B-169414, JUL 7, 1970, 50 COMP GEN 11

B-169414, JUL 7, 1970, 50 COMP GEN 11

CONTRACTS - SPECIFICATIONS - FAILURE TO FURNISH SOMETHING REQUIRED - ADDENDA ACKNOWLEDGMENT - LEGAL RELATIONSHIP OF PARTIES ALTERED AN AMENDMENT TO AN INVITATION ISSUED TO IMPLEMENT DEFENSE PROCUREMENT CIRCULAR NO. 74 ENTITLED "SUBCONTRACTOR COST OR PRICING DATA AND AUDIT REQUIREMENTS," THAT RECOGNIZED EXEMPTIONS EQUIVALENT TO THOSE PROVIDED IN THE SO-CALLED TRUTH IN NEGOTIATIONS ACT, IS A MATERIAL AMENDMENT, WHETHER OR NOT THE IMPACT ON PRICE IS DEMONSTRABLE, OR THE LEGAL OBLIGATIONS IMPOSED ARE NEW OR BEING CLARIFIED, AND THE FAILURE TO ACKNOWLEDGE THE AMENDMENT MAY NOT BE WAIVED AS A MINOR INFORMALITY UNDER ARMED SERVICES PROCUREMENT REGULATION 2-405, EVEN THOUGH THE AMENDMENT WAS NOT RECEIVED. THE AMENDMENT ALTERED THE LEGAL RELATIONSHIP OF THE PARTIES, EVEN THOUGH NOT NECESSARILY VARYING THE ACTUAL WORK TO BE PERFORMED, BY MAKING THE SUBMISSION OF COST OR PRICING DATA, AND THE PRIME CONTRACTOR'S RESPONSIBILITY FOR DEFECTIVE SUBCONTRACTOR DATA MANDATORY INSTEAD OF DISCRETIONARY.

TO THE SECRETARY OF THE AIR FORCE, JULY 7, 1970:

BY LETTER, WITH ENCLOSURES, DATED MAY 1, 1970, THE CHIEF, CONTRACT PLACEMENT DIVISION, DIRECTORATE OF PROCUREMENT POLICY, DEPUTY CHIEF OF STAFF, SYSTEMS AND LOGISTICS, FURNISHED OUR OFFICE A REPORT ON THE PROTEST OF ADMIRAL SYSTEMS CORPORATION AGAINST THE PROPOSED AWARD OF A CONTRACT TO ZENITH RADIO CORPORATION UNDER INVITATION FOR BIDS NO. F33657-70-B-0056, A TWO-STEP FORMALLY ADVERTISED SOLICITATION, ISSUED BY THE AFSC AERONAUTICAL SYSTEMS DIVISION (ASD), WRIGHT-PATTERSON AIR FORCE BASE, OHIO.

THE SUBJECT INVITATION WAS ISSUED ON JANUARY 16, 1970, TO SOURCES THAT HAD SUBMITTED ACCEPTABLE TECHNICAL PROPOSALS PURSUANT TO LETTER REQUEST FOR TECHNICAL PROPOSAL NO. F33657-70-R-0056 DATED JULY 10, 1969, AND AMENDMENT 0001 DATED AUGUST 4, 1969, AND REQUESTED INCREMENTAL PRICES FOR VARIOUS QUANTITIES OF TS-1843A/APX TRANSPONDER TEST SETS (ITEM 1) AND MT- 3513A/APX MOUNTINGS (ITEM 2). ON JANUARY 19, 1970, ASD ISSUED AMENDMENT 0001 TO IMPLEMENT THE REQUIREMENTS OF DEFENSE PROCUREMENT CIRCULAR (DPC) NO. 74, ENTITLED "SUBCONTRACTOR COST OR PRICING DATA AND AUDIT REQUIREMENTS." THAT CIRCULAR CONTAINS THE FOLLOWING STATEMENTS REGARDING THE CHANGES EFFECTED:

(A) PROVIDE NEW REQUIREMENTS FOR OBTAINING COST OR PRICING DATA FROM FIRST AND LOWER TIER SUBCONTRACTORS AT THE TIME OF PRICING A PRIME CONTRACT. EXEMPTIONS EQUIVALENT TO THOSE PROVIDED BY P. L. 87-653 ARE RECOGNIZED. ALSO FAILURE TO COMPLY MAY BE EXCUSED IN EXCEPTIONAL CASES PROVIDED ADEQUATE ALTERNATE ARRANGEMENTS ARE MADE AS OUTLINED.

(B) CLARIFY THE APPLICATION OF COST OR PRICING DATA REQUIREMENTS TO CONTRACT MODIFICATIONS NETTING UNDER $100,000 BUT BASED ON ADDITIVE AND DEDUCTIVE COSTS AGGREGATING $100,000 OR MORE.

(C) PROVIDE A GUARANTEE OF ACCURACY - AS DISTINGUISHED FROM COMPLETENESS AND CURRENCY - IN CASES WHERE ONLY PARTIAL COST OR PRICING DATA IS REQUIRED.

(D) CONFORM THE AUDIT AND RECORDS CLAUSES UNDER 7-104.42 TO THE MINSHALL BILL (P.L. 90-512) AMENDMENT TO 10 U.S CODE 2306(F).

INSOFAR, AS IS RELEVANT TO OUR CONSIDERATION HERE, DPC 74 MAKES THE FOLLOWING CHANGES: REVISES PARAGRAPH 7-104.29(B) OF THE ARMED SERVICES PROCUREMENT REGULATION (ASPR) BY SUBSTITUTING A CLAUSE ENTITLED "PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA-PRICE ADJUSTMENTS (1970 JAN)" FOR THE NOVEMBER 1967 CLAUSE; REVISES ASPR 7-104.41(B) BY SUBSTITUTING A CLAUSE ENTITLED "AUDIT-PRICE ADJUSTMENTS (1970 JAN)" FOR THE APRIL 1969 CLAUSE; REVISES ASPR 7-104.42(B) BY SUBSTITUTING A CLAUSE ENTITLED "SUBCONTRACTOR COST OR PRICING DATA-PRICE ADJUSTMENTS (1970 JAN)" FOR THE MAY 1963 CLAUSE. THE AMENDMENT SUBSTITUTED THE FOREGOING REVISED CLAUSES FOR THE PRIOR ASPR VERSIONS.

BY THE FEBRUARY 17, 1970, BID OPENING DATE, EIGHT SOURCES RESPONDED AND ON THE QUANTITY PROPOSED FOR AWARD ZENITH IS LOW, WITH A BID IN A TOTAL AMOUNT OF $3,851,445.65, AND ADMIRAL IS SECOND LOW WITH A BID IN A TOTAL AMOUNT OF $3,934,495.

ZENITH, HOWEVER, FAILED TO ACKNOWLEDGE AMENDMENT 0001. UPON INVESTIGATION, IT WAS DETERMINED THAT THE AMENDMENT WAS MAILED BY ASD, AND THAT ZENITH DID NOT RECEIVE THE AMENDMENT. THE CONTRACTING OFFICER PROPOSES TO WAIVE ZENITH'S FAILURE TO ACKNOWLEDGE THE AMENDMENT AS A MINOR INFORMALITY IN ACCORDANCE WITH ARMED SERVICES PROCUREMENT REGULATION (ASPR) 2-405.

BY LETTER DATED MARCH 25, 1970, COUNSEL FOR ADMIRAL PROTESTED AGAINST THE PROPOSED ACTION TO OUR OFFICE, FOCUSING SPECIFICALLY ON THE FAILURE TO ACKNOWLEDGE AMENDMENT 0001. BY LETTER, WITH ENCLOSURES, DATED MAY 22, 1970, TO THE CONTRACTING OFFICER, STEWART-WARNER CORPORATION ALSO PROTESTED AGAINST CONSIDERATION OF ZENITH'S BID FOR AWARD AND, IN COMPLIANCE WITH ITS REQUEST, THE CONTRACTING OFFICER HAS FORWARDED THE PROTEST TO OUR OFFICE FOR CONSIDERATION. IN ACCORDANCE WITH OUR BID PROTEST PROCEDURES, ZENITH WAS AFFORDED AN OPPORTUNITY TO COMMENT ON THE RECORD, AND IT RESPONDED BY LETTER, WITH ENCLOSURES, DATED MAY 25, 1970. AWARD IS BEING WITHHELD PENDING OUR RESOLUTION OF THE PROTEST.

AS OUTLINED IN ITS SUBMISSION OF MAY 13, 1969, COUNSEL FOR ADMIRAL'S BASIC POSITION IS THAT THE DPC 74 REVISIONS ADDED BY AMENDMENT 0001 MATERIALLY ALTER THE LEGAL RELATIONSHIP BETWEEN THE GOVERNMENT AND THE SUCCESSFUL CONTRACTOR AND, THEREFORE, COULD AFFECT THE ULTIMATE COST TO THE GOVERNMENT FOR THE CONTRACT ITEMS. THE MATERIALITY OF THE DPC 74 CHANGES IS CONTESTED BY THE CHIEF, CONTRACT PLACEMENT DIVISION, THE CONTRACTING OFFICER AND ZENITH. IN HIS REPORT OF APRIL 17, 1970, THE CONTRACTING OFFICER MAINTAINS THAT AMENDMENT 0001 REVISIONS "ESSENTIALLY CLARIFY" THE APPLICATION OF THE COST OR PRICING DATA REQUIREMENTS TO SUBCONTRACTORS, AND HE FURTHER EMPHASIZES THAT THE PRIOR ASPR PROVISIONS WERE ALREADY A PART OF THE INVITATION. ZENITH HAS ALSO ADOPTED THIS APPROACH.

RESOLUTION BY OUR OFFICE OF THE QUESTION WHETHER FAILURE TO ACKNOWLEDGE AN AMENDMENT RENDERS A BID NONRESPONSIVE IS GENERALLY BASED ON A DETERMINATION WHETHER THE AMENDMENT COULD AFFECT PRICE, QUANTITY, OR QUALITY. IF RESOLVED, AFFIRMATIVELY, THE AMENDMENT IS MATERIAL AND THE BID MUST BE REJECTED AS NONRESPONSIVE. 42 COMP. GEN. 490 (1963); 37 ID. 785 (1958).

ARGUMENT WITH RESPECT TO THE MATERIALITY OF AMENDMENT 0001 HAS BEEN CONCENTRATED PRIMARILY ON THE "PRICE" FACET OF THIS GENERAL CRITERIA. THE CONTRACTING OFFICER MAINTAINS THAT AN IMPACT ON PRICE IS NOT DEMONSTRABLE. RELIANCE IS ALSO PLACED ON ZENITH'S LETTER OF MARCH 23, 1970, TO THE CONTRACTING OFFICER, WHICH ACKNOWLEDGED RECEIPT OF THE AMENDMENT (AFTER BID OPENING) AND DENIED THAT IT HAS ANY EFFECT ON PRICE, QUANTITY, OR QUALITY, AND ALSO THE FACT THAT ZENITH DID NOT TIMELY RECEIVE THE AMENDMENT. THESE CIRCUMSTANCES, HOWEVER, ARE NOT DECISIVE IN RESOLVING THE PRESENT MATTER. SEE, FOR EXAMPLE, 40 COMP. GEN. 126 (1960); B-164154, JULY 3, 1968; B-164016, MAY 28, 1968. MOREOVER, WE ARE NOT PERSUADED THAT A DETERMINATION OF THE LIKELIHOOD OF A SUBSEQUENT MODIFICATION IS CONTROLLING. IN THIS REGARD, THE RECORD INCLUDES AN OPINION DATED APRIL 17, 1970, FROM THE DIRECTOR OF PROCUREMENT LAW, OFFICE OF THE STAFF JUDGE ADVOCATE, WHICH OBSERVES THAT IT IS SPECULATIVE WHETHER THE CONTRACT WILL BE MODIFIED AFTER AWARD AND, ASSUMING THAT A MODIFICATION IS MADE, WHETHER SUCH MODIFICATION WOULD RENDER THE CLAUSES OPERABLE. HOWEVER, AS COUNSEL FOR ADMIRAL NOTES, THERE ARE NUMEROUS TERMS AND PROVISIONS OF THE CONTRACT WHICH ARE MATERIAL AND MAY OR MAY NOT BECOME OPERATIVE DURING PERFORMANCE OF THE CONTRACT, AND COUNSEL'S REFERENCE TO A WARRANTY PROVISION EXEMPLIFIES THIS POINT.

OF MORE IMPORTANCE, IN OUR VIEW, IS THE SUGGESTION IN THE DIRECTOR'S OPINION THAT THERE IS NO REALISTIC WAY OF PLACING A MONETARY VALUE, IF ANY, ON THE SUBSTITUTION OF THE CURRENT CLAUSES FOR THOSE REFERENCED IN THE UNAMENDED INVITATION. IT IS ALSO SUGGESTED IN SUPPORT OF THIS ARGUMENT THAT THE REVISED CLAUSES COULD BE ADDED AT THE TIME OF A MODIFICATION TO THE CONTRACT, AND THE EFFECT ON PRICE COULD BE DETERMINED AT THAT TIME. ALTHOUGH ZENITH EXPRESSES A WILLINGNESS TO CURE THE FAILURE TO ACKNOWLEDGE THE AMENDMENT BY ACCEPTANCE OF THE REVISED CLAUSES PRIOR TO AWARD, IT SIMILARLY MAINTAINS IN ITS LETTER OF MAY 25, 1970, THAT ADMIRAL HAS "FAILED TO MEET THE PROOF REQUIRED TO SHOW THAT THE AMENDED PROVISIONS INCREASED THE PRICE OR WOULD INCREASE THE PRICE OF THE CONTRACT."

TO THE EXTENT THAT THESE CONTENTIONS SUGGEST THAT AN INABILITY TO ESTABLISH AN EXACT DOLLAR IMPACT ATTRIBUTABLE TO THE FAILURE TO ACKNOWLEDGE AMENDMENT 0001 REQUIRES A CONCLUSION THAT THE AMENDMENT IS NOT MATERIAL, WE MUST DISAGREE. WE DO NOT BELIEVE THAT, AS A GENERAL PROPOSITION, IT WOULD BE SUCCESSFULLY ARGUED THAT AN EXCEPTION TO PROVISIONS FIXING THE CONTRACTUAL RELATIONSHIP OF THE PARTIES REASONABLY COULD NOT AFFECT PRICE. WE DO RECOGNIZE IN THIS INSTANCE THAT A JUDGMENT AS TO THE CONSTRUCTIVE PRICE IMPACT OF THE REVISED CLAUSES IS NOT PARTICULARLY HELPFUL OR MEANINGFUL SINCE ZENITH'S BID AS SUBMITTED MAY HAVE INCLUDED A PRICE CONTINGENCY FOR THE PRIOR ASPR VERSIONS OF THE CLAUSES. IN SUCH CIRCUMSTANCES, A CONCLUSION BASED SOLELY ON PRICE IMPACT TENDS TO SUBORDINATE THE BASIC INQUIRY WHICH, AS WE SEE IT, IS WHETHER THE REVISED CLAUSES SUBSTITUTED BY AMENDMENT 0001 MATERIALLY ALTERED THE LEGAL RELATIONSHIP OF THE PARTIES. IN FORMULATING THE INQUIRY IN THIS MANNER, IT MUST BE EMPHASIZED, AS WE SUGGESTED IN B-158689, APRIL 28, 1966, THAT THE MATERIALITY OF A DEFECT, SUCH AS THE ONE INVOLVED HERE, IS NOT DIMINISHED BECAUSE IT MODIFIES THE LEGAL RELATIONSHIP OF THE PARTIES WITHOUT NECESSARILY VARYING THE ACTUAL WORK TO BE PERFORMED. SEE, E.G., 38 COMP. GEN. 532 (1969) (FAILURE TO FURNISH REQUIRED BID BOND); 43 ID. 206 (1963) (FAILURE TO FURNISH REQUIRED LIST OF SUBCONTRACTORS). FOR THAT MATTER, THE DEFECT MAY BE MATERIAL EVEN IN CIRCUMSTANCES WHERE IT CAN BE SHOWN THAT THE IMPACT ON PRICE IS TRIVIAL. B-168551, FEBRUARY 3, 1970 (FAILURE TO ACKNOWLEDGE AMENDMENT ADDING A WAGE RATE DETERMINATION); 47 COMP. GEN. 496 (1968) (PROGRESS PAYMENTS). FINALLY, WE NOTE THAT IT HAS NOT BEEN IMPLIED THAT THE LEGAL RELATIONSHIP ESTABLISHED BY THE CONTRACTUAL PROVISIONS IMPLEMENTING PUBLIC LAW 87-653, THE SO-CALLED TRUTH IN NEGOTIATIONS ACT, IS OTHER THAN MATERIAL.

THE DISPUTE, THEN, IS WHETHER THE REVISED PROVISIONS ADDED BY AMENDMENT 0001 IMPOSED ADDITIONAL OBLIGATIONS NOT LEGALLY ENFORCEABLE UNDER THE PRIOR PROVISIONS. SEE 48 COMP. GEN. 555,558 AND 559 (1969). THE SUBMISSION BY ADMIRAL'S COUNSEL, OF MAY 13, 1970, CONTAINS AN EXTENSIVE REVIEW OF THE REVISED CLAUSES VIS-A-VIS THE PRIOR VERSIONS. WE HAVE EXAMINED THE CONTRASTS DRAWN IN THIS SUBMISSION IN LIGHT OF ZENITH'S RESPONSE TO THE LETTER OF MAY 13 AND WE MUST CONCLUDE THAT THE REVISED CLAUSES DO AFFECT THE LEGAL RELATIONSHIP OF THE PARTIES. IN REACHING THIS CONCLUSION, WE ARE OF THE OPINION THAT THE AMENDMENT MADE CERTAIN, AS A LEGAL PROPOSITION, AREAS WHICH PREVIOUSLY WERE SUBJECT TO VALID QUESTION. IN THIS SENSE, "CLARIFICATION" (AS THE REVISED CLAUSES HAVE BEEN DENOMINATED) OF LEGAL OBLIGATIONS ARE NO LESS MATERIAL THAN THE CREATION OF NEW LEGAL OBLIGATIONS. TO ILLUSTRATE OUR CONCLUSION AND EMPHASIS, WE REFER TO TWO CHANGES MADE BY DPC 74 WHICH COUNSEL FOR ADMIRAL CONSIDERS CRITICAL AND ZENITH'S RESPONSES.

FIRST, WITH RESPECT TO THE "PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA-PRICE ADJUSTMENTS" CLAUSE, ADMIRAL'S COUNSEL NOTES IN THE SUBMISSION OF MAY 13 THAT:

*** WHEREAS FORMERLY A CONTRACTOR WOULD ONLY BE REQUIRED TO APPLY THE PRICING DATA REQUIREMENTS FOR CONTRACT MODIFICATIONS IN EXCESS OF $100,000, THE AMENDED PROVISIONS REQUIRE THE APPLICATION OF THE COST OR PRICING DATA REQUIREMENTS WHEN THE MODIFICATION INVOLVES AGGREGATE INCREASES AND/OR DECREASES IN COSTS PLUS APPLICABLE PROFITS EXPECTED TO EXCEED $100,000. ***

ZENITH SUGGESTS, IN REBUTTAL, THAT "PROTESTANT'S REFERENCE TO THE DATA REQUIRED FOR ADDITIVE AND DEDUCTIVE COSTS IS NOT PERTINENT AS THE CONTRACTING OFFICER HAD THE DISCRETION, BEFORE DPC-74, TO REQUIRE SUCH DATA UNDER THE ASPR EVEN IF THE NET DOLLAR CHANGE IS ZERO." WE AGREE THAT THE CONTRACTING OFFICER COULD REQUEST DATA WHEN AGGREGRATE INCREASES AND/OR DECREASES IN COSTS PLUS PROFITS WERE EXPECTED TO EXCEED $100,000. SEE, IN THIS RESPECT, ARMED SERVICES PROCUREMENT REGULATION MANUAL FOR CONTRACT PRICING (ASPM NO. 1, FEBRUARY 14, 1969), CHAPTER 16, AT PAGE 16- 1. BUT THE DPC 74 REVISIONS MAKE IS MANDATORY ON THE CONTRACTOR TO FURNISH DATA IN THIS CIRCUMSTANCE. HENCE, WE MUST CONCLUDE THAT THE CHANGE DICTATED BY DPC 74 FROM THE STATED DISCRETIONARY AUTHORITY OF THE CONTRACTING OFFICER TO A CONTRACT REQUIREMENT FOR THE SUBMITTAL OF COST OR PRICING DATA REPRESENTED A MATERIAL CHANGE WHICH AFFECTS THE LEGAL RELATIONSHIP OF THE CONTRACTING PARTIES. IN THE ABSENCE OF AN ACKNOWLEDGMENT BY A BIDDER OF AN AMENDMENT INCORPORATING SUCH CHANGE INTO THE SOLICITATION, NO AUTHORITY WOULD EXIST TO AWARD A CONTRACT TO SUCH A BIDDER SINCE TO DO SO WOULD RESULT IN A CONTRACT LEGALLY DIFFERENT THAN THE ONE ADVERTISED.

SECOND, COUNSEL FOR ADMIRAL OBSERVES THAT THE REVISED "PRICE REDUCTION FOR DEFECTIVE COST OR PRICING DATA-PRICE ADJUSTMENTS" CLAUSE NOW SPECIFICALLY REFERS TO PROSPECTIVE SUBCONTRACTORS AND EXTENDS THE GUARANTEE OF ACCURACY TO ESTIMATES SUBMITTED BY THE CONTRACTOR BASED ON COST OR PRICING DATA SUBMITTED BY A PROSPECTIVE SUBCONTRACTOR NOT SUBSEQUENTLY AWARDED A CONTRACT. ZENITH SUGGESTS, HOWEVER, THAT "THE CONTRACTING OFFICER AS A PRACTICAL MATTER GENERALLY DEMANDED PRIOR TO DPC- 74 THAT PRIME CONTRACTORS BE RESPONSIBLE FOR DEFECTIVE PROSPECTIVE SUBCONTRACTOR DATA." NEVERTHELESS, A CLEAR CONTRACTUAL RESPONSIBILITY WOULD EXIST UNDER AMENDMENT 0001.

WE VIEW THESE TWO ASPECTS OF THE DPC-74 CHANGES INCORPORATED INTO AMENDMENT 0001 AS RENDERING THE AMENDMENT SIGNIFICANTLY MATERIAL FROM A LEGAL STANDPOINT. OUR OFFICE, WHICH IS PARTICULARLY INVOLVED IN MONITORING THE EFFECTIVENESS OF CONTRACT COST AND PRICING PROVISIONS, IS OF THE OPINION THAT THE FAILURE TO ACKNOWLEDGE AMENDMENT 0001 MAY NOT PROPERLY BE CATEGORIZED AS A MINOR INFORMALITY WHICH MAY BE WAIVED PURSUANT TO ASPR 2-405. THE CONTRARY POSITIONS ADVANCED ARE NOT WITHOUT MERIT. HOWEVER, ON BALANCE, WE FEEL THAT THE INVIOLABILITY OF THE COMPETITIVE BIDDING SYSTEM DICTATES THE RESULT HERE, ESPECIALLY WHEN VIEWED IN THE LIGHT OF THE WELL-PUBLICIZED PURPOSES SOUGHT TO BE ACHIEVED BY THE SUBSTANTIAL CHANGES EFFECTED BY DPC-74. ACCORDINGLY, IT IS OUR OPINION THAT ZENITH'S BID MUST BE CONSIDERED AS NONRESPONSIVE AND SHOULD NOT BE CONSIDERED FOR AWARD.