B-232431.2, B-232431.3, Jan 24, 1989, 89-1 CPD 64

B-232431.2,B-232431.3: Jan 24, 1989

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

Solicitation provision requiring payment for shortages in government- furnished linen inventory is unobjectionable where procedure is deemed necessary by agency to prevent extensive losses which had been experienced previously under incumbent contract. 2. Solicitation provision setting forth computation method for increasing contract price in option years to reflect prior issuance of new Department of Labor wage determinations is not unreasonable on basis that it does not fully reimburse contractor for prior years' increased cost. The purpose of the provision is to provide prospectively a basis to reflect the future impact of a new wage determination. Liquidated damages provision allowing for contract payment deductions for unsuccessful performance of maintenance and repair requirement is reasonably related to probable actual damages when the maximum deduction is based on the criticality of the services to be performed and the value of the government-furnished equipment to be maintained.

B-232431.2, B-232431.3, Jan 24, 1989, 89-1 CPD 64

PROCUREMENT - Sealed Bidding - Invitations for bids - Terms - Liquidated damages - Propriety DIGEST: 1. Solicitation provision requiring payment for shortages in government- furnished linen inventory is unobjectionable where procedure is deemed necessary by agency to prevent extensive losses which had been experienced previously under incumbent contract. 2. Solicitation provision setting forth computation method for increasing contract price in option years to reflect prior issuance of new Department of Labor wage determinations is not unreasonable on basis that it does not fully reimburse contractor for prior years' increased cost; the purpose of the provision is to provide prospectively a basis to reflect the future impact of a new wage determination, and not to provide retroactive compensation on a cost reimbursement basis, which would be inconsistent with the contemplated fixed-price contract. 3. Liquidated damages provision allowing for contract payment deductions for unsuccessful performance of maintenance and repair requirement is reasonably related to probable actual damages when the maximum deduction is based on the criticality of the services to be performed and the value of the government-furnished equipment to be maintained, not solely on labor and repair costs, and the amount of the deduction increases with the number of deficiencies found.

Crown Management Services, Inc.:

Crown Management Services, Inc., the incumbent contractor, protests that various specifications in invitation for bids (IFB) No. M00681-88 B-0019 are unfair, unreasonable, or otherwise deficient. The IFB, issued by the United States Marine Corps, solicited bids to provide laundry and dry cleaning services at Camp Pendleton, California.

We deny the protest.

The IFB solicited the services on a fixed-price basis for a 1-year period, with four 1-year options. Bidders were to provide unit and total prices for the base year and each option year to perform specific laundry and dry cleaning services based on estimated quantities. Under the terms of the solicitation, the successful contractor will be issued an inventory of certain government-furnished linen items in order to operate a direct exchange program under which customers will be provided an even exchange of clean serviceable items (i.e., sheets, pillow cases, blankets, and mattress covers) for returned items. Payment under the contract is to be made on the basis of monthly invoices, supported by a listing of all work delivered by line item, quantity, unit of issue, unit price and total price. Bid opening under the solicitation has been indefinitely postponed.

Payment For Shortages

First, Crown protests the provision in the solicitation that requires payment by the contractor for any shortages in the linen inventory; the protester argues that because long and short errors in inventory tend to equal out over the contract term, it is an unfair penalty to require payment for shortages without allowing compensation for overages. Crown maintains that since, without such reciprocity, a bidder must add into its bid price an allowance for losses, it also would be in the government's interest to allow credit for overages. The protester suggests that the preferred solution to the linen shortage situation is a contract clause used by another agency, which provides for an allowable semi-annual loss of linen of up to 15 percent for explained and unexplained reasons, with possible contractor liability if there is an excessive loss of linen.

The agency explains that the payment for linen shortages provision is necessary to prevent losses, such as previously experienced under the predecessor contract with Crown, where inventories indicated that thousands of sheets and pillow cases had been lost. It is the Corps' further position that allowing credit for overages, as the protester suggests, is objectionable because it would encourage lax accounting for the items, and because any excess property a contractor may come to possess already is government property, for which the contractor should not receive any credit. The Corps believes any prudent offeror will take into account linen losses and make a corresponding allowance in bid price.

It is the contracting agency that is most familiar with the conditions under which the required services and supplies have been and will be used. Therefore, our Office will not question an agency decision concerning the best methods of accommodating their needs absent clear evidence that those decisions are arbitrary or otherwise unreasonable. See Aquasis Services, Inc., B-229686, Jan. 29, 1988, 88-1 CPD Para. 98.

Here, the procuring agency has provided support for its position that the protested clause is necessary to meet its actual minimum needs based on the problems with linen shortages it has experienced in the past. We find that this provision is a reasonable means for the Corps to encourage proper accounting for linen items turned over to the contractor and, toward this same end, see nothing improper in not crediting the contractor for previously missing government property that happens to turn up during the contract period. While Crown may prefer that the agency use another method of addressing the shortage situation that does not require bidders to factor potential shortages into their bids, the mere fact that bidders are left to do so does not render this otherwise unobjectionable provision improper. See Master Security, Inc., B-232263, Nov. 7, 1988, 88-2 CPD Para. 449.

Option Year Price Adjustments

Crown next complains that the computation method for increasing its contract payments to account for increased wages that may occur during the option years due to the implementation of new Department of Labor (DOL) wage determinations issued during the course of the contract is inadequate. In this regard, the solicitation provides that the contract price will be adjusted for increased wage costs due to a new DOL wage determination change based on the average number of full-time Service Contract Act employees employed by the contractor for the 3 months preceding the effective date of the new wage determination. The protester maintains that the only fair method of computing the contract cost adjustment is to compensate the contractor based on the exact amount he has paid to all employees during the accounting period due to the changed wage determination.

The agency argues that it never intended to treat this firm, fixed price contract like a cost reimbursement-type contract for purposes of any wage determination changes, which would be the effect of Crown's approach. The Corps considers the adjustment procedure to be a reasonable means for the parties to calculate costs to protect the contractor from possible labor cost increases in the option years.

We find the cost adjustment procedure unobjectionable; it provides an objective means for calculating contract price increases during option years due to wage determination changes. Crown's argument appears to be based on a misunderstanding of the price adjustment provision. The adjustment is to be negotiated with the contractor at the beginning of a new contract option period (assuming, of course, that an option has been exercised), to change the original bid price to reflect increases in the contractor's labor costs resulting from any increased wage rate determination that took effect during the prior contract period. The 3- month employee average is merely necessary to determine how many employees the contractor likely will have during the new contract period so that the projected labor costs for the new year can be calculated. Contrary to Crown's apparent understanding, the provision is not designed to reimburse the contractor for any increased labor costs from prior contract periods. We conclude that the price adjustment provision is proper.

Deduction - Maintenance

The protester contends that the solicitation improperly permits a deduction from the contract payment for deficient performance in excess of the value of the tasks actually performed deficiently, and thus constitutes a punitive deduction, prohibited by the Federal Acquisition Regulation (FAR), subpart 12.2 ("Liquidated Damages"). Specifically, the deduction provision complained of, which covers maintaining government- furnished equipment, specifies a maximum deduction of 22 percent when 100 percent of the sample inspected is found below the acceptable quality level. Crown complains that this amount exceeds the cost of the services (based on its estimates of labor and repair parts costs), and thus is punitive. While the agency maintains that the deduction provision is reasonably related to the probable actual damages which would occur if the required services were not performed, with specific consideration given to the criticality of the services to be performed and the value of the government-furnished equipment to be maintained. Crown argues that these factors the government has considered in addition to labor cost are not proper elements of cost for consideration when establishing the deduction provision.

Since the protested deduction provision establishes fixed amounts the government can recover upon proof of deficient performance, without proof of the damages actually sustained, they are subject to the requirement in the FAR that the rate of such damages, termed liquidated damages, be reasonable in light of the solicitation's requirements. FAR Sec. 12.202(b). Liquidated damages fixed without any reasonable relationship to probable actual damages may be held to be a penalty and therefore unenforceable. Starlite Services, Inc., B-219418, Oct. 15, 1985, 85-2 CPD Para. 410.

We find that the protested deduction provision is not arbitrary or otherwise unreasonable. Initially, we see nothing improper in the agency's consideration of the criticality of the services and the value and condition of the nearly new government-furnished equipment in computing the value of the service if foregone. In this regard, the agency reports that proper maintenance of the laundry facility is of critical importance because it is the only facility available to support all Marine Corps activities in southern California, as well as some Navy facilities; in effect, the agency explains, there is no alternative to this laundry facility if equipment fails. Further, the agency reports that since much of the equipment, valued in excess of 1 million dollars, is nearly new, it wishes to ensure proper maintenance so that the equipment will last for its projected service life. Given these circumstances, we believe it is clear that the actual value of the services foregone would represent more that just labor and repair parts costs, as suggested by the protester.

In any event, the protester's argument again appears to be based on some misunderstanding as to the operation of the deduction provision. We have held that liquidated damages are unreasonable where the solicitation provides for a deduction for an entire service consisting of several tasks based on the contractor's failure to perform satisfactorily only some of the tasks, and the nature of the deficiencies does not render the entire service unsuitable for the government's purpose. See Starlite Services, Inc., B-219418, supra. That is not the situation here. Rather, the provision in question permits a maximum deduction of 22 percent of the monthly contract invoice price if the acceptable quality level (AQL) is exceeded and the entire sample inspected is found defective, but also provides that if less than 100 percent of the sample is found defective, a correspondingly smaller deduction will be made. Since the deduction provision thus would allow deduction only of an amount proportional to the percentage of the sample found defective, the provision does not constitute an impermissible penalty and thus is unobjectionable.

Deduction - Hazardous Waste

Finally, Crown complains that the 2.5 percent maximum AQL for the hazardous waste handling and disposal function under the IFB is too stringent. The protester complains that, in practice, when the AQL is applied to the Sampling Guide (MIL-STD-105D), a single defect will result in a deduction, which means that a performance level of 100 percent is required to avoid a contract price reduction. The agency responds that the stringent AQL is necessary because of the criticality of handling hazardous waste in order to prevent harm to employees and the environment, and also to avoid potential future payments of costs for cleanup or fines; failure to operate the dry cleaning machines in compliance with applicable requirements can subject the government to fines of up to $10,000 per day. Based upon these risks involved, the agency believes that it must require that the contractor perform to the high level indicated.

While the deficiency standard here obviously is strict and may be difficult to meet, the Corps' position is reasonable. That is, given the serious consequences of improperly handling hazardous waste and the potential substantial financial impact on the government of even a single deficiency in this area, we see nothing improper in the agency establishing a standard designed to compel the contractor to perform in whatever manner is necessary to avoid such deficiencies altogether. Since the deduction formula in this area also provides for contract price deductions proportional to the number of defects in the sample, and not flat deductions for any defects, the clause is unobjectionable.

The protest is denied.