TITLE:  Government Scrap Sales, B-295585, March 11, 2005
BNUMBER:  B-295585
DATE:  March 11, 2005
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   Decision

   Matter of:   Government Scrap Sales

   File:            B-295585

   Date:              March 11, 2005

   Joseph Summerill, IV, Esq., and Frances Gardner, Esq., Barnes & Thornburg
LLP, for the protester.

   Craig A. Holman, Esq., and Kara L. Daniels, Esq., Holland & Knight LLP,
for Liquidity Services, Inc., an intervenor.

   Joel Zimmer, Esq., Defense Logistics Agency, for the agency.

   Scott H. Riback, Esq., and John M. Melody, Esq., Office of the General
Counsel, GAO, participated in the preparation of the decision.

   DIGEST

   Protest that proposed awardee of scrap property contract has an
impermissible organizational conflict of interest (OCI) because a
subsidiary company performs a related surplus property contract is denied;
the theoretical possibility that the awardee will act in bad faith under
its contract does not establish an OCI, and provides no other basis for
denying firm the award.

   DECISION

   Government Scrap Sales (GSS) protests the proposed award of a contract to
Liquidity Services, Inc. (LSI) under invitation for bids (IFB) No.
99-4001, issued by the Defense Logistics Agency (DLA), Defense
Reutilization and Marketing Service (DRMS) for the sale of scrap
materials.  GSS maintains that award to LSI will result in an improper
organizational conflict of interest (OCI).

   We deny the protest.

   BACKGROUND

   DRMS is responsible for the disposal operations of the Department of
Defense (DOD), including the reutilization, transfer, donation and sale of
surplus DOD property.  The sale of surplus property is accomplished
through the award of contracts for the sale of property to vendors that in
turn resell the property.  DRMS utilizes two surplus property contracts:
    the commercial venture (CV) contract, under which useable surplus
commercial property is sold, and the scrap venture (SV) contract, under
which scrap property that is no longer useable is sold.  (This protest
relates to the award of the SV contract.)  The two contracts operate in a
similar manner:  the contractor purchases the property from DLA and then
resells it, presumably at a price greater than the price paid to the
agency.  The contractor's (and agency's) return under both contracts is in
the form of net proceeds, or distributions (gross revenue from the sale of
the property minus the contractor's direct costs).  The agency receives 80
percent of the distributions and the contractor 20 percent.[1]  Under the
SV contract, the contractor also may earn an incentive payment of up to an
additional 10 percent of the contractor's distribution amount if
(1)A 60A percent or more of gross sales are made to concerns having 100 or
fewer employees (5A percent), and (2) 50 percent or more of the sales to
small businesses are to firms having 25 or fewer employees (5A percent). 

   Surplus Acquisition Venture, LLC (SAV), the current CV contractor, is a
subsidiary of LSI.[2]  GSS alleges that SAV's status as the CV contractor
creates a potential OCI if the SV contract is awarded to LSI, since
LSI/SAV would be able to manipulate the disposition of property to its
advantage.  Specifically, GSS asserts that SAV would have an incentive,
and would be able to designate useable property as scrap in order to bring
it under the SV contract, which, according to GSS, is more profitable than
the CV contract.  According to GSS, the small business participation
incentives available under the SV contract allow for the possibility of
the SV contractor earning as much as 25 percent of the net contract
proceeds, while the CV contract provides for maximum possible earnings of
only 20 percent.  

   In support of its conflict scenario, GSS poses a hypothetical example to
demonstrate the economic incentive it claims LSI/SAV would have to convert
surplus property under the CV contract to scrap under the SV contract. 
The example involves the sale of a 5-pound valve having an original
acquisition value of $320.  GSS asserts that it would be profitable for
LSI/SAV to have SAV purchase the valve as surplus under the CV contract
for a fraction of its original value--GSS hypothecates $.032--abandon the
valve, and then have LSI repurchase it as scrap under the SV contract (at
a hypothetical price of $.005), and then sell the valve at the same price
for which SAV would have sold it under the SV contract, $100 in the
example.  While, according to GSS, the distribution to SAV would have been
$19.9675 under the CV contract (20A percent of the $100 net proceeds minus
the two purchase prices totaling $.0325), LSI would receive a distribution
of $24.9675 if it took advantage of the small business incentives under
the SV contract.

   Although DRMS, not the CV contractor, has sole authority to designate
property as either useable or scrap, GSS claims that there are three ways
that SAV would be able to have property moved from the CV contract to the
SV contract:  (1) under the terms of the CV contract, SAV can abandon
property that it is obligated to purchase, which allegedly would compel
DRMS to divert the property to the SV contractor; (2)A the CV contract
specifically provides that SAV can refuse acceptance of any item that has
an acquisition value exceeding $10 million, which would relegate the
property to the SV contract; (3) under the CV contract, SAV can challenge
the designation of property as useable and, thus, can influence the
ultimate decision regarding the designation of property as useable versus
scrap.  Since LSI would have the incentive and the opportunity to
essentially convert surplus property under the CV contract into scrap
under the SV contract, GSS concludes, LSI has an impermissible OCI.

   As a general rule, OCIs may be broadly categorized into three situations:
    impaired objectivity, unequal access to information and biased ground
rules.  American Mgmt. Sys., Inc., B-285645, Sept. 8, 2000, 2000 CPD P 163
at 4.    GSS has not articulated which of the three situations it believes
is present here.  However, we find that none applies.  The unequal access
to information and biased ground rules situations clearly are not
applicable to this aspect of the protest.[3]  In an unequal access to
information situation, there must be some showing that the allegedly
conflicted entity has had access to information not available to the other
competitors, while in a biased ground rules situation there must be some
showing that the entity had an opportunity (such as in preparing the
solicitation) to influence the ground rules for the competition.  Id. 
Under the third situation, impaired objectivity, the concern is that,
because of the nature of a firm's actual or potential work under another
government contract, it may be unable to provide objective advice or
judgments to the government.  Id.  Here, because the CV contractor is not
called upon by the terms of its contract to provide objective judgments
regarding the disposition of property as useable versus scrap (such
judgments are contractually the responsibility of DRMS), it follows that
there can be no issue of an impairment of LSI's objectivity. 

   In the final analysis, GSS does not allege that LSI's objectivity will be
impaired; rather, it alleges that, because of the additional potential
profit available under the SV contract, LSI will have an incentive to act
deliberately, in concert with SAV, to maneuver property offered to SAV
under the CV contract to the SV contract.  This amounts to an allegation
that LSI may potentially engage in bad faith in its performance of the two
contracts.  However, there simply is no basis to deny a firm an award due
to bad faith that has not occurred but, rather, is a mere theoretical
possibility. 

   In any case, we find the scenario outlined by GSS to be flawed in several
respects.  For example, GSS incorrectly asserts that LSI would be eligible
to receive as much as an additional 5A percent of the net proceeds if it
meets the small business participation goals set out in the
solicitation--increasing its total distribution from 20A percent to 25
percent.  The SV contract provides that each of the small business
incentives may be as much as 5 percent of the total distributions to the
contractor (for a total of 10 percent of the contractor's distributions),
not 5 percent of the total net proceeds.  IFB at 40.  Thus, since the
contractor's distribution is 20 percent of the net proceeds, meeting the
small business incentives would increase LSI's distribution to no more
than 22 percent of the net proceeds--10A percent of 20 percent--not

   25 percent.[4]  Thus, the additional profit on which GSS's scenario is
founded--and, thus, LSI/SAV's supposed incentive to shift surplus property
to the CV contract--would be substantially smaller than GSS describes.[5] 

   Further, GSS has not established that the valve in the protester's example
would sell for the same price whether surplus or scrap, as the example
assumes.  Under the CV contract, the valve would be sold as is, and would
presumably be purchased at the fair market value for a valve of its size
and type.  Under the SV contract, on the other hand, the contractor would
be obligated to mutilate the valve before selling it as scrap.  IFB at 19,
115.  There is no basis to assume--and, again, GSS has not shown--that the
net proceeds from the sale of an item as scrap under the SV contract would
exceed the net proceeds from a sale under the CV contract, even with the
small business participation incentives under the SV contract.  Thus,
again, the supposed profit incentive for converting surplus property to
scrap has not been established. 

   GSS also asserts that LSI gained an improper competitive advantage in the
SV contract competition by virtue of SAV's access to superior information
as the CV contractor, and that LSI had an unfair advantage over other
bidders because it could bid by planning to consolidate operations under
the CV and SV contracts. 

   These assertions are without merit.  The advantages that LSI may enjoy by
virtue of having its subsidiary perform the CV contract are nothing more
than the advantages that would be enjoyed by any other incumbent
contractor.  The mere existence of a prior or current contractual
relationship between the agency and the contractor does not create an
unfair competitive advantage, nor is the agency required to compensate for
every competitive advantage inherently gleaned by a competitor's prior or
current performance of a particular requirement.  Optimum Tech., Inc.,
B-266339.2, Apr. 16, 1996, 96-1 CPD P 188 at 7.  For example, an incumbent
contractor's acquired technical expertise or firsthand knowledge of the
costs of performing a requirement generally does not constitute an unfair
advantage that the acquiring activity is required to eliminate.  Id. 
Moreover, the mere fact that LSI may be more advantageously situated by
virtue of its ability to consolidate operations under the two contracts is
not the type of competitive advantage that the agency is required to
eliminate; every contractor enjoys the advantage of its peculiar market
position including, for example, economies of scale available to a large
business, but not to smaller concerns.  We conclude that LSI did not have
an unfair competitive advantage.

   The protest is denied.

   Anthony H. Gamboa

   General Counsel

   ------------------------

   [1] Under the CV contract, DRMS receives 78.2 percent of the distributions
and another concern, Kormendi/Gardner Partners (KGP) receives 1.8 percent
of the distributions.  KGP is an unrelated private concern that was
awarded a consulting contract in 1997 to develop a model for privatizing
DRMS's surplus sales responsibilities. 

   [2] Under both the CV and SV contracts, the winning contractor is required
to form a separate entity known as the purchaser.  SAV formed a concern
known as Government Liquidation, LLC (GL) to act as the purchaser under
the CV contract.

   [3] We discuss separately below another aspect of GSS's protest in which
the firm alleges that LSI had information not available to the other
competitors. 

   [4] Applying the correct small business incentive amounts to GSS's example
would reduce the potential distribution under the CVA contract to
$21.9675, and thereby significantly reduce the differential between the SV
and CV contracts in the example. 

   [5] Further, the amount of the incentives aside, the incentives under the
SV contract are in no way guaranteed.  Rather, as noted above, they are
available only if the contractor meets the solicitation's small business
participation goals.  The protester has presented no evidence--such as
identifying small businesses that would be available to purchase scrap
property--establishing that the incentives easily could be met.