B-152766, APRIL 3, 1964, 43 COMP. GEN. 657

B-152766, APRIL 3, 1964, 43 COMP. GEN. 657

CONTRACTS - MULTI-YEAR PROCUREMENTS - VALIDITY THE USE OF THE MULTI-YEAR PROCUREMENT PROCEDURE PRESCRIBED IN PARAGRAPH 1 -322 OF THE ARMED SERVICES PROCUREMENT REGULATION FOR COMPETITIVE CONTRACTING OF KNOWN REQUIREMENTS, UNDER WHICH CONTRACT QUANTITIES ARE BUDGETED AND ACCOUNTED FOR IN ACCORDANCE WITH THE PROGRAM YEAR IN WHICH EACH QUANTITY IS AUTHORIZED, NO-YEAR FUNDS ARE USED, AND REDUCED UNIT PRICES ARE OBTAINED BY ELIMINATING REPETITIVE, SUBSTANTIAL START-UP COSTS, DOES NOT PREVENT COMPETITION BY SMALL BUSINESS CONCERNS OR VIOLATE THE SMALL BUSINESS ACT, NOTHING IN THE PROCEDURE RESTRICTING THE PLACEMENT OF CONTRACTS WITH QUALIFIED SMALL BUSINESS CONCERNS, WHICH SHOULD FIND THE OPPORTUNITY TO SPREAD START-UP COSTS ATTRACTIVE, DOES NOT DEROGATE THE PURPOSES OF THE ADVERTISING STATUTES (10 U.S.C. 2304 (A) AND 2305), FREE AND OPEN COMPETITION BEING OBTAINED FOR THE GOVERNMENT'S KNOWN NEEDS, AND DOES NOT VIOLATE THE PRINCIPLES OF FUND OBLIGATIONS, THE STATUTORY TIME LIMITS ON OBLIGATION AND EXPENDITURE OF FUNDS NOT APPLYING TO NO-YEAR FUNDS.

TO THE ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION, APRIL 3, 1964:

FURTHER REFERENCE IS MADE TO YOUR LETTER OF OCTOBER 28, 1963, REQUESTING OUR OPINION AS TO THE LEGALITY OF A PROPOSED REVISION OF THE ARMED SERVICES PROCUREMENT REGULATION CONCERNING THE USE OF A MULTI YEAR PROCUREMENT PROCEDURE. SUCH PROCEDURE IS NOW ESSENTIALLY EMBODIED IN PARAGRAPH 1-322 OF THE REGULATION.

AS PRESENTLY CONSTITUTED PARAGRAPH 1-322 DEFINES MULTI-YEAR PROCUREMENTS AS A METHOD FOR COMPETITIVE CONTRACTING FOR KNOWN REQUIREMENTS FOR MILITARY SUPPLIES, IN QUANTITIES NOT IN EXCESS OF PLANNED REQUIREMENTS FOR 5 YEARS SET FORTH IN, OR IN SUPPORT OF, THE DEPARTMENT OF DEFENSE FIVE YEAR FORCE STRUCTURE AND FINANCIAL PROGRAM, EVEN THOUGH THE TOTAL FUNDS WHICH ARE EXPECTED ULTIMATELY TO BE OBLIGATED BY THE CONTRACT ARE NOT AVAILABLE TO THE CONTRACTING OFFICER AT THE TIME OF ENTERING INTO THE CONTRACT. UNDER THIS METHOD, CONTRACT QUANTITIES ARE BUDGETED AND ACCOUNTED FOR IN ACCORDANCE WITH THE PROGRAM YEAR IN WHICH EACH QUANTITY IS AUTHORIZED. IT WOULD NOT BE USED WHERE FUNDS COVERING THE PROCUREMENT ARE LIMITED BY STATUTE FOR OBLIGATION DURING THE FISCAL YEAR IN WHICH THE CONTRACT IS EXECUTED. IT WOULD BE USED ONLY WHERE COMPETITIVE PROCEDURES ESTABLISH THAT REDUCED UNIT PRICES WOULD RESULT OVER ANNUAL BUYS BY REASON OF THE ELIMINATION OF REPETITIVE, SUBSTANTIAL, START-UP COSTS.

CONTRACTS AWARDED UNDER MULTI-YEAR PROCUREMENT WOULD PROVIDE THAT THE GOVERNMENT IS NOT OBLIGATED TO THE CONTRACTOR FOR CONTRACT PERFORMANCE IN ANY AMOUNT IN EXCESS OF THAT DESCRIBED IN THE CONTRACT AS AVAILABLE FOR PERFORMANCE AND THAT THE CONTRACTOR IS NOT OBLIGATED TO INCUR COSTS FOR THE PERFORMANCE REQUIRED FOR ANY PROGRAM YEAR AFTER THE FIRST UNLESS AND UNTIL HE HAS BEEN NOTIFIED OF AN INCREASE IN THE AVAILABILITY OF FUNDS. IF SO NOTIFIED, THE CONTRACTOR'S OBLIGATION WOULD BE INCREASED ONLY TO THE EXTENT CONTRACT PERFORMANCE IS REQUIRED FOR THE ADDITIONAL PROGRAM YEARS FOR WHICH FUNDS WERE MADE AVAILABLE.

CANCELLATION OF THE CONTRACT WOULD OCCUR UPON NOTIFICATION TO THE CONTRACTOR THAT FUNDS ARE NOT AVAILABLE FOR SUBSEQUENT PROGRAM YEARS OR UPON FAILURE TO NOTIFY THE CONTRACTOR OF THE AVAILABILITY OF FUNDS BY A SPECIFIED TIME. IN THE EVENT OF CANCELLATION, THE CONTRACTOR WOULD BE PAID A CANCELLATION CHARGE. THIS CHARGE WOULD BE EXPRESSED IN PERCENTAGES OF THE TOTAL, MULTI-YEAR CONTRACT PRICE AND WOULD REPRESENT THE START-UP COSTS WHICH NORMALLY WOULD BE AMORTIZED IN ALL ITEMS TO BE FURNISHED UNDER THE MULTI-YEAR REQUIREMENTS. FOR EACH PROGRAM YEAR'S REQUIREMENT THERE WOULD BE PROVIDED SUFFICIENT FUNDS FOR OBLIGATION TO COVER THE QUANTITY OF ITEMS TO BE DELIVERED THEREUNDER. IN ADDITION, THERE WOULD BE A COMMITMENT OF FUNDS REPRESENTING THE POSSIBLE CANCELLATION COSTS. APPROPRIATE ADJUSTMENT OF THE COMMITMENT FOR CANCELLATION WOULD BE MADE EFFECTIVE WITH THE START OF EACH SUCCESSIVE PROGRAM YEAR'S REQUIREMENT.

PARAGRAPH 1-322 FURTHER PROVIDES THAT IN CASES WHERE THE PERIOD OF PRODUCTION IS SUCH THAT A CONTINGENCY FOR LABOR AND MATERIAL COSTS IS LIKELY OTHERWISE TO BE INCLUDED IN THE MULTI-YEAR CONTRACT PRICE, THE CONTRACTING OFFICER SHOULD NORMALLY USE A PROVISION FOR PRICE ESCALATION; THAT WHERE OPTIONS ARE OTHERWISE AUTHORIZED, MULTI-YEAR CONTRACTS MAY INCLUDE AN "OPTION TO INCREASE QUANTITIES" CLAUSE IN WHICH THE PERIOD PER EXERCISE OF THE OPTION IS LIMITED TO THE DATE SET FORTH IN THE CONTRACT SCHEDULE FOR NOTIFYING THE CONTRACTOR THAT FUNDS ARE AVAILABLE FOR THE REQUIREMENTS OF THE NEXT SUCCEEDING PROGRAM YEAR; AND THAT INASMUCH AS THIS METHOD OF PROCUREMENT MAY BE SUITABLE FOR TOTAL SMALL-BUSINESS SET- ASIDES, IN ANY PROCUREMENT WHERE BOTH THE TOTAL SET-ASIDE PROCEDURE AND MULTI-YEAR PROCEDURE ARE APPROPRIATE, BOTH MAY BE USED.

YOU SAY THAT THE MULTI-YEAR PROCUREMENT PROCEDURE IN COMBINING REQUIREMENTS FOR PERIODS OF FROM 2 TO 5 YEARS NECESSARILY ELIMINATES COMPETITION BY SMALL-BUSINESS CONCERNS FOR SUCH PROCUREMENTS AND THAT IT CAN ONLY HAVE THE EFFECT OF FURTHER REDUCING THE ALREADY RELATIVELY SMALL PERCENTAGE OF DEFENSE CONTRACTS AWARDED TO SUCH CONCERNS. YOU CONSIDER THAT THE MULTI-YEAR PROCUREMENT PROCEDURE VIOLATES THE PURPOSE, INTENT, SPIRIT AND PROVISIONS OF THE SMALL BUSINESS ACT.

YOU ALSO CONTEND THAT THE MULTI-YEAR PROCUREMENT PROCEDURE IS IN VIOLATION OF (1) THE ADVERTISING REQUIREMENTS OF 10 U.S.C. 2304 (A) AND 2305, AND (2) THE PRINCIPLES GOVERNING THE OBLIGATION OF FUNDS AS ENUNCIATED BY OUR OFFICE.

SECTION 2 (A) OF THE SMALL BUSINESS ACT (15 U.S.C. 631 (A) ( PROVIDES THAT IT IS THE DECLARED POLICY OF CONGRESS THAT THE GOVERNMENT SHOULD AID, COUNSEL, ASSIST, AND PROTECT INSOFAR AS POSSIBLE, THE INTERESTS OF SMALL BUSINESS CONCERNS IN ORDER TO PRESERVE FREE COMPETITIVE ENTERPRISE, TO INSURE THAT A FAIR PROPORTION OF THE TOTAL PURCHASES OR CONTRACTS OR SUBCONTRACTS FOR PROPERTY AND SERVICES FOR THE GOVERNMENT SHALL BE PLACED WITH SMALL BUSINESS ENTERPRISE.

IT WOULD APPEAR THAT THE OPPORTUNITY GIVEN TO SPREAD START-UP COSTS OVER SEVERAL YEARS SHOULD MAKE THE MULTI-YEAR PROCUREMENT PROCEDURE ATTRACTIVE TO SMALL BUSINESS CONCERNS. IT IS OUR UNDERSTANDING THAT, IN MANY SINGLE YEAR PROCUREMENTS HIGH START-UP COSTS AND "MAKE READY" EXPENSES TEND TO DISCOURAGE FIRMS--- PARTICULARLY SMALLER ONES WITH LIMITED FINANCIAL RESOURCES--- WHERE THEY MUST COMPETE WITH A PRODUCING FIRM THAT HAS ALREADY RECOVERED THESE COSTS. THE CAPITAL INVESTMENT FREQUENTLY REQUIRED FOR NEW PRODUCERS ALSO DISCOURAGES COMPETITION IN ANNUAL PROCUREMENTS BECAUSE OF THE RISK OF LOSING SUCCEEDING AWARDS, WITH NO ASSURANCE OF FUTURE DEPRECIATION RECOVERY. IN VIEW THEREOF IT WOULD APPEAR THAT SMALL BUSINESS CONCERNS IN MANY INSTANCES SHOULD BE ABLE TO COMPETE MORE EFFECTIVELY FOR PROCUREMENTS ON A MULTI-YEAR BASIS THAN ON AN ANNUAL BASIS.

SECTION 15 OF THE ACT (15 U.S.C. 644) PROVIDES THAT SMALL BUSINESS CONCERNS SHALL RECEIVE ANY AWARD OR CONTRACT OR ANY PART THEREOF AS TO WHICH IT IS DETERMINED TO BE IN THE INTEREST OF ASSURING THAT A FAIR PROPORTION OF THE TOTAL PURCHASES AND CONTRACTS FOR PROPERTY AND SERVICES FOR THE GOVERNMENT ARE PLACED WITH SMALL BUSINESS CONCERNS. UNDER SECTION 15 OF THE ACT THE DETERMINATION AS TO WHETHER A PARTICULAR PROCUREMENT SHOULD BE SET ASIDE IN WHOLE OR IN PART FOR SMALL BUSINESS CONCERNS IS WITHIN THE JURISDICTION OF THE ADMINISTRATIVE AGENCY AND THE SMALL BUSINESS ADMINISTRATION. THE GENERAL POLICY OF THE DEPARTMENT OF DEFENSE REGARDING THE PLACEMENT OF CONTRACTS WITH SMALL BUSINESS CONCERNS IS CONTAINED IN PART 7 OF PARAGRAPH I OF ASPR. NEITHER THOSE REGULATIONS NOR THE PROVISIONS OF THE SMALL BUSINESS ACT MADE IT MANDATORY THAT THERE BE SET ASIDE FOR SMALL BUSINESS CONCERNS ANY PARTICULAR PROCUREMENT. COMP. GEN. 351. HOWEVER, WE FIND NOTHING IN THE MULTI-YEAR PROCUREMENT PROCEDURE WHICH WOULD PREVENT THE PLACEMENT OF APPROPRIATE CONTRACTS THEREUNDER WITH QUALIFIED SMALL BUSINESS CONCERNS. CONVERSELY, ASPR 1- 322.1 (A) STATES THAT IN ANY PROCUREMENT WHERE BOTH THE TOTAL SET ASIDE PROCEDURE AND MULTI-YEAR PROCEDURE ARE APPROPRIATE, BOTH MAY BE USED. THE OTHER HAND, WE RECOGNIZE THAT MANY MULTI-YEAR PROCUREMENTS, BECAUSE OF THEIR SIZE, MAY NOT BE CONSIDERED APPROPRIATE FOR SMALL BUSINESS SET- ASIDE. HOWEVER, SINCE SUCH PROCUREMENTS WOULD NOT SEEM TO BE OF A TYPE WHICH WOULD, IN THE ABSENCE OF MULTI-YEAR PROCEDURES, BE SET ASIDE EITHER PARTIALLY OR COMPLETELY FOR SMALL BUSINESS CONCERNS ON A 1-YEAR BASIS, WE SEE NO VALID REASON FOR HOLDING THAT THE INCREASE IN THE SIZE OF A PROCUREMENT WHICH RESULTS FROM ADOPTION OF THE MULTI-YEAR PROCEDURE MAKES SUCH PROCEDURE INCONSISTENT WITH SECTION 15 OF THE SMALL BUSINESS ACT.

WITH RESPECT TO YOUR CONTENTION THAT THE MULTI-YEAR PROCUREMENT PROCEDURE IS VIOLATIVE OF THE ADVERTISING REQUIREMENTS OF 10 U.S.C. 2304 (A) AND 2305, IT SHOULD BE NOTED THAT THE PRIMARY PURPOSE OF THOSE STATUTES IS TO GIVE ALL BIDDERS AN EQUAL OPPORTUNITY TO COMPETE FOR GOVERNMENT BUSINESS AND TO SECURE TO THE UNITED STATES THE BENEFITS OF FREE AND OPEN COMPETITION. SEE B-151770, AUGUST 15, 1963, 43 COMP. GEN. 159, WHICH YOU CITE. FREE AND OPEN COMPETITION FOR THE GOVERNMENT'S KNOWN NEEDS IS IN FACT OBTAINED WHEN A MULTI-YEAR PROCUREMENT IS ADVERTISED. THE CASES YOU CITE INVOLVED SITUATIONS WHERE THE GOVERNMENT RESERVED THE RIGHT TO ORDER SUPPLIES WHOSE NEED HAD NOT BEEN ASCERTAINED AT TIME OF AWARD. THAT IS NOT THE SITUATION HERE AND WE ARE THEREFORE UNABLE TO AGREE THAT THE MULTI -YEAR PROCEDURE IS IN DEROGATION OF THE PURPOSES OF THE ADVERTISING STATUTES.

WITH REGARD TO THE OBLIGATION OF FUNDS, THE ANTI-DEFICIENCY ACT, SECTION 3679, R.S., 31 U.S.C. 665 (A); THE SURPLUS-FUND-CERTIFIED CLAIMS ACT OF 1949, 31 U.S.C. 712A; AND SECTION 3732, R.S. 41 U.S.C. 11, WHICH YOU CITE, EVIDENCE A PLAIN INTENT ON THE PART OF THE CONGRESS TO PROHIBIT EXECUTIVE OFFICERS, UNLESS OTHERWISE AUTHORIZED BY LAW, FROM MAKING CONTRACTS INVOLVING THE GOVERNMENT IN OBLIGATIONS FOR EXPENDITURES OR LIABILITIES BEYOND THOSE CONTEMPLATED AND AUTHORIZED FOR THE PERIOD OF AVAILABILITY OF AND WITHIN THE AMOUNT OF THE APPROPRIATION UNDER WHICH THEY ARE MADE; TO KEEP ALL THE DEPARTMENTS OF THE GOVERNMENT, IN THE MATTER OF INCURRING OBLIGATIONS FOR EXPENDITURES, WITHIN THE LIMITS AND PURPOSES OF APPROPRIATIONS ANNUALLY PROVIDED FOR CONDUCTING THEIR LAWFUL FUNCTIONS; TO PROHIBIT ANY OFFICER OR EMPLOYEE OF THE GOVERNMENT FROM INVOLVING THE GOVERNMENT IN ANY CONTRACT OR OTHER OBLIGATION FOR THE PAYMENT OF MONEY FOR ANY PURPOSE, IN ADVANCE OF APPROPRIATIONS MADE FOR SUCH PURPOSE; AND TO RESTRICT THE USE OF ANNUAL APPROPRIATIONS TO EXPENDITURES REQUIRED FOR THE SERVICE OF THE PARTICULAR FISCAL YEAR FOR WHICH THEY ARE MADE. COMP. GEN. 272, B-144641, NOVEMBER 30, 1962.

THE MULTI-YEAR PROCUREMENT PROCEDURE, HOWEVER, WOULD NOT BE USED WHERE FUNDS COVERING THE PROCUREMENT ARE LIMITED BY STATUTE FOR OBLIGATION DURING THE FISCAL YEAR IN WHICH THE CONTRACT IS EXECUTED. IN OTHER WORDS THE FUNDS TO BE OBLIGATED THEREBY ARE NO-YEAR FUNDS. WHERE CONGRESS EXPRESSLY PROVIDES IN AN APPROPRIATION, THAT IT SHALL "REMAIN AVAILABLE UNTIL EXPENDED" THEREBY MAKING IT A NO-YEAR APPROPRIATION, ALL STATUTORY TIME LIMITS AS TO WHEN THE FUNDS MAY BE OBLIGATED AND EXPENDED ARE REMOVED. 40 COMP. GEN. 694; 31 U.S.C. 718. IN THE INSTANT CASE THERE WOULD BE NO OBLIGATION FOR SUBSEQUENT YEARS' REQUIREMENTS UNTIL FUNDS HAVE BEEN MADE AVAILABLE AND THE CONTRACTOR NOTIFIED THEREOF. WITH RESPECT TO THE CANCELLATION COSTS, WHICH ACTUALLY REPRESENT UNRECOVERED, AMORTIZED START-UP COSTS, IT IS IMMATERIAL WHETHER THEY BE CONSIDERED AS NEEDS OF THE FIRST YEAR'S REQUIREMENT OR AS NEEDS OF FUTURE REQUIREMENTS, SINCE NO- YEAR FUNDS ARE INVOLVED AND SUCH FUNDS COVERING MAXIMUM CANCELLATION COSTS WOULD BE AVAILABLE AT THE TIME OF THE INITIAL AWARD. THUS, THERE WOULD ALWAYS BE SUFFICIENT FUNDS OBLIGATED OR COMMITTED TO COVER THE MAXIMUM LIABILITY OF THE GOVERNMENT UNDER MULTI-YEAR CONTRACTS. NO OBLIGATIONS ARE INCURRED IN EXCESS OF AVAILABLE APPROPRIATIONS OR IN ADVANCE OF APPROPRIATIONS BEING MADE THEREFOR.

ACCORDINGLY, ON THE PRESENT RECORD, WE PERCEIVE NO LEGAL OBJECTION TO THE MULTI-YEAR PROCUREMENT PROCEDURE.