BNUMBER: B-281631
DATE: March 15, 1999
TITLE: Smelkinson Sysco Food Services, B-281631, March 15, 1999
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Matter of:Smelkinson Sysco Food Services
File: B-281631
Date:March 15, 1999
John A. Burkholder, Esq., McKenna & Cuneo, for the protester.
Lynne Georges, Esq., Defense Supply Center Philadelphia, Defense
Logistics Agency, for the agency.
Susan K. McAuliffe, Esq., and Christine S. Melody, Esq., Office of the
General Counsel, GAO, participated in the preparation of the decision.
DIGEST
Protest of terms of solicitation for commercial food distribution
services is sustained where agency failed to conduct adequate market
research to support its determination that the challenged terms
(requiring, among other things, that profit associated with
interorganizational transfers of food items be disclosed) are
consistent with customary commercial practice, or, alternatively,
failed to obtain waiver necessary to tailor standard commercial item
provision in a manner inconsistent with customary commercial practice.
DECISION
Smelkinson Sysco Food Services protests the terms of request for
proposals (RFP) No. SPO300-99-R-D008, issued by the Defense Supply
Center Philadelphia (DSCP), Defense Logistics Agency, for full service
food distribution support for a number of federal installations in the
Washington D.C. area. Smelkinson protests the RFP requirement that
offerors disclose, among other things, profit associated with
interorganizational transfers of food items.
We sustain the protest.
The RFP, issued on October 23, 1998, contemplates the award of a
fixed-price contract with weekly economic price adjustments, for a
base year and 4 option years, for full line food distribution, where
the "prime vendor" contractor serves as the customer's primary source
for food items. The procurement is being conducted pursuant to the
commercial-item acquisition procedures of Part 12 of the Federal
Acquisition Regulation (FAR). The RFP's pricing schedule lists
commercial food items to be supplied, with their estimated quantities,
for offerors to price. Offerors are to provide the following prices
by item: delivered price per unit, distribution price per unit, total
unit price, and total extended price. The RFP's "price changes"
clause, included in the solicitation as an addendum to FAR sec. 52.212-4,
provides the following definitions of the relevant pricing terms: the
"unit price" is the "total price charged to DSCP per unit for a
product delivered to the Government consisting of two components:
'delivered price' and 'distribution price'"; the "delivered price" is
the "actual invoice price . . . of the product paid to the
manufacturer/supplier, delivered to the Prime Vendor's facility"; and
the "distribution price" is the "firm fixed price, offered as a dollar
amount, which represents all the elements of the contract price other
than the delivered price . . . [such as] projected general and
administrative costs, overhead, profit, packaging costs,
transportation costs . . . and any other expenses." RFP sec.
52.212-4(t), at 82-83. This clause allows for changes in the
"delivered price" on a weekly basis, to reflect fluctuation of item
prices in the commercial market; the contractor's distribution price,
however, remains fixed.
The RFP's "interorganizational transfers" clause, the subject of this
protest, provides further pricing requirements for the determination
of "delivered price" related to transfers among contractor affiliates
or divisions. This clause provides as follows:
For purposes of determining the delivered price of an item
delivered under this contract, allowances for materials, supplies
and services that are sold or transferred between any divisions,
subdivisions, subsidiaries, or affiliates of the contractor under
a common control shall be on the basis of the cost incurred by
the transferring organization. When materials or supplies are
purchased specifically for the contract, only the actual purchase
cost of these materials or supplies should be charged to the
contract. . . .
If the contractor has an established centralized procurement
function, all actual costs associated with the operation of this
function may be added to the invoice price when the product is
transferred to the affiliated organization.
Notwithstanding the above, allowances may be at price when it is
an established practice of the offeror/contractor to transfer
product to its affiliated organizations at other than actual
cost, by use of a catalogue, competition or some other standard
pricing mechanism, that transfer price can be used as the invoice
price of the item as long as all affiliated organizations were
charged the same price for that item.
If the catalogue or standard price at which the item is being
transferred includes profit to the transferring organization,
that profit must be disclosed to the Contracting Officer. The
Contracting Officer and the offeror/contractor will agree to a
procedure for this disclosure. If no disclosure is made, then
profit may not be included in the price charged to the Government
for the item.
RFP sec. 52.212-4(u), at 84-85 (emphasis added).
The same RFP clause addresses freight (or transportation) costs as
follows:
The following requirements must be met before freight costs can
be charged to the Government as part of the delivered price of
the product:
1. Only actual costs paid by the contractor or any of its
affiliated organizations may be included as part of the delivered
price.
. . . . .
4. If the offeror/contractor deviates from the above, full
disclosure must be made to the Contracting Officer who will
determine if an exemption from these requirements will be
granted. Exemptions will only be granted when the Contracting
Officer determines that the exemption is in the best interest of
the Government.
Id. at 85-86 (emphasis added).
Smelkinson contends that the requirements for disclosure of profit and
freight costs in excess of actual costs related to interorganizational
transfers among affiliates are contrary to customary practice in the
food distribution industry.
Smelkinson asserts that it is customary in the food service industry
for large food distributors, or consortiums of smaller food service
companies, to operate through a central purchasing and distribution
center that can purchase from suppliers at high volume, resulting in
lower prices that may be passed to consortium members or affiliates.
Smelkinson explains that certain mark-ups may then be added to these
prices, for instance, in light of numerous "value-added services"
performed by the central purchasing and distribution center for its
members. Smelkinson Comments, Jan. 14, 1999, at 4-7. Smelkinson
further states that where the distributor, or central purchasing and
distribution center, operates its own transportation network,
customary commercial practice is for transportation of the item
transferred to be charged at price, rather than cost, which may
include profit or other elements.
Smelkinson contends that, although different food service distributors
may price their products and product transfers in different ways, it
is not customary practice to require, as the RFP does here, disclosure
of profit, or freight costs in excess of actual costs, in otherwise
competitive prices offered by the distributors. Smelkinson adds that
its large commercial food distribution operation does not include an
accounting system that identifies the "profit" element per
interorganizational transfer required to be disclosed by the RFP.
Smelkinson therefore contends that, since the challenged disclosure
terms are inconsistent with customary commercial practice, and, since
the agency has failed to request and obtain the waiver necessary to
include the challenged terms, the RFP is defective.
FAR sec. 12.301(a), implementing the Federal Acquisition Streamlining Act
(FASA) of 1994, 10 U.S.C. sec. 2377 (1994), regarding the preference for
the acquisition of commercial items that meet an agency's needs,[1]
provides that
contracts for the acquisition of commercial items shall, to the
maximum extent practicable, include only those clauses--
(1) Required to implement provisions of law or executive
orders applicable to the acquisition of commercial items; or
(2) Determined to be consistent with customary practice.
FAR sec. 12.301(b)(3) provides for the inclusion of the clause at FAR sec.
52.212-4 in solicitations and contracts for commercial item
acquisitions, which clause "includes terms and conditions which are,
to the maximum extent practicable, consistent with customary
commercial practices." FAR sec. 12.301(b)(3) further provides that the
"contracting officer may tailor" the terms of FAR sec. 52.212-4 in
accordance with FAR sec. 12.302. In pertinent part, FAR sec. 12.302(a),
provides that:
because of the broad range of commercial items acquired by the
Government, variations in commercial practices, and the relative
volume of the Government's acquisitions in the specific market,
contracting officers may, within the limitations of this subpart,
and after conducting appropriate market research, tailor the
provision at . . . [FAR sec. ] 52.212-4, Contract Terms and
Conditions--Commercial Items, to adapt to the market conditions
for each acquisition.
FAR sec. 12.302(c), regarding the tailoring of clauses for conditions
inconsistent with customary practice, provides:
The contracting officer shall not tailor any clause or otherwise
include any additional terms or conditions in a solicitation or
contract for commercial items in a manner that is inconsistent
with customary commercial practice for the item being acquired
unless a waiver is approved in accordance with agency procedures.
The request for waiver must describe the customary commercial
practice found in the marketplace, support the need to include a
term or condition that is inconsistent with that practice and
include a determination that use of the customary commercial
practice is inconsistent with the needs of the Government. A
waiver may be requested for an individual or class of contracts
for that specific item.
In response to the protest here, the agency asserts that the
interorganizational transfers clause included in the RFP, as an
addendum to FAR sec. 52.212-4, is not inconsistent with customary
commercial practice in the food distribution industry, and therefore
no waiver is required to tailor the clause. The agency states that it
has conducted market research that supports its position; in
particular, the agency lists several conferences held in the food
distribution industry in which the agency discussed its prime vendor
program. Some of the solicitations recently issued pursuant to this
program include the currently protested terms. The agency reports
that no other firm has objected to the terms of the
interorganizational transfers clause at these conferences.
Consequently, the agency asserts that, since no single pricing method
is utilized in the food services distribution industry, and no firm
has objected to the clause's terms (even though they were included in
other recent prime vendor solicitations), the clause is not
inconsistent with customary commercial practice. The agency does not
assert, however, nor does the record otherwise show, that the specific
terms challenged by Smelkinson were ever researched or discussed by
the agency with industry representatives at these conferences or
elsewhere.
The FAR, at Part 10, provides general guidance to an agency regarding
the scope and proper methods for conducting required market research.
The specific techniques listed and factors to be considered, see FAR sec.
10.002(b)(1), reflect the purpose of market research--to generate a
meaningful exchange of information between the agency and industry.
Here, we think that the agency has failed to meet its obligation to
conduct appropriate market research to show that the challenged terms
are consistent with customary commercial practice.
As stated above, there is no showing in the record that the specific
disclosure requirements, particularly regarding profit, were ever
researched, discussed with, or commented upon by, industry
representatives.[2] While the agency relies on the fact that the
clause at issue was not objected to by industry representatives, such
silence alone is not an acceptable substitute for the agency's
obligation to conduct market research to confirm customary industry
practice in the use of these terms, particularly in view of the
protester's assertion that there is no industry practice requiring
disclosure of profit or other cost data for interorganizational
transfers.[3] In fact, the agency itself acknowledges that there is
no customary commercial practice requiring such disclosure. DSCP
Supp. Report, Jan. 28, 1999, at 3; Affidavit of Thomas J. Lydon, Jan.
28, 1999, at 1-2.
Since the clause at FAR sec. 52.212-4, presenting standard terms and
conditions for use in commercial item acquisitions, does not include
the disclosure requirements challenged by Smelkinson, it is clear that
the agency has "tailored" the provision in the RFP. Given the lack of
any meaningful market research showing that the challenged terms are
consistent with customary commercial practice, we conclude that the
agency violated the requirement in FAR sec. 12.302(a) to conduct
appropriate market research prior to tailoring the regulatory
provision. In the alternative, given the agency's apparent concession
that there is no customary commercial practice calling for the type of
disclosure required by the RFP clause, we conclude that the agency
improperly tailored the standard clause at FAR sec. 52.212-4 without
obtaining the requisite waiver to do so under FAR sec. 12.302(c).
Accordingly, we sustain the protest.[4]
We recommend that the agency amend the RFP to remove the challenged
disclosure provisions, and then request new proposals. In the
alternative, if the agency continues to believe that the provisions
are needed, the agency should either confirm through appropriate
market research that the provisions are consistent with customary
commercial practice or obtain a waiver, pursuant to FAR sec.
12.302(c).[5] We also recommend that the protester be reimbursed the
reasonable cost of filing and pursuing its protest, including
attorneys' fees. 4 C.F.R. sec. 21.8(d)(1) (1998). The protester should
submit its claim for costs, detailing and certifying the time expended
and costs incurred, with the contracting agency within 60 days after
receipt of this decision. 4 C.F.R. sec. 21.8(f)(1).
The protest is sustained.
Comptroller General
of the United States
1. In determining whether commercial items are suitable to meet an
agency's needs, FASA requires that the head of an agency conduct
market research "appropriate to the circumstances . . . before
developing new specifications for a procurement by the agency; and
before soliciting bids or proposals for a contract in excess of the
simplified acquisition threshold." 10 U.S.C. sec. 2377(c).
2. The agency states that in Lankford-Sysco Food Servs., Inc.; Sysco
Food Servs. of Arizona, Inc., B-274781, B-275081, Jan. 6, 1997, 97-1
CPD para. 11 at 5, we found the same market research claimed here by the
agency to be appropriate support for the agency's determination in
that case that a different clause in a prime vendor solicitation,
regarding rebates and discounts, was reflective of customary
commercial practice. In that case, however, the agency reported that
comments had been solicited and received from industry
representatives, supporting the customary nature of the particular
clause at issue in that case. Id. Here, however, the record provides
no evidence that the disclosure requirements of the RFP's
interorganizational transfers clause were ever the subject of
discussions with industry representatives.
3. The protester's position is based on a sworn statement by one of
its vice presidents who states that he is familiar not only with the
protester's own practice, but with the practices of other food service
companies and several purchasing consortiums of such companies.
Declaration of Dale K. Robertson, Jan. 13, 1999, at 1,3.
4. The protester also contends that the agency developed its price
disclosure requirements to target the protester. Since there has been
no showing, nor do we find evidence in the record, of agency intent to
harm the protester in this regard, we find no merit to the allegation.
See Virginia Telecomms. & Sec., Inc., B-247368, May 20, 1992, 92-1 CPD para.
456 at 4. The protester also argues that the requirements for
disclosure of profit and freight costs in excess of actual costs on
interorganizational transfers are contrary to the prohibition on
requiring certified cost and pricing data in a commercial item
acquisition. See FAR sec. 15.403-1(b)(3). While we agree that requiring
submission of cost or pricing data would generally be inappropriate in
the context of a commercial-item acquisition, the prohibition to which
the protester refers applies to certified cost or pricing data, see
FAR sec. 15.401, 15.406-2, and the RFP clause at issue here contains no
requirement for such certification.
5. The agency asserts that the challenged clause is necessary for it
to conduct a proper price analysis of proposals and to prevent
overcharges by the contractor for adjustments to the delivered price.
We find this issue premature for our review at this time. Any
examination of the agency's need for the clause would not be ripe for
review until the agency obtained a waiver to tailor the standard
commercial item provision at FAR sec. 52.212-4. The agency's statement
of need for the clause would be generated during the waiver process
pursuant to FAR sec. 12.302(c). See Aalco Forwarding, Inc., et al.,
B-277241.8, B-277241.9, Oct. 21, 1997, 97-2 CPD para. 110 at 18-22.