B-155566, APR. 23, 1965

B-155566, APR. 23, 1965

TO SELLERS, CONNER AND CUNEO:

WE HAVE TELEGRAMS DATED NOVEMBER 10 AND 15, 1964, AS WELL AS A LETTER DATED NOVEMBER 12, FROM YOUR CLIENT, FEDERAL ELECTRIC CORPORATION (FEC), AND YOUR LETTERS DATED NOVEMBER 27, 1964, AND FEBRUARY 15, 1965, PROTESTING AN AWARD OF A CONTRACT BY THE DEPARTMENT OF THE AIR FORCE TO UNITED STATES UNDERSEAS CABLE CORPORATION (USUCC) FOR THE PROCUREMENT OF A COMMUNICATIONS CABLE PURSUANT TO THE "WET WASH C" COMMUNICATIONS SYSTEM PROGRAM IN THE PACIFIC AREA.

PURSUANT TO DIRECTIVES IMPLEMENTING THE DEPARTMENT OF DEFENSE (DOD) BALANCE OF PAYMENTS PROGRAM, THE PROCUREMENT WAS NEGOTIATED UNDER THE AUTHORITY OF 10 U.S.C. 2304 (A) (1). OFFERS WERE SOLICITED BY MEANS OF A TWO-STEP "BALANCE OF PAYMENTS RESTRICTED ADVERTISING" PROCEDURE SET FORTH IN A DOD MEMORANDUM OF JULY 16, 1962, EXCEPT THAT BIDS WERE NOT RESTRICTED TO FIRMS OFFERING DOMESTIC SUPPLIES. REQUEST FOR TECHNICAL PROPOSALS PR ES-4-ESM-40584 WAS ISSUED AS THE FIRST STEP OF THE PROCUREMENT BY THE ELECTRONIC SYSTEMS DIVISION, AIR FORCE SYSTEMS COMMAND, ON AUGUST 11, 1964. IT ADVISED RECIPIENTS THAT THE INVITATION FOR BIDS (IFB), WHICH WAS SUBSEQUENTLY ISSUED ON OCTOBER 15 AS THE SECOND STEP OF THE PROCUREMENT TO THE THREE FIRMS WHICH QUALIFIED UNDER THE FIRST STEP, WOULD CONTAIN LANGUAGE SUBSTANTIALLY AS SET FORTH IN THE FOLLOWING QUOTATION FROM PARAGRAPH 31 OF THE SPECIAL CONDITIONS, WHICH APPEARS ON PAGE 22 OF THE IFB:

"31. BALANCE OF PAYMENTS

"CERTIFICATE

ALL ITEMS BEING PURCHASED ARE IN IMPLEMENTATION OF THE BALANCE OF PAYMENTS PROGRAM, THE BIDDER OR OFFEROR HEREBY CERTIFIES THAT THE MAXIMUM COST OF ALL COMPONENTS OF FOREIGN ORIGIN CONTAINED OR TO BE INCORPORATED IN SUCH ITEMS, AND OF ALL WORK OR SERVICES OF FOREIGN ORIGIN PERFORMED OR FURNISHED UNDER THIS CONTRACT, HAS BEEN SET FORTH IN THE COLUMN ENTITLED FOREIGN COST IN THE SCHEDULE OF THIS INVITATION FOR BID. FAILURE TO FURNISH THIS INFORMATION WILL RESULT IN THE BIDDER BEING NONRESPONSIVE.

"EVALUATION OF BIDS

IN IMPLEMENTATION OF THE BALANCE OF PAYMENTS PROGRAM, AND FOR BID EVALUATION PURPOSES ONLY, FIFTY PERCENT (50 PERCENT) OF THE AMOUNT CERTIFIED HEREIN BY THE BIDDER AS THE COST OF COMPONENTS OF FOREIGN ORIGIN AND OF WORK OR SERVICES OF FOREIGN ORIGIN WILL BE ADDED TO THE TOTAL BID.

"CERTIFICATION WARRANTY

IN THE EVENT OF AWARD OF A CONTRACT, THE CONTRACTOR AGREES THAT IN THE DELIVERY OF ITEMS UNDER THIS CONTRACT, OR IN THE PERFORMANCE OR FURNISHING OF WORK OR SERVICES UNDER THIS CONTRACT, WHICH THE GOVERNMENT HAS SPECIFIED HEREIN TO BE IN IMPLEMENTATION OF THE BALANCE OF PAYMENTS PROGRAM, THE TOTAL COST OF COMPONENTS OF FOREIGN ORIGIN INCORPORATED IN SUCH ITEMS, AND OF WORK OR SERVICES OF FOREIGN ORIGIN, SHALL NOT EXCEED THE TOTAL MAXIMUM COST OF COMPONENTS OF SUCH ITEMS OF FOREIGN ORIGIN AND OF WORK AND SERVICES OF FOREIGN ORIGIN AS SET FORTH IN THE CERTIFICATE SUBMITTED BY THE CONTRACTOR WITH ITS BID OR PROPOSAL, OR IN ANY AMENDMENT THEREOF.

THE ORIGIN OF COMPONENTS AND OF WORK OR SERVICES FURNISHED OR PERFORMED UNDER THIS CONTRACT IS OF CRITICAL IMPORTANCE TO THE GOVERNMENT. RECOGNITION THEREOF THE CONTRACTOR AGREES THAT ANY VIOLATION OF THIS CLAUSE ENTITLED "CERTIFICATION WARRANTY" SHALL BE DEEMED A BREACH OF THIS CONTRACT; AND FURTHER RECOGNIZING THE DIFFICULTY OF ASCERTAINING ACCURATELY THE AMOUNT OF DAMAGES WHICH THE GOVERNMENT WILL SUFFER IN SUCH EVENT, THE CONTRACTOR AGREES THAT THERE SHALL BE DUE AND PAYABLE TO THE GOVERNMENT WITH RESPECT TO EVERY SUCH BREACH, AS LIQUIDATED DAMAGES AND NOT AS A PENALTY, AN AMOUNT EQUAL TO THE SUM BY WHICH THE ACTUAL COST OF COMPONENTS OR WORK AND SERVICES OF FOREIGN ORIGIN EXCEEDS THE TOTAL AMOUNT SET FORTH IN THE CERTIFICATE SUBMITTED BY THE CONTRACTOR WITH ITS BID OR PROPOSAL, OR IN ANY AMENDMENT THEREOF.'

YOUR CLIENT'S LOWEST BID WAS $5,982,662, OF WHICH A TOTAL OF $2,981,074 WAS QUOTED IN THE BID SCHEDULE UNDER THE HEADING,"FOREIGN COST.' THE LOWEST BID SUBMITTED BY USUCC WAS $6,489,819, OF WHICH A TOTAL OF $1,007,463 WAS QUOTED AS "FOREIGN COST.' EVALUATION OF BIDS IN ACCORDANCE WITH THE APPROPRIATE PROVISIONS OF THE IFB, INCLUDING THE PRESCRIBED 50 PERCENT EVALUATION PENALTY ON THAT PORTION OF THE BID CERTIFIED AS "FOREIGN COST," PRODUCED AN EVALUATED PRICE OF $7,056,184.64 FOR USUCC, WHILE YOUR CLIENT'S EVALUATED PRICE WAS $7,499,309.01. THE CONTRACT WAS AWARDED TO USUCC ON NOVEMBER 10, 1964.

YOU CONTEND THAT USUCC'S BID WAS EVALUATED TOO LOW BECAUSE IT GROSSLY UNDERSTATED ACTUAL FOREIGN COSTS, AND THEREFORE DID NOT CONFORM TO WHAT YOU CONSIDERED TO BE THE REQUIREMENTS OF THE IFB. THE QUOTED LANGUAGE FROM PARAGRAPH 31 OF THE IFB REQUIRES ALL BIDDERS TO SET FORTH AN AMOUNT REPRESENTING THE COST OF FOREIGN COMPONENTS AND SERVICES, AND TO CERTIFY THAT SUCH AMOUNT REPRESENTS THE MAXIMUM FOREIGN COST CONTAINED IN THE BID. USUCC DID STATE AND CERTIFY A CERTAIN AMOUNT AS REPRESENTING THE MAXIMUM COST OF FOREIGN COMPONENTS AND SERVICES, AND CONSEQUENTLY WAS STRICTLY RESPONSIVE TO THE LITERAL TERMS OF THE INVITATION, REGARDLESS OF THE ACCURACY OF THE CERTIFIED INFORMATION. THE DEPARTMENT OF THE AIR FORCE TAKES THE POSITION THAT SINCE THE IFB REQUIRED A WARRANTY OF THE AMOUNT OF FOREIGN COSTS, AND PROVIDED FOR LIQUIDATED DAMAGES IN THE EVENT OF BREACH THEREOF, THE AIR FORCE WAS NOT REQUIRED TO VERIFY THE CORRECTNESS OF THE ESTIMATED FOREIGN COST AS A CONDITION PRECEDENT TO THE ACCEPTANCE OF THE BID.

YOU URGE THAT A PROPER READING OF THE ABOVE MENTIONED PROVISIONS OF THE IFB COMPELS THE CONCLUSION THAT A CERTIFICATION CANNOT BE RESPONSIVE TO THE TRUE INTENT OF THE REQUIREMENT UNLESS THE STATED AMOUNT OF FOREIGN COST IS IN FACT AN ACCURATE ESTIMATE. YOU CITE AS SUPPORT OUR DECISIONS 39 COMP. GEN. 695 AND 41 COMP. GEN. 339, WHICH INVOLVED PROTESTS TO PROPOSED AWARDS UNDER THE PROVISIONS OF THE BUY AMERICAN ACT.

IN THE LATTER OF THE TWO DECISIONS CITED, WE DID ANALYZE THE PROTESTING BIDDER'S ALLEGATIONS THAT MORE THAN 50 PERCENT OF A COMPETITOR'S BID PRICE REPRESENTED FOREIGN COST. HOWEVER, IN BOTH OF THOSE DECISIONS WE INDICATED THAT THE POSSIBLE TENDENCY TO UNDERSTATE FOREIGN COST WOULD BE DISCOURAGED BY USE OF A PROVISION FOR LIQUIDATED DAMAGES, AND WE RECOMMENDED ITS FUTURE USE. WE NEED NOT DECIDE WHETHER THE USE OF A LIQUIDATED DAMAGES PROVISION MAY SUPPLANT THE ALLEGED NEED TO ANALYZE STATED FOREIGN COST TO DETERMINE ACTUAL COMPLIANCE WITH THE BUY AMERICAN ACT, SINCE IN THE INSTANT CASE WE ARE DEALING WITH AN ADMINISTRATIVE POLICY, RATHER THAN A STATUTORY MANDATE, REGARDING THE EVALUATION OF BIDS WHICH PURPORT TO INCLUDE A CERTAIN PERCENTAGE OF FOREIGN COST. IN OUR VIEW, THE VALIDITY OF YOUR CONTENTION THAT THE IFB SHOULD BE CONSTRUED NOT ONLY TO REQUIRE BIDDERS TO STATE AND CERTIFY THE FOREIGN COST OF COMPONENTS, BUT TO REQUIRE THE PROCURING AGENCY TO VERIFY THE ACCURACY OF SUCH STATEMENT, DEPENDS IN GREAT PART UPON WHETHER THE ADMINISTRATIVE OBJECTIVE TO IMPLEMENT ITS BALANCE OF PAYMENTS POLICY AND REDUCE EXPENDITURES ABROAD MAY BE ACHIEVED BY USE OF THE SUBJECT LIQUIDATED DAMAGES PROVISION, WHICH IS THE POSITION TAKEN BY THE AIR FORCE, OR MAY BE ACHIEVED ONLY BY REJECTING AS NONRESPONSIVE ANY BID WHICH SUBSTANTIALLY UNDERSTATES THE ACTUAL FOREIGN COST CONTAINED IN ITS BID.

YOU ARGUE THAT THE REASON FOR THE USE OF A LIQUIDATED DAMAGES PROVISION IS SOLELY TO PREVENT THE CONTRACTOR FROM CHANGING THE FOREIGN COMPONENT CONTENT AFTER AWARD AND DURING PERFORMANCE OF THE CONTRACT, AND THAT THERE IS NO RELATIONSHIP BETWEEN THIS PROVISION AND THE ONE PRESCRIBING AN EVALUATION PENALTY FOR THE USE OF FOREIGN COMPONENTS. TO SUPPORT THE ARGUMENT, YOU OFFER THE FOLLOWING ILLUSTRATION AND EXPLANATORY COMMENT:

"DECLARED COST OF FOREIGN COMPONENTS:

BID EVALUATION OF BID LIQUIDATED DAMAGES

$500,000 $750,000 $100,000

ACTUAL COST OF FOREIGN COMPONENTS:

BID EVALUATION OF BID LIQUIDATED DAMAGES

$600,000 $900,000

"THUS, CONTRACTOR ONLY PAYS $100,000 AS LIQUIDATED DAMAGES FOR HIS BREACH OF CONTRACT IN MISREPRESENTING THE FOREIGN MATERIAL CONTENT, WHEREAS UNDER THE "EVALUATION OF BIDS" PROVISION HE HAS GAINED AN ADVANTAGE OF HAVING A LOWER BID BY SUCH MISREPRESENTATION TO THE EXTENT OF 0,000.'

THE FIGURES USED FOR EVALUATION IN YOUR ILLUSTRATION ARE CORRECT ONLY IF THE $500,000 AND $600,000 ARE TOTAL BID PRICES, SINCE THE EVALUATION PRESCRIBED BY THE INSTANT INVITATION IS TOTAL BID PRICE PLUS 50 PERCENT OF THE FOREIGN COST, RATHER THAN 150 PERCENT OF STATED FOREIGN COST. THE DIFFERENCE OF $150,000 BETWEEN YOUR EVALUATION FIGURES ($750,000 AND $900,000) THUS INCLUDES A DIFFERENCE OF $100,000 BETWEEN THE BID PRICES OF $500,000 AND $600,000, AND ONLY $50,000 RESULTING FROM THE EVALUATION FORMULA. IN ADDITION, IN THE EXAMPLE STATED, THE BIDDER AT $500,000 WOULD RECEIVE, AFTER DEDUCTION OF LIQUIDATED DAMAGES, ONLY $400,000, OR $200,000 LESS THAN WOULD BE PAID ON THE $600,000 BID.

IF THE FORMULA IS INTENDED TO BE APPLIED TO TWO BIDS IDENTICAL IN TOTAL AMOUNT, ONE OF WHICH INCLUDED THE TRUE FOREIGN COST OF $600,000 AND THE OTHER AN AMOUNT OF $100,000 LESS, THE LATTER BID WOULD BE EVALUATED AT $50,000 LESS, BUT AT A COST OF $100,000 IN LIQUIDATED DAMAGES. IF THE FALSIFIED BID SHOULD BE INCREASED BY $100,000 TO OFFSET THE LIQUIDATED DAMAGES, IT WOULD THEN BE EVALUATED AT $50,000 HIGHER THAN THE CORRECT BID. IF, ON THE OTHER HAND, THE BIDDER WAS WILLING TO PERFORM THE CONTRACT FOR $100,000 LESS THAN HIS TOTAL BID PRICE, HE WOULD RECEIVE A MORE FAVORABLE EVALUATION BY BIDDING HIS TRUE PRICE AND INCLUDING THE TRUE FOREIGN COST. ASSUMING THAT UCC DID, AS ALLEGED BY YOU, UNDERSTATE ITS FOREIGN COST BY $1,000,000 IN ORDER TO OBTAIN AN ADVANTAGE IN EVALUATION, THE NET AMOUNT WHICH IT WILL RECEIVE UNDER ITS $6,500,000 BID, AFTER DEDUCTION OF $1,000,000 LIQUIDATED DAMAGES, WILL BE $5,500,000. BIDDING THAT AMOUNT AND SHOWING ITS TRUE FOREIGN COST OF $2,000,000, ITS EVALUATED BID WOULD HAVE BEEN $6,500,000, OR $500,000 LESS THAN THE EVALUATION ON THE BID IT DID SUBMIT.

IT IS THUS CLEAR THAT THE EFFECT OF THE PRESCRIBED METHOD OF EVALUATION AND ASSESSMENT OF LIQUIDATED DAMAGES IS NOT, AS YOU CONTEND, TO OFFER AN ADVANTAGE TO A BIDDER WHO UNDERSTATES HIS FOREIGN COST, BUT RATHER TO PENALIZE SUCH A METHOD OF BIDDING. IN THESE CIRCUMSTANCES, THERE WOULD APPEAR TO BE NO NECESSITY FOR ANY INQUIRY BY THE GOVERNMENT INTO THE ACCURACY OR BONA FIDES OF THE BIDDERS' REPRESENTATIONS AS TO THEIR FOREIGN COSTS PRIOR TO CONTRACT AWARD.

YOU ALSO ALLEGE THAT THREE DIFFERENCES BETWEEN THE AIR FORCE INTERPRETATIONS OF APPLYING CERTAIN BALANCE-OF-PAYMENTS PROVISIONS IN THE SPECIFICATIONS FOR THIS PROCUREMENT, AND IN THE SPECIFICATIONS FOR A SUBSEQUENT SOLICITATION FOR AN UNDERGROUND CABLE SYSTEM, RESULTED IN SUCH COMPLETE CONFUSION THAT, IN LIGHT OF THE GOVERNMENT'S ALL-OUT DRIVE TO REDUCE MILITARY SPENDING, THE CONTRACT TO USUCC SHOULD BE CANCELLED AND AWARD MADE TO FEC, THE LOW BIDDER, WITHOUT REGARD TO THE BALANCE OF PAYMENTS PROVISIONS IN THE IFB. IN REPLY, THE ADMINISTRATIVE REPORT POINTS OUT THAT THE INTERPRETATIONS OF THE SPECIFICATIONS FOR THE SUBSEQUENT PROCUREMENT WERE ISSUED AFTER BIDS FOR THE INSTANT PROCUREMENT HAD BEEN OPENED AND AWARD MADE. YOUR CLIENT AND OTHER BIDDERS HAD BEEN ADVISED PRIOR TO THE BID OPENING OF THE INTERPRETATIONS FOR APPLICATION TO THE "WET WASH C" BUY, AND APPARENTLY COULD NOT HAVE BEEN CONFUSED BY SUBSEQUENT INTERPRETATIONS ISSUED BY ANOTHER PROCURING ACTIVITY FOR A SEPARATE PROCUREMENT. THEREFORE, IT DOES NOT APPEAR THAT YOUR CLIENT OR OTHER BIDDERS HAVE BEEN PREJUDICED BY THE DIFFERENT INTERPRETATIONS. THE ABSENCE OF A SHOWING OF SUCH PREJUDICE, WE CANNOT AGREE THAT THE THREE RELATIVELY MINOR CHANGES IN THE SPECIFICATIONS, OR IN THE AIR FORCE'S OPINION AS TO HOW THE SPECIFICATIONS SHOULD BE APPLIED, HAVE RENDERED THOSE SPECIFICATIONS MATERIALLY DEFECTIVE.