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trueblue

FOB Destination - Disadvantage due to Geographic Location

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Working on a proposal for a "best value" contract.  I've been told that the government can't score a bidder lower due to delivery costs, but I haven't been able to substantiate that.  For example, for goods which need to be delivered by sea to the west coast, it seems west coast bidders would have lower prices (and therefore, an advantage) than gulf coast or east coast bidders due to geographic location.  Does anybody have any insight into how the government takes this into account, if at all? 

Thanks.

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If a west coast bidder has a competitive advantage over an east coast bidder, because the west coast vendor is closer to the place of final delivery, what is the problem?  There is nothing wrong with competitive advantages -- contracting officers only have to deal with unfair competitive advantages.  Geographic location is not an unfair competitive advantage.  If the west coast bidder has a lower price (or lower total cost to the Government) than the east coast bidder, and all else is equal, then award to the west coast bidder.  Hurrah for the west coast bidder!

Don is right about FOB Destination contracts (since end-item transportation costs will already be part of the bidder's proposed price).  Let me add something about FOB Origin contracts.  If you're planning a FOB Origin contract, then you should evaluate the total cost to the Government, which will include an estimate for transportation costs.  It's simple:

. Bidder A (east coast):
. Bid Price = $1,000,000 (proposed contract price)    
. Transportation Estimate = $400,000 (Government's estimate)
. Evaluated Price = $1,400,000 (total cost to the Government)
.
. Bidder B (west coast):

. Bid Price = $1,200,000 (proposed contract price)
. Transportation = $100,000 (Government's estimate)
. Evaluated Price = $1,300,000 (total cost to the Government)

Bidder A has a lower price, but Bidder B has a lower total cost to the Government.  Bidder B wins in a FOB Origin scenario.  This is completely fair.  Don't cry for Bidder A.  Hurrah for the west coast bidder!

See FAR 47.301(a), FAR 47.301-2, and FAR 47.306.

See also the provision at FAR 52.247-47, Evaluation--F.O.B. Origin.

 

.

Edited by ji20874
to add blurb about 52.247-47

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15 hours ago, trueblue said:

I've been told that the government can't score a bidder lower due to delivery costs, but I haven't been able to substantiate that. 

Are you "scoring" costs?

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15 hours ago, Don Mansfield said:

Generally, the Government wouldn't take into account differing transportation costs when the delivery terms are FOB destination. See Volume I, Subchapter 5.4, of the Contract Pricing Reference Guides regarding transportation costs.

Don, I'm not sure what you intended to convey by "wouldn't take into account differing transportation costs when the delivery terms are FOB destination".  As would make common sense to me, the reference you cited does say to consider the overall cost, including transportation costs when determining the most advantageous offer to the government.

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15 hours ago, Don Mansfield said:

Generally, the Government wouldn't take into account differing transportation costs when the delivery terms are FOB destination.

This is the Beginners Only category, and that might be mislead some beginners.

The government always takes transportation costs into account in some manner. In f.o.b. destination acquisitions, transportation cost is typically included in evaluated prices. In f.o.b. origin acquisitions it's often a "price-related" or "cost to the Government" factor that can be considered even though it's not part of the bid or proposal price.

See FAR 14.201-8 ("price-related factors") for sealed bidding and 15.304(c)(1) ("cost to the Government") for competitive negotiation.

The concept of "price-related factors" and "cost to the Government" and the rules about their consideration are discussed in Formation of Government Contracts, 4th ed. For sealed bidding, "price-related factors" are discussed in pp. 591-597. See pp. 593-595 for specific discussion of transportation costs. For competitive negotiation, "cost to the Government" are discussed in pp. 692-695 under the heading "Other Costs to the Government."

I disagree that consideration of transportation cost is "simple." Sometimes it is, but even a casual review of GAO protest decisions about evaluation of transportation cost will show that it can be very complicated.

 

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I think the concept of considering transportation cost (that transportation cost will be added to the offer price to determine the Government's overall cost) is quite a simple concept.  But I understand that in some cases, implementing the concept in a real acquisition can become complicated.

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5 hours ago, joel hoffman said:

Don, I'm not sure what you intended to convey by "wouldn't take into account differing transportation costs when the delivery terms are FOB destination".  As would make common sense to me, the reference you cited does say to consider the overall cost, including transportation costs when determining the most advantageous offer to the government.

joel,

Here is the relevant excerpt from the Pricing Guides:

 

Quote

Step 1. Determine Solicitation Provisions.

The solicitation must specify the acceptable f.o.b. terms and the basis for offer evaluation.

  • If the solicitation requires that all offerors be made f.o.b. destination, transportation must be included in the offered. No further consideration of transportation costs is required.
  • When offers are quoted f.o.b. origin, consider the following factors along with purchase price when evaluating prices:
    • The cost of transportation from the offeror's designated point of origin to the destination defined in the solicitation. The Government normally uses land transportation rates in proposal evaluation.
    • When provided for in the solicitation, proposed cost-reimbursable differentials based on possible routing conditions. These contingencies may be included by offerors to compensate for an unfavorable routing condition. Evaluation is based on the routing conditions anticipated at the time of award.
  • When offers may be quoted either f.o.b. origin or f.o.b. destination, your evaluation of:
    • F.o.b. destination offers will not require adjustment to consider the cost of transportation.
    • F.o.b. origin offers must consider the factors described above.

 

Italics added for emphasis.

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Thanks, Don.

Just to be clear then, for the benefit of a beginner, everyone here seems to agree that one should ensure that cost of transportation is considered.  There shouldn't be a special leveling technique used to help a seller that has to charge higher shipping costs be as competitive as a local seller. From Don's link, above:

Quote

5.4 Transportation Costs

When to Consider as a Price-Related Factor (FAR 47.301FAR 47.301-1, and FAR 47.301-2). When transportation costs are not included in item purchase price, you must consider them as part of any supply contract award decision. Your objective is to ensure that acquisitions are made on the basis most advantageous to the Government, and that supplies arrive in good order, in good condition, on time, at the required place.

Work with your agency transportation officer during solicitation and evaluation of offers to ensure that all necessary transportation factors are considered, including transportation costs.

And see FAR 47.301:

 

Quote

 

47.301 -- General.

(a) Transportation and traffic management factors are important in awarding and administering contracts to ensure that

(1) acquisitions are made on the basis most advantageous to the Government and

(2) supplies arrive in good order and condition and on time at the required place. (See 47.104 for possible reduced transportation rates for Government shipments.)

(b) The requiring activity shall --

(1) Consider all transportation factors including present and future requirements, positioning of supplies, and subsequent distribution to the extent known or ascertainable; and

(2) Provide the contracting office with information and instructions reflecting transportation factors applicable to the particular acquisition.

 

Bottom line is that "most advantageous to the Government" trumps* leveling the playing field for transportation costs. 

*No pun intended. I'm pretty certain that the businessman and current President, Mr. Trump, would agree. 

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