Contract Content/Structure: The Government anticipates structuring the contract for pricing and payment according to the actual tonnage picked up. The potential CLIN structure is attached. Do you have any suggestions or comments on the anticipated structure as compared to customary commercial practices, the impacts of pricing this structure, or information necessary for Contractors to provide fair and reasonable pricing for this contract structure?

Id. at 8.

Although the agency report does not contain the actual responses to this question, the agency’s summary of those responses states that 7 responses were received, and that "four (4) respondents suggested the CLIN structure be a monthly CLIN and three (3) respondents had no comments to the current tonnage-based contract structure." Id. at 11.

Finally, the agency states that it obtained "historical market research" that had been performed in September 2014 by personnel at Fort Drum, New York, by contacting a sales representative for Thomas Trash Services, a company located in upstate New York. Based on this contact, the agency stated:

[The named sales representative] explained that fixed and variable costs can be combined to establish a per ton price. [The sales representative] stated that this is the method of pricing used by Thomas Trash Services and it is a practical method of pricing for trash removal services. Based on [the sales representative's] expertise and knowledge of industry, it has been verified that pricing based on tonnage is an acceptable commercial practice.

Id. at 11-12.

Upon reviewing its market research, summarized above, the agency concluded that:

[I]t is in the Government’s best interest to utilize the tonnage approach. The Government has determined it is a commercial practice . . . . During the solicitation phase, offerors will have the ability to establish pricing which would include all fixed and variable costs, on a per-ton basis. This restructure will give greater incentive for the Contractor to maintain lower costs.

Id. at 12.

Based on the record here, we conclude that the agency’s market research fails to reasonably support the agency’s conclusion that pricing for refuse contracts on a per-ton basis reflects customary commercial practice; further, no waiver was executed.

First, we agree with the protester’s assertion that it was unreasonable for the agency to rely on other government refuse contracts as a basis for establishing customary commercial practice, since contracts with the federal government are not generally considered to be part of the commercial marketplace. In this regard, the FAR defines the term “Commercial item” as: “Any item, other than real property, that is of a type customarily used by the general public or by non‑government entities for purposes other than government purposes . . . .” FAR § 2.101 (emphasis added). If government contracts were generally considered part of the commercial marketplace, everything the government procures could be considered a commercial item, and a significant portion of FAR Part 12 would be rendered superfluous. See Smelkinson Sysco Food Services, supra, at 5 (protest sustained despite agency’s assertion that the challenged solicitation provisions appeared in other government contracts). In this regard, since the intent of FAR Part 12 is that both the government and its contractors will benefit by the government’s acquisition of commercial goods and services using the same terms and conditions used in the commercial marketplace, such benefits fail to be realized when the government includes solicitation terms in commercial acquisitions that are contrary to that objective. In short, the agency’s reliance here on other government refuse contracts does not provide a reasonable basis for its determination that the pricing provisions in this solicitation reflect customary commercial practice.

Next, we agree with the protester that the feedback received by the agency in response to the January 2015 SSN does not support the agency’s determination that pricing on a per‑ton basis reflects customary commercial practice in refuse contracts. As noted above, the agency’s SSN referenced the solicitation’s price-per-ton approach and asked the following question:

Do you have any suggestions or comments on the anticipated structure as compared to customary commercial practices, the impacts of pricing this structure, or information necessary for Contractors to provide fair and reasonable pricing for this contract structure?

AR, Tab 4, Market Research Report, at 8.

Of the seven responses received, the agency’s market research report states that four suggested pricing should be “monthly,” and the other three “had no comments” on this issue. Id. at 11. That is, the majority of respondents indicated that customary commercial practice reflected monthly-based prices--not prices based on tonnage collected--and none of the respondents identified any current commercial contracts priced on a per-ton basis.[8] Further, the agency’s reliance on three of the respondents who did not comment on this issue provides no basis for the agency to conclude that the solicitation’s pricing terms constitute customary commercial practice. We have specifically held that the absence of objections to a solicitation provision does not satisfy an agency's obligation to establish support for an affirmative determination regarding customary commercial practice. See Smelkinson Sysco Food Services, supra., at 6.

Finally, we agree with the protester’s contention that the market research previously performed by Fort Drum personnel through their contact with a sales representative for a trash company in upstate New York does not provide an adequate basis for concluding that this solicitation’s price-per-ton approach reflects customary commercial practice. Here, the record does not contain, or even reference, any particular commercial refuse contract to which the New York trash company was a party. Further the record does not contain any documentation from the sales representative himself, nor does it even contain any documentation from the Fort Drum personnel who contacted the sales representative. Finally, although the agency refers to the “expertise and knowledge” of the sales representative, see AR, Tab 4, Market Research Report, at 12, nothing in the record in any way addresses the basis for, or extent of, such “expertise and knowledge.”

On this record, we reject the agency’s assertion that its market research provides a reasonable basis for determining that the price-per-ton provisions in this solicitation are consistent with customary commercial practice. Accordingly, the protest is sustained, based on the agency’s failure to reasonably support that determination.  (Red River Waste Solutions, LP B-411760.2: Jan 20, 2016)  (pdf)

Sales Leakage Clause

Next, Verizon argues that the sales leakage clause is inconsistent with customary commercial practice. This clause requires the vendor to audit purchases of products and services by entities that are eligible to use the BPA, but that elect to place orders under different contract vehicles. The clause also requires the vendor to “deem” orders for products and services placed under other arrangements to have occurred under the BPA, and thus provide such customers with the same terms and prices offered under the BPA. Vendors are also required to take “commercially reasonable action” to direct the sales from other contract vehicles to the BPA. The clause sets out these requirements as follows:

2.11.5 Sales Leakage


The goals of this program can only be realized through cooperation between the Government and the Contractor to direct all appropriate purchases through this contract vehicle. All orders placed by government entities for products or services described and priced under this agreement shall be deemed to have been made through this agreement and thus eligible for the terms and prices provided by this agreement. This requirement is applicable for all distribution outlets, such as web, direct sales, and retail.

The Contractor shall establish a process to regularly audit sales to entities as listed in ADM4800.2E Appendix A, determine where sales outside the contract vehicle are occurring (i.e., sales leakage), and take commercially reasonable action to direct further sales through the contract vehicle for all Agencies that have committed to using this contract vehicle. Results of these audits will be presented as an agenda item during Program Management Reviews.

With Ordering Entity authorization, the Contractor shall move all identified instances of Agency sales leakage to this contract vehicle. The Government will issue a task order to the Contractor in order to facilitate such transitions.

RFQ amend. 0004 at 26.

Verizon argues that the sales leakage clause would effectively modify all of Verizon’s existing contracts by deeming sales under other contracts to have occurred under the terms and prices of the BPA; Verizon also argues that this clause is inconsistent with customary commercial practice.

GSA argues that the clause is consistent with commercial practice, based on the experience of its program manager. See AR Tab 28, Decl. of GSA Program Manager ¶¶ 8-15. Here again, however, the information provided by the GSA program manager does not provide specific examples of where this particular clause is in use as a customary commercial practice. Instead, the agency cites examples of state agencies, such Virginia and Missouri, which the agency contends use mandatory statewide contracts. See id. ¶ 13. The references provided by the agency do not discuss sales leakage clauses, and therefore do not demonstrate that the RFQ clause here is a customary commercial practice.

Verizon also argues that the clause is inconsistent with GSA regulations which do not require vendors to report sales made under non-FSS schedule contracts to be reported as FSS sales, thereby requiring payment of the 0.75% industrial funding fee (IFF) by the vendor to GSA. See 48 C.F.R. 552.238-74(a)(3) (2012). The protester argues that requiring the vendor to direct sales from other contract vehicles to the BPA would subject those sales to the IFF payment requirements. GSA did not respond to this argument.

On this record, we conclude that the agency does not demonstrate that the sales leakage clause is a customary commercial practice, and we sustain the protest on this basis.  (Verizon Wireless, B-406854, B-406854.2, Sep 17, 2012)  (pdf)

Diebold argues that because these changes to the terms and conditions of the contract were material, OCC was required to issue an amendment to the RFP to allow the offerors to compete on an equal basis. In response, the agency asserts that the changes to the terms and conditions included in ADT's contract from those included in the RFP were permissible. The agency argues that FAR part 12 gives contracting officers the discretion to tailor commercial items clauses and that the changes made were minor.

It is a fundamental principle of government procurement that competition must be conducted on an equal basis, that is, offerors must be treated equally and be provided with a common basis for the preparation of their proposals. Systems Mgmt., Inc.; Qualimetrics, Inc., B-287032.3, B-287032.4, Apr. 16, 2001, 2001 CPD para. 85 at 8. When, either before or after receipt of quotations, the government changes or relaxes its requirements, it must issue an amendment to notify all offerors of the changed requirements and give them an opportunity to respond. Id.; AVL Books.Com, Inc., B-295780, Mar. 28, 2005, 2005 CPD para. 46 at 2; see Cardkey Sys., B‑220660, Feb. 11, 1986, 86-1 CPD para. 154 at 2 ("If it becomes apparent that the contract being negotiated differs significantly from the requirements stated in the RFP, the contracting agency must amend the RFP or, at the least, advise offerors of the change during discussions and seek new offers.") We will sustain a protest where an agency, without issuing a written amendment, materially alters the solicitation's requirements to the protester's prejudice. See Systems Mgmt., Inc.; Qualimetrics, Inc.; Qualimetrics, Inc., supra at 8.

We agree with OCC that contracting officers are permitted under FAR part 12 to tailor the provisions of FAR sect. 52.212-4 to the market practices and conditions for each acquisition. FAR sect. 12.302(a). However, this section makes clear that any tailoring to the provisions and clauses can only be done "after conducting appropriate market research," id., and "shall be by addenda to the solicitation and contract." FAR sect. 12.302(d). Consequently, under commercial item acquisitions, a contracting officer exercising the authority to change the terms and conditions must do so in a manner that gives all offerors an equal opportunity to compete by either publishing the tailored clauses in the initial solicitation's addenda or by providing an amendment to the solicitation to include the revised terms and conditions. See Aalco Forwarding, Inc., et al., B-277241 et al., Oct. 21, 1997, 97‑2 CPD para. 110 at 18.

We find that the agency altered materially the terms and conditions of the solicitation when it modified the draft contract at ADT's request. For example, the modified section H.21 eliminated ADT's obligation to indemnify the government for suits or damages based upon "detection events." ADT's email to the agency during the negotiations of the contract terms and conditions demonstrates how the modified section H.21 limited ADT's liability/risk beyond that provided for in the RFP:

[REDACTED BY GAO]

AR, Tab 8, ADT Email to OCC (Feb. 10, 2011). Thus, the record shows that the changed language of section H.21 was a material change to the RFP because it greatly reduced the liability of ADT by absolving it from the results of "detection events."

Additionally, section H.23 materially reduced ADT's liability compared to that set forth in solicitation provision FAR sect. 52.212-4(p) by allowing ADT to limit its liability with respect to consequential damages. The solicitation's limitation of liability provision stated, "Except as otherwise provided by an express warranty, the Contractor will not be liable to the Government for consequential damages resulting from any defect or deficiencies in accepted items." FAR sect. 52.212-4(p). Again, ADT's email to the agency during negotiations of the contract terms and conditions illustrates why this change is material:

[REDACTED BY GAO]

AR, Tab 8, ADT Email to OCC (Feb. 10, 2011). Thus, it is apparent that the additional contract provision (section H.23) proposed by ADT and accepted by OCC granted ADT a broader limitation of liability for consequential damages than established in the solicitation, and thus was a material change to the RFP.

Accordingly, as illustrated by the foregoing examples, we find that the agency was required to issue an amendment to the solicitation upon the addition and acceptance of these material changes. AVL Books.Com, Inc., supra at 2. Because the agency did not issue the required amendment permitting all offerors to respond on the altered requirements, we find the agency's actions resulted in unequal treatment of Diebold.  (Diebold, Inc., B-404823, June 2, 2011)  (pdf)

The protesters contend that solicitation provisions are inconsistent with commercial practice, are unduly restrictive or onerous, and are ambiguous. The protesters' arguments generally revolve around the pricing scheme in the solicitation including, among other things, how the distribution and delivered prices are to be calculated.

The agency admits that several provisions are inconsistent with commercial practice, but asserts that it properly obtained a waiver to deviate from those practices. The agency also denies that the solicitation is unduly restrictive, onerous, or ambiguous.

The Federal Acquisition Streamlining Act of 1994 (FASA), 10 U.S.C. sect. 2377 (2000), established a preference and specific requirements for acquiring commercial items that meet the needs of an agency. FAR Part 12 implements this Act by allowing agencies to use solicitation terms--and to make other adjustments in the areas of acquisition planning, evaluation, and award--that more closely resemble the commercial marketplace when procuring commercial items. See generally Aalco Forwarding, Inc., et al., B-277241.8, B-277241.9, Oct. 21, 1997, 97-2 CPD para. 110 at 9-10. Consistent with this approach, FAR sect. 12.302(c) bars the tailoring of solicitations for commercial items in a manner inconsistent with customary commercial practice 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 the use of the customary commercial practice is inconsistent with the needs of the government. Id. We will review challenges to waivers under this provision for reasonableness. Aalco Forwarding, Inc., supra, at 11.

The waiver here identified several terms that are inconsistent with commercial practice, including (among others): (1) the inclusion of a tailored economic price adjustment provision, (2) modifications to rebate, discounts, and other price-related provisions, and (3) the inclusion of a unilateral changes clause. AR, Tab 11, Class Waiver and Addendum. The agency explained that these deviations were necessary to insure transparency in food pricing and to prevent fraud, especially given that there had been several fraud indictments involving subsistence contracts outside the continental United States. Contracting Officer's Supp. Statement at 1-2. In addition, the agency relied on a Department of Defense Inspector General report that found that DLA Troop Support did not provide sufficient oversight of costs of subsistence vendors in Afghanistan and recommended better contract administration of prime vendor costs. Id.

The waiver explained that commercial contracts often include economic price adjustment clauses to cope with inflation. However, the waiver justified the need for a more limited, tailored economic price adjustment clause on the basis that it "would not be practical or possible to adjust the prices of food service delivery suppliers in a changing marketplace via the use of a single index." AR, Tab 11, Class Waiver, at 2.

The waiver explained that customary commercial practice includes rebates, discounts, earned income allowances, freight allowances, and other provisions as economic incentives or benefits between manufacturers and distributors. However, the waiver justified changes to these provisions on the grounds that the agency wanted to avoid excessive pass through charges from multiple sources along the supply chain, promote transparency in pricing, and insert integrity into commercial pricing practice. Id. at 3; Class Waiver Addendum, at 2. The waiver further stated that various price provisions, including a most favored customer warranty, are necessary to ensure that the delivered price charged to the government only includes the price of the product delivered to the initial entry point of the contractor's distribution network, and to ensure that the contractors' delivered price is equal to or lower than the price provided to commercial customers. Id., Class Waiver Addendum, at 2.

The waiver explained that customary commercial practice usually involves bilateral changes. However, the waiver justified the inclusion of a unilateral waiver provision because the government needs the right to make unilateral changes in delivery and shipment requirements in order to be able to supply food on a daily basis to its military customers, whose needs may change over the course of the contract. Id. at 1.

Based on this record, we find that the waiver satisfies the requirements of the FAR and supports the agency's decision to deviate from commercial practice. In this regard, we cannot find unreasonable the agency's decision--when faced with possible overcharges to the government--to adopt a series of pricing provisions intended to safeguard the government from excessive charges and to ensure pricing transparency and integrity. Indeed, we have previously held that an agency may use other than commercial clauses when necessary to protect the government's interest in avoiding fraud and otherwise ensure fair pricing. See PWC Logistics Servs. Co., B‑400660, Jan. 6, 2009, 2009 CPD para. 67, at 6-7. Although the protesters claim that the waivers are unjustified because, among other things, the agency's arguments concerning fraud and transparency are unreasonable and could be addressed by other means,[4] we find that the protesters' arguments amount to mere disagreement with the agency's rationale, which does not provide a basis to sustain the protest.

We are also unpersuaded by the protesters' arguments that the solicitation terms are unreasonable, too onerous or unfair to distributors, or are ambiguous. These arguments are variations of their protests that the solicitation deviates from commercial practice, which we have denied above. In any event, we have reviewed all of the protesters' alternative arguments and find them to be without merit.

For example, the protesters object to weighting the distribution price by a factor of 20 for price evaluation purposes, arguing that the multiplier of 20 is arbitrary and results in a distorted price evaluation. However, the agency explains that historically the aggregate distribution price was 10 percent of the aggregate delivered price, so the distribution price was multiplied by 10 to make the two components more equal. However, this number was then multiplied by 2 (resulting in a factor of 20) because the distribution price was not equal to the delivered price, but was more important in the evaluation. Giving greater weight to the fixed distribution price was intended to reduce the effect of any manipulation of delivered pricing. Contracting Officer's Statement at 32; AR, Tab 10, Memorandum for the Record, at 2-3. We find this explanation reasonable.

In another example, the protesters assert that the solicitation gives vendors who are private label holders an unfair competitive advantage, because the solicitation treats private label holders as manufacturers. However, we are unpersuaded that private label holders are given an unfair competitive advantage. Indeed, an agency is not required to equalize a competitive advantage that a firm may enjoy because of its own particular business circumstances, where that advantage does not result from a preference or unfair action by the government. JBG/Naylor Station I, LLC, B‑402807.2, Aug. 16, 2010, 2010 CPD para. 194 at 4-5. As explained above, the agency's pricing methodology was based on the agency's needs for transparency in its subsistence program and not based on a preference for a distributor with a specific market strategy.

Finally, the protesters assert that various terms are unworkable or ambiguous. We have reviewed the solicitation terms and the protesters' objections and find that the RFP is sufficiently definitive and flexible to allow for a fair competition on a relatively equal basis. It is clear from the record that the protesters understand what is required by the RFP, but they mainly object that the requirements are inconsistent with customary commercial practice and/or their own unique business models. To the extent the protesters desire more favorable terms, consistent with their business practices and without risk, there is no legal requirement that a solicitation be drafted so as to eliminate all performance uncertainties; the mere presence of risk does not render a solicitation improper. Pacific Consol., Indus., B-250136.5, Mar. 22, 1994, 94-1 CPD para. 206 at 6; see also CWTSatoTravel, B-404479.2, Apr. 22, 2011, 2011 CPD __. Agencies may properly impose substantial risk upon the contractor, even where the risk in question is financial in nature. Id.  (U.S. Foodservice, Inc.; Labatt Food Services, LP, B-404786; B-404786.2; B-404786.3; B-404786.4, May 13, 2011)  (pdf)

We will review challenges to waivers under this provision for reasonableness. Aalco Forwarding, Inc., et al., B-277241.8, B-277241.9, Oct. 21, 1997, 97-2 CPD para. 110 at 18; Crescent Helicopters, B-284706 et al., May 30, 2000, 2000 CPD para. 90 at 3. We find that PWC has provided no basis for questioning the the reasonableness of the waiver here.

The record includes both documentation of DSCP's market research into commercial practices and the waiver itself, signed by the supervisor (DSCP Integrated Supply Team (IST) Supervisor) of the contracting officer listed in the RFP. The waiver represents that the agency has determined that the use of other than commercial clauses was necessary to protect the government's interest in avoiding fraud and otherwise ensuring fair pricing. Class Waiver Addendum for the Inclusion of Provisions/Clauses in Prime Vendor Commercial Acquisitions Inconsistent with Customary Commercial Practices, Sept. 19, 2008; RFP at 1; Declaration of IST Supervisor; Agency Report (AR) at 4. In this regard, the waiver cites a number of problems that have arisen under DSCP's subsistence prime vendor contracts, under which the government is obligated to pay the actual cost of the food (plus a distribution price), including: the government has found that industry rebates, discounts, allowances or similar economic incentives are often hidden from the government in private agreements between manufacturers and distributors; there are no standard definitions of many pricing terms; and the price paid by the prime vendor may be layered with excessive fees imposed by numerous dealers/ distributors/consolidators. Waiver Addendum; Declaration of IST Supervisor.

Further, it appears that the cited problems may have resulted in significant overcharges to the government. In this regard, the record shows that the U.S. Attorney's Office for the Northern District of Georgia has opened a civil fraud investigation into PWC's actions in connection with its incumbent prime vendor contracts to purchase food to support operations in Iraq, Kuwait, and Jordan, investigating whether PWC overcharged the government hundreds of millions of dollars. The record indicates that one focus of the investigation is PWC's retention of certain rebates and discounts from its suppliers (including possibly excessive claimed prompt payment discounts), while another focus is on whether PWC is using other companies, such as distributors and consolidators, to inflate the product prices charged to the government. Declaration of Assistant U.S. Attorney; Declaration of DSCP Deputy Director, Subsistence Supplier Operations. In addition, the record indicates that the investigation into whether the charges to the government for food were proper has been hampered by a failure by PWC to furnish requested invoices from manufacturers, growers and suppliers. Declaration of IST Supervisor. Against this background, the waiver addendum explains that such pricing provisions as FOB Origin/Point of Manufacturer pricing, requirements and restrictions regarding rebates and discounts, and documentation requirements are necessary to avoid excessive passthrough charges at multiple points along the supply chain and to ensure pricing transparency and integrity. Waiver Addendum.

In summary, the record indicates that DSCP, faced with possible overcharges to the government under PWC's current contract, has adopted a series of pricing provisions intended to safeguard the government from excessive charges and to ensure pricing transparency and integrity. In addition, DSCP is implementing the mandatory MPA program, under which DSCP negotiates prices directly with food manufacturers, and the use of which was likewise approved in the waiver addendum, in an attempt to maximize the leverage of DSCP's purchasing power and obtain fair and reasonable product pricing. RFP at 84; Waiver Addendum; AR at 18. PWC has not shown, nor does the record otherwise indicate, that the agency's objectives with these provisions could be accomplished by the use of commercial clauses. Under these circumstances, the waiver is unobjectionable.  (PWC Logistics Services Company, B-400660, January 6, 2009)  (pdf)

The Army responds that FAR § 47.207-6 does not apply to this acquisition because this procurement is being conducted under the commercial item provisions of FAR Part 12. The agency also states that, in any event, the RFP does not deprive the protesters of the ability to price services to be provided; rather, "[t]he solicitation just simplifies and provides a format for the price submission." Agency Legal Memorandum at 9. The agency states that the RFP establishes various rates for different accessorial services (which the agency asserts are at a comparable level "to what many carriers are charging"), and that "[a]ny difference in costs that a contractor wishes to account for can be added to their line[-]haul rates and still be able to submit competitive rates." Contracting Officer's Statement at 6. 

We agree with the Army that the agency was not required to apply FAR § 47.207-6(b) to this commercial item acquisition. In this regard, FAR § 12.301(d) provides that "[n]otwithstanding prescriptions contained elsewhere in the FAR, when acquiring commercial items, contracting officer shall be required to use only those provisions and clauses prescribed in this part." There is no requirement in FAR Part 12 to apply the requirements in FAR § 47.207-6(b) in commercial item acquisitions. 

Furthermore, we have recognized the wide discretion an agency has to prescribe charges for services ancillary to the transportation of goods. Such prescription of charges, we found, provides the agency with a rational and practical means for selecting the low-priced carriers, without having to account for all the potential variations in charges that may be submitted by the various offerors. See Sea-Land Serv., Inc., supra, at 13-14. (ABF Freight System, Inc.; Old Dominion Freight Line, Inc.; Overnite, B-291185, November 8, 2002)  (pdf)

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. 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.  (Smelkinson Sysco Food Services, B-281631, March 15, 1999)