B-204733, NOV 17, 1983, OFFICE OF GENERAL COUNSEL

B-204733, NOV 17, 1983, OFFICE OF GENERAL COUNSEL

PRECIS-UNAVAILABLE

THE HONORABLE DAVID STOCKMAN DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET:

WE REFER TO THE REQUEST FOR COMMENTS ON YOUR PROPOSED AMENDMENTS TO OMB CIRCULAR NO. A-125, THE IMPLEMENTING REGULATIONS FOR THE PROMPT PAYMENT ACT, 31 U.S.C.A. SECS. 1801-1808 (1983). THE PROPOSAL, WHICH WAS PUBLISHED IN THE FEDERAL REGISTER ON SEPTEMBER 8, 1983, IS DESIGNED TO PROVIDE ADDITIONAL GUIDANCE TO FEDERAL AGENCIES ON THE PROPER TIMING OF PAYMENTS MADE TO CONTRACTORS, PARTICULARLY WHERE PROGRESS PAYMENTS OR ADVANCE FINANCING ARE PROVIDED BY THE GOVERNMENT.

THE OBJECTIVE OF THE CIRCULAR, AS STATED IN THE TRANSMITTAL LETTER AND IN THE PREAMBLE, IS TO "ASSURE RECOGNITION OF THE TIME VALUE OF MONEY IN THE GOVERNMENT'S ACQUISITION/CONTRACTING PROCESS." IT IS ALSO INTENDED TO ASSURE THAT WHEN THE GOVERNMENT CONFERS A BENEFIT ON A SUPPLIER BY MAKING A PAYMENT BEFORE THE CONTRACT IS COMPLETED, THE GOVERNMENT SHOULD RECEIVE A COMMENSURATE BENEFIT, SUCH AS LOWER PRICES, ACCELERATED DELIVERY SCHEDULES, OR OTHER CONSIDERATIONS.

IN WHAT AMOUNTS TO A MAJOR CHANGE IN THE FINANCING OF MANY LARGE GOVERNMENT PROCUREMENTS, AGENCIES COULD NO LONGER ROUTINELY AGREE TO MAKE PROGRESS PAYMENTS UNDER A BROAD INTERPRETATION OF WHAT IS IN THE BEST INTERESTS OF THE GOVERNMENT. INSTEAD, SECTION 3A(4) OF THE CIRCULAR STATES:

"AGENCIES SHALL INCLUDE ... THE ANALYSIS OF HOW THE CONTRACTING OFFICER DETERMINED THAT THE VALUE OF THE CONSIDERATION WAS AT LEAST EQUAL TO THE INCREASED COST TO THE GOVERNMENT OF THE EARLIER DISBURSEMENT OF FUNDS."

THERE IS NO SPECIFIC GUIDANCE PROVIDED TO AGENCY CONTRACTING OFFICERS ON HOW TO PERFORM THE REQUIRED ANALYSIS, AND NO PROVISION MADE FOR AN INDEPENDENT ASSESSMENT OF THAT ANALYSIS. THAT LACK COULD BE REMEDIED BY PROMULGATION BY THE OFFICE OF FEDERAL PROCUREMENT POLICY OF SPECIFIC CRITERIA FOR THE BENEFIT ANALYSIS WHICH WOULD PROVIDE GUIDANCE FOR CONTRACTING AGENCIES.

WE HAVE THE FOLLOWING SPECIFIC COMMENTS:

1. PARAGRAPH 3A(2) PROVIDES, IN PERTINENT PART:

"WHEN IT IS IN THE GOVERNMENT'S INTEREST, CONTRACT FINANCING WILL BE OFFERED ON AN OPTIONAL BASIS IN INVITATION FOR BIDS AND, EXCEPT FOR OFFERS FROM SMALL BUSINESSES, THE TIME VALUE OF MONEY WILL BE USED AS A CONTRACT AWARD FACTOR."

WE BELIEVE THAT THE PHRASE UNDERLINED ABOVE AMOUNTS TO A PREFERENCE FOR ONE CLASS OF BIDDERS - SMALL BUSINESS - AND IS IMPERMISSIBLE UNDER THE PROCUREMENT STATUTES AND THEIR IMPLEMENTING REGULATIONS.

SECTION 2304(A) OF TITLE 10 OF THE U.S.C. PROVIDES, WITH RESPECT TO PROCUREMENTS OF THE ARMED SERVICES AND NASA:

"PURCHASES OF AND CONTRACTS FOR PROPERTY OR SERVICES ... SHALL BE MADE BY FORMAL ADVERTISING, AND SHALL BE AWARDED ON A COMPETITIVE BID BASIS TO THE LOWEST RESPONSIBLE BIDDER ..."

THERE IS A SIMILAR PROVISION IN THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, AS AMENDED, 41 U.S.C. SEC. 253(B), APPLICABLE TO MOST CIVILIAN AGENCIES.

IT STATES:

"AWARD SHALL BE MADE ... TO THAT RESPONSIBLE BIDDER WHOSE BID, CONFORMING TO THE INVITATION FOR BIDS, WILL BE MOST ADVANTAGEOUS TO THE GOVERNMENT, PRICE AND OTHER FACTORS CONSIDERED."

THE GENERAL ACCOUNTING OFFICE HAS HAD A NUMBER OF OCCASIONS TO CONSIDER THE IMPACT OF THE UNDERLINED PHRASE, ABOVE, IN THE LIGHT OF SUBSEQUENT ENACTMENTS REQUIRING THAT A FAIR PROPORTION OF THE TOTAL PURCHASES OF SUPPLIES, EQUIPMENT, AND SERVICES BE PLACED WITH SMALL BUSINESS CONCERNS. WE MADE IT CLEAR THAT THE CONGRESS' ANNOUNCED POLICY TO MAKE SURE THAT SMALL BUSINESSES HAVE AN OPPORTUNITY TO COMPETE FOR GOVERNMENT CONTRACTS DOES NOT MEAN THAT THE PRINCIPLE OF MAKING AWARDS TO THE LOWEST RESPONSIBLE BIDDER IS TO BE IGNORED, OR THAT SMALL BUSINESSES ARE TO BE GIVEN FAVORED TREATMENT IN EVALUATING THEIR BIDS.

MOREOVER, WE SAID:

"WHILE THE TERM, 'OTHER FACTORS' AS THUS USED IS NOT EXPRESSLY DEFINED, IT SEEMS CLEAR THAT SUCH TERM WAS NOT INTENDED TO BE GIVEN OTHER THAN ITS CUSTOMARY OR USUAL MEANING, I.E., IT COMPREHENDS SUCH FACTORS AS AN EVALUATION OF THE BIDDER'S EXPERIENCE, REPUTATION, FINANCIAL STABILITY, AND ABILITY TO PERFORM THE CONTRACT."

28 COMP.GEN. 662 (1949). SEE ALSO 40 COMP.GEN. 489 (1961) WHICH MAKES THE SAME POINT WITH REGARD TO LABOR SURPLUS AREA SET ASIDES.

WE RECOGNIZE THAT UNDER THE SMALL BUSINESS ACT, AS AMENDED, EXPRESS LEGISLATIVE SANCTION HAS BEEN GIVEN TO PROVIDING A PREFERENCE FOR SMALL BUSINESSES AND LABOR SURPLUS AREA FIRMS BY RESTRICTING COMPETITION TO THESE BIDDERS. THIS, HOWEVER, WAS TO BE DONE BY MEANS OF SET-ASIDES. WHERE COMPETITION REMAINS UNRESTRICTED, THE ACT DOES NOT PERMIT THE EXERCISE OF A PREFERENCE BY APPLYING DIFFERENTIAL AWARD FACTORS BASED ON THE SIZE OF THE BIDDER OR HIS GEOGRAPHIC LOCATION. 40 COMP.GEN. 489, 490 (1961).

WE STRONGLY SUGGEST THAT IF THE CIRCULAR RETAINS THE REQUIREMENT THAT THE TIME VALUE OF THE GOVERNMENT'S MONEY IS TO BE USED AS A CONTRACT AWARD FACTOR, THE EXCEPTION FOR OFFERS OF SMALL BUSINESSES BE DROPPED.

2. PARAGRAPH 3C INCREASES THE THRESHOLD LEVEL FOR PERMITTING PROGRESS PAYMENTS FROM $1 MILLION TO $10 MILLION. WHILE WE RECOGNIZE THAT INFLATION OVER THE LAST 20 YEARS HAS PROBABLY MADE AN ADJUSTMENT IN THRESHOLD LEVELS DESIRABLE, WE ARE NOT PERSUADED THAT A TENFOLD INCREASE IS NECESSARY AND SUGGEST THAT ANY SAVINGS MAY BE MORE THAN OFFSET BY HIGHER PRICES FOR PROCUREMENTS UNDER THE THRESHOLD.

3. PARAGRAPH 3F(4), WHICH ESTABLISHES THE DATE OF THE PAYMENT REQUEST AS THE INVOICE DATE FOR PURPOSES OF DETERMINING WHEN A PAYMENT IS DUE IS UNOBJECTIONABLE IN SUBSTANCE. HOWEVER, FROM ITS CONTEXT AND FROM DISCUSSIONS WITH A REPRESENTATIVE OF YOUR OFFICE, THE PARAGRAPH IS APPARENTLY INTENDED TO COVER ALL FORMS OF CONTRACT FINANCING, INCLUDING PROGRESS PAYMENTS. WE DO NOT BELIEVE THAT THE PARAGRAPH, AS WRITTEN, HAS ANY APPLICABILITY TO PROGRESS PAYMENTS BECAUSE IT QUALIFIES IT BY SAYING, "WHERE PAYMENTS ARE MADE BEFORE RECEIPT OF GOODS OR SERVICES, AND TITLE DOES NOT PASS ...." THE USUAL CASE, STANDARD PROGRESS PAYMENT CLAUSES - SEE FOR EXAMPLE, DEFENSE ACQUISITION REGULATION 7 104.35 - VESTS TITLE IN THE GOVERNMENT, EVEN THOUGH THE CONTRACTOR RETAINS POSSESSION OF THE CONTRACT PROPERTY IN ORDER TO UTILIZE IT IN COMPLETING HIS CONTRACT OBLIGATIONS.

WE HOPE THESE COMMENTS WILL BE HELPFUL AND APPRECIATE YOUR SOLICITATION OF OUR VIEWS. OF COURSE, WE WILL BE HAPPY TO OFFER OUR ASSISTANCE ON ANY FUTURE CONSIDERATION OF THIS PROBLEM.