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78 PERIOD WHEN PROTEST LODGED Approximately four out <strong>of</strong> every ten protest decisions (42 percent) issued by GAO in fiscal years 1971-1972 involved protests that had been lodged before <strong>the</strong> award <strong>of</strong> a contract. However, approximately one <strong>of</strong> every five decisions on pre-award protests was not rendered until after award. Fiscal Fiscal Time <strong>of</strong> receipt 1972 1971 Protests received before award 338 282 Protests received after award 420 431 Period <strong>of</strong> receipt not reported 0 2 Total decisions rendered 758 715 Protests received before award but decisions rendered after award 87 36 Source r Statistics furnished bY Office <strong>of</strong> General Counsel, U.S. General Accounting Office. AGENCY SUSPENSION OF AWARD WHILE PROTEST PENDING WITH GAO Seven <strong>of</strong> 16 responding agencies put <strong>the</strong> responsibility for <strong>the</strong> decision to suspend award into <strong>the</strong> hands <strong>of</strong> <strong>the</strong> contracting <strong>of</strong>ficer. Of <strong>the</strong>se seven, four allow <strong>the</strong> contracting <strong>of</strong>ficer to act alone, one requires GAO concurrence, and two have <strong>the</strong> contracting <strong>of</strong>ficer consult an <strong>of</strong>ficial in higher headquarters. Nine more <strong>of</strong> <strong>the</strong> responding agencies indicated that a higher authority decides <strong>the</strong> issue <strong>of</strong> suspension <strong>of</strong> procurement activity, generally (except for one agency) in a headquarters <strong>of</strong>fice. Eleven agencies stated that <strong>the</strong>y conduct exhaustive review <strong>of</strong> protests filed with GAO and act to rectify <strong>the</strong> situation if appropriate. The review may include presentation <strong>of</strong> additional evidence to <strong>the</strong> contracting <strong>of</strong>ficer, conferences and correspondence, and submission <strong>of</strong> technical or legal opinions. Only four agencies stated that no attempt is made to review such protests, and one agency replied that it Part G seldom attempts to resolve protests at this stage. One agency did not answer <strong>the</strong> question. SIZE OF CONTRACT AWARD CANCELED Data was ga<strong>the</strong>red on 21 award protests decided during 1967-1971 in which GAO recommended cancellation <strong>of</strong> a contract. Analysis <strong>of</strong> this data does not support a hypo<strong>the</strong>sis that GAO recommends cancellation <strong>of</strong> <strong>the</strong> contract only where <strong>the</strong> size <strong>of</strong> <strong>the</strong> contract is nominal. GAO recommended cancellation <strong>of</strong> ten contracts where <strong>the</strong> contract price was less than $100,000. In ano<strong>the</strong>r 11 contracts, GAO recommended cancellation where <strong>the</strong> dollar amount exceeded $100,000. Four <strong>of</strong> <strong>the</strong> 11 involved sums greater than $250,000; ano<strong>the</strong>r four had a contract price above $500,000. The largest contract award reversed by GAO exceeded $6,000,000. CAUSES OF AWARD PROTESTS Data was collected from 13 procuring agencies or agency components to determine <strong>the</strong> primary causes <strong>of</strong> award protests. Each agency supplied information on both protests submitted directly to <strong>the</strong> agency and those submitted to GAO. Analysis <strong>of</strong> 1,052 protests revealed that three major issues were raised. The adequacy or legality <strong>of</strong> <strong>the</strong> solicitation was challenged in 29 percent <strong>of</strong> <strong>the</strong> protests. The responsiveness <strong>of</strong> ano<strong>the</strong>r bid or <strong>of</strong>fer was at issue in ano<strong>the</strong>r 30 percent <strong>of</strong> <strong>the</strong> cases. The responsibility <strong>of</strong> ano<strong>the</strong>r bidder was disputed in 13 percent <strong>of</strong> <strong>the</strong> protests. The remaining 28 percent <strong>of</strong> <strong>the</strong> challenges were concerned with various matters, including ambiguous or restrictive specifications, evaluation criteria, mistake in bid, and set-aside procedures. The causes by agency during 1968 1970 are shown below: Challenged adcl/uacy Challenged re8pon. Challenged re81Jonor lcgalitll eseeeeee <strong>of</strong> ano<strong>the</strong>r aibility <strong>of</strong> ano<strong>the</strong>r O<strong>the</strong>r ...lgency <strong>of</strong> solicitation bid or <strong>of</strong>fer bidder or <strong>of</strong>feror challenges Army 184 153 67 123 Navy 38 66 19 74 Air Force AFLC 24 21 19 8 Langley 2 1 0 No rpt. DSA (1970 only) 0 18 11 45
Selected Issues <strong>of</strong> LiabiIity and <strong>the</strong> extent to which <strong>the</strong> Government, or its suppliers, should bear such a risk. THE ROLE OF INSURANCE Most suppliers carry some form <strong>of</strong> general or product liability insurance providing financial protection for claims resulting from loss or damage caused by defective products. However, we have been unable to obtain detailed data on specific types and amounts <strong>of</strong> coverage. Despite <strong>the</strong> lack <strong>of</strong> specific details regarding premium costs and <strong>the</strong> extent <strong>of</strong> product liability coverage, a number <strong>of</strong> basic facts about product liability insurance and insurance practices can be verified. "Product liability" is commonly understood to mean liability <strong>of</strong> a contractor for injury to persons or property caused by its defective products, and includes liability to third parties who are not parties to <strong>the</strong> contract. Such liability to third persons is insurable, and most manufacturers and suppliers carry product liability insurance for third-person liability. However, product liability insurance is not intended to be a guarantee <strong>of</strong> good workmanship; it does not normally cover loss <strong>of</strong> or damage to <strong>the</strong> product itself nor <strong>the</strong> cost <strong>of</strong> repair, replacement, or removal <strong>of</strong> <strong>the</strong> product. Military aircraft, missiles, space systems, and o<strong>the</strong>r complex products, including spare parts and components, which are destroyed or severely damaged, are not generally included in <strong>the</strong> premium rate <strong>of</strong> <strong>the</strong> manufacturer and its component manufacturer's product liability insurance coverage. Nei<strong>the</strong>r commercial nor Government product liability insurance covers <strong>the</strong> "business risk" <strong>of</strong> <strong>the</strong> failure <strong>of</strong> a product to perform its intended purpose due to improper design or specification. An example <strong>of</strong> an uninsurable business risk is <strong>the</strong> costly recall situation, or "sistership" liability, such as liability caused by <strong>the</strong> grounding <strong>of</strong> all aircraft <strong>of</strong> <strong>the</strong> same type. It is not uncommon for <strong>the</strong> product liability insurance carried by industry to cover both its commercial and Government work. This is esipecially true at <strong>the</strong> subcontractor and supplier I.evel. The premium costs for product liability. innirance are determined or structured by loss rxperience, and experience with a particular company is nearly always <strong>the</strong> major or controlling factor in setting premium rates. Costs for premiums are reflected in contract pricing through a number <strong>of</strong> different accounting methods. Often, such premium costs are allocated to an overhead expense pool which is <strong>the</strong>n prorated as part <strong>of</strong> an indirect expense rate against all contracts. Sometimes costs may be charged as a direct expense to a contract. Some companies segregate amounts for military insurance coverage from commercial coverage. Because premium costs are determined by loss experience and <strong>the</strong> exposure to liability for such losses, <strong>the</strong>re is a direct relationship between costs paid by <strong>the</strong> Government in its contract prices (directly or indirectly) and <strong>the</strong> amount <strong>of</strong> damages it recovers as a result <strong>of</strong> loss or <strong>of</strong> damage to Government property. PRICING Finally, <strong>the</strong> present uncertainty and vagueness <strong>of</strong> <strong>the</strong> extent <strong>of</strong> contractor and supplier liability for loss <strong>of</strong> or damage to Government property have made it difficult to price <strong>the</strong> risks involved adequately or accurately. Warranties in Government contracts pose a nearly insoluble pricing problem. While Government policy allows <strong>the</strong> inclusion <strong>of</strong> a factor in <strong>the</strong> price to cover <strong>the</strong> cost <strong>of</strong> including a warranty, <strong>the</strong> contractor's difficulty is one <strong>of</strong> establishing some reasonable basis for predicting warranty costs for a product being produced for <strong>the</strong> first time. The problem is fur<strong>the</strong>r complicated because postacceptance Government remedies are provided for in so many different standard clauses and are stated to be "nonexclusive"; that is, are merely remedies in addition to whatever o<strong>the</strong>r remedies may exist under <strong>the</strong> law. CONCLUSIONS A lack <strong>of</strong> a clear and explicit definition <strong>of</strong> postacceptance rights <strong>of</strong> <strong>the</strong> Government and obligations <strong>of</strong> contractors and suppliers increases <strong>the</strong> probability <strong>of</strong> disputes and litigation. It places indefinite risk on contractors and suppliers because <strong>of</strong> <strong>the</strong> inability to predict or determine <strong>the</strong> extent <strong>of</strong> <strong>the</strong> exposure to liability. Fur<strong>the</strong>r, <strong>the</strong> lack <strong>of</strong> a clear statement 95
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