B-155711, FEB. 4, 1965

B-155711, FEB. 4, 1965

TO THE HONORABLE LAWSON B. KNOTT, JR., ACTING ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

BY LETTER DATED JANUARY 14, 1965, WITH ENCLOSURES, YOUR GENERAL COUNSEL FURNISHED A REPORT WITH RESPECT TO THE PROTESTS OF AUTOMATIC RETAILERS OF AMERICA, INC. (ARA), AND THE MACKE VENDING COMPANY AGAINST THE CONSIDERATION OF "NEGATIVE" AND/OR "ZERO" BIDS SUBMITTED IN RESPONSE TO INVITATION FOR BIDS NO. GS-R3-PBOE-14, OR, IN THE ALTERNATIVE, AGAINST ANY AWARD UNDER THE INVITATION WHICH IS ALLEGED TO BE AMBIGUOUS AND MISLEADING.

THE INVITATION, DATED OCTOBER 27, 1964, REQUESTED BIDS FOR THE OPERATION OF CAFETERIA AND RELATED FACILITIES AT THE SOCIAL SECURITY BUILDING, BALTIMORE, MARYLAND, FOR A 5-YEAR PERIOD BEGINNING ON DECEMBER 23, 1964, WITH AN OPTION TO EXTEND ANNUALLY THEREAFTER FROM ONE TO FIVE YEARS AT THE CONTRACTING OFFICER'S DISCRETION BUT SUBJECT TO THE OPERATOR-CONTRACTOR'S CONSENT. THE FACE SHEET OF THE INVITATION REQUESTED BIDS AS FOLLOWS:

"IN COMPLIANCE WITH THE ABOVE INVITATION THE UNDERSIGNED AGREES THAT, IF THIS BID IS ACCEPTED WITHIN ... DAYS (60 DAYS UNLESS A SHORTER PERIOD IS INSERTED BY THE BIDDER) AFTER THE DATE OF OPENING OF THE BIDS, HE WILL WITHIN 15 DAYS (UNLESS A LONGER PERIOD IS ALLOWED) AFTER RECEIPT OF ACCEPTANCE BY THE GOVERNMENT FURNISH PERFORMANCE BOND AS REQUIRED AND, UPON RECEIPT OF NOTICE FROM THE GOVERNMENT TO PROCEED, THEREAFTER PROVIDE THE SERVICES DESCRIBED IN THE CONTRACT REQUIREMENTS, IN STRICT ACCORDANCE WITH ALL PROVISIONS OF THE INVITATION FOR A FEE EQUAL IN AMOUNT TO ... PERCENT OF THE GROSS REVENUE, PLUS OTHER PAYMENTS AS SPECIFIED IN THE CONTRACT REQUIREMENTS, IF ANY.'

THE TERM "GROSS REVENUE" IS DEFINED BY PARAGRAPH 1 (E) OF THE GENERAL PROVISIONS AS CONSISTING ,* * * OF THE TOTAL RECEIPTS RECEIVED FROM OPERATIONS UNDER THIS CONTRACT, FROM ANY SOURCE, INCLUDING RECEIPTS FROM THE SALE OF SERVICES AND SUPPLIES, AND COMMISSIONS SUCH AS THOSE FROM VENDING MACHINES * * *.'

SECTION "F" OF THE SCHEDULE PROVIDES WITH RESPECT TO VENDING MACHINES THAT:

"THE OPERATOR SHALL ARRANGE, IN COOPERATION WITH THE DIVISION OF VOCATIONAL REHABILITATION OF THE MARYLAND STATE DEPARTMENT OF EDUCATION, OR THEIR NOMINEE, THE MARYLAND WORKSHOP FOR THE BLIND, FOR THE INSTALLATION, MAINTENANCE AND OPERATION OF AUTOMATIC VENDING MACHINES OF THE TYPES AND TO THE EXTENT INDICATED IN THE ATTACHED EXHIBIT NO. 1, PAGE 4. THE NUMBERS AND TYPES OF VENDING MACHINES ARE LISTED FOR INFORMATION ONLY AS THESE MAY BE CHANGED FROM TIME TO TIME AS FUTURE NEEDS BECOME KNOWN. THE OPERATOR WILL RECEIVE, AS A PART OF THE GROSS REVENUE UNDER THESE OPERATIONS, FIFTY PERCENT (50 PERCENT) OF THE COMMISSIONS PAID BY VENDING MACHINE OPERATORS, THE BALANCE BEING RECEIVED BY THE APPROPRIATE STATE LICENSING AGENCY FOR THE BLIND WHICH WILL CONTINUE TO OPERATE THREE VENDING STANDS WITHIN THE BUILDINGS.'

THIS SECTION WAS AMENDED BY ADDENDUM NO. 4 TO THE INVITATION TO PROVIDE THAT ANY ARRANGEMENT FOR VENDING MACHINE SERVICES WOULD NOT RESULT IN A LOWER MONTHLY COMMISSION PAYMENT BY THE OPERATOR TO THE MARYLAND WORKSHOP FOR THE BLIND THAN THE AVERAGE COMMISSIONS PAID DURING THE FIRST SIX MONTHS OF 1964.

SECTION VII OF THE CONTRACT REQUIREMENTS PROVIDES FOR ALLOCATION AND PAYMENT OF GROSS REVENUE IN THE FOLLOWING ORDER:

(1) THREE PERCENT OF GROSS REVENUE TO THE SOCIAL SECURITY ADMINISTRATION;

(2) ONE PERCENT TO SOCIAL SECURITY EMPLOYEES' ACTIVITIES ASSOCIATION;

(3) PAYMENT OF OPERATING EXPENSES AS DEFINED IN SECTION "D" OF SECTION VII;

(4) PAYMENT OF OPERATING FEE, AS BID, ON PERCENTAGE OF GROSS REVENUE; AND

(5) ANY REMAINDER OF GROSS REVENUE THEN FOR PAYMENT TO THE SOCIAL SECURITY ADMINISTRATION.

THIRTEEN BIDS WERE RECEIVED AND OPENED ON NOVEMBER 18, 1964, AS FOLLOWS:

TABLE

PERCENTAGE OF

BIDDER GROSS REVENUE

A. L. MATHIAS CO. 1.5

HORN AND HARDART .475

BRASS RAIL -6.8

WARR-BACH (*) .000075

WHITE COFFEE POT AND HORN AND HORN 0.000

AUTOMATIC CANTEEN .11

AUTOMATIC RETAILERS .0001

SZABO FOOD SERVICE .0

SCHUNICK CATERERS 2.98

MACKE VENDING .9

GADIOUX -1.0111

SOUTHERN CAFETERIAS 3.9

SHATTUCK CO. 2.89

(*) CURRENT CONTRACTOR

IRRESPECTIVE OF THE QUESTION WHETHER NEGATIVE OR ZERO BIDS ARE RESPONSIVE TO THE INVITATION THE SOCIAL SECURITY ADMINISTRATION HAS RECOMMENDED, AND YOUR GENERAL COUNSEL CONCURS, THAT ALL BIDS RECEIVED UNDER THE INVITATION BE REJECTED; THAT A JOINT STUDY BE UNDERTAKEN WITH YOUR ADMINISTRATION TO DETERMINE THE BEST ARRANGEMENTS FOR THE ENTIRE FOOD AND CAFETERIA OPERATIONS IN THE FUTURE; AND THAT, BASED THEREON, THE INVITATION BE REVISED AND THE GOVERNMENT'S REQUIREMENTS BE READVERTISED. THE BASES OF SUCH RECOMMENDATION ARE AS FOLLOWS:

"IN VERY RECENT YEARS THERE HAS BEEN A PHENOMENAL GROWTH OF THE VENDING MACHINE BUSINESS. THERE HAVE BEEN MERGERS OF SMALLER VENDING MACHINE COMPANIES INTO LARGE ONES. IN ADDITION THESE COMPANIES HAVE ALSO ABSORBED SOME RESTAURANT BUSINESSES. FOR INSTANCE, VENDOMAT AND SLATER ARE NOW A.R.A., ONE OF THE BIDDERS. BRASS RAIL IS OWNED BY A VENDING OUTFIT HEADQUARTERED IN CHICAGO.

"THE REASON WHY A COMBINED VENDING AND RESTAURANT OUTFIT CAN MAKE A MINUS BID IS OBVIOUS. THERE COULD BE AS MUCH OR MORE PROFIT FROM THE VENDING MACHINES THAN HAS BEEN PAID UNDER THE PRESENT CONTRACT IN COMMISSIONS. HAS BEEN POINTED OUT THAT THE COMMISSIONS AMOUNT TO ABOUT $135,000 PER ANNUM. THUS A PAYMENT OF EVEN $50,000 A YEAR WOULD LEAVE A HANDSOME PROFIT.

"THUS THERE SEEMS TO HAVE BEEN PRODUCED, OUT OF QUITE RECENT HAPPENINGS A NEW AND UNEXPECTED SITUATION. ENTERTAINMENT OF A CONTRACT PROVIDING FOR A MINUS FEE CALLS FOR A COMPLETE ABOUT FACE FROM THE INTENTION TO OPERATE UNDER AN ARRANGEMENT CONTAINING AN INCENTIVE TO THE OPERATOR TO BUILD UP CAFETERIA SALES, WHICH MEANS GOOD FOOD AT THE RIGHT PRICES. UNDER A MINUS FEE, THE OPERATOR WOULD PAY LESS IF CAFETERIA SALES WERE LOWER.

"IT MAY BE ARGUED THAT PROVISIONS IN THE CONTRACT FOR THE FILING FOR APPROVAL OF PRICE LISTS AND TO GOVERN THE QUALITY OF FOOD AND SERVICE CAN BE RELIED UPON TO PROVIDE A QUALITY OPERATION. REALISTICALLY, HOWEVER, MARGINAL SHORTCOMINGS ARE DIFFICULT TO CONTROL OR TO PENALIZE. IT IS NOT UNREASONABLE TO ASSUME IT TO BE POSSIBLE, SINCE MACHINE VENDING PAYS THE WAY, THAT THE EMPHASIS COULD BE SHIFTED TO IT AT THE EXPENSE OF A BETTER CAFETERIA OPERATION. TO STATE IT IN THE EXTREME, EMPLOYEES COULD BE FORCED BY BAD BUSSING, BAD FOOD, HIGH PRICES, ETC., FROM USE OF THE CAFETERIA TO USE OF THE VENDING MACHINES. THIS IS THE PRIMARY PROBLEM INVOLVED IN THE SITUATION.

"IT IS QUESTIONABLE WHETHER THE OPERATOR SHOULD HAVE BEEN GIVEN THE FUNCTION OF ARRANGING FOR THE VENDING MACHINE SERVICE OR COMMISSIONS. HOWEVER, IT WAS ANTICIPATED THEN THAT VENDING MACHINE COMPANIES WOULD NOT ENTER THE COMPETITION FOR THE CAFETERIA OPERATION. UNDER CONDITIONS OF FIVE YEARS AGO THIS PROVED TO BE A CORRECT ASSUMPTION. NOW, VENDING MACHINE OPERATORS MOVE IN TO TAKE CONTROL AND IN EFFECT, CONTRACT WITH THEMSELVES. THE SEPARATION OF THE BIDDING AND CONTRACT FOR THE OPERATION OF VENDING MACHINES WITH THE CONTRACTING DONE BY THE GOVERNMENT INSTEAD OF THE OPERATOR NEEDS STUDY AND DECISION.

"THE BEST BID FOR OPERATION OF THE VENDING MACHINES MIGHT PRODUCE COMMISSIONS MUCH HIGHER THAN ARE NOW PAID. IF CONTRACTED FOR BEFORE AND MADE A PART OF THE SPECIFICATIONS FOR LATER BID REQUESTS FOR OPERATION OF THE CAFETERIA, SOME IF NOT ALL OF THE SHORTCOMINGS OF THE PRESENT SITUATION MIGHT BE CLEARED AWAY.

"THE PRESCRIPTION IN THE SPECIFICATIONS FOR THE BIDS OPENED ON DECEMBER 18, THAT COMMISSIONS FROM VENDING MACHINE SALES SHALL NOT BE LOWER THAN THE AVERAGE PAID DURING THE FIRST SIX MONTHS OF 1964 DISREGARDS INCREASED SALES IN THE FUTURE FROM ENLARGED STAFF AND NEW BUILDINGS. IT IS NOT AN EQUITABLE PROVISION.

"ON THE AVERAGE, EACH OF THE 10,000 EMPLOYEES IN WOODLAWN SPENDS $75.00 EACH YEAR IN THE VENDING MACHINES. OF THIS EACH CONTRIBUTES ABOUT $6.50 A YEAR TO THE BLIND. THIS IS ACTUALLY MORE THAN SOME CONTRIBUTE IN CAMPAIGNS FOR TAX DEDUCTIBLE CHARITIES. THE COMMISSIONS PAID TO THE BLIND MAY BE MORE THAN SHOULD, REASONABLY OR LEGALLY, BE PAID. THERE SEEMS TO BE NO BASIS FOR ADOPTION OF THE ARBITRARY 50 PERCENT DIVISION MADE FIVE YEARS AGO, OTHER THAN THE LACK OF DATA UPON WHICH TO BASE A DIFFERENT RATE. IF THE COMMISSIONS PAID TO THE BLIND ARE EXCESSIVE, (COMMISSIONS ON COFFEE, FOR INSTANCE, MIGHT BE EXCLUDED) THE EXCESS OUGHT TO BE REDIRECTED TO LOWERING THE COST OF FOOD SALES IN THE CAFETERIAS AND FROM THE CARTS.

"THESE PROBLEMS ARE COMPLEX. THE SOLUTION WILL REQUIRE A TIME CONSUMING STUDY OF ALL PHASES OF A NEW, UNEXPECTED SITUATION AND THE CAREFUL DESIGN OF NEW ARRANGEMENTS WHICH CAN BE RELIED UPON TO PRODUCE WANTED RESULTS. THE LEGAL ASPECTS ARE EXTREMELY EXTENDED RANGING THROUGH GAO PRECEDENT OPINIONS INVOLVING EMPLOYEE FUNDS, BIDDING, AND THE LAWS AND REGULATIONS COVERING THE RIGHTS OF THE BLIND, ETC.'

WE BELIEVE THAT THE FOREGOING AND THE RECORD BEFORE US WOULD JUSTIFY AN ADMINISTRATIVE DETERMINATION, IN ACCORDANCE WITH SECTION 1-2.404-1 OF THE FEDERAL PROCUREMENT REGULATIONS, THAT COMPELLING REASONS EXIST FOR REJECTION OF ALL BIDS AND CANCELLATION OF THE INVITATION. WE, THEREFORE, WOULD NOT OBJECT IF SUCH ACTIONS WERE TAKEN BY YOUR ADMINISTRATION.