Government Scrap Sales, B-295585, March 11, 2005

B-295585 Mar 11, 2005 Jump To VIEW DECISION DOWNLOADS RELATED PAGES GAO CONTACTS Highlights Government Scrap Sales (GSS) protests the proposed award of a contract to Liquidity Services, Inc. (LSI) under invitation for bids (IFB) No. 99-4001, issued by the Defense Logistics Agency (DLA), Defense Reutilization and Marketing Service (DRMS) for the sale of scrap materials. GSS maintains that award to LSI will result in an improper organizational conflict of interest (OCI). We deny the protest. View Decision B-295585, Government Scrap Sales, March 11, 2005 Decision Matter of: Government Scrap Sales File: B-295585 Date: March 11, 2005 Joseph Summerill, IV, Esq., and Frances Gardner, Esq., Barnes & Thornburg LLP, for the protester. Craig A. Holman, Esq., and Kara L. Daniels, Esq., Holland & Knight LLP, for Liquidity Services, Inc., an intervenor. Joel Zimmer, Esq., Defense Logistics Agency, for the agency. Scott H. Riback, Esq., and John M. Melody, Esq., Office of the General Counsel, GAO, participated in the preparation of the decision. DIGEST Protest that proposed awardee of scrap property contract has an impermissible organizational conflict of interest (OCI) because a subsidiary company performs a related surplus property contract is denied; the theoretical possibility that the awardee will act in bad faith under its contract does not establish an OCI, and provides no other basis for denying firm the award. DECISION Government Scrap Sales (GSS) protests the proposed award of a contract to Liquidity Services, Inc. (LSI) under invitation for bids (IFB) No. 99-4001, issued by the Defense Logistics Agency (DLA), Defense Reutilization and Marketing Service (DRMS) for the sale of scrap materials. GSS maintains that award to LSI will result in an improper organizational conflict of interest (OCI). We deny the protest. BACKGROUND DRMS is responsible for the disposal operations of the Department of Defense (DOD), including the reutilization, transfer, donation and sale of surplus DOD property. The sale of surplus property is accomplished through the award of contracts for the sale of property to vendors that in turn resell the property. DRMS utilizes two surplus property contracts: the commercial venture (CV) contract, under which useable surplus commercial property is sold, and the scrap venture (SV) contract, under which scrap property that is no longer useable is sold. (This protest relates to the award of the SV contract.) The two contracts operate in a similar manner: the contractor purchases the property from DLA and then resells it, presumably at a price greater than the price paid to the agency. The contractor's (and agency's) return under both contracts is in the form of net proceeds, or distributions (gross revenue from the sale of the property minus the contractor's direct costs). The agency receives 80 percent of the distributions and the contractor 20 percent. [1] Under the SV contract, the contractor also may earn an incentive payment of up to an additional 10 percent of the contractor's distribution amount if (1)60percent or more of gross sales are made to concerns having 100 or fewer employees (5percent), and (2) 50 percent or more of the sales to small businesses are to firms having 25 or fewer employees (5percent). Surplus Acquisition Venture, LLC (SAV), the current CV contractor, is a subsidiary of LSI. [2] GSS alleges that SAV's status as the CV contractor creates a potential OCI if the SV contract is awarded to LSI, since LSI/SAV would be able to manipulate the disposition of property to its advantage. Specifically, GSS asserts that SAV would have an incentive, and would be able to designate useable property as scrap in order to bring it under the SV contract, which, according to GSS, is more profitable than the CV contract. According to GSS, the small business participation incentives available under the SV contract allow for the possibility of the SV contractor earning as much as 25 percent of the net contract proceeds, while the CV contract provides for maximum possible earnings of only 20 percent. In support of its conflict scenario, GSS poses a hypothetical example to demonstrate the economic incentive it claims LSI/SAV would have to convert surplus property under the CV contract to scrap under the SV contract. The example involves the sale of a 5-pound valve having an original acquisition value of320. GSS asserts that it would be profitable for LSI/SAV to have SAV purchase the valve as surplus under the CV contract for a fraction of its original value--GSS hypothecates $.032--abandon the valve, and then have LSI repurchase it as scrap under the SV contract (at a hypothetical price of $.005), and then sell the valve at the same price for which SAV would have sold it under the SV contract, $100 in the example.