B-170421, MAR 30, 1971, 50 COMP GEN 694

B-170421: Mar 30, 1971

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POST OFFICE DEPARTMENT - STAR ROUTE CONTRACTS - READJUSTMENT COMPENSATION - METHOD OF COMPUTATION THE UNILATERAL CHANGE BY THE POST OFFICE DEPARTMENT FROM A SO-CALLED "OPERATING RATIO METHOD" TO A NEW FORMULA TO DETERMINE THE READJUSTMENT OF COMPENSATION UNDER STAR ROUTE CONTRACTS PURSUANT TO 39 U.S.C. 6423 WHEREBY INCREASES IN PROFIT ARE GOVERNED EXCLUSIVELY BY ADDITIONAL CAPITAL EXPENDITURES INCURRED THROUGH PURCHASE OR MAINTENANCE OF CAPITAL GOODS IS NOT PROHIBITED BY THE STATUTE. THE DENIAL OF AN ADJUSTMENT IS NOT CONSIDERED A DISPUTE CONCERNING A QUESTION OF FACT WITHIN THE MEANING OF THE "DISPUTES" CLAUSE OF THE CONTRACT. THE POSTMASTER GENERAL HAS THE DISCRETIONARY AUTHORITY TO DETERMINE THAT THE OPERATING RATIO METHOD CONVERTS A STAR ROUTE CONTRACT INTO AN UNDESIRABLE TYPE OF COST-PLUS CONTRACT WHEREBY PROFIT IS ALLOWED AS A PERCENTAGE COST.

B-170421, MAR 30, 1971, 50 COMP GEN 694

POST OFFICE DEPARTMENT - STAR ROUTE CONTRACTS - READJUSTMENT COMPENSATION - METHOD OF COMPUTATION THE UNILATERAL CHANGE BY THE POST OFFICE DEPARTMENT FROM A SO-CALLED "OPERATING RATIO METHOD" TO A NEW FORMULA TO DETERMINE THE READJUSTMENT OF COMPENSATION UNDER STAR ROUTE CONTRACTS PURSUANT TO 39 U.S.C. 6423 WHEREBY INCREASES IN PROFIT ARE GOVERNED EXCLUSIVELY BY ADDITIONAL CAPITAL EXPENDITURES INCURRED THROUGH PURCHASE OR MAINTENANCE OF CAPITAL GOODS IS NOT PROHIBITED BY THE STATUTE, AND THE DENIAL OF AN ADJUSTMENT IS NOT CONSIDERED A DISPUTE CONCERNING A QUESTION OF FACT WITHIN THE MEANING OF THE "DISPUTES" CLAUSE OF THE CONTRACT. ALTHOUGH SECTION 6423 GIVES A STAR ROUTE CONTRACTOR THE RIGHT TO ASK FOR A READJUSTMENT OF COMPENSATION AND TO EXPECT A REASONABLE RETURN, THE POSTMASTER GENERAL HAS THE DISCRETIONARY AUTHORITY TO DETERMINE THAT THE OPERATING RATIO METHOD CONVERTS A STAR ROUTE CONTRACT INTO AN UNDESIRABLE TYPE OF COST-PLUS CONTRACT WHEREBY PROFIT IS ALLOWED AS A PERCENTAGE COST.

TO THE PEOPLES CARTAGE, INCORPORATED, MARCH 30, 1971:

REFERENCE IS MADE TO YOUR LETTERS TO THIS OFFICE DATED NOVEMBER 5, NOVEMBER 20, 1970, AND JANUARY 19, 1971, AND ATTACHMENTS TO THESE LETTERS, IN WHICH YOU CLAIM THAT THE POST OFFICE DEPARTMENT ACTED IMPROPERLY IN CHANGING THE METHOD OF COMPUTING READJUSTMENTS IN CONTRACT PRICE UNDER THE PROVISIONS OF 39 U.S.C. 6423, WHICH STATE AS FOLLOWS:

(A) THE POSTMASTER GENERAL WITH THE CONSENT OF THE CONTRACTOR MAY READJUST THE COMPENSATION UNDER A STAR ROUTE *** CONTRACT FOR INCREASED OR DECREASED COSTS OCCASIONED BY CHANGED CONDITIONS OCCURRING DURING THE CONTRACT TERM WHICH COULD NOT REASONABLY HAVE BEEN ANTICIPATED AT THE TIME

(1) THE ORIGINAL BID WAS MADE; OR

(2) THE BOND FOR A RENEWED CONTRACT WAS EXECUTED. ***

THE RECORD SHOWS THAT IN JUNE 1967 SEVEN OF YOUR STAR ROUTE CONTRACTS WERE RENEWED FOR A PERIOD OF 4 YEARS EACH. SECTION 9(B) OF THE GENERAL PROVISIONS IN EACH OF THOSE CONTRACTS PROVIDES IN SUBSTANCE FOR READJUSTMENT OF COMPENSATION UNDER THE CONTRACT AT THE REQUEST OF THE CONTRACTOR, AS PROVIDED IN 39 U.S.C. 6423. SECTION 9(B) FURTHER PROVIDES THAT A DENIAL OF SUCH READJUSTMENT SHALL NOT BE CONSIDERED A DISPUTE CONCERNING A QUESTION OF FACT WITHIN THE MEANING OF THE "DISPUTES" CLAUSE OF THE CONTRACT. ALSO, SECTION 9(C) OF THE GENERAL PROVISIONS PROVIDES FOR ADJUSTMENT OF COMPENSATION TO REFLECT UNION AGREEMENTS OR STATUTES OR REGULATIONS WHICH BECOME EFFECTIVE DURING THE CONTRACT TERM, AND SECTION 11 PROVIDES FOR RELEASE OF THE CONTRACTOR FROM THE CONTRACT "UNDER CERTAIN CIRCUMSTANCES INVOLVING UNDUE HARDSHIP TO THE CONTRACTOR."

IT APPEARS THAT IN APRIL 1969 YOU FILED APPLICATION FOR INCREASED COMPENSATION UNDER SECTION 9(B) AND 39 U.S.C. 6423. YOU REPORT THAT IN THE PAST IT HAD BEEN THE PRACTICE TO ALLOW A PROFIT BASED ON APPROXIMATELY THE SAME RATIO AS EXISTED WHEN THE CONTRACT WAS BID OR RENEWED; BUT THAT THIS TIME YOU WERE NOTIFIED BY THE POST OFFICE DEPARTMENT (IN LATE 1969) THAT THE ADJUSTMENT WOULD BE BASED ON A NEW FORMULA WHEREBY INCREASES IN PROFIT ARE GOVERNED EXCLUSIVELY BY ADDITIONAL CAPITAL EXPENDITURES INCURRED THROUGH PURCHASE OR MAINTENANCE OF CAPITAL GOODS, RATHER THAN THE SO-CALLED "OPERATING RATIO METHOD." AS A RESULT APPROXIMATELY $11,900 OF THE $51,160 PER ANNUM INCREASE WHICH YOU REQUESTED WAS DISALLOWED.

YOU THEN FILED AN APPEAL WITH THE POST OFFICE DEPARTMENT (POD) BOARD OF CONTRACT APPEALS. ON AUGUST 14, 1970, THE APPEAL WAS DISMISSED WITHOUT PREJUDICE (POD BCA NO. 441) BECAUSE OF THE SPECIFIC LANGUAGE IN SECTION 9(B) OF THE GENERAL PROVISIONS WHICH EXCLUDES APPLICATION OF THE DISPUTES PROCEDURE TO SECTION 9(B) DENIALS. YOU SUBSEQUENTLY FILED AN APPEAL WITH OUR OFFICE, AS SUGGESTED BY THE BOARD OF CONTRACT APPEALS.

AS STATED IN YOUR APPEAL TO THE BOARD, YOU BELIEVE THAT THE "OPERATING RATIO METHOD" IS THE PROPER WAY TO DETERMINE THE COMPENSATION ADJUSTMENT FOR THE FOLLOWING REASONS:

A. IT IS COMMON PRACTICE IN THE MOTOR CARRIER INDUSTRY TO DETERMINE COSTS AND RATES APPLICABLE, USING THE OPERATING RATIO PRINCIPLE.

B. THE INTERSTATE COMMERCE COMMISSION SPECIFICALLY REFERS TO THE OPERATING RATIO IN DEALING WITH RATES AND REPORTS OF CARRIERS UNDER THEIR JURISDICTION.

C. IT IS MY UNDERSTANDING THAT P.O.D. "REGIONAL INSTRUCTIONS" ON PAY ADJUSTMENTS DATED OCT. 3, 1967. FILING NO. 521-1 TAKES INTO CONSIDERATION ON PAGE 25 THE ENTIRE QUESTION OF THE OPERATING RATIO, SPECIFICALLY REFERRING TO COMMON CARRIER STATISTICS. IF THERE HAVE BEEN ANY CHANGES TO THESE INSTRUCTIONS, OTHER THAN PREVIOUSLY MENTIONED, WE ARE UNAWARE OF THEM.

D. IN RECENT YEARS, AS THE LARGER CONTRACTORS SUCH AS PEOPLES CARTAGE BECAME PROMINENT, IT WAS REQUIRED THAT THE AMOUNT OF PROFIT BE SUBMITTED AS PART OF THE COST ESTIMATE WHEN BIDDING. THE OPERATING RATIO WAS ALWAYS USED BY OUR COMPANY WHEN SUBMITTING THIS INFORMATION. IT IS INTERESTING TO NOTE THAT MANY CHANGES HAVE TAKEN PLACE ON FORM 5478, AND THAT THESE FORMS PREVIOUSLY DID NOT EVEN HAVE AN ITEM MARKED "PROFIT" WHICH PROBABLY ACCOUNTS FOR SOME OF THE CONFUSION CONCERNING THE OPERATING RATIO.

E. THE RATIO IS A PROPER METHOD OF DETERMINING PROFIT ESPECIALLY DURING PERIODS OF INFLATION BECAUSE AS COSTS INCREASE, MORE DOLLARS IN THE FORM OF PROFIT OR RETAINED EARNINGS ARE NECESSARY TO CONDUCT YOUR BUSINESS, AND THIS CAN ONLY OCCUR IF A PROPER RATIO IS MAINTAINED, EVEN THEN, YOU NEVER MAINTAIN THE RATIO DURING PERIODS OF INFLATION; BECAUSE IN APPLYING THE RATIO IN THE MOTOR CARRIER INDUSTRY, IT IS ALWAYS APPLIED IN ARREARS.

F. SINCE WE ARE A CORPORATION, IT IS A GENERALLY ACCEPTED METHOD OF DETERMINING A RETURN ON OUR INVESTMENT. WHEN THE POST OFFICE DEPARTMENT CURTAILS SERVICE, IT HAS BEEN AND IS DONE ON A PRO RATA BASIS. PROFIT IS ALSO ON A PRO RATA BASIS, AS WE ARE NOT ALLOWED TO KEEP THE ORIGINAL DOLLAR AMOUNT OF PROFIT AS SUBMITTED WITH THE BID, A ONE SIDED INTERPRETATION OF THE LAW, AS IS THE CASE IN THE FILING OF OUR NEW APPLICATION ON STAR ROUTE 25010.

IN ADDITION, YOU CONTEND THAT SINCE THE OPERATING RATIO METHOD WAS USED WHEN YOUR CONTRACTS WERE RENEWED, THE POST OFFICE DEPARTMENT SHOULD NOT BE PERMITTED TO UNILATERALLY CHANGE THE PROCEDURE TO THE CONTRACTOR'S DETRIMENT DURING THE CONTRACT PERIOD.

THE POST OFFICE DEPARTMENT CONCEDES THAT SECTION 6423 WAS INTENDED TO GIVE A STAR ROUTE CONTRACTOR THE RIGHT TO ASK FOR READJUSTMENT AND TO EXPECT A REASONABLE RETURN FOR HIS WORK. HOWEVER, THE DEPARTMENT CONTENDS THAT THE READJUSTMENT WAS CLEARLY COMMITTED TO THE DISCRETION OF THE POSTMASTER GENERAL AND WAS TO BE PROCESSED UNDER SUCH REGULATIONS AS HE MAY PRESCRIBE (62 STAT. 477). SINCE 1948, WHEN THE LAW WAS ENACTED, A NUMBER OF DIFFERENT METHODS OF READJUSTMENT HAVE BEEN USED BY THE POSTMASTER GENERAL. IN 1964 THE POST OFFICE STARTED TO USE THE OPERATING RATIO METHOD AS AN ALTERNATE TO THE CONSUMER PRICE INDEX (CPI) BASIS PREVIOUSLY USED. FINALLY, IN 1969 THE CURRENT METHOD WAS ADOPTED. THE OPERATING RATIO METHOD APPEARS TO HAVE BEEN ABANDONED BECAUSE IT CAME TO BE VIEWED AS A MEANS OF CONVERTING THE STAR ROUTE CONTRACT INTO AN UNDESIRABLE TYPE OF COST-PLUS CONTRACT WHEREBY PROFIT WAS ALLOWED AS A PERCENTAGE OF COST.

WE AGREE THAT THE OPERATING RATIO METHOD DOES HAVE THE ASPECT OF A COST- PLUS-A-PERCENTAGE-OF-COST TYPE CONTRACT. IN ANY CASE, OUR REVIEW OF THE LEGISLATIVE HISTORY OF THE STATUTE CONFIRMS THE POST OFFICE DEPARTMENT'S INTERPRETATION OF ITS DISCRETIONARY AUTHORITY TO MAKE THESE READJUSTMENTS. IN B-78175, SEPTEMBER 16, 1948, WE REVIEWED THE HISTORY OF THE THEN NEW LEGISLATION AND WE CONCLUDED THAT THE POSTMASTER GENERAL IN HIS DISCRETION MAY ADJUST A STAR ROUTE CONTRACT SO THAT THE CONTRACTOR WILL NOT ONLY BE RELIEVED FROM ANY LOSS BUT WILL RECEIVE A REASONABLE RETURN UNDER THE CONTRACT. OUR DECISION DID NOT INDICATE, HOWEVER, THAT PROFIT SHOULD BE READJUSTED ON THE BASIS OF ANY PARTICULAR METHOD. IN 48 COMP. GEN. 719 (1969), WE HELD THAT A NEW CONTRACT WAS CREATED AS A RESULT OF A SECTION 6423 READJUSTMENT. THIS CONCLUSION WAS CONFIRMED IN B- 165493, DATED DECEMBER 29, 1970.

CONSISTENT WITH THE STATUTE AND OUR DECISIONS, WE SEE NO BASIS UPON WHICH WE COULD REQUIRE THE DEPARTMENT TO ACCEPT THE READJUSTMENT IN COMPENSATION WHICH YOU URGE. SECTION 6423 PROVIDES THAT THE READJUSTMENT MUST BE MUTUALLY AGREED UPON. THE FACT THAT A NEW METHOD OF COMPUTING THE READJUSTMENT WAS ADOPTED BY THE POST OFFICE DEPARTMENT AFTER YOUR CONTRACTS WERE RENEWED DOES NOT CHANGE THE SITUATION. AS STATED BY THE POST OFFICE DEPARTMENT IN ITS REPLY TO YOUR APPEAL, THE STATUTE DOES NOT PROVIDE FOR A METHOD OR FORMULA FOR COMPUTING READJUSTMENTS, NOR DOES THE CONTRACT. THE DEPARTMENT DOES RECOGNIZE THAT WHEN A CONTRACTOR FILES APPLICATION FOR A READJUSTMENT UNDER SECTION 6423, THE AMOUNT ACCEPTED BY THE POSTMASTER GENERAL SHOULD PERMIT A "REASONABLE RETURN" TO THE CONTRACTOR FOR HIS WORK. IN THIS REGARD, WE NOTE THE STATEMENT OF THE BOARD CONCERNING YOUR READJUSTMENTS THAT THE CONTRACTING OFFICER HAS OFFERED NEW TERMS " *** WHICH TAKE INTO ACCOUNT IN SOME WAY OPERATING RATIO AND PROFIT."

BASED ON THE RECORD BEFORE US, WE DO NOT FIND THE METHOD USED BY THE POST OFFICE DEPARTMENT IN COMPUTING SECTION 6423 ADJUSTMENTS FOR YOUR CONTRACTS TO BE CONTRARY TO LAW. YOUR REFERENCES TO OTHER METHODS USED BY THE POST OFFICE DEPARTMENT, OR BY THE INTERSTATE COMMERCE COMMISSION IN DEALING WITH RATES AND REPORTS OF CARRIERS, ARE NOT RELEVANT TO A SECTION 6423 SITUATION. ACCORDINGLY, YOUR REQUEST THAT WE DIRECT THE POSTMASTER GENERAL TO USE YOUR SUGGESTED METHOD FOR DETERMINING THE SECTION 6423 READJUSTMENTS FOR YOUR CONTRACTS IS DENIED.

IN LINE WITH THE ABOVE, YOU URGE THAT THE PROCUREMENT PROCEDURES BE REVISED TO REQUIRE DCASR TO REQUEST FROM THE PRODUCER WHOSE BID OR OFFER IS CHALLENGED A LIST OF PARTS USED IN THE END ITEM, TO VERIFY THE COST OF SUCH PARTS, AND TO CLEARLY INTERPRET THE ASPR PROVISIONS RELATING TO COMPONENTS IN TERMS OF MATERIAL COST RATHER THAN THE END ITEM PRICE. YOU FURTHER RECOMMEND THAT IN THOSE CASES WHICH INVOLVE PROTESTED AWARDS A FINAL SOURCE INSPECTION BE REQUIRED TO INSURE THAT ANY FOREIGN COMPONENTS IN THE ITEMS TO BE SHIPPED TO THE GOVERNMENT ACCOUNT FOR LESS THAN 50 PERCENT OF THE TOTAL COMPONENT COST.

WITH REFERENCE TO THE ASA PROCUREMENT UNDER RFP DAHCO7-70-R-0185, PURSUANT TO WHICH WJ WAS AWARDED CONTRACT DAHCO7-70-C-0243 FOR PREAMPLIFIER ASSEMBLIES, YOU STATE THAT THE LOCAL DCASR OFFICE (DCASR BURLINGAME, CALIFORNIA), IN RESPONSE TO A REQUEST BY ASA FOR INVESTIGATION REGARDING THE USE OF FOREIGN PARTS IN THE WJ EQUIPMENT, SIMPLY REPORTED TO ASA THAT THE REPRESENTATION BY WJ THAT THE FOREIGN PARTS USED BY WJ DID NOT COMPRISE 50 PERCENT OF THE COST OF ALL COMPONENTS WAS VALID. AS TO THE NAVY PROCUREMENT, AWARD OF WHICH IS BEING WITHHELD PENDING OUR DECISION ON YOUR PROTEST, YOU STATE THAT NRL WAS SIMILARLY ADVISED BY DCASR THAT THE PROCUREMENT ITEM, A LOW-NOISE MICROWAVE TRANSISTOR AMPLIFIER WITH INTEGRAL POWER SUPPLY, IS NOT CONSIDERED FOREIGN UNDER THE ASPR PROVISIONS. WE UNDERSTAND THAT THE ITEMS UNDER THE ASA AND NRL PROCUREMENTS ARE ESSENTIALLY THE SAME AND THEY BOTH WILL BE REFERRED TO AS AMPLIFIERS.

THE RECORDS MADE AVAILABLE TO OUR OFFICE ON BOTH OF THESE PROCUREMENTS SHOW THAT THE SOLICITATIONS SPECIFICALLY PROVIDED THAT THE CONTRACTS WOULD BE SUBJECT TO THE PROVISIONS OF THE BUY AMERICAN ACT CLAUSE SET FORTH IN ASPR 6-104.5, WHICH INCLUDES THE FOLLOWING PERTINENT LANGUAGE:

(A) IN ACQUIRING END PRODUCTS, THE BUY AMERICAN ACT (41 U.S.C. 10A D) PROVIDES THAT THE GOVERNMENT GIVE PREFERENCE TO DOMESTIC SOURCE AND PRODUCTS. FOR THE PURPOSE OF THIS CLAUSE:

(I) "COMPONENTS" MEANS THOSE ARTICLES, MATERIALS, AND SUPPLIES, WHICH ARE DIRECTLY INCORPORATED IN THE END PRODUCTS;

(II) "END PRODUCTS" MEANS THOSE ARTICLES, MATERIALS, AND SUPPLIES, WHICH ARE TO BE ACQUIRED UNDER THIS CONTRACT FOR PUBLIC USE; AND

(III)A "DOMESTIC SOURCE END PRODUCT" MEANS (A) AN UNMANUFACTURED END PRODUCT WHICH HAS BEEN MINED OR PRODUCED IN THE UNITED STATES AND (B) AN END PRODUCT MANUFACTURED IN THE UNITED STATES IF THE COST OF THE COMPONENTS THEREOF WHICH ARE MINED, PRODUCED, OR MANUFACTURED IN THE UNITED STATES OR CANADA EXCEEDS 50 PERCENT OF THE COST OF ALL ITS COMPONENTS. FOR THE PURPOSES OF THIS (A) (III) (B), COMPONENTS OF FOREIGN ORIGIN OF THE SAME TYPE OR KIND AS THE PRODUCTS REFERRED TO IN (B) (I) (II) OR (III) OF THIS CLAUSE SHALL BE TREATED AS COMPONENTS MINED, PRODUCED, OR MANUFACTURED IN THE UNITED STATES.

(THE FOREGOING REQUIREMENTS ARE ADMINISTERED IN ACCORDANCE WITH EXECUTIVE ORDER NO. 10582, DATED DECEMBER 17, 1954. SO AS TO ALLEVIATE THE IMPACT OF DEPARTMENT OF DEFENSE EXPENDITURES ON THE UNITED STATES BALANCE OF INTERNATIONAL PAYMENTS, BIDS OFFERING DOMESTIC SOURCE END PRODUCTS NORMALLY WILL BE EVALUATED AGAINST BIDS OFFERING OTHER END PRODUCTS BY ADDING A FACTOR OF FIFTY PERCENT (50%) TO THE LATTER, EXCLUSIVE OF IMPORT DUTIES. DETAILS OF THE EVALUATION PROCEDURE ARE SET FORTH IN SECTION VI OF THE ARMED SERVICES PROCUREMENT REGULATION.)

IN THE PROPOSAL SUBMITTED BY WJ IN RESPONSE TO THE ASA SOLICITATION. MADE THE ENTRY "NONE" IN THE BLOCK ENTITLED "EXCLUDED END PRODUCTS" BENEATH THE BUY AMERICAN CERTIFICATE ON PAGE 2 OF THE STANDARD FORM 33 BID FORM, THUS INDICATING THAT NO END PRODUCT WAS EXCLUDED FROM WJ'S CERTIFICATION THAT EACH END PRODUCT TO BE DELIVERED WOULD BE A DOMESTIC SOURCE END PRODUCT AS DEFINED IN THE BUY AMERICAN ACT CLAUSE. WJ'S PROPOSAL WAS ACCORDINGLY EVALUATED AS A DOMESTIC OFFER AND, SO EVALUATED, IT WAS LOW FOR THE ITEMS WHICH WERE AWARDED TO IT.

THE NRL SOLICITATION STANDARD FORM 18, PROVIDED SPACE ON ITS FACE FOR OFFERORS TO FURNISH THE CITY AND COUNTRY OF ORIGIN "IF THE MATERIAL YOU ARE OFFERING IS FOREIGN MADE." WJ'S LOW QUOTATION CARRIED NO ENTRY IN THIS SPACE, NOR WAS THERE ANY INDICATION ELSEWHERE IN THE QUOTATION AS TO THE FOREIGN PRODUCT CONTENT OF THE EQUIPMENT OFFERED BY WJ. THE QUOTATION WAS THEREFORE REGARDED AS A DOMESTIC OFFER FOR EVALUATION PURPOSES.