Matter of: Bulova Technologies, Inc. File: B-252660 Date: July 15, 1993

B-252660: Jul 15, 1993

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Equitable adjustments are within the scope of the contract. Contracting officer properly determined that option exercise was most advantageous to the government where: (1) option price was evaluated in original competitive procurement. (2) contracting officer believed that new solicitation would result in higher prices because future procurements will be limited to mobilization base producers. (3) option price is only slightly more than protester's option price and agency is willing to pay premium to maintain the mobilization base. BTI contends that the Army's attempted exercise of the option for additional M762 fuzes was improper and not in accord with the terms of the contract. Was an unjustified and unlawful sole-source contract award.

Matter of: Bulova Technologies, Inc. File: B-252660 Date: July 15, 1993

PROCUREMENT Contract Management Contract administration Contract terms Modification Propriety PROCUREMENT Contract Management Contract administration Options Use GAO review Contract modifications related to engineering change proposals, subcontracting arrangements, and equitable adjustments to price and delivery schedule associated with engineering change proposals and government caused delay do not invalidate agency's exercise of contract option, where contract modifications, subcontracts, and equitable adjustments are within the scope of the contract. PROCUREMENT Contract Management Contract administration Options Use GAO review In deciding to obtain fuzes by exercising an existing contract option, contracting officer properly determined that option exercise was most advantageous to the government where: (1) option price was evaluated in original competitive procurement; (2) contracting officer believed that new solicitation would result in higher prices because future procurements will be limited to mobilization base producers; and (3) option price is only slightly more than protester's option price and agency is willing to pay premium to maintain the mobilization base.

Attorneys

DECISION Bulova Technologies, Inc. (BTI) protests the Department of the Army's exercise of an option in contract No. DAAA21-90-C-0002, between the Army Armament Research, Development & Engineering Center, Picatinny Arsenal, and Alliant Techsystems, Inc. (ATI). The contract, for supplying M762 and M767 electronic time fuzes used in various Army munitions, contains an option clause for additional quantities of both types of fuzes. BTI contends that the Army's attempted exercise of the option for additional M762 fuzes was improper and not in accord with the terms of the contract, and, therefore, was an unjustified and unlawful sole-source contract award. We deny the protest.

In 1989, the Army conducted a competition, restricted to American and Canadian firms, for fixed-price, incentive-type contracts for production of electronic time fuzes in order to establish a competitive mobilization base. Contracts for basic production and option quantities were awarded to both BTI and ATI[1] in November of that year[2]. BTI's contract was for 76,000 M762 fuzes (approximately 47 percent of the basic requirement), while ATI's contract was for 85,000 M762 fuzes (approximately 53 percent of the initial production quantity). Each contract contained an option for the Army to increase the quantity of M762 fuzes by up to 417,000 additional units.

In December 1991, the Army exercised its option with BTI for an additional 207,858 fuzes; in September 1992, the Army again exercised its option to require BTI to supply the remaining 209,142 option units. On March 5, 1993, the Army exercised its option under the ATI contract for 128,902 additional M762 fuzes. BTI filed its protest in our Office on March 12.

BTI asserts that the Army's attempt to exercise the ATI contract option was improper for several reasons. First, BTI contends that the Army attempted to exercise the option after it had already expired. Second, the protester argues that the Army and ATI improperly renegotiated several material option terms. Finally, BTI alleges that the Army did not comply with the requirements of Federal Acquisition Regulation (FAR) Sec. 17.207 which prohibits exercising an option unless the contracting officer determines that exercise of the option is "the most advantageous method" of fulfilling the agency's need. We do not agree that the option was improperly exercised.

Regarding the argument that the Army tried to exercise the option after it had expired, the ATI contract states: "The contracting officer may exercise the evaluated option at any time prior to delivery of the 16,000th accepted unit required under the basic contract." [Emphasis added.]

The record shows that the Army exercised its option with ATI by issuing contract modification No. P00008 on March 5, 1993. The record also shows that, even though ATI attempted delivery of the lot test sample containing the 16,000th unit in January, 1993, the Army refused to accept the lot because two of the fuzes failed acceptance testing. The Army investigated, determined the likely cause of the failures, and tested 80 additional fuzes before accepting the lot by letter to ATI dated March 30. Thus, it is clear that the Army exercised its option before accepting the 16,000th fuze from ATI, while the option was still viable under the terms of the ATI contract.

The protester next argues that the Army and ATI improperly renegotiated several contract terms. Specifically, BTI asserts that the Army and ATI agreed to modify the contract to allow ATI to subcontract the mechanical assembly of fuzes, change the delivery schedule, and increase the price. BTI contends that these negotiations were improper, thereby invalidating the option provision.

Preservation of the integrity of the competitive procurement system requires that contracting parties not make changes to contracts which have the effect of circumventing the competitive procurement statutes; this principle is violated when a modification so substantially changes the purpose or nature of a contract that the contract for which the competition was held and the contract which is to be performed are essentially different. See Gulton Indus., Inc., Engineered Magnetics Div., B-203265, July 20, 1982, 82-2 CPD Para. 59. Ordinarily, a modification falls within the scope of the contract originally competed where potential offerors could reasonably have anticipated that such a modification might be made under the changes or other contract clauses. See Hewlett Packard Co., B-245293, Dec. 23, 1991, 91-2 CPD Para. 576. In our opinion, the modifications cited by BTI clearly are within the scope of the contract originally awarded to ATI.

Regarding ATI's subcontracting the mechanical assembly of the fuzes, the contract specifically envisioned and authorized such subcontracting arrangements. The contract incorporated FAR Sec. 52.244-1, Subcontracts (Fixed-Price Contracts), which requires advance notification of and the contracting officer's consent for subcontracts. The contract further provided at clause H.29, Special Surveillance of Subcontracts, that the contracting officer could consent to subcontracting for certain critical items, and at clause H.13, Change in Place of Performance-Ammunition and Explosives, the contract authorized changing the place of performance with the contracting officer's consent. As subcontracting was specifically contemplated under the original RFP and ATI's contract, we do not believe that ATI's subcontracting the mechanical assembly of the fuzes went beyond the scope of the original contract or was otherwise an improper modification of the option terms. See Hewlett Packard Co., supra.

Regarding the change in delivery schedule and increase in price, the record clearly shows that during the more than 3 years between award of the contract to ATI and the Army's exercise of the option, there were a number of performance delays. For example, the Accudyne protest noted earlier resulted in more than 4 months of unavoidable delay. The Army acknowledged in contract modification No. P00008 its responsibility for more than 17 months of performance delays (including delays related to the protest and various engineering change proposals). The contracting officer has authority to make equitable adjustments under the changes clause (FAR Sec. 52.243-1), or other appropriate contract clause, resulting in higher prices or a revised delivery schedule, in some instances where delay was caused by the Government. For example, contract clause I.3, First Article Approval-Government Testing, set time limits for government approval or rejection of first article units, and specifically authorized adjustments to the delivery schedule and the contract price where the government did not act within the time limits prescribed.

The record also clearly reflects a number of engineering change proposals. The contract contemplated and, in fact, in a number of places, encouraged ATI to submit engineering change proposals to the Army for approval and incorporation into the contract. For example, under contract clause C.3, ATI was required to review the electrical and mechanical designs of the fuzes for deficiencies and to propose design changes to correct the deficiencies. The contracting officer may make equitable adjustments to the contract price or delivery schedule under the contract's changes clause for such design changes where appropriate. The contracting officer reports that, rather than making equitable adjustments every time a delay or engineering change proposal justified it, he adjusted price upward and extended the delivery schedule because of various delays and several different engineering change proposals at one time in contract modification No. P00008 wherein he also exercised the option.

In our opinion, the use of approved subcontractors, changes to the design specifications, modifications to the delivery schedule, and associated price increases were all contemplated under the contract with ATI, and were matters of contract administration within the contracting officer's authority. We see nothing improper in the contracting officer's resolving such matters and modifying the contract concurrent with his exercising the option. Therefore, we conclude that the modifications did not go beyond the scope of the contract, were properly incorporated into the option provisions, and did not invalidate the Army's exercise of the option. See Hewlett Packard Co., supra.

The protester also argues that the contracting officer could not properly determine that exercise of the option was "the most advantageous method" of fulfilling the Army's requirements as required by FAR Sec. 17.207.

Our Office generally will not question the exercise of an option unless we find that the applicable regulations were not followed or that the agency's determination to exercise the option, rather than conduct a new procurement, was unreasonable. Valentec Wells, Inc., B-239499, Aug. 29, 1990, 90-2 CPD Para. 177. While it may be appropriate in certain circumstances for a contracting officer to contact all available sources or to issue a solicitation to determine whether an option price is most advantageous, neither procedure is mandated by regulations, and contracting officers have discretion in determining what constitutes a reasonable check on prices in the market. Id.

Furthermore, decisions concerning what producers should be included in the mobilization base and restrictions required to meet the needs of industrial mobilization involve complex judgments which are generally best left to the discretion of military agencies. Id.; Oto Melara, S.p.A., B-225376, Jan. 6, 1987, 87-1 CPD Para. 15. This Office will question those decisions only if the record convincingly shows that the agency has abused its discretion. Valentec Wells, Inc., supra.

Here, the contracting officer made a determination that exercising the ATI option was most advantageous to the government and that the price was fair and reasonable, noting that the option price had been evaluated in the original "highly competitive" procurement. The contracting officer reports that a new solicitation will probably result in higher prices, because future procurements of these fuzes will be limited to mobilization base producers and, therefore, will probably not obtain the lower prices expected in a full and open competition. Furthermore, the contracting officer reports that the Army is willing to pay a reasonable premium[3] to ATI for the option quantity in order to maintain two mobilization base producers.

We cannot conclude that the contracting officer abused his discretion in determining ATI's price to be fair and reasonable based upon the aggressive competition in the original procurement. Moreover, the contracting officer properly considered the effect that limiting future procurements to mobilization base producers might have on price. In this regard, FAR Secs. 17.207(c)(3) and (e) state that the contracting officer is to consider price and "other factors," including such matters as the government's need for continuity of operation. An agency may pay a reasonable premium and may even award a contract on a sole-source basis in order to maintain the mobilization base.[4] Valentec Wells, Inc., supra; Oto Melara, S.p.A., supra. Thus, there is no basis to overturn the agency's determination.

Accordingly, the protest is denied.

1. At the time of award, ATI was named Honeywell, Inc.

2. Accudyne Corp. protested the awards in our Office. See Accudyne Corp., 69 Comp.Gen. 379 (1990), 90-1 CPD Para. 356, for additional background information.

3. We note that ATI's option unit price is very close to BTI's unit price, even though BTI's unit price is based upon the exercise of option quantities that are three times as large.

4. BTI argues that the Army agreed, in contract modification No. P00008, to pay ATI approximately $1.5 million more than the original contract price for the option quantity. However, the record actually shows that most of the additional money the Army agreed to pay ATI was for: (1) engineering change proposals that were already incorporated into the basic production contract but for which the contracting parties had not previously agreed upon related price increases and (2) government caused delays. As previously stated, it is clearly within the contracting officer's authority to pay a contractor for design changes and government caused delays. Moreover, the mechanism used by the contracting officer to make the price adjustment (i.e., contract Modification No. P00008) and the timing of the modification i.e., when the option was exercised) are matters of contract administration within the contracting officer's judgment. There is nothing in the record to establish that the Army is increasing the option prices to be paid for reasons beyond those identified above.