B-160560, SEPTEMBER 15, 1967, 47 COMP. GEN. 155

B-160560, SEPTEMBER 15, 1967, 47 COMP. GEN. 155

APPROPRIATIONS - AVAILABILITY - CONTRACTS - FUTURE NEEDS UNDER A CONTRACT NEGOTIATED PURSUANT TO 10 U.S.C. 2304 (A) (13), FOR GENERATOR SETS TO BE PURCHASED DURING A 12-MONTH PERIOD, AND THE SUBJECT TO MINIMUM AND MAXIMUM QUANTITY, AS WELL AS DOLLAR LIMITATIONS, THE FUNDING OF THE LAST TWO PURCHASES WAS NOT INCONSISTENT WITH PROVISIONS OF THE ARMED SERVICES PROCUREMENT REGULATION, NOR IN VIOLATION OF THE APPROPRIATION PROVISIONS AT SECTIONS 3732, 3679, AND 3690 OF THE REVISED STATUTES, EVEN THOUGH SUFFICIENT FUNDS TO COVER MAXIMUM QUANTITIES ORDERABLE WERE NOT AVAILABLE AT THE TIME THE CONTRACT WAS EXECUTED, THE CONTRACT, AN INDEFINITE QUANITY AND NOT A REQUIREMENTS CONTRACT, THE GOVERNMENT WAS NOT REQUIRED TO OBLIGATE FOR MORE THAN THE COST OF THE MINIMUM QUANTITY, AND THE ISSUANCE OF THE PURCHASE ORDERS ANALOGOUS TO THE SITUATIONS IN LEITER V UNITED STATES, 271 U.S. 204, REGARDING A LEASE RENEWAL OPTION, WHICH DID NOT GO INTO FUNDING, IS NOT AUTHORITY FOR CONCLUDING THE LAST TWO PURCHASE ORDERS WERE ILLEGALLY ISSUED. CONTRACTS - OPTIONS - INDEFINITE V REQUIREMENTS CONTRACT WHILE IN ORDINARY USAGE THERE IS LITTLE DISTINCTION BETWEEN A CONTRACT INCLUDING AN OPTION FOR AN ADDITIONAL AMOUNT AND AN INDEFINITE QUANTITY CONTRACT, THE EXPRESSIONS ARE EMPLOYED IN THE ARMED SERVICES PROCUREMENT REGULATION AS PARTICULAR TERMS OF ART TO DISTINGUISH BETWEEN TWO DIFFERENT KINDS OF OPTION CONTRACTS, AND THE USE OF THE INDEFINITE QUANTITY CONTRACT DESCRIBED IN PARAGRAPH 3-409.3 FOR THE NEGOTIATION OF COMMERCIAL ITEMS, WITHOUT TIME OR QUANTITY LIMITATIONS, IN THE PURCHASE OF A MINIMUM QUANTITY OF GENERATOR SETS, WITH A RIGHT TO ORDER DURING A 1-YEAR PERIOD ADDITIONAL QUANTITIES UP TO EIGHT TIMES THE MINIMUM WAS APPROPRIATE, AS THE OPTION CONTRACT DESCRIBED IN PARAGRAPH 1-1501 ET SEQ., WHICH DOES LIMIT TIME AND QUANTITIES, IS INTENDED FOR USE IN ADVERTISING OR NEGOTIATING FOR ITEMS NOT READILY AVAILABLE ON THE OPEN MARKET, WHERE REQUIREMENTS BEYOND MINIMUM QUANTITIES ARE FORESEEABLE AND LATER ORDERS MAY REPRESENT LESS THAN MINIMUM ECONOMIC PRODUCTION QUANTITIES, WHICH CONSIDERING START-UP COSTS, PRODUCTION LEAD TIE, ETC., COULD PRECLUDE ADEQUATE COMPETITION. ADVERTISING - NECESSITY OR NONNECESSITY - PURCHASE ORDERS UNDER AN INDEFINITE QUANTITY CONTRACT THE ISSUANCE WITHOUT SECURING COMPETITION OF PURCHASE ORDERS FOR GENERATOR SETS DURING THE LAST 2 MONTHS OF A 12-MONTH CONTRACT NEGOTIATED UNDER 10 U.S.C. 2304 (A) (13) FOR AN INDEFINITE QUANTITY OF SETS, AS PROVIDED IN PARAGRAPH 3-409.3 OF THE ARMED SERVICES PROCUREMENT REGULATION, DID NOT VIOLATE THE ADVERTISING STATUTE AT SECTION 3709 OF THE REVISED STATUTES (41 U.S.C. 5), OR 10 U.S.C. 2304 (G), REGARDING COMPETITION TO THE EXTENT FEASIBLE IN THE NEGOTIATION OF CONTRACTS, ABSENT EVIDENCE OF THE POSSIBILITY THAT ANOTHER SUPPLIER COULD HAVE FURNISHED THE SETS AT A LOWER PRICE.

TO THE FEDERAL ELECTRIC CORPORATION, SEPTEMBER 15, 1967:

REFERENCE IS MADE TO YOUR LETTERS OF DECEMBER 12, 1966, AND APRIL 26, 1967, AND THE MEETINGS WITH REPRESENTATIVES OF THIS OFFICE REGARDING YOUR PROTEST AGAINST PURCHASE ORDERS NUMBERED 9 AND 10, ISSUED UNDER CONTRACT NO. AF 04/606/-15369.

THIS CONTRACT FOR VARIOUS TYPES OF MOBILE GENERATOR SETS WAS AWARDED TO FEDERAL ELECTRIC CORPORATION, EFFECTIVE DECEMBER 20, 1965, BY THE SACRAMENTO AIR MATERIEL AREA, DIRECTORATE OF PROCUREMENT AND PRODUCTION, MCCLELLAN AIR FORCE BASE, CALIFORNIA. THE AWARD WAS NEGOTIATED PURSUANT TO 10 U.S.C. 2304 (A) (13), AS IMPLEMENTED BY SECTION 3-213 OF THE ARMED SERVICES PROCUREMENT REGULATION (ASPR) BASED ON THE DETERMINATIONS BY THE ASSISTANT SECRETARY OF THE AIR FORCE THAT THE GENERATOR SETS ARE TECHNICAL EQUIPMENT WHICH REQUIRE STANDARDIZATION AND INTERCHANGEABILITY OF PARTS.

THE CONTRACT AT PART XI RESERVED TO THE GOVERNMENT THE RIGHT TO ISSUE ORDERS THEREUNDER FOR A PERIOD NOT TO EXCEED 12 MONTHS FROM THE DATE OF APPROVAL. UNDER PART Y OF THE SCHEDULE OF ITEMS THE GOVERNMENT WAS COMMITTED TO THE PURCHASE OF 453 UNITS AND COULD ORDER AS MANY AS 3,600. PART X OF THE CONTRACT WHICH WAS COMPLETED BY THE GOVERNMENT AT THE TIME OF AWARD PROVIDED THAT THE MINIMUM DOLLAR AMOUNT TO BE EXPENDED UNDER THE CONTRACT WAS $2,893,884 AND THAT THE MAXIMUM DOLLAR AMOUNT WAS $23,114,753.

THE FOLLOWING ORDERS HAVE BEEN PLACED BY THE GOVERNMENT PURSUANT TO PART XI OF THE CONTRACT. ORDER NO. ORDER DATE QUANTITY

(1) 20 DECEMBER 1965 453 EACH

(2) 11 JANUARY 1966 6 EACH

(3) 30 MARCH 1966 292 EACH

(4) 15 APRIL 1966 662 EACH

(5) 13 MAY 1966 8 EACH

(6) 14 JUNE 1966 101 EACH

(7) 20 JUNE 1966 199 EACH

(8) 17 AUGUST 1966 43 EACH

(9) 7 NOVEMBER 1966 443 EACH

(10) 9 DECEMBER 1966 426 EACH

TOTAL 2,633 EACH

FEC HAS QUESTIONED THE LEGALITY OF THE LAST TWO ORDERS (NUMBERED 9 AND 10) CONTENDING THAT THEY WERE ISSUED IN CONTRAVENTION OF SECTIONS 3732/41 U.S.C. 11), 3679/31 U.S.C. 665 (A) ( AND 3690/31 U.S.C. 712 (A) ( OF THE REVISED STATUTES WHICH RESPECTIVELY PROVIDE IN PART AS FOLLOWS:

"NO CONTRACT OR PURCHASE ON BEHALF OF THE UNITED STATES SHALL BE MADE, UNLESS THE SAME IS AUTHORIZED BY LAW OR IS UNDER AN APPROPRIATION ADEQUATE TO ITS FULFILLMENT * * *.

"NO OFFICER OR EMPLOYEE OF THE UNITED STATES SHALL MAKE OR AUTHORIZE AN EXPENDITURE FROM OR CREATE OR AUTHORIZE AN OBLIGATION UNDER ANY APPROPRIATION OR FUND IN EXCESS OF THE AMOUNT AVAILABLE THEREIN; NOR SHALL ANY SUCH OFFICER OR EMPLOYEE INVOLVE THE GOVERNMENT IN ANY CONTRACT OR OTHER OBLIGATION, FOR THE PAYMENT OF MONEY FOR ANY PURPOSE, IN ADVANCE OF APPROPRIATIONS MADE FOR SUCH PURPOSE, UNLESS SUCH CONTRACT OR OBLIGATION IS AUTHORIZED BY LAW.

"EXCEPT AS OTHERWISE PROVIDED BY LAW, ALL BALANCES OF APPROPRIATIONS CONTAINED IN THE ANNUAL APPROPRIATION BILLS AND MADE SPECIFICALLY FOR THE SERVICE OF ANY FISCAL YEAR SHALL ONLY BE APPLIED TO THE PAYMENT OF EXPENSES PROPERLY INCURRED DURING THAT YEAR, OR TO THE FULFILLMENT OF CONTRACTS PROPERLY MADE WITHIN THAT YEAR.' IT IS FEC'S POSITION THAT ORDERS NUMBERED 9 AND 10 VIOLATED THE APPROPRIATION STATUTES SINCE SUFFICIENT FUNDS TO COVER THE MAXIMUM QUANTITIES ORDERABLE UNDER THE CONTRACT WERE NOT AVAILABLE TO OBLIGATE AT THE TIME THE CONTRACT WAS EXECUTED.

FEC CONTENDS THAT OUR DECISION AT 42 COMP. GEN. 272, SHOULD BE APPLIED TO THE INSTANT PROCUREMENT AND THAT ORDERS NUMBERED 9 AND 10 SHOULD BE FOUND INVALID ON THE BASIS OF THAT DECISION. THE FACTS IN42 COMP. GEN. 272, HOWEVER, ARE DISTINGUISHABLE FROM THE FACTS IN THE INSTANT CASE. THE CONTRACT CONSIDERED IN 42 COMP. GEN. 272, WAS A REQUIREMENTS CONTRACT WHICH OBLIGATED THE GOVERNMENT TO ORDER FROM THE CONTRACTORS SUCH REQUIREMENTS AS THE GOVERNMENT MIGHT HAVE. IN THIS CONNECTION PARAGRAPH 27 (B) OF THE GENERAL PROVISIONS OF THE CONTRACT CONSIDERED IN 42 COMP. GEN. 272, PROVIDED AS FOLLOWS:

"/B) THE GOVERNMENT AGREES TO CALL ON THE CONTRACTOR FOR ALL REQUIREMENTS FOR SUCH SUPPLIES AND SERVICES OF THE GOVERNMENT ACTIVITY DESIGNATED IN PARAGRAPH (A) ABOVE. THE CONTRACTOR AGREES TO FURNISH SUCH SUPPLIES AND SERVICES WHEN CALLED FOR BY THE GOVERNMENT.'

THERE IS NO PROVISION IN THE INSTANT CONTRACT WHICH OBLIGATES THE GOVERNMENT TO PLACE ANY ORDERS WITH FEC FOR REQUIREMENTS OVER AND ABOVE THE MINIMUM QUANTITY. THIS MAKES THE INSTANT CONTRACT MATERIALLY DIFFERENT FROM THE CONTRACT CONSIDERED IN 42 COMP. GEN. 272.

COUNSEL FOR FEC ALSO CITED IN HIS BRIEF THE CASE OF LEITER V. UNITED STATES, 271 U.S. 204/1926). IN THAT CASE THE GOVERNMENT ENTERED INTO SEVERAL LEASES. AT THE TIME THE LEASES WERE EXECUTED NO APPROPRIATIONS WERE AVAILABLE FOR THE PAYMENT OF RENT AFTER THE FIRST FISCAL YEAR. MAY 29, 1922, BEFORE ANY APPROPRIATION HAD BEEN MADE OUT OF WHICH THE RENT MIGHT BE PAID FOR THE NEXT FISCAL YEAR, THE GOVERNMENT ADVISED THE LESSOR THAT IT WOULD VACATE THE PREMISES. THE LESSOR DENIED THE GOVERNMENT'S RIGHT TO TERMINATE THE LEASES. THE COURT UPHELD THE GOVERNMENT'S RIGHT TO TERMINATE THE LEASES ON THE BASIS THAT IN SO FAR AS THE LEASES EXTENDED BEYOND THE CURRENT FISCAL YEAR, THEY WERE IN VIOLATION OF THE EXPRESS PROVISION OF THE REVISED STATUTES AND CREATED NO BINDING OBLIGATION ON THE GOVERNMENT. THE COURT IN THE LEITER CASE RECOGNIZED THAT IF THE GOVERNMENT BY ITS DULY AUTHORIZED OFFICERS AFFIRMATIVELY CONTINUED THE LEASE FOR THE SUBSEQUENT YEAR AND AN APPROPRIATION WERE MADE AVAILABLE FOR THE PAYMENT OF RENT, SUCH CONTINUATION OF THE LEASE WOULD NOT BE IN VIOLATION OF THE APPROPRIATION STATUTES. IT IS OUR OPINION THAT THE ISSUANCE OF A PURCHASE ORDER UNDER THE INSTANT CONTRACT WOULD BE ANALOGOUS TO THE SITUATION REFERRED TO IN THE LEITER CASE WHERE AUTHORIZED OFFICERS OF THE GOVERNMENT AFFIRMATIVELY ACT TO CONTINUE THE LEASE BEYOND THE FISCAL YEAR IN WHICH THE CONTRACT WAS EXECUTED. SEE 9 COMP. GEN. 6, WHERE WE STATED THAT THE LEITER CASE REAFFIRMED THE VIEW THAT IN CASES OF LEASES FOR A NUMBER OF YEARS, FROM THE BEGINNING OF THE FISCAL YEAR FOLLOWING THAT FOR WHICH THE LEASE WAS MADE, THERE IS HELD TO BE MERELY AN OPTION IN THE GOVERNMENT FOR RENEWAL FROM YEAR TO YEAR UNTIL THE END OF THE TERM. THEREFORE, WE DO NOT CONSIDER THE LEITER CASE AS AUTHORITY FOR CONCLUDING THAT PURCHASE ORDERS NUMBERED 9 AND 10 WERE ILLEGALLY ISSUED. THE LEITER CASE DOES NOT GO INTO THE MATTER OF FUNDING THE CONTRACT INVOLVED.

IN 9 COMP. GEN. 6, ALSO CITED IN FEC'S BRIEF, WE CONSIDERED WHETHER THERE WOULD BE AUTHORITY FOR ENTERING INTO A DEFINITE QUANTITY CONTRACT FOR THE DELIVERY OF 500,000 BARRELS OF CEMENT OVER A PERIOD OF 3.5 CALENDER YEARS. WE HELD THAT THERE WOULD NOT BE AUTHORITY FOR ENTERING INTO SUCH CONTRACT UNLESS THE APPROPRIATION FOR THE FISCAL YEAR IN WHICH THE CONTRACT WAS EXECUTED WAS ADEQUATE FOR ITS FULFILLMENT. IN THE INSTANT SITUATION IF THE AIR FORCE HAD CHOSEN TO PURCHASE THE UNITS WHICH WERE THE SUBJECT OF ORDERS NUMBERED 9 AND 10 BY COMPETITIVE BIDDING RATHER THAN ORDERING THESE UNITS FROM FEC UNDER THE CONTRACT, IT COULD HAVE DONE SO WITHOUT LEGAL LIABILITY. SEE B 160783, MARCH 24, 1967. CONSEQUENTLY, IT IS OUR VIEW THAT 9 COMP. GEN. 6, IS NOT APPLICABLE TO THE INSTANT CASE.

FEC HAS ALSO CITED 16 COMP. GEN. 37 AND 20 COMP. GEN. 572. IN 16 COMP. GEN. 37, WE PERMITTED A BIDDER TO WITHDRAW HIS BID BECAUSE OF A MISTAKE. THE SECOND QUESTION IN 16 COMP. GEN. 37 WAS WHETHER THE CONTRACT WHICH WOULD BE EXECUTED IN 1937, COULD BE CHARGEABLE TO THE 1936 APPROPRIATION ON THE BASIS THAT THE REQUIREMENTS WERE SOLICITED IN FISCAL YEAR 1936 AND AN AWARD APPARENTLY WOULD HAVE BEEN IN FISCAL YEAR 1936 IF THE LOW BIDDER HAD NOT BEEN PERMITTED TO WITHDRAW ITS BID. WE HELD THAT PAYMENT UNDER ANY CONTRACT ENTERED INTO AFTER JUNE 30, 1936, ON THE BASIS OF THAT ADVERTISEMENT COULD NOT BE CHARGED TO THE 1936 APPROPRIATION. IN VIEW OF THE MATERIAL DIFFERENCES IN THE FACTS, WE FIND NO BASIS TO CONSIDER THE HOLDING IN 16 COMP. GEN. 37 APPLICABLE HERE.

IN 20 COMP. GEN. 572 WE CONSIDERED A CONTRACT WHICH WAS RENEWABLE AT THE OPTION OF THE GOVERNMENT FOR A PERIOD EXPIRING JUNE 30, 1942, AND THEREAFTER RENEWABLE AT THE OPTION OF THE GOVERNMENT FOR PERIODS OF ONE YEAR NOT TO EXTEND BEYOND JUNE 30, 1946. THE CONTRACT ALSO PROVIDED THAT IF THE OPERATIONS OF THE CONTRACT EXTENDED BEYOND THE FISCAL YEAR IN WHICH IT WAS MADE, IT WAS UNDERSTOOD THAT THE CONTRACT WAS MADE CONTINGENT UPON CONGRESS MAKING THE NECESSARY APPROPRIATIONS FOR EXPENDITURES AFTER THE CURRENT YEAR HAD EXPIRED. WE HELD THAT THE GOVERNMENT ASSUMED NO OBLIGATION BEYOND THE CURRENT FISCAL YEAR UNLESS AND UNTIL THE OPTION WAS EXERCISED FOR THE SUCCEEDING FISCAL YEAR. ALTHOUGH THE CONTRACT SPECIFICALLY MADE ANY EXTENSION SUBJECT TO THE APPROPRIATION BY CONGRESS OF THE NECESSARY FUNDS, IT DOES NOT APPEAR THAT THE DETERMINATION OF THE CONTRACT'S VALIDITY WAS DEPENDENT UPON INCLUSION OF THAT PROVISION. OUR VIEW 20 COMP. GEN. 572 SUPPORTS THE POSITION THAT THE METHOD OF FUNDING THE INSTANT CONTRACT DID NOT VIOLATE THE APPROPRIATION STATUTES.

PURSUANT TO OUR REVIEW OF THE CONTRACT, YOUR BRIEFS AND THE INFORMATION FURNISHED BY THE DEPARTMENT OF THE AIR FORCE, WE CONCLUDE THAT THE AIR FORCE'S FUNDING OF THE INSTANT CONTRACT WAS CONSISTENT WITH ASPR AND DID NOT VIOLATE THE CITED PROVISIONS OF THE APPROPRIATION STATUTES.

THE OTHER MAJOR ASPECT OF THIS CASE CONCERNS FEC'S CONTENTION THAT THE QUANTITIES CALLED FOR UNDER ORDERS NUMBERED 9 AND 10 EXCEED THE QUANTITY GUIDELINES SET FORTH IN OUR DECISION AT 41 COMP. GEN. 682, 686-689, AND THE MAXIMUM QUANTITY LIMITATION SET FORTH IN SECTION 1 1504 (A) OF ASPR. FEC ALLEGES THAT THERE IS NO REAL DISTINCTION BETWEEN THE OPTION TYPE CONTRACT SET FORTH IN PART 15 OF SECTION I OF ASPR AND THE INDEFINITE QUANTITIES CONTRACT SET FORTH IN SECTION 3 409.3 OF ASPR. A QUESTION HAS ALSO BEEN PRESENTED WHETHER THE INSTANT PROCUREMENT IS IN VIOLATION OF THE INTENT OF THE ADVERTISING STATUTES AT SECTION 3709, OF THE REVISED STATUTES, 41 U.S.C. 5.

IN 41 COMP. GEN. 682 WE CONSIDERED A CONTRACT WITH A "MINIMUM" QUANTITY AND A "MAXIMUM" FOUR TIMES GREATER WITH A RIGHT IN THE GOVERNMENT TO ORDER, FOR A PERIOD OF ONE YEAR AFTER AWARD, ADDITIONAL QUANTITIES UP TO THE STATED MAXIMUM AT THE UNIT PRICE FOR THE MINIMUM. IN 41 COMP. GEN. 682, 687, WE COMMENTED ON PARAGRAPH 1-350.1 OF THE NAVY PROCUREMENT DIRECTIVES WHICH STATED AS FOLLOWS IN SUBPARAGRAPH (B): "* * * CONSISTENT WITH THE OBTAINING OF REASONABLE PRICES, WIDE USE SHOULD BE MADE OF - INDEFINITE (SIC) QUANTITY- OR -OPEN END- CONTRACTS OR OTHER METHODS FOR OBTAINING INITIAL QUANTITIES OR REORDERS, WITHOUT OBLIGATING FUNDS FOR THE QUANTITIES FOR WHICH TOTAL REQUIREMENTS MAY BE KNOWN, OR FOR WHICH FUNDS MAY BE AVAILABLE. * * *.' OUR COMMENT ON THE ABOVE QUOTED DIRECTIVE WAS "AN OPTION OF THE CHARACTER HERE INVOLVED IS NOT, IN OUR OPINION, IN THE BEST INTEREST OF THE GOVERNMENT IF THE KNOWN REQUIREMENTS EXCEED THE MINIMUM QUANTITIES ON WHICH BIDS ARE SOLICITED.' WE SUGGESTED AS A PRACTICAL MATTER THAT UNLESS THE CASE IS EXCEPTIONAL, THE ADDITIONAL QUANTITIES TO BE PROCURED THROUGH THE EXERCISE OF AN OPTION SHOULD BE LIMITED TO 25 PERCENT OF THE BASIC QUANTITY AND 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.

SUBSEQUENT TO OUR DECISION IN 41 COMP. GEN. 682, THE FOLLOWING PROVISION WAS INCLUDED IN ASPR SEC. 1-1504 (A):

"WHEN A SOLICITATION CONTAINS AN OPTION WHICH REQUIRES THE OFFERING OF ADDITIONAL QUANTITIES OF SUPPLIES AT UNIT PRICES NO HIGHER THAN THOSE FOR THE INITIAL QUANTITIES, IT SHALL PROVIDE THAT THE OPTION QUANTITIES SHALL NOT EXCEED 50 PERCENT OF THE INITIAL QUANTITY.'

IT IS AIR FORCE'S POSITION THAT THE QUANTITY LIMITATION WOULD NOT BE APPLICABLE SINCE THE CONTRACT IN THE INSTANT PROCUREMENT IS OF THE INDEFINITE QUANTITY TYPE. OPTION TYPE CONTRACTS ARE COVERED BY PART I OF SECTION 15 OF ASPR. ASPR 3-409.3 PROVIDES FOR THE INDEFINITE QUANTITIES TYPE CONTRACT AND THE AIR FORCE CONTENDS THAT THE INSTANT CONTRACT FULLY MET THE REQUIREMENTS OF THIS PROVISION. THE ASPR SECTION RELATING TO THE INDEFINITE QUANTITIES TYPE CONTRACT DOES NOT CONTAIN A QUANTITY LIMITATION AS DOES THE ASPR SECTION RELATING TO THE OPTION TYPE CONTRACT. IN OTHER WORDS IT IS THE AIR FORCE'S POSITION THAT THE CONTRACT WE CONSIDERED IN OUR DECISION AT 41 COMP. GEN. 682 AND THE OPTION TYPE CONTRACT SPECIFIED IN ASPR ARE DISTINGUISHABLE FROM THE TYPE OF CONTRACT CONTEMPLATED BY SECTION 3-409.3 OF ASPR. BY LETTER OF DECEMBER 28, 1962, THE ASSISTANT SECRETARY OF DEFENSE, INSTALLATION AND LOGISTICS, COMMENTED TO OUR OFFICE ON OUR DECISION AT 41 COMP. GEN. 682 AS FOLLOWS: "* * * HOWEVER, I BELIEVE IT IS NECESSARY TO DISTINGUISH BETWEEN (I) THE USE OF OPTIONS DISCUSSED IN SECTION I, PART 15 OF ASPR AS RELATED TO SUPPLIES OR SERVICES NOT READILY AVAILABLE ON THE OPEN MARKET, AND (II) THE USE OF INDEFINITE DELIVERY TYPE CONTRACTS DISCUSSED IN ASPR 3-409 AS RELATED TO COMMERCIAL ITEMS. THERE ARE MANY COMMERCIAL TYPES OF SERVICES AND SUPPLIES FOR WHICH IT IS NECESSARY THAT A READY SOURCE BE AVAILABLE ON SHORT NOTICE TO FILL INDIVIDUAL ORDERS FOR SUPPLIES OR SERVICES, OR TO FURNISH SUPPLIES OR SERVICES ON A CONTINUING BASIS OVER EXTENDED PERIODS. IN MANY OF THESE CASES, REQUIREMENTS MAY FLUCTUATE WIDELY AND CANNOT BE PREDICTED WITH ANY DEGREE OF CERTAINTY. EXAMPLES OF SOME OF THESE ARE PURCHASES OF PETROLEUM, WAREHOUSING SERVICES, AND PURCHASE AND REFRIGERATION OF SOLID AND LIQUID FOOD SUPPLIES, AMONG MANY OTHERS. IN THESE TYPES OF SITUATIONS, MINIMUM AND MAXIMUM QUANTITIES OR SERVICES GENERALLY ARE PRESCRIBED WITH THE MINIMUM USUALLY REPRESENTING THE KNOWN ESTABLISHED NEED OR INITIAL ORDER. COMPETING CONTRACTORS ARE INFORMED IN THESE CASES OF THE GOVERNMENT'S EXPECTATIONS AS TO VOLUME, PARTICULARLY WHERE REQUIREMENTS TYPE CONTRACTS ARE INVOLVED. IF THE MAJOR PORTION OF POTENTIAL REQUIREMENTS WERE CONTRACTED FOR INITIALLY, WE MIGHT FIND OURSELVES IMPROPERLY OVER-OBLIGATING FUNDS IN THE ABSENCE OF FIRM ESTABLISHED REQUIREMENTS, OR INVOLVED IN NUMEROUS PARTIAL TERMINATION ACTIONS DUE TO MISCALCULATED REQUIREMENTS BASED PURELY ON ESTIMATES SUBJECT TO WIDE VARIATION. IN THESE TYPES OF PROCUREMENTS I DO NOT FEEL WE CAN PLACE ANY PERCENTAGE LIMITATION ON QUANTITIES TO BE ORDERED IN THE FUTURE WHERE THE PERCENTAGE FIGURE IS DERIVED BY COMPARING POTENTIAL TOTAL ORDERS WITH THE MINIMUM OR INITIAL ORDER. IN SOME INSTANCES WE DO GREATLY LIMIT THE TIME, AS FOR EXAMPLE, IN THE SUPPLYING OF MILK TO NAVY SHIPS AT CERTAIN PORTS WHERE COMPETITION IS OBTAINED FROM LOCAL SOURCES ON A QUARTERLY BASIS. WHERE PRICES ARE RELATIVELY STABLE FOR EXTENDED PERIODS, HOWEVER, SUCH AS IN THE CASE OF MOVEMENT AND STORAGE OF HOUSEHOLD GOODS, RE-SOLICITATIONS QUARTERLY WOULD NOT BENEFIT THE GOVERNMENT.'

WE TOOK NO EXCEPTION TO THE LETTER OF DECEMBER 28, 1962, FROM THE ASSISTANT SECRETARY OF DEFENSE, A COPY OF WHICH HAS BEEN MADE AVAILABLE TO YOU. WE UNDERSTAND THAT THIS LETTER OF DECEMBER 28, 1962, WAS REVIEWED BY THE ASPR COMMITTEE WHEN IT CONSIDERED THE QUANTITY LIMITATION WHICH WAS PUT INTO ASPR 1-1504 (A).

WHILE WE AGREE THAT IN ORDINARY USAGE THERE IS NO REAL DISTINCTION BETWEEN A CONTRACT INCLUDING AN OPTION FOR AN ADDITIONAL QUANTITY AND AN INDEFINITE QUANTITY CONTRACT PERMITTING THE PURCHASER TO ORDER QUANTITIES BEYOND THE MINIMUM REQUIRED--AND WE USED THE TERMS INTERCHANGEABLY IN 41 COMP. GEN. 682--IT IS APPARENT THAT THE TWO EXPRESSIONS ARE EMPLOYED IN ASPR AS PARTICULAR TERMS OF ART TO DISTINGUISH BETWEEN TWO DIFFERENT KINDS OF OPTION CONTRACTS. THE FIRST, DESIGNATED AS AN OPTION CONTRACT, IS DESCRIBED IN ASPR 1-1501 ET SEQ. THIS IS INTENDED FOR USE IN THE CASE OF EITHER ADVERTISED OR NEGOTIATED PROCUREMENTS OF ITEMS NOT READILY AVAILABLE ON THE OPEN MARKET, WHERE REQUIREMENTS FOR THE QUANTITIES BEYOND THE MINIMUM ARE FORESEEABLE (WHICH WE TAKE TO MEAN POSSIBLE OR LIKELY BUT NOT FIRM OR DEFINITE) AND WHERE LATER ORDERS MAY REPRESENT LESS THAN MINIMUM ECONOMIC PRODUCTION QUANTITIES WHICH, CONSIDERING START UP COSTS, PRODUCTION LEAD TIMES, ETC., COULD PRECLUDE ADEQUATE COMPETITION. THIS IS THE KIND OF SITUATION WE CONSIDERED IN 41 COMP. GEN. 682 AND PURSUANT TO THAT DECISION, ASPR 1-1504 (A) LIMITS OPTIONS IN TERMS OF BOTH TIME AND QUANTITIES.

ON THE OTHER HAND, THE INDEFINITE QUANTITY CONTRACTS DESCRIBED AT ASPR 3- 409.3 ARE FOR USE ONLY IN NEGOTIATED PROCUREMENTS OF COMMERCIAL OR MODIFIED COMMERCIAL ITEMS. THE REGULATION CONTAINS NO LIMITATIONS ON TIME OR QUANTITY UNDER THIS TYPE OF OPTION AND IT IS SIGNIFICANT THAT WE HAVE NOT OBJECTED TO THE ABSENCE OF SUCH LIMITATIONS NOTWITHSTANDING THAT IN THE LETTER OF DECEMBER 28, 1962, FROM THE ASSISTANT SECRETARY OF DEFENSE, THE DISTINCTION WAS SPECIFICALLY POINTED OUT.

A CLOSE READING OF 41 COMP. GEN. 682 MAKES IT CLEAR THAT THE PROCUREMENT, TO BE AWARDED PURSUANT TO FORMAL ADVERTISING, INVOLVED FIRM OBLIGATIONS FOR RELATIVELY LIMITED QUANTITIES OF TWO ITEMS, SELLING FOR ROUGHLY $3.00 AND $1.50 RESPECTIVELY PER UNIT, WHICH WERE NOT READILY AVAILABLE ON THE OPEN MARKET. WE THERE CRITICIZED THE USE OF SUCH PROCEDURE WHERE THE MINIMUM QUANTITY WAS LESS THAN THE PROCURING AGENCY'S KNOWN REQUIREMENTS AT TIME OF AWARD. IN THAT KIND OF SITUATION IT IS NOT UNLIKELY THAT AN INCREASE IN THE MINIMUM OR A LIMITATION ON THE TIME IN WHICH TO EXERCISE THE OPTION WOULD RESULT IN BIDS MORE FAVORABLE TO THE GOVERNMENT.

BY CONTRAST, THE NEGOTIATED CONTRACT HERE AT ISSUE INVOLVES A MODIFIED COMMERCIAL ITEM AT A COST FOR THE MINIMUM QUANTITY ALONE OF ALMOST $3,000,000. UNDER THE CIRCUMSTANCES WE DO NOT THINK THAT SUCH FACTORS AS START UP COSTS AND MINIMUM ECONOMIC PRODUCTION RUNS WOULD BE FACTORS IN PRICING THE CONTRACT AS WOULD BE THE CASE WITH RESPECT TO THE PROCUREMENT DESCRIBED IN 41 COMP. GEN. 682. THEREFORE, REGARDLESS OF THE POSSIBLE CONFUSION INDUCED BY THE SELECTION OF TERMINOLOGY, WE BELIEVE THERE IS A LEGITIMATE BASIS FOR DISTINGUISHING THE KIND OF PROCUREMENT DESCRIBED AT ASPR 1-15 FROM THAT DEPICTED IN ASPR 3-409.3. WE CONCLUDE THAT IN THE CIRCUMSTANCES THE PROVISIONS OF THE CONTRACT WERE NOT INCONSISTENT WITH ASPR OR OUR DECISIONS.

YOU ALSO CONTEND THAT THE INSTANT CONTRACT VIOLATED THE INTENT OF SECTION 3709 OF THE REVISED STATUTES, 41 U.S.C.5, BECAUSE PURCHASE ORDERS 9 AND 10 WERE ISSUED WITHOUT OBTAINING COMPETITION. IN THIS CONNECTION IT SHOULD BE NOTED THAT SECTION 3709 IS AN ADVERTISING STATUTE WHILE THE INSTANT PROCUREMENT WAS NEGOTIATED UNDER 10 U.S.C. 2304 (A) (13). HOWEVER, WE ARE COGNIZANT OF THE FACT THAT COMPETITION TO THE EXTENT FEASIBLE IS REQUIRED IN NEGOTIATION BY 10 U.S.C. 2304 (G).

WE HAVE NOT FOUND ANY CASES WHICH WOULD INDICATE THAT SECTION 3709 CONTEMPLATES ANY SPECIFIC TIME BETWEEN ADVERTISING AND AWARD OTHER THAN THAT SUCH TIME INTERVAL SHOULD BE REASONABLE. IN B-116427, SEPTEMBER 27, 1955, IT WAS PROPOSED THAT BIDS WOULD BE SOLICITED ON A THREE-YEAR BASIS FOR CERTAIN TRANSPORTATION SERVICES. WE CONSIDERED WHETHER THE INTENT OF SECTION 3709 WOULD BE SERVED BY RENEWAL WITHOUT ADVERTISING. IN THAT SITUATION IT WAS OUR UNDERSTANDING THAT THE CONTRACTOR WAS REQUIRED TO HOLD AN INTERSTATE COMMERCE COMMISSION CERTIFICATE AS A CONTRACT CARRIER WHICH MIGHT BE REFUSED TO ANOTHER CARRIER. WE HELD THAT IF AT THE TIME FOR RENEWAL OF THE CONTRACT NO OTHER CARRIER COULD OBTAIN A CERTIFICATE, ADVERTISING WOULD SERVE NO USEFUL PURPOSE; HENCE, IT WOULD NOT BE REQUIRED (CITING 28 COMP. GEN. 470). WE ALSO OBSERVED THAT IF IT APPEARED THAT COMPETITION COULD BE SECURED, RENEWAL OF THE EXISTING CONTRACT WOULD NOT BE JUSTIFIED IN THE ABSENCE OF A SHOWING THAT LOWER PRICES COULD NOT OTHERWISE BE OBTAINED.

WE THINK IT IS SIGNIFICANT THAT IN THIS CASE OTHER POTENTIAL SUPPLIERS OF THE TYPE OF GENERATOR SETS DID NOT COMPLAIN ABOUT NOT BEING GIVEN AN OPPORTUNITY TO COMPETE FOR THE PROCUREMENTS UNDER PURCHASE ORDERS 9 AND 10. IN VIEW OF THE INFORMATION FURNISHED TO OUR OFFICE BY THE AIR FORCE REGARDING YOUR PRICES FOR THE MB-TEEN GENERATOR SETS THERE APPARENTLY WOULD BE NO POSSIBILITY OF ANOTHER POTENTIAL SUPPLIER FURNISHING THESE GENERATORS AT A LOWER PRICE. THEREFORE, THERE SEEMS TO BE NO QUESTION THAT LOWER PRICES FOR THE SPECIFIED GENERATORS COULD NOT HAVE BEEN OBTAINED EVEN IF THERE HAD BEEN COMPETITION FOR THE REQUIREMENTS SATISFIED UNDER PURCHASE ORDERS 9 AND 10.

ACCORDINGLY, WE CONCLUDE THAT THE ISSUANCE OF PURCHASE ORDERS 9 AND 10 UNDER THE INSTANT CONTRACT RATHER THAN FORMALLY ADVERTISING OR OTHERWISE OBTAINING COMPETITION DID NOT CONSTITUTE A VIOLATION OF EITHER SECTION 3709 OF THE REVISED STATUTES, 41 U.S.C. 5, OR 10 U.S.C. 2304 (G).