B-4006601.1, Redacted Pre-Award Procurement Protest … · V&E General Counsel, GAO October 1,2008 Page 3 previous statutes dating back to the Competition in Contracting Act of19841

Vinson&Elkins

Michael R. Charness [email protected]

Tel 202.639.6780 Fax 202.879.8980

October 1, 2008

SUSPENSION OF CONTRACT AWARD REQUIRED

General CounselGovernment Accountability Office441 G Street, NWWashington, DC 20548

ATTN: Procurement Law Control Group

Re: Protest ofPWC Logistics Services Company K.S.C.(c)Defense Supply Center Philadelphia Solicitation No. SPM-300-08-R-0061

Dear Sir or Madam:

Pursuant to 4 C.F.R. § 21.1(a) and Federal Acquisition Regulation ("FAR") 33.104,PWC Logistics Services Company K.S.C.(c) ("PWC") respectfully protests the terms ofSolicitation SPM-300-08-R-0061 (the "RFP"), issued by Defense Supply Center Philadelphia("DSCP") for a "Prime Vendor" food distributor for authorized military customers inKuwait, Iraq and Jordan. PWC, also known as Agility Defense & Government Services, islocated at the following address: Sulaibiya, Beside Land Customs Clearing Area, P.O. Box25418, Safat, Kuwait, 13115; telephone: +965-498-1897; facsimile: +965-467-8953. Thislaw firm represents PWC in this protest. E-mail notifications relative to this protest may beprovided to: [email protected], [email protected], [email protected] [email protected].

Pursuant to Government Accountability Office ("GAO") Bid Protest Regulations, 4C.F.R. § 21.4, PWC respectfully requests that GAO issue a protective order in this protest.

Vinson & Elkins LLP Attorneys at Law

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Tel 202.639.6500 Fax 202.639.6604 www.velaw.com

V&E

I.

General Counsel, GAO October 1, 2008 Page 2

INTERESTED PARTY STATUS, TIMELINESS AND MANDATORYSUSPENSION OF CONTRACT AWARD

PWC is an interested party because it is a prospective bidder or offeror on the abovereferenced RFP. PWC will submit a proposal prior to the closing date and time. PWC is alsothe incumbent Prime Vendor contractor for the entire geographic zone covered by the RFP.Given these facts, PWC's direct economic interest will be affected by the award of a contractunder the RFP. 4 C.F.R. § 21.0(a)(1).

On May 2, 2008, DSCP issued the RFP. The RFP as issued listed an offer due date,or closing date, of June 30, 2008. On June 17,2008, DSCP issued Amendment 0002 to theRFP, which extended the closing date to July 31, 2008. On July 18, 2008, DSCP issuedAmendment 0004 to the RFP, which extended the closing date to August 15, 2008. OnAugust 8, 2008, DSCP issued Amendment 0007 to the RFP, which extended the closing dateto August 29, 2008. Most recently, on August 28, 2008, DSCP issued Amendment 0009 tothe RFP, which extended the closing date to October 2,2008 at 3:00 pm Eastern time. Thisprotest is timely because it is filed prior to October 2, 2008 at 3:00 pm, the time set forreceipt of initial proposals. 4 C.F.R. § 21.2(a)(1).

This is a pre-award protest of the terms of the RFP. Pursuant to 31 U.S.c. § 3553(c)and FAR § 33.104(b), DSCP may not award a contract while this protest is pending. Assuch, PWC requests that the GAO notify the Contracting Officers for the procurement thatthey may not award a contract pending resolution of this protest. The Contracting Officersare Linda L. Ford, telephone 215-737-7804 and Timothy Dlugokecki, telephone 215-7374671. The facsimile number for both Ms. Ford and Mr. Dlugokecki is 215-737-2161. Ms.Ford's e-mail address is [email protected] and Mr. Dlugokecki's e-mail address [email protected].

In accordance with 4 C.F.R. § 21.l(e), PWC will furnish a complete copy of thisprotest and all attachments to the DSCP Contracting Officers within one day after filing theprotest with GAO.

II. INTRODUCTION AND SUMMARY OF ARGUMENT

In 1994, Congress passed the Federal Acquisition Streamlining Act ("FASA"). Pub.L. No. 103-355, 108 Stat. 3243 (1994). This statute represented the most forceful legislativeendorsement of the federal government's procurement of commercial items to date. While

V&E General Counsel, GAO October 1,2008 Page 3

previous statutes dating back to the Competition in Contracting Act of 19841 had encouragedfederal agencies to purchase commercial products, FASA was the first to set forth a firmpreference for the purchase of commercial items. See FASA § 8104; 10 U.S.C. § 2377. InFASA, Congress required that the drafters of the Federal Acquisition Regulation ("FAR")create a new list of contract clauses to be included in contracts for the acquisition ofcommercial items. This list was to consist, "to the maximum extent practicable," of onlythose contract clauses: (1) required to implement statutes and executive orders applicable tothe acquisition of commercial items, or (2) "that are determined to be consistent withstandard commercial practice." FASA § 8002(b)(1) (emphasis added). These clauseswould, "to the maximum extent practicable," be the only clauses used in contracts for theacquisition of commercial items. FASA § 8002(b)(3). In 1995, the FAR was amendedaccordingly, creating in Part 12 the commercial items contracting vehicle used today. See 60Fed. Reg. 48,206 (Sep. 18, 1995).

Congress enacted FASA in response to a growing sense, both in the acquisitioncommunity and in Congress itself, that the procurement regulations had become overlycomplicated and burdensome. The House Report drafted prior to FASA's passage stated:

Companies have found it difficult to sell commercial products to the FederalGovernment because of the complex web of procurement requirements, e.g.,requirements for cost data and other financial information, audit rights,government-unique terms and conditions, and unlimited Government rights totechnical and proprietary data. Such practices are uncommon, if notnonexistent, in the private sector.

H.R. Rep. No. 103-545(11), at 104 (1994).

The "Section 800" Committee assembled by the Department of Defense ("DoD") hadreached similar conclusions. It its final report (upon which Congress largely relied indrafting FASA), the Committee stated that the acquisition laws represented "the apex of a'cascading pyramid' of restrictive regulations, overly detailed military specifications, andcommon procurement practices that typically added 30-50 percent to the costs of doingbusiness with the Department of Defense." Acquisition Law Advisory Panel, StreamliningDefense Acquisition Laws, Executive Summary, at 3 (Jan. 1993). The Committee also citeda workshop in which industry participants listed the reasons why they were leaving thedefense market, which included "audit procedures inconsistent with those typically used byindustry; inappropriate overlays of defense-unique requirements on commercial products;

Pub. L. No. 98-369, 98 Stat. 1175 (1984).

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inappropriate application of regulations, specifications, and standards; ... and unnecessarycalls for cost or pricing data." Id., Chapter 8, at 8-7, n. 24. The preference for slimmeddown commercial items contracts in FASA was designed to help remedy these problems,making it both easier for companies to do business with the Government and cheaper for theGovernment to purchase commercial products and services.

The movement toward more simplified commercial item contracting continued in1996 with the passage of the Federal Acquisition Reform Act ("FARA"), later re-named theClinger-Cohen Act. Pub. L. No. 104-106, 110 Stat. 642, 679 (1996). This statute created awholesale exemption for commercial item contracts to the requirement for submission ofcertified cost or pricing data. FARA § 4201(a); 10 U.S.C. § 2306a(b)(1)(B). It alsoeliminated contracting agencies' specific authority to conduct post-award audits ofinformation submitted to the agencies by commercial item contractors. FARA § 4201(a)(replacing provision previously at 10 U.S.C. § 2306a(d)(3».

These two statutes thus created a regime in which Part 12 commercial item contractswould, to the maximum extent possible, contain only terms and conditions consistent withcustomary commercial practices in the relevant industries, and would not includeburdensome requirements calling for the audit of contractor records or the submission of costor pricing data. It was such a contracting vehicle that the Section 800 Committee envisionedwhen submitting its report to Congress.2

The RFP at issue in this protest is itself a commercial item procurement. As such, itis required to comply with the limitations imposed by FASA and FARA discussed above.Unfortunately, the RFP instead represents a wholesale departure from these principles. Itincludes terms and conditions contrary to commercial practice, and imposes unnecessaryadministrative burdens on both DSCP and the eventual contractor. It claims impermissibleaudit rights for DSCP and unlawfully requires the submission of cost or pricing data. It alsosuffers from additional flaws related to its evaluation scheme and the imposition of excessivecost risk on the contractor.

Congress' aversion to the incorporation of government-unique clauses in contracts for commercialitems was expressed yet again earlier this year with the passage of Section 821 of the National DefenseAuthorization Act for Fiscal Year 2008. Pub. L. No. 1lO-181, 122 Stat. 226 (2008). That statute required theDoD to "develop and implement a plan to minimize the number of government-unique contract clauses used incommercial contracts ...." The DoD subsequently issued a memorandum that set forth the following policy:"Unique clauses or instructions incorporated into solicitations and contracts for commercial items bycontracting activities in addition to those prescribed in the FAR or DFARS shall not be used, unless thecontracting activity can demonstrate that inclusion of such instruction or clause is essential." Memorandumfrom Shay D. Assad, Director, Defense Procurement, Acquisition Policy, and Strategic Sourcing (Mar. 17,2008), at Exhibit A (emphasis added).

V&£ General Counsel, GAO October 1, 2008 Page 5

First, the pricing and discount provisions of the RFP are inconsistent with customarycommercial practices in the food distribution industry. Specifically, the following issues areproblematic: (1) the definition of "Product Price"; (2) the limitations on "early paymentdiscounts" that may be received and retained by the Prime Vendor from its suppliers; and (3)the possible application of "most-favored-customer" pricing and discount provisions to thePrime Vendor's suppliers. In drafting these clauses, DSCP has ignored industry input and itsown historical understanding of industry practices.

Second, the RFP's evaluation scheme is defective. It provides no criteria that informofferors how DSCP will allocate awards between the two relevant geographical zones. Italso includes no limitations on the sources DSCP may consult when making its contractorrisk assessment. In addition, the RFP includes several flaws related specifically to theevaluation of offerors' prices.

Third, the RFP imposes an umeasonable amount of risk on offerors without any rightto an equitable adjustment. While some risks are to be expected in a fixed-price, wartimecontract, DSCP has asked offerors to predict future costs that cannot be estimated with anyreasonable confidence. These include costs related to the required use of Governmentselected suppliers and ocean shipping companies, as well as other indefinite costs such as thebackhauling of water and other supplies to unknown destinations in Iraq.

Finally, the RFP includes impermissible clauses and omits a mandatory clause.DSCP has, without authority, claimed the right to audit contractor records relevant to pricingand discounts. It has also claimed, in a disguised requirement for cost or pricing data, theright to require production of documentation from any of the Prime Vendor's subcontractors,as well as suppliers in the "product price supply chain." In addition, DSCP has neglected toinclude in the RFP the mandatory clause relating to Defense Base Act insurancerequirements for contractors working overseas.

With this RFP, DSCP has employed the commercial contract model whileabandoning the rules and principles applicable to commercial item contracting. Moreover,the RFP contains other problems that must be addressed. For the reasons set forth in moredetail below, PWC respectfully requests that the GAO sustain this protest and require DSCPto amend the RFP to remedy these flaws.

V&E

III. BACKGROUND

A. Pertinent Provisions of the RFP


3

The RFP calls for one or two Prime Vendor contractors to procure and deliver foodand other non-food items to DSCP's military customers located in Kuwait, Iraq and Jordan.The RFP divides the region into two zones:

Zone 1 - Kuwait and Northern, Central, and Southern portions of Iraq to besupported via delivery routes originating from Kuwait and Turkey.

Zone 2 - Jordan and West-Central portion ofIraq, primarily but not limited tothe Anbar Province to be supported via delivery routes originating fromJordan.

RFP, Statement of Work ("SOW"), Supplies/Services and Prices ("S/S&P"), § I.E, at 47.3

The RFP includes the following information regarding DSCP's plans to allocate awardbetween the two zones:

The Government intends to make two awards, one per zone. The intent is tohave two different contractors, one for each of the separate zones. In order toensure that two sources are available and to ensure the continuous availabilityof reliable sources of supplies, the Government reserves the right to exclude,under the authority of FAR 6.202, the awardee under one of these zones frombeing eligible for award under the other zone. However, [the] Governmentreserves the right to make one award for both zones, as necessary to supportboth zones ifit is in the government's best interest.

Offerors are encouraged to submit separate offers, one for each zone, but shallnot make one offer on a zone contingent upon receiving an award on the otherzone.

RFP, SOW, S/S&P, § I.H, at 48. The estimated annual sales for Zone 1 are$1,308,737,022.57, and the estimated annual sales for Zone 2 are $264,041,437.40. Id.

Citations to the RFP in this protest refer to the version of the RFP with changes from all Amendmentsincorporated. This document is available on DSCP's website at the following address:http://www.dscp.dla.mil/subs/pv/regions/mideast.08R0061.pdf (last visited September 26, 2008).


Despite this large discrepancy in value between the two zones, the RFP includes no furtherinfonnation regarding which zone will be awarded first, or the factors that will be consideredwhen excluding the awardee of one zone from the competition for the other zone.

1. Pricing Provisions

The RFP contains a complex pricing structure. DSCP describes the contract type inthe RFP as a "fixed price/fixed price with prospective price redetennination contract." RFP,FAR 52.216-1 - Type of Contract, at 179. Generally, for each food item, the contractor willcharge DSCP a "Contract Unit Price." RFP, SOW, S/S&P, § XIILA, at 71. The ContractUnit Price consists of the "Product Price" and the "Distribution Price." Id. Depending uponthe circumstances, the "Distribution Price" may consist of only the "Nonnal DistributionPrice," or the Nonnal Distribution Price plus a "Premium Distribution Price." Id. While theProduct Price may change over the course of the contract in response to market conditions(see RFP, SOW, S/S&P, § XVI, at 85), the Nonnal and Premium Distribution Prices are finnfixed prices. RFP, SOW, S/S&P, §§ XIII.A.3, XIII.A.4, at 72-73.

The definition of Product Price reads as follows:

The product price will be derived in one of two manners for this solicitation:1) through the use ofDSCP's Manufacturers Price Agreements (MPAs); or 2)through the use of commercial pricing. When a DSCP MPA is available, theMPA price shall be used for the product price. When a DSCP MPA is notavailable, the Product Price shall be limited to the original manufacturer's orgrower's price for product. The Product Price shall be based on FOBOrigin/Point ofMamifacture. In addition, the Product Price shall exclude allcosts that are required to be covered in the nonnal distribution price, includingbut not limited to, all transportation, broker and dealer costs and fees; and itshall exclude all costs that are required to be covered in the premiumdistribution price.

RFP, SOW, S/S&P, § XIII.A.2, at 71 (emphasis added). The Manufacturer's PricingAgreement ("MPA") Program is DSCP's plan to directly negotiate pricing agreements withfood manufacturers. This element of the RFP is discussed below.

As set forth in the definition above, the Product Price under the RFP is the priceoffered for the food item by the lowest level manufacturer or grower for pick-up at itsfacility. All other costs incurred by the contractor are required to be included in either theNonnal or Premium Distribution Price. These costs include:


... the Prime Vendor's projected general and administrative expenses,overhead, profit, packaging/marking/labeling costs, all Non Point ofManufacturer fees (CONUS and OCONUS4 Broker, Dealer, Subcontractorand Fresh Fruit and Vegetable Consolidation Point fees) including, but notlimited to procurement, storage, consolidation, pallets, palletizing anddistribution work.

RFP, SOW, S/S&P, § XIII.A.3, at 72.

The RFP includes three exceptions to the requirement for use of FOB Origin/Point ofManufacture pricing. The first exception allows for the inclusion of airfreight transportationcharges in the Product Price for certain fresh fruit and vegetable ("FF&V") purchasesrequired to be flown into Kuwait, Jordan or Turkey due to insufficient local supply. SeeRFP, SOW, S/S&P, § XIILA.2.b, at 71. The second exception allows for the use of a"national commercial price inclusive of transportation costs to a Distribution Point" forcertain U.S.-based manufacturers, but only on a case-by-case basis and with the approval ofthe Contracting Officer. See RFP, SOW, S/S&P, § XIILA.2.c, at 71. The third exceptionallows for the use of prices from nonprofit agencies for certain items required to bepurchased from those agencies. See RFP, SOW, S/S&P, § XIILA.2.d, at 71.

As a part of their proposals, all offerors are required to provide a copy of "themanufacturer or grower's invoice or quote" on the manufacturer or grower's companyletterhead for each item listed in the RFP. See RFP, Addendum to FAR 52.212-1, § 9.iii.E, at165. During contract performance, the Prime Vendor is also required to produce "invoice orquote documentation directly from the manufacturer or grower on their letterhead" uponrequest for existing catalog items, and must also submit such invoices when adding catalogitems and when requesting a price redetermination for existing catalog items. See RFP,SOW, S/S&P, § XIII.A.2.e, at 71.

2. Manufacturer's Pricing Agreements Provisions

As mentioned above, the RFP explains that DSCP anticipates implementing an MPAProgram at an as-yet-undetermined date. The MPAs will be agreements between DSCP and

4 "CONUS" refers to Continental United States, while "OCONUS" refers to Outside the ContinentalUnited States. The Solicitation requires Prime Vendors to supply food products both from CONUS andOCONUS areas. Items required to be purchased from OCONUS areas are described as "local market readyitems," or LMRI. See RFP, SOW, S/S&P, §§ II.B, II.C, at 49. Much of the LMRI required under the RFPconsists of fresh fruit and vegetables ("FF&V") that cannot survive a long over-oceanjoumey.


food manufacturers that identify a product price that will be fixed for a certain amount oftime, and the Prime Vendor will be required to purchase the MPA food items from the MPAholders. See RFP, SOW, S/S&P, § XV, at 84. Specifically, the RFP provides the followingpertinent information regarding the MPA Program:

When available, the list of MPA holders, the specific items under agreement,and the fixed product prices for those items will be provided via solicitationamendment or contract modification as appropriate prior to the solicitationclosing date, during negotiations or during contract implementation (rampup/ramp-down).

If MPA items are added to this solicitation via solicitation amendment, thefixed MPA item product price will be used for evaluation of the market basketschedule of items for all offerors. 5 The offerors will not be required to havecommercial agreements in place with the MPA holders at this time. TheContracting Officer will automatically substitute each offerors [sic] marketbasket product price with the fixed MPA product price despite whether theoffered product price is higher or lower than the fixed MPA product price.

The awardee(s) will be required to establish commercial agreements with theMPA holders for all MPA items cited for cataloging during the rampup/ramp-down phase of the contract. As the program is implemented, it isanticipated that 75 to 80 percent of the contract product price dollar value willbe under agreement.

RFP, SOW, S/S&P, § XV, at 84. The RFP does not identify the names of potential MPAholders or their locations. Nor does it include any discussion of who is responsible for costsor other liabilities incurred by the Prime Vendor due to performance failures by the MPAholders, or whether the Prime Vendor will be penalized in its evaluations in the event suchproblems are encountered.

3. Rebates, Discounts and Most-Favored Customer Provisions

The RFP requires the Prime Vendor to guarantee that for all items, the product priceunder the contract will be "equal to or lower than its product price to its most favoredcustomer." RFP, SOW, S/S&P, § XVII.a, at 86. It also generally requires all discounts,

The "market basket schedule of items" is the list of food products in the RFP for which each offerormust submit product prices.


rebates or allowances "or other similar economic incentives or benefits given to any othercustomer at any time" during performance of the contract to be "passed" to the Governmentvia a reduced catalog price. Id. While the RFP does not say so explicitly, it appears from theword "passed" that the discounts and rebates referred to are those that are received by thePrime Vendor from its suppliers. The RFP allows catalog prices for the "product price"component to be adjusted every 30 days, as long as the contracting officer determines thenew prices to be fair and reasonable. See RFP, SOW, S/S&P, § XVI, at 85-86.

There is one exception to the RFP's requirement to pass on all discounts receivedfrom suppliers. The Prime Vendor is allowed to retain "early payment discounts" receivedfrom its suppliers, but only if the discounts meet certain conditions. The exact language ofthe RFP is as follows:

The contractor may retain Early Payment discounts that meet the followingconditions:

(i) the Early Payment discount is an incentive to encourage payment earlierthan the normal payment due date; such as, 14, 30, or 60 days;(ii) the Early Payment discount is consistent with commercial practice;(iii) the Early Payment discount is routinely given by the suppliers tocustomers other than the Prime Vendor at the same discount rate and underthe same conditions as provided to the Prime Vendor;(iv) the Early Payment discount is not established, requested, or negotiated forthe purpose of avoiding giving DSCP a lower cost or a rebate or in exchangefor a higher invoice price;(v) the Early Payment discount is no more than 2 percent and the earlypayment is required within 10 days to obtain the discount; and(vi) the contractor actually made the required payment within the time periodrequired to receive the discount.

RFP, SOW, S/S&P, § XVII.b, at 86. If an early payment discount does not satisfy theseconditions, the RFP requires the contractor to pass the discount through to the Governmentvia a reduced catalog price, as discussed above.

4. Over-Ocean Transportation of CONUS Items

The RFP informs prospective offerors that the Prime Vendor will be required to usethe Defense Transportation System ("DTS") to ship products purchased from CONUS-basedsuppliers to Kuwait or Jordan. RFP, SOW, S/S&P, § VI.A.l, at 60. Over-ocean


transportation through DTS will be provided by a commercial shipping line chosen by theUnited States Transportation Command ("USTRANSCOM"). Id. The future contractbetween USTRANSCOM and the shipping line is known as the Universal Services Contract("USC"). Id. The RFP includes the following detail about the process:

When a carrier is utilized pursuant to the USC, the applicable Governmentdesignated Ocean carrier will provide sea vans and transport them to thespecified CONUS manufacturer or CONUS distribution facility . . . TheGovernment designated Ocean carrier will then pick up the loaded vans andtransport them to the applicable Port for subsequent shipment through DTS.

The Prime Vendor will be responsible for any detention charges and arrangingthe return of empty containers to the Government designated ocean carrier ...If the U.S. facility the Prime Vendor distributes product from is more than 500miles from the CONUS port, the Government will provide drayage to the portif there are no carrier rates in the current USC Contract to cover that portionof the drayage ... If such charges are incurred, it will be the responsibility ofthe Prime Vendor to cover such charges and not the Government.

The terms and conditions of the USTRANSCOM contract with the designatedcarrier govern carrier liability for any loss or damage to products during"Point to Point" transportation, and the contractor is solely responsible fordeveloping and presenting any claims for delay, loss, or damage to theUSTRANSCOM designated carrier, which is solely responsible for anyliability. The contractor is cautioned that in some instances theUSTRANSCOM contract carrier may have limited or no liability under theterms of the USTRANSCOM contract.

RFP, SOW, S/S&P, §§ VLA.5, VLA.7, VLA.8, at 61-62. While DSCP provided a link to thecurrent USTRANSCOM contract in the RFP, it also informed offerors that the USC contractthat will be in effect during the period of performance is not expected to be awarded untilJanuary 2009, several months after submission of proposals for the Prime Vendor contract.See RFP, Amend. 0003, § II, answer to question ("A. to Q.") 199 ("The solicitation should beout on the street in June 2008. The anticipated award date is January 2009, withimplementation beginning in March 2009.") Given that USTRANSCOM did not release the


new USC solicitation until August 8, 2008, the contract will likely be awarded even laterthan DSCP anticipated. See USC06 RFP cover page, at Exhibit B.

The Prime Vendor RFP includes the following additional information on therelationship between the Prime Vendor and the USTRANSCOM contractor:

During the implementation period as defined in the solicitation, the PrimeVendor contractor shall enter into an agreement and work with the USCcarriers handling routes within the Prime Vendor's geographical responsibilityto develop a claims process involving the Prime Vendor contractor and theUSC contractor(s) ... Such an agreement shall address issues such as claimsprocessing and dispute resolution for losses and damage to the Prime Vendorcargo by the USC carrieres) and for the resolution of claims by the USCcarrieres) against the Prime Vendor for detention of carrier containers, portstorage for detained containers, and maintenance provided by a carrier fordetained refrigerated containers. The Prime Vendor shall pay the USCcarriers directly for any detention, port storage or maintenance chargesincurred by the Prime Vendor and the USC carrieres) shall pay the PrimeVendor directly for any charges for loss/damage to Prime Vendor cargoincurred by the USC carrieres).

The Prime Vendor should consider that substantive terms and conditions ofthe USC contract and this contract may be relevant to the agreement andprocedures negotiated with the USC carrieres) concerning claims procedures,dispute resolution procedures, etc.... For example, the dollar amount ofdamage for detention of containers of the USC carrier by the Prime Vendor isestablished in the USC contract.

The Government is not responsible or liable for any loss or damage to thePrime Vendor's products shipped through under [sic] the DTS.

RFP, SOW, S/S&P, § VLB, at 63.

V&E

B. DSCP Question and Answer Sessions


Given the complexity and size of the procurement, it is not surprising that DSCPsolicited two rounds of questions from prospective offerors to help clarify specific RFPprovisions. The first round of questions was submitted in response to the original draft of theRFP, and was published in Section II of RFP Amendment 0003 on July 17, 2008.Amendment 0003 includes 290 questions and answers, several of which include multiplesub-questions and answers. Since Amendments 0003 and 0004 made significant changes tothe original version of the RFP, DSCP allowed another round of questions, which werepublished along with the answers in Amendment 0006 on August 1,2008. Amendment 0006includes 68 additional questions and answers. The majority of the questions and answersfocused on the provisions discussed above. Despite the serious issues raised by many of thequestions, DSCP did not make any additional substantive changes the RFP.

IV. ARGUMENT

A. The Solicitation Includes Terms Contrary to Commercial Practice andFederal Acquisition Regulation Part 12

The RFP is a commercial items procurement under Part 12 of the FAR. Indeed,DSCP has utilized Standard Form 1449, "Solicitation/Contract/Order for Commercial Items"as the RFP cover page. In addition, the RFP includes FAR clauses 52.212-1, 52.212-2,52.212-3, 52.212-4, and 52.212-5, all required by the FAR to be incorporated intosolicitations for commercial items. See FAR § 12.301(b).

Despite the RFP's status as a Part 12 commercial item procurement, DSCP hasincorporated terms and conditions that are contrary to commercial practice and commerciallyimpracticable. This was made clear to DSCP as early as May of this year, when theInternational Foodservice Distributors Association ("IFDA") informed DSCP in a letter thatthe language in several of the clauses described above "ranges far beyond customarycommercial practices in the foodservice distribution industry in a number of significantaspects." See Letter from Mark S. Allen, IFDA President and CEO, to Raymond G. Miller,Director, DSCP Subsistence Supplier Operations Directorate (May 29, 2008) (hereinafter"May IFDA Letter"), Exhibit C, at 1_2.6 While PWC does not object to DSCP's stated goal

6 The IFDA is a trade organization representing foodservice distributors throughout the U.S., Canada,and internationally. For further background on the organization, see http://www.ifdaonline.org (last visitedSept. 30, 2008). PWC is neither a member of, nor affiliated with, the IFDA.


of achieving "transaction transparency," (see RFP, Amend. 0003, § II, As. to Qs. 18, 22, 227,235) the agency may not, under aFAR Part 12 solicitation, drastically alter the functioningand operation of the commercial food distribution industry to its personal liking.

As a commercial items procurement, the FAR requires the RFP to include, "to themaximum extent practicable," only those clauses "determined to be consistent withcustomary commercial practice." FAR § 12.301(a)(2). While the FAR does allow for"tailoring" of the standard clauses in a commercial items solicitation, such tailoring ispermissible only after the agency has conducted "appropriate market research." FAR §12.302(a); see also Smelkinson Sysco Food Servs., B-281631, 99-1 CPD ,-r 57 (Mar. 15,1999). Furthermore, if an agency wishes to add terms or conditions to a solicitation that areinconsistent with customary commercial practice, such tailoring is permitted only if theagency has acquired a waiver supporting the need to use such terms or conditions. See FAR§ 12.302(c); Smelkinson, supra. In issuing this RFP, DSCP has violated all of the aboverequirements.7 As such, the RFP must be withdrawn and amended. See Smelkinson, supra.

1. Product Pricing

The commercial food industry, both in the United States and internationally, is madeup of a complex network of food producers, growers, manufacturers, brokers, "private label"vendors, wholesalers, and distributors. See Declaration of Thomas J. Ryan, ,-r,-r 4 - 6, atExhibit D. Each type of company sells food, but the price of similar food items can varydrastically depending upon the type of company selling the food, the volume of food beingpurchased, and any discounts, rebates, allowances or other payment terms agreed uponbetween the buyer and the seller. Ryan Dec!. ,-r 7.

When an organization such as the Prime Vendor makes large-volume purchases, it iscustomary to purchase the food items through some type of distributor. Ryan Dec!. ,-r 17.This is the case for both CONUS-based purchasing and OCONUS purchasing in the MiddleEast. The advantage of buying through a distributor is that the distributor offers one price fora large quantity of items. Distributors usually sell a large variety of food products from avariety of entities, and thus a customer like the Prime Vendor can purchase many of itsrequired products from a distributor without having to locate multiple smaller manufacturers.

7 In a letter to PWC's counsel, Contracting Officer Linda Ford acknowledged that the solicitationincludes terms and conditions "inconsistent with customary commercial practices for acquiring commercialsubsistence items." She added that "these differences have been approved" in accordance with FAR §12.302(c). This letter was not shared with PWC personnel. Since we are not aware of the specific RFP clausesfor which DSCP has apparently acquired a waiver, we maintain our protest of the inclusion of all RFP clausesinconsistent with customary commercial practice.


Id. This is especially important when no single supplier can satisfy the Prime Vendor'srequirements. The distributor has pre-existing commercial relationships with many smallermanufacturers and suppliers, and purchases from those manufacturers and suppliers in largequantities. As such, distributors are often able to buy products from such smaller suppliers atprices lower than those given to other customers. Id. Distributors usually charge a"distribution fee" to cover their general and administrative expenses, overhead, profit, andany other services they perform for the customer (such as consolidation, palletizing, relabeling, etc.). Ryan Decl. ~ 18.

With regard to CONUS purchasing,

the price of the product asn u or, w lC IS the customary method 0 pricing in the food industry.

Ryan Decl. ~ 10. This "delivered price" includes "inland freight," or the cost to transport theproduct to the distributor's facility. Id. It is not customary commercial practice in the foodindustry for manufacturers or distributors to provide the FOB Point of Manufacture prices, asrequired by the RFP. Ryan Decl. ~ 14.8

Unlike the current RFP, previous DSCP Prime Vendor contracts used the concept of"delivered price," both for CONUS and OCONUS regions. See, e.g. Contract No. SPM30005-D-3128 (cover page and pricing clause); Solicitation No. SPM300-06-R-0061 (cover pageand pricing clause), at Exhibit E. In fact, DSCP awarded a CONUS contract using deliveredprices as recently as June 2008. See Contract No. SPM300-08-D-3270 (cover page andpricing clause), at Exhibit F.9 DSCP therefore clearly knows that the use of delivered pricesis consistent with this commercial practice, yet has decided to abandon a concept it hasemployed in its contracts for at least the last 11 years. See Lankford-Sysco Food Services,Inc.; Sysco Food Services of Arizona, Inc., B-274781, B-275081, 97-1 CPD ~ 11 (Jan. 6,1997) (discussion ofRFPs that "require offerors to provide the 'delivered price,' 'distributionprice,' and 'unit price'" for each food item).

As explained in Mr. Ryan's Declaration, a manufacturer may provide a discount off of the deliveredprice if a distributor (or any other customer) elects to pick up ordered products from the manufacturer's facility.Ryan Decl. ~ 13. However, this discount, referred to as a "backhaul allowance," does not necessarily equal theamount normally factored into the delivered price for inland freight. Id. Thus, even in this circumstance, theFOB Point of Manufacture price is not provided.

9 Contract No. SPM300-08-D-3270 was awarded under Solicitation No. SPM300-06-R-0061. The coverpage and pricing clauses from that solicitation appear at Exhibit E.


The RFP's "Exception 2" to the Product Price definition above partially addressesthis problem, as it allows for the use of a "national commercial price inclusive oftransportation costs to a Distribution Point," but only on a case-by-case basis with approvalof the Contracting Officer. See RFP, SOW, S/S&P, § XIII.A.2.c, at 71. DSCP stated in itsanswers to prospective offerors' questions that the term "Distribution Point" in the exceptionrefers only to "a fully integrated regional distribution center of a manufacturer," and not afacility owned by a distributor or consolidator. RFP, Amend. 0003, § II, As. To Qs. 152,269. Thus, this exception may be of some utility if the Prime Vendor purchases frommanufacturers that maintain such a distribution center, and offer national prices that includetransportation to that point. However, most manufacturers do not deliver to a fixed,manufacturer-owned distribution point; instead, they deliver directly from the plant toflistributors and other customers. Ryan Decl. ~ 12.

Of course, the RFP does not require the Prime Vendor to purchase CONUS-basedgoods from a distributor. It may purchase directly from food manufacturers, _

In these situations, it may be possible to receive FOB Point of Manufacturepncmg an mvoices from some manufacturers, if those manufacturers are willing and ablealter their customary practices. However, this may not be the most efficient method ofprocurement. See Ryan Decl. ~ 17.

Furthermore, there are several common scenarios under which a Prime Vendor cannotobtain FOB Point of Manufacture pricing, even if attempting to purchase directly from themanufacturer. First, some manufacturers may maintain exclusive distribution relationshipswith distributors. In this circumstance, the Prime Vendor may be able to purchase onlythrough the distributor, and the only price/invoice available would be the distributor'sinvoice price. See, e.g., RFP, Amend. 0006, § II, Q. 30 ("Pepsi in Turkey is only availablethrough one distributor"). The same is true for private label vendors. The private labelcompany is the entity that sells and markets the food product, but the manufacturing of thefood is often performed by a third party and/or in an alternate location. Ryan Decl. ~~ 5, 15.The price offered by the private label company is not the FOB Point of Manufacture price,but rather a price that incorporates transportation, marketing, and other costs incurred by theprivate label vendor. Ryan Decl. ~ 15. Finally, in the case of manufacturers that use brokers,the price quoted by the manufacturer invariably includes a certain amount to offset the feespaid by the manufacturer for the broker's services. Ryan Decl. ~~ 6, 16. Thesemanufacturers would generally not be able to offer prices that exclude this price factor, andeven if they could, they would likely refuse to do so, since manufacturers view the amountspaid to brokers as confidential business information. Ryan Decl. ,-r 16.

10


With regard to OCONUS purchases of fresh fruit and vegetables and other items fromthe local market in the Middle East or Europe, it is also contrary to commercial practice forfood distributors to provide FOB manufacturer/grower pricing or invoices.

distributors may not even have access to grower invoices, as they may purchase their goodsfrom wholesalers, who in tum may purchase from cooperatives. See RFP, Amend. 0003, §II, Q. 13. While there may be OCONUS distributors that are willing and able to attain andprovide manufacturer/grower invoices with FOB manufacturer/grower pricing, compliancewith the RFP;s Product Price definition in the OCONUS context would be near-impossiblegiven the large quantity of LMRI required by the contract and the small number of OCONUSsuppliers that are VETCOM approved.

With regard to FF&V, the pricing requirements in the RFP provide an excellentdemonstration of why large-volume purchasers under customary commercial practice buysuch items from distributors at the distributor's price, without access to grower invoices.Procurement of the quantity of FF&V required by the Armed Services in Kuwait and Iraqlikely requires purchasing from several distributors, who in tum purchase from multiplesources. Thus, even assuming that the Prime Vendor could acquire grower's invoices, pricesfor the same item would vary from invoice-to-invoice. DSCP has apparently recognized thisproblem, and has instructed the Prime Vendor to re-determine the product price for everytype of fruit or vegetable every month by calculating a weighted average using the price fromeach grower during the previous month and the quantity of each item purchased from eachgrower during that month. I I The very need for this unwieldy, time consuming and costly

The Solicitation allows for the purchasing of OCONUS food items only from "sanitarily approvedfood establishments," as listed by the U.S. Army Veterinary Command ("VETCOM"). See RFP, SOW,Description and Specifications, § VII(a)(l), at 107.

II Specifically, the RFP states as follows:

... for FF&V items only, when multiple sources are being utilized and more thanone manufacturer's product is receipted prior to a catalog update, the contractor shall


procedure demonstrates why in customary commercial practice, large volume purchasers ofFF&V buy from distributors at distributor prices. Furthermore, the procedure itself iscontrary to commercial practice, as it fails to take into account that prices for' FF& V can, anddo, fluctuate dramatically within individual months, and often daily. Seehttp://www.ers.usda.gov/Briefing!cpifoodandexpenditures/cpibias.htm (last visited Sept. 30,2008) ("Prices for some food items, particularly fresh fruits and vegetables, ... occasionallyfluctuate widely").

i

The RFP's Product Price definition is thus inconsistent with commercial practice in avariety of ways. This is evident from the multitude of questions on this topic posed byprospective offerors during the pre-proposal period. In total, 56 questions published byDSCP related to the Product Price in some shape or form. PWC is also aware that thesedepartures from commercial practice were highlighted by U.S. food industry representativesat a meeting with DSCP that took place while this solicitation was under development. 12 Infact, it was subsequently reported to PWC that DSCP requested that the IFDA prepare andsubmit a Product Price definition that would be consistent with commercial practice. Oninformation and belief, the IFDA forwarded this price definition, which contrasted starklywith the RFP's Product Price definition, to DSCP during the week of August 11, 2008.However, DSCP elected to ignore the industry's suggestions and move forward with the RFPas drafted.

DSCP has, contrary to the requirements of the FAR, failed to conduct adequatemarket research, ignored the industry input it has received, and included in the RFP adefinition of Product Price that is contrary to customary commercial practice.

establish the product price based on the mix of invoices received post the previousredetermination period. The product price would be derived as follows:

Supplier A - 40% X $5.70 = $2.28Supplier B - 30% X $5.90 = $1.77Supplier C - 30% X $6.30 = $1.89

Product Price = $5.94

RFP, SOW, S/S&P, § XIILC, at 73.

11 The conference occurred at the Research & Development Associates ("R&DA") for Military Food &Packaging Systems, Inc. Annual Spring Meeting in Naples, Florida on June 3, 2008. Seehttp://www.militaryfood.org/S08Presentations.html. section entitled "The Prime Vendor Track," toward thebottom of the page (last visited Sept. 30, 2008).

V&E

2.


Early Payment Discount Restrictions

An "early payment" or "prompt payment discount" is a discount from the invoiceprice offered by a seller to a buyer as an incentive for payment earlier than the date ordinarilyrequired. Such discounts are common in many industries, and in fact are regularly offered togovernment agencies by contractors. See FAR clause 52.232-8, Discounts for PromptPayment. Early payment discounts are also referred to as "cash discounts" or more generallyas "payment tenns" or "credit tenns." Ryan Decl. ,-r 19. The two elements of the earlypayment discount are (l) the amount of the discount, expressed as a percentage of the invoiceprice, and (2) the number of days within which payment must be made in order for the buyerto take the discount. Ryan Decl. ,-r 20. The buyer and seller set these tenns throughnegotiations prior to purchase.

In the commercial world, the tenns of specific early payment discounts vary widelyand depend upon a variety of factors. See May IFDA Letter, at 6 ("Early payment discountsare common in the industry, but can have varying terms and conditions to their use. Thesetenns and conditions are the product of negotiation between the parties and can changequickly.") For example, in the food industry, smaller suppliers may offer a sizable promptpayment discount for payment within a relatively short period, because without earlypayment, they may not have sufficient cash on hand or credit lines to continue theiroperations. Ryan Decl. ,-r 21. Other U.S.-based suppliers may offer sizable prompt paymentdiscounts when dealing with a foreign customer, especially when payment timelines in thecountry where the foreign company is located are much longer than in the United States.From the purchaser's point of view, the decision regarding whether to take a prompt paymentdiscount will depend on its own financial situation, and whether or not it would be morebeneficial to invest or otherwise use the required funds instead of paying the seller early.Ryan Decl.,-r 22.

The RFP's Early Payment Discount provisions essentially dictate the payment tennsthat the Prime Vendor may agree to with its suppliers. While the Prime Vendor is notprevented from negotiating and receiving an early payment discount with a larger discountpercentage or longer payment timetable, there is no economic incentive to do so, since alldiscount amounts not meeting the two percent, 10-day tenns set forth in the RFP must bepassed through to the Government. In other words, by agreeing to an early payment discountwith a discount percentage larger than two percent or a payment timetable longer than 10days, the Prime Vendor would be sacrificing the time value of its money with noconsideration for that loss. No rational economic actor would behave in such fashion.Instead, the Prime Vendor will either (l) limit the terms of its early payment discount


agreements to not exceed the two percent, 10 day terms in the RFP, or (2) refuse to take anyearly payment discounts and pay its suppliers within the normal payment period.

The problem here is that the two percent, 10 day terms mandated by DSCP are notconsistent with commercial practice. As discussed above, early payment discount terms inthe food industry are quite common and vary depending upon the unique circumstances ofthe buyer and the seller. This fact was emphasized to DSCP in two letters from the IFDA.Commenting on an early payment discount provision substantially similar to the provision inthe RFP, the IFDA stated the following:

IFDA, which has a strong understanding of industry practices as part of itsordinary operations, can represent that there are no customary commercialpractices across the foodservice distribution industry that encompass theparticular limitations set forth in sub-paragraphs (i) through (vi) [of the earlypayment discount provisions], particularly with regard to the two percent and10-day limitations.

Letter from Mark S. Allen, IFDA to Frank Bankoff, DSCP Chief of CONUS Prime VendorSupplier Division (Feb. 11, 2008), Exhibit I, at 6; see also May IFDA Letter, at 6 ("thelimitation to a two (2) percent discount and payment within ten (l0) days is an arbitraryrequirement and not standard in commercial practice"). Thus, while early payment discountterms of two percent for payment within 10 days may be terms that some companies offer,they do not represent customary commercial practice across the food industry, or anyindustry for that matter. For example, PWC is aware of numerous government contracts inwhich government agencies have accepted prompt payment discounts significantly moregenerous than two percent, 10 days. These include contracts involving the Defense LogisticsAgency ("DLA"), DSCP's "parent" agency. See charts of prompt payment discountsreceived by General Services Administration and DLA, at Exhibit J.

Furthermore, it is contrary to commercial practice for DSCP to mandate the terms ofearly payment discounts that the Prime Vendor may accept from its suppliers. In thecommercial food industry, a customer would never attempt to limit the credit terms agreedupon by the vendor and that vendor's supplier. Ryan Dec!. ~23. Such an action would benonsensical, as the early payment discount terms affect only the timing and amount ofpayment; they have no relation to any future sale of the product by the buyer. ld.

On information and belief, various representatives from the food industry broughtthese departures from customary commercial practice to DSCP's attention during the R&DAmeeting that occurred in June. See n. 12, supra. Despite these warnings, and those included


in the IFDA's letters, DSCP elected to include the provision in the RFP, and has refused toremove or amend it.

DSCP's position is that it is not restricting the Prime Vendor to the two percent, 10day early payment discount terms. Rather, it asserts that it is merely dictating which earlypayment discounts the Prime Vendor may retain. See RFP, Amend. 0003, § II, Q. 6, A. tosub-Q. 64, at 16 ("There are no restrictions placed on negotiated payment terms between theprime vendor and the manufacturer. The solicitation identified Early Payment discounts thatmay be retained by the contractor and those that are required to be passed on to theGovernment.") As discussed above, such a position is disingenuous, as no rational economicactor performing under a contract awarded from this solicitation would agree to paymentterms exceeding the two percent, 10-day limit set forth by DSCP.

Assuming for the moment that DSCP's argument that it is not restricting paymentterms is correct (which it is not), the Early Payment Discount provisions would still beflawed. This is because it is contrary to customary commercial practice for DSCP to demandthe receipt of any portion of a prompt payment discount. In other words, if for some reason aPrime Vendor were to agree to early payment terms exceeding the two percent, 10-day limit,it would be contrary to commercial practice for DSCP to receive the benefit of that earlypayment discount, as it has required in the RFP.

In customary commercial practice in the food industry, early payment discountsreceived by a purchaser are not passed on to future customers. Ryan Decl. ~ 24. This isbecause the payment terms between buyer and seller represent a commercial agreement thatis independent of any relationship between the buyer and its future customers, whethercommercial or public. For example, a food distributor would not pass on to its customers theearly payment discount it receives from a manufacturer. This is because the early paymentdiscount (unlike a discount for volume purchases) does not affect the invoice price of thefood, and as such does not "follow" the food product as it is sold to later customers. Id.Furthermore, the distributor's purchases are for its inventory - they are made before the fooditems are ordered by the end-user, and without any guarantee that they will ultimately besold. Finally, it is entirely logical that the distributor would retain the early payment discountamounts; after all, if the distributor were to pay the manufacturer late and incur a late fee, itwould not bill its future customers for that late fee.

In the RFP, DSCP has altered customary commercial practice by demanding that thePrime Vendor pass through to it any discount exceeding the two percent, 10 day terms.There is nothing in the relationship between the Prime Vendor and the Government thatwould justify such a departure from commercial practice. Like the example of the distributor


in the paragraph above, the Prime Vendor purchases food from its suppliers for its inventorywithout any guarantee that the products will be ultimately purchased by the Government.RFP, SOW, S/S&P, § XLA, at 70. The Prime Vendor's ability to sell the products it buysdepends on a number of factors, including the number of troops stationed in the relevantcountries and the ordering habits of the individual Armed Forces dining facilities.Furthermore, there is no requirement that the individual Armed Forces units purchase theirfood supplies through the Prime Vendor contract. RFP, SOW, Special ContractRequirements, § I, at 137. The RFP places all risk on the contractor for overstocked itemsand damage to the items in transit into Iraq, and the Government does not take title to orderedgoods until the products are accepted at the respective dining facilities. RFP, SOW, S/S&P,§ XXIX, at 100. All negotiations by the Prime Vendor with regard to payment terms takeplace prior to and independent from any ordering of food items by the Government. Finally,there is nothing in the RFP that prevents the Prime Vendor from selling food items tocustomers other than the Government. See RFP, Amend. 0003, § II, Q. 50. In all respects,then, the Prime Vendor is similarly situated to the distributor in the example above. It iscontrary to commercial practice for DSCP, as the Prime Vendor's customer, to claim anyamount of an early payment discount received by the Prime Vendor from its suppliers.

DSCP was clearly aware that its requirement would be contrary to commercialpractice, since previous DSCP solicitations have recognized as much. In a series of CONUSbased "Prime Vendor Support" solicitations issued beginning in November 2006, DSCPincluded the following provision in its standard "Rebates/Discounts" clause:

Discounts or rebates received by the prime vendor from its suppliers as aresult of a prompt or early payment made by the prime vendors [sic] to suchsuppliers are not required to be passed to DSCP or its customers.

See, e.g., Solicitation No. SPM300-06-R-0019, SOW, S/S&P, § XIILE, at 43, at Exhibit K.Thus, the new requirement for pass-through of early payment discounts contradicts not onlycommercial practice in the food distribution industry, but also DSCP's historical practiceswith its own contractors. As with the Product Price definition, DSCP has inexplicablychosen to abandon its own understanding of customary commercial practices.

Even further evidence that the RFP's Early Payment Discounts clause is contrary tocommercial practice can be found in DSCP's attempted integration of a substantially similarversion of the clause into existing Prime Vendor contracts and solicitations earlier this year.See, e.g., Amend. 0006 to Solicitation No. SPM300-06-R-0061 (incorporating clause DSCP52.231-9P03 - Rebates/Discounts and Price-Related Provisions (JAN 2008)), at Exhibit L.Realizing that the clause was inconsistent with the functioning of the food distribution


industry, the vast majority of Prime Vendor contractors and offerors refused to accept itsincorporation into contracts and solicitations. DSCP was forced to cancel several attemptedcontract modifications and rescind the amendment from several solicitations. See, e.g.,Amend. 0007 to Solicitation No. SPM300-06-R-0061 (rescinding Amendment 0006), atExhibit M. Notwithstanding this clear message from the food industry, DSCP has includedthe clause in the current RFP.

There are also practical reasons why early payment discounts are not passed on tofuture customers in common commercial practice. These same issues would createnumerous administrative headaches if the requirement is retained in the RFP. First of all, itmay be impossible to allocate specific discounts to products purchased by the Government.The products shipped to the Government may consist of a mixture of products from differentsuppliers having different early payment arrangements with the Prime Vendor. Furthermore,the Prime Vendor may not have paid its suppliers within the agreed-upon time frame toreceive the discount on certain orders, and thus may have ultimately paid different amountsfor different shipments of the same product from the same vendor. Finally, the RFP requiresany early payment discounts to be passed through to the Government to be reflected in areduced catalog price. See RFP, SOW, S/S&P, § XVII.a, at 86. However, product prices canbe changed only every 30 days pursuant to the RFP's Prospective Price Redeterminationclause. See RFP, SOW, S/S&P, § XVI, at 85. Therefore, even if the contractor couldsomehow sort out the issues mentioned above and allocate the appropriate prompt paymentdiscount to each specific Government food order, it would be unable to lower and raise thecatalog price fast enough to accurately pass through the correct amounts to DSCP.

The early payment discount provisions of the RFP are therefore contrary to customarycommercial practice and entirely impracticable. The provisions have no place in a contractfor commercial items.

3. Most Favored Customer Pricing, Discounts and Rebates

Finally, the RFP's "most-favored customer" clause also may be contrary tocommercial practice. On its face, the provision does not appear problematic. It seems torequire the Prime Vendor to give its best product price and best discounts to the Government,as compared to any other customer. However, in its answers to questions submitted bypotential offerors, DSCP clearly indicated that the clause may also apply to distributors,manufacturers and other suppliers from which the Prime Vendor purchases food items. SeeRFP, Amend. 0003, § II, A. to Q. 224 ("all requirements apply to the PV, and must be passedon to all sub-contractor relationships"). If the "most-favored-customer" clause does have the


meaning ascribed to it by DSCP, such a requirement would be contrary to commercialpractice.

a. Pricing

Application of the "most-favored-customer" pricing clause to all manufacturers andsuppliers selling food products to the Prime Vendor would be a drastic departure fromcustomary commercial practice. Like many industries, the food industry uses tiered, volumebased pricing. Ryan Decl. ~ 8. Customers purchasing large quantities of product from aspecific supplier can buy at a lower price than customers purchasing smaller amounts of thesame products. The higher-volume purchasers are in a better pricing tier than the smallervolume purchasers. Id.

While the Prime Vendor will undoubtedly buy large quantities of products frommanufacturers and distributors, this volume may not be as high as the volumes purchased byother customers, and the Prime Vendor contract relationship will have a duration measured ina few years, and not decades like many other purchasers. For example, a large supermarketchain may purchase a larger volume of a certain product than the Prime Vendor. As such,the Prime Vendor may not always be at the top pricing tier by volume. In such a situation, itwould be contrary to commercial practice for the manufacturer to offer the Prime Vendor its"tier one" price. Ryan Decl. ~ 9. However, under DSCP's interpretation of the RFP, thePrime Vendor would be required to obtain this price. It would be highly unlikely for themanufacturers to grant the Prime Vendor a special exemption from the tiered pricing scheme.Id.

Perhaps recogmzmg that such a requirement would be contrary to commercialpractice, DSCP has traditionally required food suppliers to provide prices equal to or lowerthan the contractor's most favored customer "for similar quantities under comparable termsand conditions." See, e.g., Solicitation SPM300-05-R-0323 (cover page and pricing clause),at Exhibit N; see also May IFDA letter, at 4. As explained by the IFDA, such language is"critical" for the most-favored-customer requirement to operate consistently with customarycommercial practice. Id. Inexplicably, DSCP has dropped the quoted limiting language fromthis RFP.

It should be noted in this regard that the General Services Administration ("GSA"),which also requires most favored customer status on Federal Supply Schedule contracts,allows the contractor to negotiate a "basis of award" customer or class of customers againstwhich prices will be compared. 48 C.F.R. §§ 538.272(a), 552.238-75. Here, DSCP isrequiring all of the Prime Vendor's suppliers' customers to be included in the price analysis


regardless of size, comparable terms and conditions and quantities. This requirement iscontrary even to GSA's long established method ofmanaging most favored customer pricing.

In addition to being both contrary to commercial practice and commerciallyimpracticable, DSCP's interpretation ofthe "most-favored-customer" clause may also violatefederal law. The Robinson-Patman Act, 15 U.S.C. § 13 et seq., prohibits U.S.-basedbusinesses from discriminating in price between different purchasers of the same commodity.There is an exception for volume-based purchases, and the Act does not apply to sales to thefederal government. However, in the possible situation in which a U.S.-based manufactureris selling to a U.S.-based distributor for ultimate sale to the Prime Vendor, it may violate theAct for the manufacturer to offer the distributor a lower price than it offers to other customersin the same volume tier. Ryan Decl. ~ 9.

b. Discounts and Rebates

The "most-favored-customer" section of the RFP also requires the Prime Vendor topass to DSCP "discounts, rebates, allowances or similar economic incentives or benefitsgiven to any other customer at any time during the period of performance." RFP, SOW,S/S&P, § XVII(a), at 86. This includes early payment discounts not meeting the conditionsdescribed in the RFP. DSCP apparently also intends this provision to apply to all of thePrime Vendor's subcontractors and suppliers. See RFP, Amend. 0003, § II, A. to Q. 224.Such a requirement would be contrary to commercial practice and commerciallyimpracticable.

Commercial relationships between manufacturers and distributors in the food industrymay involve many complex arrangements calling for various types of discounts, allowancesor payments provided by the manufacturers to distributors, usually in consideration for somekind of service by the distributor. For example, the manufacturer may give a distributor anallowance as a payment for marketing of the manufacturer's brand, or for some other type ofvalue-added service. This latter form of discount is often referred to as "earned income," butit can also be called a "promotional allowance," a "purchasing allowance" or a "growthprogram," among other names. Ryan Decl. ~ 25. In a previous case dealing with a differentclause in a different solicitation, GAO found that the solicitation did not require such earnedincome to be passed on to the Government. See Lankford-Sysco, supra. Unlike thesolicitation at issue in that case, the RFP here includes no limitation on the definition of"discounts, rebates, allowances or other similar economic incentives or benefits." As such, itcould be interpreted to require the Prime Vendor's suppliers to pass on to the Prime Vendor,and subsequently, to the Government, all discounts, rebates, and allowances, includingallowances representing earned income. Such a requirement would clearly be contrary to


commercial practice, as alleged by the protestor in the LanJiford-Sysco case. See also RyanDecl. ~~ 26-27; May IFDA letter, at 3-4 ("the language in the [clause] seems to impose somenew, affirmative duty to seek out additional rebates or discounts for DSCP customers towhich they are not currently entitled. This would create an obligation not found in thecommercial marketplace.").

Furthermore, and perhaps more importantly, it would be contrary to commercialpractice for distributors to reveal to a customer, including the Prime Vendor, the specificdiscounts, rebates and allowances it receives from its manufacturers. The Prime Vendorwould only be privy to volume discounts, which generally are reflected in the tiered pricinglevel, and subsequently, the invoice price. The discount arrangements between varioussubcontractors in the Prime Vendor's supply chain are simply unavailable to the PrimeVendor, as suppliers consider such information confidential and proprietary. Ryan Decl. ~28; see also May IFDA letter, at 4 ("distributors do not share their commercial methodsfreely, especially those that relate to allowances and other economic incentives"). Therefore,even if the Prime Vendor were to demand that its distributors and manufacturers pass throughall economic incentives offered to their other customers, it would have no way to verify thatthe suppliers were indeed doing so. In all likelihood, the suppliers would refuse to agree tosuch a request, as it would be far removed from customary commercial practice.

Thus, with regard to both the pricing and discount elements of the "most-favoredcustomer" clause, DSCP's apparent requirement to flow down the clause to allsubcontractors is clearly contrary to commercial practice. PWC is unaware of any marketresearch that could support such a requirement.

The Product Price, Early PaYment Discounts, and "most-favored-customer" clausesof the RFP prejudice all prospective offerors, as the incorporation of the clauses requires theofferors to promise to alter their normal procurement and pricing operations in a mannerinconsistent with customary commercial practice.


The Product Price, Early Payment Discounts and "most-favored-customer" clausesare contrary to commercial practice and therefore may not be incorporated into the RFP. SeeSmelkinson, supra.

B. The Solicitation's Evaluation Scheme Is Flawed and Arbitrary

A solicitation's evaluation scheme must be fair and designed to reasonably putofferors on notice ofhow the agency intends to make its award decision. See Am. Med. Info.Servs., B-288627, 2001 CPD ~ 188 (Nov. 7,2001); FAR § 15.304(d). In this case, the RFPcontains an evaluation scheme that contains at least four flaws which are virtually guaranteedto result in an arbitrary and insupportable award decision that will prejudice the offerors andpreclude DSCP from selecting the "best value" proposals.

1. Allocation of Awards between Zones

First, the RFP fails to identify any evaluation criteria that DSCP would be required touse in allocating contract awards for each of the two zones covered by the solicitation. In theRFP's Addendum to FAR 52.212-2, DSCP enumerated the evaluation scheme to be used inselecting the successful offeror for each of the two zones included in the RFP. It identifiedthe relative importance of the various technical factors and subfactors and generallyexplained how technical/cost tradeoffs will be made. However, DSCP also notified offerorsin the RFP that it may exclude a contract awardee for one of the zones from being eligible forcontract award for the other zone in order to ensure that two sources are available. See RFP,SOW, S/S&P, §§ I.H, at 48; IX, at 68. No explanation is provided concerning how thisexclusion decision will be made, despite the fact that the estimated contract value fOf Zone 1is approximately five times greater than the estimated value for Zone 2 ($1,308,737,022.57for Zone 1 versus $264,041,437.40 for Zone 2). RFP, SOW, S/S&P, § II.A, at 48. If allowedto stand, this failure to include any discernible evaluation standards would grant DSCPunfettered discretion that would prejudice the offerors, especially since the RFP provides thatan offeror may not qualify its bid to ensure that it is considered first for the Zone 1 contract.See, e.g., RFP, Amend. 0003, § II, A. to Q. 73 ("Each zone is separate and should beconsidered and quoted on as such").

.. The landing of a head or tail couldsimilarly decide whether DSCP awards Zone 1 first or Zone 2; whether DSCP awards the


second contract to the offeror that is otherwise next in line for award or to another offeror; orwhether DSCP simply awards both contracts to one offeror (as it has reserved the right todo). DSCP should at the very least be required to notify offerors which contract will beawarded first and when an offeror reasonably could be eligible for award in both zones.Such information would enable offerors to develop an informed bidding strategy and avoidunnecessary effort and expense. As it is, the agency's intention to exclude a source uponcontract award likely violates FAR section 6.202 (the very authority cited by DSCP as thebasis for excluding offerors) in that section 6.202 should be used to limit a source frombidding, as opposed to permitting participation in the entire procurement, only to be excludedat the time of award. See, e.g., Am. Sci & Eng'g, Inc. v. Kelly, 69 F. Supp. 2d 227 (D. Mass.1999) (finding that an agency may conclude that it would increase competition or lowerfuture procurement costs to exclude a given vendor from bidding); see also HawkerEternacell, Inc., B-283586, 99-2 CPD ~ 96 (Nov. 23, 1999) (sustaining agency's exclusion ofa source from bidding on a contract).l3

2. Contractor Risk Assessments

DSCP's planned methodology for evaluating proposal risk is also arbitrary andcapricious. The RFP provides that "[t]he Government will make a risk assessment based oninformation contained in the proposal and other information, which has or may be derivedfrom sources other than the proposal. Risk to the Government will be considered in therating for any factors and/or sub-factors." RFP, Addendum to FAR 52.212-2, § 1, at 173(emphasis added). Based on this broad language, DSCP could use virtually any informationin determining an offeror's risk, whether such information is contained in the offeror'sproposal, compiled by the agency during its pre-award reviews or even provided to theagency by a competitor or under similarly questionable circumstances.

13 In addition, FAR 6.202 is meant to pennit exclusion of only ofpre-existing sources from competitionin order to establish alternative sources of supply. See Hawker, supra (sustaining agency exclusion of preexisting source for batteries from participating in procurement for alternate source); Defense FAR Supplement("DFARS") Procedures, Guidance, and Infonnation ("PGI") § 206.202(b)(i)(C) (instructing agencies todocument "whether the existing source must be totally excluded from the contract action" (emphasis added».Here, there are no pre-existing sources, as DSCP is re-soliciting the entire geographical region.


DSCP should set forth the specific sources of information to beused in the risk assessment.

3. Substitution of Product Prices with MPA Prices

A third flaw in DSCP's proposed evaluation scheme is its planned replacement ofofferors' product pricing with MPA pricing, which is almost certain to result in unrealisticunit prices and possibly an incorrect award decision. The agency intends to substitute MPApricing regardless of whether a particular offeror's price is higher or lower. RFP, SOW,S/S&P, § XV, at 84. DSCP claims that this process will be helpful to offerors as "itequalizes the product price evaluation for MPA items, as all offerors will have the benefit ofMPA product prices." RFP, Amend. 0003, A. to Q. 34. However, DSCP does not intend toadjust the offerors' distribution prices (which are based in part on the supplier the offerorintends to use), and has not indicated it would allow the offerors to revise their offers toaccount for the resulting changes to their costs. To the contrary, when asked about the effectof replacing the offerors' prices with MPA prices, DSCP responded, "switchingmanufacturers should not necessitate alternate distribution fees." See RFP, Amend. 0006, A.to Q. 40.

As a result, in some cases, DSCP's substitution of an MPA supplier will provide awindfall to an offeror, to the detriment of other offerors (i.e., in situations where the MPAsupplier is located closer to the offeror's CONUS consolidation facilities, which lowers theofferor's overall costs of distribution). Conversely, in other cases an offeror will beprejudiced by the substitution of an MPA supplier that is farther away and results in higherdistribution costs that are not covered by the offeror's proposed distribution price. DSCP hasacknowledged that the substitution ofMPA holders for the offeror's proposed suppliers "mayresult in higher or lower normal distribution prices." RFP, Amend. 0003, A. to Q. 179 (asamended by Amend. 0011). However, DSCP "do[es] not believe that this fluctuation intransportation cost will be disproportionately lower or higher." Id. It is unclear upon whatbasis DSCP has rested this conclusion, given the high costs of fuel and the fact that the MPAholders' facilities could be located anywhere in the continental United States, potentiallythousands ofmiles from the Prime Vendor's consolidation facilities.

Accordingly, it is possible that the contract awardee for each zone could be an offerorwith distribution prices that are unrealistic and do not cover the true cost of performance,especially since DSCP anticipates that ultimately 75-80% of the contract's product pricedollar value will derive from purchases ofMPA items. RFP, SOW, S/S&P, § XV, at 84. Anagency is required to ensure as part of its evaluation that prices obtained are fair and


reasonable. See FAR § 15.402(a). The opposite outcome is likely to result, however, basedon this flawed evaluation scheme.

4. Submission of Prices Not Meeting Product Price Definition

The RFP's dramatic departure from customary commercial practice has createdadditional confusion regarding the evaluation of prices not meeting the RFP's "ProductPrice" definition. Specifically, DSCP has failed to indicate under what circumstances suchprices will be accepted, and if accepted, how such prices will be compared with others duringthe proposal evaluation process. As such, offerors will have differing understandings ofDSCP's requirements, and will not be submitting bids on a common basis. See United Int'lInvestigative Servs., Inc., B-284871, 2000 CPD ~ 111 (June 15,2000) (a solicitation must be"sufficiently definite and free from ambiguity to permit competition on a common basis").

Perhaps recognizing that compliance with the Product Price definition is simplyimpossible in certain situations, the RFP includes three explicit exceptions that allow fortransportation costs to be included in the product price on a case-by-case basis. See SectionlILA. 1,supra. It is unclear from the terms of the RFP whether these exceptions may beutilized in offered product prices, as the RFP's proposal submission requirements include noindication that offerors may use them and no instructions on how to do so. However,DSCP's answers to submitted questions seem to indicate that offerors may indeed attempt touse the exceptions in their proposals. See RFP, Amend. 0003, § II, A. to Q. 156(c); Am.0006, § II, As. to Qs. 7, 31.

Ambiguity remains, however, with regard to the submission of prices under theexceptions and how DSCP will evaluate such prices. With regard to Exception 1, whichallows for the inclusion of airfreight charges in the product price for certain FF&V purchasesfrom outside the local market, DSCP stated: "Estimated airfreight charges should be includedin the quoted product price ... when exception 1 applies.... At time of cataloging, fair andreasonable price determinations will be made for items that are priced higher than originallyquoted." RFP, Amend. 0006, § II, A. to Q. 7. The instruction to use "estimated" airfreightcharges will lead to wildly divergent product prices for these items - some offerors maypurposely over-estimate the cost of airfreight in order to avoid the possibility of drasticchanges during contract performance, while others may under-estimate in order to offer thelowest possible product price, knowing that adjustments can be made during catalo in .DSCP has provided no indication of how it will evaluate these estimated charges.


Exception 2 allows for the use of a manufacturer's "national commercial price,"which includes transportation costs to a distribution point. The RFP states that the use of theexception is contingent upon the contracting officer's approval, but includes no details as towhat factors the contracting officer will look to when making the approval decision. Whenqueried for details, DSCP stated merely: "National commercial prices will be verified withthe manufacturer and accepted on a case by case basis depending on those discussions."RFP, Amend. 0003, § II, A. to Q. 156(b). Given the lack of guidance on the use of thisexception, an offeror submitting what its manufacturers have represented to be nationalcommercial prices will have no way to know whether DSCP will agree with themanufacturers or accept the prices submitted.

As mentioned above, DSCP has also provided no indication of whether offers ofproduct prices that utilize the two exceptions will be evaluated more or less favorably thanoffers that do not utilize the exceptions. DSCP's silence on this issue leaves offerors in theposition of guessing at whether the better strategy is to attempt to propose product prices notusing the exceptions, or to propose the best product prices, even if this necessitates the use ofthe exceptions.

Finally, several prospective offerors pointed out that compliance with the ProductPrice definition may be impossible in certain situations, notwithstanding the availability ofthe exceptions. For example, one questioner suggested that distributor prices may be theonly prices available for certain products in certain countries. RFP, Amend. 0006, § II, Q.30. Others pointed out that FF&V distributors in the Middle East, Europe and the UnitedStates do not share grower invoices. RFP, Amend. 0006, § II, Qs. 32, 64. In response tothese questions, DSCP instructed offerors to "[c]larify the particular situation in writingwithin the cost and price proposal and provide the available invoice and any other supportdocumentation." RFP, Amend. 0006, § II, As. to Qs. 30, 32, 64. Like the answer to thequestion regarding "national commercial prices," this response offers no indication ofwhether DSCP will accept or reject such prices, what factors it will use to make such adecision, or whether the submission of such prices, even accompanied by an explanation, willresult in a lower rating or score. Furthermore, DSCP's answer suggests that compliance withthe Product Price definition is not entirely mandatory, thus creating even more uncertaintyfor prospective offerors. For example, offerors do not know whether it is more advap.tageousto offer on the one hand FF&V products from a supplier that can provide grower infoices, or


on the other hand offer FF& V products that may be of a better quality or available at a lowerprice, but from a supplier that does not provide grower invoices. 14

The ambiguities created by DSCP's departure from commercial practice and itssubsequent answers to offerors' questions have led to uncertainty regarding the evaluationscheme for product pricing, and have ensured that offerors will not be competing on acommon basis. DSCP must provide more definite evaluation criteria before moving forwardwith the procurement.

C. The RFP Imposes Unreasonable Risk without the Right to an EquitableAdjustment

Another defect in the RFP is that it imposes an unreasonable level of risk on thecontractor, in most cases without the possibility of an equitable adjustment to the contractprices. Although nearly all government fixed price contracts impose at least some risk andofferors are expected to use their judgment in taking these risks into account in preparingtheir offers, solicitations that impose an unreasonable amount of risk unduly restrictcompetition and are impermissible. Four Star Maint. Corp., B-240413, 91-1 CPD ~ 70(Nov. 2, 1990); see also FAR § 16.202-2(d) (firm-fixed-price contracts appropriate onlywhen "performance uncertainties can be identified and reasonable estimates of their costimpact can be made.") GAO has instructed that "[a] procuring agency must providesufficient information in a solicitation to enable offerors to compete intelligently and on arelatively equal basis." Braswell Servs. Group, Inc., B-278521, 98-1 CPD ~ 49 (Feb. 9,1998) (citing State Mgmt. Servs., Inc., B-251715, 93-1 CPD ~ 355 (May 3, 1993».

Under this solicitation, the distribution prices submitted by the offerors will almostcertainly be wildly divergent and possibly unreasonably high due to DSCP's failure toprovide ample information necessary to make informed pricing decisions. RFP pricingstructures must satisfy a reasonableness test and must allow the offeror to reasonably bid.See Four Star, supra. However, in this case, DSCP has unreasonably required that offerorsprovide firm fixed distribution prices despite the fact that many of the pricing elementscannot reasonably be calculated and are not subject to an equitable adjustment at any timeduring contract performance.


As outlined above, offerors are expected to provide one finn fixed distribution pricefor each product category, although many of the major elements that comprise the price areunknown. For example, DSCP' s intended substitution of MPA pricing, both prior to awardand throughout the life of contract, creates a host of uncertainties, which will negativelyaffect the offerors. First, the transportation cost element of distribution prices is based on thelocation and particular contractual arrangement with a proposed supplier, but the offeror willnot be able to adjust its bid or contract after award to adjust for the change in supplier, even ifthe replacement of the MPA supplier results in a distribution price that will not cover the costof transportation. See Section IV.B.3, supra. DSCP has stated that "it is anticipated thateach offeror will do their own risk analysis of how changes to the location of manufacturers .. . may result in higher or lower nonnal distribution prices." RFP, Amend. 0003, § II, A. toQ. 179 (as amended by Amend. 0011). What is unclear is how DSCP expects prospectiveofferors to perfonn such a "risk analysis" when DSCP has provided no infonnationwhatsoever regarding the locations of MPA holders or what products they will supply. It isalso possible that DSCP may not enter into any MPAs at all.

Second, if the offeror elects to purchase directly from a CONUS-based MPA supplier(rather than through a distributor), the offeror may be required to pay the cost of transportinggoods from the MPA supplier's facility to the port if the MPA facility is located more than500 miles away, although the offeror will not know which MPAs will be selected and whenand where they are located. See RFP, SOW, S/S&P, § VLA.7, at 61.

Third, it is virtually impossible for an offeror to quantify the risk associated withproducts received from the MPA suppliers but not yet delivered to the Government at thefinal delivery point in the event the PV contract were to end or be tenninated, as the offerorhas no prior contractual arrangement with the MPA. In addition, the offeror has no ideawhether the MPA supplier will perfonn in accordance with contract requirements -- theofferor may incur additional costs for fixing labeling or palletizing errors, or finding alternatesources to fill orders the MPA supplier is unable to fill. When queried on this issue, DSCPresponded with the following remarkable statement: "The prime vendor is responsible for theperfonnance of its subcontractors whether they are mandatory sources or not." RFP, Amend.0003, § II, Q. 6, A. to sub-Q. 209, at 18. Substitution of the MPAs may also create otherunknown liabilities for which there is no coverage. Finally, developing realistic socioeconomic participation goals, which will also affect pricing, will be extremely difficult whenthe offeror has no idea for which products MPAs will be established.

With respect to the over-ocean transportation costs to be covered within thedistribution price, there are additional unknowns that make it virtually impossible for theofferors to properly predict their costs. Notably, the RFP provides that in order to ship


product through the Defense Transportation System ("DTS"), the contractor will have toenter into contracts with USTRANSCOM carriers that will be selected under a contract to beawarded in approximately January 2009, after proposals are submitted in response to thisRFP. See RFP, SOW, S/S&P, § VI, at 60-63; RFP, Amend. 0003, § II, A. to Q. 199.Although DSCP has provided offerors with information concerning its currentUSTRANSCOM carrier contract, there is no way in advance of award to know what termsand conditions can be negotiated with the new carrieres), specifically with respect to claimsprocessing, risk allocation and assessment and the dispute resolution process. DSCP hasasked the offerors to anticipate a host of potential costs based on a nonexistent contract.Thus, the offeror cannot accurately project the extent of costs associated with detainedcontainers and related charges. See RFP, SOW, S/S&P, § VI.B, at 63 ("the dollar amount ofdamage for detention of containers of the USC carrier by the Prime Vendor is established inthe USC contract"). It is also unclear whether the contractor or the USTRANSCOMrepresentative will be responsible for arranging the return of empty containers to the OceanCarrier, which could be a substantial additional cost. See RFP, SOW, S/S&P, § VI.E.2., at64.

The RFP also requires offerors to anticipate the costs involved in "backhauling"bottled water and other "government owned class 1 products" after delivery of PV productsto customer locations in Iraq. See RFP, SOW, S/S&P, § II.I, at 56. The RFP does provideestimated backhauling quantities per month and provides that "the backhaul destinationsmust be located within Iraq and along the route back to the prime vendor's distributionfacility." Id. However, it does not identify the locations of the water manufacturing plantswhere the items will be picked up, and it does not identify the specific destinations to whichthe backhauled products will be delivered. Furthermore, the RFP provides no maximumlimit on the number of backhauling missions that DSCP may demand. DSCP has refused toprovide further clarification of this requirement. For example, when asked between whichdestinations backhauling would be performed, DSCP answered merely: "To be determined."RFP, Amend. 0003, § II, Q. 109. It is unclear how DSCP expects offerors to accuratelypredict the costs involved in backhauling without this information. By requiring offerors toinclude backhauling costs in their distribution price, DSCP has created for itself unlimitedauthority to use the Prime Vendor's assets with virtually zero cost liability.

DSCP has also failed to provide the necessary information to offerors concerningVETCOM-approved FF&V suppliers. With respect to pricing for FF&V suppliers, DSCPhas advised offerors that they will be limited to using suppliers approved by VETCOM.RFP, SOW, Description and Specifications, § VII, at 107. However, to the extent thatofferors are even able to attain pricing from FF&V "growers," as required by the RFP, suchlow-level suppliers will not have been approved by VETCOM at the time of bidding.


According to DSCP, guidance will be provided in a "soon to be released Military Handbook"appendix, which will describe policies for "unprocessed FF&V suppliers in OCONUSareas." RFP, Amend. 0003, § II, A. to Q. 51. Offerors will find it difficult to estimateadditional expenses involved in locating and dealing with alternate FF&V suppliers shouldsuch change be necessitated by the not-yet-released guidance.

These specific pricing risks are in addition to the other risks attendant to wartimecontracting, such as the possibility of diverted trucks, demurrage, damage to persons andproperty, and increased insurance costs. 15 All of these risks must be included in the fixeddistribution price. This pricing scheme results in a situation in which virtually all of thepricing burden and risk is borne by the offeror, or must be addressed through the inclusion ofcontingencies-a practice that the government has long disapproved in other circumstances.See FAR § 31.205-7. The scheme is even more unreasonable due to DSCP's refusal toconsider upward equitable adjustments for the contractor,16 while at the same time reservingthe right to obtain more favorable pricing for itself in the event of changed circumstances.See RFP, SOW, S/S&P, § XIILB, at 73 ("Distribution prices are fixed however DSCP willaccept contractor offered price reductions at any time or price reductions may be applied viaa contract modification to remove a program requirement").

Such a complete, one-sided assignment of the risk, which is unsupported by anyidentified agency need, is patently unreasonable. As GAO has previously stated, "[i]t is ourview that, under CICA, agencies may impose risks on contractors only to the extentnecessary to reasonably limit the burdens on the government." See, e.g., Four Star, supra.

15 For example, the solicitation provides that the contractor "bears all risk and responsibility for personalinjury or death of its employees or agents or subcontractor employees or agents or for any damage to, loss of ordemurrage of equipment during the transportation of the product into Iraq." RFP, SOW, S/S&P, § II.F, at 52.See also RFP, SOW, S/S&P, § XIII.A.4.d, at 72 ("Iraq Vehicle Transportation (Limited to risk, elevatedinsurance, in-transit visibility, recovery, demurrage, and other reasonable and allowable costs that the primevendor finds necessary to include that are unique to the expense of operating a vehicle in Iraq ...)"). Whenasked about the possibility of the military commandeering Prime Vendor trucks for storage, DSCP answered:"This is an element of risk." RFP, Amend. 0003, § II, A. to Q. 100.

\6 See Benco Contract Servs., B-233748, 89-1 CPD ~ 205 (Feb. 24, 1989) (in which GAO denied aprotest involving a question of whether an invitation for bids provided sufficient information to offerors, in partbecause equitable adjustments were available to compensate the contractor for uncertain requirements).


E. The RFP Includes Impermissible Terms and Omits a Mandatory Clause

The RFP includes several provisions that violate federal procurement laws andregulations. These provisions must be removed from the solicitation. In addition, the RFPhas omitted a mandatory clause, the absence of which will cause offerors to be competing onan unequal basis.

1. Audit Rights Clause

The RFP provides DSCP with audit rights that far exceed what an agency is entitledto under a fixed price commercial items contract. Specifically, the RFP states the following:

The Contracting Officer, or authorized representative, shall have the right toexamine and audit all the Contractor's records (as defined at FAR 52.2152(a)) relevant to the existence of discounts, rebates, allowances or othersimilar economic incentives or benefits, and most favored customer productprices.

RFP, SOW, S/S&P, § XVII(d), at 87.

PWC is aware of no statute or regulation granting the contracting officer authority toaudit the contractor's price records on a fixed price commercial items contract such as this.Tellingly, FAR § 52.215-2, the general Audit and Records clause cited by DSCP in theprovision quoted above, is inapplicable to contracts for commercial items. See FAR §15.209(b)(1)(iii). While contracting officers previously had post-award audit authority oncommercial items contracts, this authority was repealed by section 4201 of the ClingerCohen Act of 1996. Pub. L. No. 104-106, 110 Stat. 642. The FAR clause that implementedthis authority was subsequently removed from the FAR. See FAR § 52.215-43, AuditCommercial Items (Oct 1995); 62 Fed. Reg. 225, 257, 260 (Jan. 2, 1997).

As commercial items contractors are exempt from the requirement of the Truth inNegotiations Act to provide certified cost or pricing data, the contract audit provisions of that


statute are also inapplicable to contracts for commercial items. See FAR § 12.503(c)(2); 10U.S.C. §§ 2306a(b)(l)(B); 2306a(g).

DSCP simply has no authority for the claimed audit rights. The provision must beremoved from the RFP.

2. Product Price Records Clause

In a related provision appearing in the same paragraph as the audit rights clausediscussed above, DSCP claims the following right:

The government may require the contractor to submit invoices and otherdocumentation from all subcontractor tiers or any supplier or person in theproduct price supply chain, to substantiate discounts, rebates, allowances orother similar economic incentives or benefits, and/or to substantiate thatproduct prices under this contract are equal to or lower than product pricesthat are given to the contractor's most favored customer.

RFP, SOW, S/S&P, § XVII(d), at 87. First, the claimed right to demand records from "allsubcontractor tiers" would provide DSCP access to invoices from every distributor orconsolidator used by the Prime Vendor. The fees charged by these companies will likelycomprise a significant portion of the contractor's distribution prices. Second, documentationfrom the "product price supply chain" apparently refers to invoices and other documentsshowing the prices at which manufacturers purchase raw materials for use in creating thefood products sold to the Prime Vendor. Through this provision, DSCP has impermissiblyclaimed the right to request cost or pricing data on a contract for commercial items.

The FAR defines "cost or pricing data" as "all facts that, as of the date of priceagreement ... prudent buyers and sellers would reasonably expect to affect pricenegotiations significantly." FAR § 2.l01(a). As the records of the costs making up theproduct price and the distribution price, invoices from subcontractors and raw materialssuppliers clearly fall under the definition of "cost or pricing data." Indeed, the FAR lists"vendor quotations" as an example of cost or pricing data. /d. As discussed above, theGovernment is prohibited from requesting cost or pricing data on contracts for commercialitems. See FAR § l5.403-l(b)(3). As such, the provision quoted above must be removedfrom the solicitation.

DSCP's position is that it is not requiring cost or pricing data. In response to aquestion from a prospective offeror regarding this provision, DSCP responded: "DSCP is not


requiring that cost or pricing data be submitted. Weare requesting actual invoices frommanufacturers that you do business with." RFP, Amend. 0003, § II, A. to Q. 60. Thisresponse is nonsensical, as the provision at issue goes far beyond requesting invoices frommanufacturers. On the contrary, it requires the submission of documentation from "allsubcontracting tiers or any supplier or person in the product price supply chain." This is ahighly intrusive requirement that has no place in a contract for commercial items.

3. Defense Base Act Insurance Clause

Finally, DSCP has failed to include a clause in the RFP that is required by statute tobe incorporated. The Defense Base Act ("DBA"), 42 U.S.C. 1651 et seq., requires that allservice contracts to be performed outside the United States include provisions requiringcontractors to purchase workers' compensation insurance coverage for their employees. See42 U.S.C. § 1651(a)(4); FAR § 28.305. This mandatory clause appears in the FAR at section52.228-3.

The contract to be awarded under this solicitation is at its essence a service contract.While DSCP will purchase supplies under this contract in the form of food products, it willprimarily purchase the services of the Prime Vendor in warehousing, consolidating, labeling,and delivering the food products to the respective dining facilities in Kuwait and Iraq. Thisis especially the case given that DSCP intends to perform much of the food procurementfunction on its own through the use of MPA suppliers. On the SF 1449 cover page of theRFP under number 20, Schedule of Supplies/Services, DSCP has described the procurementas follows: "ACQUISITION FOR FULL LINE FOOD AND NON-FOOD DISTRIBUTIONFOR AUTHORIZED CUSTOMERS ...." (emphasis added). When drafting the RFP,DSCP clearly envisioned the distribution of food items as the primary purpose of thecontract.


Nonetheless, DSCP has taken the position that the contract to be awarded under theRFP is a supply contract, and not a service contract. See RFP, Amend. 0003, § II, A. to Q. 85("This is a supply contract not a service contract. You are purchasing food and distributingit.") As such, it has not incorporated FAR 52.228-3 into the RFP. Nor has it apparentlyconsulted with or sought a waiver from the Secretary of Labor, as provided for in the DBA.See 42 U.S.C. § l65l(e); FAR § 28.305(d). Instead, DSCP has unilaterally decided that theDBA is inapplicable to the RFP. 17

In addition to requiring contracting agencies to include the mandatory clause in allapplicable contracts, the DBA also imposes an independent obligation on contractorsperforming such contracts to secure workmen's conwensation insurance for their employees.See 42 U.S.C. § 1651(a)(4); 33 U.S.C. § 932(a). 8 If a contractor fails to secure suchinsurance, and subsequently fails to pay the required compensation to an injured employee,the contractor may be liable for damages to the employee in tort. 33 U.S.C. § 905(a). Inaddition, the contractor as well as its president, secretary and treasurer may be criminallyliable for fines and/or imprisonment. 33 U.S.C. § 938(a).

Given the statutory requirement and potential penalties for non-compliance, someofferors may decide that the DBA does in fact apply to this procurement, despite DSCP'sposition that it does not. After all, the statute does not excuse contractors from compliance ifthe contracting agency neglects to include the required clause. These offerors will includethe cost of DBA insurance in their distribution prices, while other offerors may followDSCP's guidance and elect not to include the cost. This will result in offerors essentiallybidding against different requirements. See Contingency Mgmt. Group, LLC; lAP WorldwideServs., Inc., B-309752, 2008 CPD ~ 83 (Oct. 5, 2007) ("it is a fundamental principle ofgovernment procurement that the contracting agency must treat all offerors equall ,and in sodoin must evaluate proposals evenhandedly against common requirements" .

17 DSCP's position is untenable, as the DBA creates an exemption to its protections only for contractoremployees who are "engaged exclusively in furnishing materials or supplies" under the contract. 42 U.S.c. §l651(a)(4) (emphasis added). As the contract awarded under the RFP will be at 1eastpartially a contract forservices, this exemption is inapplicable.

18 The DBA imposes this obligation by applying the provisions of the Longshore and Harbor Workers'Compensation Act ("LHWCA"), 33 U.S.C. § 901 et seq., to contractors on applicable contracts. The LHWCArequires employers to either secure workmen's compensation insurance or obtain authorization from theSecretary of Labor to be self-insured. 33 U.S.C. § 932(a).


DSCP should amend the solicitation to include the mandatory requirement for DBAinsurance, or share with potential offerors a waiver or formal determination of inapplicabilityfrom the Department of Labor in order to avoid unequal bidding.

v. REQUEST FOR DOCUMENTS

Pursuant to 4 C.F.R. § 21.1(d)(2), PWC requests that DSCP provide it withdocuments relevant to this protest, which are listed below.

1. All documents related to research performed by DSCP related to productpricing, early payment discount practices and guarantees of "most-favoredcustomer" pricing and discounts in the food industry. This request includesrecords of all communications with members of the food industry and foodindustry representatives, including correspondence and minutes of meetings orconference calls. It also includes all articles, surveys or other materials reliedupon when drafting the product price, early payment discounts and mostfavored-customer provisions of the RFP. These documents are relevantbecause they are necessary to assess whether DSCP conducted sufficientresearch pursuant to FAR § 12.302(a), and whether the research demonstratesthat the relevant RFP clauses are or are not consistent with customarycommercial practice.

2. All requests for waivers submitted by DSCP pursuant to FAR § 12.302(c),concerning addition of terms or conditions to a solicitation for commercialitems that are inconsistent with customary commercial practice. Thesedocuments are relevant because they are necessary to assess whether DSCPhas acted in accordance with the requirements of the FAR by including certainterms and conditions in the RFP that are inconsistent with customarycommercial practice.

3. All waivers obtained by DSCP pursuant to FAR § 12.302(c), concerningaddition of terms or conditions to a solicitation for commercial items that areinconsistent with customary commercial practice. These documents arerelevant because they are necessary to assess whether DSCP has acted inaccordance with the requirements of the FAR by including certain terms andconditions in the RFP that are inconsistent with customary commercialpractice.

V&E

4.

5.


All communications between DSCP officials and offerors or contractors onother DSCP solicitations or contracts regarding DSCP clause 52.231-9P03 Rebates/Discounts and Price-Related Provisions (JAN 2008). Thesedocuments are relevant because they are necessary to assess the objections orconcerns that offerors and contractors may have had to the terms of that clausethat are substantially similar to certain terms of this RFP. This informationmay shed further light on whether such clauses are impracticable and/orinconsistent with customary commercial practice.

All documents and communications between and among DSCP officialsand/or other Government officials related to the following sections of theRFP:

In the SOW section titled "Supplies/Services and Prices":

II.I - Backhauling Government Furnished Material, at 56.

VI - Transportation, at 60-64.

IX - Award Details, at 68-69.

XIII - Pricing, at 71-73.

XV - DSCP Manufacturer's Pricing Agreement Program, at 84-85.

XVII - Rebates/Discounts and Price-Related Provisions, at 86-87.

In the SOW section titled "Description and Specifications":

VII - Sanitary Conditions, at 107-109.

In the section titled "Addendum to FAR 52.212-2":

End of section 1(a) - discussion of contractor risk assessments, at 173.

These documents are relevant because the listed clauses are the clauses atissue in this protest. The documents are necessary to evaluate DSCP'sreasoning for including the clauses as drafted in the proposal.

V&E

6.

7.

8.

General Counsel, GAO October 1,2008 Page 42

DSCP's Source Selection Plan and any other associated documents related toproposal evaluation plans. These documents are relevant because they arenecessary to assess whether DSCP has addressed the flaws discussed inSection IV.B above in its internal proposal evaluation plans.

All documents related to the Department of Labor's position regardingwhether the Defense Base Act applies to this procurement. This requestincludes any waiver or determination of applicability or inapplicability,whether formal or informal, issued by the Department of Labor. Thesedocuments are relevant because they are necessary to assess whether DSCPrightfully excluded the Defense Base Act clause from the RFP.

All documents and correspondence related to this procurement exchangedbetween DSCP and individuals and/or entities outside of the U.S.Government. These documents are relevant because they are necessary toensure that all potential problems with the RFP, including those discussed inthis protest, are addressed prior to DSCP moving forward with theprocurement.

VI. REQUEST FOR HEARING

Pursuant to 4 C.F.R. § 21.1 (d)(3), PWC requests a hearing before the GAO. Ahearing is needed because this protest raises fundamental and important issues regarding theextent to which contracting agencies may legitimately use the FAR Part 12 commercialcontracting vehicle while simultaneously including government-unique requirements thatrequire contractors and subcontractors to drastically change the way they do business. TheGAO is entitled to hear testimony regarding DSCP's rationale for its departure fromcustomary commercial practices, its imposition of an unlimited and unreasonable amount ofrisk on offerors, and its claims of intrusive and inappropriate audit and document productionrights.

VII. PRAYER FOR RELIEF

Based on the foregoing, PWC requests that the GAO sustain this protest and takeappropriate remedial action. This would include recommending that DSCP amend the RFPto correct the flaws identified above and solicit new bids in response to the amended RFP. In


addition, PWC requests that the GAO recommend that PWC be reimbursed for its protestcosts by DSCP.

Sincerely,

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Counsel for PWC Logistics Services Company K.S.C.(c)

B-4006601.1, Redacted Pre-Award Procurement Protest … · V&E General Counsel, GAO October 1,2008 Page 3 previous statutes dating back to the Competition in Contracting Act of19841

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