Opinion ID: 384567
Heading Depth: 1
Heading Rank: 2

Heading: application of the buy american act surcharge.

Text: 12 Our review of the agency's purchasing decision-including its interpretation of the procurement regulations-is quite limited. Judicial intrusion into government purchases necessarily delays completion of the contract and increases costs, with little measurable benefit to the public. We recognized this problem in Sea-Land Service, Inc. v. Brown, 600 F.2d 429, 435 (3d Cir. 1979), and stated that a court should not substitute its judgment for that of the contracting agency. Rather the court should determine whether the procurement decision was a rational one; if so the agency's decision must be upheld. 13 While courts do have an obligation to ensure agency compliance with the applicable statutes and regulations, several factors enter into the analysis. As we noted in Sea-Land : 14 When jurisdiction is exercised in the field of governmental procurement, there are three interests that must be weighed: the practical considerations of efficient procurement of supplies for continuing government operations; the public interest in avoiding excessive costs; and the bidder's entitlement to fair treatment through adherence to statutes and regulations.... A showing of clear illegality is an appropriate standard to impose on an aggrieved bidder who seeks relief. 15 Id. at 434. See also M. Steinthal & Co. v. Seamans, 455 F.2d 1289, 1301 (D.C.Cir.1971) (If the court finds a reasonable basis for the agency's action, the court should stay its hand even though it might, as an original proposition have reached a different conclusion as to the proper administration and application of the procurement regulations.) 16 12. Applying the first criterion of Sea-Land -the practical considerations for the efficient procurement of supplies-we note initially, that any delay in the award or performance of the contract will necessarily delay the completion of the entire project. Delay in the completion of the plant will result in an increase in the consumption of finite energy resources while forcing the consumers to pay higher rates required by the greater cost of non-hydroelectric power. 8 This factor supports the affirmance of the Corps' contract award so that further delay in the construction of the hydroelectric plant, and the expense that entails, can be minimized. 17 The second criterion-public interest in avoiding excessive costs-also militates toward affirming the award of the contract to Hitachi. Government contracts are awarded under a competitive bidding process to reward the most cost efficient manufacture and thereby save public funds. Hitachi's unadjusted bid was almost one million dollars less than Allis-Chalmers'. Even after adjustments that included a twelve percent surcharge on portions of Hitachi's bid, Allis-Chalmers' proposal still exceeded Hitachi's by approximately $20,000. Public funds would be saved by awarding the contract to Hitachi. 18 The third criterion-the bidder's entitlement to fair treatment through agency adherence to statutes and regulations-is most important for our analysis and the primary focus of Allis-Chalmers' complaint. Because we hold that the cost of installation at the damsite and the services of an erecting engineer were properly excluded from the Act's Surcharge, we do not reach the issue of the surcharge rate and therefore uphold the Section's award of the contract to Hitachi. 19 Allis-Chalmers challenges Hitachi's treatment under the Act on several grounds. Initially, appellants claim that both the Executive Order and the regulations implementing the Buy American Act, require that once a bid is determined to be foreign the entire bid price is subject to the Act. 9 Therefore all of Hitachi's bid, including installation and engineering, should have been subject to the surcharge. 20 As support for this interpretation, appellant cites section 2(b) of the Executive Order which provides that the bid or offered price of foreign materials is subject to the Act's surcharge. 10 The phrase bid or offered price is then defined by section 1(c) of the Executive Order to be the price of such materials delivered at the place specified in the invitation for bid including applicable duty and all costs incurred after arrival into the United States. 11 Thus according to Allis-Chalmers, once a bid is classified as foreign, section 2(b) applies the Act's surcharge to the entire bid or offered price which section 1(c) defines as all costs incurred after arrival into the United States. 21 Allis-Chalmers also relies on the federal procurement regulations that require all foreign bids to be adjusted by a surcharge. 12 These regulations define a foreign bid as the bid or offered price for a foreign end product, 13 and end products are defined as items to be delivered to the government, as specified in the contract.... 14 Hence, appellant contends that because turbines are a foreign end product under the contract their costs must be adjusted by the surcharges. 22 We cannot accept this interpretation. To apply the surcharge automatically to the entire price of a foreign bid once it is determined that the bid is foreign, ignores the implementary regulation that requires the surcharge to be applied to a foreign bid on a line-by-line basis. Specifically 41 C.F.R. § 1-6.104-4(b) directs the procuring agency to parse the foreign bid into taxable and non-taxable segments. It states in part: 23 When more than one line item is offered in response to an invitation for bids or request for proposals, the appropriate factor shall be applied on an item-byitem basis, except that the factor may be applied to any group of items as to which the invitation for bids or request for proposals specifically provides that award is to be made on a particular group of items. 24 This provision undercuts Allis-Chalmers contention that once a bid is determined to be foreign the entire total is subject to the Act's surcharge. 25 Additionally, as the Section argues, the Executive Order and implementary regulations do not subject the entire bid to the Act's surcharge but rather exclude all post-delivery expenses. Specifically section 1(c) of the Executive Order states that the bid or offered price of foreign origin means the bid or offered price of such materials delivered at the place specified in the invitation for bid.... This reference to the delivered price is reinforced by the definition of end products contained in 41 C.F.R. § 1-6.101(a): As to a given contract, the end products are the items to be delivered to the government, as specified in the contract.... 26 The focal point of this interpretation is the determination of when materials are delivered under the contract; if costs occur before delivery they are subject to the surcharge, if they are incurred after delivery they are exempt. The expenses of an erecting engineer and installation occur after delivery and therefore are exempt from the surcharge. Delivered is defined by the invitation for bids to mean F.O.B. railroad cars, Del Rio, Texas. In re Allis-Chalmers Corporation, B-195311 at 3 (Dec. 7, 1979) (Decision of Comptroller General). Appellants contend that an end product is not delivered under the contract until it is completely assembled and operational. We refuse to accept this and find instead that the turbine sub-assemblies were delivered, as the invitation for bids states, when they arrived F.O.B. at Del Rio, Texas. 27 Under the strict standard of review set out by this court in Sea-Land we cannot hold the Section's construction of the federal procurement regulation to be clearly illegal. Sea-Land, 600 F.2d at 3450. Indeed, the Corps' invitation for bids underscores the Section's construction of the Act. General Conditions 3.2 and 3.3 of the invitation for bid stated: 28 3.2 End Products are the items to be delivered to the Government, as specified in the contract, including supplies to be acquired by the Government for public use in connection with service contracts, but excluding installation and other services to be performed after delivery. 29 3.3 When the services of erecting engineers are specified in the bid amount in the Schedule for Services of Erecting Engineers will be subtracted (sic) from the bid amount before application of the Buy American Act. 30 General Conditions 3.2 and 3.3 (emphasis added). See Allis-Chalmers, 481 F.Supp. 1256, 1260 (M.D.Pa.1980). The conditions of the bid solicitation, gave bidders notice of how the Section would interpret the Act. While such statements are not a binding construction of the procurement regulations, they do evidence a consistency of treatment throughout the bidding process and add support to the Section's construction of the regulations. 31 Finally we consider it important that the Comptroller General has addressed this precise issue and excluded installation and other post-delivery expenses from the Act's surcharge. In Re Allis-Chalmers, B-195311, (Dec. 7, 1979) (Decision of the Comptroller General). While his opinion is not controlling as a matter of law, it is material to our decision. Wheelabrator Corporation v. Chafee, 455 F.2d 1306, 1313 (D.C.Cir.1971). Cf. Gladstone, Realtor v. Village of Bellwood, 441 U.S. 91, 105-06 n.15, 99 S.Ct. 1601, 1611, 60 L.Ed.2d 66 (1979) (non-judicial relief for housing violations described as more expeditious and less burdensome method of resolving housing complaints). In this case the Comptroller General affirmed the Section's interpretation of the Act and award of the contract to Hitachi. His opinion stated (T)he Act, the E.O. and F.P.R. (do) not prohibit the exclusion of installation costs and other services incurred or provided after delivery to the government of the end product before application of the Buy American Act differential. In re Allis-Chalmers Corporation, B-195311 at 6-7. 32 This exclusion of post-delivery expenses is consistent with earlier constructions of the Act by Comptroller General. In Westinghouse Electric Corporation, 53 Comp.Gen. 259, 261-62 (1973), appellant argued that the services of an installation engineer were part of the end product and hence not subject to the Act's surcharge. The Comptroller General disagreed: 33 We are inclined to the view that under the provisions of the Buy America Act, as implemented by Executive Order No. 10582 and FPR 1-6.2, computation of the differential should be based on the cost of the foreign supplies or materials delivered at destination, and that additional costs involved in installation or other services to be performed after delivery should be excluded from the computation. 34 Id. at 261 (quoting from a transmittal letter to the Secretary of the Interior involving Fairbanks Morse & Company). Thus the Comptroller's application of the Act's surcharge to the delivered cost of Hitachi's turbines conformed with prior interpretations of the Act's scope. 35 Allis-Chalmers also contends that end products in this case means two fully assembled hydroelectric turbines that have been installed into the power plant. If the turbines in this contract had not been so large, appellant contends, they would have been shipped completely assembled from the point of foreign manufacture, and the Act's surcharge would have applied to the entire bid price. Allis-Chalmers claims that Hitachi should not be treated differently under the Act simply because the size of the turbines requires the shipment of unassembled parts with final assembly performed at the damsite. It is error, appellant argues, to speak of an unassembled turbine as an end product when the contract calls for two functioning hydroelectric generators. Hence, the final assembly of the turbines at the damsite is not installation at all but rather the final stage of manufacturing and the Act's surcharge should apply to this activity. 36 We find this logic unpersuasive, as did the Comptroller General. While shipping constraints may cause the hydroelectric turbines to be delivered in sections, the sum of these pieces is not a collection of useless parts, but rather the materials that comprise a functioning turbine. As the Comptroller General emphasized, it is not possible to install a large turbine or generator as a fully assembled unit. 15 The assembly/installation of the various sections of a turbine must be done in stages as the construction of the powerhouse progresses. Hence Hitachi's installation/final assembly cost is excluded from the Act's surcharge not because the size of the turbine required unassembled shipping, but rather because the various stages of powerhouse construction dictate the delivery of disassembled turbine parts. 37 As noted earlier, the Corps has historically awarded separate contracts for the manufacture of the turbines and the installation of these turbines during the powerhouse construction. The Corps' decision to combine the two stages into a contract for the Amistad damsite is no reason to blur the distinction between manufacturing, which is subject to the Act's surcharge and installation which is not. 16 38 Finally, Allis-Chalmers contends that limiting the Act's surcharge to cost of foreign goods will encourage unbalanced bidding. Unbalanced bidding occurs when companies use foreign manufactured goods and materials that are subject to the surcharge, but then perform the bulk of manufacturing on these materials in the United States to minimize the impact of the Act's surcharge. This type of unbalanced bidding, it is contended, undercuts the protection afforded American labor by the Buy American Act. 39 This analysis presents several problems. First, while unbalanced bidding may exist, there is no indication that Hitachi's bid was unbalanced. Second, we believe that materially unbalanced bids can be detected and adjusted by the procuring agency. Finally, we fail to appreciate the problem of unbalanced bidding. The central purpose of the Buy American Act was to protect the American worker. 17 If the foreign firms make their bids unbalanced by performing a disproportionate amount of manufacturing at the American jobsite, then the purpose of the Buy American Act-protection of the American worker-has been largely achieved. Foreign firms will employ American workers to perform the assembly/installation on the domestic jobsite and minimize their foreign manufacturing subject to the Act's surcharge. The Buy American Act protects American labor, not specific employers who seek contracts. To the extent firms submit unbalanced bids by having the majority of the work performed on the domestic jobsite with a minimum of the bid subject to the Act's surcharge the Buy American Act has served its purpose-American workers perform the jobsite manufacturing and the cost of foreign goods and materials is subject to the Act's surcharge. 40 We find therefore that the Section's award of the contract to Hitachi America was not clearly illegal and we affirm the judgment of the district court. 41