B-160209, JAN. 11, 1967

B-160209, JAN. 11, 1967

TO THE CUNO ENGINEERING CORPORATION:

IN YOUR LETTERS OF OCTOBER 6 AND 13, 1966, YOU PROTEST AWARD OF A CONTRACT BY THE PHILADELPHIA NAVAL SHIPYARD TO AQUA-CHEM, INC., FOR FOUR DISTILLATION UNITS WHICH THE GOVERNMENT INTENDS TO HAVE INSTALLED ON THE LST-1180 AND LST-1181 U.S. NAVY VESSELS. YOU CONTEND THAT AQUA CHEM IS A NONRESPONSIVE BIDDER, AND THAT THE INVITATION FOR BIDS, (IFB) NO. N00151- 67-B-0233, CONTAINED A DEFECTIVE AND DISCRIMINATORY SYSTEM OF EVALUATING BIDS.

THE RECORD SHOWS THAT THE TWO BIDS RECEIVED OF THE SIX SOLICITED WERE AS FOLLOWS:

CHART

AQUA-CHEM CUNO

ITEM 1 (LST 1180) $87,600 $85,212

ITEM 2 (TESTING) NO CHARGE 42,000

ITEM 13 (LST 1181) $87,600 85,212

$177,600 $215,799

THE IFB INSTRUCTED BIDDERS TO ENTER A BID PRICE, OR INSERT A NOTATION OF "NO CHARGE" OR "NOT APPLICABLE," FOR EACH ITEM OF THE INVITATION. IT ALSO CONTAINED A BID EVALUATION PROVISION WHICH ADVISED BIDDERS, IN EFFECT, THAT A SUM OF $26,400, REPRESENTING A COST WHICH THE SHIPYARD ESTIMATED IT WOULD INCUR IN REDESIGNING THE LST 1180 AND 1181 IN ORDER TO ACCOMMODATE THE INSTALLATION OF ANY DISTILLATION UNIT OTHER THAN THE ONE DESIGNED FOR THE LST 1179, WOULD BE ADDED TO ALL BIDS FOR EVALUATION PURPOSES, EXCEPT THAT THE SUM WOULD NOT BE ADDED TO THE BID OF THE SUPPLIER FOR LST 1179 DISTILLATION UNIT, PROVIDED HE INDICATED HE WOULD SUPPLY UNITS IDENTICAL TO THE ONE HE WAS PRODUCING FOR THE LST 1179.

YOU ALLEGE THAT AT BID OPENING A GOVERNMENT EMPLOYEE HANDED YOUR REPRESENTATIVE A COPY OF AQUA-CHEM'S BID, AND THAT YOUR REPRESENTATIVE RECALLS THAT FOR ITEM 2 THEREIN AQUA-CHEM HAD INSERTED A DASH RATHER THAN A NOTATION OF "NO CHARGE.' HOWEVER, THE PROCURING ACTIVITY DENIES YOUR ASSERTION, AND HAS SUBMITTED AS A PART OF ITS REPORT COPIES OF AQUA-CHEM'S ORIGINAL BID AND ITS NON-DUPLICATE COPY, BOTH OF WHICH HAVE THE NOTATION "NO CHARGE" BESIDE ITEM 2. THE ACTIVITY HAS ALSO INCLUDED COPIES OF DOCUMENTS PREPARED BY TWO BID-RECORDING SERVICES WHICH HAD REPRESENTATIVES PRESENT AT THE BID OPENING (BENTON REPORTING SERVICE AND MARKET SERVICE). BOTH DOCUMENTS INDICATE THAT AQUA-CHEM BID "NO CHARGE" FOR ITEM 2. ON THE BASIS OF THIS RECORD, WE MUST CONCLUDE THAT ACQUA-CHEM WAS RESPONSIVE TO THE IFB REQUIREMENT UNDER DISCUSSION.

YOU HAVE RAISED SEVERAL OBJECTIONS TO THE BID EVALUATION PROVISION. SINCE YOUR BID WAS OVER $38,000 HIGHER THAN AQUA-CHEM'S WITHOUT CONSIDERING THE $26,400 BID EVALUATION FACTOR WHICH WOULD HAVE INCREASED YOUR COMPETITOR'S PRICE ADVANTAGE, WE DO NOT CONSIDER THE OBJECTIONS A SUFFICIENT BASIS FOR CANCELLING THE CONTRACT AWARDED TO THE LOW BIDDER. HOWEVER, WE ALSO BELIEVE THE BID EVALUATION CLAUSE IS DEFECTIVE IN AT LEAST ONE OF THE TWO RESPECTS DISCUSSED IN OUR DECISION OF TODAY, B- 159750, COPY ENCLOSED, IN WHICH AQUA-CHEM PROTESTED AN AWARD OF DISTILLING UNITS TO YOUR FIRM ON GROUNDS PERTAINING TO A SIMILAR EVALUATION CLAUSE. IN THAT CASE YOU WERE THE LOW BIDDER, WITHOUT CONSIDERING THE ADDITIONAL PRICE ADVANTAGE YOU ENJOYED AS A RESULT OF THE BID EVALUATION CLAUSE. IN THIS CASE, WE FOUND NO REASON WHY THE CONTRACT AWARDED TO THE LOW BIDDER SHOULD BE CANCELLED.

AS WE NOTED IN OUR DECISION B-159750, THE SECRETARY OF THE NAVY IS BEING ADVISED TO TAKE CORRECTIVE ACTIONS TO PREVENT THE FUTURE USE OF THIS EVALUATION SYSTEM IN SIMILAR CIRCUMSTANCES. OUR ADVICE WILL REFERENCE YOUR PROTEST, AS WELL AS B-159750.

ALTHOUGH YOU SAY YOU DO NOT MAKE THE FOLLOWING CONTENTION "A POINT OF PROTEST," YOU NEVERTHELESS ALLEGE THAT THE SUBJECT PROCUREMENT SHOULD HAVE BEEN CONDUCTED BY NEGOTIATION PROCEDURES RATHER THAN BY COMPETITIVE ADVERTISING. YOU DO NOT SUGGEST WHAT THE LEGAL JUSTIFICATION FOR NEGOTIATION WOULD HAVE BEEN, AND IT IS NOT ENTIRELY CLEAR WHY A CONSIDERATION OF THE "ENTIRE IFB" SHOWS THAT ADVERTISING WAS NOT FEASIBLE IN THIS PROCUREMENT. APPARENTLY, THE BASIS OF YOUR CONTENTION IS IN SOME WAY RELATED TO THE PROBABILITY THAT AQUA-CHEM ENJOYED A COMPETITIVE ADVANTAGE IN THAT, UNDER THE TERMS OF THE IFB, IT WOULD PROBABLY BE ABLE TO OBTAIN A WAIVER OF THE TESTING REQUIREMENT BECAUSE IT WOULD HAVE COMPLETED TESTS ON AN IDENTICAL UNIT. (IN THIS REGARD, IT SHOULD BE NOTED THAT IN ITS CONTRACT FOR THE LST-1179, AQUA CHEM PRICED THIS TESTING AT $41,000, WHICH IS IN THE SAME RANGE AS THE $42,000 YOU BID FOR THE TESTING IN THIS PROCUREMENT.)

WE HAVE FREQUENTLY CONSIDERED THE PROBLEMS RAISED BY ONE OR MORE BIDDERS HAVING AN INHERENT COMPETITIVE ADVANTAGE OVER OTHERS. ALTHOUGH OUR DECISION REPORTED AT 42 COMP. GEN. 717 DEALS SPECIFICALLY WITH THE DISADVANTAGE OF NEW PRODUCERS HAVING TO FURNISH PREPRODUCTION SAMPLES, WE THINK THE FOLLOWING LANGUAGE, QUOTED FROM PAGES 720-21 OF THE DECISION, ADEQUATELY EXPRESSES OUR GENERAL VIEWS ON THIS SUBJECT:

"AS POINTED OUT IN THE DECISIONS REFERRED TO, THERE IS NO QUESTION BUT THAT THE DEVELOPER OR FIRST PRODUCER OF A SPECIALIZED PIECE OF EQUIPMENT NORMALLY HAS A SUBSTANTIAL COMPETITIVE ADVANTAGE OVER WOULD BE COMPETITORS, AND SHOULD BE ABLE TO FURNISH IT AT A LOWER PRICE. THE GOVERNMENT PRESUMABLY HAS PAID EITHER DIRECTLY OR INDIRECTLY THE COST OF THE INITIAL DEVELOPMENT AND OF THE FIRST PRODUCER'S KNOW-HOW, AND SHOULD BE ABLE TO REALIZE ON ITS INVESTMENT WITHOUT SUBSTANTIALLY DUPLICATING IT TO SET UP ANOTHER PRODUCER. HOWEVER, EXPERIENCE HAS AMPLY DEMONSTRATED THAT SO LONG AS A SINGLE PRODUCER IS PERMITTED TO MAINTAIN HIS MONOPOLY POSITION HIS PRICE TENDS TO REMAIN SUBSTANTIALLY HIGHER THAN WHEN HE IS REQUIRED TO MEET COMPETITION, AND IT IS IN RECOGNITION OF THIS FACT THAT THE CONGRESS HAS ADOPTED THE POLICY OF MAXIMUM COMPETITION.

"IN THE EXTREME CASE, WHERE THE SETTING UP OF AN ADDITIONAL PRODUCER OR SOURCE OF SUPPLY IS IN THE INTEREST OF NATIONAL DEFENSE, A CONTRACT MAY BE NEGOTIATED UNDER 10 U.S.C. 2304 (A) (16), AND UNDER THAT AUTHORITY ANY ADDITIONAL COST INVOLVED COULD BE ASSUMED BY THE GOVERNMENT, WITHOUT REGARD TO PRICES AVAILABLE FROM PRIOR PRODUCERS.

"AT THE OTHER EXTREME, WHERE IT IS DETERMINED THAT A SUBSTANTIAL INITIAL INVESTMENT OR AN EXTENDED PERIOD OF PREPARATION WOULD BE REQUIRED FOR PRODUCTION OF TECHNICAL OR SPECIAL ARTICLES AND THAT FORMAL ADVERTISING MIGHT REQUIRE DUPLICATION OF INVESTMENT OR PREPARATION ALREADY MADE AND THUS INCREASE THE COST TO THE GOVERNMENT, OR UNDULY DELAY PROCUREMENT, NEGOTIATION WITH PRIOR PRODUCERS IS AUTHORIZED BY 10 U.S.C. 2304 (A) (14).

"IN BETWEEN THOSE EXTREMES, WE KNOW OF NO SATISFACTORY SUBSTITUTE FOR FORMAL ADVERTISING AND COMPETITIVE BIDDING, DESPITE THE FACT THAT A PRIOR PRODUCER MAY HAVE A SUBSTANTIAL COMPETITIVE ADVANTAGE. IT HAS BEEN OBSERVED THAT IN MANY CASES PRIOR NONPRODUCERS HAVE QUOTED PRICES CLOSELY COMPETITIVE WITH THOSE OF BIDDERS WHO HAVE PREVIOUSLY SUPPLIED THE IDENTICAL ITEM; IT MAY BE SURMISED THAT IN SUCH CASES THE WILLINGNESS OF THE ONE BIDDER TO ABSORB SOME OR ALL OF THE INITIAL COSTS OF QUALIFYING HIMSELF AS A PRODUCER TENDS TO BALANCE THE NORMAL DESIRE OF THE OTHER TO MAINTAIN HIS PRICE AS HIGH AS HE THINKS HE CAN WITHOUT JEOPARDIZING HIS PREVIOUS MONOPOLY. IN ANY EVENT, WE BELIEVE THAT THE INTRODUCTION OF THE THREAT OF COMPETITION MAY BE MORE EFFECTIVE IN LOWERING THE PRICE OF AN EXISTING PRODUCER THAN ANY NEGOTIATING TECHNIQUES.' FOR THE FOREGOING REASONS, YOUR PROTEST IS DENIED.