The quality of the product being procured should be included in the specifications. Therefore, as a general rule quality is not a factor to be considered where the product offered meets the specifications. Thus, under R. S. 3709 it was held that the acceptance of other than the lowest bid was not authorized simply because, in the opinion of the Contracting Officer, a higher bidder offered supplies of a better quality, unless the invitation specified the quality required and also indicated that such quality would be a determining factor.82 Furthermore, it is improper to prefer a particular make or model of automotive equipment on the sole ground that it is believed to be more suitable. However, in a few cases, the Comptroller General has approved awards to higher bidders on the basis of quality even though the low bidder met the specifications. For example, in a case where the low bidder offered a grade of flour which had previously been found unsatisfactory, he said:

83

"There being a great difference in the grades of flour and with no practicable means of determining the quality thereof other than by actual use, the certificate of the administrative officer concerned with reference to the quality thereof will be accepted by this office."

For certain classes of products, where the specifications require prior testing to determine whether or not a specific product as manufactured by a particular manufacturer conforms to requisite quality, there are maintained qualified products lists. In invitations for the purchase of products on such lists the Navy reserves the right to reject bids on products which have not been subjected to the required tests and found satisfactory for inclusion on the applicable list. Only those bids offering products which have been approved need be considered in making the award; however, bidders who have not had their products qualified are afforded this opportunity whenever qualification testing of the product may be accomplished within the time when the award must be made.

827 Comp. Gen. 298.

83 13 Comp. Gen. 226; 5 Comp. Gen. 30.

4 Comp. Gen. 1035.

85 17 Comp. Gen. 992.

16 Comp. Gen. 1095. ST 17 Comp. Gen. 615.

Frequently, a number of items in an invitation for bids are grouped under the heading "lot." For example, lot 1, item 1 may call for the delivery of a designated quantity of the described article to one Navy activity and other numbered items under lot 1 will specify varying quantities of the same article for delivery to other named activities. In this situation, the invitation provides that: Generally, award will be made to a single bidder on each entire lot. However, the Government reserves the right to award by items when the result of the bidding shows that the supplies or services have not been properly grouped, or when it is advantageous to the Government to award by items.

It is also proper for bidders to group certain items with the condition that the bid is submitted on an "all or none" basis. In such case, the award must be made on the same basis as that contained in the bid. It would appear to be prejudicial to the rights of other bidders to permit a bidder to withdraw this condition after the opening.

Federal and state taxes such as excise taxes and use taxes must be considered in the evaluation of bids. In this connection it should be noted that the invitation for bids may request, but may not require, bidders to quote prices free of taxes or to consent to the deduction of included taxes from otherwise acceptable low prices.85 When it is not shown affirmatively in the bid as submitted that applicable taxes are excluded from the bid price, it is to be presumed that they are included and the bid. is evaluated on that basis.86 Therefore, for purposes of evaluation of bids and award, all bids should be adjusted to a tax-inclusive basis before comparison with other bids rather than to a tax-excluded basis as the tax-included bids may not show the amount of the tax included in the price bid.87

With reference to equal bids, the Armed Services Procurement Regulation provides that when two or more bids are equal in all respects (taking into consideration cost of transportation, cash discounts, and any other factors properly to be considered), award shall be made by a drawing by lot. When award is to be made by lot and the information available shows that the product of a particular manu

facturer is offered by more than one bidder, a preliminary drawing by lot is made to ascertain which of the bidders offering the product of such manufacturer will be included in the final drawing. This regulation also requires that drawings must be witnessed by at least three persons and provides that it may be attended by the bidders or their representative.

CONCLUSION

Under the Armed Services Procurement Act, procurement by formal advertising is the general rule and procurement by negotiation is the exception. Since the Armed Services must, therefore, procure the great bulk of their supplies by competitive bidding, the preservation of integrity and confidence of bidders in this system is essential. Integrity and confidence can only be maintained by strict adherence to the fundamental principles discussed in this chapter, the more important of which are the following:

1. Bids should be solicited from a representative group of prospective bidders.

2. Specifications for supplies should be carefully and clearly drawn so as not to favor the product of a particular supplier or to prevent the prospective bidders from competing on an equal basis.

3. If relief may properly be granted, the Government should not take undue advantage of a bidder who has established his mistake by clear and convincing proof.

4. Likewise, a bidder should not be allowed to use a claim of mistake as a means of escaping the consequences of an improvident bid, or otherwise to improve his position to the prejudice of other bidders.

5. While the Comptroller General and the courts will probably allow contracting officers more liberal discretion in considering other factors in making awards under the Armed Services Procurement Act than under R. S. 3709, nevertheless, Contracting Officers have a keen responsibility, in exercising this discretion, to act judiciously; otherwise, there will be a tendency for bidders to lose faith in the impartiality and the fairness of the competitive bid system.

INTRODUCTION

Prior to World War II, Government procurement (whether by the Armed Services or by any other purchasing agency of the Federal Government) was entered into for the most part by means of formal advertising-that is to say, by the use of solicited competitive bids and formal award to the lowest bidder. This was because of Revised Statutes 3709 (41 U. S. Code 5), which had required since its initial enactment in 1861 that

"All purchases and contracts for supplies or services, in any of the Departments of the Government, except for personal services, shall be made by advertising a sufficient time previously for proposals respecting the same, when the public exigencies do not require the immediate delivery of the articles or performance of the service."

And despite certain exceptions to the strict requirement of R. S. 3709, whether those exceptions grew out of interpretations of 3709 by the Comptroller General or out of a few specific statutory authorizations for negotiation, it is unquestioned that until the First War Powers Act late in 1941 the use of negotiation as a method of procurement was rare.

This historical subject of pre-war and wartime methods of procurement, especially as it relates to a consideration of R. S. 3709 and the First War Powers Act, has been discussed fully in Chapter 1 of this course. It therefore will not be further discussed in this chapter, except to the extent that some of the present "circumstances permitting negotiation" may be likened to or contrasted with some of the earlier exceptions to the advertising require

* Prepared by Harold B. Gross, Assistant General Counsel, Department of the Navy.

ments of R. S. 3709. Similarly, there is no reason to discuss further in this chapter the related subject (also treated in detail in Chapter 1) of the needs for and the historical evolution of the current Armed Services Procurement Act of 1947 (41 U. S. Code 151), which was finally enacted on 19 February 1948, to be effective from and after 19 May 1948, as the single, uniform authority and guide for the methods and procedure of all Armed Services procurement.

What this chapter will discuss is the method of procurement by negotiation used under the authority of the Armed Services Procurement Act. Although that Act 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 the immediately preceding chapter of this course. The purpose here, therefore, will be (1) to consider the nature and operation of negotiation as one of the two principal methods of procurement, (2) to analyze in some detail each of the sixteen circumstances under which negotiation is permitted by the Act (as well as the few additional circumstances covered by the Act's reference to negotiation in any situation "otherwise authorized by law"), (3) to 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 (4) to 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 already have arisen in connection with procurement by negotiation. At the outset, and before embarking upon a detailed analysis of the circumstances permitting negotiation as set forth in the Procurement Act, it is important to stress the difference in the nature and extent of the negotiation authority given by this Act as compared on the one hand to the rigid situation under R. S. 3709 and on the other hand to the liberal authority granted by the First War Powers Act of 1941 and its implementing Executive Order 9001. R. S. 3709, as has been and will be repeatedly stressed throughout this course, presented the one extreme of strict rules of formal advertising for nearly every Government purchase; the First War Powers Act, 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 complete freedom as to purchasing methods, and resulted in the inevitable fact that throughout the war, at least so far as the Armed Services were concerned, there was no need and virtually no attempt to comply with the formalities of procurement by 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 post-war result of authorizing the more liberal purchasing method of negotiation in those situations which seemed to warrant or compel negotiation, but requiring the impartiality and mathematical accuracy of the advertising method of procurement in all other situations.

The Armed Services Procurement Act of 1947, which has been universally considered to have superseded (from and after 19 May 1948) the negotiation authority of the First War Powers Act as well as the restrictive formalities of R. S. 3709, had many objectives other than the authorization of negotiated contracts under certain circumstances. Among these more important other objectives were the following: (1) unifying the procurement author

ity throughout the National Military Establishment, (2) consolidating within the framework of one statute the basic procurement authority for the three Services, (3) assuring small business an opportunity to secure a fair proportion of the total value of military purchases, (4) reestablishing formal advertising as the preferred and usual method of procurement, but liberalizing that method by expressly permitting consideration of "other factors" besides price in making an award, (5) permitting the use of that type of negotiated 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. Most of these objectives, and the subjects which they concern, are discussed in detail elsewhere in this course. The ensuing discussion in this chapter, dealing with the procedures and problems of procurement by negotiation, will touch on only those portions of the Act, and will refer only to those aspects of the long and interesting history of its passage through the Committees and Houses of Congress, which will throw light on the immediate question of the nature and use of this particular method of purchasing supplies and services for the Armed Services in general and for the Department of the Navy in particular.

NEGOTIATION AS DISTINGUISHED FROM FORMAL ADVERTISING

Before considering each circumstance permitting negotiation as enumerated in the Armed Services Procurement Act, it seems advisable first to consider just what negotiation is, what it entails, and how it differs from advertising-or "formal advertising"-as a particular method to be used for the procurement of supplies and services.

Chapter 2 has already set forth the basic ingredients of, as well as the procedures and

problems under, the other method used by the Armed Services for purchasing its required supplies and services-namely, the method of procurement by formal advertising. As pointed out in Chapter 2, that method entails the solicitation of bids by the Government, the submission of bids by qualified suppliers, the opening and recording of bids by the Government, and (under Section 3 of the Armed Services Procurement Act) the awarding of a contract by the Government "to that responsible bidder whose bid, conforming to the invitation for bids, will be most advantageous to the Government, price and other factors considered." Numerous problems and questions, many of them of a technical nature, have been discussed in connection with those four main steps in the process of procuring by means of formal advertising; and throughout the consideration of those problems in Chapter 2, the accent was consistently placed on balancing the interest of the Government with the likelihood of prejudice to other bidders. The important thing was the formality of the required procedures, and strict compliance with the rules of the game. Only under rare and special conditions could the terms or provisions of any bid be changed after public opening; and only under peculiar circumstances could mistakes or irregularities in bids be rectified-and then, as a general rule, only with the approval of the presumed arbiter, the General Accounting Office. Seldom could such important bargaining factors as quality, price, and business reputation be unrestrictedly considered by the Government's purchasing officer; and seldom could there be any give and take, between buyer and seller, over the inclusion and wording of contract clauses. Each transaction entered into as a result of formal advertising was to be an arm's-length transaction, carried out with virtually no opportunity for negotiating the deal itself or the particular terms of the deal.

When the Government buys something as a result of negotiation, however, whether under the broad wartime authority of the First War Powers Act or under the relatively few statutory and interpretative exceptions to the prewar R. S. 3709 or under the circumstances specifically enumerated in the Armed Services

Procurement Act, the formal procedures and rather rigid rules for procurement by formal advertising need not be observed. There is still competition and bargaining, it should be remembered; but instead of the mailing or advertising or public posting of invitations to bid, with the imposed safeguard that all qualified sources of supply be canvassed so as to assure full and free competition, informal price quotations (supported by statements of estimated cost or other satisfactory evidence of reasonable price) are requested from qualified sources of supply for the particular articles or work being procured. Thereafter, on the basis of these informal price quotations, and without any formal or public opening, the Contracting Officer for the Government negotiates a contract with that supplier who offers the best deal to the Government. In this negotiation many different factors are considered and weighed comparison of prices, and consideration of other prices for supplies and services similar to those which are being procured; comparison of the business reputations and responsibilities of the various suppliers who submit informal quotations or proposals; consideration of quality, and of the satisfaction of technical requirements; consideration of delivery possibilities, of the extent and nature of expected sub-contracting, and of the most favorable type of contract (usually in terms of a fixed price contract as compared with a contract of the cost-reimbursement type). Individual bargaining is conducted by the buyer and seller, by mail or by conference or by both mail and conference. In short, with procurement by negotiation the Government is free, like any other purchaser, to do business with whichever supplier seems to offer the most satisfactory terms.

This privilege or freedom of purchasing supplies and services by means of negotiation, as distinguished from doing the same thing by means of formal advertising, is permitted under the Armed Services Procurement Act only to a limited degree. Not only must certain findings and determinations often be made in justification of the use of this method of procurement (as will be discussed below), and not only must certain procedural and contracting formalities be observed with this kind of