B-165795, JULY 2, 1969, 49 COMP. GEN. 1

B-165795, JULY 2, 1969, 49 COMP. GEN. 1

CONTRACTS -- AWARDS -- SMALL BUSINESS CONCERNS -- SELF-CERTIFICATION -- "GOOD FAITH" CERTIFICATION WHILE A BIDDER'S GOOD FAITH IS THE CRITERION FOR DETERMINING THE ACCEPTABILITY OF HIS SELF-CERTIFICATION AS TO HIS SMALL BUSINESS STATUS, THE DETERMINING FACTOR IN DECIDING WHETHER ACTIONS AFTER BID OPENING THAT AFFECT SELF-CERTIFICATION ARE PERMISSIBLE IS WHETHER THOSE ACTIONS GIVE THE BIDDER AN UNDUE ADVANTAGE OVER OTHER BIDDERS BY GIVING HIM AN OPTION TO REMAIN INELIGIBLE OR TAKE STEPS TO PRESERVE HIS SMALL BUSINESS STATUS FOR AWARD PURPOSES. TO PERMIT A FIRM THAT HAD CERTIFIED ITSELF IN GOOD FAITH AS A SMALL BUSINESS CONCERN TO TERMINATE AFTER BID OPENING ITS MANAGEMENT AGREEMENT WITH A LARGE BUSINESS CONCERN FOR THE PURPOSE OF QUALIFYING FOR THE AWARD OF THE SET-ASIDE PORTION OF AN INVITATION WOULD GIVE THE BIDDER JUST SUCH AN OPTION AND WOULD HAVE A DELETERIOUS EFFECT ON THE INTEGRITY OF THE BIDDING SYSTEM. CONTRACTS -- AWARDS -- LABOR SURPLUS AREAS -- DETERMINATION -- AFTER BID OPENING THE OBLIGATION UNDER THE LABOR SURPLUS AREA PROVISIONS OF AN INVITATION TO PERFORM AT LEAST 30 PERCENT OF THE CONTRACT IN OR NEAR SECTIONS OF CONCENTRATED UNEMPLOYMENT RELATING TO A BIDDER'S RESPONSIBILITY RATHER THAN BID RESPONSIVENESS, THE INFORMATION OF COMPLIANCE WITH THE REQUIREMENT TO PERFORM IN AN AREA OF UNEMPLOYMENT MAY BE FURNISHED AFTER BID OPENING. THE BASIS FOR CONSIDERATION OF A BID UNDER THE INVITATION BEING THAT THE BIDDER, OR HIS FIRST-TIER SUBCONTRACTOR, HAS BEEN CERTIFIED ELIGIBLE BY THE DEPARTMENT OF LABOR AND THAT THE BIDDER AGREES TO PERFORM A "SUBSTANTIAL PORTION," PRESCRIBED BY THE INVITATION AS AT LEAST 30 PERCENT, IN OR NEAR SECTIONS OF CONCENTRATED UNEMPLOYMENT, THE ONLY CONCERN SATISFYING BOTH REQUIREMENTS IS ENTITLED TO FIRST NEGOTIATION FOR AN AWARD UNDER THE LABOR SET-ASIDE PORTION OF THE INVITATION.

TO THE SECRETARY OF THE AIR FORCE, JULY 2, 1969:

BY LETTER DATED FEBRUARY 27, 1969, THE DEPUTY CHIEF, PROCUREMENT OPERATIONS DIVISION, DIRECTORATE, PROCUREMENT POLICY, DCS/S&L, FURNISHED OUR OFFICE WITH A REPORT ON THE PROTEST OF KINGS POINT MFG. CO., INC., AGAINST THE AWARD OF A CONTRACT TO EITHER KENTUCKY APPALACHIAN INDUSTRIES, INC. (KAI), OR IRVING AIR CHUTE CO. INC., UNDER INVITATION FOR BIDS NO. FO9603-69-B-0234, ISSUED BY WARNER ROBINS AIR FORCE BASE, GEORGIA, ON THE GROUND THAT THOSE TWO FIRMS HAD VIOLATED INVITATION INDEPENDENT PRICING PROVISIONS. KINGS POINT ALSO PROTESTED THE SMALL BUSINESS STATUS OF KAI TO THE CONTRACTING OFFICER IN ACCORDANCE WITH ARMED SERVICES PROCUREMENT REGULATION (ASPR) 1-703.

THE SUBJECT INVITATION WAS FOR 8,000 CARGO TIEDOWN NETS AND CONTAINED A SET-ASIDE PORTION, WHICH CALLED FOR AWARD OF A CONTRACT FOR AN ADDITIONAL 8,000 NETS TO SMALL BUSINESS AND/OR LABOR SURPLUS AREA BIDDERS IN ACCORDANCE WITH A PRIORITY SCHEDULE CONTAINED IN THE INVITATION. THE PRIORITY SCHEDULE PROVIDED THAT NEGOTIATIONS FOR AWARD OF A CONTRACT UNDER THE SET-ASIDE PORTION OF THE INVITATION WOULD BE CONDUCTED FIRST WITH THE LOWEST RESPONSIVE BIDDER WHICH WAS A SMALL BUSINESS CONCERN AND ALSO QUALIFIED AS A CERTIFIED-ELIGIBLE CONCERN AS DEFINED THEREIN.

BIDS WERE OPENED DECEMBER 6, 1968. THE LOW BID AT A NET PRICE OF $69.99 EACH WAS SUBMITTED BY IRVING, A LARGE BUSINESS NONCERTIFIED ELIGIBLE FIRM. THE SECOND LOW BID AT A NET PRICE OF $70.11 EACH WAS SUBMITTED BY KAI, WHICH CERTIFIED IN ITS BID THAT IT WAS A SMALL BUSINESS CERTIFIED- ELIGIBLE CONCERN, AND THE THIRD LOW BID AT $71.69 EACH WAS SUBMITTED BY KINGS POINT, WHICH IS A SMALL BUSINESS CERTIFIED ELIGIBLE CONCERN.

WE UNDERSTAND THAT KAI WAS ORGANIZED IN 1965, FOR THE PURPOSE OF STIMULATING THE ECONOMY OF PRESTONBURG, KENTUCKY, A CHRONIC UNEMPLOYMENT AREA, AND THAT IRVING HAS BEEN FURNISHING MANAGEMENT ASSISTANCE TO KAI FOR A PERCENTAGE OF NET PROFITS SINCE 1966.

KINGS POINT CONTENDS THAT THE MANAGEMENT AGREEMENT BETWEEN IRVING AND KAI GAVE IRVING SUCH CONTROL OVER KAI THAT KAI MAY NOT QUALIFY AS A SMALL BUSINESS CERTIFIED-ELIGIBLE CONCERN ENTITLED TO FIRST CONSIDERATION UNDER THE INVITATION SET-ASIDE PRIORITY SCHEDULE.

KINGS POINT PROTEST AS TO THE SIZE STATUS OF KAI WAS REFERRED BY THE CONTRACTING OFFICER, PURSUANT TO ASPR 1-703(B)(1), TO THE APPROPRIATE SMALL BUSINESS ADMINISTRATION (SBA) REGIONAL OFFICE FOR DETERMINATION. JANUARY 20, 1969, THE SBA REGIONAL OFFICE FOUND THAT KAI QUALIFIED AS A SMALL BUSINESS CONCERN FOR THE PURPOSE OF THIS PROCUREMENT. KINGS POINT APPEALED THIS FINDING TO THE SBA SIZE APPEALS BOARD, AND ACTION ON THE KINGS POINT PROTEST TO OUR OFFICE WAS DEFERRED PENDING A FINAL RULING BY THE SIZE APPEALS BOARD. ALSO, IN EARLY MARCH 1969, IT WAS DETERMINED THAT URGENCY PRECLUDED FURTHER POSTPONEMENT OF AWARD UNDER THE NON-SET-ASIDE PORTION OF THE INVITATION. AWARD OF THE NON-SET ASIDE PORTION WAS MADE TO IRVING AS THE LOWEST BIDDER. AWARD OF THE SET-ASIDE PORTION OF THE INVITATION HAS BEEN WITHHELD PENDING OUR DECISION AND THE FINAL RULING OF THE SIZE APPEALS BOARD.

THE IRVING-KAI MANAGEMENT AGREEMENT, WHICH IS THE ESSENCE OF THE SIZE PROTEST, PROVIDES GENERALLY THAT IRVING WOULD FURNISH FINANCIAL AND TECHNICAL ASSISTANCE TO KAI IN THE "MANAGEMENT, CONDUCT AND ESTABLISHMENT OF ITS BUSINESS" IN RETURN FOR 95 PERCENT OF KAI'S NET PROFITS, REIMBURSEMENT OF EXPENSES, AND THE FREEDOM FROM ANY FINANCIAL LIABILITY FOR ITS ACTIONS ON BEHALF OF KAI. THE AGREEMENT WAS FOR AN INITIAL TERM OF 2 YEARS AND WAS AUTOMATICALLY RENEWABLE FOR ADDITIONAL 1-YEAR TERMS UNLESS TERMINATED BY APPROPRIATE WRITTEN NOTICE FROM EITHER PARTY TO THE OTHER.

CONSIDERATION BY THE SBA SIZE APPEALS BOARD OF THE LEGAL EFFECT OF THIS AGREEMENT, WHICH WAS IN EFFECT AT THE TIME OF BID OPENING, RESULTED IN A DECISION DATED APRIL 11, 1969, WHICH CONCLUDED THAT KAI WAS NOT A SMALL BUSINESS CONCERN FOR PURPOSES OF THE INSTANT PROCUREMENT. RECONSIDERATION OF THIS RULING WAS REQUESTED BY KAI, HOWEVER, ON THE BASIS THAT WHILE THE AGREEMENT WAS IN EFFECT WHEN BIDS WERE OPENED, IT HAD SINCE BEEN TERMINATED WITH THE RESULT THAT KAI, UPON CANCELLATION OF THE AGREEMENT, QUALIFIED AS A SMALL BUSINESS CONCERN AND THEREFORE WAS ENTITLED TO FIRST PRIORITY FOR AWARD OF THE SET-ASIDE PORTION. ON JUNE 2, 1969, THE SBA SIZE APPEALS BOARD, UPON REHEARING, FOUND THAT THE TERMINATION OF THE MANAGEMENT AGREEMENT BY KAI ON APRIL 2, 1969, WAS SUFFICIENT TO QUALIFY KAI AS A SMALL BUSINESS CONCERN ON AND AFTER THAT DATE. HOWEVER, THERE REMAINS FOR OUR CONSIDERATION THE QUESTION WHETHER KAI'S CHANGE IN SIZE STATUS AFTER BID OPENING IS SUFFICIENT TO ENTITLE IT TO PRIORITY CONSIDERATION AS A SMALL BUSINESS CONCERN FOR THE SET-ASIDE PORTION OF THE INSTANT INVITATION.

AS A GENERAL RULE, A SELF-CERTIFIED BIDDER'S STATUS AS A SMALL BUSINESS CONCERN FOR THE PURPOSES OF A PARTICULAR PROCUREMENT IS FOR DETERMINATION AT THE TIME OF AWARD RATHER THAN AT THE TIME OF BID OPENING. ACCORDINGLY, A SELF-CERTIFIED SMALL BUSINESS BIDDER WHOSE STATUS CHANGES FROM SMALL TO LARGE BETWEEN THE OPENING OF BIDS ON A PROCUREMENT SET ASIDE FOR SMALL BUSINESS AND THE TIME FOR AWARD WILL BE INELIGIBLE FOR AWARD. 46 COMP. GEN. 898 (1967). SIMILARLY, A BIDDER ON A SMALL BUSINESS RESTRICTED PROCUREMENT WHO CERTIFIES HIMSELF IN GOOD FAITH AS A SMALL BUSINESS CONCERN WHEN HE PROPERLY SHOULD HAVE BEEN CLASSED AS LARGE BUSINESS BUT WHO BECAME SMALL BUSINESS BETWEEN BID OPENING AND THE TIME FOR AWARD BECAUSE OF A CHANGE IN SIZE STANDARDS WILL BE QUALIFIED TO RECEIVE AN AWARD. 42 COMP. GEN. 219 (1962). HOWEVER, WHERE A BIDDER'S CHANGE IN STATUS BEFORE AWARD FROM LARGE BUSINESS TO SMALL BUSINESS AFTER A GOOD FAITH SELF-CERTIFICATION IS BROUGHT ABOUT BY THE BIDDER'S AFFIRMATIVE ACTS, WE HAVE HELD THAT SUCH A BIDDER MAY NOT BE CONSIDERED AS A SMALL BUSINESS CONCERN FOR PURPOSES OF A SET-ASIDE AWARD BECAUSE TO DO SO WOULD GIVE THE BIDDER AN OPTION AFTER BIDS ARE OPENED OF DETERMINING WHETHER IT WOULD BE IN HIS BEST INTEREST TO TAKE ACTION, OR NOT TO TAKE ACTION, TO BECOME ELIGIBLE FOR AWARD. SEE 41 COMP. GEN. 47 (1961).

IN A LETTER DATED JUNE 17, 1969, THE ATTORNEY FOR KAI MAINTAINS THAT AT THE TIME THE ACTION WAS INITIATED TO TERMINATE THE MANAGEMENT AGREEMENT, I.E., BY KAI'S LETTER TO IRVING DATED MARCH 3, 1969, PROVIDING THE 30-DAY TERMINATION NOTICE REQUIRED BY THE AGREEMENT, NO DETERMINATION HAD BEEN MADE THAT THE MANAGEMENT AGREEMENT VITIATED KAI'S SMALL BUSINESS STATUS. IN THIS REGARD, IT IS POINTED OUT THAT THE APPROPRIATE SBA REGIONAL OFFICE HAD CONCLUDED ON MORE THAN ONE OCCASION THAT THE MANAGEMENT AGREEMENT DID NOT SERVE TO CHANGE KAI'S SMALL BUSINESS STATUS; THAT THE MATTER HAD NOT BEEN RULED ON AT THAT TIME BY THE SBA SIZE APPEALS BOARD; AND THAT, IN FACT, THE FIRST NEGATIVE SIZE APPEALS BOARD RULING, AFTER AN INITIAL FAVORABLE RULING, WAS NOT ISSUED UNTIL APRIL 11, 1969, 9 DAYS AFTER THE TERMINATION OF THE MANAGEMENT AGREEMENT. IT IS THEREFORE CONTENDED THAT WHILE KAI ADMITTEDLY DID TAKE ACTION TO TERMINATE THE AGREEMENT AFTER BID OPENING, SUCH ACTION WAS TAKEN IN GOOD FAITH AND WAS NOT MOTIVATED BY ANY DESIRE TO CHANGE FROM LARGE BUSINESS TO SMALL BUSINESS STATUS, BECAUSE AT THAT POINT IN TIME NO SBA DETERMINATION HAD BEEN MADE THAT KAI WAS ANYTHING OTHER THAN A SMALL BUSINESS CONCERN.

WHILE THE BIDDER'S GOOD FAITH IS THE CRITERION FOR DETERMINING THE ACCEPTABILITY OF HIS SELF-CERTIFICATION AS TO SMALL BUSINESS STATUS, THE DETERMINING FACTOR IN DECIDING WHETHER A BIDDER'S ACTIONS AFTER THE OPENING OF BIDS AFFECTING HIS SELF-CERTIFICATION ARE PERMISSIBLE IS WHETHER THOSE ACTIONS GIVE HIM AN UNDUE ADVANTAGE OVER OTHER BIDDERS BY GIVING HIM AN OPTION TO REMAIN INELIGIBLE OR TO TAKE STEPS WHICH WOULD PRESERVE HIS SMALL BUSINESS STATUS FOR AWARD PURPOSES. THE RULE AGAINST ALLOWING A BIDDER SUCH AN OPTION, THEREFORE, IS NOT DEPENDENT ON THE BIDDER'S GOOD FAITH OR LACK THEREOF IN SELF-CERTIFYING HIS SMALL BUSINESS STATUS, BUT RATHER THE CONTROLLING FACTOR IS THE DELETERIOUS EFFECT THE EXERCISE OF SUCH OPTIONS WOULD HAVE UPON THE INTEGRITY OF THE COMPETITIVE BIDDING SYSTEM. 41 COMP. GEN. 47, 55.

IN OUR OPINION, NO QUESTION EXISTS AS TO THE GOOD FAITH OF KAI WHEN IT SELF-CERTIFIED ITSELF AS A SMALL BUSINESS CONCERN. HOWEVER, THE LETTER FROM KAI TO IRVING, REQUESTING TERMINATION OF THE MANAGEMENT AGREEMENT, IN ADDITION TO STATING THAT IRVING'S ASSISTANCE UNDER THE AGREEMENT TERMS WAS NO LONGER NEEDED, STATED AS FOLLOWS:

TWICE RECENTLY, KENTUCKY APPALACHIAN INDUSTRIES' SMALL BUSINESS STATUS HAS BEEN CHALLENGED BECAUSE OF THE MANAGEMENT CONTRACT WITH IRVING. PRESENT, THIS COMPANY'S SMALL BUSINESS STATUS IS UNDER PROTEST IN CONNECTION WITH A CARGO NET BID FROM THE AIR FORCE. THIS MATTER HAS BEEN REFERRED TO THE SMALL BUSINESS ADMINISTRATION AND GENERAL ACCOUNTING OFFICE FOR A DECISION.

IT WOULD BE WRONG AND TRAGIC THEN, IF KENTUCKY APPALACHIAN INDUSTRIES WERE TO LOSE ITS SMALL BUSINESS STATUS STRICTLY BECAUSE OF THIS MANAGEMENT CONTRACT WITH IRVING. *** .

WHILE IT IS TRUE THAT NO FINAL ACTION HAD BEEN TAKEN BY SBA DETERMINING KAI TO BE A LARGE BUSINESS CONCERN BECAUSE OF THE EXISTENCE OF THE MANAGEMENT AGREEMENT AT THE TIME OF THIS LETTER, WE BELIEVE THAT THE QUOTED LANGUAGE CLEARLY SHOWS THAT THE POSSIBILITY OF SUCH ADVERSE SBA ACTION WAS THE PRIME MOTIVATING FACTOR BEHIND KAI'S REQUEST FOR TERMINATION. WE THEREFORE MUST VIEW KAI'S REQUEST FOR TERMINATION OF THE MANAGEMENT AGREEMENT AS THE EXERCISE OF AN OPTION, NOT EXTENDED TO OTHER BIDDERS, FOR THE PURPOSE OF PRESERVING THE EFFICACY OF ITS SELF CERTIFICATION TO OBTAIN THE AWARD OF THE SET-ASIDE PORTION OF THE INVITATION. ACCORDINGLY, WE CONCLUDE THAT KAI MAY NOT BE CONSIDERED AS A SMALL BUSINESS CONCERN FOR PURPOSES OF THIS PROCUREMENT.

WITH RESPECT TO THE ELIGIBILITY OF KINGS POINT FOR FIRST PRIORITY NEGOTIATION UNDER THE SET-ASIDE PORTION OF THE INVITATION AS THE ONLY QUALIFIED SMALL BUSINESS CERTIFIED-ELIGIBLE CONCERN, KAI BY TELEGRAM DATED APRIL 14, 1969, TO THE CONTRACTING OFFICER, PROTESTED THE CERTIFIED ELIGIBLE STATUS OF KINGS POINT. THE BASIS OF THE PROTEST WAS THAT WORK AMOUNTING TO 30 PERCENT OF THE CONTRACT PRICE WOULD NOT BE PERFORMED BY KINGS POINT, WHICH HAS BEEN CERTIFIED ELIGIBLE BY THE DEPARTMENT OF LABOR, OR BY A CERTIFIED-ELIGIBLE, FIRST-TIER SUBCONTRACTOR, AS REQUIRED BY THE TERMS OF THE INVITATION. SPECIFICALLY, KAI CONTENDED THAT THE MURDOCK WEBBING CO., A CERTIFIED ELIGIBLE CONCERN FROM WHICH KINGS POINT WOULD SECURE WEBBING, IS A SECOND-TIER RATHER THAN A FIRST-TIER SUBCONTRACTOR BECAUSE ORDERS FOR WEBBING WOULD ACTUALLY BE PLACED BY KINGS POINT WITH THE ALLIANCE WEBBING CO. (APPARENTLY NOT A CERTIFIED-ELIGIBLE CONCERN), WHICH, IN TURN, WOULD PURCHASE THE WEBBING FROM THE MURDOCK WEBBING CO., INC. KAI ALSO MAINTAINED THAT THE PORTION OF THE CONTRACT WORK TO BE PERFORMED BY KINGS POINT, NOT INCLUDING THAT PERFORMED BY ITS SUBCONTRACTORS, WOULD NOT ALONE AMOUNT TO 30 PERCENT OF THE CONTRACT PRICE, AS REQUIRED BY THE INVITATION; AND THAT KINGS POINT THEREFORE IS NOT ENTITLED TO CONSIDERATION AS A CERTIFIED-ELIGIBLE CONCERN. SINCE THE SECOND CLASSIFICATION IN THE SET-ASIDE ORDER OF PRIORITY CALLS FOR NEGOTIATION WITH CERTIFIED-ELIGIBLE CONCERNS, NOT ENTITLED TO SMALL BUSINESS STATUS, A FAVORABLE RESOLUTION OF KAI'S PROTEST WOULD ENTITLE IT TO BE CONSIDERED FOR THE SET-ASIDE AHEAD OF KINGS POINT.

IN RESPONSE TO THIS ALLEGATION, THE CONTRACTING OFFICER SECURED LETTERS FROM KINGS POINT AND MURDOCK WEBBING CO., INC., WHICH STATE UNEQUIVOCALLY THAT MURDOCK AND KINGS POINT WOULD DEAL DIRECTLY WITH ONE ANOTHER FOR PURPOSES OF THE INSTANT PROCUREMENT, THEREBY PROVIDING THE CONTRACTING OFFICER WITH ASSURANCE THAT CONTRACT WORK AMOUNTING TO AT LEAST 30 PERCENT OF THE CONTRACT PRICE WOULD BE PERFORMED IN A LABOR SURPLUS AREA. FURTHER, BECAUSE OF THE DIFFICULTY INVOLVED IN EVIDENCING FIRM COMMITMENTS FROM SUPPLIERS BEFORE ANY AWARD IS MADE, OR, FOR THAT MATTER, IN DETERMINING WHAT THE PRICE OF A LABOR SURPLUS SET-ASIDE CONTRACT WILL BE BEFORE AWARD IS MADE ON THE NON-SET-ASIDE PORTION, THERE IS NO REQUIREMENT THAT A BIDDER CONCLUSIVELY SHOW IN HIS BID COMPLIANCE WITH THE REQUIREMENT THAT WORK REPRESENTING 30 PERCENT OF THE CONTRACT PRICE WILL BE PERFORMED IN AN AREA OF CONCENTRATED UNEMPLOYMENT. RATHER, THE REQUIREMENT FOR CONSIDERATION OF A BID UNDER THE LABOR SURPLUS AREA PROVISIONS OF THE SUBJECT INVITATION IS THAT THE BIDDER PROVIDE EVIDENCE WITH HIS BID THAT THE BIDDER HIMSELF, OR HIS FIRST-TIER SUBCONTRACTOR, HAS BEEN APPROPRIATELY CERTIFIED ELIGIBLE BY THE DEPARTMENT OF LABOR AND THAT THE BIDDER AGREES ACCORDING TO THE TERMS OF THE INVITATION TO PERFORM "A SUBSTANTIAL PORTION" (DESCRIBED ELSEWHERE IN THE INVITATION AS AT LEAST 30 PERCENT) OF HIS CONTRACT IN OR NEAR SECTIONS OF CONCENTRATED UNEMPLOYMENT. SEE, IN THIS REGARD, B 153267, JUNE 8, 1964. THUS, THE 30- PERCENT OBLIGATION TO PERFORM IN LABOR SURPLUS AREAS RELATES TO THE BIDDER'S RESPONSIBILITY RATHER THAN TO HIS RESPONSIVENESS AND ANY INFORMATION IN THAT REGARD MAY BE FURNISHED AFTER THE OPENING OF BIDS. COMP. GEN. 748 (1969). ACCORDINGLY, WE CONCLUDE THAT NO BASIS EXISTS FOR QUESTIONING THE CONTRACTING OFFICER'S DETERMINATION THAT KINGS POINT IS PROPERLY QUALIFIED AS A SMALL BUSINESS CERTIFIED-ELIGIBLE CONCERN AND ENTITLED TO FIRST NEGOTIATION FOR AN AWARD UNDER THE SET-ASIDE PORTION OF THE INVITATION.