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ADDITIONAL MATERIAL SUBMITTED BY MR. LOEB Our company has been invited to present its views concerning the possibility of teletype paper procurement being placed on a term contract basis. We are opposed to this procedure and will attempt to show that it operates against the Government's best interests.
Permit us to approach the matter by analyzing four separate, but related areas.
DO TERM CONTRACTS REDUCE PAPER WORK?
A strong argument advanced for term contracts is that they reduce paper work on the part of the Government. Is this true? Our company presently holds term contracts on computing machine paper and cash register tape for several depots. In the six weeks these contracts have been in force, we have received eight separate purchase orders. These require eight separate requisitions, eight separate inspections, eight separate receiving procedures, and eight separate voucher procedures. In addition to this, the Government is required to collect and analyze monthly reports showing the status of each of these orders and inspectors are required to prepare and submit bi-monthly reports. Both reports are new and represent additional detail work. To emphasize how ridiculous this duplication of paper work can get, we have received different orders from the same depot within three days—all requiring extended duplication. In the face of this experience, can it really be claimed that term contracts result in less paper work for the Government?
When compared with this experience, the method of procuring quarterly depot by depot, on an “all or none” basis, seems a model of efficiency. While it may require some forecasting of requirements, this cost is more than offset by reduced freight costs, inspection, requisitioning, receiving, and vouchering.
DO TERM CONTRACTS SHIFT BURDENS OF FORECASTING, FINANCING, AND STORAGE?
One of the most serious consequences of term contracts is the shifting of responsibility and economic burden from the Government to vendors. Let us see how this works.
A. Under the term contract method of procurement individual depots are not required to forecast their needs item by item. This forecasting must be attempted, then, by vendors, for the nature of our industry is such that a short time limit precludes anything other than stockpiling all items on contract. Vendors cannot buy raw materials and produce order-by-order, therefore, they must try to forecast individual depot requirements item by item. This is a job that obviously a vendor is ill-equipped to do. To indicate how impossible it is for a vendor to forecast requirements, see exhibit “A” and note the extreme variations in purchasing from period to period.
B. Realizing the difficulty in forecasting, the vendor must then prepare himself to fill orders that come in-not knowing when these orders will arrive, what items will be called for, or in what quantity. To accomplish this, he must buy and pay for vast amounts of raw materials. He must manufacture and place in storage large quantities of a wide variety of items—without absolute assurance that each or any will be ordered. At this point, it should be noted that Government specifications as to finish, size, construction and pack are generally different from those of the commercial market. This makes it almost impossible to sell Government specification items commercially at a profit. It must be emphasized that the risks involved in this procedure are very, very great. Is it proper that the Government require vendors to take such risks?
C. In addition to the risks, this procedure forces a large financial burden on the vendor. He has to maintain big inventories of both raw materials and finished product. He has to store them for an unknown length of time. The capital and space required are vast. Is it the Government's intent to shift this economic burden to the vendor? If so, it seems to be contrary to the well known practice of aiding some business firms with free plants, accelerated write-offs, and other means of assist
DO TERM CONTRACTS TEND TO ENCOURAGE SMALL BUSINESS? In discussing this aspect of the problem, the technical definition of small business (fewer than 500 employees) must be discarded. We do not know of a single firm whose number of employees involved in our industry approaches 500. Despite this, there are one or two "giants" and the remaining plants are very small, having only a few machines and a small number of employees. These small plants are generally limited in capital and storage capacity. Term contracts, however, seem to demand but impossible for the small plants to bid. It seems that term contracts will eliminate from bidding all but a handful of the "giants” of the industry. This treatment of small business seems contrary to publicized Government policy.
DO TERM CONTRACTS RESULT IN LOWER PRICES? It is difficult to pin-point answers to this all-important question. But it seems that the only valid approach is one of long range effect.
It appears certain that there will be fewer and fewer bidders on term contracts. We believe that there were fewer bidders on the second contract for computing machine paper than on the first one. It is possible that our company will not bid on the next one, for the reasons already discussed. We believe that the reduction in number of bidders will tend to cost the Government money in the form of higher prices that need be.
Let us see how this works. Our company has supplied the Government with more than $250,000.00 worth of these items in five years. Obviously had we not been low bidder on this volume, the Government would have had to pay more. Extending this idea, it can be seen that eliminating many bidders such as ourselves will result in less competition and higher prices.
Our company believes that in five years, we have saved the Government no less than $7,500.00 in direct savings by having been low bidder. Indirect savings are much greater, for the records show that prices dropped drastically when our company started bidding. Who can say what will happen to prices should we stop bidding?
A number of things seem clear: (1) It is doubtful if the Government reduces paper work with term contracts; (2) Term contracts shift a huge forecasting, financial, and storage burden to vendors-a burden so great as to eliminate all but a few bidders; (3) Term contracts operate against small business; and (4) Elimination of bidders will result in reduced competition and higher prices.
We recommend, instead, a system which will avoid these pitfalls. Quarterly procurement, on an "all or none” basis for each depot, accomplishes the following: (i) It reduces total paper work; (2) It requires the Government to assume responsibility for forecasting, financing, and storage, thereby broadening the base of potential bidders; (3) A broader base of bidders tends to help small business; and (4) Lower prices will result from more competition and more economically sized shipments.
DECEMBER 29, 1960. GENERAL SERVICES ADMINISTRATION, New York 13, N. Y. Attention: Mr. Kendall.
DEAR MR. KENDALL: We wish to call to your attention that invitation FNHON271-A-1-6-61 was circulated based on interim spec. UU-T-00110 (Navy-S&A). As we did not have any prior knowledge of the existence of this interim spec., we have not had an opportunity to comment on the proposed changes. It is our opinion that vendors' comments should be considered before applying new specifications to contract inquiries.
Several provisions in the interim spec. make us extremely reluctant to bid on contracts covered by it. This is because of a lack of clarity in some instances, and what we consider to be unnecessarily stringent inspection provisions in other instances.
It is our judgment that the effect of these questioned provisions are to expose vendors excessively without enhancing quality. Such risks will tend to increase costs without improving the quality of the product shipped.
Following are detailed explanations of our position on these questioned provisions:
1. Paragraph 4.5 stipulates rejection if any one roll fails the tests under 4.5.2, 4.5.3, and 4.5.4: We do not consider this reasonable, but cite the requirements under 4.4 as affording adequate protection to both the Government and vendors.
This provision is particularly stringent when applied to 4.5.2, which deals with yardage requirements. It is conceivable that one roll a fraction of an inch short could cause rejection of 100,000 perfect rolls. This obviously would be unsound. We suggest instead an average of random samples, within stated limits.
2. Paragraphs 4.5.3 and 4.5.4 deal with requirements without providing an objective standard. We believe it essential that a clear definition be provided together with a method of measuring so that vendors and inspectors have an objective standard to use in quality control efforts. Such a definition and standard should be Our company is of the opinion that the best interests of the Government will be served by modifying the spec. along the lines suggested.
JANUARY 4, 1967. No one can disagree with Mr. Griffins statement, to wit: “Our goal is to supply merchandise made in accordance with customer requirements, and we expect that material offered under terms of a supply contract will comply with the requirements of that contract. It would be difficult for a supplier to have first hand knowledge that his product complies unless he himself provides for its testing and inspection. Our quality control program serves to assure our customers that the material they have requested meets their specifications; it is not intended to take the place of the suppliers quality control program”. (I might interject that on a recently completed contract, covering scores of releases, over a period of a year, each tested and certified to be in compliance by a GSA approved commercial lab, each release was completely retested by a GSA lab before release for shipment. Not once was the test by the commercial lab found to be in error. This practice was pointed out to the Commissioner, but the procedure continued for the life of the contract.)
We do disagree with the implementation of this aim. Why should the government operate under different caveats than general industry. A contractor is aware of the specification covering products on which he bids, and he is aware of the penalty of supplying goods which do not comply. A “responsible bidder” indeed should, and must assure himself that he is producing specification merchandise. The method however, should be his choice, and the penalty his if he cuts corners.
The government philosophy has greatly changed over the years. Form R2-298 (March 1952) GSA-Special Conditions, states under paragraph I, "The cost of testing the first sample of an order or shipment shall be borne by G.S.A.”
In a letter to me dated July 13, 1960, Mr. George P. Miller, Chief Specifications and Standards Branch, Standardization Division, General Services Administration, says: “It will not be necessary to assume the burden of establishing a complete laboratory. You may use any laboratory acceptable to the government, including your suppliers. Generally the mill log submitted by them will be acceptable, however, the FSS will have to confirm that data reported on mill records are verifiable in the Q.C.D. laboratories, before it can accept converted papers you may wish to offer for acceptance. Until verification is found to be generally satisfactory, your shipments may not be accepted before the Q.C.D. has approved samples for shipment. However, after the Q.C.D. has established that mill log values on lots of paper that you certify are verifiable, the lots will be accepted with only occasional verification tests.”
The key to the whole problem of equitable relationship, depends upon interpretation of 5(e) of Form 32, which is amplified in 5(b) of Form 1427.
The crux of the issue is whether a
The provisions of 32 and 1424 * government, in fact, are much more favorable to the government than to the contractor.
As recently as 4 November, 1965, Mr. H. J. McIsaac, Chief Standardization Branch, Clothing and Organic Material Division, U.S. Army Laboratories, Natick, Massachusetts, wrote me:
"In accordance with provisions of 4.1 and 4.2, it is not required that the end item supplier perform the testing of the base paper component. The end item supplier is however, responsible for assuring that the components meet the specifications requirements when sampled and tested as specified in paragraph 220.127.116.11. In lieu of testing the components himself, the end item supplier may rely on certified test results as submitted by the component suppliers”.
GENERAL SERVICES ADMINISTRATION,
FEDERAL SUPPLY SERVICE,
Washington, D.C., February 16, 1967. Mr. Donald J. LOEB, K-C Converters, Inc., Kansas City, Mo.
DEAR MR. LOEB: Reference is made to your letter of January 25, 1967, regarding sampling and testing of teletypewriter paper in roll form in accordance with FederYour comments regarding paragraph 4.1.2 and 4.3.4 are well taken. It was not intended that the end item rolls were to be retested for the paper characteristics specified in Section 3. Paragraph 4.3.4 should have included a statement that the tests for the paper characteristics determined in 4.1.2 were not to be repeated on the finished rolls.
The Standardization Division is preparing an amendment to the subject specification clarifying this and other areas of misunderstanding. It is expected that printed copies of this amendment should be available within 30 days. It is anticipated that this amendment will serve to correct some problem areas in the specification pending the preparation and publication of a completely revised document. Sincerely yours,
L. F. DONAHUE,
Standards and Quality Control.
GENERAL SERVICES ADMINISTRATION,
Washington, D.C., May 23, 1968. Hon. RICHARD BOLLING, House of Representatives, Washington, D.C.
DEAR MR. BOLLING: This is in further reply to your letter of April 16 on behalf of Mr. Donald J. Loeb, Rite-Made Paper Converters, Inc., Kansas City, Missouri, concerning delays in payment of invoices submitted to our regional office and term contracts awarded to that firm under which very few or no purchase orders were issued.
Although there is no specific statutory prohibition on the inclusion in Government contracts of a provision under which interest would be added to the payment of an invoice where such payment has been delayed beyond a specified time, there is no agreement within the Government whether this could be done in the absence of specific statutory authority to do so.
Moreover, inclusion of a requirement to pay interest if payment of an invoice is delayed beyond a specified time would create a contingent liability, which might interfere with the orderly obligation of appropriated funds in accordance with the requirements of Chapter 4, Title 7, of the General Accounting Office Procedures and Policy Manual, since the exact amount to be obligated would be indefinite and subject to future determination. In addition, where the appropriation to be charged is for a particular year, such a provision might involve the Government in an obligation for the future payment of money for which no appropriation had been made, which would be contrary to law (22 Comp. Gen. 772). However, in accordance with Mr. Loeb's suggestion, we will give consideration to the question of whether ways can be found which would be both practicable and legal to include such a provision in any Government procurement contracts.
We believe that the more effective and practical approach wherever possible is to eliminate delays in the payment of invoices to assure payment in a timely manner, and thus avoid the very real hardships that arise when payment of an invoice is unduly delayed. In this regard, invoices normally are paid by GSA within an average of 17 workdays, and in the case of invoices involving prompt payment discounts, within the discount period. We strive to maintain and improve this record, although, in processing the many thousands of transactions which must be handled, we encounter peak workloads, and occasionally to our great regret, oversights do occur.
Contractors are urged to communicate immediately with the designated paying office or the contracting officer whenever payments are not processed on schedule. It is regrettable that the contracting officer did not learn of Rite-Made Paper Converter's Invoice dated October 30, 1967, until January 18, 1968, when he received a communication from Rite-Made. The paying office advised the contracting officer that the receiving report had not been received and would be traced. Rite-Made was advised by telephone on January 25 that payment would be expedited, and on January 30 the payment was processed. In accordance with our objective to eliminate all such oversights, each case where delay in payment is discovered is carefully investigated, and corrective action is taken where possible to guard against recur
We fully appreciate the problems of manufacturers alluded to by Mr. Loeb in connection with his suggestion that indefinite-quantity requirements contracts provide some compensation for standby expense when actual orders fall below the anticipated level. In those instances where we are able to determine minimum order
ing minimum quantity purchases, in some instances up to 50 percent of the total estimated quantity.
The needs, however, of the Federal agencies fluctuate so widely, particularly in currently prevailing times of restrictive funding, that guaranteed minimums could not be justified, if the Government is to avoid the possibility of acquiring unneeded supplies. Although it is true that the problems mentioned by Mr. Loeb of needing to keep machine time and raw materials available to meet orders do exist, requirements contracts usually are for standard commercial supplies, and we have found that, in general, suppliers holding such contracts are able to fulfill Government orders from their regular production runs. If we may be of further assistance, please let us know. Sincerely,
J. E. MOODY, Acting Administrator.
GENERAL SERVICES ADMINISTRATION,
Washington, D.C., August 2, 1968. Hon. EDWARD V. LONG, U.S. Senate, Washington, D.C.
DEAR SENATOR LONG: This will supplement our letters to you of May 23 and July 17 concerning a proposal of Rite-Made Paper Converters, Inc., Kansas City, Missouri, that the Government pay interest when payment of an invoice is delayed beyond a specified time.
We have completed our study of this proposal. An analysis was made of unpaid vouchers for the fiscal year 1967 and for nine months of fiscal year 1968, ending March 31, 1968. This analysis included all vouchers processed by the General Services Administration in our Central Office and all ten of our regional offices. The analysis indicated that most vouchers were paid promptly with less than one third of one percent of the total processed being on hand for more than 30 days. It is considered that this is an extremely small percentage since it includes vouchers unpaid for more than 30 days for all reasons including incorrect invoices from contractors, missing information, incomplete documentation, and items in dispute.
Our general procedure is to pattern our procurement operations after good commercial practices to the maximum extent possible. In connection with the above study, we have made a survey of commercial firms, including department stores, airlines, banks, and other establishments, to ascertain commercial practice regarding additional compensation in the event payments are delayed beyond a normal 30 day period. In no instance could we discover any commercial practice of paying interest on past due invoices.
Many firms bidding on Government requirements follow the practice of quoting discounts for prompt payment of invoices. This further insures that the vendor is paid on time and, if not paid on time, the contractor earns the discount which the Government loses. If the time discount provides for payment of invoices in 20 days or more, the discount is deducted from the bid price in the evaluation of bids.
As indicated above, our payment performance record has been extremely good. Further, we have no current difficulty nor complaints from other companies regarding our payment practices. Deviation from standard commercial practice as now followed by the Government by paying interest when payment of an invoice is delayed more than 30 days would require extensive additional audit procedures and involve considerable additional administrative expense to the Government. The nominal amount of interest that commercial concerns could possibly realize on the relatively insignificant number of vouchers involved would not warrant the changes requested, particularly as the vendor by his own action of quoting a discount for prompt payment can adequately protect his interest. Accordingly we do not propose to change our payment practices as requested by Rite-Made.
In our letter of July 17 we stated that we would comment on the four questions raised by Mr. Loeb in the second paragraph of his letter of June 18. The Answer to question No. 1 is that the net amount of the order is obligated when the order is placed; to No. 2, when a variation in quantity is permissible, the amount obligated is sufficient to cover the maximum permissible quantity (that is, the 10 per cent increase); and No. 3, payments of interest by the Internal Revenue Service would have to be referred to that Service for reply. Since the study made indicates that the payment of interest would not be warranted, question No. 4 is academic and