B-126794, APRIL 27, 1956, 35 COMP. GEN. 590

B-126794, APRIL 27, 1956, 35 COMP. GEN. 590

COST-CONTRACTS - OVERHEAD ADJUSTMENT PROBLEMS PROCUREMENT STATUTES DO NOT PERMIT A DISTINCTION IN THE AWARD OF GOVERNMENT CONTRACTS BETWEEN NONPROFIT AND COMMERCIAL ORGANIZATIONS AND THE PROHIBITION AGAINST THE EXECUTION OF COST-TYPE CONTRACTS AT PREDETERMINED FIXED OVERHEAD RATES IS APPLICABLE TO EDUCATIONAL INSTITUTIONS WHICH HAVE RESEARCH CONTRACTS. ADMINISTRATIVE AGENCIES WHICH WITHHOLD A PERCENTAGE OF THE CONTRACT PRICE UNDER COST-TYPE RESEARCH CONTRACTS ARE NOT REQUIRED TO CONTINUE TO WITHHOLD WUCH AMOUNTS FOR PURPOSES OF OVERHEAD ADJUSTMENT AFTER THE CONTRACTOR HAS SUBMITTED THE REPORT, OR ACCOMPLISHED THE CONTRACT OBJECTIVE. OVERHEAD DETERMINATIONS UNDER COST-TYPE CONTRACTS SHOULD BE MADE AFTER THE CLOSE OF THE FISCAL YEAR, OR AT THE END OF THE CONTRACT PERIOD, AND NOT AT THE RATE PRIOR TO THE CONTRACT PERIOD. ADMINISTRATIVE AGENCIES SHOULD ESTABLISH CLEAR COST PRINCIPLES AT THE TIME CONTRACTS WITH EDUCATIONAL INSTITUTIONS ARE NEGOTIATED TO MINIMIZE PROBLEMS IN THE ADJUSTMENT OF PROVISIONAL OVERHEAD RATES TO THE ACTUAL OVERHEAD COSTS.

TO THE NATIONAL FEDERATION OF COLLEGE AND UNIVERSITY BUSINESS OFFICERS ASSOCIATION, APRIL 27, 1956:

YOUR COMMITTEE'S DISCUSSION WITH US ON APRIL 6, 1956, TO REVIEW CERTAIN MATTERS CONNECTED WITH DECISION B-126794, 35 COMP. GEN. 434, ON THE ILLEGALITY OF FIXED OVERHEAD RATES IN CONTRACTS WAS BOTH INTERESTING AND HELPFUL. THIS OFFICE IS PARTICIPATING WITH THE EXECUTIVE AGENCIES IN RESOLVING PROBLEMS RELATED TO THE REIMBURSEMENT OF INDIRECT COSTS IN RESEARCH CONTRACT WITH UNIVERSITIES, INCLUDING EXAMINATION OF CURRENT PRINCIPLES AND PRACTICES IN ORDER TO DEVELOP CRITERIA FOR GOVERNMENT-WIDE APPLICATION. THE INFORMATION YOU FURNISHED AT THE APRIL 6 MEETING WILL BENEFIT US IN OUR ANALYSES, AND I HOPE WE MAY CALL ON YOU AND YOUR COMMITTEE FROM TIME TO TIME FOR ADDITIONAL ASSISTANCE.

THE LAW DOES NOT PERMIT A DISTINCTION BETWEEN NONPROFIT AND COMMERCIAL ORGANIZATIONS WITH RESPECT TO THE FACTORS INVOLVED IN THE USE OF FIXED OVERHEAD RATES IN CONTRACTS, AS WE DISCUSSED AT THE MEETING. THE STATUTES AND CONGRESSIONAL POLICY, AS WELL AS OUR JANUARY 27, 1956 DECISION, WERE DIRECTED TO A SYSTEM OF CONTRACTING, WHEREVER EMPLOYED, RATHER THAN TO A TYPE OF CONTRACT OR CONTRACTOR OR ANY SPECIFIC CONTRACTOR. YOU CITED OTHER INSTANCES, SUCH AS THE RENEGOTIATION ACT OF 1951, 50 U.S.C. APP. 1211 NOTE, WHERE UNIVERSITIES AND OTHER NONPROFIT INSTITUTIONS ARE EXEMPTED. UNDOUBTEDLY IN EACH OF THESE INSTANCES THE EXEMPTION OR OTHER DIFFERENTIATION WAS MADE BY THE CONGRESS ON THE MERITS OF THE PARTICULAR CIRCUMSTANCES, AND WAS EXPRESSLY PROVIDED FOR IN THE LEGISLATION. EDUCATIONAL INSTITUTIONS WERE NOT EXEMPTED BY THE CONGRESS IN THE CASE OF THE COST-PLUS-A PERCENTAGE-OF-COST SYSTEM OF CONTRACTING. ASIDE FROM THE QUESTION OF ILLEGALITY, AS NOTED IN THE JANUARY 27, 1956 DECISION, WE HAD WRITTEN ON APRIL 15, 1955 AND MAY 20, 1955, TO THE SECRETARY OF DEFENSE TO POINT OUT THAT THE FIXED OVERHEAD RATE METHOD OF PAYING OVERHEAD WAS ADMINISTRATIVELY UNDESIRABLE. THE METHOD, WHEREVER APPLIED, MAY BE UNFAIR TO THE GOVERNMENT OR THE CONTRACTORS AND IS INCONSISTENT WITH THE BASIC NATURE OF COST-TYPE CONTRACTS, I.E., THE REIMBURSEMENT OF CONTRACT COSTS ON THE BASIS OF THE COSTS INCURRED DURING THE CONTRACT PERIOD.

YOUR COMMITTEE ALSO REFERRED TO THE HARDSHIPS RESULTING FROM DELAYS IN REIMBURSEMENT, PARTICULARLY THOSE WHICH MAY OCCUR BECAUSE OF WITHHOLDINGS UNDER THE CONTRACTS PENDING FINAL DETERMINATION OF OVERHEAD. ALTHOUGH THE USE OF CONTRACT HOLDBACKS IS A PROCEDURE DESIGNED TO INSURE EFFECTIVE FINANCIAL CONTROLS, AND AS SUCH INVOLVES A PRINCIPLE IN WHICH THIS OFFICE CONCURS, IT DOES NOT APPEAR NECESSARY THAT THE HOLDBACK BE RETAINED, AT LEAST NOT IN THE SAME AMOUNT, WHEN THE REPORT HAS BEEN SUBMITTED OR OTHER EQUIVALENT OBJECTIVE HAS BEEN ACCOMPLISHED. WE BELIEVE THAT THE ADMINISTRATIVE AGENCIES, WHICH HAVE OPERATING RESPONSIBILITY FOR CONTRACT PAYMENTS, SHOULD AVOID ANY UNNECESSARY DELAY IN MAKING THESE PAYMENTS AND WE SHALL BE GLAD TO ASSIST THEM IN ANY PROBLEMS THAT THEY MAY HAVE. UNDERSTAND THAT THE PRIMARY PURPOSE OF THE MEETING BETWEEN THE DEPARTMENT OF DEFENSE REPRESENTATIVES AND YOUR COMMITTEE ON MARCH 14, 1956, WAS TO SOLICIT YOUR VIEWS AND RECOMMENDATIONS PRELIMINARY TO FORMULATION OF POLICIES TO ADMINISTER THE CONTRACTS IN THE MOST SATISFACTORY MANNER.

FOR PURPOSES OF CLARIFICATION, WE ARE BRIEFLY COMMENTING ON THE OTHER POINTS WHICH YOU INDICATED WERE OF LESSER SIGNIFICANCE.

1. YOUR REPRESENTATIVES POINTED OUT THAT THE COST PRINCIPLES SET FORTH IN THE ARMED SERVICES PROCUREMENT REGULATIONS AND IN THE " BLUE BOOK" DO NOT CONTEMPLATE REIMBURSEMENT OF ACTUAL COSTS BUT REPRESENT A COMPROMISE BASIS FOR OVERHEAD PAYMENT. THE DECISION UNDER DISCUSSION RELATED PRIMARILY TO THE TIME FOR DETERMINING THE AMOUNT OF OVERHEAD TO BE REIMBURSED RATHER THAN TO THE COST PRINCIPLES TO BE USED. THE TERM "ACTUAL COST" REFERRED TO THE USE OF EXPERIENCED COST AS OPPOSED TO THE USE OF ANTICIPATED COST, RATHER THAN TO THE PRECISENESS OF THE COST DETERMINATION. THE OVERHEAD SHOULD BE DETERMINED AFTER THE CLOSE OF THE FISCAL YEAR OR CONTRACT PERIOD RATHER THAN ON THE BASIS OF A FIXED RATE DETERMINED BEFORE THE CONTRACT PERIOD. ALTHOUGH THE DECISION DID NOT RELATE TO COST PRINCIPLES AS SUCH, THIS OFFICE CONCURS WITH THE NATIONAL SCIENCE FOUNDATION THAT EXISTING COST PRINCIPLES SHOULD BE REEVALUATED AND WE ARE PARTICIPATING WITH THE BUREAU OF THE BUDGET AND THE TREASURY DEPARTMENT IN A STUDY OF COST PRINCIPLES.

2. THE MEMBERS OF YOUR COMMITTEE ALSO EXPRESSED SOME CONCERN LEST THE REQUIREMENT THAT RATES BE ADJUSTED FROM PROVISIONAL TO AN ACTUAL COST BASIS BECOME A ONE-WAY BENEFIT TO THE GOVERNMENT, BECAUSE OF CONTRACT CEILINGS AND APPROPRIATION LIMITATIONS. THE CIRCUMSTANCES HERE DO NOT APPEAR TO BE ANY DIFFERENT UNDER CONTRACTS WITH UNIVERSITIES THAN THEY ARE UNDER COMMERCIAL CONTRACTS, WHERE SUCH ADJUSTMENTS HAVE BEEN COMMON PRACTICE WITHOUT APPRECIABLE DIFFICULTIES FOR A NUMBER OF YEARS. CONTRACT CEILINGS AND APPROPRIATION LIMITATIONS REQUIRE THAT CONTRACT COSTS, BOTH DIRECT AND INDIRECT, BE KEPT UNDER OBSERVATION AND THAT APPROPRIATE ACTION BE TAKEN WHEN CEILINGS OR LIMITATIONS ARE APPROACHED. ALTHOUGH THE FUNDS REQUIRED ARE NOT AS PRECISELY KNOWN AS THE WORK PROGRESSES WHEN PROVISIONAL RATES ARE USED RATHER THAN FIXED RATES, THE DIFFERENCE BETWEEN THE TWO SHOULD NOT BE SO DIFFERENT AS TO CHANGE MATERIALLY THE ANTICIPATION OF CONTRACT CEILINGS OR APPROPRIATION LIMITATIONS.

3. THE UNIVERSITY REPRESENTATIVES ALSO QUESTIONED WHETHER ANY SYSTEM OF OVERHEAD REIMBURSEMENT OTHER THAN THAT CURRENTLY USED WOULD BE JUSTIFIED BY THE MONETARY DIFFERENCES INVOLVED. THE STATUTORY PROHIBITION AND THE DECISION RELATE TO THE SYSTEM ITSELF IRRESPECTIVE OF THE AMOUNTS INVOLVED. WE RECOGNIZE THAT IN SOME INSTANCES THE TOTAL VOLUME OF GOVERNMENT RESEARCH WORK WITH A PARTICULAR INSTITUTION MAY BE SO SMALL THAT COMPUTATION OF THE ACTUAL INDIRECT COSTS, UNDER WHATEVER COST PRINCIPLES WOULD NORMALLY APPLY, MAY NOT BE JUSTIFIED. IN SUCH CASES IT MAY BE ADMINISTRATIVELY DESIRABLE TO ADOPT SOME ALTERNATIVE BUT LEGALLY ACCEPTABLE PROCEDURE SUCH AS A FLAT AMOUNT FOR INDIRECT COSTS. HOWEVER, ANY DEPARTURE FROM ACTUAL COST UNDER A COST-TYPE CONTRACT, UNLESS COST SHARING HAS BEEN AGREED TO, IS CONSIDERED ADMINISTRATIVELY UNDESIRABLE IF THE AMOUNTS INVOLVED ARE SIGNIFICANT.

4. CONSIDERABLE CONCERN WAS ALSO EXPRESSED BY THE MEMBERS OF YOUR COMMITTEE CONCERNING THE DANGER THAT THE GROUND RULES FOR COMPUTING OVERHEAD PAYMENTS MIGHT BE CHANGED BETWEEN THE TIME THE CONTRACT WAS ENTERED INTO AND THE TIME THAT THE ACTUAL OVERHEAD WOULD BE COMPUTED AFTER COMPLETION. IT WAS STATED THAT WHEN PREDETERMINED FIXED OVERHEAD RATES ARE USED THE UNIVERSITIES KNOW IN ADVANCE THEIR RATE OF REIMBURSEMENT. THE OTHER HAND, YOU INDICATED THAT IF A PROVISIONAL RATE IS USED AND LATER ADJUSTED TO ACTUAL COST THERE IS NO ASSURANCE THAT THE RULES WILL NOT BE CHANGED BY CONTRACTING AND AUDITING PERSONNEL WHO ARE INEXPERIENCED WITH THE BACKGROUND AND HISTORY OF THE EXISTING COST PRINCIPLES OR WHO ADOPT A STRICTER INTERPRETATION OF THE PRINCIPLES THAN THOSE INDIVIDUALS INITIALLY NEGOTIATING THE CONTRACT. THIS IS ESSENTIALLY A CONTRACT ADMINISTRATION PROBLEM, AND OF COURSE IT CAN NEVER BE COMPLETELY RESOLVED. MUCH CAN BE DONE, HOWEVER, TO MINIMIZE THIS PROBLEM THROUGH A CLEAR STATEMENT OF COST PRINCIPLES AND PROVISIONS IN THE CONTRACT COVERING THE SPECIFIC APPLICATION OF THOSE PRINCIPLES TO THE CONTRACT.

WE HAVE ASKED THE ADMINISTRATIVE AGENCIES TO IMPLEMENT OUR DECISION OF JANUARY 27, 1956, AS SOON AS PRACTICABLE. IT IS HOPED THAT THROUGH THE COOPERATIVE EFFORTS OF YOUR REPRESENTATIVES AND THE RESPONSIBLE ADMINISTRATIVE AGENCIES THE NECESSARY REVISIONS IN PROCEDURES WILL BE ACCOMPLISHED AT AN EARLY DATE.

THE VIEWS OF THE MEMBERS OF YOUR COMMITTEE AND THE OPPORTUNITY TO DISCUSS THIS PROBLEM WITH YOU WERE APPRECIATED.