BNUMBER: B-265884
DATE: November 7, 1995
TITLE: [Letter]
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B-265884
November 7, 1995
The Honorable Dan Burton
House of Representatives
Dear Mr. Burton:
This responds to your August 4, 1995, letter requesting that our
Office review the Army's planned procurement of metal parts for M-795
high fragmentation artillery projectiles. On July 20, 1995, the
Deputy Assistant Secretary of the Army for Procurement signed a
Justification and Approval (J&A) to authorize limited competition for
this procurement. The J&A establishes a mobilization base for the
item consisting of two government-owned, contractor-operated Army
ammunition plants, the Scranton and Louisiana Army Ammunition Plants
(SAAP and LAAP, respectively).
You ask several specific questions about the validity of the J&A
prepared in this case. First, you ask whether the Army violated the
Competition in Contracting Act of 1984 (CICA). You also ask about the
accuracy of the J&A's reference to a prior contract for M-795 metal
parts, and whether incorrect information about a prior procurement
would invalidate the J&A. Finally, you request additional information
on procurement of high fragmentation projectiles and ask whether costs
are affected by restricted competition in artillery projectile
procurements.
CICA permits restricted competition when supported by a properly
prepared J&A. We note that the Army's J&A includes extensive
discussion of the need to "prove out" the new and "vital flex-line
manufacturing process," but does not discuss mobilization concerns in
the same depth. As a result, it is not clear from the J&A as written
that it fully documents the need for a mobilization base. Your staff
has advised us that your constituent, ERI Babcock & Wilcox, Inc. of
Indianapolis (ERI), intends to file a bid protest contesting the
Army's mobilization base determination. Receipt of a timely bid
protest will permit us to exercise our statutory function to gather
all information and render a decision on the validity of the Army's
justification for excluding ERI.
In response to your second question, SAAP apparently produced a small
quantity of M-795 metal parts in 1978. This was in connection with
the development of a Technical Data Package for the M-795. However,
the prior contract has no apparent bearing on the validity of the
present J&A. As to procurement costs, it is generally agreed that
limiting competition increases costs. Although cost savings are
certainly desirable, the mobilization base exception in CICA also
takes account of the need to preserve production capacity for a
national emergency.
Statutory Background
The Competition in Contracting Act, at 10 U.S.C. 2304, requires the
Department of Defense to obtain full and open competition in its
procurements. Subparagraph (c)(3)(A) of section 2304, authorizes an
exception when:
"it is necessary to award the contract to a particular source or
sources in order . . . to maintain a facility, producer,
manufacturer, or other supplier available for furnishing property
or services in case of a national emergency or to achieve
industrial mobilization. . . . "
Before using this CICA exception, the procuring agency must prepare a
written J&A. A properly prepared and approved J&A permits the agency
to restrict competition consistent with the law. Along with other
procedural requirements, the statute and the Federal Acquisition
Regulation (FAR) provide that a J&A must identify the exception
sought, and include:
"a demonstration, based on the proposed contractor's
qualifications or the nature of the procurement, of the reasons
for using that exception"
10 U.S.C. 2304(f). See also, 48 C.F.R. 6.303 and 6.303-2.
The FAR also lists the proper purposes for restricting competition to
a mobilization base. They include: "[k]eep[ing] vital facilities or
suppliers in business," and "[m]aintain[ing] properly balanced sources
of supply for meeting the requirements of acquisition programs in the
interest of industrial mobilization." 48 C.F.R.
6.302-3(b)(i) and (iii).
By executing a J&A, military agencies may limit competition in order
to create or preserve a mobilization base. Use of the mobilization
base exception authorizes preselection of an appropriately limited
number of sources for a specific critical item. These suppliers
comprise the mobilization base. Once the mobilization base is
established, the procuring entity may award future contracts
exclusively to the
suppliers in the base. The goal of this procurement strategy is to
provide those suppliers with sufficient work on a continuing basis to
allow them to maintain the production capability that would be needed
immediately in time of war.[1]
Ammunition Plant Closure and Congressional Response
In April 1991 the Army issued its Ammunition Production Base Planning
and Restructuring Study.[2] Recognizing that reduced threat in the
post-cold war era would continue to diminish the need for new
production of ammunition, the Army formulated a plan for downsizing
the existing ammunition industrial base. As part of that plan, the
Army articulated a policy to rely on the commercial sector to produce
metal parts. Consistent with the policy, it listed several GOCO
plants producing metal parts for closure. SAAP and LAAP were both
scheduled to be closed in 1995.
In fiscal year 1993, despite the announced closure, Congress began
allocating funds specifically for upgrading SAAP and LAAP to "flexible
manufacturing centers." Since 1993, almost $50 million has been
designated for improvements at these two plants. Meanwhile, both
plants remained on the closure list, and over time their active
workload was reduced. Then, the conferees on the fiscal year (FY)
1995 Defense Appropriations Act directed that M-795 metal parts be
procured from the "existing government-owned production base." H.R.
Rep. No. 103-747, reprinted in 140 Cong. Rec. H9632 (daily ed. Sept.
26, 1994). The same conference report directed that $25 million in FY
1994 funds be transferred from other uses to the
M-795 procurement and used for a "prove-out of the flexible
manufacturing capabilities at the Louisiana and Scranton Army
Ammunition Plants."[3] According to the J&A, without the opportunity
to demonstrate flex-line manufacturing techniques on the M-795
procurement, SAAP and LAAP would apparently have little or no other
work.
M-795 Procurement
The J&A for the M-795 procurement states that the acquisition strategy
is to limit competition for producing metal parts to SAAP and LAAP,
"which recently have been facilitated with unique flex-line
manufacturing capabilities so as to prove-out the flex-line concept
and to keep those vital facilities/suppliers in business." The J&A
explains that the flexible manufacturing concept "integrates a
development and production capability into a single facility [and]
creates a unique capability . . . that will allow the Army to obtain
similar manufacturing technology production efforts of various items
from" the GOCOs.
The J&A then lists a number of specific benefits to be derived from
flexible manufacturing centers, and suggests that, if shown to be
successful, the concept will be extended throughout the ammunition
industrial base. The J&A goes on to state that restricting the M-795
program to SAAP and LAAP will ensure that the plants have sufficient
workload to retain the expertise needed for the demonstration project.
Referring to the $50 million investment directed by Congress, the J&A
concludes that if SAAP's and LAAP's "vital expertise is lost, then the
Army's considerable investment in the vital flexible manufacturing
center concept will, effectively, also be lost." Specifically with
respect to ERI, the J&A concludes that although the firm is capable of
the contract performance requirements, "the contractor's facility has
not been deemed vital for this acquisition as it does not have a
flex-line manufacturing capability."
Case Law
Over the years, our Office has decided a number of bid protests
involving the establishment of a mobilization base, and the inclusion
or exclusion of particular suppliers from the base. Consistently, we
have recognized that such determinations involve complex judgments and
the exercise of discretion by agency officials. We limit our standard
of review in such cases because the normal concern of maximizing
competition is secondary to the ends of industrial mobilization.
However, if a firm convincingly demonstrates an abuse of discretion,
we will sustain a protest of the need for or the composition of a
mobilization base. See NI Industries, Inc., Vernon Division,
B-223941, Dec. 15, 1986, 86-2 CPD 674.
Your letter includes a June 21 letter from counsel for ERI Babcock &
Wilcox of Indianapolis (ERI). ERI had initially expressed interest in
participating in the mobilization base, but the firm ultimately was
excluded because it lacks flex-line manufacturing capability. That
letter, however, was written without benefit of the J&A, which was not
executed until July 20. The bid protest process will afford ERI the
opportunity to examine and comment on the Army's specific reasons for
limiting the acquisition to the two GOCO's, and will result in
creation of a full record for purposes of a decision by our Office
under our bid protest authority.
Army officials advised us that a request for proposals for M-795 metal
parts was issued in mid-September 1995, with evaluations scheduled for
November 1995, and award contemplated in February of 1996. If we find
in the bid protest that the exclusion of ERI was improper, we are
authorized to recommend that the firm be permitted to compete. See 31
U.S.C. 3554(b).
Other Concerns
You asked whether a previous contract for M-795 parts mentioned in the
J&A was actually performed at SAAP. According to the J&A, a contract
was awarded to SAAP in 1978 to produce a few M-795 projectiles for
testing, and it also resulted in the delivery of a Level III Technical
Data Package. We have no information that would disprove the
statement in the J&A that the metal parts work was done at SAAP. In
any case, the J&A does not suggest that the Army selected SAAP for the
mobilization base on the basis of expertise acquired under the 1978
contract. Therefore, the prior procurement history does not appear to
be related to the decision to limit competition.
You also asked whether full and open competition has been secured in
the procurement of other high fragmentation artillery projectiles. To
the best of our knowledge, in recent years all or nearly all
procurements of large ammunition items, such as grenades and artillery
shells, have been accomplished using established mobilization bases
appropriate to the item procured and the quantity needed. In fact,
ERI is a participant in the mobilization base for Navy 105mm
projectiles, and has been since at least 1990.
Your last question is whether the procurement methods have had any
impact on cost. In general, restricted procurements cause higher
costs. However, in the case of mobilization base contracting, the
government receives the benefit of the contractors' continuing
availability to produce quickly the large quantities of specialized
items needed in time of war. The mobilization base exception in CICA
reflects the Congress' determination that this advantage is worth a
premium.
See Bulova Technologies, Inc., B-252660, July 15, 1993, 93-2 CPD 23,
at 6.
Contract awards in procurements restricted to a mobilization base may
be made on the basis of factors other than cost. In Lance Ordnance
Co. Inc., et al., B-246849,
et al., Mar. 31, 1992, 92-2 CPD 29, for example, a mobilization base
supplier was selected for award of additional quantities because its
existing contract was near completion. However, cost may be a primary
factor as well. In Honeywell, Inc.,
B-236357, Nov. 22, 1989, 89-2 CPD 490, the contract properly was
awarded to the lowest offeror among several in the mobilization base.
Finally, the decision to utilize a mobilization base to procure a
critical item does not always signal the end of further competition
for the item. In some cases, it may be necessary to enlarge the base.
See Propper International, Inc., B-229888, et al., Mar. 22, 1988,
88-1 CPD 296. In addition, if procurement needs for an item exceed
the amount necessary to sustain the mobilization base, all responsive
and responsible offerors must be permitted to participate in the
acquisition of the excess amounts.
We are enclosing for your information a copy of our new Bid Protest
Regulations, which are effective as of October 1, and a recent report
on artillery projectile inventories that also discusses future
procurement needs. We trust the foregoing is helpful to you.
Sincerely yours,
Robert P. Murphy
General Counsel
Enclosures
B-265884
November 7, 1995
DIGEST
The Competition in Contracting Act, 10 U.S.C. 2304, permits
restriction of competition to insure suppliers of critical items
constantly maintain the production capacity that would be needed in
the event of a national emergency. GAO's standard of review
recognizes substantial agency discretion in the establishment and
composition of a mobilization base.
1. In the field of ammunition production, some of the manufacturers
are government-owned, government-operated (GOGO) or government-owned,
contractor-operated (GOCO) plants. Like other potential participants
in the mobilization base, the GOGOs and GOCOs need continuous work if
they are to remain active and retain their production skills and
capabilities.
2. The study was updated in 1993. Army officials advised us
informally that there is no 1995 update.
3. In an attempt to counteract the FY 95 conference instructions, the
Senate Armed Services Committee reporting S. 1087, the FY 1996
National Defense Authorization bill, directed the Army to consider
public-private competition for the parts.
S. Rep. No. 112, 104th Cong., 1st Sess. 32. The Senate Appropriations
Committee also recommended increasing the amount allocated for the
M-795 procurement by $20 million for FY 1996. S. Rep. No. 124, 104th
Cong., 1st Sess. 62. As of
October 31, 1995, there has been no final Conference action on either
act.