BEFORE THE ALASKA DEPARTMENT OF ADMINISTRATION

On August 27, 1997, the Division of General Services [DGS] issued ITB Nos. 2128 and 2129, entitled "Establishment of Contracts for the Purchase and Delivery of Various Fuels on a 'Keep Full' Basis and on an 'As Needed' Basis into State Fuel Tanks at Various Locations in Northern Interior Alaska". Delta Fuel Company [Delta] and Service Oil & Gas, Inc. [Service] submitted bids on ITB 2128 and 2129, respectively. Karl Brothers, Inc., [Karl Brothers] submitted bids on both solicitations, claiming eligibility for a disability preference on both solicitations pursuant to AS 36.30.170. Karl Brothers was the apparent low bidder.

On October 13, 1997, DGS wrote Karl Brothers requesting additional information in order to determine whether Karl Brothers was a responsible bidder. AS 36.30.360(a); 2 AAC 12.500. Among other things, DGS asked Karl Brothers to "provide details of your company's past performance of supplying fuel; this information is also required in order to determine if your firm qualifies for the Alaskans With Disabilities Preference..." See, AS 36.30.170(j). In a letter dated October 28, counsel for Karl Brothers responded that Karl Brothers had not previously supplied fuel, but that it "qualifies for the disability preference in that it will 'add value' by controlling, managing, and supervising the services provided." See, AS 36.30.170(j). In support of that assertion, Karl Brothers submit additional documentation¹, including, among other things, its subcontract with Alaska Petroleum Distributing, Inc. [Alaska Petroleum]. The subcontract, entitled "Subcontract for Delivery Equipment, Operators and Service", requires Alaska Petroleum to "reserve for the exclusive purpose of fulfilling this agreement, and KBI's contract with the State of Alaska", three petroleum delivery trucks, to "provide operators for the Dedicated Equipment", to pick up petroleum from Mapco and to deliver it on either a "keep full" or "as needed" basis. The "keep full" basis means that "the specific delivery location shall not be allowed to reach below fifty percent (50%) of capacity"; the "as needed" basis means deliveries are upon notification to Alaska Petroleum from Karl Brothers. It therefore appears that except as specifically directed by Karl Brothers, it was the obligation of Alaska Petroleum to monitor tank status and arrange for pick up and delivery on a "keep full" basis. [Contract at 2] Under the terms of the contract, Karl Brothers is to invoice the State and pay Alaska Petroleum after payment by the State; Alaska Petroleum is responsible for insurance, including "sudden and accidental pollution as well as all other forms of environmental liability," [Contract at 3] It appears that the intent of the agreement is that the truck operators would remain Alaska Petroleum's employees at all times, since Alaska Petroleum was required to maintain their Workers' Compensation coverage. [Contract at 3]

Based on the information provided, on November 20, DGS wrote to Karl Brothers, stating "It does appear that Karl Bros., Inc. will be adding value by actually performing, controlling, managing and supervising some of the services provided." On December 31, 1997, DGS made a formal determination of responsibility, and on January 2, 1998 it issued notices of intent to award the contracts to Karl Brothers.

Service and Delta filed identical protests, arguing, among other things, that Karl Brothers was not entitled to the Alaskans with Disabilities preference because it was "not going to perform, control, manage and supervise the services provided, as they have indicated that they will be subcontracting the delivery of fuels..." [Protest at 2] DGS denied the protest on the basis of the information submitted by Karl Brothers in response to DGS' request of October 13. It stated:

Service and Delta appealed to the Commissioner, repeating its argument that because it had subcontracted delivery of the fuel, Karl Brothers was not entitled to the preference. [Appeal at 2] The Commissioner assigned the matter to a hearing officer.

After a prehearing conference, DGS reviewed the file. It determined that "the performance required under ITB No. 2128 [and ITB 2129] cannot be viewed as services in light of AS 36.30.990(19), which defines services as 'the furnishing of labor, time or effort by a contractor, not involving the delivery of a specific end product other than reports that are merely incidental to the required performance...'". [4/13 Letter] The parties were advised of DGS' determination. At a prehearing conference the parties agreed to file legal memoranda addressing the issue raised by DGS and to submit the issue for determination on the record. The memoranda have been received. For the reasons that follow, I conclude that Karl Brothers does not qualify for the disability preference.

AS 36.30.170(j) establishes two ways in which a bidder may qualify for application of the disability preference to a particular contract: first, if it "add[s] value by actually performing, controlling, managing and supervising the services provided"; second, if it has "sold supplies of the general nature solicited to other state agencies, governments, or the general public."

Karl Brothers argues that ITB 2128 and ITB 2129 were not purely "service" contracts or purely "supply" contracts, but rather "contracts which have both a service and a supply component." Because of the "service" component of ITB 2128 and 2129, Karl Brothers argues, it may qualify for the disability preference under the "adding value" clause. The exclusion from AS 36.30.990(19) of services "involving the delivery of a specific end product", Karl Brothers argues, is limited to the "labor time and effort expended in actually delivering the end product", [KB Mem. at 3] i.e., to the "supply" component of a contract. The exclusion, Karl Brothers argues, does not extend to "Functions such as quality control, accounting, record keeping, OPIS invoicing, and preparation of State tax returns", [id.] i.e., to the "services" component of a contract. Karl Brothers argues that its performance of the service component of ITB 2128 and 2129 constitutes a "significant amount of the total contract value. In fact, without the functions performed by KBI, the contract could not be performed at all." [KB Mem. at 4] AS 36.30.170(j) and AS 36.30.990(19), it argues, should not be given a narrow construction, but should be interpreted in accordance with the legislature's intent "to benefit the disabled in the award of State contracts." [KB Mem. at 3-4]

DGS responds that "the disabled bidder preference, along with the other preference authorized in AS 36.30.170, are to be strictly construed." [DGS Mem. at 2] Citing an informal Attorney General's opinion², DGS argues that "Preferences make the cost of doing public business higher" and therefore "it is important that the specific conditions for which a preference has been determined to be allowed by the legislature be strictly met by a bidder..." [DGS Mem. at 3-4] DGS argues that a contract is properly classified as either a "service" contract pursuant to AS 36.30.990(19) because it does not involve the delivery of a specific end product, or as a "supply" contract pursuant to AS 36.30.990(22), because it "results in the delivery of equipment, materials, or property." DGS argues that because the interpretation of AS 36.30.170(j), -.990(19), and -.990(22) "involves complex matters and formulation of fundamental policies involving particularized expertise" by DGS, the Commissioner should give deference to DGS' interpretation. [DGS Mem. at 4-5]

Service and Delta argue that the "the state, in buying fuel, is not entering into a service contract...[and] AS 36.30.990(22) clearly defines fuel as a 'supply'". [SD Mem. at 3] ITB 2128 and ITB 2129 call for delivery F.O.B. into the state tanks, they point out. [id.] Other purchases of products, such as road graders, for example, would have a service component, Service and Delta argue, but this does not make such contracts "service" contracts. [SD Mem. 3-4] The legislative history of AS 36.30.170(j), Service and Delta argue, indicates that it was intended to "assure that persons claiming a preference were established in the general business of provided supplies, prior to seeking preferential treatment in state procurement." [SD Mem. at 4]

A. DGS' Interpretation is Not Controlling.

Assuming, without deciding, that the interpretation of AS 36.30.170(j) and AS 36.30.990(19) and (22) involves complex matters and formulation of fundamental policies involving particularized expertise in regard to State procurement policy and procedure, in interpreting those provisions of law in an appeal brought under AS 36.30.625, the Commissioner is not obligated to defer to the interpretation advanced by DGS. It is precisely the function of the Commissioner, in his multiple capacities as an appointee of the Governor confirmed by the legislature, as the chief executive of the Department of Administration, and as the officer with the statutory responsibility and authority to determine appeals under the Procurement Code, to interpret and apply the statutes he is charged with executing, subject to review by the courts. While on appeal the courts may afford the Commissioner's interpretation substantial deference, or no deference whatsoever, it is the Commissioner's interpretation that initially guides the Department of Administration. As a matter of course the Commissioner gives serious consideration to the expertise and views of his subordinates regarding complex issues and fundamental policy concerns, but the ultimate authority and the concomitant responsibility for the interpretation adopted at the administrative level lies with the Commissioner.

B. The Proposed Performance of Karl Brothers under ITB 2128 and ITB 2129

Does Not Constitute "Services" Within the Meaning of AS 36.30.990(19).

AS 36.30.990(19) states: "'services' means the furnishing of labor, time or effort by a contractor, not involving the delivery of a specific end product other than reports that are merely incidental to the required performance; it does not include employment agreements or collective bargaining agreements." AS 36.30.170(j) provides that a bidder may qualify for a preference on a contract when it "add[s] value by actually performing, controlling, managing and supervising the services provided."

Karl Brother points to two kinds of services that are being provided in connection with ITB 2128 and ITB 2129. The first sort of services are those inherent in the pickup, transportation and delivery of the petroleum supplies. Karl Brothers does not actually perform these services, but it initially argued that it "added value" by controlling, managing and supervising Alaska Petroleum Distributor's performance of those services. I disagree. This category of services is provided directly to the State by Alaska Petroleum under its subcontract with Karl Brothers. Nothing in the subcontract provides Karl Brothers with any right to control, manage or supervise Alaska Petroleum's performance of those services. To the contrary, the subcontract appears to contemplate an independent contractor relationship. A contractor who subcontracts out to an independent contractor performance of services without exercising or retaining in the subcontract a right to supervise, manage or control those services does not "add value" to the performance of those services by the subcontractor. It does not appear, therefore, that Karl Brothers would qualify for the preference insofar as the provision of the first category of services is concerned. In any event, those services clearly involve "delivery of a specific end product", and as Karl Brothers implicitly concedes, even if it added value to the provision of those services by supervising, managing or controlling Alaska Petroleum's performance, it would not be entitled to a preference because such services are specifically excluded by AS 36.30.990(19).

The second category of services identified by Karl Brothers are the services ancillary, to one degree or another, to any contract for the provision of products. These include accounting, record keeping, invoicing, and contract administration services generally³. These services are performed by Karl Brothers itself. For purposes of AS 36.30.170(j), Karl Brothers contends, these services are sufficient. First, it argues for a liberal interpretation of AS 36.30.170(j). What is at issue, however, is not the interpretation of AS 36.30.170(j), but rather the interpretation of AS 36.30.990(19). AS 36.30.990(19) applies throughout AS 36.30 and must be interpreted consistently throughout, "unless the context...clearly requires a different meaning." Id. The context of AS 36.30.170(j) does not clearly require any special usage of the term "services". While one purpose of preferences is to assist certain categories of vendors, and to that extent a liberal construction might be appropriate, preferences increase the cost to the state of doing business, and to that extent they should be strictly construed. These divergent considerations militate against a liberal construction of AS 36.30.990(19) in the context of AS 36.30.170(j).

Next, Karl Brothers argues that the ancillary services it provides constitute a "significant amount of the total contract value" and that they are essential to the performance as a whole. The first proposition has not been established as a matter of fact. There is nothing in the record to suggest that the total value of the contract was significantly increased by the ancillary services provided by Karl Brothers. In a contract of this nature, it may safely be assumed that by far the major portion of Karl Brother's bid consisted of the price paid to Mapco for fuel oil, plus the cost of the subcontract to Alaska Petroleum. While the total value of Karl Brother's ancillary services over the life of the contract may be "significant", the are only a minor element in comparison to the whole. Furthermore, while the services may be essential, they are no more so in this contract than in any other contract for the provision of goods and materials.

ITB 2128 and ITB 2129 involve contracts whose fundamental purpose is to obtain a specific end product. Whether the ancillary services performed by Karl Brothers in connection with that fundamental purpose are substantial, either in themselves or in relation to the overall contract value, the fact remains that the primary purpose of the contract is acquire a specific end product for use by the state, and that any services performed in conjunction with the acquisition of the product are merely ancillary to that end. To separate the service and supply components of a unitary contract in connection with AS 36.30.170(j) would substantially alter the definition set forth in AS 36.30.990(19). For purposes of AS 36.30.170(j), I conclude that services performed in connection with a particular contract "involve" the delivery of a specific end product within the meaning of AS 36.30.990(19) when the primary purpose of the contract is the acquisition of that product. Whether a contract whose primary purpose is not the acquisition of a specific product might also "involve" the delivery of a specific end product within the meaning of AS 36.30.990(19) is a question that need not be answered in this case.

The appeal of Service Oil & Gas and Delta Fuel Company is sustained. The decision to deny the protests is reversed. This matter is remanded to DGS to implement an appropriate remedy. See AS 36.30.585(a).

DATED this 26th day of May , 1998.

______________________________

Andrew M. Hemenway

¹ The information submitted by Karl Brothers in response to DGS' inquiry was confidential, pursuant to AS 36.30.360(b). However, following a prehearing conference and in camera review of all of the documents by the Hearing Officer, Karl Brothers gave its written consent to the disclosure of the documents determined by the Hearing Officer to be relevant to the "management and control" issue.
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² See, 1989 Inf. Op. Att'y. Gen. (July 1; 663-89-0635).
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³ Karl Brothers refers to "quality control" as one of these types of services. It is unclear what Karl Brother means by this. It retained no control over Alaska Petroleum's performance, and the quality of the petroleum products was Mapco's responsibility.
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