B-151399, B-151458, MAY 31, 1963

B-151399, B-151458, MAY 31, 1963

TO THE SECRETARY OF COMMERCE:

BY LETTER DATED APRIL 25, 1963, YOUR GENERAL COUNSEL FORWARDED A COPY OF CONTRACT NO. CC-4784 WITH INTERPUBLIC, INCORPORATED, AND ASKED THAT WE REVIEW THE BASIS FOR THE ASSISTANT GENERAL COUNSEL'S CONCLUSION, AS SET OUT IN HIS MEMORANDUM OF APRIL 22, THAT THE PAYMENT PROVISIONS OF SUCH CONTRACT DO NOT VIOLATE THE COST-PLUS-A-PERCENTAGE OF-COST PROHIBITION SET OUT IN 41 U.S.C. 254 (B).

ARTICLE IV OF CONTRACT NO. CC-4784 PROVIDES THAT THE CONTRACTOR, UNLESS OTHERWISE SPECIFIED IN A TASK ORDER, SHALL BE COMPENSATED FOR ITS SERVICES ON THE FOLLOWING BASES:

"/A) FOR ALL STAFF TIME WITH THE EXCEPTION OF FIELD WORK, COMPENSATION WILL BE BASED UPON SALARY COST MULTIPLIED BY A FACTOR OF THREE (3). THIS INCLUDES DIRECT TIME APPLIED BY DESIGNERS, ARTISTS, COPYWRITERS, AND MARKETING EXECUTIVES. CLERICAL, ADMINISTRATIVE, AND SECRETARIAL TIME WILL NOT BE CHARGED FOR. ALSO, THERE WILL BE NO CHARGE FOR MANAGEMENT DIRECTION BOTH WITHIN AND OUTSIDE THE UNITED STATES.

"/B) FIELD WORK WILL BE CHARGED FOR ON THE BASIS OF SALARY COST MULTIPLIED BY A FACTOR OF TWO (2). ONLY BUSINESS DAYS AND HOURS WILL BE USED IN THE COMPUTATION OF SUCH CHARGES. SUNDAYS AND HOLIDAYS WILL BE INCLUDED ONLY IN INSTANCES IN WHICH SERVICES ARE ACTUALLY RENDERED ON SUCH DAYS.

"/C) REIMBURSEMENT WILL BE MADE TO THE CONTRACTOR FOR OUT-OF-POCKET EXPENSES INCURRED IN CONNECTION WITH THE SERVICES TO BE RENDERED UNDER THIS CONTRACT, SUCH AS TRAVEL (PURSUANT TO ARTICLE VIII), TELEPHONE, TELEGRAPH, POSTAGE, AND DELIVERY CHARGES, IN ACCORDANCE WITH USUAL GOVERNMENT PROCEDURES APPLICABLE TO SUCH COSTS. IN ADDITION, A SUM EQUIVALENT TO 17.65 PERCENT OF CERTAIN OUT-OF-POCKET EXPENSES (NOT INCLUDING THE EXAMPLES MENTIONED IN THE PREVIOUS SENTENCE) WILL BE PAID TO THE CONTRACTOR FOR THAT TYPE OF EXPENSE FOR WHICH A COMMISSION IS GENERALLY PAID BY CLIENT-ADVERTISERS, SUCH AS FOR ART WORK, TALENT, AND PRODUCTION ENGAGED AND SUPERVISED BY THE CONTRACTOR.'

THE CONTRACT CONTAINS NO OTHER SPECIFIC PAYMENT PROVISIONS, AND IT MUST THEREFORE BE ASSUMED THAT WHATEVER PROFIT IS EXPECTED TO BE REALIZED BY THE CONTRACTOR WILL BE INCLUDED IN HIS COMPENSATION COMPUTED ON THE ABOVE BASES. IT NECESSARILY FOLLOWS THAT THE TOTAL AMOUNT OF THE CONTRACTOR'S PROFITS WILL INCREASE AS THE COST TO THE GOVERNMENT, COMPUTED ON SUCH BASES, INCREASES.

AS INDICATED IN 38 COMP. GEN. 38, 41, THE PROHIBITION AGAINST CPPC CONTRACTS IS DIRECTED TO PRECLUDING ANY TEMPTATION OR POSSIBILITY THAT A CONTRACTOR MAY INCREASE HIS PROFIT BY CARELESSLY OR DELIBERATELY INCREASING HIS COST AT THE EXPENSE OF THE GOVERNMENT UNDER A REIMBURSABLE CONTRACT. IT IS OUR OPINION THAT THE COMPUTATION OF COMPENSATION IN ACCORDANCE WITH THE PROVISIONS SET OUT IN ARTICLE IV OF THE INSTANT CONTRACT PERMITS THE CONTRACTOR TO INCREASE HIS PROFIT BY CARELESSLY OR DELIBERATELY INCREASING HIS COSTS, AND THAT ARTICLE IV IS, THEREFORE, IN VIOLATION OF 41 U.S.C. 254 (B).

WITH RESPECT TO WHETHER THE PROVISIONS OF ARTICLE III ARE SUFFICIENT TO VALIDATE THE CONTRACT, THAT ARTICLE READS AS FOLLOWS:

"/A) WHEN THE GOVERNMENT DESIRES THE CONTRACTOR TO PERFORM ANY WORK UNDER THIS CONTRACT IT WILL COMMUNICATE WITH THE CONTRACTOR, SPECIFYING THE NATURE OF THE WORK OR PROJECT DESIRED AND ANY PERTINENT DETAILS, OR THE CONTRACTOR MAY ON ITS OWN VOLITION RECOMMEND A PROJECT. THE CONTRACTOR SHALL SUBMIT TO THE GOVERNMENT, IN WRITING, AN ESTIMATE OF THE COST OF AND TIME REQUIRED FOR THE WORK OR PROJECT. IF ACCEPTABLE, THE GOVERNMENT WILL ISSUE TO THE CONTRACTOR A TASK ORDER AUTHORIZING THE PERFORMANCE OF THE WORK OR PROJECT. IF AT ANY TIME DURING WORK ON ANY PROJECT IT APPEARS THAT THE TOTAL COST TO BE INCURRED OR TIME REQUIRED WILL EXCEED THE ESTIMATE, THE CONTRACTOR SHALL PROMPTLY NOTIFY THE GOVERNMENT AND SHALL NOT PROCEED FURTHER UNLESS AND UNTIL THE GOVERNMENT APPROVES A REVISED ESTIMATE; OR, AT THE OPTION OF THE GOVERNMENT, FURTHER WORK ON THE PROJECT MAY BE TERMINATED. IN THE EVENT OF ANY CONFLICT BETWEEN THE PROVISIONS OF A TASK ORDER AND THIS CONTRACT, THE PROVISIONS OF THE TASK ORDER WILL GOVERN.

"/B) THE CONTRACTOR SHALL KEEP AVAILABLE THE NECESSARY PERSONNEL AND FACILITIES FOR THE PERFORMANCE OF THE WORK DIRECTED BY ANY TASK ORDER ISSUED PURSUANT TO THIS CONTRACT.'

AS SET OUT IN HIS MEMORANDUM OF APRIL 22, IT APPEARS TO BE YOUR ASSISTANT GENERAL COUNSEL'S OPINION THAT APPROVAL BY YOUR AGENCY OF A TASK ORDER CONSUMMATES A CONTRACT PROVIDING FOR A FIXED RATE OF PAYMENT ON A DOLLAR BASIS, RATHER THAN ON A PERCENTAGE BASIS, AND THAT THE DOLLAR LIMITATION INCLUDED IN SUCH TASK ORDERS ADEQUATELY PROTECTS THE GOVERNMENT FROM THE EVILS TO WHICH THE CPPC PROHIBITION IS DIRECTED. HOWEVER, OUR EXAMINATION OF VARIOUS TASK ORDERS SHOWS THAT THE DOLLAR AMOUNTS SET OUT THEREIN ARE NOT DETERMINATIVE OF THE COST OF PERFORMANCE TO THE GOVERNMENT, AND THAT THE FINAL AMOUNT BILLED BY THE CONTRACTOR AND PAID BY THE GOVERNMENT MAY BE EITHER MORE OR LESS THAN THE AMOUNT PROPOSED BY THE CONTRACTOR AND INCORPORATED INTO A TASK ORDER BY THE GOVERNMENT. IN THE ABSENCE OF A CONTRARY PROVISION IN SUCH TASK ORDERS IT MUST BE ASSUMED THAT THE CONTRACTOR IS BILLING THE GOVERNMENT IN ACCORDANCE WITH THE PROVISIONS OF THE BASIC CONTRACT. TO THE EXTENT THAT A TASK ORDER THEREBY PERMITS PAYMENTS TO BE COMPUTED ON THE SAME BASIS AS THE BASIC CONTRACT, WE MUST THEREFORE CONCLUDE THAT THE TASK ORDER ALSO VIOLATES THE CPPC PROHIBITION.

WITH RESPECT TO THE LIMITATION ON PAYMENTS INCLUDED IN TASK ORDERS, THE MEMORANDUM OF APRIL 22 APPEARS TO RELY ON OUR DECISION AT 23 COMP. GEN. 410 WHICH HELD THAT SUCH A LIMITATION WAS SUFFICIENT TO PROTECT THE INTEREST OF THE GOVERNMENT. HOWEVER, OUR REASONING ON THAT POINT WAS SUBSEQUENTLY DISAFFIRMED AT 33 COMP. GEN. 291 AND 38 ID. 38. IN VIEW THEREOF, IT IS OUR OPINION THAT INDIVIDUAL TASK ORDERS WHICH PERMIT THE COMPUTATION AND PAYMENT OF COMPENSATION ON THE SAME BASIS AS IS SET OUT IN THE BASIC CONTRACT ARE IN VIOLATION OF THE CPPC PROVISIONS OF 41 U.S.C. 254 (B).

IT IS SETTLED LAW THAT A GOVERNMENT CONTRACT WHICH IS PROHIBITED BY STATUTE CANNOT BE ENFORCED IN ACCORDANCE WITH ITS TERMS AGAINST THE GOVERNMENT, AND THAT THE GOVERNMENT, AT MOST, IS LIABLE FOR SERVICES RECEIVED UNDER SUCH A CONTRACT ONLY TO THE EXTENT OF THE REASONABLE VALUE OF SUCH SERVICES. WHILE THE REASONABLE VALUE OF THE SERVICES RENDERED UNDER CONTRACTS OF THE TYPE DESCRIBED ABOVE SHOULD PROPERLY INVOLVE CONSIDERATION OF THE COSTS INCURRED BY THE CONTRACTORS, A REVIEW OF THE RECORDS OF YOUR OFFICE INDICATES THAT THE INFORMATION SUBMITTED BY THE CONTRACTORS IN SUPPORT OF PERIODIC BILLINGS UNDER EACH TASK ORDER IS INSUFFICIENT TO COMPLETELY IDENTIFY EITHER THE TYPES OR AMOUNTS OF COSTS INCURRED BY THE CONTRACTORS. WE THEREFORE SUGGEST THAT AN AUDIT BE CONDUCTED OF THE OPERATIONS AND EXPENDITURES OF ALL CONTRACTS OF THIS TYPE AND THAT ANY PAYMENTS PRESENTLY DUE OR WHICH MAY BECOME DUE UNDER EXISTING TASK ORDERS BE ADJUSTED TO REFLECT REASONABLE VALUE, INCLUDING A REASONABLE FEE, FOR SUCH SERVICES.

IN THE ABSENCE OF LEGISLATION SPECIFICALLY EXEMPTING YOUR AGENCY FROM THE PROVISIONS OF 41 U.S.C. 254 (B) ANY FUTURE TASK ORDERS SHOULD PROVIDE FOR COMPENSATION COMPUTED ON A BASIS WHICH WILL NOT VIOLATE THAT STATUTE, AND ACTION DIRECTED TO THE EXECUTION OF BASIC CONTRACTS PROVIDING FOR COMPUTATION ON A SIMILAR BASIS SHOULD BE INSTITUTED IMMEDIATELY, WITH DUE REGARD BEING GIVEN IN BOTH AREAS TO THE PRICE NEGOTIATION POLICIES AND TECHNIQUES PRESCRIBED BY SUBPART 1-3.8 OF THE FEDERAL PROCUREMENT REGULATIONS.

IT IS TO BE UNDERSTOOD THAT NO FURTHER PAYMENTS SHOULD BE MADE TO INTERPUBLIC FOR SERVICES ALREADY RENDERED ON THE BASES INDICATED ABOVE WITHOUT CONCURRENCE OF THE DEPARTMENT OF JUSTICE IN ORDER THAT THERE MAY BE NO POSSIBILITY ON PREJUDICING THE DEPARTMENT'S CONSIDERATION OF THE QUESTION AS TO WHETHER THERE HAS BEEN A VIOLATION OF THE THEN EXISTING STATUTE 18 U.S.C. 434. IN ADDITION NO NEW AGREEMENT SHOULD BE ENTERED INTO WITH INTERPUBLIC PENDING ADVICE FROM THE DEPARTMENT OF JUSTICE AS TO WHETHER THERE MAY HAVE BEEN A VIOLATION OF THE THEN EXISTING STATUTE 18 U.S.C. 434. SEE OUR LETTER TO YOU OF TODAY IN RESPONSE TO LETTER DATED APRIL 29, 1963, FROM YOUR GENERAL COUNSEL.