B-160815, APRIL 21, 1967, 46 COMP. GEN. 749

B-160815, APRIL 21, 1967, 46 COMP. GEN. 749

BIDS - EVALUATION - MULTI V. SINGLE YEAR PROCUREMENTS UNDER AN INVITATION SOLICITING BIDS ON TWO BASES, ONE MANDATORY FOR A SINGLE YEARS' PROCUREMENT, THE OTHER OPTIONAL FOR THREE PROGRAM YEARS, WHERE A PRICE ESCALATION CLAUSE FOR LABOR INCREASES, CANCELLATION CHARGES IN THE EVENT FUNDS ARE NOT AVAILABLE FOR PROCUREMENT ON A MULTI-YEAR BASIS, AND AN OPTION TO THE GOVERNMENT TO INCREASE PROCUREMENT REQUIREMENTS ARE NOT CONSIDERED IN THE EVALUATION OF BIDS, AN AWARD ON A MULTI-YEAR BASIS THAT IS DETERMINED TO BE LOWER THAN THE COST OF AN AWARD FOR THE TOTAL REQUIREMENTS BASED ON THE LOWEST SINGLE-YEAR PRICE IS NOT PREJUDICIAL TO SMALL BUSINESS CONCERNS, NOR DETRIMENTAL TO THE COMPETITIVE BIDDING SYSTEM, SMALL BUSINESS CONCERNS HAVING SUBMITTED MULTI-YEAR AS WELL AS SINGLE-YEAR BIDS AT COMPETITIVE PRICES. BIDS - COMPETITIVE SYSTEM - MULTI V. SINGLE YEAR PROCUREMENTS - SMALL BUSINESS V. LARGE BUSINESS CONCERNS THE AWARD OF A MULTI-YEAR CONTRACT TO A LARGE BUSINESS CONCERN WHERE A SMALL BUSINESS CONCERN WAS LOW BIDDER ON THE SINGLE-YEAR PROCUREMENT REQUIREMENTS UNDER AN INVITATION SOLICITING BIDS ON BOTH BASES WAS NOT PREJUDICIAL TO THE SMALL BUSINESS CONCERN, NOR DID THE AWARD SUBVERT THE INTEGRITY OF THE PROCUREMENT PROCESS, THE SUBMISSION BY SMALL BUSINESS CONCERNS OF BOTH MULTI-YEAR AND SINGLE-YEAR BIDS EVIDENCING THE MULTI-YEAR PROCEDURE ENCOURAGED SMALL BUSINESS CONCERNS TO COMPETE WITH LARGE BUSINESS CONCERNS FOR ITEMS ON WHICH HIGH START-UP COSTS MIGHT NORMALLY KEEP A SMALL BUSINESS CONCERN FROM BIDDING ON A SINGLE YEAR BASIS. BIDS - OPTIONS - MULTI V. SINGLE YEAR PROCUREMENTS AN OPTION RESERVED TO THE GOVERNMENT TO INCREASE SINGLE-YEAR OR FIRST- YEAR QUANTITY OF A THREE PROGRAM YEAR PROCUREMENT BY 100 PERCENT AT A STIPULATED UNIT PRICE OR LOWER, EXPANDED TO 50 PERCENT OPTIONAL INCREASE ON THE SECOND AND THIRD PROGRAM YEARS REQUIREMENTS THAT IS NOT A FACTOR IN BID EVALUATION DOES NOT JUSTIFY A SINGLE-YEAR AWARD ANY MORE THAN A MULTI- YEAR AWARD, AND THE FACT THAT IN THE EVENT OF A SINGLE-YEAR AWARD, THE OPTION WOULD AFFORD THE GOVERNMENT ADEQUATE PROTECTION SHOULD ITS REQUIREMENTS INCREASE DURING THE CONTRACT YEAR PROPERLY WAS NOT FOR CONSIDERATION IN DETERMINING TO MAKE AN AWARD ON THE MULTI-YEAR, LOWER COSTS BASIS RATHER THAN TO THE LOW BIDDER ON THE SINGLE-YEAR PROCUREMENT, SOLICITATION OF BIDS FOR LESS THAN KNOWN REQUIREMENTS WITH THE INTENT OF EXERCISING AN OPTION TO FILL REQUIREMENTS TENDING TO RESULT IN HIGHER UNIT PRICES. CONTRACTS - MULTI-YEAR PROCUREMENTS - PRICE ADVANTAGE WHERE PRIOR TO AUTHORIZING THE USE OF THE MULTI-YEAR PROCUREMENT METHOD, A DETERMINATION IS MADE THAT LOWER PRICES COULD NOT REASONABLY BE ANTICIPATED UNDER ANNUAL BUYS BY REASON OF THE CONTINUITY OF PRODUCTION OR ELIMINATION OF REPETITIVE SUBSTANTIAL START-UP COSTS, AND THAT THE DESIGN AND SPECIFICATIONS OF THE ITEM WOULD NOT CHANGE TO AN EXTENT THAT WOULD INVOLVE A MAJOR IMPACT ON THE CONTRACT PRICE, THE CRITERIA IN PARAGRAPH 1- 322.1 (C) OF THE ARMED SERVICES PROCUREMENT REGULATION HAS BEEN MET AND THE DETERMINATION, ABSENT EVIDENCE OF ERROR, IS PROPER.

TO HENRY PRODUCTS CO., INC., APRIL 21, 1967:

REFERENCE IS MADE TO YOUR LETTER OF JANUARY 30, 1967, AS SUPPLEMENTED BY A LETTER DATED FEBRUARY 3 FROM YOUR ATTORNEYS, PROTESTING AGAINST AWARD BY THE DEPARTMENT OF THE ARMY OF A MULTIYEAR CONTRACT FOR RADIO SET AN/GRC- 106 UNDER INVITATION FOR BIDS (IFB) NO. DAAB05-67-B-0275, ISSUED NOVEMBER 18, 1966, BY THE UNITED STATES ARMY ELECTRONICS COMMAND, PHILADELPHIA, PENNSYLVANIA, AND REQUESTING THAT OUR OFFICE DIRECT AWARD OF A SINGLE-YEAR CONTRACT TO YOU.

THE IFB SOLICITED BIDS ON TWO BASES. ALTERNATE "A," ON WHICH SUBMISSION OF BIDS BY ALL BIDDERS WAS MANDATORY, COVERED A SINGLE YEAR'S REQUIREMENT OF 746 UNITS; ALTERNATE "B," ON WHICH SUBMISSION OF BIDS WAS OPTIONAL, COVERED REQUIREMENTS FOR 3 PROGRAM YEARS IN QUANTITIES OF 746 UNITS FOR THE FIRST YEAR, 1,354 UNITS FOR THE SECOND YEAR, AND 2,400 UNITS FOR THE THIRD YEAR, BIDS BEING REQUIRED TO COVER THE TOTAL REQUIREMENTS FOR THE 3 YEARS (4,500 UNITS) AT THE SAME UNIT PRICE FOR EACH ITEM FOR ALL 3 YEARS. IN ADDITION, BIDDERS WERE CAUTIONED THAT ALL ALTERNATE "B" BIDS MUST BE ACCOMPANIED BY ALTERNATE "A" BIDS.

THE MULTIYEAR PROVISIONS ON PAGE 6 OF THE IFB INCLUDED THE FOLLOWING PARAGRAPHS RELATING TO BID EVALUATION, WHICH ARE IN ACCORD WITH ARMED SERVICES PROCUREMENT REGULATION (ASPR) 1-322.3 (G):

D. EVALUATION OF BIDS WILL BE EFFECTED AS FOLLOWS:

IN COMPARING PRICES FOR THE FIRST PROGRAM YEAR REQUIREMENTS AGAINST PRICES FOR MULTI-YEAR REQUIREMENTS, THE EVALUATED UNIT PRICE FOR EACH ITEM OF THE LOWEST EVALUATED OFFER RECEIVED ON THE FIRST PROGRAM YEAR ALTERNATIVE SHALL BE MULTIPLIED BY THE TOTAL NUMBER OF UNITS OF THAT ITEM REQUIRED BY THE MULTI-YEAR ALTERNATIVE. THE SUM OF THESE PRODUCTS SHALL BE COMPARED AGAINST THE TOTAL EVALUATED PRICE OF THE LOWEST OFFER RECEIVED FOR ALL ITEMS UNDER THE MULTI-YEAR ALTERNATIVE. IF THE MULTI-YEAR PRICE IS LOW, AWARD SHALL BE MADE ON THAT BASIS; OTHERWISE, AWARD SHALL BE MADE ON THE BASIS OF THE FIRST PROGRAM YEAR ALTERNATIVE.

E. IN ADDITION TO OTHER FACTORS, BIDS/OFFERS WILL BE EVALUATED ON THE BASIS OF ADVANTAGES OR DISADVANTAGES TO THE GOVERNMENT THAT MIGHT RESULT FROM MAKING INDIVIDUAL PROGRAM YEAR AWARDS. FOR THE PURPOSE OF MAKING THIS EVALUATION IT WILL BE ASSUMED THAT THE SUM OF $50.00 WOULD BE THE ADMINISTRATIVE COST TO THE GOVERNMENT FOR ISSUING AND ADMINISTERING SEPARATE CONTRACTS FOR EACH PROGRAM YEAR, AND AWARD WILL BE MADE ON THE BASIS OF THE LOWEST OVERALL PRICE TO THE GOVERNMENT COMPUTED IN ACCORDANCE WITH THE CRITERIA OUTLINED IN THE FOREGOING PARAGRAPHS, INCLUDING SUCH ADMINISTRATIVE COSTS.

A PRICE ESCALATION CLAUSE, INCLUDED IN THE IFB PURSUANT TO ASPR 1 322.2 (A), PROVIDED FOR UPWARD OR DOWNWARD PRICE ADJUSTMENT (LIMITED TO AN UPWARD MAXIMUM OF 10 PERCENT OF THE CONTRACT PRICES) TO COVER CHANGES IN LABOR COSTS AS PUBLISHED BY THE UNITED STATES DEPARTMENT OF LABOR, AND BIDDERS WERE ADVISED THAT BIDS WOULD BE EVALUATED ON THE BASIS OF THE PRICES WITHOUT THE ADDITION OF ALLOWABLE ESCALATION.

IN ACCORDANCE WITH ASPR 1-322.5 (A), THE INVITATION INCLUDED THE CLAUSE ENTITLED "LIMITATION OF PRICE AND CONTRACTOR OBLIGATIONS (OCT. 1966)" WHEREBY IN THE EVENT OF A MULTIYEAR AWARD THE GOVERNMENT'S OBLIGATIONS WOULD BE LIMITED TO THE AMOUNT OF FUNDS SPECIFICALLY STIPULATED IN THE SCHEDULE TO BE AVAILABLE FOR CONTRACT PERFORMANCE, WITH THE FURTHER PROVISION THAT UPON AVAILABILITY OF ADDITIONAL FUNDS SUFFICIENT FOR THE NEXT SUCCEEDING PROGRAM YEAR, AND NOTICE THEREOF TO THE CONTRACTOR BY THE CONTRACTING OFFICER WITHIN A STIPULATED TIME, SUCH AMOUNT WOULD BE INCREASED ACCORDINGLY. THIS WAS FOLLOWED BY THE "CANCELLATION OF ITEMS (OCT. 1966)" CLAUSE PRESCRIBED BY ASPR 1-322.5 (B), UNDER WHICH PROGRAM YEAR REQUIREMENTS FOR ANY OR ALL PROGRAM YEARS AFTER THE FIRST WOULD BE CANCELED IF THE CONTRACTING OFFICER WITHIN A STIPULATED TIME EITHER NOTIFIED THE CONTRACTOR THAT FUNDS WOULD NOT BE AVAILABLE FOR ANY SUBSEQUENT YEAR OR YEARS, OR FAILED TO NOTIFY THE CONTRACTOR THAT FUNDS HAD BEEN MADE AVAILABLE. IN THAT EVENT THE CONTRACTOR WOULD BE PAID A CANCELLATION CHARGE, NOT EXCEEDING THE CEILING FIXED IN THE SCHEDULE.

CONSIDERATION OF THE CANCELLATION CHARGE IN THE EVALUATION OF THE BIDS IS PROHIBITED BY THE ASPR.

ON PAGE 71 OF THE IFB, THE GOVERNMENT RESERVED AN OPTION TO INCREASE THE SINGLE-YEAR OR FIRST-YEAR QUANTITY BY 100 PERCENT AT THE STIPULATED UNIT PRICE OR LESSER PRICE OFFERED BY THE BIDDER. HOWEVER, BIDDERS WERE INFORMED THAT THE OPTION WAS NOT TO BE A FACTOR IN BID EVALUATION. SUBSEQUENT AMENDMENT, THE PROVISION WAS EXPANDED TO PROVIDE FOR A 50 PERCENT OPTIONAL INCREASE ON THE SECOND AND THIRD PROGRAM YEARS REQUIREMENTS.

ON JANUARY 19, 1967, THE 11 BIDS WHICH HAD BEEN RECEIVED, EACH OF WHICH COVERED BOTH ALTERNATES, WERE OPENED AS SCHEDULED. YOU AND THREE OTHER BIDDERS HAD THE STATUS OF SMALL BUSINESS CONCERNS FOR THE PROCUREMENT. THE REMAINING SEVEN BIDDERS WERE LARGE BUSINESS CONCERNS.

ON ALTERNATE "A" (THE 1-YEAR REQUIREMENT) YOU WERE LOWEST WITH A UNIT PRICE OF $7,260.70. THE SECOND AND THIRD LOW BIDS, WITH UNIT PRICES OF $9,340.10 AND $9,824.00, RESPECTIVELY, WERE SUBMITTED BY LARGE BUSINESS CONCERNS. THE OTHER THREE SMALL BUSINESS CONCERNS QUOTED UNIT PRICES OF $10,502.97, $13,800, AND $14,900 AND STOOD FIFTH, EIGHTH, AND TENTH, RESPECTIVELY. THE HIGHEST BID, WITH A UNIT PRICE OF $16,500, WAS SUBMITTED BY THE MAGNAVOX COMPANY (MAGNAVOX), ONE OF THE LARGE BUSINESS CONCERNS.

ON ALTERNATE "B," THE MULTIYEAR UNIT PRICES WERE FROM 4 TO 52 PERCENT LOWER THAN THE ALTERNATE ,A" SINGLE-YEAR UNIT PRICES. MAGNAVOX, WITH A UNIT PRICE OF $6,897, WAS LOWEST; YOU WERE SECOND WITH A UNIT PRICE OF $6,957.46; AND HONEYWELL, INC. (HONEYWELL), A LARGE BUSINESS CONCERN, WAS THIRD WITH A UNIT PRICE OF $6,971. THE OTHER THREE SMALL BUSINESS CONCERNS QUOTED MULTIYEAR UNIT PRICES OF $8,181, $9,590, AND $10,731 AND STOOD SEVENTH, TENTH, AND ELEVENTH, RESPECTIVELY.

PURSUANT TO THE IFB PROVISIONS, THE LOW ALTERNATE "B" BID OF $6,897 PER UNIT WAS INCREASED BY PACKAGING AND PACKING COSTS AMOUNTING TO $20.79 PER UNIT, AND THE TOTAL UNIT PRICE OF $6,917.79 WAS MULTIPLIED BY THE MULTIYEAR QUANTITY OF 4,500 UNITS; THEN, TO THE PRODUCT OF $31,130,055, TRANSPORTATION CHARGES OF $29,463.66 WERE ADDED, RESULTING IN AN EVALUATED LOW MULTIYEAR PRICE OF $31,159,518.66. SIMILAR EVALUATION OF THE LOW ALTERNATE "A" BID RESULTED IN A TOTAL PRICE OF $32,657,460.74. BASED ON SUCH EVALUATION THE COST OF A MULTIYEAR AWARD WAS DETERMINED TO BE $1,497,942.08 LOWER THAN THE COST OF AN AWARD FOR THE TOTAL REQUIREMENTS BASED ON THE LOWEST SINGLE-YEAR PRICE.

YOU CONTEND THAT THE MULTIYEAR PROCUREMENT PROCEDURES ARE PREJUDICIAL TO THE INTERESTS OF SMALL BUSINESS AND CONTRADICT THE TERMS OF THE SMALL BUSINESS ACT, 15 U.S.C. 631 NOTE, AND THE ARMED SERVICES PROCUREMENT ACT, 41 U.S.C. 151 NOTE (1952 ED.), AND RELATED REGULATIONS. YOU ASSERT THAT THE ESCALATION CLAUSE IS A SHAM BECAUSE IT IS OBVIOUS THAT THERE CAN BE NO DOWNWARD ESCALATION IN PRICES, AND THAT IT IS DETRIMENTAL TO THE BEST INTERESTS OF THE GOVERNMENT BECAUSE THE COSTS COULD BE PROHIBITIVE IN RELATION TO THE FIXED PRICE QUOTATIONS RECEIVED BY THE GOVERNMENT ON A SINGLE-YEAR AWARD BASIS. YOU FURTHER CONTEND THAT A MULTIYEAR CONTRACT IS A NEGOTIATED TYPE CONTRACT AND THAT THE GOVERNMENT'S OPTION UNDER A SINGLE -YEAR CONTRACT WOULD PROTECT IT BY AFFORDING IT AN OPPORTUNITY TO INCREASE THE SINGLE YEAR QUANTITY BY 100 PERCENT WITHIN 1 YEAR OF THE CONTRACT AWARD DATE WITHOUT ANY INCREASE IN THE ORIGINAL CONTRACT PRICE.

IN SUPPLEMENTING YOUR PROTEST, YOUR ATTORNEYS CONTEND THAT THE ESCALATION, CANCELLATION, AND LIMITATION OF PRICE AND CONTRACTOR'S OBLIGATIONS CLAUSES IN THE IFB MAKE IT IMPOSSIBLE FOR THE GOVERNMENT TO ESCAPE A SUBSTANTIAL LOSS UNDER ANY CONCEIVABLE CIRCUMSTANCES ON A 3 YEAR AWARD, SINCE PRICES ARE BOUND TO BE HIGHER FOR THE SECOND AND THIRD YEARS SHOULD THE QUANTITIES FOR THOSE YEARS BE PROCURED, OR, SHOULD CANCELLATION OF THE REQUIREMENTS FOR SUCH YEARS BE EFFECTED, THE CANCELLATION CHARGES WOULD INCREASE THE FIRST-YEAR PRICE. FURTHER, IT IS STATED THAT UNDER A MULTIYEAR AWARD, THE GOVERNMENT IS "SADDLED" WITH A PRICE FOR ALL UNITS WHICH CANNOT BE LESS THAN THE BID PRICE PLUS THE ESCALATION AND WHICH IS WITHOUT BENEFIT OF ANY COMPETITION IN THE THEN MARKET OR COST-SAVING ACHIEVED IN THE FIRST YEAR PRODUCTION OR IN THE NORMAL DEVELOPMENT OF MANUFACTURING TECHNIQUES IN THE MEANTIME (I.E., DURING THE CONTRACT PERIOD).

WITH RESPECT TO THE BIDS SUBMITTED BY MAGNAVOX AND HONEYWELL, YOUR ATTORNEYS CALL ATTENTION TO THE FACT THAT BOTH BIDDERSS QUOTED ALTERNATE "A" PRICES ($16,500 AND $10,993, RESPECTIVELY), WHICH WERE SUBSTANTIALLY HIGHER THAN THEIR ALTERNATE "B" PRICES, AND THE STATEMENT IS MADE THAT SUCH ACTION VIRTUALLY AMOUNTS TO AN OMISSION OF THE ALTERNATE "A" PRICES WHICH RENDERS THE BIDS NONRESPONSIVE. IT IS CONTENDED THAT THE PURPOSE OF THE HIGH ALTERNATE "A" BIDS WAS TO PRECLUDE CONSIDERATION OF THE TWO BIDS ON ANY BASIS OTHER THAN ALTERNATE "B," AN ACTION WHICH AMOUNTS TO A TACTIC THAT MAKES COMPARISON OF THE BIDS MEANINGLESS AND SHOULD THEREFORE NOT BE PERMITTED "TO VALIDATE A PATENTLY INVALID PROPOSAL.' FINALLY, IT IS ASSERTED, YOU ARE THE ONLY BIDDER WHO SUBMITTED ALTERNATE PROPOSALS GENUINELY RESPONSIVE TO AND CONSISTENT WITH THE MULTIYEAR GOVERNMENT CONCEPT, AS WELL AS THE LOW BIDDER ON ALTERNATE "A," AND THAT YOU SHOULD RECEIVE AWARD ON ALTERNATE "A" BECAUSE IT IS THE LOWEST BID SUBMITTED AND BECAUSE SUCH AWARD WOULD GIVE THE GOVERNMENT THE GREATEST POSSIBLE PROTECTION, WHICH, IT IS STATED, IS THE OBJECTIVE OF THE COMPETITIVE BIDDING SYSTEM.

THE SMALL BUSINESS ADMINISTRATION (SBA), IN A LETTER DATED MARCH 31, ALSO URGES THAT THE ALTERNATE "A" BID PRICES OF MAGNAVOX AND HONEYWELL WERE SUBMITTED ONLY TO EFFECT COMPLIANCE WITH THE IFB REQUIREMENT THAT ALTERNATE "B" BIDS MUST BE ACCOMPANIED BY ALTERNATE "A" BIDS. IN THIS CONNECTION, SBA MAKES THE FOLLOWING STATEMENTS:

* * * SUCH CONDUCT IS ILLUSTRATIVE OF THE MANNER IN WHICH THE MULTI YEAR PROCEDURE CAN BE MISUSED TO PERMIT BIDDERS TO GIVE THE IMPRESSION OF SUBSTANTIAL SAVINGS AND THUS ESTABLISH A BASIS FOR AWARDING NOT ONLY BEYOND THE CURRENTLY AVAILABLE FUNDS BUT ALSO FOR SUPPLIES WHICH MAY OR MAY NOT BE REQUIRED IN FUTURE YEARS. IT ALSO DEMONSTRATES HOW A PROCUREMENT WHOSE SIZE IS WITHIN THE SMALL BUSINESS POTENTIAL CAN BE EXPENDED TO THE POINT WHERE SMALL CONCERNS CANNOT COMPETE EFFECTIVELY. THIS CASE, THE INVITATION CALLED FOR 746 UNITS THE FIRST YEAR AND SUBSTANTIALLY LARGER QUANTITIES, TO WIT, 3,754 UNITS IN THE SUCCEEDING YEARS.

WE ARE MINDFUL THAT YOUR OFFICE HAS SUSTAINED THE LEGALITY OF THE MULTI- YEAR PROCUREMENT CONCEPT (43 COMP. GEN. 657). THIS DECISION, HOWEVER, WAS NOT PREDICATED UPON A CONSIDERATION OF THE PROPOSED PROCEDURE AS APPLIED IN THIS INSTANCE. MOREOVER, THE APPLICATORY ASPR PROVISION, PARAGRAPH 1- 322, HAS BEEN SUBSTANTIALLY REVISED SINCE YOUR DECISION.

THE MULTI-YEAR PROCUREMENT PROCEDURE CONTEMPLATES THAT BIDS SHALL BE SOLICITED UPON THE ONE-YEAR QUANTITY ONLY OR, IN THE ALTERNATIVE, ON THE MULTI-YEAR QUANTITY, AND AWARD IS TO BE MADE FOR WHICHEVER OF THESE ALTERNATIVES REFLECTS THE LOWEST UNIT PRICE TO THE GOVERNMENT. THE INVITATION IN THIS PROCUREMENT SUBSTANTIALLY SO PROVIDES. BUT THE BIDDING CLEARLY ESTABLISHES THAT LARGE BUSINESS CONCERNS, BY SUBMITTING "ARBITRARY" PRICES ON THE ONE-YEAR QUANTITY ARE INTERESTED AND COMPETE ONLY FOR THE MULTI-YEAR QUANTITY.

IN PRACTICE, THEREFORE, THERE IS NO TRUE COMPETITION FOR THE ONE YEAR REQUIREMENT AND THERE CAN BE NO EFFECTIVE COMPARISON OF THE PRICES FOR BOTH ALTERNATIVES. A TACIT ASSUMPTION, IF NOT A PREMISE EXPRESSLY ARTICULATED IN THE ASPR, IS THE PREMISE THAT THE INTERESTS OF THE GOVERNMENT ARE ADEQUATELY PROTECTED SINCE BID PRICES ON BOTH ALTERNATIVES COULD BE COMPARED. THIS BASIC PREMISE DISAPPEARS IN CIRCUMSTANCES SUCH AS THOSE PRESENTED IN THIS CASE.

WE PREVIOUSLY CONTENDED THAT THE MYP IN COMBINING REQUIREMENTS FOR THE MULTI-YEAR PERIOD (2-5 YEARS) NECESSARILY OPERATES TO ELIMINATE COMPETITION BY SMALL BUSINESS CONCERNS FOR SUCH PROCUREMENTS AND CAN ONLY OPERATE TO FURTHER REDUCE THE ALREADY RELATIVELY SMALL PERCENTAGE OF DEFENSE CONTRACTS AWARDED TO SUCH CONCERNS. YOUR DECISION OF APRIL 3, 1964, STATED: "* * * IT WOULD APPEAR THAT SMALL BUSINESS CONCERNS IN MANY INSTANCES SHOULD BE ABLE TO COMPETE MORE EFFECTIVELY FOR PROCUREMENTS ON A MULTI-YEAR BASIS THAN ON AN ANNUAL BASIS.'

HOWEVER, WE THINK THAT NOTWITHSTANDING THE FACT THAT SOME SMALL BUSINESSES CAN COMPETE EFFECTIVELY IN SOME INSTANCES FOR THE MULTI YEAR PORTION OF A PROCUREMENT, THE PRACTICAL EFFECT OF THE MULTI-YEAR PROCUREMENT PROCEDURE IS TO PRECLUDE MANY SMALL BUSINESS FIRMS, WHO COULD EFFECTIVELY COMPETE FOR THE ONE-YEAR REQUIREMENT, BY ESCALATING THE PROCUREMENT TO THE POINT WHERE IT IS OUTSIDE THEIR POTENTIAL. ACCORDINGLY, SBA TAKES THE POSITION THAT THE "OBVIOUS TACTICS" ADOPTED BY THE LOW MULTIYEAR BIDDER (MAGNAVOX) WARRANT THE CONCLUSION THAT AN AWARD OF A CONTRACT FOR THE MULTIYEAR PERIOD WILL SUBVERT THE INTEGRITY OF THE PROCUREMENT PROCESS, AND SBA THEREFORE RECOMMENDS THAT AWARD BE MADE UNDER ALTERNATE "A.'

IN A REPORT DATED FEBRUARY 24, 1967, THE CONTRACTING OFFICER MAKES THE FOLLOWING STATEMENTS:

INVITATION FOR BIDS NO. DAAB05-67-B-0275 COVERING THE REQUIREMENTS OF RADIO SET AN/GRC-106 WAS ISSUED ON 18 NOVEMBER 1966 AND WAS AMENDED BY AMENDMENTS NOS. 0001 THROUGH 0006, WITH DATE AND HOUR OF OPENING AT 19 JANUARY 1967 AT 1:00 P.M., EST. PRIOR TO SOLICITATION, IT WAS DETERMINED THAT THE MULTI-YEAR PROCUREMENT METHOD WAS THE MOST FEASIBLE, BASED ON THE CRITERIA SET FORTH IN ASPR 1-322.1 (C). SINCE THERE HAS BEEN NO PREVIOUS COMPETITION FOR PRODUCTION OF THE EQUIPMENT, IN ACCORDANCE WITH THE CRITERIA SET FORTH IN ASPR 1-322.2 (B) (III) (A), THE SOLICITATION INCLUDED PROVISIONS THAT A PRICE MUST BE SUBMITTED FOR THE TOTAL REQUIREMENTS OF THE FIRST PROGRAM YEAR, THAT A PRICE MAY BE SUBMITTED FOR THE TOTAL MULTI-YEAR QUANTITY, AND A PROVISION THAT IF ONLY ONE RESPONSIVE BID ON THE MULTI-YEAR REQUIREMENTS IS RECEIVED FROM A RESPONSIBLE BIDDER, THE GOVERNMENT RESERVES THE RIGHT TO DISREGARD THE BID ON THE MULTI-YEAR QUANTITY AND TO MAKE AN AWARD ONLY FOR THE FIRST PROGRAM YEAR REQUIRMENTS.

THE DETERMINATION TO AWARD THE FIRST PROGRAM YEAR QUANTITY (ALTERNATE "A" --- 746 EACH OF ITEM NO. 1) OR THE MULTI-YEAR ALTERNATIVE OF THREE PROGRAM YEAR QUANTITIES (ALTERNATE "B"--- 4500 EACH) WILL BE MADE ON THE BASIS OF THE LOWEST OVERALL EVALUATED COST TO THE GOVERNMENT COMPUTED IN ACCORDANCE WITH THE CRITERIA SET FORTH IN THE SOLICITATION, AS PRESCRIBED BY THE ARMED SERVICES PROCUREMENT REGULATION, I.E., THE EVALUATED UNIT PRICE FOR EACH ITEM OF THE LOWEST EVALUATED BID RECEIVED ON THE FIRST PROGRAM YEAR ALTERNATIVE SHALL BE MULIPLIED BY THE TOTAL NUMBER OF UNITS OF THAT ITEM REQUIRED BY THE MULTI-YEAR ALTERNATIVE. THE SUM OF THESE PRODUCTS SHALL BE COMPARED AGAINST THE TOTAL EVALUATED PRICE OF THE LOWEST BID RECEIVED FOR ALL ITEMS UNDER THE MULTI-YEAR ALTERNATIVE. IF THE MULTI-YEAR PRICE IS LOW, AWARD SHALL BE MADE ON THAT BASIS; OTHERWISE, AWARD SHALL BE MADE ON THE BASIS OF THE FIRST PROGRAM YEAR ALTERNATIVE. THE CANCELLATION CEILING SHALL NOT BE A FACTOR FOR EVALUATION. OTHER EVALUATION FACTORS ARE SET FORTH IN THE INVITATION FOR BIDS, E.G., TRANSPORTATION CHARGES AND ADMINISTRATIVE COST OF ISSUING AND ADMINISTERING SEPARATE CONTRACTS FOR EACH PROGRAM YEAR.

IT IS NOT CONSIDERED THAT BIDDING UNDER ALTERNATE "B" IS IMPROPER OR DEPRIVES THE GOVERNMENT OF AN EQUITABLE CHOICE BETWEEN ALTERNATE "A" AND ALTERNATE "B.'

A TOTAL OF ELEVEN (11) FIRMS SUBMITTED BIDS IN RESPONSE TO THE INVITATION FOR BIDS. THE BID OF HENRY PRODUCTS CO. INC., WAS DETERMINED TO BE LOW UNDER ALTERNATE "A," AND THE BID OF MAGNAVOX COMPANY WAS DETERMINED TO BE LOW UNDER ALTERNATE "B.' BECAUSE OF THE DIFFERENCE OF $1,497,942.08 BETWEEN THE TOTAL EVALUATED PRICE OF THE LOWEST BID RECEIVED FOR ALL ITEMS UNDER THE MULTI-YEAR ALTERNATIVE OF $31,159,518.66 (TOTAL BID PRICE PLUS TRANSPORTATION CHARGES) AND THE AMOUNT OF $32,657,460.74, WHICH IS THE SUM OF THE PRODUCTS PLUS EVALUATING FACTORS AS SPECIFIED IN PARAGRAPH 2.B. ABOVE, IT IS DEEMED TO BE IN THE BEST INTERESTS OF THE GOVERNMENT TO EVALUATE THE RESPONSIBILITY OF THE LOW BIDDER UNDER ALTERNATE "B" WITH A VIEW TOWARDS AWARDING THE MULTI-YEAR ALTERNATIVE OF THREE PROGRAM YEAR QUANTITIES.

IT IS AGREED THAT THE UNIT PRICE OF THE LOW BIDDER UNDER ALTERNATE "B" ($6,917.79 INCLUDING PACKAGING AND PACKING COSTS) IS CONSIDERABLY LOWER THAN ITS BID PRICE UNDER ALTERNATE "A" ($16,524.23 INCLUDING PACKAGING AND PACKING COSTS). FURTHER STARTUP COSTS, SUCH AS PREPRODUCTION ENGINEERING, SPECIAL TOOLING, OR PLANT REARRANGEMENT, ARE NOT CONSIDERED TO BE OF SUCH MAGNITUDE TO WARRANT THIS DIFFERENCE IN PRICE. HOWEVER, ALTHOUGH THE PRICE UNDER ALTERNATE "A" MAY BE AN ARBITRARY PRICE BASED ON THE REQUIREMENT THAT A PRICE MUST BE SUBMITTED FOR THE TOTAL REQUIREMENTS OF THE FIRST PROGRAM YEAR ALTERNATE, IT IS RECOGNIZED THAT A BIDDER MAY CHOOSE TO BID ANY PRICE IT DESIRES, PARTICULARLY UNDER FORMAL ADVERTISING, REGARDLESS OF WHETHER THAT PRICE MAY BE COMPETITIVE. IT WOULD APPEAR FROM THE PRICES SUBMITTED, THAT THE LOW BIDDER UNDER ALTERNATE ,B" COULD REALIZE SUBSTANTIAL COST SAVINGS OVER A SUBSTANTIALLY LARGER QUANTITY AND WAS THEREFORE POSSIBLY INTERESTED ONLY IN COMPETING UNDER THE MULTI-YEAR REQUIREMENTS.

IT IS NOT CONSIDERED THAT THE ESCALATION AND CANCELLATION PROVISIONS OF ALTERNATE "B" WILL INCREASE UNIT PRICES SUBSTANTIALLY ABOVE THE FIRM FIXED PRICE OF THE LOW BIDDER OF ALTERNATE "A.'

THE SOLICITATION AS ORIGINALLY ISSUED ON 18 NOVEMBER 1966 INCLUDED A PRICE ESCALATION CLAUSE BASED UPON VARIATIONS IN THE WHOLESALE PRICE INDEX AS PUBLISHED BY THE DEPARTMENT OF LABOR, BUREAU OF LABOR STATISTICS. SUBSEQUENTLY, ANALYSES OF LABOR AND MATERIAL TRENDS INDICATED THAT USE OF THIS INDEX, PARTICULARLY CATEGORY 125, TELEVISION, RADIO RECEIVERS AND PHONOGRAPHS, WAS NO LONGER APPROPRIATE FOR USAECOM MULTI-YEAR PROCUREMENT ACTIONS, SINCE THE STEADY DOWNWARD TREND DOES NOT COMPARE FAVORABLY WITH RECENT SHARP INCREASES IN LABOR COSTS BEING EXPERIENCED IN THE MILITARY ELECTRONICS MANUFACTURING INDUSTRY. AMENDMENT NO. 0004 TO THE SOLICITATION WAS ISSUED ON 23 DECEMBER 1966 TO DELETE THE PRICE ESCALATION CLAUSE INCLUDED THEREIN AND TO SUBSTITUTE A PRICE ESCALATION PROVISION DESIGNED TO LIMIT ESCALATION TO ONLY THAT PORTION OF THE SELLING PRICE ATTRIBUTABLE TO LABOR COSTS, BASED ON THE AVERAGE HOURLY EARNINGS EXCLUDING OVERTIME OF PRODUCTION WORKERS IN MANUFACTURING, OF THE MAJOR INDUSTRY GROUP ENTITLED ELECTRICAL EQUIPMENT AND SUPPLIES AS PUBLISHED IN THE U.S. DEPARTMENT OF LABOR EMPLOYMENT AND EARNINGS MONTHLY REPORT ON THE LABOR FORCE. THIS APPROACH GIVES WEIGHT TO THE FACT THAT LABOR COSTS, AS A RESULT OF NATIONAL TRADE UNIONS, ARE RELATIVELY CONSTANT THROUGHOUT THE INDUSTRY, APPLYING EQUALLY AS WELL TO LARGE BUSINESSES AS TO SMALL. FIXED POINT OF REFERENCE CAN THEREFORE BE ESTABLISHED FROM WHICH DISTINCT VARIATIONS MAY BE MEASURED. A SIMILAR POINT OF REFERENCE FOR MATERIAL COSTS CANNOT BE ESTABLISHED BECAUSE THESE COSTS VARY FROM MANUFACTURER TO MANUFACTURER AND CAN BE SIGNIFICANTLY AFFECTED BY THE BUYING POWER OF INDIVIDUAL COMPANIES. A LARGE COMPANY WITH HEAVY COMMERCIAL AS WELL AS MILITARY ORDERS GENERALLY HAS A BROAD BASE OF VENDORS FROM WHICH TO CHOOSE.

THE ANALYSES OF LABOR AND MATERIAL TRENDS REFERENCED ABOVE WERE INSTITUTED AS A RESULT OF COMPLAINTS FROM VARIOUS REPRESENTATIVES OF INDUSTRY AGAINST THE PRICE ESCALATION PROVISION BASED UPON THE WHOLESALE PRICE INDEX INCLUDED IN SEVERAL OUTSTANDING MULTI-YEAR PROCUREMENT INVITATIONS FOR BIDS. TO THE CONTRACTING OFFICER'S KNOWLEDGE, THE PROTESTOR DID NOT RENDER A COMPLAINT EITHER AGAINST THE ORIGINAL OR REVISED PRICE ESCALATION PROVISION.

A REVIEW WAS MADE BY AN ACCOUNTANT OF THE ECONOMICS BRANCH, USAECOM, OF THE COMPUTATIONS MADE BY THE PROTESTOR REGARDING THE ALLEGATION DISPUTED IN PARAGRAPH 4.A. ABOVE, WHICH CONCLUDED AS FOLLOWS:

(1)NO COMPUTABLE DOLLAR LOSS TO THE GOVERNMENT IS LIKELY TO RESULT UNDER THE PROTESTOR'S ASSUMPTIONS, DUE TO CANCELLATION CHARGES, SINCE THE PERCENTAGES SET FORTH IN THE SOLICITATION ARE CEILINGS, AND SUCH CHARGES ARE SUBJECT TO AUDIT AND NEGOTIATIONS UNDER ASPR CRITERIA.

(2) WHEN PROBABLE ESCALATION COSTS ARE CONSIDERED, USING THE ASSUMPTIONS MADE BY THE PROTESTOR, NO OVERALL LOSS TO THE GOVERNMENT CAN BE COMPUTED. THE LOSS INDICATED ON THE INCREASE OPTION QUANTITY WITHIN THE PROTESTOR'S ASSUMPTIONS IS LESS THAN THE TOTAL SAVINGS UNDER THE MULTI-YEAR BUY OF THE BASIC 4500 EACH AND CAN BE IGNORED.

THE TERMS OF THE SOLICITATION PERTAINING TO ALTERNATE "B" ARE NOT CONSIDERED TO BE PREJUDICIAL TO SMALL BUSINESS CONCERNS.

THE QUANTITIES UNDER THE MULTI-YEAR ALTERNATIVE ARE DEEMED TO BE WITHIN THE PRODUCTION CAPABILITIES OF SMALL BUSINESS CONCERNS WHO POSSESS ADEQUATE TECHNICAL ABILITY, FACILITIES, AND FINANCIAL RESOURCES. THE TERM "SMALL BUSINESS" DOES NOT NECESSARILY DENOTE LACK OF CAPABILITY TO PRODUCE ON A CONTRACT OF LARGE DOLLAR VALUE OR COMPLEX EQUIPMENT. OF THE ELEVEN (11) FIRMS WHO SUBMITTED BIDS IN RESPONSE TO THE INVITATION FOR BIDS, FOUR (4) FIRMS ARE SMALL BUSINESS, AND THE PRICES SUBMITTED BY THESE COMPANIES ARE CONSIDERED TO BE COMPETITIVE, IN VIEW OF THE FACT THAT THIS IS THE FIRST-TIME COMPETITIVE SOLICITATION FOR THE EQUIPMENT.

ATTENTION IS INVITED TO THE STATEMENT OF THE DEPUTY ASSISTANT SECRETARY OF THE ARMY (INSTALLATIONS AND LOGISTICS) TO THE SUBCOMMITTEE ON GOVERNMENT PROCUREMENT, SENATE SELECT COMMITTEE ON SMALL BUSINESS, DATED NOVEMBER 1966, WHICH READS, IN PART, REGARDING THE USE OF THE MULTI-YEAR METHOD OF PROCUREMENT,"IN ADDITION TO THE MANY COST ADVANTAGES, THIS METHOD PERMITS THE BROADENING OF THE COMPETITIVE BASE WITH AN OPPORTUNITY FOR PARTICIPATION BY SMALL BUSINESS CONCERNS NOT OTHERWISE WILLING OR ABLE TO BID ON LESSER QUANTITIES DUE TO HIGH INITIAL INVESTMENT AND START-UP COSTS. AWARDS TO SMALL BUSINESS CONCERNS UNDER THE MULTI-YEAR CONCEPT HAVE BEEN MOST GRATIFYING.' THE ABOVE REMARKS FURTHER CORROBORATE THE OPINION THAT THE MULTI-YEAR METHOD OF PROCUREMENT IS NOT PREJUDICIAL TO SMALL BUSINESS CONCERNS, BUT IS, IN FACT, ADVANTAGEOUS.

THE PROTESTOR IS THE LOW BIDDER UNDER ALTERNATE "A" AND THE SECOND LOW BIDDER UNDER ALTERNATE ,B," AT BID PRICES CONSIDERED TO BE HIGHLY COMPETITIVE. IF THE PROTESTOR, WHICH IS A SMALL BUSINESS CONCERN, CONSIDERS THE TERMS OF THE MULTI-YEAR ALTERNATIVE (ALTERNATE "B") PREJUDICIAL TO SMALL BUSINESS CONCERNS, IT COULD HAVE VOICED ITS OPINIONS PRIOR TO BID OPENING IN AN ATTEMPT TO ALLEVIATE THE ALLEGED PREJUDICE. WOULD APPEAR FROM THE BID SUBMITTED THAT THE COMPANY CONSIDERED ITSELF CAPABLE OF COMPETING WITH LARGE BUSINESS AND PERFORMING UNDER A LARGE DOLLAR VALUE CONTRACT PRIOR TO SUBMISSION OF BID, AND IS ONLY NOW PROTESTING ALLEGED PREJUDICE TO SMALL BUSINESS SINCE IT IS NOT THE FIRST LOW BIDDER IN ACCORDANCE WITH THE EVALUATION FACTORS IN THE SOLICITATION.

THE CONTRACTING OFFICER RECOMMENDS THAT THE PROTEST OF HENRY PRODUCTS COMPANY, INC. BE DENIED AND THAT AN AWARD BE AUTHORIZED TO THE LOW BIDDER UNDER ALTERNATE "B," WHO HAS BEEN DETERMINED TO BE RESPONSIBLE, SINCE THIS ACTION IS DEEMED TO BE IN THE BEST INTERESTS OF THE GOVERNMENT.

IN CONNECTION WITH THE PREVIOUS PROCUREMENTS OF THE PROCUREMENT ITEM, ALL OF WHICH WERE NONCOMPETITIVE, IT IS OUR INFORMATION THAT THE ORIGINAL CONTRACT PRICE IN 1964 WAS $23,558 PER UNIT FOR 500 UNITS; THAT A UNIT PRICE OF $14,908 WAS PAID FOR AN ADD-ON QUANTITY OF 51 UNITS UNDER SUCH CONTRACT; AND THAT A 1966 LETTER CONTRACT WAS AWARDED FOR 1,831 UNITS AT A UNIT PRICE OF $15,709. FURTHER, THE ABSTRACT OF BIDS IN THIS PROCUREMENT INDICATES THAT THE DEVELOPER OF THE ITEM, GENERAL DYNAMICS, A LARGE BUSINESS CONCERN, STOOD NINTH ON ALTERNATE "A" WITH A UNIT PRICE OF $14,800 AND EIGHTH ON ALTERNATE "B" WITH A UNIT PRICE OF $8,320, THE PRICE REDUCTION FOR THE MULTIYEAR QUANTITY AMOUNTING TO 43.8 PERCENT AS COMPARED WITH THE REDUCTIONS OF 52 PERCENT OFFERED BY MAGNAVOX, THE LOW MULTIYEAR BIDDER, AND 37 PERCENT OFFERED BY HONEYWELL, THE THIRD LOW MULTIYEAR BIDDER.

ASPR 1-322.1 (A) DESCRIBES THE MULTIYEAR PROCUREMENT AS FOLLOWS:

(A) DESCRIPTION OF PROCEDURE. MULTI-YEAR PROCUREMENT IS A METHOD FOR COMPETITIVE CONTRACTING FOR KNOWN REQUIREMENTS FOR MILITARY SUPPLIES, IN QUANTITIES AND TOTAL COST NOT IN EXCESS OF PLANNED REQUIREMENTS FOR FIVE YEARS, SET FORTH IN, OR IN SUPPORT OF, THE DEPARTMENT OF DEFENSE FIVE YEAR FORCE STRUCTURE AND FINANCIAL PROGRAM, EVEN THOUGH THE THE TOTAL FUNDS ULTIMATELY TO BE OBLIGATED BY THE CONTRACT ARE NOT AVAILABLE TO THE CONTRACTING OFFICER AT THE TIME OF ENTERING INTO THE CONTRACT. UNDER THIS METHOD, CONTRACT QUANTITIES ARE BUDGETED FOR AND FINANCED IN ACCORDANCE WITH THE PROGRAM YEAR FOR WHICH EACH QUANTITY IS AUTHORIZED. THIS PROCEDURE PROVIDES FOR SOLICITATION OF PRICES FOR SUPPLIES BASED EITHER ON AWARD OF THE CURRENT ONE-YEAR PROGRAM QUANTITY ONLY, OR, IN THE ALTERNATIVE, ON TOTAL QUANTITIES REPRESENTING THE FIRST AND ONE OR MORE SUCCEEDING PROGRAM YEAR QUANTITIES (MULTI-YEAR). AWARD IS MADE ON WHICHEVER OF THESE TWO ALTERNATIVE BASES REFLECTS THE LOWEST UNIT PRICES TO THE GOVERNMENT. IF AWARD IS MADE ON THE MULTI-YEAR BASIS, FUNDS ARE OBLIGATED ONLY FOR THE FIRST YEAR'S QUANTITY, WITH SUCCEEDING YEARS' CONTRACT QUANTITIES FUNDED ANNUALLY THEREAFTER. IN THE EVENT FUNDS ARE NOT MADE AVAILABLE TO SUPPORT ONE OR MORE SUCCEEDING YEAR'S QUANTITIES, CANCELLATION IS EFFECTED. THE CONTRACTOR IS PROTECTED AGAINST LOSS RESULTING FROM CANCELLATION BY CONTRACT PROVISIONS ALLOWING REIMBURSEMENT OF UNRECOVERED NONRECURRING COSTS INCLUDED IN PRICES FOR CANCELLED ITEMS.'

ASPR 1-322.1 (C) SETS FORTH CRITERIA REQUIRING THE USE OF MULTIYEAR PROCUREMENT AS FOLLOWS:

(C)APPLICATION. UNLESS OVERRIDING DISADVANTAGES ARE EVIDENT, THE MULTI- YEAR PROCUREMENT METHOD SHOULD BE USED WHEN ALL OF THE FOLLOWING CRITERIA ARE PRESENT:

(I) REDUCED UNIT PRICES CAN REASONABLY BE ANTICIPATED OVER ANNUAL BUYS BY REASON OF CONTINUITY OF PRODUCTION OR ELIMINATION OF REPETITIVE SUBSTANTIAL STARTUP COSTS, INCLUDING SUCH COSTS AS PREPRODUCTION ENGINEERING, SPECIAL TOOLING, PLANT REARRANGEMENT, INITIAL REWORK, INITIAL SPOILAGE, AND PILOT RUNS; (II) THERE IS REASONABLE EXPECTATION THAT EFFECTIVE COMPETITION CAN BE OBTAINED;

(III) THERE ARE KNOWN REQUIREMENTS FOR THE QUANTITIES TO BE PURCHASED UNDER THE MULTI-YEAR CONTRACT; AND

(IV) THE DESIGN AND SPECIFICATIONS OF THE ITEM ARE NOT EXPECTED TO CHANGE TO AN EXTENT THAT WOULD INVOLVE A MAJOR IMPACT ON CONTRACT PRICE.

IN 43 COMP. GEN. 657, WE GAVE CAREFUL CONSIDERATION TO STATEMENTS BY THE ADMINISTRATOR OF SBA THAT THE MULTIYEAR PROCUREMENT PROCEDURE NECESSARILY ELIMINATES COMPETITION BY SMALL BUSINESS CONCERNS FOR SUCH PROCUREMENTS AND REDUCES THE PERCENTAGE OF DEFENSE CONTRACTS AWARDED TO SUCH CONCERNS; THAT THE PROCEDURE VIOLATES THE PURPOSE, INTENT, SPIRIT, AND PROVISIONS OF THE SMALL BUSINESS ACT; AND THAT IT ALSO VIOLATES THE STATUTORY PROVISIONS CODIFIED AT 10 U.S.C. 2304 (A) AND 2305 GOVERNING DEFENSE PROCUREMENTS. IN REACHING OUR DECISION THAT THE MULTIYEAR PROCUREMENT PROCEDURE WAS NOT LEGALLY OBJECTIONABLE ON THOSE GROUNDS WE MADE THE FOLLOWING PERTINENT STATEMENTS AT PAGES 659 AND 660:

SECTION 2 (A) OF THE SMALL BUSINESS ACT (15 U.S.C. 631 (A) ( PROVIDES THAT IT IS THE DECLARED POLICY OF CONGRESS THAT THE GOVERNMENT SHOULD AID, COUNSEL, ASSIST, AND PROTECT INSOFAR AS POSSIBLE, THE INTERESTS OF SMALL BUSINESS CONCERNS IN ORDER TO PRESERVE FREE COMPETITIVE ENTERPRISE, TO INSURE THAT A FAIR PROPORTION OF THE TOTAL PURCHASES OR CONTRACTS OR SUBCONTRACTS FOR PROPERTY AND SERVICES FOR THE GOVERNMENT SHALL BE PLACED WITH SMALL BUSINESS ENTERPRISE.

IT WOULD APPEAR THAT THE OPPORTUNITY GIVEN TO SPREAD START-UP COSTS OVER SEVERAL YEARS SHOULD MAKE THE MULTI-YEAR PROCUREMENT PROCEDURE ATTRACTIVE TO SMALL BUSINESS CONCERNS. IT IS OUR UNDERSTANDING THAT, IN MANY SINGLE YEAR PROCUREMENTS HIGH START-UP COSTS AND "MAKE READY" EXPENSES TEND TO DISCOURAGE FIRMS--- PARTICULARLY SMALLER ONES WITH LIMITED FINANCIAL RESOURCES--- WHERE THEY MUST COMPETE WITH A PRODUCING FIRM THAT HAS ALREADY RECOVERED THESE COSTS. THE CAPITAL INVESTMENT FREQUENTLY REQUIRED FOR NEW PRODUCERS ALSO DISCOURAGES COMPETITION IN ANNUAL PROCUREMENTS BECAUSE OF THE RISK OF LOSING SUCCEEDING AWARDS, WITH NO ASSURANCE OF FUTURE DEPRECIATION RECOVER. IN VIEW THEREOF IT WOULD APPEAR THAT SMALL BUSINESS CONCERNS IN MANY INSTANCES SHOULD BE ABLE TO COMPETE MORE EFFECTIVELY FOR PROCUREMENTS ON A MULTI-YEAR BASIS THAN ON AN ANNUAL BASIS.

SECTION 15 OF THE ACT (15 U.S.C. 644) PROVIDES THAT SMALL BUSINESS CONCERNS SHALL RECEIVE ANY AWARD OR CONTRACT OR ANY PART THEREOF AS TO WHICH IT IS DETERMINED TO BE IN THE INTEREST OF ASSURING THAT A FAIR PROPORTION OF THE TOTAL PURCHASES AND CONTRACTS FOR PROPERTY AND SERVICES FOR THE GOVERNMENT ARE PLACED WITH SMALL BUSINESS CONCERNS. UNDER SECTION 15 OF THE ACT THE DETERMINATION AS TO WHETHER A PARTICULAR PROCUREMENT SHOULD BE SET ASIDE IN WHOLE OR IN PART FOR SMALL BUSINESS CONCERNS IS WITHIN THE JURISDICTION OF THE ADMINISTRATIVE AGENCY AND THE SMALL BUSINESS ADMINISTRATION. THE GENERAL POLICY OF THE DEPARTMENT OF DEFENSE REGARDING THE PLACEMENT OF CONTRACTS WITH SMALL BUSINESS CONCERNS IS CONTAINED IN PART 7 OF PARAGRAPH I OF ASPR. NEITHER THOSE REGULATIONS NOR THE PROVISIONS OF THE SMALL BUSINESS ACT MADE IT MANDATORY THAT THERE BE SET ASIDE FOR SMALL BUSINESS CONCERNS ANY PARTICULAR PROCUREMENT. COMP. GEN. 351. HOWEVER, WE FIND NOTHING IN THE MULTI-YEAR PROCUREMENT PROCEDURE WHICH WOULD PREVENT THE PLACEMENT OF APPROPRIATE CONTRACTS THEREUNDER WITH QUALIFIED SMALL BUSINESS CONCERNS. CONVERSELY, ASPR 1- 322.1 (A) STATES THAT IN ANY PROCUREMENT WERE BOTH THE TOTAL SET ASIDE PROCEDURE AND MULTI-YEAR PROCEDURE ARE APPROPRIATE, BOTH MAY BE USED. THE OTHER HAND, WE RECOGNIZE THAT MANY MULTI-YEAR PROCUREMENTS, BECAUSE OF THEIR SIZE, MAY NOT BE CONSIDERED APPROPRIATE FOR SMALL BUSINESS SET ASIDE. HOWEVER, SINCE SUCH PROCUREMENTS WOULD NOT SEEM TO BE OF A TYPE WHICH WOULD, IN THE ABSENCE OF MULTI-YEAR PROCEDURES, BE SET ASIDE EITHER PARTIALLY OR COMPLETELY FOR SMALL BUSINESS CONCERNS ON A 1-YEAR BASIS, WE SEE NO VALID REASON FOR HOLDING THAT THE INCREASE IN THE SIZE OF A PROCUREMENT WHICH RESULTS FROM ADOPTION OF THE MULTI-YEAR PROCEDURE MAKES SUCH PROCEDURE INCONSISTENT WITH SECTION 15 OF THE SMALL BUSINESS ACT.

WITH RESPECT TO YOUR CONTENTION THAT THE MULTI-YEAR PROCUREMENT PROCEDURE IS VIOLATIVE OF THE ADVERTISING REQUIREMENTS OF 10 U.S.C. 2304 (A) AND 2305, IT SHOULD BE NOTED THAT THE PRIMARY PURPOSE OF THOSE STATUTES IS TO GIVE ALL BIDDERS AN EQUAL OPPORTUNITY TO COMPETE FOR GOVERNMENT BUSINESS AND TO SECURE TO THE UNITED STATES THE BENEFITS OF FREE AND OPEN COMPETITION. SEE B-151770, AUGUST 15, 1963, 43 COMP. GEN. 159, WHICH YOU CITE. FREE AND OPEN COMPETITION FOR THE GOVERNMENT'S KNOWN NEEDS IS IN FACT OBTAINED WHEN A MULTI-YEAR PROCUREMENT IS ADVERTISED. * * * AND WE ARE THEREFORE UNABLE TO AGREE THAT THE MULTI-YEAR PROCEDURE IS IN DEROGATION OF THE PURPOSES OF THE ADVERTISING STATUTES.

IN THE INSTANT PROCUREMENT, THE PARTICIPATION BY FOUR SMALL BUSINESS CONCERNS, ALL OF WHOM SUBMITTED MULTIYEAR AS WELL AS SINGLE-YEAR BIDS, APPEARS TO SUBSTANTIATE OUR CONCLUSION THAT THE MULTIYEAR PROCEDURE SHOULD ENCOURAGE SMALL BUSINESS CONCERNS TO COMPETE WITH LARGE BUSINESS CONCERNS FOR ITEMS ON WHICH HIGH STARTUP COSTS MIGHT NORMALLY KEEP A SMALL BUSINESS CONCERN FROM BIDDING ON A SINGLE-YEAR BASIS. FURTHER, IT IS OUR VIEW THAT THE PRICES QUOTED BY THE SMALL BUSINESS BIDDERS WERE COMPETITIVE, PARTICULARLY SINCE THEY COMPARE FAVORABLY WITH THE PRICES QUOTED BY THE OTHER BIDDERS, THE HIGHEST SMALL BUSINESS MULTI YEAR BID OF $10,731 PER UNIT BEING ONLY $3,834 HIGHER THAN MAGNAVOX'S LOW UNIT BID PRICE OF $6,897, WHEREAS THE HIGHEST SMALL BUSINESS SINGLE-YEAR BID OF $14,900, WHICH EXCEEDED YOUR LOW UNIT BID PRICE OF $7,260 BY $7,640, PLACED TENTH UNDER ALTERNATE "A.' IT IS SIGNIFICANT THAT YOU WERE LOWEST ON ALTERNATE "A" AND SECOND ON ALTERNATE "B," ON WHICH YOUR UNIT PRICE OF $6,957 WAS LESS THAN $100 HIGHER THAN MAGNAVOX'S LOW UNIT BID OF $6,897.

CONCERNING YOUR CONTENTION THAT IN THE EVENT OF A SINGLE-YEAR AWARD, THE OPTION RESERVED BY THE GOVERNMENT WOULD AFFORD IT ADEQUATE PROTECTION SHOULD ITS REQUIREMENTS INCREASE DURING THE CONTRACT YEAR, YOUR ATTENTION IS DIRECTED TO THE FACT THAT BY THE TERMS OF THE IFB THE OPTION WAS NOT TO BE CONSIDERED IN EVALUATING BIDS UNDER EITHER ALTERNATE. THEREFORE, IT COULD NOT BE CONSIDERED TO JUSTIFY A SINGLE YEAR AWARD ANY MORE THAN A MULTIYEAR AWARD. FURTHER, WE HAVE HELD THAT THE SOLICITATION OF BIDS FOR LESS THAN THE GOVERNMENT'S KNOWN REQUIREMENT WITH THE INTENT OF EXERCISIN AN OPTION TO FULFILL SUCH REQUIREMENT IS NOT IN THE BEST INTEREST OF THE GOVERNMENT SINCE IT WOULD TEND TO RESULT IN HIGHER UNIT PRICES THAN FOR A LARGER QUANTITY. 41 COMP. GEN. 682, 687.

AS TO THE CLAIM THAT THE ESCALATION PROVISIONS MAY GIVE RISE TO EXORBITANT PRICES AFTER THE FIRST YEAR IN VIEW OF THE RISING TREND IN COSTS, IT IS TO BE NOTED THAT THE ESCALATION CLAUSE IS TO BE INVOKED ONLY WITH RESPECT TO CHANGES IN LABOR COSTS; THAT ANY INCREASE IN UNIT PRICES BASED THEREON IS LIMITED TO 10 PERCENT OF THE ORIGINAL CONTRACT PRICE, AND THAT ANY BID PREDICATED UPON A HIGHER ESCALATION PERCENTAGE IS REQUIRED TO BE REJECTED. IN THIS CONNECTION, SHOULD LABOR COSTS INCREASE AFTER AWARD OF A SINGLE-YEAR CONTRACT, THE GOVERNMENT WOULD HAVE NO SUCH LIMITATION ON BID PRICES TENDERED FOR ITS REQUIREMENTS FOR THE SUCCEEDING YEARS, WHICH COULD WELL EXCEED THE FIRST-YEAR PRICE BY MORE THAN 10 PERCENT. CONVERSELY, SHOULD THERE BE A DOWNWARD TREND IN LABOR COSTS AFTER THE FIRST YEAR, THE ESCALATION PROVISIONS IN THE MULTIYEAR CONTRACT WOULD AFFORD THE GOVERNMENT THE BENEFIT OF ANY DECREASE TO THE SAME EXTENT AS READVERTISING BUT WITHOUT THE ADDITIONAL COSTS INCIDENT THERETO. WE ARE THEREFORE UNABLE TO CONCLUDE THAT ESCALATION SHOULD HAVE BEEN A CONSIDERED FACTOR IN EVALUATING THE MULTIYEAR BIDS.

CONCERNING THE EFFECT OF THE CLAUSES RELATING TO LIMITATION OF PRICE AND CONTRACTOR OBLIGATIONS AND CANCELLATION OF ITEMS, THE LANGUAGE OF SUCH CLAUSES MAKES IT CLEAR THAT CANCELLATION IS EXPECTED ONLY IN THE EVENT OF NONAVAILABILITY OF FUNDS FOR THE SECOND AND/OR THIRD PROGRAM YEARS, IN WHICH EVENT THE GOVERNMENT IS NOT OBLIGATED TO PURCHASE, AND THE CONTRACTOR IS NOT OBLIGATED TO SUPPLY, THE REQUIREMENTS FOR THE PROGRAM YEAR OR YEARS AFFECTED BY THE CANCELLATION. AS POINTED OUT IN 43 COMP. GEN. 215, THE POSSIBILITY OF CANCELLATION FOR NONAVAILABILITY OF FUNDS IS CONSIDERED TOO REMOTE TO REQUIRE OR JUSTIFY THE CONSIDERATION OF CANCELLATION COSTS IN EVALUATING BIDS. SIMILARLY, WHILE THE GOVERNMENT CUSTOMARILY RESERVES A RIGHT TO TERMINATE ITS CONTRACTS FOR CONVENIENCE, WITH COMPENSATION TO THE CONTRACTOR, WE HAVE NEVER CONSIDERED THIS POSSIBILITY AS AFFECTING THE PROPRIETY OF EVALUATING BIDS ON THE BASIS OF THE PRICES QUOTED FOR ITS EXISTING NEEDS AS STATED IN THE INVITATION.

CONCERNING THE ABSENCE OF PRICE COMPETITION AFTER THE FIRST YEAR OR THE LOSS OF BENEFIT OF POSSIBLE PRICE REDUCTIONS DUE TO TECHNICAL ADVANCES DURING THE CONTRACT PERIOD, IT IS TO BE NOTED THAT PRIOR TO AUTHORIZING THE USE OF THE MULTIYEAR PROCUREMENT METHOD IN THIS PROCUREMENT A DETERMINATION WAS MADE THAT THE CRITERIA SET FORTH IN ASPR 1-322.1 (C) HAD BEEN MET; THAT IS, THE PROCURING ACTIVITY WAS SATISFIED, AMONG OTHER THINGS, THAT LOWER PRICES COULD REASONABLY BE ANTICIPATED THAN UNDER ANNUAL BUYS, BY REASON OF CONTINUITY OF PRODUCTION OR ELIMINATION OF REPETITIVE SUBSTANTIAL STARTUP COSTS, AND THAT THE DESIGN AND SPECIFICATIONS OF THE ITEM WERE NOT EXPECTED TO CHANGE TO AN EXTENT THAT WOULD INVOLVE A MAJOR IMPACT ON CONTRACT PRICE. IN THE ABSENCE OF EVIDENCE SUCH DETERMINATIONS ARE IN ERROR, WE MUST ACCEPT THEM AS OVERRIDING THE OTHER FACTORS TO WHICH YOU HAVE REFERRED.

TURNING NOW TO THE ASSERTION THAT THE ALTERNATE "A" PRICES QUOTED BY MAGNAVOX AND HONEYWELL, THE LOWEST AND THIRD LOW ALTERNATE "B" BIDDERS, ARE UNREALISTIC AND WERE SUBMITTED MERELY TO EFFECT TECHNICAL COMPLIANCE WITH THE IFB REQUIREMENT THAT ALL ALTERNATE "B" BIDS BE ACCOMPANIED BY ALTERNATE "A" BIDS, IT IS NOTED THAT SUCH PRICES COMPARE FAVORABLY WITH THE PRICES REPORTED TO HAVE BEEN PAID FOR THE PROCUREMENT ITEM IN THE PRIOR NONCOMPETITIVE PROCUREMENTS. IT ALSO APPEARS THAT HONEYWELL'S ALTERNATE "A" UNIT PRICE OF $10,993 STOOD SIXTH AS OPPOSED TO THE TENTH- PLACE ALTERNATE "A" UNIT BID PRICE OF $14,800 QUOTED BY GENERAL DYNAMICS, WHO, AS THE DEVELOPER OF THE ITEM, MIGHT REASONABLY HAVE BEEN EXPECTED TO QUOTE ONE OF THE LOWEST PRICES. FURTHER, HONEYWELL'S REDUCTION OF ITS SINGLE-YEAR PRICE BY 37 PERCENT TO A MULTIYEAR PRICE OF $6,971 PER UNIT COMPARES FAVORABLY WITH THE 35 PERCENT REDUCTION OFFERED BY FREQUENCY ENGINEERING LABORATORIES, ONE OF THE SMALL BUSINESS BIDDERS, AS WELL AS TO THE 43-PERCENT DIFFERENTIAL QUOTED BY GENERAL DYNAMICS.

AS TO THE COMPARISON REQUIRED BY THE IFB AND THE ASPR BETWEEN 1-YEAR AND MULTIYEAR COST, THIS IS NOT BASED UPON THE PRICES QUOTED FOR THE RESPECTIVE ALTERNATES BY EACH INDIVIDUAL BIDDER, BUT UPON THE LOWEST OFFER RECEIVED UNDER EACH OF THE TWO ALTERNATES. WE KNOW OF NO WAY TO PREVENT A BIDDER WHO IS NOT INTERESTED IN THE SINGLE-YEAR QUANTITY FROM EFFECTIVELY ELIMINATING HIMSELF FROM COMPETITION THEREFOR BY DELIVERATELY BIDDING A HIGH PRICE, BUT SO LONG AS THERE IS THE POSSIBILITY THAT ANY BIDDER INTERESTED IN THE SINGLE-YEAR PROGRAM MAY PREVENT A MULTI-YEAR AWARD BY QUOTING A LOWER PRICE, WE DO NOT SEE HOW THE BIDDING OF DELIBERATELY EXCESSIVE PRICES BY SOME BIDDERS PREVENTS THE GOVERNMENT FROM GETTING THE BENEFITS OF FULL COMPETITION. IF NO BIDDER IS INTERESTED IN THE 1-YEAR CONTRACT, THE JUSTIFICATION FOR THE USE OF THE MULTIYEAR PROCEDURE WOULD APPEAR TO BE CONFIRMED. IF ALL BIDS ON BOTH BASES ARE BELIEVED TO BE TOO HIGH, THE CONTRACTING OFFICER HAS THE RIGHT TO REJECT ALL BIDS AND NEGOTIATE UNDER 10 U.S.C. 2304 (A) (15), OR ADVERTISE ON DIFFERENT TERMS IF CONSIDERED APPROPRIATE.

IN THE LIGHT OF THE FOREGOING, WE FIND NO LEGAL BASIS FOR OBJECTION TO A MULTIYEAR AWARD TO MAGNAVOX IN THIS PROCUREMENT, AND YOUR PROTEST IS THEREFORE DENIED.