BNUMBER:  B-272069
DATE:  September 6, 1996
TITLE:  Lewis Machine & Tool Co.

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Matter of:Lewis Machine & Tool Co.

File:     B-272069

Date:September 6, 1996

Alan M. Grayson, Esq., and Victor A. Kubli, Esq., Law Offices of Alan 
M. Grayson, for the protester.
Daniel C. Sauls, Esq., Jerald S. Howe, Jr., Esq., and Paul R. Hurst,
Steptoe & Johnson, for United Defense Limited Partnership, an 
intervenor.
Richard A. Couch, Esq., and Vera Meza, Esq., Department of the Army, 
for the agency.
Adam Vodraska, Esq., and James A. Spangenberg, Esq., Office of the 
General Counsel, GAO, participated in the preparation of the decision.

DIGEST

Under a solicitation for a prototype lightweight howitzer, the 
protester's proposal, premised on a prototype developed and fabricated 
by an Army arsenal and provided under a subcontract to the protester, 
could not be accepted because the subcontract was not authorized by 10 
U.S.C.  sec.  2208(j), which permits subcontracting by arsenals only where 
they can compete directly under the solicitation with private firms, 
which this solicitation did not permit.

DECISION

Lewis Machine & Tool Co. protests the decision by the Army 
Tank-Automotive and Armaments Command, Armament Research, Development 
and Engineering Center, Picatinny Arsenal, New Jersey, to eliminate 
Lewis from the competition under request for proposals (RFP) No. 
DAAE30-96-R-0003 for a contract to participate in the "shoot-off" 
phase of the development of a lightweight 155 millimeter (mm) 
howitzer.  This RFP contemplated the award of fixed-priced contracts 
to all acceptable offerors for the "shoot-off," the first phase in the 
acquisition of a lightweight 155 mm howitzer to replace aging and 
heavier howitzers currently in use by the Army and Marine Corps.  

We deny the protest.

The RFP required offerors to deliver a single prototype howitzer, as 
well as related equipment, technical and other specified 
documentation, and a support team, to Yuma Proving Ground in Arizona 
by April 25, 1996.  Agency personnel then performed an initial 
screening of the proposed howitzers for compliance with the criteria 
listed in the RFP and reviewed the acceptability of the submitted 
technical and other specified documentation.  All offerors whose 
howitzers passed the initial screening were awarded firm, fixed-price 
contracts in the amount of $500,000 to participate in the "shoot-off" 
between the competing prototype howitzers.  The "shoot-off" is a 
6-month long period of developmental tests and operational assessments 
at several Army and Marine Corps sites, during which agency personnel 
test, evaluate, and compare the features and attributes of the 
howitzers which passed the initial screening.  During the "shoot-off," 
each offeror is responsible for training agency personnel in the 
operation and maintenance of its howitzer, and for responding to 
government technical inquiries.  Offerors are also responsible for 
providing technical support and engineering, spare parts, and 
maintenance, and for shipping the howitzers from test site to test 
site.

For the next phase of this procurement, the Army will use the results 
of the "shoot-off" together with the evaluations of proposals 
submitted by the competitors to select a contractor for the 
Engineering and Manufacturing Development (EMD) phase of the project.  
The EMD contractor is to supply eight test article howitzers, based on 
the successful prototype used at the "shoot-off," at specified 
intervals for further tests to validate engineering changes and 
manufacturing technologies.  The EMD contract will also contain 
options for subsequent large-scale production of the howitzer.

The Arsenal Statute, 10 U.S.C.  sec.  4532 (1994), requires the Army to 
make its supplies in government-owned factories or arsenals if 
economical.  See Action Mfg, Co., B-220013, Nov. 12, 1985, 85-2 CPD  para.  
537; B-143232, Dec. 15, 1960.  Under current Army procedures, the Army 
determines prior to issuing a solicitation whether it is more 
economical to "make" the needed item utilizing in-house manufacturing 
capacity or to "buy" the item from private industry.[1]  

Here, the solicitation contemplated the purchase of the howitzer from 
private industry, which has produced prototypes based on previous 
development efforts, and did not contemplate that arsenals could 
compete with private firms for the contracts; none of the standard 
provisions announcing that arsenals could compete as a prime 
contractor were included in the RFP.  In this regard, where the Army 
makes a "buy" determination, the Army procedures generally preclude 
Army industrial facilities, such as arsenals, from competing with 
private industry under the resulting solicitation.[2]

Following the Army's issuance of a draft RFP in June 1995, the Rock 
Island Arsenal (RIA) requested the contracting activity to amend the 
solicitation to allow offerors to utilize RIA as a subcontractor.  RIA 
is a working capital-funded Army industrial facility that has produced 
various artillery systems, and operates an extensive artillery 
manufacturing facility with related technological capabilities and the 
necessary skilled personnel.  The contracting activity previously 
provided funding to RIA to help develop a new recoil technology for 
the howitzer program, and, after the draft RFP was issued RIA 
expressed interest in producing the weapon or its components.  RIA's 
representatives state that they discussed the possibility of 
subcontracting with several large defense firms expected to compete 
for the contract.  Those firms had committed to proposing other 
prototypes, but expressed interest in subcontracting with RIA for 
components or services at a later date if selected for the EMD 
contract.  RIA proceeded to fabricate a technology demonstrator, which 
became RIA's lightweight 155 mm howitzer prototype; RIA's 
representatives state that RIA developed the prototype to showcase the 
new recoil technology, which the contracting activity intended to make 
available to the winner of the competition.

An amended draft RFP issued on January 12, 1996, informed offerors 
that RIA was "allowed to sell items as a subcontractor to industry" 
and that a solicitation provision prohibiting contractor personnel 
from supervising or directing government personnel did not prohibit a 
prime contractor/subcontractor relationship between industry and a 
government-owned and operated facility such as an arsenal.  RIA then 
requested that the solicitation include the following provision:

     "This solicitation is open to competition between Department of 
     Defense [DOD] activities and private firms for subcontracting 
     pursuant to 10 U.S.C.  sec.  2208(j), and all other applicable 
     statutes and regulations."

The final version of the RFP was issued on April 10, 1996, but 
inadvertently omitted the solicitation provision requested by RIA.

Meanwhile, Lewis--a small business defense contractor located near 
RIA, which was cognizant of the procurement effort--learned that RIA 
was completing its prototype.  Lewis has weapons manufacturing 
experience with such items as artillery components, grenade launchers, 
and small arms.  At the time, Lewis was subcontracting work to RIA 
through the Manufacturing Technology Consortium, an organization 
associated with RIA, which is involved in local business development, 
training and technical assistance, including the utilization of excess 
capacity at RIA's manufacturing and engineering facilities.  Lewis was 
aware that the solicitation prevented RIA from directly entering its 
prototype in the "shoot-off," but suggested to RIA that Lewis enter 
the competition as the prime contractor using RIA's prototype.  
Although Lewis would not have been able to enter the competition 
without using the RIA prototype, Lewis claims to be capable of 
developing and fabricating the prototypes required for the EMD phase 
of the contract based on the RIA design, as well as eventually 
proceeding to full scale production of the gun, with subcontracting as 
needed.

Following discussions with RIA representatives, Lewis submitted a 
proposal to RIA on April 16 through the Manufacturing Technology 
Consortium outlining how Lewis would enter the competition for the 
lightweight 155 mm howitzer using RIA's prototype.  RIA officials 
considered Lewis's proposal beneficial to RIA because its prototype 
would be entered in the "shoot-off" competition and, if successful, 
result in future work for the arsenal.  RIA officials also considered 
the arrangement permissible under the solicitation because Lewis would 
be acting as the prime contractor, which RIA was precluded from doing, 
and because they expected the RFP to be amended to include the 
RIA-requested solicitation provision permitting subcontracting with 
DOD activities such as RIA.  

On April 18, the contracting activity amended the final RFP to add the 
subcontracting provision requested by RIA to the RFP's executive 
summary.

RIA drafted a subcontract, which specified that Lewis, pursuant to
10 U.S.C.  sec.  2208(j), had requested to team with RIA, whereby RIA 
agreed to provide its prototype howitzer for Lewis's use during the 
"shoot-off" and Lewis agreed to assume the cost of transporting the 
gun to Yuma Proving Ground as well as engineering support provided by 
RIA.  The subcontract provided that Lewis shall have the sole and 
exclusive right to perform the functions of project management and 
systems integration to the extent RIA has the right to grant, and that 
the United States has the right to purchase any of Lewis's design 
changes or technical improvements.  Despite being named a "Contract of 
Sale" and referring to Lewis as the "Buyer" and RIA (representing the 
United States) as the "Seller", the subcontract did not transfer 
ownership of the prototype to Lewis; rather, the United States 
continues to possess all rights, title, interest, and license to the 
prototype.  The subcontract also provided that Lewis and RIA would 
continue the teaming arrangement if the RIA prototype was selected for 
award.  The subcontract was approved by the head of the RIA-based Army 
Industrial Operations Command, reviewed by Lewis's attorney, and 
signed by Lewis and a contracting officer for RIA on April 19.

Lewis entered the RIA prototype in the competition as Lewis's proposed 
howitzer, which was delivered to Yuma Proving Ground in time for the 
April 25 commencement of the "shoot-off," along with the required 
equipment, documentation, and support team.  

After consulting with other Army officials and with the approval of 
the head of the contracting activity, the contracting officer 
eliminated Lewis from the competition on May 10 on the basis that:

     "[RIA's] efforts are of such [a] substantial nature that [RIA is] 
     in effect the prime contractor under the proposal [Lewis] 
     submitted for this effort.  This is not in compliance with the 
     provision allowing [DOD] activities to compete for subcontracts."

In this regard, the Army asserts that besides supplying the actual 
prototype howitzer and equipment, RIA also provided personnel for 
Lewis's support team, and was primarily responsible for preparing the 
technical and other required documentation.  The Army explains that in 
doing so, RIA circumvented the statutory requirements governing such 
agreements, as well as the Army's own internal policy procedures 
restricting Army industrial facilities from competing directly with 
private firms where, as here, the competition for the prime 
contract(s) to be awarded under the solicitation is not open to 
participation by DOD activities.

Lewis protested to our Office that the Army improperly eliminated it 
from the competition for doing exactly what the RFP permitted, namely 
subcontracting with a DOD activity pursuant to 10 U.S.C.  sec.  2208(j).  

We find that, notwithstanding the inclusion in the RFP of the 
solicitation provision expressly allowing for subcontracting with DOD 
activities pursuant to 10 U.S.C.  sec.  2208(j), Lewis's subcontract with 
RIA was not authorized by that statute, which provides:

     "The Secretary of a military department may authorize a working 
     capital funded industrial facility of that department to 
     manufacture or remanufacture articles and sell these articles, as 
     well as manufacturing or remanufacturing services provided by 
     such facilities, to persons outside the [DOD] if--

        (1) the person purchasing the article or service is fulfilling 
     a
           [DOD] contract; and

        (2) the [DOD] solicitation for such contract is open to
           competition between [DOD] activities and private firms."

In implementing 10 U.S.C.  sec.  2208(j), the Army's policy statement 
(noted above) states that:

     "[b]y its terms, [10 U.S.C.  sec.  2208(j)] requires that only [DOD] 
     contracts awarded through public/private competition can be open 
     to subcontracting by Army industrial facilities.  When a 
     competition is open to public facilities, it is thus also open 
     for possible subcontracting under [10 U.S.C.  sec.  2208(j)]."

Likewise, the Army's draft regulation (noted above) provides that an 
arsenal's authorization to compete with private industry for 
subcontract awards is subject to the requirement that "[t]he DOD prime 
contract must have been open to competition from both public and 
private entities."

It is undisputed that the RFP here was not open to competition between 
DOD activities and private firms, such that an Army arsenal could 
compete directly with private firms for the prime contract(s) to be 
awarded under the RFP.  The plain language of 10 U.S.C.  sec.  2208(j), as 
confirmed by the implementing Army policy and procedures, precluded 
the Army from opening the competition to DOD activities for 
subcontracting since the solicitation was not open to competition 
between DOD activities and private firms for the prime contract(s).[3]  
Lewis's proposal was premised upon its subcontract with RIA; Lewis 
could not and did not allege that it could or would offer a howitzer 
from an alternate source for the "shoot-off."  Thus, the acceptance of 
Lewis's proposal would have been inconsistent with 10 U.S.C.  sec.  
2208(j).  Under the circumstance, Lewis's elimination from the 
competition was required, since its proposal was premised upon the 
improper RIA subcontract.[4]   See Energy Compression Research Corp., 
B-243650.2, Nov. 18, 1991, 91-2 CPD  para.  466, aff'd, B-243650.3, May 11, 
1992, 92-1 CPD  para.  432 (awardee's proposal premised on use of Federally 
Funded Research and Development Center (FFRDC) should have been 
rejected as contrary to prohibition against FFRDCs competing with 
private firms).

Nevertheless, Lewis asserts that its proposal should be accepted 
because Lewis relied upon the solicitation provision permitting 
subcontracting with DOD activities, as well as on assurances from RIA 
that the subcontract was legal, in submitting a proposal under the RFP 
premised upon the RIA prototype.[5]  However, the improper inclusion 
in the solicitation of the provision permitting subcontracting with 
DOD activities provides no basis to accept Lewis's proposal because 
the government is neither bound nor estopped by the actions of its 
officers or agents "in entering into an arrangement or agreement to do 
or cause to be done what the law does not sanction or permit."  Utah 
Power & Light Co. v. United States, 243 U.S. 389, 409 (1917).  
Further, offerors for government contracts are deemed to have 
constructive notice of the contents of the United States Code, and 
anyone entering into an arrangement with the Government takes the risk 
of having accurately ascertained that he who purports to act for the 
Government stays within the bounds of his authority.  Federal Crop 
Ins. Corp. v. Merrill, 332 U.S. 380, 384 (1947); Trapper Mining Inc. 
v. Lujan, 923 F.2d 774, 781 (10th Cir. 1991), cert. denied, 502 U.S. 
821 (1991); see Mine Safety Appliance Co., B-242379.5, Aug. 6, 1992, 
92-2 CPD  para.  76
(note 4); R.B.S., Inc., B-194941, Aug. 27, 1979, 79-2 CPD  para.  156, 
aff'd, B-194941,
Oct. 12, 1979, 79-2 CPD  para.  249.  Thus, notwithstanding the unauthorized 
solicitation provision permitting subcontracting with DOD activities, 
there is no basis to contract on the basis of a proposal premised on 
such a subcontract, where, as here, the subcontract is inconsistent 
with an applicable statute.  See Honeywell Info. Sys., Inc., 56 Comp. 
Gen. 167 (1976), 76-2 CPD  para.  475.[6]  

The protest is denied.

Comptroller General
of the United States

1. These procedures are found in a June 6, 1995, draft regulation 
issued by the Commander, Army Materiel Command, prescribing policies, 
responsibilities, and procedures for implementing a July 20, 1992, 
policy statement from the Office of the Assistant Secretary of the 
Army on the implementation of statutory authorities for manufacturing 
by Army industrial facilities.

2. Army industrial facilities may be allowed to participate in a 
solicitation where it is unclear whether it is economical to have the 
work performed in-house or where a solicitation involves requirements 
that are not appropriate for a "make" decision, but present 
substantial subcontracting opportunities for Army facilities.

3. Counsel for the contracting activity now concedes that it probably 
did not have the authority to include the RIA-requested solicitation 
provision.

4. The protester has not cited, nor have we have found, any other 
appropriate authority for this subcontract, which specified only 10 
U.S.C.  sec.  2208(j) as the authority on which it was based.  In 
requesting the solicitation provision allowing subcontracting under 
the authority of 10 U.S.C.  sec.  2208(j), RIA noted that without that 
solicitation provision, subcontracting would have to be in accordance 
with 
10 U.S.C.  sec.  4543 (1994), which authorizes Army industrial facilities 
to sell manufactured articles or services outside DOD under certain 
conditions which neither the record nor the protester indicate were or 
could be met in this case.  The subcontract with Lewis is apparently 
the first time RIA has subcontracted under
10 U.S.C.  sec.  2208(j).

5. Lewis also claims to have relied on RFP provisions which permitted 
offerors to rely on the government for some or all of the background 
intellectual property for their prototypes as well as on Government 
Furnished Equipment (GFE).  These provisions do not themselves 
authorize subcontracting with arsenals, but recognize, as indicated in 
the record, that prototypes may have been developed through authorized 
licensing or cooperative research and development agreements with the 
government and that proposals could be based on the use of the GFE 
listed in the RFP.

6. As noted, the Arsenal Statute requires the Army to make supplies in 
government-owned factories or arsenals if economical.  See B-143232, 
supra.  The record before us shows that RIA operates an extensive 
artillery manufacturing facility and has developed a prototype 
howitzer that may satisfy the Army's requirements.  However, the 
record contains no evidence that the contracting activity determined, 
in deciding to "buy" the weapon from private industry, that developing 
and manufacturing the weapon in government-owned factories or 
arsenals--such as RIA--could not be done on an economical basis.  In 
such an analysis, the costs of the government factory or arsenal must 
be evaluated on an "out-of-pocket" basis.  Action Mfg. Co., supra.  By 
separate letter, we are bringing this matter to the attention of the 
Secretary of the Army for whatever action he deems appropriate.