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EVEN THOUGH LOW BIDDER ALLEGED CONTRACTORS IN NON-SET ASIDE PROCUREMENT WERE "BUYING IN" AS EVIDENCED BY INCREASE IN CONTRACT PRICE. WAS PROPERLY NOT CONSIDERED FOR AWARD. CHANGES GRANTED PRESENT CONTRACTORS ARE RESULT OF LEGITIMATE ENGINEERING CHANGES IN SPECIFICATIONS ACCEPTED BY CONTRACTING OFFICER AS BENEFICIAL TO GOVERNMENT AND NOT RESULT OF "BUY IN" AS IMPLIED. JR.: FURTHER REFERENCE IS MADE TO YOUR PROTEST ON BEHALF OF DALTO ELECTRONICS CORPORATION AGAINST THE PROPOSED CANCELLATION OF INVITATION FOR BIDS NO. WAS ISSUED ON MAY 25. WAS JUNE 19. AT THE TIME THE APP WAS FORMULATED THE PROJECT MANAGER AND THE INDUSTRIAL ENGINEERING DIVISION DETERMINED THAT A SMALL BUSINESS FIRM COULD DELIVER APPROXIMATELY 300 UNITS PER MONTH AND A LARGE BUSINESS FIRM COULD PRODUCE APPROXIMATELY 500 UNITS PER MONTH.

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B-164677, OCT. 10, 1969

AWARDS--SMALL BUSINESS CONCERNS--SET-ASIDES--WITHDRAWAL UNDER INVITATION FOR BIDS RESTRICTED TO SMALL BUSINESS SET-ASIDE, LOWEST RESPONSIBLE BID, $800.000 ABOVE BIDS IN UNRESTRICTED PROCUREMENT FOR SAME ITEM, EVEN THOUGH LOW BIDDER ALLEGED CONTRACTORS IN NON-SET ASIDE PROCUREMENT WERE "BUYING IN" AS EVIDENCED BY INCREASE IN CONTRACT PRICE, WHICH FURTHER SUPPORTED REASONABLENESS OF PROTESTANT'S BID, WAS PROPERLY NOT CONSIDERED FOR AWARD, SINCE CONSIDERABLE PRICE DIFFERENCE BETWEEN LOW BID AND BIDS UNDER UNRESTRICTED PROCUREMENT, IN ADDITION TO GOVERNMENT'S ESTIMATE, AFFORDS NO BASIS FOR FINDING ABUSE OF ADMINISTRATIVE DISCRETION, AND CHANGES GRANTED PRESENT CONTRACTORS ARE RESULT OF LEGITIMATE ENGINEERING CHANGES IN SPECIFICATIONS ACCEPTED BY CONTRACTING OFFICER AS BENEFICIAL TO GOVERNMENT AND NOT RESULT OF "BUY IN" AS IMPLIED.

TO MR. JAMES V. JOY, JR.:

FURTHER REFERENCE IS MADE TO YOUR PROTEST ON BEHALF OF DALTO ELECTRONICS CORPORATION AGAINST THE PROPOSED CANCELLATION OF INVITATION FOR BIDS NO. DAAB07-68-B-0348, ISSUED BY THE UNITED STATES ARMY ELECTRONICS COMMAND, FORT MONMOUTH, NEW JERSEY.

THE SUBJECT INVITATION, A 100-PERCENT SMALL BUSINESS SET ASIDE, WAS ISSUED ON MAY 25, 1968, AS A 2-YEAR, MULTIYEAR PROCUREMENT. THE DATE SPECIFIED FOR RECEIPT OF BIDS, AS AMENDED, WAS JUNE 19, 1968. THE SUBJECT INVITATION CALLED FOR BIDS ON A TOTAL TWO YEAR QUANTITY OF 2,548 AN/TVS-2 CREW-SERVED NIGHT VISION SIGHTS AND ANCILLARY EQUIPMENT. THE ADVANCE PROCUREMENT PLAN FOR THE EQUIPMENT CALLED FOR A TOTAL MONTHLY DELIVERY OF 1,300 UNITS. AT THE TIME THE APP WAS FORMULATED THE PROJECT MANAGER AND THE INDUSTRIAL ENGINEERING DIVISION DETERMINED THAT A SMALL BUSINESS FIRM COULD DELIVER APPROXIMATELY 300 UNITS PER MONTH AND A LARGE BUSINESS FIRM COULD PRODUCE APPROXIMATELY 500 UNITS PER MONTH. THEREFORE, AT THE SAME TIME THE SUBJECT INVITATION WAS ISSUED AN UNRESTRICTED INVITATION WAS ISSUED CALLING FOR TWO AWARDS OF 500 UNITS PER MONTH. AWARDS UNDER THAT INVITATION WERE MADE TO ELECTRO-OPTICAL SYSTEMS, INCORPORATED, AND ELECTROSPACE CORPORATION AT UNIT PRICES OF $577 AND $625, RESPECTIVELY.

ELEVEN BIDS WERE RECEIVED UNDER THE SUBJECT INVITATION. THE THREE LOWEST BIDS WERE AS FOLLOWS:

BIDDERS UNIT PRICE TOTAL

ELECTROSPACE $ 692 $1,736,400

MICROPAC 840 2,105,236

DALTO 1,075 2,748,325 ELECTROSPACE WAS DETERMINED TO BE OTHER THAN A SMALL BUSINESS CONCERN BY THE SMALL BUSINESS ADMINISTRATION AND, THEREFORE, INELIGIBLE FOR AWARD. THE SECOND LOW BIDDER, MICROPAC INDUSTRIES, INCORPORATED, WAS FOUND NONRESPONSIVE AND ITS PROTEST TO OUR OFFICE WAS DENIED ON SEPTEMBER 13, 1968, B-164677. AFTER THESE TWO BIDS WERE REJECTED, A PREAWARD SURVEY OF DALTO WAS REQUESTED. IN THE MEANTIME ELECTROSPACE HAD APPEALED THE SIZE DETERMINATION TO THE SBA SIZE APPEALS BOARD, WHICH AFFIRMED THE DETERMINATION ON FEBRUARY 25, 1969. ELECTROSPACE PROTESTED TO OUR OFFICE. ON MARCH 21, 1969, AN AFFIRMATIVE PREAWARD SURVEY REPORT ON DALTO WAS RECEIVED BY THE CONTRACTING OFFICER. ON APRIL 16, 1969, WE DENIED ELECTROSPACE'S PROTEST, B-164677.

THEREAFTER, THE CONTRACTING OFFICER REPORTS THAT HE WAS CONSIDERING CANCELLING THE SMALL BUSINESS SET-ASIDE BECAUSE HE FELT DALTO'S PRICE WAS UNREASONABLE WHEN ON MAY 12, 1969, HE RECEIVED WORD THAT DALTO HAD PROTESTED HIS PROPOSED ACTION TO OUR OFFICE. ON MAY 15, 1969, THE CONTRACTING OFFICER WAS ADVISED THAT DALTO REDUCED ITS PRICE TO $985. HIS REPORT TO OUR OFFICE ON DALTO'S PROTEST THE CONTRACTING OFFICER ADVISED THAT HE INTENDED TO CANCEL THE SUBJECT INVITATION BECAUSE HE STILL FELT DALTO'S PRICE WAS UNREASONABLE EVEN THOUGH ITS OFFER HAD BEEN REDUCED. HIS DETERMINATION WAS BASED ON THE PROCUREMENT HISTORY OF THE ITEM, PARTICULARLY THE TWO RECENT AWARDS TO EOS AND ELECTROSPACE, AND THE GOVERNMENT'S ESTIMATE OF THE UNIT PRICE ON THE SET-ASIDE, WHICH WAS $890. AS STATED PREVIOUSLY, EOS AND ELECTROSPACE BID UNIT PRICES OF $577 AND $625, RESPECTIVELY, ON THE NON-SET-ASIDE PROCUREMENT. THE CONTRACTING OFFICER NOTED THAT THE DIFFERENCE BETWEEN THE EOS AND DALTO BIDS FOR THE TOTAL QUANTITY WAS $1,278,129, OR $1,049,129 ON THE BASIS OF DALTO'S REDUCED OFFER. BY LETTER DATED JULY 16, 1969, AFTER DALTO HAD BEEN GIVEN AN OPPORTUNITY TO REVIEW THE ADMINISTRATIVE REPORT, DALTO ADVISED THE CONTRACTING OFFICER THAT IT WAS FURTHER REDUCING ITS UNIT PRICE TO $890.

AFTER RECEIVING NOTICE OF THIS LATEST OFFER BY DALTO TO REDUCE ITS PRICE, WE ASKED THE CONTRACTING OFFICER TO ADVISE WHETHER CONSIDERATION HAD BEEN GIVEN TO THIS OFFER AND WHAT HIS POSITION WAS WITH RESPECT THERETO. REPLIED ON SEPTEMBER 5, 1969, THAT IT HAD BEEN CONSIDERED, AND HE STILL BELIEVED IT WAS EXCESSIVE. HE ALSO ADVISED THAT IN VIEW OF DEVELOPMENTS SINCE HIS INITIAL REPORT TO OUR OFFICE THERE WERE ADDITIONAL REASONS WHY HIS DECISION TO DISSOLVE THE SET-ASIDE AND READVERTISE SHOULD BE SUSTAINED. HE STATES THAT BECAUSE OF CONSTRAINTS ON THE ARMY'S 1970 FISCAL YEAR BUDGET, THE REQUIREMENT FOR 1,300 UNITS PER MONTH HAS CHANGED. THE PROJECT MANAGER RECOMMENDS THAT THE 2,548 UNITS TO BE PROCURED UNDER THE SUBJECT INVITATION BE COMBINED WITH AN ADDITIONAL REQUIREMENT FOR 272 UNITS AND THE NEW REQUIREMENT BE PROCURED ON AN UNRESTRICTED BASIS WITH DELIVERIES EXTENDED THROUGH SEPTEMBER 1971. ADDITION, THE CONTRACTING OFFICER REPORTS THAT DURING PERFORMANCE OF THE CONTRACTS AWARDED TO EOS AND ELECTROSPACE MANY SUBSTANTIAL ENGINEERING CHANGES HAVE BEEN RECOMMENDED BY THE CONTRACTORS. SOME OF THESE CHANGES HAVE BEEN GRANTED AND WILL INCREASE THE CONTRACT PRICES FROM APPROXIMATELY $60,000 TO $180,000. AS A CONSEQUENCE, THE CONTRACTING OFFICER REPORTS THAT THE ENGINEERING PACKAGE DALTO BID ON MUST BE REVISED TO INCORPORATE THESE CHANGES. THEREFORE, HE PROPOSES TO REVISE BOTH THE DRAWING PACKAGE AND PURCHASE DESCRIPTION IN ANY READVERTISEMENT AND SOLICIT BIDS ON AN UNRESTRICTED BASIS.

IT IS YOUR POSITION THAT SINCE DALTO IS THE LOW RESPONSIVE BIDDER IT SHOULD RECEIVE AWARD OF THE SET-ASIDE. YOU CONTEND THAT THE CONTRACTING OFFICER'S DETERMINATION THAT DALTO'S BID PRICE AS REDUCED TO $985 WAS EXCESSIVE RESULTED FROM EITHER FAILURE TO EXERCISE HIS DISCRETION AND CONSIDER ALL THE FACTORS OR WAS AN ARBITRARY EXERCISE OF DISCRETION. THIS CONNECTION, YOU CONTEND THAT HE DID NOT CONSIDER THE LOWER QUANTITY BEING PROCURED (AS COMPARED TO THE UNRESTRICTED PROCUREMENT APPARENTLY), THE SMALL BUSINESS CHARACTER OF THE PROCUREMENT, THE HISTORY OF PRIOR CONTRACT PRICES, THE POSSIBILITY THAT THE PRESENT CONTRACTORS WERE "BUYING IN" , OR THE GOVERNMENT'S ESTIMATE. YOU ALSO CONTEND THAT THE $890 FIGURE WAS THE ESTIMATE FOR LARGE BUSINESS CONCERNS, AND THE FACT THAT PARTIAL SET-ASIDE PROCEDURES WERE NOT FOLLOWED INDICATES THAT THE ARMY DID NOT EXPECT A SMALL BUSINESS CONCERN COULD COME WITHIN 120 PERCENT OF THIS FIGURE. SINCE DALTO'S ORIGINAL BID WAS CLOSE TO 120 PERCENT OF THE ESTIMATE, YOU CONTEND THIS PROVES THE REASONABLENESS OF ITS BID. WITH RESPECT TO PRIOR PRICES FOR THE ITEM, YOU POINT OUT THAT IN 1967 VARO BID $990. YOU ALSO EXPRESS CONCERN THAT THE INTENT OF THE CONTRACTING OFFICER IS TO CANCEL THE SUBJECT INVITATION AND AWARD THE QUANTITY CALLED FOR THEREIN TO ELECTROSPACE.

IN A TELEGRAM DATED SEPTEMBER 12, 1969, YOU REPLY TO THE CONTRACTING OFFICER'S REPORT OF SEPTEMBER 5, 1969. YOU CONTEND THAT HIS REFUSAL TO ACCEPT DALTO'S OFFER TO REDUCE ITS BID TO $890 IS CAPRICIOUS. WITH REGARD TO THE ENGINEERING CHANGES, YOU CONTEND THAT DALTO SHOULD BE GIVEN AN OPPORTUNITY TO CONSIDER WHETHER THEY WILL ACCEPT THEM WITHOUT AN INCREASE IN ITS BID PRICE. YOU ALSO STATE THAT IF THE CHANGES ARE SUBSTANTIAL AND NOT WITHIN THE CHANGES CLAUSE OF THE EOS AND ELECTROSPACE CONTRACTS, THE CONTRACTS SHOULD BE CANCELLED OR TERMINATED AND THE REMAINING REQUIREMENTS READVERTISED.

THE SMALL BUSINESS ADMINISTRATION HAS ALSO SUBMITTED THEIR VIEWS ON THE CONTRACTING OFFICER'S PROPOSED DISSOLUTION OF THE SET-ASIDE. SBA ALSO EXPRESSES CONCERN THAT THE CONTRACTING OFFICER INTENDS TO AWARD THE SET- ASIDE REQUIREMENT TO EITHER EOS OR ELECTROSPACE. IN ADDITION, THEY ALSO ARGUE THAT SINCE A PARTIAL SET-ASIDE WAS NOT MADE THIS INDICATES THAT THE ARMY DID NOT EXPECT ANY SMALL BUSINESS BID TO BE WITHIN 120 PERCENT OF THE NON-SET-ASIDE BIDS. FINALLY, SBA CONTENDS THAT DALTO SHOULD RECEIVE THE AWARD OR NEGOTIATIONS SHOULD BE CONDUCTED WITH ALL THE RESPONSIVE SMALL BUSINESS BIDDERS PURSUANT TO ASPR 3-215.

ARMED SERVICES PROCUREMENT REGULATION 1-706.3 (A) PROVIDES FOR THE WITHDRAWAL OF A SMALL BUSINESS SET-ASIDE WHEN IT IS CONSIDERED THAT AWARD UNDER THE SET-ASIDE "WOULD BE DETRIMENTAL TO THE PUBLIC INTEREST (E.G., BECAUSE OF UNREASONABLE PRICE)"; AND WE HAVE RECOGNIZED THAT THE DETERMINATION TO WITHDRAW A SMALL BUSINESS SET-ASIDE BECAUSE OF UNREASONABLE PRICE IS A MATTER WHICH RESTS WITHIN ADMINISTRATIVE DISCRETION AND, IN THE ABSENCE OF BAD FAITH, OR ARBITRARY OR CAPRICIOUS ACTION, WE WILL NOT OBJECT TO SUCH ACTION. 37 COMP. GEN. 147; B 164523, AUGUST 28, 1968. WE SEE NO BASIS FOR FINDING AN ABUSE OF ADMINISTRATIVE DISCRETION WHERE, AS HERE, THERE IS A DIFFERENCE OF OVER $800,000 BETWEEN THE SMALL BUSINESS BID (BASED ON DALTO'S OFFERED REDUCTION TO $890) AND THE MOST RECENT BIDS UNDER AN UNRESTRICTED PROCUREMENT.

FROM THE RECORD BEFORE US, IT APPEARS THAT THE CHANGES THAT HAVE BEEN GRANTED THE PRESENT CONTRACTORS ARE THE RESULT OF LEGITIMATE ENGINEERING CHANGES IN THE SPECIFICATIONS WHICH THE CONTRACTING OFFICER HAS ACCEPTED AS BEING TO THE GOVERNMENT'S BENEFIT BOTH IN THE CURRENT CONTRACTS AND FOR FUTURE PROCUREMENTS AND NOT THE RESULT OF A "BUY IN" AS YOU IMPLY. MOREOVER, THE CHANGES WILL INCREASE THE CONTRACT PRICES FROM $60,000 TO $180,000, LEAVING A CONSIDERABLE DISPARITY BETWEEN DALTO'S BID PRICE AND THE CONTRACT PRICES.

IT APPEARS CLEAR FROM THE ADMINISTRATIVE REPORT THAT THE $890 GOVERNMENT ESTIMATE WAS FOR THE SET-ASIDE QUANTITIES AND NOT THE NON SET-ASIDE QUANTITIES AS YOU CONTEND. WE FIND NO EVIDENCE IN THE RECORD TO SUPPORT YOUR ARGUMENT THAT A PARTIAL SET-ASIDE WAS NOT MADE BECAUSE IT WAS FELT THAT SMALL BUSINESS COULD NOT BID WITHIN 120 PERCENT OF LARGE BUSINESS. AT ANY RATE, THE DETERMINATIVE FACTOR AS TO THE UNREASONABLENESS OF DALTO'S BID WAS A COMPARISON WITH THE BIDS UNDER THE NON-SET-ASIDE AND, AS STATED ABOVE, WAS IN OUR OPINION A PROPER EXERCISE OF DISCRETION.

WHILE THERE IS NO DOUBT THAT THE PROVISIONS OF THE SMALL BUSINESS ACT AUTHORIZE THE AWARD OF CONTRACTS TO SMALL BUSINESS CONCERNS AT PRICES WHICH MAY BE HIGHER THAN THOSE OBTAINABLE BY UNRESTRICTED COMPETITION, WE KNOW OF NO VALID BASIS UPON WHICH IT MAY BE CONCLUDED THAT THIS ACT WAS INTENDED TO REQUIRE THE AWARD OF CONTRACTS TO SMALL BUSINESS CONCERNS AT PRICES CONSIDERED UNREASONABLE BY THE CONTRACTING AGENCY, OR THAT THE CONTRACTING AGENCY WOULD BE PROHIBITED FROM WITHDRAWING A SET-ASIDE DETERMINATION WHERE THE BIDS SUBMITTED BY SMALL BUSINESS CONCERNS WERE CONSIDERED UNREASONABLE.

ALTHOUGH ASPR 3-215 APPEARS TO PROVIDE AUTHORITY TO NEGOTIATE WITH THE REMAINING RESPONSIBLE BIDDERS IN THE CIRCUMSTANCES HERE PRESENT, AS STATED BY SBA, ITS USE IS NOT MANDATORY. MOREOVER, NEGOTIATIONS WOULD BE LIMITED TO THE RESPONSIBLE BIDDERS UNDER THE SET-ASIDE AND THE NEGOTIATED PRICE WOULD HAVE TO BE AS LOW AS THAT OFFERED BY ANY RESPONSIBLE SUPPLIER. ADDITION, FORMAL ADVERTISING IS REQUIRED WHERE FEASIBLE AND PRACTICABLE UNDER THE EXISTING CONDITIONS AND CIRCUMSTANCES EVEN THOUGH SUCH CONDITIONS AND CIRCUMSTANCES WOULD OTHERWISE SATISFY THE REQUIREMENTS AUTHORIZING NEGOTIATION. ASPR 3 102.

ANY CONCERN THAT THE QUANTITIES CALLED FOR UNDER THE SET-ASIDE WILL BE GIVEN TO EOS OR ELECTROSPACE, OTHER THAN IN A MANNER CONSISTENT WITH COMPETITIVE BIDDING PROCEDURES, IS UNWARRANTED. IN A LETTER DATED SEPTEMBER 5, 1969, THE ACTING DIRECTOR OF PROCUREMENT AND PRODUCTION, UNITED STATES ARMY MATERIEL COMMAND, ADVISES THAT THE COURSE OF ACTION TO BE TAKEN IS TO DISSOLVE THE SMALL BUSINESS SET-ASIDE, CANCEL THE INVITATION, AND PROCURE THE ITEMS BY ISSUANCE OF A NEW SOLICITATION ON AN UNRESTRICTED BASIS.

ACCORDINGLY, WE FIND NO BASIS UPON WHICH OUR OFFICE MAY PROPERLY OBJECT TO THE PROPOSED ACTION.

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