APPENDIX 3M-DOD RESPONSE TO GAO REPORT B-146894 (LANE CONSTRUCTION CO.—ANDREWS AFB CASE) Reference is made to your letter of October 12, 1964 (B-146894), and your report to the Congress dated June 2, 1964, regarding the legality of a contract made with the Lane Construction Corporation, Meriden, Connecticut (OSD Case #1863). The Department of the Army is carrying out the action requested in your decision including the evaluation of the contractor's work on a quantum meruit basis and the withholding of further payment under the contract. However, as indicated in the enclosed memorandum of law, we remain firmly of the view that the contract awarded to the Corporation was entirely legal and proper. There is serious concern within the Department of Defense as to the effect that a decision such as was made by your office in this case will have on the confidence that industry is entitled to place in its contracts with the Government. Where firm contractual commitments are made based on determinations made by contracting agencies which involve the reasonable exercise of judgment and where the contractors are not themselves at fault in regard to such determinations, we strongly feel that these commitments should not be repudiated by the Government. This should be particularly true where the contracts have been completed or substantially performed. Sincerely, Enclosure Memorandum of Law /s/ Cyrus R. Vance PARTMENT OF DEFENSE UNITED STATES OF AMERICA DEPARTMENT OF DEFENSE OFFICE OF GENERAL COUNSEL MEMORANDUM OF LAW SUBJECT: Legality of the award of Contract DA-49-080-Eng-4182 to the Lane Construction Corporation In a report to the Congress submitted by letter dated June 2, 1964 (B-146894), the Comptroller General found that subject contract awarded on January 28, 1959 was illegal. He requested that the Department of the Army determine the value of the work on a quantum meruit basis and recover any amounts paid to the contractor in excess of reasonable value. The contractor completed performance in May 1962. It is the conclusion of this memorandum that the contract award was legal and that for the Government under the circumstances involved to repudiate it, as suggested by the Comptroller General, is in derogation, rather than in furtherance, of the competitive bid system of procurement. FACTS Pursuant to an Invitation for Bids issued on November 28, 1958, a formal advertised contract, DA-49-080-Eng-4182, was awarded on January 28, 1959 to the Lane Construction Corporation, the low bidder, in the amount of $8.4 million for construction of a runway, taxiway, and apron at Andrews Air Force Base. The bid of the Corporation was $1.35 million below the Government estimate. The work called for by the contract was part of a high priority expansion project, other parts of which were interrelated with the Lane contract, to accommodate the close-down and transfer of all Bolling Air Force Base and Anacostia Naval Air Station air traffic to Andrews. On April 9, 1963, four years after the award of the contract to Lane and approximately one year after work under the contract had been completed, the General Accounting Office advised the Department of the Army that it found reason to question the legality of the award and suggested that further payment to the Corporation be suspended until the General Accounting Office further reviewed the matter. (Approximately $200,000 was being withheld by the Army pending negotiation of certain claims under the contract.) Subsequently, the Comptroller General in a report to the Congress dated June 2, 1964 (B-146894) held that the contract was awarded illegally and requested that the Army make an evaluation on a quantum meruit basis to determine the value of the work performed and recover any amounts paid to the contractor in excess of reasonable value. While the Department of Defense strongly disagrees with the conclusions of the Comptroller General, the evaluation is nevertheless currently in process. The Comptroller General found that the work contemplated under the contract, which had been awarded by the Army Corps of Engineers as contracting agent, differed substantially from that advertised in the invitation to bid. The contract price, following the issuance of various modifications during the course of performance, came to approximately $12 million. Much of this modification work resulted from additional construction authorized by the Congress in the Military Construction Authorization and Appropriation Acts enacted later that year. However, the Comptroller based his finding on the fact that the Air Force, shortly before the award of the contract but after the invitation for bids had been issued, had decided it required a new narrow-gauge-type runway lighting system to be financed out of the then existing authorization and funding. This decision was communicated to the Army Engineers on January 20, 1959, the same day bids were opened. Upon notification of this decision, the Corps of Engineers obtained from the architect-engineer a rough estimate that the change in the lighting system would cost $1.2 million. Specifications and plans for the new lighting system were not in existence and were not in fact developed until November 1959. Based on the favorable bids received, the need to initiate the work as soon as possible (there would have been approximately one year's delay if award had awaited the development of plans and specifications for the new lighting system) and the opinion of the Corps that the architect-engineer estimate was high, the Corps of Engineers decided to award the contract on the basis of the invitation to bid and incorporate the work on the new lighting system at a later date after plans and specifications for it had been developed. The Lane Construction Corporation was informed of this intention after the bid opening and a few days before the actual award. The work on the new lighting system as subsequently incorporated in the contract by change order cost approximately $600,000, approximately 7% of the original contract price. It is the opinion of the Comptroller General that the known change in the scope of the contract prior to award "was of such significance that it was inappropriate and illegal to award the contract in an unrevised form." He stated that "to allow such a procedure would be grossly unfair to other bidders and would not afford the Government the full advantages of true competition." Instead of awarding the contract on the basis of the original invitation to bid, the Comptroller General in his report stated his belief that the Corps of Engineers (1) should have readvertised the procurement on the basis of requirements known at the time of award; (2) split the work by awarding that portion already firm and readvertise the remainder when plans and specifications were completed; or (3) if the first two were impracticable, negotiate the procurement. Following the issuance of his report, the Department of Defense in a DISCUSSION The basis for the Comptroller General's finding of illegality over five years after the award of the contract and approximately two years after completion of the work by the contractor is that the contemplated change in the lighting system was so substantial that the award was grossly unfair to other bidders and did not afford the Government the full advantages of true competition. There is no allegation that the Corps of Engineers in making, or the contractor in accepting, the award acted in other than good faith. The Comptroller General is of this view even if the alternate courses of action which he suggested might have been taken were impractical or undesirable. In its letter of September 14, 1964, the Department of Defense addressed itself to each of the three alternate courses of action suggested by the Comptroller General. The first alternative was to revise the plans and specifications for the runway incorporating the new lighting system and readvertise the entire project. However, the fact was that necessary plans and specifications for the new narrow-gauge-type runway lighting system had not been developed. Since the proposed contract could not be revised to include the requirement for the new system until these plans and specifications were developed, there would have been a substantial delay, estimated to be approximately one year, in placing the contract and getting the work started. The need for the new runway was too urgent to permit the Air Force to accept such a delay. In his October 12, 1964 letter, the Comptroller General stated that "the need was apparently not so urgent as to call for invoking the negotiating authority pursuant to 10 U.S.C. 2304(a)(2)." There was no need or justification for invoking this negotiation authority. The proposed procurement had been subjected to vigorous competition. The low bid was $1.35 million below the Government's estimate. It was considered in the best interest of the Government to accept this bid. The Comptroller General notes that if the contract had been negotiated, there would have been an examination of records clause inserted in accordance with 10 U.S.C. 2313(b). This point is discussed below in connection with the third suggested alternative. The second alternative suggested by the Comptroller General, if the work was so urgent that it could not be deferred until revised plans and specifications could be developed, was to award a contract (after readvertising) for that portion of the work that was firm and on which the contractor could proceed and then award another advertised contract for the remainder of the work when plans and specifications were completed. In addition to the delay which would have occurred in dividing up the procurement and readvertising, it is the opinion of the Corps of Engineers that the possible result of two separate contractors working on the same construction project would have been unacceptable. In its opinion the nature of the project was such as to require performance by one contractor, both in terms of economy and efficiency. The third alternative of the Comptroller General states that "if it were impracticable to defer or split the work for separate contracts, then we believe a competitive negotiated contract should have been awarded." What would have been accomplished by employing such an alternative is not very clear. Obviously, "competitive negotiation" would not have resulted in any firmer plans and specifications than those contained in the original invitation to bid. Plans for the new lighting system actually were not developed until November 1959, ten months later. As noted above, the procurement had already been subject to vigorous competition. Furthermore, the basic problem would not have been affected by the use of negotiation. Changes to incorporate the new lighting system would still have been necessary and these changes would still have had to been negotiated on a noncompetitive basis with the firm receiving the negotiated contract. Under these circumstances, it is not understood how a contract which the Comptroller General considers illegal when made under formal advertising would have been considered legal if negotiated. The Comptroller General states in connection with this alternative that if a negotiated contract had been made, there would have been more data available for use in pricing subsequent changes. In this regard, it should be noted that Congress in 1962, in enacting Public Law 87-653 which required the submission by offerors of cost or pricing data in connection with negotiated contracts over $100,000 (10 U.S.C. 2306(f)), exempted from the requirement contracts based on adequate price competition. As far as pricing of changes is concerned, contracting officers may under formally advertised as well as negotiated contracts, both of which contain the standard "Changes" clause, require as much data from the contractor as they consider necessary before agreeing to an equitable adjustment in the price for the changes ordered. It is true that if the contract had been negotiated, the General Accounting Office would have had access to the contractor's records of costs on the original contract |