B-159493, MARCH 28, 1967, 46 COMP. GEN. 713

B-159493, MARCH 28, 1967, 46 COMP. GEN. 713

CONTRACTS - FEDERAL SUPPLY SCHEDULE - ORDER LIMITATION - SPLITTING REQUIREMENTS UNDER A FEDERAL SUPPLY SCHEDULE (FSS) CONTRACT IMPOSING A $50,000 LIMITATION ON ORDERS AND LISTING TWO SUPPLIERS OF FILM INSPECTION MACHINES, THE PURCHASE BY THE ARMY OF THE HIGHER PRICED ONLY COMMERCIAL ITEM ON THE FSS BY SPLITTING REQUIREMENTS INTO SEVERAL ORDERS TO AVOID THE LIMITATION--- MANDATORY ON DEFENSE AGENCIES EVEN THOUGH NOT OBLIGATED TO USE THE FSS--- VIOLATES THE BASIC CONCEPTS OF COMPETITIVE BIDDING AND IN EFFECT IS A SOLE-SOURCE NEGOTIATION WITHOUT THE FINDING REQUIRED BY 10 U.S.C. 2310, NOTWITHSTANDING THERE IS NO PROHIBITION AGAINST THE PURCHASE OF THE COMMERCIAL ITEM CONSIDERED ESSENTIAL EVEN WHEN IT IS BELIEVED THAT FORMAL SOLICITATION OF BIDS WOULD ELICIT RESPONSIVE OFFERS FROM OTHER THAN THE ONE REMAINING, BUT UNSATISFACTORY FSS SOURCE. HOWEVER, TO PROTECT THE INTERESTS OF THE GOVERNMENT, THE PROPER PROCEDURE WOULD HAVE BEEN TO NEGOTIATE THE PROCUREMENT UNDER 10 U.S.C. 2304 (A) (10) ON THE BASIS THAT IT WAS IMPRACTICABLE TO OBTAIN COMPETITION.

TO THE SECRETARY OF THE ARMY, MARCH 28, 1967:

WE HAVE RECEIVED ADMINISTRATIVE REPORTS FROM HEADQUARTERS, ARMY MATERIEL COMMAND, DATED NOVEMBER 25, 1966, AND FEBRUARY 20, 1967, INVOLVING A PROTEST BY MR. R. F. MENARY, PRESIDENT OF PAULMAR, INC., AGAINST A PROCUREMENT OF 68 FILM INSPECTION MACHINES FROM THE HARWALD COMPANY BY THE U.S. ARMY ELECTRONICS COMMAND AT FORT MONMOUTH. THE PROCUREMENT WAS ACCOMPLISHED BY PLACING ORDERS UNDER A FEDERAL SUPPLY SCHEDULE (FSS) CONTRACT, HEREINAFTER REFERRED TO AS THE 1966 FSS CONTRACT, AWARDED BY THE GENERAL SERVICES ADMINISTRATION (GSA) FOR THE REQUIREMENTS OF CIVILIAN AGENCIES OF THE GOVERNMENT FOR SUCH MACHINES DURING THE PERIOD DECEMBER 1, 1965, TO NOVEMBER 30, 1966.

THE CONTRACT LISTED BOTH HARWALD AND PAULMAR AS SUPPLIERS OF MACHINES OF THE TYPE INVOLVED, AND PROVIDED THAT ALL EXECUTIVE AGENCIES OF THE GOVERNMENT EXCLUDING THE DEPARTMENT OF DEFENSE, WERE OBLIGATED TO ORDER FROM CONTRACTORS LISTED IN THE SCHEDULE "SUCH PRODUCTS OF THE PARTICULAR MAKE, MODEL, OR BRAND AS MAY BE REQUIRED DURING THE PERIOD OF SUCH CONTRACT" FOR DELIVERY WITHIN THE 48 CONTINGUOUS STATES AND THE DISTRICT OF COLUMBIA. OTHER AGENCIES, INCLUDING THE DEPARTMENT OF DEFENSE, WERE AUTHORIZED BY THE TERMS OF THE CONTRACT TO SATISFY THEIR REQUIREMENTS FOR FILM INSPECTION MACHINES BY PLACING ORDERS UNDER IT, BUT CONTRACTORS WERE NOT OBLIGATED TO ACCEPT SUCH ORDERS. WITH RESPECT TO SUCH FSS CONTRACTS, NOT BY THEIR TERMS MANDATORY UPON THE DEPARTMENT OF DEFENSE, PARAGRAPH 5- 103, ARMED SERVICES PROCUREMENT REGULATION, PROVIDES THAT THE DEFENSE AGENCIES SHALL PURCHASE OR PLACE ORDERS UNDER THEM SUBJECT TO CERTAIN CONDITIONS, ONE OF WHICH IS THAT SUCH PURCHASE OR ORDER BE WITHIN THE MINIMUM AND MAXIMLUM ORDER LIMITATIONS OF THE CONTRACT. THE CONTRACT HERE IN QUESTION CONTAINED A PROVISION LIMITING THE MAXIMUM AMOUNT OF ANY ORDER WHICH COULD BE PLACED OR ACCEPTED FOR FILM INSPECTION MACHINES TO $50,000. IN THE INSTANT CASE, THE COMMAND ISSUED TO THE HARWALD COMPANY THREE SEPARATE ORDERS, FOR AN AGGREGATE OF 68 MARK III MODELS AT A GROSS PRICE OF $121,992 EACH OF THE THREE INDIVIDUAL ORDERS AMOUNTING TO LESS THAN $50,000.

THE NET SCHEDULE PRICE OF THE HARWALD MARK III MODEL ORDERED BY THE ELECTRONICS COMMAND WAS $1,785.03 PER UNIT. PAULMAR'S MODEL 90 WAS AVAILABLE ON THE SCHEDULE AT $1,778.69. JUSTIFICATION FOR THE SELECTION OF THE HIGHER-PRICED EQUIPMENT WAS THEREFORE REQUIRED BY ASPR 5-106 (A) TO BE INCLUDED IN THE CONTRACT FILE. THE ONLY ITEM ANTEDATING THE ORDERS IN THE FILE FURNISHED US WHICH COULD BE CONSIDERED AS SUCH JUSTIFICATION APPEARS TO BE A MEMORANDUM OR COMMENT DATED FEBRUARY 16, 1966, FROM THE DIRECTOR, PROCUREMENT AND PRODUCTION, TO THE PHILADELPHIA PROCUREMENT DIVISION, WHICH CONTAINS THE FOLLOWING STATEMENT:

3. THIS DIRECTORATE CONDUCTED A SURVEY TO DETERMINE THOSE EQUIPMENTS MEETING THE MINIMUM OPERATING REQUIREMENTS OF THE PICTORIAL AND AUDIO BR, OFFICE OF THE CHIEF OF COMMUNICATIONS-ELECTRONICS, WASHINGTON, D.C. IT WAS DETERMINED THAT THE IMMEDIATE REQUIREMENTS COULD BE SATISFIED BY PROCUREMENT FROM THE FEDERAL SUPPLY SCHEDULE, THE HARWALD COMPANY, MODEL U, MARK III AND MEET THE MINIMUM OPERATING REQUIREMENTS. THIS FALLS CONSIDERABLY SHORT OF THE ,FACTUAL" JUSTIFICATION REQUIRED BY THE CITED REGULATION, AND PROVIDES NO INDICATION WHATEVER AS TO WHAT REQUIREMENTS WOULD NOT BE MET BY THE PAULMAR EQUIPMENT.

PURSUANT TO A RECOMMENDATION CONTAINED IN THE SAME MEMO, THERE WERE INCLUDED IN THE FIRST ORDER AGAINST HARWALD TWO OF THAT FIRM'S CONSIDERABLY LESS EXPENSIVE "MODEL 76" MACHINES FOR AN ADDITIONAL $3,386, AND TWO OF PAULMAR'S "MODEL 90" MACHINES WERE ALSO ORDERED UNDER THE FSS CONTRACT. THESE MACHINES WERE PURCHASED TO TEST AND EVALUATE THEIR CAPABILITIES AND POSSIBLE FUTURE UTILIZATION BY THE GOVERNMENT. WE ARE INFORMALLY ADVISED THAT THE TESTING SHOULD BE COMPLETED BY MARCH 16, 1967, AND THAT A REPORT ON THE TESTING SHOULD BE ISSUED BY APRIL 30, 1967, PRIOR TO ANY FURTHER MAJOR PROCUREMENT OF FILM INSPECTION MACHINES.

IN THE REPORT PREPARED IN RESPONSE TO THE PAULMAR PROTEST, THE COMMAND JUSTIFIES ITS FAILURE TO ORDER A LARGE QUANTITY OF THE PAULMAR PRODUCT ON THE BASIS THAT NEITHER THE DESCRIPTIVE LITERATURE NOR THE FIELD EXPERIENCE ON THE MODEL 90 PAULMAR OFFERED UNDER THE 1966 FSS CONTRACT, WAS ADEQUATE TO DETERMINE ITS PERFORMANCE CAPABILITIES. FURTHERMORE, THE MODEL 90 WHICH PAULMAR HAD PRODUCED DURING THE FIRST HALF OF 1965 OR EARLIER WAS DETERMINED NOT TO MEET THE NEEDS OF THE USING AGENCY BECAUSE IT DID NOT HAVE A BY-PASS SWITCH, A NOTCH BY-PASS SWITCH, A TOTAL OF THREE INDICATORS, AND ILLUMINATION OF THE FILM IN THE AREA OF DEFECT DETECTION.

MR. MENARY ALLEGES THAT PAULMAR AND HARWALD ARE THE ONLY MANUFACTURERS OF THE SUBJECT MACHINES, AND THAT ONLY HARWALD'S COMMERCIAL EQUIPMENT HAS THE FOUR FEATURES MENTIONED ABOVE, WHICH MR. MENARY CONSIDERS NONESSENTIAL AND EVEN UNDESIRABLE. MR. MENARY FURTHER ALLEGES THAT "THESE PARTICULAR MODEL 90-S" ARE IN SUCCESSFUL USE AT SEVERAL NAMED MILITARY INSTALLATIONS; THAT HE ADVISED THE ARMY IN 1965 THAT PAULMAR COULD PRODUCE FILM INSPECTION MACHINES INCORPORATING THE FOUR FEATURES OF THE HARWALD MODEL MENTIONED ABOVE; AND THAT THE ORDERS AWARDED TO HARWALD FOR THE MARK III MODELS ARE INVALID, BECAUSE THE FSS CONTRACT TERMS PROHIBIT AN AGENCY FROM PLACING, AND A CONTRACTOR FROM ACCEPTING AN ORDER IN EXCESS OF $50,000.

IN RESPONSE TO MR. MENARY'S ALLEGATIONS, THE COMMAND REPORTS THAT PAULMAR AND HARWALD ARE THE ONLY FIRMS WITH FSS CONTRACTS FOR FILM INSPECTION MACHINES, AND THAT OF THE TWO FIRMS, ONLY HARWALD IS KNOWN TO HAVE THE FOUR PREVIOUSLY MENTIONED FEATURES DEEMED ESSENTIAL TO MEET ARMY NEEDS. IT INDICATES THAT AFTER HAVING RECEIVED PAULMAR'S PROTEST IT CHECKED WITH VARIOUS INSTALLATIONS, INCLUDING THOSE CITED BY PAULMAR, AND FOUND WITH ONE EXCEPTION THAT ONLY THE EARLIER MODEL 90 WAS BEING USED. THE INSTALLATION USING THE MODEL 90 ON THE 1966 FSS SAYS THAT IT PURCHASED THIS MACHINE AFTER THE PROCUREMENT WHICH IS THE SUBJECT OF THIS PROTEST HAD BEEN INITIATED, AND THAT THE MACHINE DOES NOT BRAKE PROPERLY AT HIGHER SPEEDS. THE COMMAND DENIES THAT ITS PURCHASE OF 68 MARK III'S FOR $121,992 WAS INVALID, BECAUSE NO SINGLE ORDER AWARDED TO HARWALD EXCEEDED THE $50,000 LIMITATION IN THE FSS CONTRACT.

THE RECORD INDICATES THAT THE PRESENT PROCUREMENT IS THE FOURTH AND ONLY COMPLETED ATTEMPT SINCE 1958 TO PURCHASE A LARGE QUANTITY OF THESE MACHINES TO SATISFY THE NEEDS OF VARIOUS INSTALLATIONS. A CONTRACT AWARDED BY FORMAL ADVERTISING IN 1958 WAS TERMINATED BECAUSE THE USER WAS NOT SATISFIED WITH A PRODUCT PRESUMABLY MANUFACTURED IN ACCORDANCE WITH A MILITARY PERFORMANCE SPECIFICATION. THE SPECIFICATION WAS REVISED AND A FORMALLY ADVERTISED CONTRACT WAS AWARDED TO THE HARWALD COMPANY IN 1962, BUT THIS CONTRACT WAS TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT IN ORDER TO OBTAIN EQUIPMENT EQUAL TO THE HARWALD "MARK II" MODEL AND PAULMAR'S "MODEL 60" (WHICH BECAME MODEL 90 IN 1965). IN 1964 THE AIR FORCE, USING A REVISED SPECIFICATION WHICH INCORPORATED THE FOUR FEATURES PECULIAR TO THE HARWALD MARK III, INITIATED AN ADVERTISED PROCUREMENT IN ANOTHER ATTEMPT TO SATISFY ARMY NEEDS. BECAUSE OF THE NEWNESS OF THE SPECIFICATION AND THE DIFFICULTIES EXPERIENCED IN THE PAST, A TWO-STEP METHOD OF ADVERTISING WAS USED. THE SOLICITATION WAS CANCELED AFTER PAULMAR, HAVING QUALIFIED UNDER STEP ONE, PROTESTED BEFORE AWARD. WE ARE NOT ADVISED OF THE GROUND OF THE PROTEST OR THE REASON FOR CANCELLATION. THE REPORT STATES THAT THIS HISTORY OF ATTEMPTED PURCHASES OF THE SUBJECT EQUIPMENT INDICATED TO ARMY PROCUREMENT OFFICIALS THAT A FORMAL SOLICITATION OF BIDS WOULD BE OF NO AVAIL, AND THAT IT WOULD BE IN THE BEST INTEREST OF THE GOVERNMENT TO MAKE THIS PROCUREMENT BY UTILIZING THE FSS.

THE RECORD IS SILENT ON WHEN THE PROCUREMENT OFFICIALS DECIDED NOT TO CONTINUE SOLICITING BIDS FROM PAULMAR AND OTHERS, AND INSTEAD TO PURCHASE THE REQUIREMENTS FOR 68 FILM INSPECTION MACHINES FROM HARWALD UNDER THE FSS. ON MARCH 17, 1965, PROCUREMENT PERSONNEL HAD VISITED PAULMAR'S SALES OFFICE TO VIEW THE MODEL 90. THE REPORT STATES THAT THE MODEL 90 WAS NOT OPERATED BECAUSE MR. MENARY TOLD THE PERSONNEL THAT THIS PARTICULAR MODEL WAS BEING DISCONTINUED, AND THAT HE CONTEMPLATED A MAJOR REDESIGN INVOLVING ELECTRONIC CIRCUITRY, IMPROVED BRAKING ACTION, DEFECT DETECTION, CABINET CONSTRUCTION, AND A CHANGE IN HIS MANUFACTURING SOURCE. MR. MENARY'S CORRESPONDENCE WITH US DOES NOT MENTION THAT THE MODEL 90 PAULMAR OFFERED UNDER ITS 1966 FSS CONTRACT WAS A MODIFIED OR IMPROVED VERSION OF THE MODEL 90'S WHICH VARIOUS INSTALLATIONS ARE CURRENTLY USING, AND HE APPEARS TO DISCUSS THE MATTER ON THE BASIS THAT PAULMAR'S COMMERCIAL VERSION OF THE MODEL 90 (EARLY OR LATE) OFFERED IN 1965 OR ON THE 1966 FSS DOES NOT POSSESS THE FOUR PREVIOUSLY MENTIONED FEATURES OF THE HARWALD MARK III. HOWEVER, HE ALLEGES, AND THE ALLEGATION IS NOT DENIED, THAT AT THE MARCH 1965 VIEWING IN HIS SALES OFFICE HE OFFERED TO SUPPLY EQUIPMENT WITH THESE FOUR FEATURES AT ANY TIME ARMY REQUIREMENTS CALLED FOR THEM, AND HE POINTED OUT AT THAT TIME THAT PAULMAR'S TECHNICALLY ACCEPTABLE PROPOSAL FOR THE PREVIOUSLY MENTIONED 1964 SOLICITATION DID OFFER THESE FEATURES. THE REPORT CONFIRMS THAT EQUIPMENT MANUFACTURED IN ACCORDANCE WITH PAULMAR'S 1964 TECHNICAL PROPOSAL WOULD MEET THE ARMY'S ESSENTIAL REQUIREMENTS.

IT IS REPORTED THAT THE CONTRACTING OFFICER ASKED HARWALD, IN JANUARY 1966, APPARENTLY BY TELEPHONE, IF IT WOULD REDUCE THE PRICE SHOWN ON A GSA LISTING HARWALD APPARENTLY HAD ALREADY SENT TO HER. HARWALD REFUSED, AND ANSWERED "THE QUESTION OF WHETHER PURCHASE USING GSA CONTRACT WOULD BE MORE OR LESS ADVANTAGEOUS TO THE GOVERNMENT THAN A SEPARATELY NEGOTIATED PURCHASE," BY REPLY THAT IT WOULD ENTER INTO A SEPARATE CONTRACT ONLY AT A HIGHER SELLING PRICE. IN THIS RESPECT, WE NOTE THAT UNDER SUBPARAGRAPH 1 (C) OF THE SPECIAL PROVISIONS OF THE FSS CONTRACT HARWALD WAS NOT OBLIGATED TO HONOR A DEFENSE AGENCY ORDER, AND THEREFORE COULD HAVE REFUSED THE ARMY'S ORDER UNDER THE FSS CONTRACT IF THE SETTLED CONTRACT PRICE HAD NOT BEEN SUFFICIENTLY ATTRACTIVE. CONSEQUENTLY, WE ARE SOMEWHAT SKEPTICAL OF THE CONTRACTING OFFICER'S CONCLUSION THAT A SOLICITATION OF OFFERS ON A SEPARATE CONTRACT NECESSARILY WOULD HAVE RESULTED IN LESS ATTRACTIVE PRICES THAN THOSE SHOWN ON THE FSS SCHEDULE.

THE RECORD FAILS TO DISCLOSE THE BASIS UPON WHICH THE CONTRACTING OFFICER COULD HAVE DETERMINED THAT SHE HAD AUTHORITY TO NEGOTIATE SOLE SOURCE RATHER THAN TO FORMALLY ADVERTISE THE PROCUREMENT. ADEQUATE SPECIFICATIONS ADMITTEDLY WERE AVAILABLE, AT LEAST FOR A TWO-STEP PROCUREMENT, AND NO URGENCY IS CLAIMED. THE CONTRACTING OFFICER STATES THAT FORMAL ADVERTISING PROCEDURES WERE NOT CONSIDERED BECAUSE OF A HISTORY OF PROCUREMENT DIFFICULTIES WHICH ARE, SO FAR AS WE CAN ASCERTAIN, UNRELATED TO THE CONDITIONS WHICH CONGRESS CONTEMPLATED AS JUSTIFICATION FOR A SOLE-SOURCE NEGOTIATION. SEE 10 U.S.C. 2304 (A).

THE RECORD IS ALSO SILENT WITH RESPECT TO HOW PAULMAR COULD HAVE KNOWN THAT ITS ELIGIBILITY TO CONTINUE COMPETING FOR A MAJOR PROCUREMENT OF FILM INSPECTION MACHINES WOULD HENCEFORTH DEPEND ON ITS PLACING A COMMERCIAL MODEL ON THE FSS SCHEDULE WHICH INCORPORATED THE FOUR FEATURES EXCLUSIVE TO THE HARWALD MARK III. WE GATHER FROM THE REPORT THAT EVEN THIS ACTION WOULD NOT HAVE RESULTED IN PAULMAR'S GETTING AN OPPORTUNITY TO COMPETE, SINCE THE AGENCY FELT IT NEEDED PROOF THAT THE MACHINE HAD WORKED SATISFACTORILY AT A USING ACTIVITY. THE LOGICAL EXTENSION OF ACCEPTING SUCH A DOCTRINE IS THAT ONLY PREVIOUS SUPPLIERS OF AN ITEM MAY COMPETE FOR A PROCUREMENT, WHICH IS PATENTLY INIMICAL TO THE CONCEPT OF FREE AND OPEN COMPETITION. FURTHERMORE, THE LACK OF ACTUAL EXPERIENCE WITH AN ITEM OFFERED ON THE FSS SCHEDULE IS NOT ONE OF THE REASONS LISTED AS ADEQUATE JUSTIFICATION FOR NOT PURCHASING THE LEAST EXPENSIVE ITEM ON THE FSS. SEE ASPR 5-106 AND THE FEDERAL PROPERTY MANAGEMENT REGULATIONS, 41 CFR 101- 26.408-3. MOREOVER, THE JUSTIFICATION SEEMS ESPECIALLY TENUOUS IN VIEW OF THE FACT THAT MANY OF THE USING INSTALLATIONS APPARENTLY HAVE HAD SATISFACTORY EXPERIENCE WITH AN EARLIER AND UNIMPROVED VERSION OF THE SAME ITEM.

UNDER PRESENT REGULATIONS AND PROCEDURES, THERE APPEARS TO BE NO LEGAL PROHIBITION AGAINST AN AGENCY PURCHASING THE ONLY COMMERCIAL ITEM ON A FSS WHICH WILL SATISFY NEEDS IT HAS DETERMINED TO BE ESSENTIAL, EVEN WHEN IT HAS REASON TO BELIEVE THAT A FORMAL SOLICITATION OF BIDS WOULD ELICIT RESPONSIVE OFFERS FROM OTHER THAN THE ONE FIRM WHICH HAS AN ACCEPTABLE ITEM ON THE FSS. HOWEVER, WHERE AS IN THIS CASE THE USE OF THE SCHEDULE FOR EITHER PLACING OR ACCEPTING ORDERS IN EXCESS OF $50,000 IS EXPRESSLY PROHIBITED BY ITS OWN TERMS, THE SPLITTING OF THE REQUIREMENTS OF AN AGENCY INTO SEVERAL INDIVIDUAL ORDERS, EACH FOR LESS THAN THE MAXIMUM LIMITATION, BUT AGGREGATING SEVERAL TIMES THAT AMOUNT, IS A WHOLLY INDEFENSIBLE PRACTICE VIOLATIVE OF ALL BASIC CONCEPTS OF COMPETITIVE BIDDING. IN EFFECT THIS PROCUREMENT WAS NOTHING OTHER THAN A SOLE-SOURCE NEGOTIATION, WITHOUT FINDINGS SUCH AS REQUIRED BY 10 U.S.C. 2310. EVEN WHERE USE OF A SCHEDULE IS MANDATORY THE FEDERAL PROPERTY MANAGEMENT REGULATIONS PROVIDE THAT "THE VALUE OF A SINGLE PURCHASE ORDER OR A SERIES OF ORDERS PLACED WITHIN A SHORT TIME" MAY NOT EXCEED THE MAXIMUM ORDER LIMITATION SPECIFIED IN THE SCHEDULE. 41 C.F.R. 101 26.401-4. FROM THE ABOVE RECORD, IT APPEARS THAT THE ARMY HAD MORE THAN ONE MANUFACTURING SOURCE AVAILABLE FROM WHICH IT COULD HAVE PROCURED THE SUBJECT FILM INSPECTION MACHINES. EVEN ACCEPTING THE HYPOTHESIS THAT ONLY HARWALD WAS CAPABLE OF SUPPLYING A FILM INSPECTION MACHINE WHICH WOULD MEET AGENCY NEEDS, PROPER PROCEDURE WOULD HAVE BEEN TO NEGOTIATE UNDER 10 U.S.C. 2304 (A) (10) UNDER A PROPER DETERMINATION AND FINDINGS, AND SO HAVE OBTAINED THE PROTECTION OF THE GOVERNMENT'S INTEREST PROVIDED BY PRESCRIBED PRICE NEGOTIATION TECHNIQUES AND THE EXAMINATION OF RECORDS CLAUSE.

THE ORDERS ISSUED AGAINST HARWALD HAVE LONG SINCE BEEN FILLED, AND NO PURPOSE WOULD BE NOW SERVED BY QUESTIONING THE VALIDITY OF SUCH ORDERS. HOWEVER, FOR PURPOSES OF FUTURE PROCUREMENTS WHERE THE AGGREGATE COST OF THE MACHINES WILL EXCEED $50,000, WE WOULD OBJECT TO ANY ORDERS BEING PLACED UNDER THE FSS CONTRACTS.