For Sale: Uncle Sam’s Scrap

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Business Succession and Estate Management Strategies

Buying surplus U.S. government property, including scrap and usables, may not be for everyone, but some recyclers swear by this niche market.

For Sale: Surplus U.S. Army Jeeps--Yours for Only $100!

Does this pitch line sound familiar? It should. Such claims have appeared in advertisements in national magazines for decades, no doubt piquing the interest of many individuals and businesses seeking great opportunities in the U.S. government's plethora of surplus materials. The fact is, however, that many of these ads are misleading at best and scams at worst, according to representatives at the Defense Reutilization and Marketing Service (DRMS) (Battle Creek. Mich.), the arm of the Defense Department that oversees sales of surplus and scrap materials. Thus, that $100 jeep could, in reality, be a $25 pile of scrap metal (to learn why, see "What's Not for Sale").

While this may be a letdown for those in search of a cheap vehicle, it reveals a glimpse of the U.S. military's position as a large, valuable, and unique source of high-quality materials for many scrap traders, processors, and consumers. When it comes to scrap, in fact, the DRMS is the largest single source of material for the domestic recycling industry, selling more than half a million tons of ferrous and nonferrous metals valued at more than $69 million in fiscal year 1993.

And these metals account for only part of the picture. The government's selling program, which includes nonmetallics such as old corrugated containers and surplus usables such as machinery, office furniture, and boots, adds up to hundreds of millions of dollars worth of goods sold each year.

Basics of the System

Government scrap and surplus materials are offered in local as well as national sales, with the type, value, and quantity of the material determining whether it is sold locally or nationally. For example, under current rules, local bases cannot sell non-munitions scrap metal in quantities of more than 20,000 pounds or with a market value greater than $2,500. This policy may soon change, however: The expected closure of 30 or more major military bases and the scaling back or reorganizing of 134 others in the years ahead are expected to increase the scrap sales potential at the local and national levels in the short term, so government officials are set to meet this year to discuss the sales guidelines.

Local sales, which are conducted by local military bases through what are known as the Defense Reutilization and Marketing Offices (DRMOs), are usually advertised through fliers mailed to individuals on local DRMO bidding lists. National sales, on the other hand, are administered by the DRMS office in Memphis, Tenn., and are advertised through sales catalogs mailed to all interested parties. These catalogs, which are more thorough than local announcements, describe the property for sale, where the property is located, the location of the sale, inspection and sale dates, and contacts for more information. In addition, the Commerce Business Daily, a federal government publication, contains notices of all scheduled national sales.

Anatomy of a National Sale

Before bidding on property listed in a sales catalog, however, advise many recyclers experienced in the process, it's important to physically inspect the material. Why? For one reason, catalog descriptions for like-sounding material vary considerably from base to base, says Gay Searle, sales manager of Acme Trading & Supply Co. (Portland, Ore.). Also, he notes, the actual material may be a far cry from how it has been described and advertised in the catalog-something you'll never know unless you inspect it in person.

Nevertheless, many bidders don't inspect the property, instead relying on a call to the base for more details on the material or an extremely low bid as a way of hedging their risk. While most bases do a credible job in properly segregating the various types of metallic scrap, and while some will provide photos, or even samples, of the scrap, Searle and others maintain that base personnel are simply not qualified to answer detailed questions on scrap items that may not even be properly sorted and segregated.

Following careful inspection, interested parties fill out bids that are then sealed for opening at a specified date and time, depending on the size and type of sale. Bidders enter their tenders on the bid forms in the catalog, complete other forms as specified by the catalog, and return them to the DRMS, along with the required bid deposit-usually 20 percent of the bid amount. The deposit must be in the form of cash or a guaranteed financial instrument such as a certified or cashier's check, or even a credit card. Bidders who have secured an irrevocable letter of credit from their bank or an approved bid bond backed by an insurance carrier also have the option of submitting their deposit by personal or company check. But even then, this form of deposit is limited to the amount of the letter of credit or the penal sum of the bond.

Seasoned bidders note that their initial bids are usually biased on the low side, in part because DRMS policy allows for bid revisions up to 3 p.m. on the day before bids are opened, and these changes can be faxed in on an item-by-item basis. This policy not only gives buyers maximum price flexibility as market conditions dictate, but also enables the seller--that is, the government--to maximize the revenue it receives.

After the bids are opened, the high bidders are chosen, and the award results--which note the winning bidders, their bids, and the quantity of material sold--are announced. Because this information can reportedly take a week or so to reach the successful bidders, some participants rely on the information services of other independent firms that attend the bid openings specifically to record the results and usually have the complete rundown in the hands of their subscribers within days of the awards. Unsuccessful bidders, meanwhile, get their bid deposits returned, usually within seven days after the awards are made.

Following the awards, successful bidders must pay for their material in full within 30 days, unless the sale was a "term sale" in which specified quantities of material--usually ferrous scrap--are released over a defined period. In these sales, winning bidders are billed at the end of the month for material picked up that month, with transacted prices pegged to a published scrap price.

Buyers must also arrange to pick -up the material within a specified period, usually ranging from three weeks to a month following an award. If material isn't removed within the specified period, buyers can face storage charges--which do vary--or forfeiture of their bid deposit. Naturally, there are exceptions to this rule for both the buyer and seller. For example, the government will usually grant extensions, without penalty, should the buyer be unable to remove material due to such factors as inclement weather and equipment breakdowns.

When it comes to picking up purchased material, each government facility has scales for proper weighing and documentation. Don't be surprised if these scales reveal that the actual volume of material varies from the original weight awarded, experienced buyers point out. Government policy allows a variance of plus or minus 25 percent, they note, adding that it is generally more common for buyers to take away more material than less. In this case, the buyer is obligated to pay for the additional material at the same unit price as the original lot. Of course, if the lot comes up short, the buyer isn't charged for material not received.

As a whole, the timeline of a national sale is such that you could bid on material in one month, be notified of the award the next month, and not pick up all the material until the following month. Thus, by the time you take possession, you may have already sold the material to a third party--not an uncommon occurrence--and may need a little luck to ensure that market conditions won't have changed to make what may have first been a profitable-looking bid into a loss on the sell side.

The System's Downsides

Overall, regular participants rate national sales conducted by the DRMS highly. In fact, a national sales office customer service survey, conducted last year by the DRMS, gleaned generally positive remarks from the 350 national sales customers that responded out of a total of 700 solicited. But one complaint from the respondents was that they weren't receiving copies of the award list in a timely fashion, if at all. Others claimed that bid deposits weren't returned quickly enough and that award documents weren't being received within 10 days following bid openings.

Many customers also noted displeasure with the requirement that bids be accompanied by guaranteed deposits, as opposed to simple company or personal checks. But government officials point out that this "hard dollars" policy was implemented in 1986 because of problems with deposit checks that bounced. In fact, according to Defense Department auditors, about $2.9 million in uncertified deposit checks was dishonored in one 18-month period during 1981 and 1982. There's always the option of obtaining a bond to cover deposits, but some individuals and small firms complain that it is either too hard or too expensive for them to do so. Still, this is the most cost-effective and efficient way for serious bidders to do business with the government, some say. "It's no big deal getting a bid bond," remarks one large processor. "It's certainly worth my time and cost. It effectively turns what would be a tie-up in money into nothing more than a clerical exercise." The underlying truth, he maintains, is that some individuals and firms don't want to subject themselves to a detailed credit analysis by the issuing insurance company.

On the other side of the fence, the DRMS can have its own problems with the system. For example, there have been instances in which awards were not honored by the buyer, usually due to changing market conditions. In such cases, however, the bidder's deposit is forfeited, thus giving participants a potent incentive not to abandon their bids. There have also been cases in which successful bidders supposedly “cherry picked" through their purchased materials, leaving unwanted scrap behind at the government site. Moreover, it's been alleged that top bidders have contacted second-highest bidders to cut deals that would enable the former to lower their average prices for the awarded materials. Naturally, these last two actions are considered serious ethical breaches that the government as well as the scrap industry condemn.

Taking the Local Sales Route

If you're interested in local sales, the more than 100 DRMOs in the continental United States sell material through regular auctions, spot bids, and "cash-and-carry" sales, which are restricted to small quantities of usables at fixed prices based on current market values. Scrap is reportedly never sold in cash-and-carry sales.

While government limits on local sales volumes mean large quantities of scrap aren't found at the local level, enough material moves through the DRMOs to attract scrap pros, as well as novices. In fact, a typical announced auction can attract "hundreds," says one East Coast processor, who adds, "That's part of the problem, too." According to this recycler, many who attend local sales are "amateurs" who bid for items, including scrap, without fully understanding the market dynamics of buying and selling the material. As a result, he asserts, it's common for bidders to overpay and end up walking away from what they just bought. He sees the same problem with usables, noting that he some times sees items at auction that were supposedly sold the previous month.

This issue has become more important recently, with interest in DRMO sales reportedly increasing in the past year due to anticipated base closures, the recent economic recession, and the numerous seminars that promise hot opportunities in buying and selling government surplus. These seminars, presented by private concerns, tend to promise more than they deliver, say those familiar with such programs. "They're not much different than the come-ons that advertise jeeps for $100," remarks one scrap recycler. He, in fact, blames the seminars for "muddying-up the waters" by attracting novice buyers to local sales, which disrupts the flow of scrap by making it harder for legitimate industry buyers to purchase material to sell to their regional scrap processing buyers.

And, of course, local sales, like national sales, have their elements of intrigue. One time, an experienced local sales participant says, he saw several buyers collude prior to a sale, while another time he recalls seeing a bidder deliberately overbid just to get onto a base to remove items that weren't even for sale. Fortunately, in both instances, the guilty parties were discovered and were barred from participating in future DRMO sales.

Despite these inherent problems with purchasing scrap, usables, and surplus from the U.S. government, Uncle Sam remains a valuable source of material for many in the scrap industry. Still, veterans warn, government sales are an extremely competitive niche market that requires careful attention to detail, not to mention business acumen, as margins are reportedly slim. "It's not an untapped gold mine," observes one scrap broker. In his view, echoed by many others, buying scrap from the federal government ought to be left to the professionals.

[SIDEBAR]

What’s Not for Sale

While the U.S. government sells a dizzying array of materials, there are a few items it won’t sell. DRMS policy, for instance, prohibits the sale of real estate, confiscated or seized property, and most contractor inventory, such as property--including scrap--generated and/or owned by government contractors. In addition, arms, ammunition, combat aircraft, and other items termed “offensive” or “defensive” in nature are never sold in original form to the general public. Instead, these items are demilitarized prior to sale to preclude reconditioning.

Even Army jeeps can’t be sold in their original form because they’re deemed unsafe for public highway use by the Department of Transportation. Government guidelines require the jeeps to be rendered unusable, which means their major engine components must be removed and their bodies destroyed. That’s why there’s no such thing as a driveable $100 U.S. Army jeep, as they come-on ads suggest. “Anyone who tells you you’re going to buy a jeep for anything other than scrap is lying,” states one DRMS official.

Of the items the government does sell, some have been put to some rather imaginative uses. The University of Utah Hospital, for example, used scrapped government equipment to build the “Jarvik 7” artificial heart that sustained the life of Barney Clark, the world’s first artificial heart recipient. In addition, the mobile life support system used during the implant operation was made entirely of surplus goods. And the same hospital has used scrap aluminum to make artificial joints and adapted a calibration machine used by the Air Force to measure skin for grafting and calibrate the exact placement of corneal implants.

[SIDEBAR]

DRMS Scrap Sales, 1991 to 1993*

Ferrous

1991

294,710 tons

$19,210,582 revenue

 

1992

363,622 tons

$23,146,832 revenue

 

1993

411,931 tons

$21,415,997 revenue

 

Total

1,070,263 tons

$63,773,411 revenue

 

Nonferrous

1991

80,995 tons

$52,208,870 revenue

 

1992

79,025 tons

$42,636,309 revenue

 

1993

91,334 tons

$47,707,716 revenue

 

Total

251,354 tons

$142,552,895

 

Nonmetallic

1991

208,738 tons

$11,712,265 revenue

 

1992

219,619 tons

$11,127,675 revenue

 

1993

221,499 tons

$9,785,984 revenue

 

Total

649,856 tons

$32,625,924 revenue

* Based on DRMS fiscal year figures, covering Oct. 1 to Sept. 30.

[SIDEBAR]

For More Information

Business Succession and Estate Management Strategies

Buying surplus U.S. government property, including scrap and usables, may not be for everyone, but some recyclers swear by this niche market.

For Sale: Surplus U.S. Army Jeeps--Yours for Only $100!

Does this pitch line sound familiar? It should. Such claims have appeared in advertisements in national magazines for decades, no doubt piquing the interest of many individuals and businesses seeking great opportunities in the U.S. government's plethora of surplus materials. The fact is, however, that many of these ads are misleading at best and scams at worst, according to representatives at the Defense Reutilization and Marketing Service (DRMS) (Battle Creek. Mich.), the arm of the Defense Department that oversees sales of surplus and scrap materials. Thus, that $100 jeep could, in reality, be a $25 pile of scrap metal (to learn why, see "What's Not for Sale").

While this may be a letdown for those in search of a cheap vehicle, it reveals a glimpse of the U.S. military's position as a large, valuable, and unique source of high-quality materials for many scrap traders, processors, and consumers. When it comes to scrap, in fact, the DRMS is the largest single source of material for the domestic recycling industry, selling more than half a million tons of ferrous and nonferrous metals valued at more than $69 million in fiscal year 1993.

And these metals account for only part of the picture. The government's selling program, which includes nonmetallics such as old corrugated containers and surplus usables such as machinery, office furniture, and boots, adds up to hundreds of millions of dollars worth of goods sold each year.

Basics of the System

Government scrap and surplus materials are offered in local as well as national sales, with the type, value, and quantity of the material determining whether it is sold locally or nationally. For example, under current rules, local bases cannot sell non-munitions scrap metal in quantities of more than 20,000 pounds or with a market value greater than $2,500. This policy may soon change, however: The expected closure of 30 or more major military bases and the scaling back or reorganizing of 134 others in the years ahead are expected to increase the scrap sales potential at the local and national levels in the short term, so government officials are set to meet this year to discuss the sales guidelines.

Local sales, which are conducted by local military bases through what are known as the Defense Reutilization and Marketing Offices (DRMOs), are usually advertised through fliers mailed to individuals on local DRMO bidding lists. National sales, on the other hand, are administered by the DRMS office in Memphis, Tenn., and are advertised through sales catalogs mailed to all interested parties. These catalogs, which are more thorough than local announcements, describe the property for sale, where the property is located, the location of the sale, inspection and sale dates, and contacts for more information. In addition, the Commerce Business Daily, a federal government publication, contains notices of all scheduled national sales.

Anatomy of a National Sale

Before bidding on property listed in a sales catalog, however, advise many recyclers experienced in the process, it's important to physically inspect the material. Why? For one reason, catalog descriptions for like-sounding material vary considerably from base to base, says Gay Searle, sales manager of Acme Trading & Supply Co. (Portland, Ore.). Also, he notes, the actual material may be a far cry from how it has been described and advertised in the catalog-something you'll never know unless you inspect it in person.

Nevertheless, many bidders don't inspect the property, instead relying on a call to the base for more details on the material or an extremely low bid as a way of hedging their risk. While most bases do a credible job in properly segregating the various types of metallic scrap, and while some will provide photos, or even samples, of the scrap, Searle and others maintain that base personnel are simply not qualified to answer detailed questions on scrap items that may not even be properly sorted and segregated.

Following careful inspection, interested parties fill out bids that are then sealed for opening at a specified date and time, depending on the size and type of sale. Bidders enter their tenders on the bid forms in the catalog, complete other forms as specified by the catalog, and return them to the DRMS, along with the required bid deposit-usually 20 percent of the bid amount. The deposit must be in the form of cash or a guaranteed financial instrument such as a certified or cashier's check, or even a credit card. Bidders who have secured an irrevocable letter of credit from their bank or an approved bid bond backed by an insurance carrier also have the option of submitting their deposit by personal or company check. But even then, this form of deposit is limited to the amount of the letter of credit or the penal sum of the bond.

Seasoned bidders note that their initial bids are usually biased on the low side, in part because DRMS policy allows for bid revisions up to 3 p.m. on the day before bids are opened, and these changes can be faxed in on an item-by-item basis. This policy not only gives buyers maximum price flexibility as market conditions dictate, but also enables the seller--that is, the government--to maximize the revenue it receives.

After the bids are opened, the high bidders are chosen, and the award results--which note the winning bidders, their bids, and the quantity of material sold--are announced. Because this information can reportedly take a week or so to reach the successful bidders, some participants rely on the information services of other independent firms that attend the bid openings specifically to record the results and usually have the complete rundown in the hands of their subscribers within days of the awards. Unsuccessful bidders, meanwhile, get their bid deposits returned, usually within seven days after the awards are made.

Following the awards, successful bidders must pay for their material in full within 30 days, unless the sale was a "term sale" in which specified quantities of material--usually ferrous scrap--are released over a defined period. In these sales, winning bidders are billed at the end of the month for material picked up that month, with transacted prices pegged to a published scrap price.

Buyers must also arrange to pick -up the material within a specified period, usually ranging from three weeks to a month following an award. If material isn't removed within the specified period, buyers can face storage charges--which do vary--or forfeiture of their bid deposit. Naturally, there are exceptions to this rule for both the buyer and seller. For example, the government will usually grant extensions, without penalty, should the buyer be unable to remove material due to such factors as inclement weather and equipment breakdowns.

When it comes to picking up purchased material, each government facility has scales for proper weighing and documentation. Don't be surprised if these scales reveal that the actual volume of material varies from the original weight awarded, experienced buyers point out. Government policy allows a variance of plus or minus 25 percent, they note, adding that it is generally more common for buyers to take away more material than less. In this case, the buyer is obligated to pay for the additional material at the same unit price as the original lot. Of course, if the lot comes up short, the buyer isn't charged for material not received.

As a whole, the timeline of a national sale is such that you could bid on material in one month, be notified of the award the next month, and not pick up all the material until the following month. Thus, by the time you take possession, you may have already sold the material to a third party--not an uncommon occurrence--and may need a little luck to ensure that market conditions won't have changed to make what may have first been a profitable-looking bid into a loss on the sell side.

The System's Downsides

Overall, regular participants rate national sales conducted by the DRMS highly. In fact, a national sales office customer service survey, conducted last year by the DRMS, gleaned generally positive remarks from the 350 national sales customers that responded out of a total of 700 solicited. But one complaint from the respondents was that they weren't receiving copies of the award list in a timely fashion, if at all. Others claimed that bid deposits weren't returned quickly enough and that award documents weren't being received within 10 days following bid openings.

Many customers also noted displeasure with the requirement that bids be accompanied by guaranteed deposits, as opposed to simple company or personal checks. But government officials point out that this "hard dollars" policy was implemented in 1986 because of problems with deposit checks that bounced. In fact, according to Defense Department auditors, about $2.9 million in uncertified deposit checks was dishonored in one 18-month period during 1981 and 1982. There's always the option of obtaining a bond to cover deposits, but some individuals and small firms complain that it is either too hard or too expensive for them to do so. Still, this is the most cost-effective and efficient way for serious bidders to do business with the government, some say. "It's no big deal getting a bid bond," remarks one large processor. "It's certainly worth my time and cost. It effectively turns what would be a tie-up in money into nothing more than a clerical exercise." The underlying truth, he maintains, is that some individuals and firms don't want to subject themselves to a detailed credit analysis by the issuing insurance company.

On the other side of the fence, the DRMS can have its own problems with the system. For example, there have been instances in which awards were not honored by the buyer, usually due to changing market conditions. In such cases, however, the bidder's deposit is forfeited, thus giving participants a potent incentive not to abandon their bids. There have also been cases in which successful bidders supposedly “cherry picked" through their purchased materials, leaving unwanted scrap behind at the government site. Moreover, it's been alleged that top bidders have contacted second-highest bidders to cut deals that would enable the former to lower their average prices for the awarded materials. Naturally, these last two actions are considered serious ethical breaches that the government as well as the scrap industry condemn.

Taking the Local Sales Route

If you're interested in local sales, the more than 100 DRMOs in the continental United States sell material through regular auctions, spot bids, and "cash-and-carry" sales, which are restricted to small quantities of usables at fixed prices based on current market values. Scrap is reportedly never sold in cash-and-carry sales.

While government limits on local sales volumes mean large quantities of scrap aren't found at the local level, enough material moves through the DRMOs to attract scrap pros, as well as novices. In fact, a typical announced auction can attract "hundreds," says one East Coast processor, who adds, "That's part of the problem, too." According to this recycler, many who attend local sales are "amateurs" who bid for items, including scrap, without fully understanding the market dynamics of buying and selling the material. As a result, he asserts, it's common for bidders to overpay and end up walking away from what they just bought. He sees the same problem with usables, noting that he some times sees items at auction that were supposedly sold the previous month.

This issue has become more important recently, with interest in DRMO sales reportedly increasing in the past year due to anticipated base closures, the recent economic recession, and the numerous seminars that promise hot opportunities in buying and selling government surplus. These seminars, presented by private concerns, tend to promise more than they deliver, say those familiar with such programs. "They're not much different than the come-ons that advertise jeeps for $100," remarks one scrap recycler. He, in fact, blames the seminars for "muddying-up the waters" by attracting novice buyers to local sales, which disrupts the flow of scrap by making it harder for legitimate industry buyers to purchase material to sell to their regional scrap processing buyers.

And, of course, local sales, like national sales, have their elements of intrigue. One time, an experienced local sales participant says, he saw several buyers collude prior to a sale, while another time he recalls seeing a bidder deliberately overbid just to get onto a base to remove items that weren't even for sale. Fortunately, in both instances, the guilty parties were discovered and were barred from participating in future DRMO sales.

Despite these inherent problems with purchasing scrap, usables, and surplus from the U.S. government, Uncle Sam remains a valuable source of material for many in the scrap industry. Still, veterans warn, government sales are an extremely competitive niche market that requires careful attention to detail, not to mention business acumen, as margins are reportedly slim. "It's not an untapped gold mine," observes one scrap broker. In his view, echoed by many others, buying scrap from the federal government ought to be left to the professionals.

[SIDEBAR]

What’s Not for Sale

While the U.S. government sells a dizzying array of materials, there are a few items it won’t sell. DRMS policy, for instance, prohibits the sale of real estate, confiscated or seized property, and most contractor inventory, such as property--including scrap--generated and/or owned by government contractors. In addition, arms, ammunition, combat aircraft, and other items termed “offensive” or “defensive” in nature are never sold in original form to the general public. Instead, these items are demilitarized prior to sale to preclude reconditioning.

Even Army jeeps can’t be sold in their original form because they’re deemed unsafe for public highway use by the Department of Transportation. Government guidelines require the jeeps to be rendered unusable, which means their major engine components must be removed and their bodies destroyed. That’s why there’s no such thing as a driveable $100 U.S. Army jeep, as they come-on ads suggest. “Anyone who tells you you’re going to buy a jeep for anything other than scrap is lying,” states one DRMS official.

Of the items the government does sell, some have been put to some rather imaginative uses. The University of Utah Hospital, for example, used scrapped government equipment to build the “Jarvik 7” artificial heart that sustained the life of Barney Clark, the world’s first artificial heart recipient. In addition, the mobile life support system used during the implant operation was made entirely of surplus goods. And the same hospital has used scrap aluminum to make artificial joints and adapted a calibration machine used by the Air Force to measure skin for grafting and calibrate the exact placement of corneal implants.

[SIDEBAR]

DRMS Scrap Sales, 1991 to 1993*

Ferrous

1991

294,710 tons

$19,210,582 revenue

 

1992

363,622 tons

$23,146,832 revenue

 

1993

411,931 tons

$21,415,997 revenue

 

Total

1,070,263 tons

$63,773,411 revenue

 

Nonferrous

1991

80,995 tons

$52,208,870 revenue

 

1992

79,025 tons

$42,636,309 revenue

 

1993

91,334 tons

$47,707,716 revenue

 

Total

251,354 tons

$142,552,895

 

Nonmetallic

1991

208,738 tons

$11,712,265 revenue

 

1992

219,619 tons

$11,127,675 revenue

 

1993

221,499 tons

$9,785,984 revenue

 

Total

649,856 tons

$32,625,924 revenue

* Based on DRMS fiscal year figures, covering Oct. 1 to Sept. 30.

[SIDEBAR]

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