B-147594, JAN. 24, 1962

B-147594, JAN. 24, 1962

TO MAJOR I. J. VARNEY:

A LETTER DATED NOVEMBER 14, 1961, FROM FINANCE CENTER, U.S. ARMY, INDIANAPOLIS, INDIANA, REQUESTS AN ADVANCE DECISION UNDER AUTHORITY OF THE ACT OF JULY 31, 1894, 28 STAT. 208, 31 U.S.C. 74. THAT REQUEST IS BASED ON YOUR LETTER OF MARCH 28, 1961, WHICH ASKS WHETHER YOU MAY REFUSE TO PAY A CLAIM OF PENNIMAN AND BROWNE, INC. (HEREINAFTER REFERRED TO AS PENNIMAN), 6252 FALLS ROAD, BALTIMORE, MARYLAND, IN THE AMOUNT OF $70 FOR CLEANING COMPOUND UNDER ORDER NO. FR 61-1289.

THE RECORD SHOWS THAT ON MARCH 3, 1961, THE PURCHASING OFFICE AT FORT RITCHIE, MARYLAND, PLACED AN ORDER WITH PENNIMAN FOR 10 PINTS OF CLEANING COMPOUND AT A PRICE OF $7 PER UNIT. ON MARCH 15, 1961, YOU WROTE THE PURCHASING OFFICER AND REQUESTED THAT SHE JUSTIFY THE PRICE OF $7, SINCE IT FAR EXCEEDED THE STANDARD UNIT PRICE OF $1 QUOTED IN THE DEPARTMENT OF THE ARMY SUPPLY MANUAL (DA SUPPLY MANUAL) SM 10-2 7900. YOUR LETTER STATED THAT UPON INQUIRY YOU DISCOVERED THAT BOWMAN MELL AND COMPANY OF HARRISBURG, PENNSYLVANIA, WOULD FURNISH THE SAME ITEM AT $0.90 A PINT IN 10-PINT LOTS. YOU POINTED OUT THAT HARRISBURG, PENNSYLVANIA, AND BALTIMORE, MARYLAND, ARE APPROXIMATELY EQUIDISTANT FROM FORT RITCHIE, MARYLAND.

IN HER LETTER OF MARCH 23, THE PURCHASING OFFICER OFFERED THE EXPLANATION THAT SINCE THE ITEM WAS NOT AVAILABLE LOCALLY, IT WAS ORDERED C.O.D. FROM THE ONLY KNOWN SOURCE OF SUPPLY. THE HIGH COST OF $7 PER PINT WAS ALLEGEDLY DUE TO PROFESSIONAL SERVICES RENDERED IN PREPARING THE CLEANING SOLVENT. THE REASON GIVEN FOR THE HIGH COST OF THE SERVICES WAS DOCUMENTED IN PENNIMAN'S LETTER OF MAY 25, 1961, TO THE PURCHASING OFFICE AT FORT RITCHIE, MARYLAND. PENNIMAN STATED THAT ITS COMPANY WAS BASICALLY AN ANALYTICAL LABORATORY AND WAS NOT SET UP FOR ROUTINE MANUFACTURE OR PRODUCTION OF THESE ITEMS, ESPECIALLY WHEN ORDERED IN SMALL QUANTITIES. IT AGREED THAT A COMPANY SET UP FOR BULK MANUFACTURING COULD SUPPLY THE CLEANING COMPOUND FOR APPROXIMATELY $1 A PINT.

THE PURCHASING OFFICER FURTHER STATED THAT APPROPRIATE STEPS HAD BEEN TAKEN TO ASSURE THAT PROCUREMENTS ORDERED BY C.O.D. METHODS WOULD BE TO THE ADVANTAGE OF THE GOVERNMENT. IN YOUR LETTER OF OCTOBER 26, 1961, TO THE ARMY FINANCE CENTER IN INDIANAPOLIS, INDIANA, YOU CONFIRM THAT THE PURCHASING OFFICER IS NOT USING BOWMAN MELL AND COMPANY AS A SOURCE OF SUPPLY.

THE PRICES QUOTED IN THE DA SUPPLY MANUAL, INCLUDING THE ONE HERE IN QUESTION, ARE PUBLISHED IN ACCORDANCE WITH THE PROVISIONS OF AR 37-60 AND AR 735-7. SECTION III OF AR 735-7 SETS FORTH THE GENERAL POLICIES FOR ESTABLISHING STANDARD PRICES FOR ITEMS FINANCED UNDER THE ARMY STOCK FUND. THIS SECTION PROVIDES THAT EACH ITEM SHALL HAVE A SINGLE STANDARD PRICE WHICH SHALL INCLUDE CURRENT MARKET COSTS AND SHALL BE REVIEWED PERIODICALLY. SECTION I, PARAGRAPH 4, DEFINES THE OBJECTIVES OF STANDARD PRICING, ONE OF WHICH IS TO:

"E. PROVIDE/S) THAT RECOVERIES BY THE STOCK FUND, UPON THE SALE OF SUPPLIES, WILL BE IN SUCH APPROXIMATE DOLLAR AMOUNTS AS ARE NEEDED TO REPLACE THE ITEM IN INVENTORY, WHEN REQUIRED.'

HOWEVER, PARAGRAPH 5 OF THAT SECTION, REVIEW AND REVISION OF STANDARD PRICES, POINTS OUT THAT WHILE THE OBJECTIVES IN PARAGRAPH 4 ARE DEPENDENT ON PRICES WHICH REFLECT CURRENT PROCUREMENT COSTS, IT IS OBVIOUSLY IMPRACTICAL TO REVISE PRICES SO THAT THEY ALWAYS REFLECT ACTUAL COSTS. PARAGRAPH 5, SECTION VIII C OF AR 37-60 STATES THAT "IN OPERATIONS OF THE MAGNITUDE AND COMPLEXITY OF MILITARY STOCK FUNDS, IT MUST BE RECOGNIZED THAT PRICING POLICIES CANNOT BE APPLIED WITH MATHEMATICAL PRECISENESS.'

WHILE IT SEEMS CLEAR THAT THE PRICES LISTED IN THE DA SUPPLY MANUAL ARE INTENDED TO REFLECT AS NEARLY AS POSSIBLE THE PROBABLE CURRENT MARKET VALUE OF THE ITEMS LISTED, WE CAN FIND NO PROVISION IN ARMY REGULATIONS 37 -60 AND 735-7 OR ELSEWHERE WHICH PROHIBITS THE PROCUREMENT OF SUPPLIES AT A COST EXCEEDING THE AMOUNT PUBLISHED IN THE DA SUPPLY MANUAL. THEREFORE, PAYMENT MAY NOT BE DENIED ON THE GROUND THAT PENNIMAN CHARGED MORE FOR ITS PRODUCT THAN THE PRICE SUGGESTED IN THE DA SUPPLY MANUAL.

NOR CAN WE SAY THAT THE PRICE CHARGED WAS SO EXORBITANT THAT THE CONTRACT WAS UNCONSCIONABLE. IN HUME V. UNITED STATES, 132 U.S. 406 (1889), AND BEARD V. UNITED STATES, 3 CT.CT. 122 (1867), THE COURTS HELD THAT THE CONTRACTS INVOLVED CALLED FOR PAYMENT OF SO GROSSLY AN UNCONSCIONABLE PRICE THAT FRAUD COULD BE IMPUTED. IN OUR DECISION B 140803, OF JANUARY 20, 1960, WE CITED THOSE OPINIONS AS AUTHORITY FOR REFUSING PAYMENT TO A CONTRACTOR WHO, ON ONE ITEM, SOUGHT TO CHARGE THE GOVERNMENT $140 A UNIT, ALTHOUGH HE HAD PURCHASED THIS ITEM FOR $3.50. IN THE INSTANT CASE, THE PRICE OF $7 PER UNIT IS NOT ONLY MUCH CLOSER TO THE MARKET VALUE OF $0.90, BUT APPARENTLY IS JUSTIFIED IN RELATION TO THE PRODUCTION COST AT PENNIMAN'S CHEMICAL LABORATORY, WHICH ADMITTEDLY DOES NOT ATTEMPT TO COMPETE WITH COMPANIES SUCH AS BOWMAN MELL AND COMPANY. THE FACTS MIGHT BE MORE DIFFICULT TO DISTINGUISH FROM THOSE CONSIDERED IN B-140803, IF PENNIMAN HAD PURCHASED THE ITEM FROM BOWMAN MELL AND COMPANY FOR $0.90 AND THEN RESOLD IT TO THE GOVERNMENT FOR $7, BUT THESE ARE NOT THE FACTS BEFORE US.

YOUR LETTER REFERS TO PART 6 OF ASPR, ENTITLED SMALL PURCHASES, WHICH PROVIDES:

"3-603 COMPETITION. REASONABLE SOLICITATION OF QUOTATIONS FROM QUALIFIED SOURCES OF SUPPLY SHALL BE SECURED IN ORDER TO ASSURE THAT THE PROCUREMENT IS MADE TO THE ADVANTAGE OF THE GOVERNMENT, PRICE AND OTHER FACTORS CONSIDERED, INCLUDING THE ADMINISTRATIVE COST OF THE PURCHASE. GENERALLY, SOLICITATION SHALL BE LIMITED TO THREE SUPPLIERS OR THE NUMBER OF SUPPLIERS IN THE LOCAL TRADE AREA, WHICHEVER IS LESS. WHERE THE PRICES ARE CONSIDERED TO BE REASONABLE, SMALL PURCHASES NOT EXCEEDING $250 MAY BE ACCOMPLISHED WITHOUT SECURING COMPETITIVE QUOTATIONS, BUT SUCH PURCHASES SHALL BE DISTRIBUTED EQUITABLE OVER A PERIOD OF TIME AMONG QUALIFIED SUPPLIERS. REASONABLENESS OF PROPOSED PRICES MAY BE ESTABLISHED BY COMPARISON WITH PREVIOUS PURCHASES, CURRENT PRICE LISTS, CATALOGUES, ADVERTISEMENTS, OR BY ANY OTHER APPROPRIATE METHOD. SOLICITATION OF QUOTATIONS WILL GENERALLY BE EFFECTED ORALLY. * * *"

WE ARE UNABLE TO FIND ANY SPECIFIC VIOLATION OF ASPR 3-603. APPARENTLY, PENNIMAN WAS THE ONLY SOURCE OF SUPPLY KNOWN TO THE PURCHASING OFFICER. WHILE WE MAY DOUBT THE DILIGENCE OF THE PURCHASING OFFICER'S INQUIRY, OUR OFFICE CANNOT SAY THAT, AS A MATTER OF LAW, SHE SHOULD HAVE ASKED FOR PRICES FROM A PARTICULAR COMPANY LOCATED IN HARRISBURG, PENNSYLVANIA.

SINCE IT APPEARS THAT THE PURCHASING OFFICER FOLLOWED THE PROCEDURES SET FORTH IN ASPR 3-603 AND THEREBY DETERMINED IN GOOD FAITH THAT AT THE TIME PENNIMAN'S PRICE OF $70 FOR 10 PINTS WAS REASONABLE, WE CANNOT CONCLUDE THAT THE PAYMENT OF THIS PRICE IS ILLEGAL. ACCORDINGLY, PAYMENT OF THE VOUCHER IN THE AMOUNT OF $70 UNDER ORDER NO. FR 61-1289 IS APPROVED.