The Duty to Eliminate Competitive Advantage Ansing Fram Contractor Possession of Government-firnlshed Property

• Author: Major Stam N. Tomanelli
• Pages: 03

1. Introduction

   At the end of fiscal year IgQZ, Department of Defense (DOD)contractore possessed government-furnished property (GFT) costing over $83 billion.' When some contractors have access to GFP and others do not, a Competitive advantage often accrues to the former to the detriment of the latter. Contract attorneys reviewing pre-solicitation contract files should be alert to this possibility. This article initially will discuss the impact that furnishing GFP can have on the competitive procurement process. Next, it will analyze the eontracting officer's obligation to eliminate this competitive advantage and discuss several exceptions to that obligation recognized by the Government Accounting Office (GAO). Finally, it will distinguish between issues arising prior to award and those arising from pastperformanee contractor retention of GFP.

   11. Overview

   Many consequences attendant to the gouenunent's decision to furnish property to its Contractors exist. Contractors with access to GF'P will not have to incur the direct costs of acquiring similar property and, with regard to capital wets, will not have to captake and

   'This lnformatlon Is manlamed by the Offlee of the Under Secretary of Defenne (Acsumtmnl (USWA)) and w u -clouly pmmded to the author by Mr James H Kordes, Deputy for Proprty Policy and Pros-arns, Office of the Asiafant Secretary or Defense (Production and Lagsfies)

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   N. TOMANELLI'

   allocate their acquisition coats to particular government contracts.2 These contractors generally will enjoy a competitive advantage over contractors that do not have acces to GFP and, therefore, must include those costs m their affers.3 Under current regulatory prescriptions, contractors are not supposed to receive subsequent con. tract awards as a result of an unfair GFP-related competitive advan.

   However, follow-on contracts are common because contracting officers are required to consider the costs and savings associated with furnishing GFP regardless of campetnive advantage.s Nevertheless, to minlmize the impact of this government-cre. ated advantage, the Federal Acwisilion Regulation (FAR)pre- scribes procedures whereby the offers of contractors with access to GFP will be burdened in an attempt to offset tius advantage. Specificaiiy, the FAR requires the use of rental equivalent facton and the actual charging of rent to neutralize competitive advantage and ensure that award 1s made to the offeror whose bid or proposal represents the lowest true cost to the government.8 This latter goal was the basis of the GAO's recommendation to the Secretary of the Navy in a 1965 opinion.7 In that case, the invitation for bids (IFB) advised that, for plicing purposes, bidders should assume that the government would not be furnishing government tooling. The incumbent contractor, who had been using government tooling, submitted a bid assuming that it could continue using the tooling but stated in its bid that if the tooling was not provided, its bid would increase by the acquisition cost of similar too1ir.g Addition of the full acquisition cost would have made the incumbent the second lowest bidder. The incumbent argued that its bid should have been

   ZThe ,sue of eompetliwe sdvmfage e m %me through contra~ef~i YC of any

   type of Gm,although contractors may be lnellned to use -me f y ~ i af GFP more than

   others to gain an advantage For example. unaufhomd use of government-furnuhed equipment (GFE) installed an the contr8etor'i production line IS le- detectable than depletion of government-furrushed malenal (OFMI m the c0ntmcl01'i invenfary Kev. enheless, compefaive advantage isuei are not llmifed to procurements involving any pzmcular t)pe of GFP

   3For example, contraeiors using GFE CM reduce potentially expensive Con-tract related nsks A study by the Rand Carparation observed that ' using GFE aide-steps two kinds of uncenanty the poasibibfy that procurement quanlltlel may be reduced, and that another firm will obmn mbsequent contract awards"

   m f - h w d

   Pianl Epulpmenl Rlmuhed ra C0nimcM-i An AnnlygY o/Pdkg and Plocf%ce The Rand Coroorlmn Memorandum RM-6024-1PR v 110891 This akrva-tmn applies to all pmpeny with B high a~qumiilon coat, especially when the pmpeny IS of such a specl&ed nature that 1 8 cost could not be recovered through sUocaflOn toolherwork

   'Seegowaliy GE*ER*L Smis ADMIN ET a.

   FEDERAL AmCllmoh REO 45 2 (I

   Apr 1984) (heremafrer FAR] (Campetitire Advantage)aid 45 201(bl

   '8-155681, Feb 28. 1965 1988 K.S. Camp Gen. LEXIS 27, 1965 WL 2541 *see zr!frQ ten aceompany,ng "Ole 9

   (C G I

   --

   increased only by the fair rental value of the tooling during the period of contract performance. The contracting officer was confronted with a situation where he was required, under the terms of the IFB, to award the contract to another bidder whose offer did not represent the lowest overall cost to the government. Consequently, the Comptroller General (Comptroller) recommended cancellation and reprocurement, reasoning:

   The method of evaluation prescribed by the subject IFB is

   based on the false premise that the Government mut be wiilmg to sacrifice potential savings equal to a bidder'scost of acquiring essential special tooling. Therefore, it appean that the language of the IFB evaluation clause isnot designed to provide the Government the maximum benefit available from the property it had already paid forand could furnish to (the Incumbent] for use in the instant procurement. . . .aThe current FAR provisions requiling either rental equivalents or the charging of mnt should avoid these situations because they provide a more realistic assessment of the government's actual casts.

   111. Nature af the Contracting Officer's Obligation

   The FAR provides: (a) The contracting officer shall, to the maximum practical extent, eliminate competitive advantage accruing to a contractor possessing Government production and research property. , . , This is done by (1) adjusting the offers of those contracton by applying, for evaluatian purposes only, a rental equivalent evaluation factor or, (2) when aausting offen is not practical, by charging the contractor rent for using the property.8

   Several situations exist where the contracting officer would not be obligated to take the remedial actions descnbed in this provision because, under the circumstances, no competitive advantage arises from the contractor's use of government production and research property (GPRP). For example, when sole Source contracting is appropriate, this provision would not apply.LO Similarly, when GPRP is made available to all offeron, no competitive advantage requmg

   elimination LS created. Confronted with a protest under these circumstances, the Comptroller reasoned:

   Thus, contrary to the protester's contention, the solicitation did not require that proposals be adjusted to take into account the government-furnished office space provided in section H-10; rather, it clearly informed offeron that cost proposals would not be adjusted on that basis since the same office space would be available to ail offerars.11

   Federal Acquisition Regulation 45 201 suggests that the contracting officer's obligation to eliminate competitive advantage is restncted to situations where offerors possess GPRP, as apposed to other types of GFP.12 Stated as a mathematical equation, GFP minusGPRP equals material, agency peculiar property, and special tooiing.'s Stnctiy readrng this provision, the FMimposes no obligation on the contracting officer to eliminate-or even attempt to eliminate-competitive advantage arising from possession of GFP not included within the definition of GPRP. This seems at odds with FAR 45.102 which states the general policy with regard to all GFP as follows

   45.102 Policy

   [I]f contractom possess Government property, agencies shall- (a) Eliminate to the maximum practical extent any competitive advantage that might anse from using such property. . .I4

   The nonspecific nature of this obligation suggests that the contract-mg officer is obligated to eliminate competitive advantage arising from contractor use and possession of any category of GFP

   Whle few recent cwes consider this issue, under pre-Competition in Contracting Act (CICA)l6 decisions, contracting officers were not obligated to use rent or rental equivalents to eliminate a competitive advantage created when the government furnished gavernment-owned, contractor-operated (GOCO) facilities16 or "mate- "SRSTeehnoloSes, 8-235403.May

   17, 1QO0.OO-lCPD~484. ~~S*esup7ote*sccompa"yl"gnoreo'3Thls result lb dedved from B compnnmn a1 the delirullons of the vmous fypesofGFPrtfortharWR45 10iandFAR45201

   "FAR45.102 ~~~eComperitlonmContraetlngAerofi884,Pub

   L l o O8-369.888Laf 1176 (1884) (amended ~eversl Llfles a1 the Ulufed Stales Code located at 10 U.5 C $5

   2304-2306 and 41 U S C $5 263,2538 81 [hereinafter CICA] 'BSseCrornLaundry&DryCleaneri.lnc .8-210283,

   Jan 14, 1886 86-1 CPD? 36, CrownLaundly&Dn Clennen, Im., 8-204175, 61 Camp Gen. 233(1982)

   In Hydrosystems Zm. ,Is the government intended to furnish

   "material" and the protester contended that the agency erred by including the awardee's proposal in the competitive range without adding a rental evaluation factor to the proposal price. The Comptroller distmguished between the contracting officer's obligation when material, as opposed to GPRP, is furnished. In denying the protest, the Comptroller stated that "Hydrosystems cites the RWclause that provides for the addition of a rental factor for the rent free use of 'government production and research property'. . . .

   However, 'government production and research property' does not pertain to material or equipment being furnished for incorporation into the contract end product."18 Because the Comptroller rendered this opinion prior to the enactment of the CICA, how the GAO would handle a situation where a dear competitive advantage is conferred by government property other than GPRP is presently unclear. Whilethe CICA does not provide...