March23, 2006
Patrick Rowe
Deputy Executive Director
Committee for Purchase from People who are
Blind or Severely Disabled
Jefferson Plaza 2, Suite 10800
1421 Jefferson Davis Hwy
Arlington, VA 22202-3259
Dear Mr. Rowe:
In this correspondence and the accompanying documents, you will find our reply to your questions of March 20, 2006. I will reply to each of your three questions individually, and provide you with accompanying documents that detail the information.
1. What is the process that ARC employs to determine whether a response will be submitted for an invitation to bid. Name the individuals and their respective positions involved in the decision and the formulation of the bid response.
From the beginning of this program, ARC has responded to each invitation issued by KCCO against the requirement to produce 15, now 20 percent of the invitation. The procedures for managing this process are listed in document package labeled ‘Contract Review-USDA Export Oil.’ Materials are priced for each invitation through solicted bids for supplies to qualifying vendors. USDA is provided with summary documentation for each solicitation, and copies are kept on file here. The names of the persons who manage this process are:
Tim Durm, Assistant Executive Director/COO
Lori Turner, Business Ops Manager
Melissa Wilson, Customer Service Manager
Karen Norris, Customer Service Supervisor
2. Describe ARC’s capability to fulfill 4-liter cans, 20 liter pails and 55 liter drums.
Arc is fully capable of filling all three package sizes. Our facilities and equipment were featured in Packaging World Magazine in August 2005. Film clips and video of our operations are featured at the following web address: http://www.packworld.com/. Copy is provided to you for your information in this reply. One should note however, that as package sizes increase, efficiencies of scale decrease. We have been limited to pricing 4 liter and 20 liter pails for USDA’s programs, and the costing and pricing packages reflect this.
Patrick Rowe, Committee for Purchase, page 2
3. Provide a summary ledger of ARC’s “Other Burden” broken out in the following categories: (1) Overhead, (2) General & Administrative costs, and (3) Net Profit for years 2003, 2004, and 2005.
I have enclosed a summary ledge for the years 1991-current as of Feb end, 2006. The years 2002-2005 are highlighted in yellow. These numbers are derived from independent audits of our organization performed in accordance with Generally Accepted Accounting Principles. I have also provided corresponding information about the JWOD program in relation to these numbers. These figures clearly reflect the continued reinvestment of net return into those facility and equipment assets necessary to gain the efficiencies necessary to meet our customer’s expectations.
Please let me know how or whether I can assist you further. A copy of this package of information will also be forwarded to Hal Goulding and Jill Beery at Nish. I am going to do my best to provide electronic copies also. Thank you for your inquiry.
Terri Lewis McRae
CEO
Cc; Kenneth Williams, Esq
Hal Goulding & Jill Beery, Nish
Saturday, August 9, 2008
Impasse Vol 1 and 2
IMPASSE BUSINESS CASE SUBMISSION BY
The Advocacy & Resources Corporation
Cookeville, Tennessee
I. Project Name
Project Name: Oil, Vegetable for use by export programs
Project Location: Cookeville, Tennessee
Project Number: 042095, 042186
JPID Number: 99612,00641
II. Statement of the Issue and Desired Outcomes
The Advocacy & Resources Corporation is a non-profit entity recognized under JWOD, doing business as ARC-Diversified (ARC-D). Located in Cookeville, Tennessee, ARC-D currently employs a 220 person work force engaged in governmental and private projects, of whom on average, 85% are classified as severely disabled. ARC has received awards through JWOD with the Department of Agriculture (USDA) since 1993 and the Department of Defense since 1994.
In 1999 the Department of Agriculture’s Farm Service Agency (USDA/FSA) requested that the Committee for Purchase (The Committee) add 15% of the total government requirement for vegetable oil for export programs (VegOil) to the procurement list for production by ARC-D. This was added at an announced targeted price, a JWOD set-aside later expanded to 20% in 2000. The Base Price and subsequent awards since that date have been constructed on actual costs and reimbursements defined in PR2 (8/27/98), Pricing of Products.
In reliance on this award and to fulfill its contractual obligations, ARC significantly expanded its plant and equipment and added approximately 50 employees, most of whom were severely disadvantaged.
In the early years of this arrangement the Committee, consistent with its enabling legislation and interpretive regulations, pricing memorandums and the purposes underlying JWOD, established and periodically revised the base Fair Market Price for the VegOil (years 2000, 2002).
For a time this system worked as designed, all in the best interests of the government, the JWOD vendor and the contracting party. In fact, after expanding its manufacturing capacity and improving its efficiencies and economies of scale ARC was able to request a reduction in the VegOil Fair Market Price in 2002.
Sole authority to establish and revise Fair Market Prices for VegOil is vested in the Committee, and the Committee’s pricing procedures take precedence over other governmental pricing provisions. (See 48 CFR 51 et seq., Committee Pricing Memorandum PR2, OMB Circular A-122, Committee Operational Memorandum No. 19 dated April 16, 2001, the JWOD Act, and its interpretive regulations). Although the Committee has allowed the USDA to ‘concur’ in the construction of the elements of periodic revisions of Base Price, by its’ actions since 2004, USDA has undertaken this authority to ‘concur’ as permission to determine and revise the constructed elements of the VegOil Fair Market Price. The USDA undertook the concurrence task with a vigor, delaying concurrence to extract concessions from ARC-D and Nish in order to conclude negotiations that run counter to established procedures for previous price changes in accordance with PR2.
Moreover, there is no record available to the parties to this negotiation that provides assurances that understandings and procedural guidance in accordance with PR2 processes have been transmitted to USDA’s agents for this negotiation since KCCO began to work toward implementing the FAR. Since 2004, in revising the Fair Market Price for VegOil, the USDA/KCCO has improperly relied on procurement practices they have developed to implement the requirements of Public Law 480. Under PL-480 the USDA is required to seek the ‘lowest landed cost’. PL-480 procedures, however, are applicable to private and for-profit entities but not to non-profit JWOD awardees, who are entities operating on actual cost basis and under pricing schemes dictated by federal statutes and regulations.
The net effect of the assumption of pricing authority by the USDA, compounded by the USDA’s application of the wrong pricing formulas, has been to compare and evaluate ARC’s JWOD actual cost-based price against the lowest awarded prices in the commercial market, the lowest market priced components without consideration of shipping and related costs, and artificial market cost comparisons involving non-like product and packaging mix. This evaluation, as it has been applied to this unique product group, is neither indexed against a median offered price nor against indexes in the marketplace. The net result is an unworkable formula, creating unrealistic comparisons, which ignore the mandates of the JWOD Act as well as other federal laws, rules and regulations.
There is an inherent and continuing conflict between the market-based manner in which USDA defines ‘fair and reasonable cost’, and the differing actual cost basis pricing procedures to achieve Fair Market Price mandated for the Committee under applicable law including Pricing Memorandum PR2 and OMB Circular A-122. There is no basis for ‘fair and reasonable evaluations’ in the Agricultural Acquisition Regulations (AGARS) which implement the Federal Acquisition Regulations (FAR). This conflict has continued through two Base Price revision actions in 2004 and 2005, and has unduly delayed the revisions to the VegOil price which ARC can charge.
Although the USDA is obligated to seek the lowest landed cost under PL-480, the non-profit and JWOD pricing provisions binding on the Committee (and so by inference in the delegation, upon the USDA) take precedence over PL-480. Committee pricing considerations for JWOD products are defined in its interpretive regulations in 48 C.F.R. 51, PR-2, Pricing for Products, and under OMB Circular A-122, Cost Principles for Non-Profit Organizations. These rules and regulations by their terms (1) statutorily regulate the accounting of costs of governmental work (products and/or services) performed by non-profits and educational institutions, and (2) set forth the parameters for auditing of non-profit contracts. OMB Circular A-122 weighs the following factors in evaluating the reasonableness of costs, using a prudent purchaser standard with consideration given to:
1. Is the cost of a type generally recognized as ordinary and necessary to the direct conduct of the work? The accounting for of all direct cost, labor and indirect costs (overhead and burden) are required for both nonprofit and educational firms. The costs associated with ARC’s inland location and JWOD program fees are consistent with the product produced, its location, mission, and program requirements. These actual costs have been established for this location and verified through periodic audits by the government’s Defense Contract Audit Agency (DCAA), which should put the question of the adequacy of cost procedures for ARC at an end. These costs are also consistent with costs for other (non-VegOil) bodies of government work performed in this location.
2. Are restraints or requirements imposed by federal law or regulation, or the terms and conditions of the award ? VegOil for export programs is unique, not commercially available, and requires materials of a non-commercial, sole source nature. Examples include the oil itself, a vitamin A fortified VegOil with associated laboratory costs for all oil produced; a non-standard and unique spouted metal can, measuring 610 x 805 with specified and unique construction, closure and markings per contract; and non-standard waterproof heavyweight boxes, requiring markings unique to various contracts. The product is intended for transport to third world countries rather than commercially within the U.S., and the container and box packaging is designed to withstand rough treatment and exposure to the elements.
3. Did the non-profit organization (ARC) act with prudence under the circumstances? ARC has demonstrated its stewardship in the performance of its VegOil award by periodic introduction of improvements to the product not required under the base award (e.g. new and better can lids, vitamin A fortification, and lab testing for quality control), and efficiencies in production designed to reduce the actual manufacturing costs and so reducing the costs to the government of the product.
There are limited markets for the packaging materials necessary to support this program, as most commercial product is not shipped to third world and developing countries, with the transportation, exposure to the elements, and related problems that entails.
There are no significant deviations from ARC’s established practices that would unjustifiably increase the award costs. Indeed, because of the delay in pass-through of actual costs in the VegOil award ARC’s reimbursement ratios have reduced significantly while its actual costs have risen. Since Base Price period 2003/2004, the increase in package and material costs without a corresponding increase in the Fair Market Price which Arc is allowed to charge, has devoured the dollars necessary to support fixed overhead & burden. The result is that creditors are past due, employees have been laid off, and the company’s viability is at risk.
ISSUES FOR IMMEDIATE CONSIDERATION BY THE COMMITTEE
In base years 2004 and 2005, the USDA has undertaken to define terms of annual revisions to the base VegOil Fair Market Price without regard for the use of actual cost principles and pricing methods designated by the government for non-profits generally (OMP Circular A-122) and under the JWOD program in particular (Committee Pricing Procedures Memorandum PR2). Instead the USDA is imposing upon ARC an agency standard for "fair and reasonable" for which there is no measurable reference or basis that can be determined in regulation. ARC would ask:
1. That the Committee set and establish the revised Fair Market Price for vegetable oil for export programs, based on actual costs in accordance with applicable laws (JWOD Act, implementing regulations, Committee Pricing Procedures Memorandum PR2, and Cost Principles for Non-profit Organizations, OMB Circular A-122). As part of this finding, ARC would ask the Committee to reject the USDA’s attempts to hold ARC to a market-based ‘fair and reasonable’ average price for which there is no referenced definition in USDA procurement policies NOR set forth in the Agriculture Acquisition Regulations Circular AAC96-04 dated April 20, 2005, or in any other pricing formula applicable to this award of which ARC is aware. The actual price schedule which ARC believes is appropriate, as documented hereinafter is:
PR2, 8/98 and OMB Circular A-122, Revised May 2004
2. That the Committee make the revised Fair Market Price for export vegetable oils retroactive to July 1, 2005, based on the authority vested in the Committee under the pricing guideline and 48 c.f.r. §51-5.5(c) and the concession that retroactive action is appropriate by the USDA itself (see attached e-mails from USDA officials), and to be paid within 15 days of the decision by the Committee. The calculation of these charges through are:
From July 1, 2005 through current date (Inv 026) are $ 873,422.85 dollars (see Table 6., Actual versus Submitted Cost)
3. That the Committee enjoin USDA from unilaterally reinterpreting the provisions of the JWOD set-aside (as illustrated by an October 18, 2005 letter from the USDA to ARC-D contained in the attachments to this Business Case). On October 18, 2005, the USDA notified ARC-D of their unilateral decision to redefine and restructure the 20% VegOil award by designating procurement amounts between and among the various sized VegOil containers without regard to notice to the Committee or the impact of this decision of agreed base price. The argument on allocation requirements has been specifically rejected by the Committee in previous comments in the Federal Register (attached hereto), and ARC would ask that the Committee, as the final arbiter of price, reject such current and future efforts by the USDA, and that in the future the USDA be required to file notice and provide opportunity to ARC-D to revise the Base Price in accordance with changes in procurement strategies.4. That USDA be required to process base price changes timely and in accordance with the not for profit agency’s fiscal year for the construction of associated costs in accordance with OMB Circular A-122, Pricing for Non-profit Organizations and/or that the Committee establish these price revisions and delegate to the USDA only its option to timely concur or document objections. Because of the untimely delays by the USDA, future pricing of products under JWOD generally and the VegOil in particular are at risk, and immediate Committee intervention is necessary.
5. That the Committee reaffirm in writing that it is the sole and final arbiter of revisions to Fair Market Pricing, and further, that it be proactive and instruct ARC to enter into Fair Market Price revision discussions directly with Committee staff for the VegOil changes to be effective July 1, 2006.
6. The Agricultural Acquisition Regulations (AGARS, April 2005) provides no specific pricing directions or evaluation standards to USDA for the purchase of JWOD associated products or definitions of ‘Fair and Reasonable Cost.’ USDA’s Procurement Policy homepage directs the reader to the policy documents published by the Committee for Purchase. This Business Case constitutes a formal report by ARC of what it perceives to be violations of the requirements for changing prices under the JWOD Act. In accordance with 48 C.F.R §51-5.8 would ask that the Committee formally investigate the actions, conduct and understandings of the USDA with respect to ARC-D’s 2005 base price change for vegoil, and take appropriate actions necessary to bring the price change process into compliance and the parties so that price changes will be made in accordance with the requirements of the JWOD Act for the 2005 base price change and future annual price changes.
III.
The Positions and Opinions of ARC-Diversified
In attempting to revise the VegOil Fair Market Price the USDA has rejected ARC's legitimate, documented, and independently audited actual cost figures, produced in the same format and manner historically called for by the Committee in determining Fair Market Price and consistent with applicable law for non-profit entities and JWOD awards. Instead, by their correspondence to the parties, the USDA has stated that it is using undefined average market costs derived from low price awards to the commercial sector to define the ‘fair and reasonable’ Fair Market Price, without reference or consideration of actual price and in disregard of applicable law.
Price revision information for VegOil is provided annually in the Spring to the National Industries for the Severely Handicapped (“Nish”) who is the relationship broker between the JWOD affiliate, the Committee, and to the USDA as the contracting agency, with the understanding and intention under applicable law that revisions to Fair Market Price will be in place by July 1 of each year. In the 2004 year the USDA missed the July 1 target date by some 4 months before it finally concurred to a revised Fair Market Price. In 2005, despite being provided actual cost information from ARC well in advance of July 1, the USDA has expanded this delay to 8 months and counting. Because of the extended delay in implementing a proper price revision ARC has been taxed with major increases in the actual costs of packaging and shipping, but without the actual cost reimbursement as mandated by law. This increase in primary expenses without a corresponding increase in revenue or reimbursement, has threatened the financial viability of ARC, leaving it with no choice but to declare an impasse.
The USDA’s actions in undertaking to dictate and revise terms VegOil Fair Market Price, in applying an improper standard for the Fair Market Price calculations, and its undue delay in implementing the mandated price revisions so that ARC could receive timely actual cost reimbursement, have been beyond the scope of the authorities afforded by regulation.
As a non-profit entity ARC has little margin for error in calculating its actual costs, and even less margin for absorbing these cost increases. The results of the USDA's unjustified delay in revising the Fair Market Price established for vegetable oil for export programs have been devastating to ARC. The company has had to absorb major price increases in packaging and shipping costs, in excess of $ 900,000.00 since July 1, 2005. ARC has been forced to delay payments to creditors placing its creditors at risk, has reduced its employee hours worked, and on February 10, 2006 was required to lay off some 25% of its work force.
IV.CHRONOLOGY OF STEPS TAKEN TO AVOID IMPASSE
This is a multi-year conflict between the parties. The base price change period should be annualized on July 1st, as this is the period for establishment of indirect costs per OMB Circular A-122. The USDA has provided evidence in conversations and correspondence that they understand the significance of the July 1 threshold and these understandings are documented in Volume 2, Section C. Negotiation Dialogue.
In early 2004 the USDA delayed the base price change for some 4 months which directly resulted from the USDA applying theory based not on the standards and pricing practices of the Committee’s enabling laws, but instead on the USDA’s subjective and arbitrary assumptions. Further, the USDA improperly forced ARC to lock in its base packaging costs for the 2004 year commencing July 1st, based on previous 2003 year averages rather than actual costs as a condition of concurrance.
In an effort to avoid conflict and to conclude negotiations, ARC made no request for retroactive reimbursement at that time despite its well-documented losses. However, it became clear through the year that the USDA’s of price setting would not be sustainable in light of naturally occurring marketplace events such as, large sales of steel to China In 2003-2004, which significantly and negatively impacted steel costs in the USA.
During this base price period (Invitations 94-65A), ARC sustained a loss on the actual costs of its packaging materials (cans, lids, boxes) of $1,315,619.56. Had the USDA not imposed upon ARC-D this ‘locking in previous year ‘averages’ of packaging costs as a parameter to set base price revisions on the VegOil award for the following year, in contradiction of applicable law and pricing standards, then this loss would not have been incurred. Because ARC was not reimbursed for these actual costs, the funds necessary to pay its vendors for the increased actual costs had to be taken from the category of overhead and burden, the only available source.
ARC offered pricing information to KCCO in June, 2005 for re-establishment of the July 1, 2005-June 30, 2006 Base Price. ARC’s data with regard to actual costs was offered consistently with previous price change actions in accordance with PR2 and well in advance of the July 1st deadline, and was again rejected by KCCO. Attempts by ARC-D and Nish to get the discussion on track for the July 1 price change period stalled.
This time, the USDA stated that ARC’s revised ‘fair and reasonable’ Fair Market Price should be “within 10% of that of the average of awarded commercial vendors,” further fixing and delimiting the base price change using arbitrary standards. This standard was presumably justified under PL- 480, or perhaps based on Hubzone premiums. However, it was totally without regulatory basis under the criteria applicable the VegOil Fair Market Base Price revisions for the ARC-D award under PR2 and OMB Circular A-122. Given its significant losses as a result of the prior base price imposed by the USDA for the 2004 base price change, ARC-D refused to accept such terms, communicating instead the desire to operate within terms of PR2.
The July 1, 2005 scheduled base price change the USDA has now delayed some 8 months. Despite repeated entreaties, the USDA has not provided any substantial objective evidence to back up concerns with pricing, actual cost comparisons, or related matters. It has provided no justification for deviating from the mandates of the law applicable to price calculations for non-profit and JWOD award entities.
The USDA has consistently attempted to hold ARC to a ‘free market-based approach’ (sic) standard. This standard as they have applied it, is impractical, unworkable, and unlawful in the context of JWOD pricing awards. It also fails to account for recent evidence of natural disasters, the impact of these disasters on commercial events in the marketplace, and the ultimate effect on the prices for shipping, cardboard and metals.
The USDA’s basis for denying ARC’s request for 2005 revisions to the Fair Market Price for VegOil to reflect these cost increases was that, “ARC’s increase was not based on an average material cost increase, but rather on the actual costs of materials.” In other words, rejection of the requested revision was based on the fact that ARC used the actual cost criteria mandated under JWOD rather than the market formula arbitrarily selected by the USDA. The logic of that analysis ignores the law and the obvious – the effects of material cost increases due to China’s increased demands starting in 2003, and the impact of natural disasters during the hurricanes of 2005. Hurricanes Katrina and Rita. ARC continues to work with 2004 figures established in 2003 for its packaging costs.
The exhaustive period of discussion without relief from the 2004 base price figure has had one net result: to cause ARC-D to drain all reserves, extend all creditors beyond their ordinary terms of payment, defer replacement of machinery and equipment, reduce work hours and wages for all employees, and lay off twenty five percent (25%) of its workforce. If left unresolved, further work force reductions will be scheduled for March 15, 2006.
As of this date, from the period July 1, 2005 through current (invitations 75-26), ARC losses total through Invitation 26 are projected at $873,422.85. Since 2004, ARC has lost 26% of its overhead and burden dollars necessary to support the cost of operations, because such funds have had to be diverted to support the increased costs of packaging materials, unique to this product, which the USDA will not recognize in its price revisions. Such an option is not sustainable, whether one is a commercial firm or a non-profit entity.
ARC is noo at risk of permanent layoffs or worse, to the detriment and harm of its severely disadvantaged work force and the JWOD program as a whole at this location.
VI.SPECIFICS OF PRICE & PRICE-RELATED ISSUES
At issue here are calculating and passing on the elements of costs relating to packaging materials in accordance with statutorily defined terms of negotiation, as in the Base Price Change Agreement (PR2). The VegOil material components primarily consist of the oil itself as fortified, the oil can and lid, and the heavy duty cardboard packaging. These component materials are unique, effectively sole source with respect to the cans and lids, and are not generally available in the commercial marketplace. The can is of a unique size and weight, and so most commercial manufactuers are not available for bids.
The only commercial manufacturer that produces the cans to the USDA specifications and sells in the general marketplace is located in Illinois, requiring add-on shipping costs. One commercial firm involved in the VegOil contracts, CalWestern, manufactures its own cans and produces a can of alternate size. However, it does not sell this in the marketplace. The balance of can manufacturers in the U.S. have been unable to effectively manufacture these unique size containers given the low volume requirements, and when contacted by ARC these manufacturers have declined to invest in development and production of these limited market items. Both the needed oil cans and the weatherproof heavy (W5C) grade boxes are non-commercial, and the set USDA standard is designed to tolerate significant abuse in transport. These component materials are also subject to high numbers of defects, which must be accounted for in production processes. The materials necessary to produce the metal container are of a unique basis weight. Certain chemicals and metals necessary to support the construction of these cans, resins and zinc, were negatively impacted by 2005 hurricanes. As a result these materials are being imported at higher costs until domestic chemical processing plants recover.
A secondary but very important issue involves the position of the USDA that effective immediately and henceforth, fifty percent (50%) of the procurement for each invitation to bid will be priced equally between the 4-liter and 20-liter packs. ARC was notified of this decision to unilaterally restructure the 20% JWOD set aside portion of the VegOil award by letter from USDA’s Kansas City office dated 10/18/2005. This position is contrary to that taken by the Committee as set forth in the Federal Register Announcement of October 13, 2000 . The Committee at that time allowed flexibility to assure that JWOD purchase awards were made in such a way that pack sizes would be purchased so that the government would achieve the best cost across the total 20% set aside whether it be 4 liter or 20 liter packs, and in accordance with the requirements of individual invitations. In other words, the Committee has previously stated that the most cost-effective units will be purchased from the 20% set aside rather than an artificial requirement that 50% of purchases be made of the 4 liter units and 50% of purchases be made from the 20 liter tins. This unilateral decision to modify the the terms of allocation departs from positions previously published by the Committee.
The impact of this decision, if allowed to stand, will have three immediate direct effects:
(1) the overall price of the JWOD VegOil program will increase to the USDA. Because the procurement economy of scale by ARC will be reduced (4 Liters), more of the expensive units will be arbitrarily assigned (20 Liters), which will result in destruction of the overall economy of the JWOD price. See enclosed table.
(2) In determining the Fair Market Price for VegOil it will be necessary to readdress and reallocate overhead and burden costs as redefined by metric tonnage divided by units of production, thus re-opening all of the component price elements and creating uncertainty as to the increased costs of this set aside.
(3) We do not believe that it is reasonable or fair to introduce this new procurement standard for inclusion into the base period July 1, 2005-June 30, 2006. Nor, do we believe that it is fair to reconstruct this set-aside without notifying the Committee of its’ desire to do so, while discussions are ongoing around the currently offered price for 2005/2006.
Finally, this decision further negatively impacts those existing VegOil commercial firms that can only bid and fill the 20 liter pail at the Jacintoport facility. Such a decision will force the USDA into the position of awarding the highest cost product to the JWOD firm, who must additionally ship to Jacintoport (TX) from Tennessee, a distance of 945 miles. With diesel fuel costs at $2.34 per gallon (+/-) another layer of cost is added to the JWOD price, while there is a packager at the same port who can only fill that container size without added freight cost. Cost differentials are illustrated in the supporting pricing information.
Terms of the Cost-Base Price Negotiation: KCCO, ARC and Nish appear not to operating with the same ‘rules of engagement’ or understandings as in the regulatory price periods defined in 48 CFR, PR2 and OMB Circular A-122, particularly as they result to the price period established by the not for profit organization’s fiscal year. Further, the parties have not been able to agree on the importance of defining price periods for establishing direct cost, cost based materials pricing, or the procedures for cost-based price changes. Nor does KCCO appear to understand the excessive and unanticipated costs imposed on the not for profit and it’s vendors by failing to complete this process in a timely manner. Costs are illustrated in supporting information.
Regulatory Authorities for Price Determination. It is the responsibility of the Committee to determine Fair Market Price and revisions thereto based on 48 CFR, PPR2 and OMB Circular A-122. A clear method for these determinations is in place. Since 2004 the USDA/ KCCO has assumed primary responsibility for setting price revisions, and by failing to concur in timely negotiation parameters for the purpose of establishing annual base Fair Market Price revisions.
By empowering the USDA to ‘concur’ with a ongoing price change using a standard without measure or regulatory authority, the Committee, unknowingly allowed the USDA to usurp its’ ‘sole authority’ to set Fair Market Prices for JWOD awardees. This has opened the door to KCCO to believe that it has the authority to determine prices in a manner which is vested within USDA’s current lowest-landed cost award practices, rather than in the manner proscribed by regulations governing pricing for non-profit and JWOD award entities. These processes are arbitrary in the marketplace and not comparable to statutorily defined processes that implement JWOD prices for products.
Removing Conflict. KCCO, has indicated that it fairly believes that itself to be acting on behalf of the best interest of the government. ARC-D has been audited by the the Defense Contract Audit Agency for its’ compliance to government pricing procedures for determination of costs by nonprofit entities, and believes that it is correct to engage in price change discussions within the terms of PR2, OMB Circular A-122, and previous price change protocols. Nish has new personnel in place who are unfamiliar with the history of this product or previous price actions. This has produced a failure of the understandings and has introduced an adversarial relationship into the ongoing discussion which now replaces the historical partnership that has operated on behalf of the organizations prior to 2004.
KCCO evaluations are applied to prices submitted by commercial firms, who each month, can determine and pass through their operational costs to USDA. If these commercial companies determine that it is to their benefit, they can and do move their operations to locations designed to give them maximum advantage in the marketplace.
The USDA/KCCO by its very procurement award practices, encourages relocation in the commercial marketplace as a factor of competition. Their system competes locations, awards the lowest submitted cost for a location, marries it with freight costs submitted independently, and makes awards based on the total configuration.
USDA/KCCO has determined that within this system, for the JWOD base price change to be ‘fair and reasonable’ it should be within approximately 10% of the average of the lowest awarded commercial firm’s costs. For the most part, JWOD firms will always be located ‘inland’ as is ARC-D, and are unable to relocate geographically to reduce freight and shipping and underlying commodity delivery costs, or to otherwise receive any benefits from the USDA/KCCO’s application of a market-based pricing scheme. .
KCCO’s award and evaluation strategy belies the fact that many other prices, which are higher, will have been offered by commercial firms, and that the current evaluation strategy does not reflect a median of offered prices. KCCO has placed ‘free-market’ constraints in direct conflict with fixed price processes, and contends that they have conducted their own research regarding materials pricing for the VegOil program. To back up their claims about the ‘soundness’ of their research, KCCO reports that ‘they’ve talked to our competitors in the marketplace’ who are reliable. To date, KCCO is unwilling to define how it measures that reliability or compares competitor reports to established, indexed values in the marketplace. The USDA has declined to produce this information other than by vague and non-specific reference to outside costs. Nor does it indicate that it has measured the performance of commercial firms prices against published marketplace measurements.
The USDA/KCCO appears to be unfamiliar with the details of specifications of its own product and packaging for the VegOil awards, including can weights and board grades for fiberboard product used for packaging materials used by other firms. This unfamiliarity brings into question the reliability of any pricing information that the USDA/KCCO may have obtained from other sources.
Competition & Risk of Harm to the Market. There is great value to the government in preserving competition in its’ procurement program, and in using information gained from this process to assess the effects of price. It must however, be an ‘apples to apples comparison. At this point, that is not possible given the geographic effect on actual price in the commercial marketplace, as opposed to the inland location of the JWOD awardee. Location impacts shipping and transportation costs for the oil and package components as well as the end product.
There is also great value to the government by using the JWOD program to provide a ‘brake’ on pricing practices in the competitive marketplace. Historically there were problems with export VegOil pricing due to mergers, consolidation, and predatory pricing practgices in the industry. For that reason, the government sought an alternative oil producer through the JWOD program. The result of the JWOD award was reduce the impact on price quality and delivery issues which resulted from having a single sole source in the marketplace, with the indirect advantage of opening the market to small commercial enterprises.
Data compiled from 2003 to the present (included for review) illustrates that once again efforts are being made to consolidate the VegOil market, to the ultimate detriment of of the government and the marketplace. The largest supplier has consolidated its operations to a hub zone and port in Texas (Jacintoport), and is manufacturing some of its own oil containers on site rather than them acquiring in the marketplace. The result of these actions are to increase the supplier’s market share, reduce its transportation costs both for obtaining components to the product and in shipment of the completed product.
The statistical data included (see Vol 1., Price) illustrates a comparison between market indexed expectations for packaging material and the offered JWOD price. We have also included comparisons of the JWOD price to award commercial prices compared to this same indexed market information for the invitations and date periods involved. We have used the information published by KCCO to demonstrate that the largest commercial supplier is currently pricing its export VegOil at or below market-indexed expectations for material and component costs, and that awarded margins have dropped from 53% of difference to 9% over indexed materials costs for packaging.
This has triggered what the commercial firms have characterized as a ‘price war’ (H. Hammerschmidt, United Oil, February 2006) among the commercial producers, with tremendous negative impact on the small existing commercial companies with narrower margins and smaller economies of scale. Since 2003 one small business firm has declared bankruptcy, and three more are offering prices that are less than expected for materials in the marketplace. Two of these commercial enterprises have privately reported that they are likely to be out of this business in the near future, because current costs are exceeding revenues. The resulting impact of recent CalWestern actions on the non-JWOD commercial vendors, and on the commercial marketplace, is apparent.
From the perspective of ARC-D, fostering a continued downward pricing spiral in the face of elevated market costs has potential to limit competition in the long term not only for the commercial market but also with respect to JWOD awards. To compare JWOD prices to the processes and lowest costs currently at work in the competitive marketplace, without adjusting for actual component costs in the base Fair Market Price for JWOD awardees, threatens the viability of ARC-D as well as its underlying suppliers of components.
As a result of the USDA/KCCO actions holding ARC-D to an improper evaluation standard, contrary to applicable laws, rules and regulations, effectively every competitor of the largest commercial awardee in the marketplace is at an economic disadvantage and is being threatened with insolvency. In the absence of Committee action, the end result could well be that a single firm once again becomes the sole surviving producer of expert VegOil purchased by the U.S. government. This shift in the marketplace could be measured in months rather than years in the absence of Committee intervention.
Additional Cost. For the future, if the USDA/KCCO actions are permitted then the pricing of products under JWOD is at risk for the arbitrary practices by any entity of the government. Arbitrary applications of the definitions of (1) cost; (2) analysis of cost, (3) the usurping of statutory pricing processes; and (4) the attempts by ARC-D and Nish, acting as the Central Nonprofit Agency, to negotiate with this customer has resulted in additional cost to ARC and ultimately, additional overhead and burden cost which must be passed on to KCCO in future pricing.
References: Agricultural Acquisition Regulations (AGARS)
PR2 8/27/98
OMB Circular A-122, Revised May 2004
Base Price Cchange Notice 2000
Base Price Change Notice 2002
Base Price Change Notice 2004
Base Price Change proposed for July 1, 2005
V.AREAS OF AGREEMENT
We agree the performance of ARC-Diversified has never been questioned by either party. We agree that JWOD associated costs are differently contrived over commercial offers. We agree that we cannot agree on the terms and conditions for the base price change for price year 2005 through 2006. We further agree that without guidance and clarification from the Committee, the parties cannot continue to negotiate and concur on a base price constructed in accordance with JWOD definitions.
VI.
CURRENT CONTRACT & ALL MODIFICATIONS
All documents and dialogue are contained in the submitted materials as follows:
Volume 1. Business Case contains:
A. Statement of the Issues & Desired Outcomes
B. Documentation of Committee actions and base price changes from August 1999;
C. Market Research
a. Analytical Tables and Charts illustrating Price
b. Analysis & Backup information on Metals costs
c. Analysis & Backup information on Fibreboard costs
d. Analysis & Backup information on Fuel costs
e. ARC’s Current Financial Position illustrated as of 2/10/06
i. June 30, 2005/Dec 30, 2005 Financial Statement
ii. June 30, 2005/Dec 30, 2005 Balance Statement
iii. Monthly Cash flows by Vegoil vendors
Volume 2. Business Case contains:
D. Negotiation Diaglogue & Records
C. Regulatory References including
a. PR2
b. Agriculture Acquisition Regulations (AGARS)
c. OMB Circular A-122
d. P.L. 480 Food for Peace Titles
Volume 1-Business Case
A. Statement of the Issues & Desired Outcomes
B. Documentation of Committee actions and base price changes from August 1999;
C. Market Research
a. Analytical Tables and Charts illustrating Price
b. Analysis & Backup information on Metals costs
c. Analysis & Backup information on Fibreboard costs
d. Analysis & Backup information on Fuel costs
e. ARC’s Current Financial Position illustrated as of 2/10/06
i. June 30, 2005/Dec 30, 2005 Financial Statement
ii. June 30, 2005/Dec 30, 2005 Balance Statement
iii. Monthly Cash flows by Vegoil vendors
POC: Terri McRae
Telephone: 931-432-5981
Fax Number: 931-432-5940
Email address: terri@arcdiversified.com
Agency Address: 435 Gould Drive, Cookeville,
Tennessee 38501
POC: Kenneth Williams, Esquire
Telephone: 931-528-6101
Fax Number: 931-432-5940
Email address: ksw@citlink.net
Physical Address: Madewell, Jared, Halfacre & Williams Attorneys at Law
230 No. Washington Avenue
Cookeville, Tennessee 38501
Volume 2
D. Negotiation Diaglogue & Records
E. Regulatory References including
a. PR2
b. Agriculture Acquisition Regulations (AGARS)
c. OMB Circular A-122
d. P.L. 480 Food for Peace Titles
POC: Terri McRae
Telephone: 931-432-5981
Fax Number: 931-432-5940
Email address: terri@arcdiversified.com
Agency Address: 435 Gould Drive, Cookeville,
Tennessee 38501
POC: Kenneth Williams, Esquire
Telephone: 931-528-6101
Fax Number: 931-432-5940
Email address: ksw@citlink.net
Physical Address: Madewell, Jared, Halfacre & Williams Attorneys at Law
230 No. Washington Avenue
Cookeville, Tennessee 38501
VII
Summary of all Submitted Prices by Invitation, 1999 forward
Current Disputed Base Price Document
1999. Initial Target Price $874.08 per MT
USDA requested the CPBOSH to place fifteen percent (15%) of the entire government requirement of vegetable oil for export programs on the Procurement List for production by the Advocacy & Resources Corporation (d.b.a ARC-diversified) in Cookeville, Tennessee, using COST-BASED PRICE was established using PR2-Pricing of Products as the method for submitting and changing prices for this commodity at the request of Steve Closson, Director of Procurement and Donations, Farm Service Agency, WDC. The terms of the initial COST-BASED PRICE, as established by the Commiittee for Purchase, consisted of the elements of :
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period = Agency Fiscal year July 1-June 30
August 2, 1999, Initial BASE Prices of $811.76 (4Ltr) and $759.76 (20 Ltr)
The terms of the initial COST-BASED PRICE, as established by the Committee for Purchase, consisted of the elements of :
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period = Agency Fiscal year July 1-June 30
Nov. 13, 2000 P.L. Addition, 5%, Total equal 20% entire government requirement
The terms of the secondary addition of 5% were COST-BASED PRICE, as established by the Committee for Purchase, consisted of the elements of :
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period Agency Fiscal year July 1-June 30
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
May 2002 Annual Base Price Change $767.20 (4 Ltr),
$749.39 (20 Ltr)
$686.39 (208 ltr).
Using 12 months of data based on agency fiscal year, COST-BASED PRICE Change revised the construction of the initial base price of 1999. Market conditions resulted in reductions of cost to the government.
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period Agency fiscal year July 1-June 30
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
Sept 2004 Annual Base Price Change $378.98 (4 Ltr) and $380.45 (20 Ltr
In 2004, ARC attempted to get the base price annual agreement back in line with ‘annual price change’ data collection and change mechanisms, using the agency’s fiscal year (July 1 through June 30) to establish the data and parameters for indirect cost (OMB Circ A-122, Section D.1.(e)). This base is fixed and allows for no adjustment of packaging costs to be passed through to KCCO. Oil as an additional component of the total price is variable and passed through to KCCO. KCCO refused to conclude negotiations until ARC agreed to try this method for one year to determine its’ overall impact on the Base Price. Using 12 months of data , this PRICE Change revised the construction of the initial base price of 1999, 2000, and 2002. Market conditions resulted in significant increases in packaging costs to ARC-Diversified without ability to pass thru to government. This remains in effect and captures packaging costs for the period March 03 thru Feb 04.
Direct cost Oil Only Pass thru cost each invitation
Packaging & Markings Avg Cost, Fixed
Labor Avg Cost, Fixed
Freight Pass thru cost
Indirect cost Overhead and burden Avg Cost, Fixed
JWOD fee. 4% Total Fixed Value Calc on Total Fixed Values
Terms: Annual Base Price Change Off annualized term
Variable Costs for oil Pass thru ea Invitation
Cost Period for Data March 03 – Feb 04 Data
Base Price Period Sept 04-June 30, 05
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
June 2005 Proposed Annual COST-BASE Price Change
ARC continues to attempt to get the base price annual agreement back in line with ‘annual price change’ data collection and change mechanisms, using the agency’s fiscal year (July 1 through June 30) to establish the data and parameters for indirect cost (OMB Circ A-122, Section D.1.(e)). Proposed base strategy is returned to original framework: direct cost is variable and allows for market adjustment of oil and packaging costs to be passed through to KCCO depending on volume requirements; labor and overhead are fixed calculated on production units (MTs) purchased in fiscal year. KCCO has refused to conclude negotiations until ARC agrees to waive terms for calculating production units and base period, and agrees to below market avg of proven packaging costs.
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Fix Values/MT
Terms: Annual Base Price Change
Pass thru variable costs ea Invitation
Cost Period Agency Fiscal year July 1-June 30
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
From 2002 through 2004, significant market and natural disaster events occurred as follows:
· CalWestern Packaging Corporation (formerly Memphis, TN) moved its’ packaging operation from Memphis to a Hubzone location in Houston, TX at Jacintoport. Upon moving operations, and the entry of United Oil and Didion Milling into the marketplace, prices dropped on a per metric ton basis from $150.00 to $200 per MT on average, or from 53% over market indexes to 9%. The following firms, described below, followed suit in an effort to recapture their investment in the marketplace.
· United Oil Corporation (Hubzone located Small Businesss located in Miami, FLA) entered the commercial bidding by adding a packaging location next door to CalWestern Packaging (Hubzone) at Jacinto Port in Houston.
· Didion Milling (Hubzone located Small Business, Madison, WI), a corn-soyblend processor, entered the packaging business as a way to utilize vegoil produced as a by-product of its’ milling operations;
· C.A. Rose Corp (SB, Minneapolis, Minnesota), went bankrupt after failing to perform on 4-liter awards;
· From Invitations 015 to current awarded prices in the commercial market place dipped significantly beyond what the ratios of Invitation 094 and its’ predecessor invitations.
· From 2003 to current, market indexes for steel and chemicals rose significantly in response to sales of steel to China and the effects of natural disasters on freight, packaging, and energy costs in the midsouth.
VIII
Agency Points of Contact
POC: Terri McRae
Telephone: 931-432-5981
Fax Number: 931-432-5940
Email address: terri@arcdiversified.com
Physical Agency Address: 435 Gould Drive, Cookeville, Tennessee 38501
POC: Kenneth Williams, Esquire
Telephone: 931-528-6101
Fax Number: 931-432-5940
Email address: ksw@citlink.net
Physical Address: Madewell & Jarrod, Attorneys
N. Washington Ave.
Cookeville, Tennessee 38501
Volume 1. Business Case
Table of Contents
Business Case
1. Project Name 1
2. Statement of the Issues & Desired Outcomes 2
3. The Positions and Opinions of ARC-Diversified 5
4. Chronology of Steps Taken to Avoid Impasse 6
5. Specifics of Price and Price-Related Issues 8
6. Areas of Agreement 13
7. Current Contract and All Modifications 14
8. Summary of All Submitted Prices by Invitation,
9. 1999 Forward & Current Disputed Base Price
10. Document 17
Milestones, 1993 – Current Date
Market Research - Price Evaluation Considerations
VegOil
Metals
Fuels
Financial Information
Summary of Submitted vs. Actual Packaging Cost by Invitation
Summary of Selected Ending Balances
Standard Income Statement
Accounts Payable Aging by Month, VegOil Vendors
Volume 2. Business Case
Table of Contents
1. Negotiation Dialogue
2. Regulatory References
PR2 (8/98)
Agriculture Acquisition Regulations (AGARS, 2004)
OMB Circular A-122 (Rev’d may 2004)
P.L. 480 Food for Peace Titles
The Advocacy & Resources Corporation
Cookeville, Tennessee
I. Project Name
Project Name: Oil, Vegetable for use by export programs
Project Location: Cookeville, Tennessee
Project Number: 042095, 042186
JPID Number: 99612,00641
II. Statement of the Issue and Desired Outcomes
The Advocacy & Resources Corporation is a non-profit entity recognized under JWOD, doing business as ARC-Diversified (ARC-D). Located in Cookeville, Tennessee, ARC-D currently employs a 220 person work force engaged in governmental and private projects, of whom on average, 85% are classified as severely disabled. ARC has received awards through JWOD with the Department of Agriculture (USDA) since 1993 and the Department of Defense since 1994.
In 1999 the Department of Agriculture’s Farm Service Agency (USDA/FSA) requested that the Committee for Purchase (The Committee) add 15% of the total government requirement for vegetable oil for export programs (VegOil) to the procurement list for production by ARC-D. This was added at an announced targeted price, a JWOD set-aside later expanded to 20% in 2000. The Base Price and subsequent awards since that date have been constructed on actual costs and reimbursements defined in PR2 (8/27/98), Pricing of Products.
In reliance on this award and to fulfill its contractual obligations, ARC significantly expanded its plant and equipment and added approximately 50 employees, most of whom were severely disadvantaged.
In the early years of this arrangement the Committee, consistent with its enabling legislation and interpretive regulations, pricing memorandums and the purposes underlying JWOD, established and periodically revised the base Fair Market Price for the VegOil (years 2000, 2002).
For a time this system worked as designed, all in the best interests of the government, the JWOD vendor and the contracting party. In fact, after expanding its manufacturing capacity and improving its efficiencies and economies of scale ARC was able to request a reduction in the VegOil Fair Market Price in 2002.
Sole authority to establish and revise Fair Market Prices for VegOil is vested in the Committee, and the Committee’s pricing procedures take precedence over other governmental pricing provisions. (See 48 CFR 51 et seq., Committee Pricing Memorandum PR2, OMB Circular A-122, Committee Operational Memorandum No. 19 dated April 16, 2001, the JWOD Act, and its interpretive regulations). Although the Committee has allowed the USDA to ‘concur’ in the construction of the elements of periodic revisions of Base Price, by its’ actions since 2004, USDA has undertaken this authority to ‘concur’ as permission to determine and revise the constructed elements of the VegOil Fair Market Price. The USDA undertook the concurrence task with a vigor, delaying concurrence to extract concessions from ARC-D and Nish in order to conclude negotiations that run counter to established procedures for previous price changes in accordance with PR2.
Moreover, there is no record available to the parties to this negotiation that provides assurances that understandings and procedural guidance in accordance with PR2 processes have been transmitted to USDA’s agents for this negotiation since KCCO began to work toward implementing the FAR. Since 2004, in revising the Fair Market Price for VegOil, the USDA/KCCO has improperly relied on procurement practices they have developed to implement the requirements of Public Law 480. Under PL-480 the USDA is required to seek the ‘lowest landed cost’. PL-480 procedures, however, are applicable to private and for-profit entities but not to non-profit JWOD awardees, who are entities operating on actual cost basis and under pricing schemes dictated by federal statutes and regulations.
The net effect of the assumption of pricing authority by the USDA, compounded by the USDA’s application of the wrong pricing formulas, has been to compare and evaluate ARC’s JWOD actual cost-based price against the lowest awarded prices in the commercial market, the lowest market priced components without consideration of shipping and related costs, and artificial market cost comparisons involving non-like product and packaging mix. This evaluation, as it has been applied to this unique product group, is neither indexed against a median offered price nor against indexes in the marketplace. The net result is an unworkable formula, creating unrealistic comparisons, which ignore the mandates of the JWOD Act as well as other federal laws, rules and regulations.
There is an inherent and continuing conflict between the market-based manner in which USDA defines ‘fair and reasonable cost’, and the differing actual cost basis pricing procedures to achieve Fair Market Price mandated for the Committee under applicable law including Pricing Memorandum PR2 and OMB Circular A-122. There is no basis for ‘fair and reasonable evaluations’ in the Agricultural Acquisition Regulations (AGARS) which implement the Federal Acquisition Regulations (FAR). This conflict has continued through two Base Price revision actions in 2004 and 2005, and has unduly delayed the revisions to the VegOil price which ARC can charge.
Although the USDA is obligated to seek the lowest landed cost under PL-480, the non-profit and JWOD pricing provisions binding on the Committee (and so by inference in the delegation, upon the USDA) take precedence over PL-480. Committee pricing considerations for JWOD products are defined in its interpretive regulations in 48 C.F.R. 51, PR-2, Pricing for Products, and under OMB Circular A-122, Cost Principles for Non-Profit Organizations. These rules and regulations by their terms (1) statutorily regulate the accounting of costs of governmental work (products and/or services) performed by non-profits and educational institutions, and (2) set forth the parameters for auditing of non-profit contracts. OMB Circular A-122 weighs the following factors in evaluating the reasonableness of costs, using a prudent purchaser standard with consideration given to:
1. Is the cost of a type generally recognized as ordinary and necessary to the direct conduct of the work? The accounting for of all direct cost, labor and indirect costs (overhead and burden) are required for both nonprofit and educational firms. The costs associated with ARC’s inland location and JWOD program fees are consistent with the product produced, its location, mission, and program requirements. These actual costs have been established for this location and verified through periodic audits by the government’s Defense Contract Audit Agency (DCAA), which should put the question of the adequacy of cost procedures for ARC at an end. These costs are also consistent with costs for other (non-VegOil) bodies of government work performed in this location.
2. Are restraints or requirements imposed by federal law or regulation, or the terms and conditions of the award ? VegOil for export programs is unique, not commercially available, and requires materials of a non-commercial, sole source nature. Examples include the oil itself, a vitamin A fortified VegOil with associated laboratory costs for all oil produced; a non-standard and unique spouted metal can, measuring 610 x 805 with specified and unique construction, closure and markings per contract; and non-standard waterproof heavyweight boxes, requiring markings unique to various contracts. The product is intended for transport to third world countries rather than commercially within the U.S., and the container and box packaging is designed to withstand rough treatment and exposure to the elements.
3. Did the non-profit organization (ARC) act with prudence under the circumstances? ARC has demonstrated its stewardship in the performance of its VegOil award by periodic introduction of improvements to the product not required under the base award (e.g. new and better can lids, vitamin A fortification, and lab testing for quality control), and efficiencies in production designed to reduce the actual manufacturing costs and so reducing the costs to the government of the product.
There are limited markets for the packaging materials necessary to support this program, as most commercial product is not shipped to third world and developing countries, with the transportation, exposure to the elements, and related problems that entails.
There are no significant deviations from ARC’s established practices that would unjustifiably increase the award costs. Indeed, because of the delay in pass-through of actual costs in the VegOil award ARC’s reimbursement ratios have reduced significantly while its actual costs have risen. Since Base Price period 2003/2004, the increase in package and material costs without a corresponding increase in the Fair Market Price which Arc is allowed to charge, has devoured the dollars necessary to support fixed overhead & burden. The result is that creditors are past due, employees have been laid off, and the company’s viability is at risk.
ISSUES FOR IMMEDIATE CONSIDERATION BY THE COMMITTEE
In base years 2004 and 2005, the USDA has undertaken to define terms of annual revisions to the base VegOil Fair Market Price without regard for the use of actual cost principles and pricing methods designated by the government for non-profits generally (OMP Circular A-122) and under the JWOD program in particular (Committee Pricing Procedures Memorandum PR2). Instead the USDA is imposing upon ARC an agency standard for "fair and reasonable" for which there is no measurable reference or basis that can be determined in regulation. ARC would ask:
1. That the Committee set and establish the revised Fair Market Price for vegetable oil for export programs, based on actual costs in accordance with applicable laws (JWOD Act, implementing regulations, Committee Pricing Procedures Memorandum PR2, and Cost Principles for Non-profit Organizations, OMB Circular A-122). As part of this finding, ARC would ask the Committee to reject the USDA’s attempts to hold ARC to a market-based ‘fair and reasonable’ average price for which there is no referenced definition in USDA procurement policies NOR set forth in the Agriculture Acquisition Regulations Circular AAC96-04 dated April 20, 2005, or in any other pricing formula applicable to this award of which ARC is aware. The actual price schedule which ARC believes is appropriate, as documented hereinafter is:
PR2, 8/98 and OMB Circular A-122, Revised May 2004
2. That the Committee make the revised Fair Market Price for export vegetable oils retroactive to July 1, 2005, based on the authority vested in the Committee under the pricing guideline and 48 c.f.r. §51-5.5(c) and the concession that retroactive action is appropriate by the USDA itself (see attached e-mails from USDA officials), and to be paid within 15 days of the decision by the Committee. The calculation of these charges through are:
From July 1, 2005 through current date (Inv 026) are $ 873,422.85 dollars (see Table 6., Actual versus Submitted Cost)
3. That the Committee enjoin USDA from unilaterally reinterpreting the provisions of the JWOD set-aside (as illustrated by an October 18, 2005 letter from the USDA to ARC-D contained in the attachments to this Business Case). On October 18, 2005, the USDA notified ARC-D of their unilateral decision to redefine and restructure the 20% VegOil award by designating procurement amounts between and among the various sized VegOil containers without regard to notice to the Committee or the impact of this decision of agreed base price. The argument on allocation requirements has been specifically rejected by the Committee in previous comments in the Federal Register (attached hereto), and ARC would ask that the Committee, as the final arbiter of price, reject such current and future efforts by the USDA, and that in the future the USDA be required to file notice and provide opportunity to ARC-D to revise the Base Price in accordance with changes in procurement strategies.4. That USDA be required to process base price changes timely and in accordance with the not for profit agency’s fiscal year for the construction of associated costs in accordance with OMB Circular A-122, Pricing for Non-profit Organizations and/or that the Committee establish these price revisions and delegate to the USDA only its option to timely concur or document objections. Because of the untimely delays by the USDA, future pricing of products under JWOD generally and the VegOil in particular are at risk, and immediate Committee intervention is necessary.
5. That the Committee reaffirm in writing that it is the sole and final arbiter of revisions to Fair Market Pricing, and further, that it be proactive and instruct ARC to enter into Fair Market Price revision discussions directly with Committee staff for the VegOil changes to be effective July 1, 2006.
6. The Agricultural Acquisition Regulations (AGARS, April 2005) provides no specific pricing directions or evaluation standards to USDA for the purchase of JWOD associated products or definitions of ‘Fair and Reasonable Cost.’ USDA’s Procurement Policy homepage directs the reader to the policy documents published by the Committee for Purchase. This Business Case constitutes a formal report by ARC of what it perceives to be violations of the requirements for changing prices under the JWOD Act. In accordance with 48 C.F.R §51-5.8 would ask that the Committee formally investigate the actions, conduct and understandings of the USDA with respect to ARC-D’s 2005 base price change for vegoil, and take appropriate actions necessary to bring the price change process into compliance and the parties so that price changes will be made in accordance with the requirements of the JWOD Act for the 2005 base price change and future annual price changes.
III.
The Positions and Opinions of ARC-Diversified
In attempting to revise the VegOil Fair Market Price the USDA has rejected ARC's legitimate, documented, and independently audited actual cost figures, produced in the same format and manner historically called for by the Committee in determining Fair Market Price and consistent with applicable law for non-profit entities and JWOD awards. Instead, by their correspondence to the parties, the USDA has stated that it is using undefined average market costs derived from low price awards to the commercial sector to define the ‘fair and reasonable’ Fair Market Price, without reference or consideration of actual price and in disregard of applicable law.
Price revision information for VegOil is provided annually in the Spring to the National Industries for the Severely Handicapped (“Nish”) who is the relationship broker between the JWOD affiliate, the Committee, and to the USDA as the contracting agency, with the understanding and intention under applicable law that revisions to Fair Market Price will be in place by July 1 of each year. In the 2004 year the USDA missed the July 1 target date by some 4 months before it finally concurred to a revised Fair Market Price. In 2005, despite being provided actual cost information from ARC well in advance of July 1, the USDA has expanded this delay to 8 months and counting. Because of the extended delay in implementing a proper price revision ARC has been taxed with major increases in the actual costs of packaging and shipping, but without the actual cost reimbursement as mandated by law. This increase in primary expenses without a corresponding increase in revenue or reimbursement, has threatened the financial viability of ARC, leaving it with no choice but to declare an impasse.
The USDA’s actions in undertaking to dictate and revise terms VegOil Fair Market Price, in applying an improper standard for the Fair Market Price calculations, and its undue delay in implementing the mandated price revisions so that ARC could receive timely actual cost reimbursement, have been beyond the scope of the authorities afforded by regulation.
As a non-profit entity ARC has little margin for error in calculating its actual costs, and even less margin for absorbing these cost increases. The results of the USDA's unjustified delay in revising the Fair Market Price established for vegetable oil for export programs have been devastating to ARC. The company has had to absorb major price increases in packaging and shipping costs, in excess of $ 900,000.00 since July 1, 2005. ARC has been forced to delay payments to creditors placing its creditors at risk, has reduced its employee hours worked, and on February 10, 2006 was required to lay off some 25% of its work force.
IV.CHRONOLOGY OF STEPS TAKEN TO AVOID IMPASSE
This is a multi-year conflict between the parties. The base price change period should be annualized on July 1st, as this is the period for establishment of indirect costs per OMB Circular A-122. The USDA has provided evidence in conversations and correspondence that they understand the significance of the July 1 threshold and these understandings are documented in Volume 2, Section C. Negotiation Dialogue.
In early 2004 the USDA delayed the base price change for some 4 months which directly resulted from the USDA applying theory based not on the standards and pricing practices of the Committee’s enabling laws, but instead on the USDA’s subjective and arbitrary assumptions. Further, the USDA improperly forced ARC to lock in its base packaging costs for the 2004 year commencing July 1st, based on previous 2003 year averages rather than actual costs as a condition of concurrance.
In an effort to avoid conflict and to conclude negotiations, ARC made no request for retroactive reimbursement at that time despite its well-documented losses. However, it became clear through the year that the USDA’s of price setting would not be sustainable in light of naturally occurring marketplace events such as, large sales of steel to China In 2003-2004, which significantly and negatively impacted steel costs in the USA.
During this base price period (Invitations 94-65A), ARC sustained a loss on the actual costs of its packaging materials (cans, lids, boxes) of $1,315,619.56. Had the USDA not imposed upon ARC-D this ‘locking in previous year ‘averages’ of packaging costs as a parameter to set base price revisions on the VegOil award for the following year, in contradiction of applicable law and pricing standards, then this loss would not have been incurred. Because ARC was not reimbursed for these actual costs, the funds necessary to pay its vendors for the increased actual costs had to be taken from the category of overhead and burden, the only available source.
ARC offered pricing information to KCCO in June, 2005 for re-establishment of the July 1, 2005-June 30, 2006 Base Price. ARC’s data with regard to actual costs was offered consistently with previous price change actions in accordance with PR2 and well in advance of the July 1st deadline, and was again rejected by KCCO. Attempts by ARC-D and Nish to get the discussion on track for the July 1 price change period stalled.
This time, the USDA stated that ARC’s revised ‘fair and reasonable’ Fair Market Price should be “within 10% of that of the average of awarded commercial vendors,” further fixing and delimiting the base price change using arbitrary standards. This standard was presumably justified under PL- 480, or perhaps based on Hubzone premiums. However, it was totally without regulatory basis under the criteria applicable the VegOil Fair Market Base Price revisions for the ARC-D award under PR2 and OMB Circular A-122. Given its significant losses as a result of the prior base price imposed by the USDA for the 2004 base price change, ARC-D refused to accept such terms, communicating instead the desire to operate within terms of PR2.
The July 1, 2005 scheduled base price change the USDA has now delayed some 8 months. Despite repeated entreaties, the USDA has not provided any substantial objective evidence to back up concerns with pricing, actual cost comparisons, or related matters. It has provided no justification for deviating from the mandates of the law applicable to price calculations for non-profit and JWOD award entities.
The USDA has consistently attempted to hold ARC to a ‘free market-based approach’ (sic) standard. This standard as they have applied it, is impractical, unworkable, and unlawful in the context of JWOD pricing awards. It also fails to account for recent evidence of natural disasters, the impact of these disasters on commercial events in the marketplace, and the ultimate effect on the prices for shipping, cardboard and metals.
The USDA’s basis for denying ARC’s request for 2005 revisions to the Fair Market Price for VegOil to reflect these cost increases was that, “ARC’s increase was not based on an average material cost increase, but rather on the actual costs of materials.” In other words, rejection of the requested revision was based on the fact that ARC used the actual cost criteria mandated under JWOD rather than the market formula arbitrarily selected by the USDA. The logic of that analysis ignores the law and the obvious – the effects of material cost increases due to China’s increased demands starting in 2003, and the impact of natural disasters during the hurricanes of 2005. Hurricanes Katrina and Rita. ARC continues to work with 2004 figures established in 2003 for its packaging costs.
The exhaustive period of discussion without relief from the 2004 base price figure has had one net result: to cause ARC-D to drain all reserves, extend all creditors beyond their ordinary terms of payment, defer replacement of machinery and equipment, reduce work hours and wages for all employees, and lay off twenty five percent (25%) of its workforce. If left unresolved, further work force reductions will be scheduled for March 15, 2006.
As of this date, from the period July 1, 2005 through current (invitations 75-26), ARC losses total through Invitation 26 are projected at $873,422.85. Since 2004, ARC has lost 26% of its overhead and burden dollars necessary to support the cost of operations, because such funds have had to be diverted to support the increased costs of packaging materials, unique to this product, which the USDA will not recognize in its price revisions. Such an option is not sustainable, whether one is a commercial firm or a non-profit entity.
ARC is noo at risk of permanent layoffs or worse, to the detriment and harm of its severely disadvantaged work force and the JWOD program as a whole at this location.
VI.SPECIFICS OF PRICE & PRICE-RELATED ISSUES
At issue here are calculating and passing on the elements of costs relating to packaging materials in accordance with statutorily defined terms of negotiation, as in the Base Price Change Agreement (PR2). The VegOil material components primarily consist of the oil itself as fortified, the oil can and lid, and the heavy duty cardboard packaging. These component materials are unique, effectively sole source with respect to the cans and lids, and are not generally available in the commercial marketplace. The can is of a unique size and weight, and so most commercial manufactuers are not available for bids.
The only commercial manufacturer that produces the cans to the USDA specifications and sells in the general marketplace is located in Illinois, requiring add-on shipping costs. One commercial firm involved in the VegOil contracts, CalWestern, manufactures its own cans and produces a can of alternate size. However, it does not sell this in the marketplace. The balance of can manufacturers in the U.S. have been unable to effectively manufacture these unique size containers given the low volume requirements, and when contacted by ARC these manufacturers have declined to invest in development and production of these limited market items. Both the needed oil cans and the weatherproof heavy (W5C) grade boxes are non-commercial, and the set USDA standard is designed to tolerate significant abuse in transport. These component materials are also subject to high numbers of defects, which must be accounted for in production processes. The materials necessary to produce the metal container are of a unique basis weight. Certain chemicals and metals necessary to support the construction of these cans, resins and zinc, were negatively impacted by 2005 hurricanes. As a result these materials are being imported at higher costs until domestic chemical processing plants recover.
A secondary but very important issue involves the position of the USDA that effective immediately and henceforth, fifty percent (50%) of the procurement for each invitation to bid will be priced equally between the 4-liter and 20-liter packs. ARC was notified of this decision to unilaterally restructure the 20% JWOD set aside portion of the VegOil award by letter from USDA’s Kansas City office dated 10/18/2005. This position is contrary to that taken by the Committee as set forth in the Federal Register Announcement of October 13, 2000 . The Committee at that time allowed flexibility to assure that JWOD purchase awards were made in such a way that pack sizes would be purchased so that the government would achieve the best cost across the total 20% set aside whether it be 4 liter or 20 liter packs, and in accordance with the requirements of individual invitations. In other words, the Committee has previously stated that the most cost-effective units will be purchased from the 20% set aside rather than an artificial requirement that 50% of purchases be made of the 4 liter units and 50% of purchases be made from the 20 liter tins. This unilateral decision to modify the the terms of allocation departs from positions previously published by the Committee.
The impact of this decision, if allowed to stand, will have three immediate direct effects:
(1) the overall price of the JWOD VegOil program will increase to the USDA. Because the procurement economy of scale by ARC will be reduced (4 Liters), more of the expensive units will be arbitrarily assigned (20 Liters), which will result in destruction of the overall economy of the JWOD price. See enclosed table.
(2) In determining the Fair Market Price for VegOil it will be necessary to readdress and reallocate overhead and burden costs as redefined by metric tonnage divided by units of production, thus re-opening all of the component price elements and creating uncertainty as to the increased costs of this set aside.
(3) We do not believe that it is reasonable or fair to introduce this new procurement standard for inclusion into the base period July 1, 2005-June 30, 2006. Nor, do we believe that it is fair to reconstruct this set-aside without notifying the Committee of its’ desire to do so, while discussions are ongoing around the currently offered price for 2005/2006.
Finally, this decision further negatively impacts those existing VegOil commercial firms that can only bid and fill the 20 liter pail at the Jacintoport facility. Such a decision will force the USDA into the position of awarding the highest cost product to the JWOD firm, who must additionally ship to Jacintoport (TX) from Tennessee, a distance of 945 miles. With diesel fuel costs at $2.34 per gallon (+/-) another layer of cost is added to the JWOD price, while there is a packager at the same port who can only fill that container size without added freight cost. Cost differentials are illustrated in the supporting pricing information.
Terms of the Cost-Base Price Negotiation: KCCO, ARC and Nish appear not to operating with the same ‘rules of engagement’ or understandings as in the regulatory price periods defined in 48 CFR, PR2 and OMB Circular A-122, particularly as they result to the price period established by the not for profit organization’s fiscal year. Further, the parties have not been able to agree on the importance of defining price periods for establishing direct cost, cost based materials pricing, or the procedures for cost-based price changes. Nor does KCCO appear to understand the excessive and unanticipated costs imposed on the not for profit and it’s vendors by failing to complete this process in a timely manner. Costs are illustrated in supporting information.
Regulatory Authorities for Price Determination. It is the responsibility of the Committee to determine Fair Market Price and revisions thereto based on 48 CFR, PPR2 and OMB Circular A-122. A clear method for these determinations is in place. Since 2004 the USDA/ KCCO has assumed primary responsibility for setting price revisions, and by failing to concur in timely negotiation parameters for the purpose of establishing annual base Fair Market Price revisions.
By empowering the USDA to ‘concur’ with a ongoing price change using a standard without measure or regulatory authority, the Committee, unknowingly allowed the USDA to usurp its’ ‘sole authority’ to set Fair Market Prices for JWOD awardees. This has opened the door to KCCO to believe that it has the authority to determine prices in a manner which is vested within USDA’s current lowest-landed cost award practices, rather than in the manner proscribed by regulations governing pricing for non-profit and JWOD award entities. These processes are arbitrary in the marketplace and not comparable to statutorily defined processes that implement JWOD prices for products.
Removing Conflict. KCCO, has indicated that it fairly believes that itself to be acting on behalf of the best interest of the government. ARC-D has been audited by the the Defense Contract Audit Agency for its’ compliance to government pricing procedures for determination of costs by nonprofit entities, and believes that it is correct to engage in price change discussions within the terms of PR2, OMB Circular A-122, and previous price change protocols. Nish has new personnel in place who are unfamiliar with the history of this product or previous price actions. This has produced a failure of the understandings and has introduced an adversarial relationship into the ongoing discussion which now replaces the historical partnership that has operated on behalf of the organizations prior to 2004.
KCCO evaluations are applied to prices submitted by commercial firms, who each month, can determine and pass through their operational costs to USDA. If these commercial companies determine that it is to their benefit, they can and do move their operations to locations designed to give them maximum advantage in the marketplace.
The USDA/KCCO by its very procurement award practices, encourages relocation in the commercial marketplace as a factor of competition. Their system competes locations, awards the lowest submitted cost for a location, marries it with freight costs submitted independently, and makes awards based on the total configuration.
USDA/KCCO has determined that within this system, for the JWOD base price change to be ‘fair and reasonable’ it should be within approximately 10% of the average of the lowest awarded commercial firm’s costs. For the most part, JWOD firms will always be located ‘inland’ as is ARC-D, and are unable to relocate geographically to reduce freight and shipping and underlying commodity delivery costs, or to otherwise receive any benefits from the USDA/KCCO’s application of a market-based pricing scheme. .
KCCO’s award and evaluation strategy belies the fact that many other prices, which are higher, will have been offered by commercial firms, and that the current evaluation strategy does not reflect a median of offered prices. KCCO has placed ‘free-market’ constraints in direct conflict with fixed price processes, and contends that they have conducted their own research regarding materials pricing for the VegOil program. To back up their claims about the ‘soundness’ of their research, KCCO reports that ‘they’ve talked to our competitors in the marketplace’ who are reliable. To date, KCCO is unwilling to define how it measures that reliability or compares competitor reports to established, indexed values in the marketplace. The USDA has declined to produce this information other than by vague and non-specific reference to outside costs. Nor does it indicate that it has measured the performance of commercial firms prices against published marketplace measurements.
The USDA/KCCO appears to be unfamiliar with the details of specifications of its own product and packaging for the VegOil awards, including can weights and board grades for fiberboard product used for packaging materials used by other firms. This unfamiliarity brings into question the reliability of any pricing information that the USDA/KCCO may have obtained from other sources.
Competition & Risk of Harm to the Market. There is great value to the government in preserving competition in its’ procurement program, and in using information gained from this process to assess the effects of price. It must however, be an ‘apples to apples comparison. At this point, that is not possible given the geographic effect on actual price in the commercial marketplace, as opposed to the inland location of the JWOD awardee. Location impacts shipping and transportation costs for the oil and package components as well as the end product.
There is also great value to the government by using the JWOD program to provide a ‘brake’ on pricing practices in the competitive marketplace. Historically there were problems with export VegOil pricing due to mergers, consolidation, and predatory pricing practgices in the industry. For that reason, the government sought an alternative oil producer through the JWOD program. The result of the JWOD award was reduce the impact on price quality and delivery issues which resulted from having a single sole source in the marketplace, with the indirect advantage of opening the market to small commercial enterprises.
Data compiled from 2003 to the present (included for review) illustrates that once again efforts are being made to consolidate the VegOil market, to the ultimate detriment of of the government and the marketplace. The largest supplier has consolidated its operations to a hub zone and port in Texas (Jacintoport), and is manufacturing some of its own oil containers on site rather than them acquiring in the marketplace. The result of these actions are to increase the supplier’s market share, reduce its transportation costs both for obtaining components to the product and in shipment of the completed product.
The statistical data included (see Vol 1., Price) illustrates a comparison between market indexed expectations for packaging material and the offered JWOD price. We have also included comparisons of the JWOD price to award commercial prices compared to this same indexed market information for the invitations and date periods involved. We have used the information published by KCCO to demonstrate that the largest commercial supplier is currently pricing its export VegOil at or below market-indexed expectations for material and component costs, and that awarded margins have dropped from 53% of difference to 9% over indexed materials costs for packaging.
This has triggered what the commercial firms have characterized as a ‘price war’ (H. Hammerschmidt, United Oil, February 2006) among the commercial producers, with tremendous negative impact on the small existing commercial companies with narrower margins and smaller economies of scale. Since 2003 one small business firm has declared bankruptcy, and three more are offering prices that are less than expected for materials in the marketplace. Two of these commercial enterprises have privately reported that they are likely to be out of this business in the near future, because current costs are exceeding revenues. The resulting impact of recent CalWestern actions on the non-JWOD commercial vendors, and on the commercial marketplace, is apparent.
From the perspective of ARC-D, fostering a continued downward pricing spiral in the face of elevated market costs has potential to limit competition in the long term not only for the commercial market but also with respect to JWOD awards. To compare JWOD prices to the processes and lowest costs currently at work in the competitive marketplace, without adjusting for actual component costs in the base Fair Market Price for JWOD awardees, threatens the viability of ARC-D as well as its underlying suppliers of components.
As a result of the USDA/KCCO actions holding ARC-D to an improper evaluation standard, contrary to applicable laws, rules and regulations, effectively every competitor of the largest commercial awardee in the marketplace is at an economic disadvantage and is being threatened with insolvency. In the absence of Committee action, the end result could well be that a single firm once again becomes the sole surviving producer of expert VegOil purchased by the U.S. government. This shift in the marketplace could be measured in months rather than years in the absence of Committee intervention.
Additional Cost. For the future, if the USDA/KCCO actions are permitted then the pricing of products under JWOD is at risk for the arbitrary practices by any entity of the government. Arbitrary applications of the definitions of (1) cost; (2) analysis of cost, (3) the usurping of statutory pricing processes; and (4) the attempts by ARC-D and Nish, acting as the Central Nonprofit Agency, to negotiate with this customer has resulted in additional cost to ARC and ultimately, additional overhead and burden cost which must be passed on to KCCO in future pricing.
References: Agricultural Acquisition Regulations (AGARS)
PR2 8/27/98
OMB Circular A-122, Revised May 2004
Base Price Cchange Notice 2000
Base Price Change Notice 2002
Base Price Change Notice 2004
Base Price Change proposed for July 1, 2005
V.AREAS OF AGREEMENT
We agree the performance of ARC-Diversified has never been questioned by either party. We agree that JWOD associated costs are differently contrived over commercial offers. We agree that we cannot agree on the terms and conditions for the base price change for price year 2005 through 2006. We further agree that without guidance and clarification from the Committee, the parties cannot continue to negotiate and concur on a base price constructed in accordance with JWOD definitions.
VI.
CURRENT CONTRACT & ALL MODIFICATIONS
All documents and dialogue are contained in the submitted materials as follows:
Volume 1. Business Case contains:
A. Statement of the Issues & Desired Outcomes
B. Documentation of Committee actions and base price changes from August 1999;
C. Market Research
a. Analytical Tables and Charts illustrating Price
b. Analysis & Backup information on Metals costs
c. Analysis & Backup information on Fibreboard costs
d. Analysis & Backup information on Fuel costs
e. ARC’s Current Financial Position illustrated as of 2/10/06
i. June 30, 2005/Dec 30, 2005 Financial Statement
ii. June 30, 2005/Dec 30, 2005 Balance Statement
iii. Monthly Cash flows by Vegoil vendors
Volume 2. Business Case contains:
D. Negotiation Diaglogue & Records
C. Regulatory References including
a. PR2
b. Agriculture Acquisition Regulations (AGARS)
c. OMB Circular A-122
d. P.L. 480 Food for Peace Titles
Volume 1-Business Case
A. Statement of the Issues & Desired Outcomes
B. Documentation of Committee actions and base price changes from August 1999;
C. Market Research
a. Analytical Tables and Charts illustrating Price
b. Analysis & Backup information on Metals costs
c. Analysis & Backup information on Fibreboard costs
d. Analysis & Backup information on Fuel costs
e. ARC’s Current Financial Position illustrated as of 2/10/06
i. June 30, 2005/Dec 30, 2005 Financial Statement
ii. June 30, 2005/Dec 30, 2005 Balance Statement
iii. Monthly Cash flows by Vegoil vendors
POC: Terri McRae
Telephone: 931-432-5981
Fax Number: 931-432-5940
Email address: terri@arcdiversified.com
Agency Address: 435 Gould Drive, Cookeville,
Tennessee 38501
POC: Kenneth Williams, Esquire
Telephone: 931-528-6101
Fax Number: 931-432-5940
Email address: ksw@citlink.net
Physical Address: Madewell, Jared, Halfacre & Williams Attorneys at Law
230 No. Washington Avenue
Cookeville, Tennessee 38501
Volume 2
D. Negotiation Diaglogue & Records
E. Regulatory References including
a. PR2
b. Agriculture Acquisition Regulations (AGARS)
c. OMB Circular A-122
d. P.L. 480 Food for Peace Titles
POC: Terri McRae
Telephone: 931-432-5981
Fax Number: 931-432-5940
Email address: terri@arcdiversified.com
Agency Address: 435 Gould Drive, Cookeville,
Tennessee 38501
POC: Kenneth Williams, Esquire
Telephone: 931-528-6101
Fax Number: 931-432-5940
Email address: ksw@citlink.net
Physical Address: Madewell, Jared, Halfacre & Williams Attorneys at Law
230 No. Washington Avenue
Cookeville, Tennessee 38501
VII
Summary of all Submitted Prices by Invitation, 1999 forward
Current Disputed Base Price Document
1999. Initial Target Price $874.08 per MT
USDA requested the CPBOSH to place fifteen percent (15%) of the entire government requirement of vegetable oil for export programs on the Procurement List for production by the Advocacy & Resources Corporation (d.b.a ARC-diversified) in Cookeville, Tennessee, using COST-BASED PRICE was established using PR2-Pricing of Products as the method for submitting and changing prices for this commodity at the request of Steve Closson, Director of Procurement and Donations, Farm Service Agency, WDC. The terms of the initial COST-BASED PRICE, as established by the Commiittee for Purchase, consisted of the elements of :
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period = Agency Fiscal year July 1-June 30
August 2, 1999, Initial BASE Prices of $811.76 (4Ltr) and $759.76 (20 Ltr)
The terms of the initial COST-BASED PRICE, as established by the Committee for Purchase, consisted of the elements of :
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period = Agency Fiscal year July 1-June 30
Nov. 13, 2000 P.L. Addition, 5%, Total equal 20% entire government requirement
The terms of the secondary addition of 5% were COST-BASED PRICE, as established by the Committee for Purchase, consisted of the elements of :
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period Agency Fiscal year July 1-June 30
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
May 2002 Annual Base Price Change $767.20 (4 Ltr),
$749.39 (20 Ltr)
$686.39 (208 ltr).
Using 12 months of data based on agency fiscal year, COST-BASED PRICE Change revised the construction of the initial base price of 1999. Market conditions resulted in reductions of cost to the government.
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Value MT
Terms: Annual Base Price Change,
Pass thru variable costs ea Invitation
Cost Period Agency fiscal year July 1-June 30
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
Sept 2004 Annual Base Price Change $378.98 (4 Ltr) and $380.45 (20 Ltr
In 2004, ARC attempted to get the base price annual agreement back in line with ‘annual price change’ data collection and change mechanisms, using the agency’s fiscal year (July 1 through June 30) to establish the data and parameters for indirect cost (OMB Circ A-122, Section D.1.(e)). This base is fixed and allows for no adjustment of packaging costs to be passed through to KCCO. Oil as an additional component of the total price is variable and passed through to KCCO. KCCO refused to conclude negotiations until ARC agreed to try this method for one year to determine its’ overall impact on the Base Price. Using 12 months of data , this PRICE Change revised the construction of the initial base price of 1999, 2000, and 2002. Market conditions resulted in significant increases in packaging costs to ARC-Diversified without ability to pass thru to government. This remains in effect and captures packaging costs for the period March 03 thru Feb 04.
Direct cost Oil Only Pass thru cost each invitation
Packaging & Markings Avg Cost, Fixed
Labor Avg Cost, Fixed
Freight Pass thru cost
Indirect cost Overhead and burden Avg Cost, Fixed
JWOD fee. 4% Total Fixed Value Calc on Total Fixed Values
Terms: Annual Base Price Change Off annualized term
Variable Costs for oil Pass thru ea Invitation
Cost Period for Data March 03 – Feb 04 Data
Base Price Period Sept 04-June 30, 05
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
June 2005 Proposed Annual COST-BASE Price Change
ARC continues to attempt to get the base price annual agreement back in line with ‘annual price change’ data collection and change mechanisms, using the agency’s fiscal year (July 1 through June 30) to establish the data and parameters for indirect cost (OMB Circ A-122, Section D.1.(e)). Proposed base strategy is returned to original framework: direct cost is variable and allows for market adjustment of oil and packaging costs to be passed through to KCCO depending on volume requirements; labor and overhead are fixed calculated on production units (MTs) purchased in fiscal year. KCCO has refused to conclude negotiations until ARC agrees to waive terms for calculating production units and base period, and agrees to below market avg of proven packaging costs.
Direct cost (Oil, Packaging & Markings) Pass thru cost each invitation
Labor Avg Fixed for Base Period
Freight Pass thru cost
Indirect cost Overhead and burden Avg fixed for Base Period
JWOD fee. 4% Total Value Calc on Total Fix Values/MT
Terms: Annual Base Price Change
Pass thru variable costs ea Invitation
Cost Period Agency Fiscal year July 1-June 30
Entire government requirement 20 % entire requirement
Pack Size 4 ltr and/or 20 ltr, whichever
Yields best cost to gov’t
From 2002 through 2004, significant market and natural disaster events occurred as follows:
· CalWestern Packaging Corporation (formerly Memphis, TN) moved its’ packaging operation from Memphis to a Hubzone location in Houston, TX at Jacintoport. Upon moving operations, and the entry of United Oil and Didion Milling into the marketplace, prices dropped on a per metric ton basis from $150.00 to $200 per MT on average, or from 53% over market indexes to 9%. The following firms, described below, followed suit in an effort to recapture their investment in the marketplace.
· United Oil Corporation (Hubzone located Small Businesss located in Miami, FLA) entered the commercial bidding by adding a packaging location next door to CalWestern Packaging (Hubzone) at Jacinto Port in Houston.
· Didion Milling (Hubzone located Small Business, Madison, WI), a corn-soyblend processor, entered the packaging business as a way to utilize vegoil produced as a by-product of its’ milling operations;
· C.A. Rose Corp (SB, Minneapolis, Minnesota), went bankrupt after failing to perform on 4-liter awards;
· From Invitations 015 to current awarded prices in the commercial market place dipped significantly beyond what the ratios of Invitation 094 and its’ predecessor invitations.
· From 2003 to current, market indexes for steel and chemicals rose significantly in response to sales of steel to China and the effects of natural disasters on freight, packaging, and energy costs in the midsouth.
VIII
Agency Points of Contact
POC: Terri McRae
Telephone: 931-432-5981
Fax Number: 931-432-5940
Email address: terri@arcdiversified.com
Physical Agency Address: 435 Gould Drive, Cookeville, Tennessee 38501
POC: Kenneth Williams, Esquire
Telephone: 931-528-6101
Fax Number: 931-432-5940
Email address: ksw@citlink.net
Physical Address: Madewell & Jarrod, Attorneys
N. Washington Ave.
Cookeville, Tennessee 38501
Volume 1. Business Case
Table of Contents
Business Case
1. Project Name 1
2. Statement of the Issues & Desired Outcomes 2
3. The Positions and Opinions of ARC-Diversified 5
4. Chronology of Steps Taken to Avoid Impasse 6
5. Specifics of Price and Price-Related Issues 8
6. Areas of Agreement 13
7. Current Contract and All Modifications 14
8. Summary of All Submitted Prices by Invitation,
9. 1999 Forward & Current Disputed Base Price
10. Document 17
Milestones, 1993 – Current Date
Market Research - Price Evaluation Considerations
VegOil
Metals
Fuels
Financial Information
Summary of Submitted vs. Actual Packaging Cost by Invitation
Summary of Selected Ending Balances
Standard Income Statement
Accounts Payable Aging by Month, VegOil Vendors
Volume 2. Business Case
Table of Contents
1. Negotiation Dialogue
2. Regulatory References
PR2 (8/98)
Agriculture Acquisition Regulations (AGARS, 2004)
OMB Circular A-122 (Rev’d may 2004)
P.L. 480 Food for Peace Titles
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