU REITERATED THAT YOU FELT THAT POLAN HAD THE SPACE, EQUIPMENT AND PERSONNEL THAT WOULD BE NEEDED TO MANUFACTURE THE UNITS AND YOU SUGGESTED THAT THE MATTER OF POLAN'S STATUS AS A MANUFACTURER UNDER THE WALSH-HEALEY ACT WAS NOT REALLY INVOLVED, BUT RATHER A QUESTION OF POLAN'S COMPETENCY TO PERFORM THE CONTRACT WHICH WAS FOR THE SMALL BUSINESS ADMINISTRATION TO PASS UPON IF THE CONTRACTING OFFICER HAD ANY DOUBTS.

SUBSEQUENTLY THE CONTRACTING OFFICER PREPARED A STATEMENT OF HIS FINDINGS AND DETERMINATIONS. HE NOTED THEREIN THAT DEPARTMENT OF LABOR CIRCULAR LETTER NO. 8-61, DATED JULY 6, 1961, PROVIDED AS FOLLOWS:

"A BIDDER WHO DESIRES TO QUALIFY FOR AN AWARD AS A MANUFACTURER MUST SHOW BEFORE THE AWARD THAT HE IS (1) AN ESTABLISHED MANUFACTURER OF THE PARTICULAR GOODS OR GOODS OF THE GENERAL CHARACTER SOUGHT BY THE GOVERNMENT OR (2) IF HE IS NEWLY ENTERING INTO SUCH MANUFACTURING ACTIVITY THAT HE HAS MADE ALL NECESSARY PRIOR ARRANGEMENTS FOR (A) MANUFACTURING SPACE, (B) EQUIPMENT, AND (C) PERSONNEL TO PERFORM THE MANUFACTURING OPERATIONS REQUIRED FOR THE FULFILLMENT OF THE CONTRACT. A NEW FIRM WHICH, PRIOR TO THE AWARD OF A CONTRACT, HAS MADE SUCH DEFINITE COMMITMENTS IN ORDER TO ENTER A MANUFACTURING BUSINESS WHICH WILL LATER QUALIFY IT SHOULD NOT BE BARRED FROM RECEIVING THE AWARD BECAUSE IT HAS NOT YET DONE ANY MANUFACTURING. THIS INTERPRETATION IS NOT INTENDED, HOWEVER, TO QUALIFY A FIRM WHOSE ARRANGEMENTS TO USE SPACE, EQUIPMENT OR PERSONNEL ARE CONTINGENT UPON THE AWARD OF A GOVERNMENT CONTRACT.'

THE CONTRACTING OFFICER CONCLUDED THAT POLAN WAS NOT A SOURCE OF SUPPLY WITHIN THE MEANING OF THE WALSH-HEALEY ACT BY REASON OF THE FACT THAT IT WAS NOT AN ESTABLISHED MANUFACTURER OF AIR COMPRESSORS AND THAT ITS ARRANGEMENTS FOR SPACE, EQUIPMENT AND PERSONNEL WERE CONTINGENT UPON THE AWARD OF THE CONTRACT. HE DECIDED THEREFORE THAT POLAN WAS NOT ELIGIBLE FOR AWARD OF THE SET-ASIDE.

THE ADMINISTRATIVE CASE FILE, WHICH INCLUDED THE FOREGOING AS WELL AS INFORMATION SHOWING THE MANUFACTURING BACKGROUND OF POLAN INDUSTRIES, WAS SUBMITTED TO THE DEPARTMENT OF LABOR FOR A RULING AS TO THE STATUS OF THE FIRM AS A MANUFACTURER OF AIR COMPRESSOR EQUIPMENT UNDER THE PROVISIONS OF THE WALSH-HEALEY ACT.

THE ADMINISTRATOR OF THE WAGE AND HOUR AND PUBLIC CONTRACTS DIVISION ADVISED AN ASSISTANT GENERAL COUNSEL, HEADQUARTERS, ARMY MATERIEL COMMAND, AS FOLLOWS:

"BASED UPON THE FACTS AS PRESENTED IN THE FILE YOU TRANSMITTED, THE DIVISIONS FIND NO REASON TO QUESTION THE CONTRACTING OFFICER'S DETERMINATION THAT THE FIRM DOES NOT QUALIFY AS AN ESTABLISHED MANUFACTURER OF AIR COMPRESSOR EQUIPMENT. THUS, THE FIRM'S ELIGIBILITY STATUS REVOLVES AROUND THE QUESTION OF WHETHER IT CAN QUALIFY AS A FIRM NEWLY ENTERING INTO A MANUFACTURING ACTIVITY. TO SO QUALIFY A FIRM MUST HAVE MADE ADEQUATE ARRANGEMENTS FOR MANUFACTURING SPACE, EQUIPMENT, AND PERSONNEL IN ORDER TO ENTER A MANUFACTURING BUSINESS WHICH WILL LATER QUALIFY IT. THE INTERPRETATION AS STATED IN CIRCULAR LETTER 8-61 WAS INTENDED TO MAKE IT CLEAR THAT A FIRM SHOULD NOT BE BARRED FROM RECEIVING A GOVERNMENT CONTRACT SOLELY BECAUSE IT HAS NOT EVER MANUFACTURED THE PARTICULAR GOODS OR GOODS OF THE GENERAL CHARACTER REQUIRED BY THE GOVERNMENT, BUT SHOULD BE QUALIFIED IF IT HAS MADE DEFINITE ARRANGEMENTS TO ENTER INTO THIS FIELD. FURTHER, THE ARRANGEMENTS TO ENTER INTO THE MANUFACTURING ACTIVITY SHOULD NOT BE CONTINGENT UPON THE AWARD OF A GOVERNMENT CONTRACT.

"IT SHOULD BE NOTED THAT THE DETERMINATION THAT A FIRM WHICH IS NEWLY ENTERING INTO A MANUFACTURING ACTIVITY HAS OR HAS NOT MADE ALL PRIOR ARRANGEMENTS FOR SPACE, EQUIPMENT AND PERSONNEL WHICH WILL ENABLE IT TO PERFORM THE MANUFACTURING OPERATIONS REQUIRED UNDER THE CONTRACT INVOLVES A JUDGMENT FACTOR BASED AT LEAST IN PART UPON A TECHNICAL BACKGROUND IN WHICH THE FINDINGS OF THE INTERESTED PROCUREMENT OFFICE WILL NECESSARILY BE PERSUASIVE.

"SINCE IT HAS BEEN DETERMINED BY YOUR AGENCY THAT THE FIRM HAS NOT MADE ALL PRIOR ARRANGEMENTS WHICH WILL ENABLE IT TO PERFORM THE MANUFACTURING OPERATIONS REQUIRED UNDER THE CONTRACT AND THAT IT HAS NO DEFINITE PLANS, APART FROM THOSE CONTINGENT UPON THE AWARD OF THE CONTRACT, TO BECOME A MANUFACTURER OF THE PARTICULAR GOODS OR GOODS OF THE SAME GENERAL CHARACTER REQUIRED BY THE CONTRACT IN QUESTION, THE DIVISIONS ARE NOT INCLINED TO QUESTION THE AGENCY DECISION.'

THE RULING WAS INTERPRETED AS A CONFIRMATION OF THE CONTRACTING OFFICER'S FINDING THAT POLAN DID NOT QUALIFY AS A MANUFACTURER UNDER THE WALSH- HEALEY ACT. AWARD FOR THE SET-ASIDE PORTION WAS THEREFORE MADE TO DAVEY COMPRESSOR COMPANY.

YOU PROTESTED THIS AWARD TO OUR OFFICE. AFTER AN ADMINISTRATIVE REPORT WAS RECEIVED, THE BASIS FOR THE ADMINISTRATIVE ACTION WAS REVIEWED WITH YOU INFORMALLY. AS THE RECORD INDICATED THAT THE ADMINISTRATIVE OFFICE HAD FELT THAT THE ADMINISTRATOR'S RULING GOVERNED THE ACTION IT TOOK WITH RESPECT TO POLAN, YOU DECIDED TO PURSUE THE MATTER WITH THE ADMINISTRATOR, WHO RECENTLY ADVISED YOU AS FOLLOWS:

"THIS IS IN REPLY TO YOUR LETTER OF AUGUST 9, 1963. YOU ASK WHETHER THE FACT THAT POLAN INDUSTRIES, INC., IS NOT PLANNING TO GO INTO THE BUSINESS OF MANUFACTURING AIR COMPRESSORS APART FROM THE AWARD OF THE CONTRACT IN QUESTION AUTOMATICALLY RENDERS IT INELIGIBLE TO BE CONSIDERED A MANUFACTURER IN CONNECTION WITH THIS CONTRACT.

"IT APPEARS THAT FOR A NUMBER OF YEARS POLAN HAD BEEN IN THE BUSINESS OF MANUFACTURING AND REPAIRING VARIOUS LINES OF MACHINES AND EQUIPMENT. THE BIDDING IN QUESTION, POLAN PROPOSED TO REMODEL AND USE PARTS OF ITS EXISTING PHYSICAL PLANT, PLANT MACHINERY, FACILITIES, AND PERSONNEL IN PRODUCING THE COMMODITY CALLED FOR. POLAN WAS FOUND BY THE CONTRACTING AGENCY TO BE NOT QUALIFIED AS A MANUFACTURER OF THE PRODUCTS INVOLVED.

"A DETERMINATION AS TO WHETHER THE PLANT, PLANT FACILITIES, AND PRODUCTION KNOW-HOW WHICH POLAN WOULD DEDICATE TO THE MANUFACTURE OF THE PRODUCT INVOLVED EQUIPPED IT TO PERFORM THE CONTRACT RESOLVES THE QUESTION WHETHER POLAN IS A PRESENT OR POTENTIAL MANUFACTURER OF THAT PRODUCT. THE DETERMINATION IN ITS VERY NATURE MUST BE LEFT LARGELY TO THE DECISION OF THE CONTRACTING AGENCY.

"ASSUMING, BUT OF COURSE NOT DETERMINING POLAN'S POTENTIAL TO PRODUCE THE SPECIFIC COMMODITY, THE QUESTION IS POSED WHETHER THE DEPARTMENT'S CIRCULAR LETTER 8-61 OPERATES TO DISQUALIFY POLAN AS THE OPERATOR OF A NEW PLANT UNLESS IT INTENDS TO MAKE THE MODIFICATIONS AND CONTINUE THE PRODUCT OUTPUT REGARDLESS OF WHETHER IT IS AWARDED THE CONTRACT. THIS LETTER SETS FORTH SPECIFIC CRITERIA FOR INTERPRETING REGULATIONS, PART 50-201, ISSUED UNDER THE WALSH-HEALEY PUBLIC CONTRACTS ACT.

"THE QUESTION ARISES OUT OF THE SECOND PARAGRAPH UNDER THE TITLE "MANUFACTURER" IN THE CIRCULAR REFERRED TO. THE PARAGRAPH APPLIES TO "A NEW FIRM," THAT IS, ONE THAT "HAS NOT DONE ANY MANUFACTURING" PREVIOUSLY. SUCH FIRM MUST SHOW THAT IT HAS NOT BEEN SET UP SOLELY TO PRODUCE ON THE ONE CONTRACT AND THEN TERMINATE ITS OPERATIONS. THE PARAGRAPH IS NOT APPLICABLE TO A PRODUCTION ENTITY WHICH IS NOT NEWLY ESTABLISHED BUT WHICH MERELY MODIFIES EXISTING FACILITIES FOR THE OUTPUT OF A PARTICULAR PRODUCT.

"THE TEST THERE IS WHETHER THERE INHERES IN THE PRODUCTION ENTITY THE CAPACITY TO MAKE THE PRODUCT; THAT IT MUST REARRANGE AND MODIFY EXISTING FACILITIES IS IMMATERIAL. AS ABOVE INDICATED, THE QUESTION AS TO WHETHER POLAN HAS SUCH POTENTIAL IS A QUESTION FOR THE CONTRACTING AGENCY. THIS DECISION IS IN THE AFFIRMATIVE, NEITHER THE PUBLIC CONTRACTS ACT NOR THE REGULATIONS THEREUNDER OPERATE TO PREVENT THE AWARD OF THE CONTRACT TO IT. THE CONTRACTING OFFICER HAS BEEN ADVISED.'

AS THE CONTRACTING OFFICER HAD DECIDED TO DISQUALIFY POLAN BECAUSE IT HAD INDICATED THAT IT DID NOT INTEND TO GO INTO THE REGULAR MANUFACTURE OF AIR COMPRESSORS OUTSIDE OF PRODUCING UNDER THE SET-ASIDE CONTRACT IF AWARDED TO IT AND AS THE ADMINISTRATOR HAS NOW MADE CLEAR THAT SUCH A CONTINGENCY BY A FIRM WHICH IS A MANUFACTURER SHOULD NOT OPERATE AGAINST AN AWARD BEING MADE TO THE COMPANY IF IT IS OTHERWISE COMPETENT TO PERFORM, YOU SUGGEST THAT POLAN SHOULD HAVE AN OPPORTUNITY TO ESTABLISH ITS COMPETENCY BEFORE THE SMALL BUSINESS ADMINISTRATION, IF NECESSARY, AND IF FOUND TO BE COMPETENT, AWARDED THE CONTRACT.

UPON REVIEW OF THE FOREGOING MATTER, IT APPEARS THAT AN ERROR WAS MADE IN DISQUALIFYING POLAN INDUSTRIES FROM THE SET-ASIDE CONTRACT BECAUSE IT DID NOT INTEND TO GO INTO THE MANUFACTURE OF AIR COMPRESSORS IF IT DID NOT RECEIVE AN AWARD OF THE SET-ASIDE. QUITE PROPERLY, AS THE ADMINISTRATOR HAS INDICATED IN THE LAST LETTER, THE QUESTION FOR RESOLUTION WAS WHETHER THE COMPANY WAS COMPETENT TO PERFORM THE CONTRACT. HOWEVER, IT DOES NOT APPEAR THAT THE CONTRACTING OFFICER ACTED IN BAD FAITH IN DISQUALIFYING POLAN. THE RECORD INDICATES THAT IT WAS HIS INTENTION TO DISQUALIFY POLAN BECAUSE HE UNDERSTOOD THE DEPARTMENT OF LABOR CIRCULAR LETTER TO REQUIRE THAT RESULT WHERE A CONTINGENCY SUCH AS POLAN PLACED UPON THE USE OF ITS SPACE, EQUIPMENT AND PERSONNEL EXISTED AND HE CONSIDERED THE ADMINISTRATOR'S FIRST DECISION TO CONFIRM DISQUALIFICATION ON THAT BASIS. AS A MATTER OF FACT, THE ASSISTANT GENERAL COUNSEL TO WHOM THE FIRST DECISION WAS ADDRESSED CONSIDERED IT AS A RULING CONFIRMING THE CONTRACTING OFFICER'S FINDING THAT POLAN DID NOT QUALIFY AS A MANUFACTURER UNDER THE WALSH-HEALEY ACT.

FURTHER, THE CONTRACTING AGENCY HAS ADVISED INFORMALLY THAT DAVEY COMPRESSOR COMPANY HAS INCURRED ABOUT $35,000 IN THE PERFORMANCE OF THE CONTRACT ENTERED INTO WITH IT AND THAT A PROTOTYPE IS EXPECTED TO BE READY FOR TESTING ABOUT THE BEGINNING OF NOVEMBER. IN ADDITION, IT SHOULD BE NOTED THAT THE GOVERNMENT DOES NOT STAND TO GAIN BY AN AWARD TO POLAN AS UNDER THE NEGOTIATION PROCEDURES FOR THE SET-ASIDE INVOLVED THE NEGOTIATED CONTRACT WOULD BE FOR THE SAME PRICE AS THE DAVEY COMPRESSOR CONTRACT SINCE AWARD UNDER THE SET-ASIDE IS MADE AT THE SAME PRICE AS THE AWARD ON THE NON-SET-ASIDE PORTION.

WHILE WE HAVE IN A NUMBER OF DECISIONS NULLIFIED ERRONEOUS AWARDS, SUCH ACTION HAS USUALLY BEEN BASED ON THE CONCLUSION THAT THE GOVERNMENT HAS BEEN DEPRIVED OF THE BENEFITS OF FULL AND FREE COMPETITION INTENDED IN ENACTMENTS SUCH AS 10 U.S.C. 2305. IN THIS CASE, THE ADVERTISING PROVISIONS OF THE LAW ARE INAPPLICABLE SINCE THE CONTRACT WAS AWARDED UNDER THE BROADER NEGOTIATING AUTHORITY. FURTHER, DAVEY COMPRESSOR IS A SMALL BUSINESS JUST AS POLAN IS AND THIS IS NOT A CASE WHERE PERMITTING AWARD TO STAND WITH THAT COMPANY WOULD RESULT IN CIRCUMVENTION OF THE SMALL BUSINESS SET-ASIDE PROGRAM PURPOSE WHICH IS TO PLACE CONTRACTS WITH SMALL BUSINESS CONCERNS. ACCORDINGLY, OUR OFFICE DOES NOT FEEL JUSTIFIED IN DIRECTING CANCELLATION OF THE EXISTING CONTRACT.