ness that straight formal advertising will be feasible in stage two. In the evaluation process, the procuring activity accepts satisfactory proposals and, without further negotiation, rejects materially defective proposals. 101 The procuring activity may, in its discretion, give prospective contractors submitting marginal proposals an additional opportunity to qualify.102

In step two, all prospects who have submitted acceptable proposals in step one are invited to submit bids under regular formal advertising procedures.103 Supplies and services offered by each bidder must conform to the specific technical proposal approved by the procuring activity.

101 The Comptroller General has denied the protests of bidders summarily rejected in step one. The reasoning is that procurement agencies must have discretion to reasonably restrict competition where necessary to complete technical valuations within existing time limitations. Also important is the Special Subcommittee's recognition of this problem and conclusion that the expected benefits of two-step formal advertising outweighed its shortcomings. See 40 Comp. Gen. 35 & 40 (1960). The evaluation process in step one was compared with the approved qualified products procurement. See 36 Comp. Gen. 809 (1957). 102 ASPR 2-503.1(a)(vii) & (b) (v) (22 July 1960, Rev 1). 103 ASPR 2-503.2 (22 July 1960, Rev 1).

CHAPTER 5

PROCUREMENT BY NEGOTIATION*

1. Introduction. From the initial enactment in 1861 of what later became section 3709 of the Revised Statutes 1 down to World War II, government contracts for the procurement of supplies and services were entered into for the most part by means of formal advertising that is to say, by the solicitation of competitive bids and formal award to the lowest responsible and responsive bidder. And despite certain exceptions to the strict requirement of Rev. Stat. § 3709, whether those exceptions grew out of interpretations of that law by the Comptroller General or out of a few specific statutory authorizations for negotiation, it is unquestioned that until the enactment of the First War Powers Act late in 19412 the use of negotiation as a method of procurement-that is to say, a method of procurement unencumbered by the formalities and procedures applicable to advertised procurement and designed to give scope to the use of normal purchasing practices in the making of procurement contracts-was rare.

From the date of the enactment of Title II of the First War Powers Act in 1941 until May 19, 1948, the effective date of the Armed Services Procurement Act of 1947,3 the armed services used and cited Title II of the First War Powers Act as the negotiation authority for all contracts. With the outbreak of the Korean War, the Department of Defense requested that Congress revitalize Title II of the First War Powers Act. This was done by the enactment on January 12, 1951, of Public Law 921, 81st Congress, which made Title II effective until June 30, 1952. Subsequent legislation continued this authority until June 30, 1958.5

From May 19, 1948, until Title II was revitalized in January 1951, it was universally considered that the Armed Services Pro

*This chapter was adopted from the first three parts of Chapter 3, Navy Contract Law, Second Edition, 1959. It was originally prepared by Harold B. Gross, formerly General Council for the Navy Department, and was revised by Meritt H. Steger, General Counsel, Navy Department.

11875, as amended, 41 U.S.C. § 5 (1958).

255 Stat. 839 (1941).

$ 62 Stat. 21 (1948).

See §§ 1.4 and 1.17, Navy Contract Law (1959). After 30 April 1942, all Army negotiated purchases were required to be made under this Act. (Proc. Regs. 11-T, W.D., SOS, 30 April 1942; 7 Fed. Reg. 3507.)

See note to 50 U.S.C. App. § 611 (Supp. V, 1958).

curement Act of 1947 had suspended the negotiation authority provided by Title II. The broad authority provided by Title II was used by the Navy, until its expiration on June 30, 1958, primarily in cases involving (i) amendments without consideration, (ii) correction of mistakes in contracts, and (iii) the formalization of informal commitments. It was also used by the Navy as negotiation authority in only a few instances where it was considered more appropriate to enter into the contracts under the broad authority provided by Title II of the First War Powers Act, as amended, rather than under the Armed Services Procurement Act. This restrictive usage of the negotiation authority provided by Title II was based on the policy statement contained in the joint regulations of the military departments governing the authority to contract under Title II of the First War Powers Act, as amended, that it was the general policy of each military department to continue to effect its procurement pursuant to the authority of the Armed Services Procurement Act of 1947 rather than pursuant to the authority of Title II of the First War Powers Act. The principal reason why the negotiation authority provided by Title II was not used was that ample authority for negotiation of contracts was provided by the Armed Services Procurement Act. No comparable negotiation authority outside of Title II of the First War Powers Act existed during World War II.

Title II of the first War Powers Act, as revitalized in January 1951, finally expired on June 30, 1958. However, by the Act of August 28, 1958, Congress enacted a new law providing permanent authority during time of national emergency for certain defense agencies "to enter into contracts or into modifications of contracts... without regard to other provisions of law relating to the making. . . amendment or modification of contracts . . . whenever [the President] deems that such action would facilitate the national defense...." While the Act of August 28, 1958, is similar to and was based on Title II of the First War Powers Act, it differs markedly from the Title II authority in that Congress has explicitly provided that it may not be used for "the negotiation of purchases or of contracts for property or services required by law to be procured by formal advertising and competitive bidding." Accordingly, whenever reference is made in this chapter to negotiation au

• See NPD 40-102a.1 (27 May 1957); APP 30-419 (5 May 1954).

772 Stat. 972 (1958), 50 U.S.C. §§ 1431-1435 (1958). Exec. Order No. 10789, 23 Fed. Reg. 8897 (1958), and Department of Defense regulations implementing this statute are published in ASPR Section XVII.

2(c) of the Act of Aug. 28, 1958, 72 Stat. 972, 50 U.S.C. § 1432 (c) (1958). A comparable limitation on the use of Title II as negotiation authority was administratively imposed by the Department of Defense between July 1, 1957, and June 30, 1958. See NPD 40-104 (Dec. 20, 1957). Of course, the statutory limitation on the use of the Act of Aug. 28, 1958, as negotiation authority does not apply if negotiation is authorized under 10 U.S.C. § 2804 (a) (1)–(16) (1958).

thority under Title II of the First War Powers Act, as amended, that reference may not be taken as also applying to the Act of August 28, 1958.

Although the Armed Services Procurement Act of 1947 provides for procurement by formal advertising as well as for procurement by negotiation, and in fact emphasizes that the former is the rule and the latter the exception, no consideration will be given here to the procedures and problems of procurement by formal advertising. That subject has been thoroughly covered in chapter 4. This chapter, therefore, will (i) consider the nature and operation of negotiation as one of the two principal methods of procurement, (ii) analyze in some detail each of the sixteen exceptions to the rule of advertising under which negotiation is permitted by that act (as well as the few additional exceptions covered by the act's reference to negotiation in any situation "otherwise authorized by law"), (iii) discuss the various conditions or restrictions imposed upon the use of negotiation as a method of procurement, with particular emphasis on the condition precedent of Determinations and Findings under certain circumstances, and (iv) indicate something of the Navy's actual operation under this part of the Armed Services Procurement Act, as well as some of the purchasing problems which have arisen in connection with procurement by negotiation.

At the outset, it is important to stress the difference in the nature and extent of the negotiation authority given by the Armed Services Procurement Act as compared on the one hand to the rigid situation under Rev. Stat. § 3709 and on the other hand to the liberal authority granted by Title II of the First War Powers Act of 1941 and its implementing Executive Order 9001. Section 3709 of the Revised Statutes presented the one extreme of strict rules of formal advertising for nearly every government purchase; Title II of the First War Powers Act of 1941 with its blanket authority to enter into contracts (and amendments or modifications thereof) "without regard to the provisions of law relating to the making, performance, amendment, or modification of contracts," represented the other extreme of almost complete freedom as to purchasing methods, and resulted in the inevitable fact that throughout World War II, at least so far as the armed services were concerned, no attempt was made to comply with the formalities of procurement by formal advertising. Between these two extremes stands the Armed Services Procurement Act of 1947 with its combined authority for procurement by advertising and procurement by negotiation, thereby achieving the harmonious and compromise result of authorizing the more liberal purchasing method of negotiation in those situations which seemed to warrant or compel negotiation, but requiring the restricting formalities of the advertising method of procurement in all other situations.

The Armed Services Procurement Act of 1947 had many objectives other than authorizing the negotiation of contracts under certain circumstances. Among these more important other objectives were the following: (1) unifying the procurement authority throughout the Department of Defense; (2) consolidating within the framework of one statute the basic procurement authority for the three military departments; (3) assuring small business an opportunity to secure a fair proportion of the total value of military purchases; (4) re-establishing formal advertising as the preferred and usual method of procurement, but expressly permitting consideration of "other factors" besides price in making an award; (5) permitting in negotiated procurement the use of that type of contract which in each instance will promote the best interests of the Government; (6) granting a limited authority for the use of advance payments; (7) giving finality to the decisions of a department head in his use of the authority granted by the act; (8) authorizing, by assignment of procurement responsibility or by mutual agreement, joint procurement between the Departments as well as procurement by one Department for another; and (9) repealing archaic and unnecessary procurement statutes.

As already stated, the Armed Services Procurement Act of 1947 has been the governing procurement statute for the military departments since May 19, 1948. But on August 10, 1956, this act technically lost its separate identity and popular name with the codification of substantially all laws relating to the Department of Defense and the military departments into a new Title 10, United States Code, entitled "Armed Forces." What was the Armed Services Procurement Act has been codified into positive law in Chapter 137 of this title.10 And with this codification the Armed Services Procurement Act as such has been repealed." This codification of the Armed Services Procurement Act has made many changes in the language of the original act, particularly with reference to the provisions of that act concerning procurement by negotiation. In this chapter we shall refer to and quote from the act as so codified. And for reasons of convenience and familiarity we shall continue to refer to the body of law now codified in Chapter 137 of Title 10, U.S. Code as the Armed Services Procurement Act, but particular sections of that act will be identified by reference to the appropriate section of Title 10, U.S. Code.

I. Negotiation as Distinguished From Advertising

2. Negotiation distinguished from advertising. Before considering each circumstance permitting negotiation as enumerated in the

Act of Aug. 10, 1956, 70A Stat. 1 (1956).

10 10 U.S.C. §§ 2301-2314 (1958).

11 Act of Aug. 10, 1956, § 53, 70A Stat. 677.