B-151776, JULY 8, 1963, 43 COMP. GEN. 27

B-151776, JULY 8, 1963, 43 COMP. GEN. 27

CONTRACTS - AWARDS - LABOR SURPLUS AREAS - QUALIFICATION A BIDDER WHO, FOR THE PURPOSE OF ESTABLISHING ELIGIBILITY FOR THE LABOR SURPLUS AREA SET-ASIDE PORTION OF A PROCUREMENT OF ALUMINUM SHEETS, AND BECAUSE IT IS AGAINST ITS TRADE PRACTICE TO RELEASE COST DATA ON PRIMARY ALUMINUM, STATES THAT THE PRICE CHARGED ITS FINISHING PLANT FOR ALUMINUM INGOTS MANUFACTURED AT THE BIDDER'S PLANT IN A PERSISTENT LABOR SURPLUS AREA IS IN EXCESS OF 50 PERCENT OF THE COST OF THE ALUMINUM INGOT ON THE BASIS THAT THE TRANSACTION BETWEEN THE INGOT PLANT AND THE FINISHING PLANT CONSTITUTES A SUBCONTRACT UNDER PARAGRAPH 3-902.1 (A) OF THE ARMED SERVICES PROCUREMENT REGULATION RELATING TO "MAKE OR BUY PROGRAMS" OR COMES UNDER EXAMPLES "C" AND ,A" IN PARAGRAPH 1-801.1, ARMED SERVICES PROCUREMENT REGULATION, RELATING TO LABOR SURPLUS AREAS MAY NOT HAVE THE REGULATION APPLICABLE TO THE "MAKE OR BUY" PROGRAM EXTENDED TO A DIFFERENT PROGRAM ON DISTRESSED LABOR AREAS, NOR MAY THE EXAMPLES INVOLVING VENDOR PURCHASES OF RAW MATERIALS IN PARAGRAPH 1-801.1 BE CONSIDERED THE SAME AS THE PRODUCTION OF MATERIALS AT ITS OWN FACILITY; THEREFORE, THE EVIDENCE SUBMITTED BY THE BIDDER DOES NOT ESTABLISH THAT COSTS OF MANUFACTURING IN THE LABOR SURPLUS AREA PLANT ARE IN EXCESS OF 50 PERCENT OF THE CONTRACT PRICE FOR FURNISHING THE END PRODUCT.

TO THE DIRECTOR, DEFENSE SUPPLY AGENCY, JULY 8, 1963:

BY LETTER DATED JUNE 10, 1963, WITH ENCLOSURES, YOUR ASSISTANT COUNSEL, FORWARDED FOR OUR CONSIDERATION THE PROTEST OF THE REYNOLDS METALS COMPANY AGAINST A DETERMINATION BY THE CONTRACTING OFFICER THAT THE COMPANY IS INELIGIBLE TO BE CONSIDERED IN NEGOTIATIONS FOR THE LABOR SURPLUS AREA SET -ASIDE UNDER INVITATION FOR BIDS NO. DSA-5-63-3266 AS A PERSISTENT LABOR SURPLUS AREA CONCERN.

THE INVITATION, DATED MARCH 12, 1963, REQUESTED BIDS ON 85,008 LBS. OF ALUMINUM ALLOY SHEET. AN ADDITIONAL QUANTITY OF 85,680 LBS. WAS SET ASIDE FOR AWARD TO ONE OR MORE LABOR SURPLUS AREA CONCERNS PURSUANT TO A "NOTICE OF LABOR SURPLUS AREA SET-ASIDE" CONTAINED IN THE INVITATION. TWELVE BIDS WERE RECEIVED AND OPENED ON APRIL 1, 1963. AWARD ON THE NON-SET-ASIDE PORTION WAS MADE ON MAY 8, 1963, TO REYNOLDS AS THE LOWEST BIDDER AT $0.322 PER LB.

CONCERNING THE SET-ASIDE PORTION OF THE INVITATION, REYNOLDS INCLUDED THE FOLLOWING STATEMENT IN ITS BID AS REQUIRED BY PARAGRAPH (C) OF THE NOTICE ENTITLED "IDENTIFICATION OF AREAS OF PERFORMANCE.'

REYNOLDS METALS COMPANY PROPOSES TO PERFORM A SUBSTANTIAL PORTION OF THE PRODUCTION OF THE CONTRACT, IF AWARDED, AT ITS ST. LAWRENCE, MASSENA, NEW YORK PLANT IN THE OGDENSBURG-MASSENNA-MALONE LABOR MARKET, PRESENTLY DESIGNATED AS AN AREA OF SUBSTANTIAL AND PERSISTENT LABOR SURPLUS ASPR 1- 801.1 (EXAMPLE C) WITH FINAL PRODUCTION AT OTHER REYNOLDS METALS PLANTS, ASPR 1-801.1 (EXAMPLE A).

REYNOLDS ALSO STATED THAT ITS PRINCIPAL PLACE OF MANUFACTURE WOULD BE LISTERHILL, ALABAMA, AN AREA OF SUBSTANTIAL LABOR SURPLUS.

THE OLIN MATHIESON CHEMICAL CORPORATION WHICH BID $0.343 PER LB. ADVISED THAT ITS PLACE OF MANUFACTURE WOULD BE HANNIBAL, OHIO, A SUBSTANTIAL AND PERSISTENT LABOR SURPLUS AREA, WHICH WOULD PLACE THIS BIDDER IN PRIORITY GROUP 2 UNDER THE LABOR SURPLUS AREA INVITATION PROVISIONS.

IN ORDER TO OBTAIN A CLARIFICATION OF THE REYNOLD'S STATEMENT AND TO ASCERTAIN WHETHER THAT BIDDER SHOULD BE CONSIDERED AS A PERSISTENT LABOR SURPLUS AREA CONCERN (PRIORITY GROUP 2) IN NEGOTIATIONS FOR THE SET-ASIDE PORTION, REYNOLDS WAS REQUESTED TO ADVISE IF THE COSTS WHICH IT WOULD INCUR ON ACCOUNT OF MANUFACTURING OR PRODUCTION PERFORMED IN THE PERSISTENT LABOR SURPLUS AREA (BY ITSELF OR ITS FIRST TIER SUBCONTRACTOR) WOULD AMOUNT TO MORE THAN 50 PERCENT OF THE CONTRACT PRICE. REYNOLDS ADVISED THAT ALUMINUM PIG (INGOT) WOULD BE MADE IN THE MASSENA, NEW YORK AREA--- A SUBSTANTIAL AND PERSISTENT LABOR SURPLUS AREA--- WITH THE FINISHED END ITEM (ALUMINUM SHEET) BEING MANUFACTURED AT LISTERHILL, ALABAMA. BY LETTER DATED APRIL 25, 1963, REYNOLDS ADVISED THAT:

HISTORICAL ACCOUNTING RECORDS FOR PAST YEARS, AS WELL AS REASONABLE PROJECTIONS FOR THE FORESEEABLE FUTURE, CLEARLY INDICATE THAT THE REYNOLDS METALS COMPANY HAS AND WILL INCUR DIRECT LABOR AND TOTAL OVERHEAD COSTS FOR EACH OF ITS REDUCTION PLANTS (INCLUDING MASSENA, JONES MILLS, PATTERSON, AND LISTERHILL) IN EXCESS OF 50 PERCENT OF THE PRICE OF ALUMINUM PIG (CURRENTLY ?225 PER POUND FOR 99.5 PERCENT PURITY PIG).

IT IS CONTRARY TO TRADE PRACTICE TO RELEASE COST DATA ON PRIMARY ALUMINUM, BUT THE FOREGOING STATEMENT, WE BELIEVE, PROVIDES ADEQUATE BASIS FOR OUR CERTIFICATION THAT PIG FROM OUR REDUCTION PLANTS LOCATED IN A "LABOR SURPLUS" AREA QUALIFIES AS PIG "SUBSTANTIALLY MANUFACTURED" IN A LABOR SURPLUS AREA. ASPR 8-101.1 (EXAMPLE C).

ON MAY 6, 1963, REYNOLDS WAS ADVISED BY THE CONTRACTING OFFICER THAT THE NOTICE OF LABOR SURPLUS SET-ASIDE DEFINES A "PERSISTENT LABOR SURPLUS AREA CONCERN" AS ONE WHICH AGREES TO PERFORM, OR CAUSE TO BE PERFORMED, A SUBSTANTIAL PORTION OF A CONTRACT IN SUCH AREA IF THE COSTS THAT WILL BE INCURRED AMOUNT TO MORE THAN 50 PERCENT OF THE CONTRACT PRICE (ASPR 1- 804.2 (B) (2) (I) ). IN VIEW THEREOF, REYNOLDS WAS ADVISED THAT UNLESS INFORMATION WAS FURNISHED THAT COSTS IN EXCESS OF 50 PERCENT OF THE CONTRACT PRICE WOULD BE INCURRED IN PERSISTENT LABOR SURPLUS AREA, IT COULD ONLY BE CONSIDERED AS ONE PRODUCING IN AN AREA OF SUBSTANTIAL SURPLUS LABOR--- PRIORITY GROUP 4. REYNOLDS PROTESTED AGAINST THIS CONCLUSION--- TO PLACE IT IN PRIORITY GROUP 4--- AND ADVISED THAT IT PROPOSED MANUFACTURING ALUMINUM SHEETS AT LISTERHILL, ALABAMA, USING INGOT MANUFACTURED AT MASSENA, NEW YORK. IT FURTHER STATED THAT:

* * * WE WISH TO CALL YOUR ATTENTION TO ASPR 3-902.1 (A) WHICH INDICATES THAT THERE CAN BE ,SUBCONTRACT" BETWEEN A CONTRACTOR AND "HIS AFFILIATE, SUBSIDIARY OR DIVISION.' A PURPOSE OF ASPR 3-902.1 (A) IS THE RECOGNITION OF SUCH "SUBCONTRACTS" AND THEIR DISQUALIFICATION UNDER ,MAKE-OR-BUY PROGRAMS.'

REYNOLDS METALS COMPANY, FOR INTERNAL PURPOSES, DIVIDES ITS MANUFACTURING OPERATIONS INTO EIGHT "DIVISIONS: " (1) ALUMINA AND REDUCTION; (2) SHEET, WIRE, ROD, BAR, POWDER AND ACSR; (3) INSULATED WIRE AND CABLE; (4) EXTRUSION; (5) FOIL AND PRINTING; (6) ARCHITECTURAL FABRICATION; (7) PLASTICS; AND (8) CANS.

ASPR 1-801.1 PROVIDES AS FOLLOWS:

TABLE

1-801.1 LABOR SURPLUS AREA CONCERN INCLUDES---

(I) PERSISTENT LABOR SURPLUS AREA CONCERNS WHICH WILL PERFORM OR CAUSE TO BE PERFORMED ANY CONTRACTS AWARDED TO THEM AS LABOR SURPLUS AREA CONCERNS SUBSTANTIALLY IN "AREAS OF SUBSTANTIAL AND PERSISTENT LABOR SURPLUS; AND

(II) SUBSTANTIAL LABOR SURPLUS AREA CONCERNS WHICH WILL PERFORM OR CAUSE TO BE PERFORMED ANY CONTRACTS AWARDED TO THEM AS LABOR SURPLUS AREA CONCERNS SUBSTANTIALLY IN "AREAS OF SUBSTANTIAL LABOR SURPLUS.'

A CONCERN SHALL BE DEEMED TO PERFORM A CONTRACT SUBSTANTIALLY IN "AREAS OF SUBSTANTIAL AND PERSISTENT LABOR SURPLUS" IF THE COSTS THAT IT INCURS ON ACCOUNT OF MANUFACTURING OR PRODUCTION (BY ITSELF OR ITS SUBCONTRACTORS) IN SUCH AREAS AMOUNT TO MORE THAN 50 PERCENT OF THE CONTRACT PRICE. A CONCERN SHALL BE DEEMED TO PERFORM A CONTRACT SUBSTANTIALLY IN "AREAS OF SUBSTANTIAL LABOR SURPLUS" IF THE COSTS THAT IT INCURS ON ACCOUNT OF MANUFACTURING OR PRODUCTION (BY ITSELF OR ITS SUBCONTRACTORS) IN SUCH AREAS OR IN "AREAS OF SUBSTANTIAL OR PERSISTENT LABOR SURPLUS" AMOUNT TO MORE THAN 50 PERCENT OF THE CONTRACT PRICE.

EXAMPLE A. ABC COMPANY, MANUFACTURING IN A FULL EMPLOYMENT AREA, BIDS ON A CONTRACT AT $1,000. ABC COMPANY WILL INCUR THE FOLLOWING COSTS:

DIRECT LABOR ----------------------------------------------- $200

OVERHEAD --------------------------------------------------- 200

PURCHASE OF MATERIALS FROM XYZ, WHICH MANUFACTURES THE

MATERIALS IN A LABOR SURPLUS AREA ------------------------ 510

ABC COMPANY QUALIFIES AS A LABOR SURPLUS AREA CONCERN.

EXAMPLE B. DEF COMPANY, MANUFACTURING IN A LABOR SURPLUS AREA, BIDS ON A CONTRACT OF $1,000. DEF COMPANY WILL INCUR THE FOLLOWING COSTS:

DIRECT LABOR ----------------------------------------------- $200

OVERHEAD --------------------------------------------------- 200

PURCHASE OF MATERIALS FROM UVW, WHICH IS LOCATED IN A LABOR

SURPLUS AREA BUT WHICH MERELY DISTRIBUTES THE MATERIALS

FROM STOCKS ON HAND (THE MATERIALS HAVING BEEN MANUFACTURED

BY UVW'S SUPPLIER) --------------------------------------- 550

DEF COMPANY DOES NOT QUALIFY AS A LABOR SURPLUS AREA CONCERN REGARDLESS OF WHETHER UVW'S SUPPLIER MANUFACTURES IN A LABOR SURPLUS AREA.

EXAMPLE C. GHI COMPANY, MANUFACTURING IN A LABOR SURPLUS AREA, BIDS ON A CONTRACT AT $1,000. GHI COMPANY WILL INCUR THE FOLLOWING COSTS:

DIRECT LABOR ----------------------------------------------- $230

OVERHEAD ---------------------------------------------------275

PURCHASE OF MATERIALS FROM RST, WHICH MANUFACTURES THE

MATERIALS IN A FULL EMPLOYMENT AREA ---------------------- 425

GHI COMPANY QUALIFIES AS A LABOR SURPLUS AREA CONCERN.

IN 41 COMP. GEN. 160, 164-165, WE HELD:

FROM THE ABOVE EXAMPLES, (ASPR 1-801.1) IT IS OBVIOUS THAT THE PLACE AT WHICH THE CONTRACTOR WILL ITSELF PERFORM MAY BE WHOLLY IMMATERIAL IF MORE THAN 50 PERCENT OF THE TOTAL COST OF PERFORMANCE WILL BE INCURRED FOR SUBCONTRACTING OR PURCHASE OF MATERIALS OR COMPONENTS. THE LOCATION OR LOCATIONS OF THE SOURCES OF SUCH MATERIALS OR COMPONENTS WILL, UNDER THE REGULATION, DETERMINE THE STATUS OF THE PRIME CONTRACTOR AS A LABOR SURPLUS AREA CONCERN.

THE REYNOLDS' EXPLANATION ABOVE AS TO ITS ELIGIBILITY APPEARS TO IMPLY THAT THE PRICE OF ALUMINUM INGOT PRODUCED IN THE MASSENA AREA SHOULD BE ACCEPTED AS THE COST OF ALUMINUM INGOT TO ITS LISTERHILL PLANT WHICH WOULD PRODUCE THE END ITEM--- ALUMINUM SHEETS--- ON THE BASIS THAT THIS CONSTITUTES A "SUBCONTRACT" WITHIN THE MEANING OF ASPR 3-902.1 (A). HOWEVER, THIS SECTION OF THE ARMED SERVICES PROCUREMENT REGULATION IS SPECIFICALLY APPLICABLE TO "MAKE-OR-BUY" PROGRAMS UNDER REQUESTS FOR PROPOSALS WHICH, UNDER THE GENERAL RULES OF CONTRACT CONSTRUCTION, MAY NOT BE EXTENDED TO AN ENTIRELY DIFFERENT CONTRACT PROGRAM HAVING FOR ITS PARAMOUNT PURPOSE AN ECONOMIC GOAL OF GOVERNMENT ASSISTANCE TO DISTRESSED LABOR AREAS.

WHETHER A PARTICULAR BIDDER WILL PERFORM A CONTRACT SUBSTANTIALLY IN "AREA OF SUBSTANTIAL AND PERSISTENT LABOR SURPLUS" IS A QUESTION OF FACT DEPENDENT UPON INFORMATION FURNISHED WITH THE BID WHICH REASONABLY ESTABLISHES THAT MORE THAN 50 PERCENT OF THE "CONTRACT PRICE" WILL BE INCURRED IN SUCH LABOR AREAS.

WHILE THE COSTS THAT MIGHT BE INCURRED BY REYNOLDS IN THE MASSENA AREA MIGHT BE IN EXCESS OF 50 PERCENT OF THE COST OF ALUMINUM INGOT PRICED AT $0.225 PER LB., OR ABOUT $0.113 PER LB., THE NON-SET-ASIDE PORTION AWARDED TO REYNOLDS IS PRICED AT $0.322 PER LB. HENCE, TO DETERMINE REYNOLDS' ELIGIBILITY UNDER ASPR 1-801.1, AN AMOUNT IN EXCESS OF $0.161 PER LB. OF THE COSTS OF MANUFACTURING OR PRODUCTION IN THE MASSENA AREA MUST BE ESTABLISHED BY REYNOLDS TO ENTITLE IT TO AWARD OF THE SET-ASIDE PORTION. THIS WAS NOT DONE. REYNOLDS' STATEMENT RELATIVE TO ITS DIRECT LABOR AND OVERHEAD COSTS TO BE INCURRED IN THE MASSENA AREA IN PRODUCING ALUMINUM INGOT AT $0.225 PER LB. MAY NOT BE ACCEPTED AS EVIDENCE OF AN AMOUNT IN EXCESS OF 50 PERCENT OF THE CONTRACT PRICE FOR FURNISHING FINISHED ALUMINUM SHEETS. ALSO, THE PRICE AT WHICH ALUMINUM INGOT MAY BE CHARGED TO THE LISTERHILL PLANT DOES NOT FIX THE COSTS WHICH REYNOLDS WILL INCUR IN PRODUCING INGOT IN THE MASSENA AREA.

EXAMPLES "C" AND "A" GIVEN IN ASPR 1-801.1 AND CITED BY REYNOLDS IN SUPPORT OF ITS POSITION ARE NOT APPLICABLE HERE SINCE THOSE EXAMPLES SPECIFICALLY REFER TO SITUATIONS INVOLVING VENDOR PURCHASES, WHEREAS HERE REYNOLDS IS NOT PURCHASING RAW MATERIALS FROM VENDORS BUT PRODUCING THE SAME AT ITS OWN FACILITIES.