B-128955, AUGUST 31, 1956, 36 COMP. GEN. 187

B-128955, AUGUST 31, 1956, 36 COMP. GEN. 187

CONTRACTS - AWARDS - ON RESERVED SET ASIDES TO SMALL BUSINESS NOTWITHSTANDING AN INVITATION FOR BIDS, WHICH SET ASIDE A PORTION OF A PROCUREMENT FOR AWARD TO SMALL BUSINESS, PROVIDED THAT THE FAIR AND REASONABLE PRICE ON THE PORTION RESERVED TO SMALL BUSINESS WOULD BE LIMITED TO THE WEIGHTED AVERAGE UNIT PRICE OF THE MULTIPLE AWARDS MADE ON THE UNRESERVED PORTION SET ASIDE, THE CONTRACTING OFFICER, UPON HIS CERTIFICATION THAT THE QUALIFIED SMALL BUSINESS BIDDERS WOULD NOT NEGOTIATE ON THE RESERVED PORTIONS SET ASIDE AT A PRICE LIMITED TO THE WEIGHTED AVERAGE, MAY MAKE AN AWARD ON THE RESERVED PORTION SET ASIDE NOT IN EXCESS OF THE NEXT HIGHEST BID AFTER THE LAST AWARDED BID ON THE UNRESERVED PORTION.

TO THE ADMINISTRATOR, SMALL BUSINESS ADMINISTRATION, AUGUST 31, 1956:

REFERENCE IS MADE TO YOUR LETTER OF AUGUST 9, 1956, REQUESTING OUR "ADVICE AS TO THE DISCRETION ACCORDED THE ARMED SERVICES PROCUREMENT PURCHASING AGENCY TO ESTABLISH A FAIR AND REASONABLE PRICE IN THE NEGOTIATION OF CERTAIN CONTRACTS WITH SMALL BUSINESS CONCERNS.' IT IS UNDERSTOOD THAT, WHILE THE MATTER INVOLVES ACTION BY AN AGENCY OTHER THAN YOURS, YOUR SUBMISSION OF THE QUESTION HAS BEEN DISCUSSED AND ACQUIESCED IN BY THE OTHER AGENCIES CONCERNED.

BY INVITATION FOR BIDS NO. ( IFB) 57-5, THE ARMED SERVICES PETROLEUM PURCHASING AGENCY SOLICITED BIDS FOR THE FURNISHING OF 33,000,000 BARRELS OF JET FUEL, OF WHICH 4,000,000 WERE SET ASIDE FOR AWARD TO SMALL BUSINESS, THE REMAINDER TO BE AWARDED THROUGH FORMAL ADVERTISING. THE INVITATION PROVIDED THAT SMALL BUSINESSES COULD QUALIFY FOR AWARDS ON THE RESERVED PORTION BY SUBMITTING BIDS ON THE UNRESERVED PORTION NOT IN EXCESS OF 120 PERCENT OF THE HIGHEST PRICE AT WHICH AWARDS WERE MADE ON THE UNRESERVED PORTION. ONCE QUALIFIED, SMALL BUSINESS WERE ELIGIBLE TO RECEIVE AWARDS ON THE RESERVED PORTION THROUGH NEGOTIATION. PARAGRAPH 4 OF THE SPECIAL INSTRUCTIONS ON THE SMALL BUSINESS SET-ASIDE INCLUDED IN THE INVITATION PROVIDED AS FOLLOWS:

4. THOSE BIDDERS WITH WHOM NEGOTIATION IS COMMENCED WILL BE OFFERED AN OPPORTUNITY TO MEET A FAIR AND REASONABLE PRICE AS DETERMINED BY THE CONTRACTING OFFICER. SUCH DETERMINATION SHALL BE MADE ON THE BASIS OF THE WEIGHTED AVERAGE UNIT PRICE OF THE INITIAL AWARDS MADE UNDER THE UNRESERVED PORTION IN THE VARIOUS GEOGRAPHIC MARKETING AREAS.

THE INVITATION FURTHER PROVIDED THAT BIDS COULD BE SUBMITTED ON ALL OR ANY PART OF THE UNRESERVED PORTION. UPON OPENING OF THE BIDS, IT BECAME APPARENT THAT MULTIPLE AWARDS AT SEVERAL UNIT PRICES WOULD HAVE TO BE MADE AND, FURTHER, THAT A NUMBER OF SMALL BUSINESSES HAD ENTERED BIDS SUFFICIENTLY LOW TO QUALIFY THEM FOR PARTICIPATION IN NEGOTIATIONS FOR AWARD OF THE RESERVED PORTION.

IN YOUR LETTER YOU INDICATED THAT IT APPEARS PROBABLE THAT NO SMALL CONCERNS WILL BE ABLE TO PARTICIPATE IN THE AWARD OF THAT PORTION RESERVED FOR SMALL BUSINESS AT A PRICE NOT MORE THAN THE WEIGHTED AVERAGE UNIT PRICE OF THE INITIAL AWARDS ON THE UNRESERVED PORTION. IN THE CIRCUMSTANCES, YOU REQUEST OUR ADVICE AS TO WHETHER AWARDS MAY BE MADE ON THE RESERVED PORTION AT A PRICE NOT IN EXCESS OF THE HIGHEST UNIT PRICE AWARDED UNDER THE UNRESERVED PORTION.

SECTION 214 OF THE SMALL BUSINESS ACT, AS AMENDED, 15 U.S.C. 643, PROVIDES THAT:

TO EFFECTUATE THE PURPOSES OF THIS TITLE, SMALL-BUSINESS CONCERNS WITHIN THE MEANING OF THIS TITLE SHALL RECEIVE ANY AWARD OR CONTRACT OR ANY PART THEREOF AS TO WHICH IT IS DETERMINED BY THE ADMINISTRATION AND THE CONTRACTING PROCUREMENT AGENCY (A) TO BE IN THE INTEREST OF MAINTAINING OR MOBILIZING THE NATION'S FULL PRODUCTIVE CAPACITY, OR (B) TO BE IN THE INTEREST OF WAR OR NATIONAL DEFENSE PROGRAMS.

IN INTERPRETING SECTION 2 (B) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947, 62 STAT. 21, 41 U.S.C. 151 (B), WE HELD IN 31 COMP. GEN. 347, THAT WHERE NEGOTIATING AUTHORITY EXISTS PURSUANT TO PROVISIONS SUCH AS CONTAINED IN SECTION 2 (C) (1) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947, 62 STAT. 21, 41 U.S.C. 151 (C) (1), CONTRACTS MAY BE NEGOTIATED WITH SMALL BUSINESS FIRMS AT A HIGHER COST TO THE GOVERNMENT THAN IS OTHERWISE OBTAINABLE. IN VIEW OF THE SUBSTANTIAL SIMILARITY BETWEEN SECTION 2 (B) OF THE ARMED SERVICES PROCUREMENT ACT AND SECTION 214 OF THE SMALL BUSINESS ACT, WE SEE NO REASON WHY OUR CONCLUSION SHOULD DIFFER IN THIS CASE. IN OTHER WORDS, SO FAR AS THE STATUTE IS CONCERNED, WE FIND NO REQUIREMENT THAT AWARDS NEGOTIATED WITH SMALL BUSINESS CONCERNS MUST BE LIMITED TO THE WEIGHTED AVERAGE OF OTHER AWARDS MADE OF THE UNRESERVED PORTION OF THE SUBJECT PROCUREMENT.

THE ABOVE-QUOTED PROVISION OF THE INVITATION APPARENTLY WAS INTENDED TO COMPLY WITH DEPARTMENT OF DEFENSE INSTRUCTION NO. 4100.9, DATED NOVEMBER 14, 1955, WHICH PROVIDES AT PARAGRAPH IV.E.2 (E), AS FOLLOWS:

WHEN THE PROCUREMENT OF THE UNRESERVED QUANTITIES HAS RESULTED IN MULTIPLE AWARDS AT DIFFERENT UNIT PRICES, AWARDS FOR QUANTITIES SET ASIDE SHALL BE AT A PRICE DETERMINED BY THE CONTRACTING OFFICER TO BE FAIR AND REASONABLE, BUT IN NO EVENT HIGHER THAN THE HIGHEST PRICE AWARDED IN CONNECTION WITH THE UNRESERVED QUANTITIES. IN THE ABSENCE OF CHANGES IN MARKET PRICES AND OTHER FACTORS REQUIRING CONSIDERATION, THE CONTRACTING OFFICER SHALL CONSIDER THE WEIGHTED AVERAGE UNIT PRICE OF ALL AWARDS MADE IN CONNECTION WITH THE UNRESERVED QUANTITIES AS BEING A FAIR AND REASONABLE PRICE. THE WEIGHTED AVERAGE UNIT PRICE SHALL BE ASCERTAINED BY ADDING THE TOTAL DOLLAR AMOUNTS OF ALL AWARDS OF THE UNRESERVED QUANTITIES AND DIVIDING THE GRAND TOTAL BY THE TOTAL NUMBER OF UNITS INCLUDED IN ALL SUCH AWARDS. ( ITALICS SUPPLIED.)

WHILE THIS INSTRUCTION FIRST FIXES "THE HIGHEST PRICE AWARDED IN CONNECTION WITH THE UNRESERVED QUANTITIES" AS THE MAXIMUM PRICE LIMIT FOR THE SET ASIDE PORTION OF THE PROCUREMENT, IT APPEARS TO QUALIFY THAT BY FIXING THE WEIGHTED AVERAGE UNIT PRICE OF AWARDS ON THE UNRESERVED QUANTITIES AS A PRIMA FACIE LIMIT, WHICH SHOULD NOT BE EXCEEDED "IN THE ABSENCE OF CHANGES IN MARKET PRICES AND OTHER FACTORS REQUIRING CONSIDERATION.' SINCE THE WEIGHTED AVERAGE UNIT PRICE IS NECESSARILY SOMETHING LESS THAN THE HIGHEST UNIT PRICE INCLUDED IN THE COMPUTATION OF THE AVERAGE, THE FIXING OF THE WEIGHTED AVERAGE AS A "FAIR AND REASONABLE" PRICE INVOLVES THE CONCLUSION THAT SOME--- PERHAPS THE MAJOR--- PORTION OF THE UNRESERVED QUANTITY WILL HAVE BEEN AWARDED AT A PRICE IN EXCESS OF THAT WHICH IS DETERMINED TO BE "FAIR AND REASONABLE.'

IF THE INSTRUCTION WERE TO BE CONSTRUED AS ESTABLISHING A BINDING ADMINISTRATIVE DETERMINATION THAT THE WEIGHTED AVERAGE PRICE ON MULTIPLE AWARDS IS IN FACT THE HIGHEST PRICE THAT MAY BE CONSIDERED FAIR AND REASONABLE, THERE WOULD BE PRESENTED A SERIOUS QUESTION AS TO THE PROPRIETY OF ALL AWARDS MADE AT A HIGHER PRICE. IN THIS ASPECT, HOWEVER, WE WOULD BE INCLINED TO REGARD THE PRESCRIBED METHOD OF DETERMINATION AS TOO ARBITRARY AND UNREALISTIC TO BE ACCEPTED.

WHILE WE SEE NO COMPELLING REASON IN THE STATUTES FOR REQUIRING THAT AWARDS FOR PARTIAL SET-ASIDES BE MADE ONLY BY NEGOTIATION, AS PROVIDED BY PARAGRAPH IVE2 OF INSTRUCTION 4100.9, OR FOR REQUIRING SUCH AWARDS TO BE MADE AT HIGHER PRICES THAN THOSE AT WHICH AWARDS MAY BE MADE FOR UNRESERVED PORTIONS OF THE SAME PROCUREMENT, THERE APPEARS TO BE NO BASIS ON WHICH WE MAY PROPERLY OBJECT TO SUCH REQUIREMENTS, SINCE THE NEGOTIATING AUTHORITY GENERALLY IS VESTED IN THE HEADS OF THE MILITARY DEPARTMENTS, AND THE AUTHORITY TO EFFECTUATE THE PURPOSES OF THE SMALL BUSINESS ACT IS LEFT PRIMARILY TO THE JOINT ACTION OF YOUR AGENCY AND THE PROCURING AGENCIES.

SO FAR AS CONCERNS THE PARTICULAR INVITATION REFERRED TO, WITHOUT REFERENCE TO THE DOD INSTRUCTIONS, WE FIND NO SPECIFIC STATEMENT IN THE " SPECIAL INSTRUCTIONS" THAT FAILURE ON THE PART OF A SMALL BUSINESS BIDDER TO MEET THE "FAIR AND REASONABLE" PRICE DETERMINED BY THE CONTRACTING OFFICER WILL AUTOMATICALLY PRECLUDE AWARD TO THAT BIDDER, ALTHOUGH THIS MIGHT BE IMPLIED FROM THE AFFIRMATIVE STATEMENT OF PARAGRAPH 5 THAT " AGREEMENT ON THE PART OF THE BIDDER TO MEET THE ,FAIR AND REASONABLE, PRICE SHALL RESULT IN AWARD TO THAT BIDDER.' THE NEXT-FOLLOWING PARAGRAPH, HOWEVER, PROVIDES THAT " IN THE EVENT THAT ANY PART OF THE QUANTITY SET-ASIDE CANNOT BE AWARDED TO SMALL BUSINESS CONCERNS, THE GOVERNMENT EXPRESSLY RESERVES THE RIGHT TO AWARD THAT QUANTITY TO THE NEXT -LOWEST BIDDERS ON THE UNRESERVED QUANTITIES WHETHER SMALL OR LARGE BUSINESS.' REGARDLESS OF THE DOD INSTRUCTIONS OR OF THE NEGOTIATING AUTHORITY OF THE ADMINISTRATIVE AGENCY HEADS, WE DO NOT BELIEVE THAT ANY AWARD UNDER THE LAST-QUOTED PROVISION COULD BE CONSIDERED TO BE IN THE BEST INTEREST OF THE GOVERNMENT IF MADE AT A PRICE IN EXCESS OF THAT WHICH COULD BE OBTAINED BY NEGOTIATION IN THE MANNER PROVIDED BY PARAGRAPH 3. WE THEREFORE FEEL THAT WE WOULD BE JUSTIFIED IN REQUIRING A CERTIFICATION BY THE CONTRACTING OFFICER, IN THE EVENT OF ANY SUCH AWARD, THAT NO SMALL BUSINESS BIDDERS QUALIFIED UNDER PARAGRAPHS 1 AND 2 WOULD ACCEPT A LIKE AWARD AT THE SAME PRICE.

WHETHER ANY AWARDS SHOULD BE MADE OF THE SET-ASIDE PORTION AT PRICES IN EXCESS OF THE "FAIR AND REASONABLE" PRICE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH THE TERMS OF THE INVITATION IS A MATTER TO BE RESOLVED BY THE PROCURING AUTHORITY IN THE LIGHT OF THE PERTINENT REGULATIONS AND DIRECTIVES, BUT SO FAR AS THIS OFFICE IS CONCERNED WE WOULD NOT OBJECT TO ANY SUCH AWARDS AT PRICES NOT IN EXCESS OF THE NEXT- HIGHER BID ON THE UNRESERVED PORTION FOR THE SAME USING ACTIVITY.