B-134500, MAR. 18, 1958

B-134500, MAR. 18, 1958

TO MR. W. E. PILCHER, DISBURSING OFFICER, DEPARTMENT OF THE ARMY:

YOUR LETTER OF SEPTEMBER 16, 1957, REQUESTING A DECISION AS TO WHETHER PAYMENT IS AUTHORIZED ON A VOUCHER COVERING A CLAIM OF THE FLIPPIN MATERIALS COMPANY, HOUSTON, TEXAS, FOR THE AMOUNT OF $25,415.64 UNDER CONTRACT NO. W-03-050-ENG-525, DATED NOVEMBER 3, 1947, HAS BEEN REFERRED HERE BY THE CHIEF OF FINANCE.

THE CONTRACT WAS ENTERED INTO WITH SEVERAL COMPANIES DOING BUSINESS AS A JOINT VENTURE UNDER THE NAME OF THE FLIPPIN MATERIALS COMPANY. THE JOINT VENTURERS AGREED TO PRODUCE MATERIALS FOR CONCRETE AGGREGATE FROM A GOVERNMENT-OWNED QUARRY SITE IN THE VICINITY OF FLIPPIN, ARKANSAS, AND TO DELIVER, PROCESS AND PLACE THE FINISHED AGGREGATE IN DESIGNATED STORAGE PILES ON THE RIGHT ABUTMENT AT BULL SHOALS DAM SITE, LOCATED ON THE WHITE RIVER IN THE STATE OF ARKANSAS.

PAYMENT FOR SUCH SERVICES WAS TO BE MADE AT STIPULATED UNIT PRICES SUBJECT TO THE PROVISIONS OF ARTICLE 29 OF THE CONTRACT, ENTITLED "REDUCTION IN PRICES.' THE CONTRACT ALSO PROVIDES IN PARAGRAPH SC-14 FOR PAYMENTS TO BE MADE BY THE GOVERNMENT IN THE FORM OF"PAYMENT FOR PREPARATORY WORK.'

IT IS REPORTED THAT THE JOINT VENTURERS HAVE FILED SUIT IN THE COURT OF CLAIMS FOR RECOVERY OF THE SUM OF $646,000, ALLEGING THAT CERTAIN EXTRA WORK WAS REQUIRED BECAUSE THE GOVERNMENT-OWNED QUARRY FROM WHICH THE MATERIALS FOR THE FINISHED AGGREGATE WERE TO BE OBTAINED WAS NOT AS REPRESENTED. YOU STATE THAT SUCH OUTSTANDING CLAIM CONTAINS NO MATTERS IDENTICAL TO THOSE BEING FORWARDED FOR ADVANCE DECISION. THE INSTANT CLAIM COVERS AN ALLEGED BALANCE OF $24,902.72 DUE UNDER THE PAYMENT PROVISIONS OF THE CONTRACT, PLUS $512.92, APPROVED FOR PAYMENT UNDER MODIFICATION 5 OF THE CONTRACT WHICH RELATES TO THE HANDLING OF ARKANSAS SEVERANCE TAX LITIGATION.

THE RECORD SHOWS THAT A CONSIDERABLE AMOUNT OF PREPARATORY WORK WAS REQUIRED BEFORE COMMENCEMENT OF DELIVERIES OF THE FINISHED AGGREGATE. DELIVERIES WERE COMMENCED IN MARCH 1951 AND COMPLETED IN OCTOBER 1952. COMPUTED AT THE CONTRACT UNIT PRICES AND LUMP SUM AMOUNTS PAYABLE UNDER CERTAIN CHANGE ORDERS, THE AMOUNT PAYABLE FOR THE MATERIAL PRODUCED WOULD BE $10,386,935.86. THAT AMOUNT WAS USED IN THE COMPUTATION OF THE ADJUSTMENT DUE THE GOVERNMENT UNDER THE FORMULA PROVIDED IN ARTICLE 29 FOR A REDUCTION IN PRICE IN THE EVENT THAT THE TOTAL CONTRACT PRICE EXCEEDED THE ACTUAL COST OF PERFORMANCE PLUS 10 PERCENT.

ON THE BASIS OF COST FIGURES SUBMITTED BY THE JOINT VENTURE THE PRICE ADJUSTMENT WOULD HAVE AMOUNTED TO A DECREASE OF $838,148.82, AND THE SUBJECT VOUCHER REPRESENTS THE BALANCE DUE THE CONTRACTOR ON THAT BASIS. YOU ARE IN DOUBT, HOWEVER, AS TO THE PROPRIETY OF CERTAIN ITEMS INCLUDED IN THE CONTRACTOR'S COST STATEMENT, IN THE AGGREGATE AMOUNT OF $105,863.60, ELIMINATION OF WHICH WOULD RESULT IN A PRICE REDUCTION OF $891,080.62 AND AN INDEBTEDNESS OF THE CONTRACTOR TO THE GOVERNMENT FOR AN OVERPAYMENT IN THE AMOUNT OF $27,516.16, COVERING A STATED BALANCE OF $28,029.08 REMAINING DUE FROM THE REDUCTION IN THE CONTRACT PRICE, LESS THE SUM OF $512.92 DUE THE JOINT VENTURERS UNDER MODIFICATION 5 OF THE CONTRACT.

THE SUM OF $52,931.80 IN CONTROVERSY CONSISTS OF THE FOLLOWING ITEMS:

CHART

INTEREST PAID TO BANK $57,470.81

DAMAGE CLAIMS 25,000.00

LEGAL EXPENSES, ETC., ON SUIT AGAINST U.S. 11,881.78

TOTAL $94,352.59 HOME OFFICE OVERHEAD CLAIMED THEREON (2 PERCENT) 1,887.05

TOTAL $96,239.64 ADDITION FOR ARRIVING AT ADJUSTED COST (10 PERCENT) 9,623.96

---------- POSSIBLE OVERSTATEMENT OF ADJUSTED COST $105,863.60 RESULTING UNDERSTATEMENT OF PRICE REDUCTION (50 PERCENT) 52,931.80

IN REGARD TO THE INCLUSION OF INTEREST AS AN ITEM OF COST, YOU REFER TO THE NEGOTIATIONS LEADING TO THE INCLUSION OF THE REDUCTION IN PRICE CLAUSE OF THE CONTRACT (ARTICLE 29) AND THE CONTRACT PROVISIONS CONCERNING PAYMENT FOR PREPARATORY WORK (PARAGRAPH SC-14). YOU STATE THAT $2,400,250 WAS PAID TO THE JOINT VENTURE AS PREPARATORY PAYMENTS IN THE VERY EARLY STAGES OF THE CONTRACT AND THAT IT WAS BELIEVED THAT THE INCLUSION OF PARAGRAPH SC-14 IN THE CONTRACT WOULD ALLOW SUFFICIENT FUNDS TO FINANCE THE JOB. THE RECORD FURNISHED CONTAINS NOTHING TO SHOW THAT THIS WAS THE CONTRACTOR'S UNDERSTANDING. THE PROPOSAL WHICH FURNISHED THE BASIS FOR ARTICLE 29 WAS STATED IN THE CONTRACTOR'S LETTER OF OCTOBER 27, 1947, WHICH CONTAINED THE STIPULATION "* * * IT WILL BE NECESSARY TO ARRIVE AT A METHOD OF DETERMINING COST AND OUR ONLY RESERVATIONS IN THAT CONNECTION ARE THAT THE CONTRACTOR NOT BE OBLIGATED TO HAVE ANY CAPITAL TIED UP IN PLANT AND EQUIPMENT AT THE CONCLUSION OF THE WORK AND THAT PROPER ALLOWANCE BE MADE FOR INDIRECT COSTS AND HOME OFFICE OVERHEAD.' INTEREST ON BORROWED CAPITAL IS AN INDIRECT COST, AND WHILE IT HAS CONSISTENTLY BEEN THE POSITION OF THE GOVERNMENT THAT INTEREST IS NOT AN ALLOWABLE ITEM OF COST UNDER COST TYPE GOVERNMENT CONTRACTS--- SEE, FOR EXAMPLE, TD 4904 AND TD 5000, AND THE WAR-NAVY DEPARTMENTS'"EXPLANATION OF PRINCIPLES FOR DETERMINATION OF COSTS, APRIL, 1942"--- WE CONCLUDE THAT THE PROVISIONS OF ARTICLE 29, READ AGAINST THE BACKGROUND OF THE ABOVE QUOTED STATEMENT AND IN THE LIGHT OF THE DETERMINATIONS OF COSTS BY THE ACCOUNTING FIRM CHOSEN IN ACCORDANCE WITH THE CONTRACT AND THE ACCEPTANCE OF THOSE DETERMINATIONS BY THE CONTRACTING OFFICER, ARE SUCH AS TO AUTHORIZE THE RECOGNITION OF INTEREST AS AN ELEMENT OF COST TO BE CONSIDERED IN COMPLETING THE COSTS OF THE CONTRACT FOR THE PURPOSES OF THAT ARTICLE.

WE DO NOT HAVE FULL INFORMATION CONCERNING THE JOINT VENTURE'S COMPUTATION OF THE REDUCTION IN CONTRACT PRICE. HOWEVER, IN ONE OF THE FINANCIAL STATEMENTS PREPARED BY THE FIRM OF ERNST AND ERNST, CERTIFIED PUBLIC ACCOUNTANTS, RELATING TO THE JOINT VENTURE, IT IS SET FORTH THAT INTEREST OF $22,792.90 WAS CHARGED TO "OZARK DAM CONSTRUCTORS," AND THAT THE JOINT VENTURE WAS CHARGED INTEREST OF $6,009.95 BY "OZARK DAM CONSTRUCTORS.' IF THE NET AMOUNT OF $16,782.95 HAS NOT BEEN INCLUDED IN THE SUM OF $1,082,975.37, DEDUCTED AS "OTHER INCOME" ON THE JOINT VENTURE'S STATEMENT OF ACCOUNT, IT IS APPARENT THAT THE SUM OF $16,782.95 SHOULD NOW BE DEDUCTED FROM THE CLAIMED INTEREST COST OF $57,470.81.

WITH RESPECT TO THE CLAIMED COST OF $25,000, WE FIND NO PROPER BASIS FOR THE CONCLUSION THAT, BECAUSE THE JOINT VENTURE'S INSURANCE COMPANY UNDERTOOK TO DEFEND AND WAS SUCCESSFUL IN DEFENDING A SECOND GROUP OF SUITS FILED AGAINST THE JOINT VENTURERS, IT HAS, THEREFORE, ADMITTED LIABILITY UNDER THE INSURANCE POLICY. THE RECORD APPEARS REASONABLY TO ESTABLISH THAT THE QUESTION OF SUCH LIABILITY WAS STILL IN DISPUTE WHEN THE INSURANCE COMPANY AGREED TO FURNISH THE NECESSARY LEGAL SERVICES FOR DEFENSE OF THE SECOND GROUP OF CASES. IN THE CIRCUMSTANCES, WE PERCEIVE NO OBJECTION TO TREATMENT OF THE SUM OF $25,000, PAID IN SETTLEMENT OF THE EARLIER SUITS, AS AN ALLOWABLE ITEM OF COST IN THE PERFORMANCE OF THE GOVERNMENT CONTRACT FOR THE PURPOSE OF DETERMINING THE PRICE REDUCTION.

CONCERNING THE CLAIMED COST OF $11,881.78, IT IS OUR OPINION THAT, WHILE COSTS OF SUCH NATURE COULD BE ALLOWED IF INCURRED IN EFFORTS TO OBTAIN A SATISFACTORY SETTLEMENT OF ALL MATTERS INVOLVING THE OBLIGATION OF THE GOVERNMENT TO MAKE PAYMENT PURSUANT TO THE CONTRACT PROVISIONS, IT WOULD NOT BE PROPER TO ALLOW ANY AMOUNT EXPENDED IN THE PROSECUTION OF AN UNLIQUIDATED DAMAGE CLAIM AGAINST THE GOVERNMENT.

YOU ARE ACCORDINGLY ADVISED THAT ON THE PRESENT RECORD PAYMENT MAY BE MADE OF THE BALANCE DETERMINED TO BE DUE AFTER ELIMINATION OF THE ITEM OF LEGAL EXPENSES OF $11,881.78 AND ADJUSTMENT OF THE INTEREST CHARGE, IF REQUIRED, TO REFLECT THE PORTION OF THE INTEREST CHARGED TO OZARK DAM CONSTRUCTORS.