B-120714, AUGUST 4, 1955, 35 COMP. GEN. 63

B-120714, AUGUST 4, 1955, 35 COMP. GEN. 63

CONTRACTS - COST-REIMBURSABLE RESEARCH AND DEVELOPMENT CONTRACTS - OVERHEAD COST COMPUTATION THE OVERHEAD STIPULATIONS IN A COST-REIMBURSABLE RESEARCH AND DEVELOPMENT CONTRACT WHICH PROVIDE FOR PAYMENT OF OVERHEAD ALLOWANCES BASED ON A PERCENTAGE OF SALARIES AND WAGES, SUBJECT TO ADJUSTMENT IF IN EXCESS OF ACTUAL OVERHEAD COSTS, MUST BE CONSTRUED, TO BE LEGALLY EFFECTIVE AND NOT IN VIOLATION OF THE PROHIBITION AGAINST COST-PLUS-A PERCENTAGE-OF-COST SYSTEM OF CONTRACTING, AS MERELY ESTABLISHING A CEILING ON OVERHEAD REIMBURSEMENT ALLOWANCES. WHERE UNDER COST-REIMBURSABLE RESEARCH AND DEVELOPMENT CONTRACT WHICH PROVIDES FOR PAYMENT OF OVERHEAD ON THE BASIS OF A PERCENTAGE OF SALARIES AND WAGES WITH ADJUSTMENT, IF THE ALLOWABLE OVERHEAD COSTS EXCEED ACTUAL OVERHEAD AS DETERMINED BY COST STUDIES, CONTRACTOR RECEIVED EXCESS OVERHEAD REIMBURSEMENT, HE IS REQUIRED TO REFUND EXCESS PAYMENTS NOTWITHSTANDING FINAL PAYMENT WAS MADE AND THE GOVERNMENT DELAYED IN MAKING COST STUDIES. WHERE FINAL PAYMENT HAS BEEN MADE TO CONTRACTOR UNDER COST REIMBURSABLE RESEARCH AND DEVELOPMENT CONTRACT AND DELAYED GOVERNMENT COST STUDIES INDICATE OVERHEAD PAYMENTS WERE MADE IN EXCESS OF ACTUAL OVERHEAD COSTS, CONTRACTING OFFICER IS REQUIRED TO REOPEN CONTRACT AND RECOVER ERRONEOUS PAYMENTS. CONTRACTOR UNDER COST-REIMBURSABLE RESEARCH AND DEVELOPMENT CONTRACTS WHICH PROVIDED FOR COMPUTATION OF OVERHEAD ON THE BASIS OF A PERCENTAGE OF SALARIES AND WAGES IS REQUIRED TO COMPUTE OVERHEAD IN ACCORDANCE WITH THE COST-ACCOUNTING SYSTEM ESTABLISHED AND USED IN CONNECTION WITH THE CONTRACT.

TO THE SECRETARY OF COMMERCE, AUGUST 4, 1955:

REFERENCE IS MADE TO YOUR LETTER OF MAY 16, 1955, WITH ACCOMPANYING MEMORANDUM OF YOUR GENERAL COUNSEL, REQUESTING AN OPINION ON SEVERAL LEGAL ISSUES RELATING TO AN APPEAL BY EMERSON RADIO AND PHONOGRAPH CORPORATION FROM A DETERMINATION BY THE CONTRACTING OFFICER THAT THE CORPORATION SHOULD REFUND APPROXIMATELY $176,000 REPRESENTING OVERPAYMENTS RECEIVED BY IT ON ACCOUNT OF OVERHEAD UNDER RESEARCH AND DEVELOPMENT CONTRACTS, NOS. CST-7454, 7803, 7804, 10245, 10248, AND 298, ENTERED INTO WITH THE NATIONAL BUREAU OF STANDARDS. THERE HAS ALSO BEEN RECEIVED A SUPPLEMENTAL BRIEF SUBMITTED BY THE CONTRACTOR'S ATTORNEYS IN ACCORDANCE WITH THE UNDERSTANDING BETWEEN THE INTERESTED PARTIES REACHED AT AN INFORMAL CONFERENCE IN OUR OFFICE ON APRIL 18, 1955, REFERRED TO IN YOUR LETTER.

THE CONTRACTOR'S POSITION IN THE MATTER IS SUMMARIZED IN A LETTER DATED DECEMBER 27, 1954, SUPPORTING ITS APPEAL, AS FOLLOWS:

(A) THE METHOD OF OVERHEAD CALCULATION USED IN CONNECTION WITH THE SUBJECT CONTRACTS FOR THE PAST EIGHT AND ONE-HALF YEARS HAS BEEN IN ACCORDANCE WITH THE LETTER AND INTENTION OF SAID CONTRACTS;

(B) THE DETERMINATIONS HERETOFORE MADE BY THE GOVERNMENT AND THE CONTRACTOR IN CONNECTION THEREWITH ARE FINAL AND CONCLUSIVE, AND NOT SUSCEPTIBLE OF REOPENING; AND

(C) THE ATTEMPTED "REDETERMINATION" AND REOPENING OF SUCH FINALLY SETTLED MATTERS BY THE CONTRACTING OFFICER IN HIS LETTER OF SEPTEMBER 22, 1954 IS NUGATORY AND WITHOUT FOUNDATION.

ALL OF THE CONTRACTS INVOLVED ARE NEGOTIATED COST-REIMBURSABLE CONTRACTS EXECUTED ON MIMEOGRAPHED FORMS PREPARED BY THE GOVERNMENT. THE FIRST CONTRACT WAS ENTERED INTO EFFECTIVE MARCH 1, 1946, THE NEXT TWO CONTRACTS WERE MADE EFFECTIVE JULY 1, 1946, AND THE FOURTH AND FIFTH CONTRACTS BECAME EFFECTIVE JULY 1, 1947, ALL UNDER AUTHORITY OF THE FIRST WAR POWERS ACT OF 1941, 55 STAT. 838, AND EXECUTIVE ORDER NO. 9001 DATED DECEMBER 27, 1941. THE LAST CONTRACT WAS ENTERED INTO EFFECTIVE FEBRUARY 15, 1951, UNDER AUTHORITY OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 63 STAT. 377, 41 U.S.C. 251 260. EVIDENCE OF THE DETERMINATIONS AND DATA FORMING THE BASIS OF THE CONTRACT NEGOTIATIONS, HOWEVER, HAS NOT BEEN MADE A PART OF THE CONTRACT RECORDS AND THIS INFORMATION, IT HAS BEEN REPORTED, IS NOT AVAILABLE IN THE BUREAU.

UNDER THE TERMS OF THE CONTRACTS, THE CONTRACTOR UNDERTOOK THE PERFORMANCE OF CERTAIN WORK, DESIGNATED AS THE " SUBJECT WORK," IN CONSIDERATION OF THE GOVERNMENT'S AGREEMENT TO MAKE THE PAYMENTS STIPULATED. THE SUBJECT WORK INCLUDED: (1) PERFORMANCE OF CERTAIN RESEARCH AND DEVELOPMENT WORK, (2) THE FURNISHING OF DRAWINGS AND SPECIFICATIONS FOR AND EXPERIMENTAL QUANTITIES OF THE COMPONENTS OR DEVICES DEVELOPED, (3) THE FURNISHING OF SPECIFICATIONS, REPORTS AND FULL INFORMATION REGARDING THE COMPONENTS, DEVICES, APPARATUS AND METHODS WITH WHICH THE CONTRACTS WERE CONCERNED, AS REQUESTED BY THE SCIENTIFIC OFFICER, AND (4) THE FURNISHING OF "A COMPLETE AND FINAL REPORT OF ITS FINDINGS AND CONCLUSIONS.' THE CONTRACTOR WAS OBLIGATED TO RENDER, WITHIN 120 DAYS AFTER TERMINATION OF THE SUBJECT WORK, AN ACCOUNTING WITH RESPECT TO THE DISPOSITION OF ALL PROPERTY ACQUIRED UNDER THE CONTRACTS. THE CONTRACTOR WAS ALSO OBLIGATED TO MAKE A COMPLETE DISCLOSURE TO THE GOVERNMENT, PRIOR TO FINAL SETTLEMENT, OF ALL INVENTIONS MADE IN CARRYING OUT SUCH WORK AND TO DESIGNATE IN WRITING WHICH OF THE INVENTIONS HAVE OR WILL BE COVERED BY APPLICATIONS FOR PATENTS FILED OR CAUSED TO BE FILED BY THE CONTRACTOR. THE CONTRACTOR WAS FURTHER OBLIGATED UNDER THE LAST THREE CONTRACTS, AS A CONDITION PRECEDENT TO FINAL PAYMENT, TO EXECUTE AND DELIVER A RELEASE DISCHARGING THE GOVERNMENT FROM ALL CLAIMS ARISING UNDER THE CONTRACTS.

UNDER THE PROVISIONS FOR PAYMENT CONTAINED IN ARTICLE 2 (A) OF THE FIRST THREE CONTRACTS, THE GOVERNMENT AGREED TO REIMBURSE THE CONTRACTOR FOR THE ACTUAL COSTS INCURRED "UPON THE SUBMISSION OF PROPERLY CERTIFIED VOUCHERS SUPPLIED BY THE GOVERNMENT AND APPROVED BY THE CONTRACTING OFFICER.' SUBPARAGRAPH (D) (4) OF THIS ARTICLE, RELATING TO DETERMINATION OF COST, PROVIDES WITH RESPECT TO OVERHEAD AS FOLLOWS:

(D) COST DETERMINATION. ACTUAL COST AS USED HEREIN INCLUDES ONLY THE FOLLOWING:

(4) OVERHEAD. AN ALLOWANCE FOR OVERHEAD COSTS NOT OTHERWISE REIMBURSABLE HEREUNDER IN AN AMOUNT NOT IN EXCESS OF ONE HUNDRED PERCENT (100 PERCENT) OF THE TOTAL SALARIES AND WAGES (BUT NOT TAXES) REIMBURSABLE UNDER SUBPARAGRAPHS (1) AND (2) HEREOF. IF A COST STUDY DEVELOPS THAT THE OVERHEAD COST ALLOWANCE IS EXCESSIVE, THE CONTRACTOR AGREES TO RETURN ANY EXCESSIVE OVERHEAD COST ALLOWANCE AS DETERMINED BY THE COST STUDY AND ALSO AGREES TO A CORRESPONDING ADJUSTMENT OF THE PERCENTAGE RATE FOR OVERHEAD.

THE GOVERNMENT AGREED UNDER ARTICLE III OF THE LAST THREE CONTRACTS TO PAY THE CONTRACTOR A SPECIFIED FIXED FEE, AND TO MAKE REIMBURSEMENT OF THE CONTRACTOR'S EXPENDITURES AS PROVIDED IN ARTICLE III (A), WHICH CONTAINS THE FOLLOWING PROVISIONS:

ARTICLE III. (A) COMPENSATION. THE GOVERNMENT SHALL PAY TO THE CONTRACTOR AS FULL COMPENSATION FOR THE PERFORMANCE OF THIS CONTRACT:

(1) THE FIXED FEE SPECIFIED IN PARAGRAPH (B) (2) OF ARTICLE II.

(2) THE ALLOWABLE COSTS OF THE PERFORMANCE OF THIS CONTRACT, WHICH ARE HEREBY DEFINED AS: (A) OVERHEAD IN THE AMOUNT DETERMINED IN ACCORDANCE WITH SUBPARAGRAPH (III) BELOW, AND (B) ALL NECESSARY COSTS OF THE NATURE DESCRIBED IN SUBPARAGRAPHS (I) (II) AND (IV) TO (VIII) BELOW, INCURRED BY THE CONTRACTOR DIRECTLY AND SPECIFICALLY IN THE PERFORMANCE OF THIS CONTRACT WHICH SHALL BE CLAIMED BY THE CONTRACTOR AND ACCEPTED AS SUCH COST BY THE CONTRACTING OFFICER IN ACCORDANCE WITH THE FOLLOWING:

(III) OVERHEAD. AN ALLOWANCE FOR OVERHEAD COSTS NOT OTHERWISE REIMBURSABLE HEREUNDER IN AN AMOUNT NOT IN EXCESS OF 100 PERCENT ( ONE HUNDRED PERCENT) OF THE TOTAL SALARIES AND WAGES (EXCLUDING TAXES AND INSURANCE) REIMBURSABLE UNDER SUBPARAGRAPH (I) HEREOF. IF A COST STUDY BY THE GOVERNMENT DEVELOPS THAT THIS OVERHEAD COST ALLOWANCE EXCEEDS ACTUAL OVERHEAD COSTS, THE CONTRACTOR AGREES TO RETURN ANY EXCESS OVERHEAD COST ALLOWANCE AS DETERMINED BY THE COST STUDY AND ALSO AGREES TO A CORRESPONDING ADJUSTMENT OF THE PERCENTAGE RATE FOR OVERHEAD. ( ITALICS SUPPLIED.)

THE LAST THREE CONTRACTS ALSO CONTAIN PROVISIONS RELATING TO THE ACCOUNTING REQUIREMENTS AND PRESERVATION OF RECORDS AS FOLLOWS:

ARTICLE VIII. RECORDS.

(A) ACCOUNTING. THE CONTRACTOR AGREES TO KEEP RECORDS AND BOOKS OF ACCOUNT, ON A RECOGNIZED COST-ACCOUNTING BASIS, SHOWING THE ACTUAL COST TO IT OF ALL ITEMS OF LABOR, MATERIALS, EQUIPMENT, SUPPLIES, SERVICES AND OTHER EXPENDITURES OF WHATEVER NATURE FOR WHICH REIMBURSEMENT IS AUTHORIZED UNDER THE PROVISIONS OF THIS CONTRACT. THE SYSTEM OF ACCOUNTING TO BE EMPLOYED BY THE CONTRACTOR SHALL BE SUCH AS IS SATISFACTORY TO THE CONTRACTING OFFICER.

(B) INSPECTION OF WORK AND RECORDS. THE CONTRACTING OFFICER, THE SCIENTIFIC OFFICER AND THEIR AUTHORIZED REPRESENTATIVES SHALL AT ALL TIMES BE AFFORDED PROPER FACILITIES FOR INSPECTION OF THE WORK, AND SHALL AT ALL TIMES HAVE ACCESS TO THE PREMISES, WORK, AND MATERIALS, TO ALL BOOKS, RECORDS, CORRESPONDENCE, INSTRUCTIONS, PLANS, DRAWINGS, RECEIPTS, VOUCHERS, AND MEMORANDA OF EVERY DESCRIPTION OF THE CONTRACTOR PERTAINING TO SAID WORK; AND THE CONTRACTOR SHALL, EXCEPT SUCH ORIGINAL DOCUMENTS AS ARE SUBMITTED IN SUPPORT OF REIMBURSEMENT VOUCHERS, PRESERVE FOR A PERIOD OF 5 YEARS AFTER COMPLETION OR TERMINATION OF THIS CONTRACT, ALL THE BOOKS, RECORDS, AND OTHER PAPERS HEREIN MENTIONED. ( ITALICS SUPPLIED.)

ALL OF THE CONTRACTS CONTAIN THE STANDARD " DISPUTES" ARTICLE PROVIDING FOR DETERMINATION BY THE CONTRACTING OFFICER OF QUESTIONS OF FACT ARISING UNDER THE CONTRACT SUBJECT TO APPEAL BY THE CONTRACTOR TO THE SECRETARY OF COMMERCE OR HIS DULY AUTHORIZED REPRESENTATIVE.

THE EVIDENCE OF RECORD DISCLOSES THAT IT WAS THE PRACTICE OF THE BUREAU TO PROCESS PROVISIONAL PAYMENTS TO THE CONTRACTOR BASED ON DESK REVIEWS BY AUTHORIZED CERTIFYING OFFICERS OF THE ARITHMETICAL CALCULATIONS ON THE VOUCHERS. THESE PROVISIONAL PAYMENTS WERE SUBJECT TO SUBSEQUENT EXAMINATION AND VERIFICATION BY BUREAU AUDITORS. THE CONTRACTING OFFICER, HOWEVER, DID NOT SIGN OR APPROVE ANY OF THE VOUCHERS NOR DID THE CONTRACTING OFFICER SUPERVISE OR CONTROL THE WORK PERFORMED BY THE AUDITORS. THE CONTRACTING OFFICER APPARENTLY DID NOT REALIZE THAT HE HAD ANY RESPONSIBILITY AND HE DID NOT, IN FACT, ASSERT ANY AUTHORITY WITH RESPECT TO THE PAYMENTS MADE TO THE CONTRACTOR. THAT THE BUREAU DID NOT INTEND THAT ANY OF THE PAYMENTS SO PROCESSED WOULD FINALIZE THE CONTRACTS SEEMS CLEARLY INDICATED BY THE TERMS OF THE CONTRACTS. IN THIS CONNECTION, THE AVAILABLE INFORMATION DOES NOT DISCLOSE WHETHER THE FINAL REPORT, PROPERTY ACCOUNTING AND PATENT DISCLOSURE PROVISIONS OF THE CONTRACTS HAVE BEEN MET, OR THAT THE RELEASES REQUIRED BY THE LAST THREE CONTRACTS AS A CONDITION PRECEDENT TO FINAL SETTLEMENT HAVE BEEN EXECUTED AND DELIVERED BY THE CONTRACTOR.

WITH PARTICULAR REFERENCE TO THE AUDITS PERFORMED, THE RECORD DISCLOSES THAT IN AUGUST 1946 AN AUDITOR FROM THE OFFICE OF THE CHIEF OF ORDNANCE, AT THE REQUEST OF THE BUREAU, AUDITED TWO VOUCHERS TOTALING APPROXIMATELY $23,000 SUBMITTED BY EMERSON UNDER CONTRACT CST 7454. THEREAFTER, PERIODIC AUDITS WERE MADE THROUGH 1951 BY REPRESENTATIVES OF THE BUREAU AND THE GENERAL ACCOUNTING OFFICE. THESE AUDITS WERE LIMITED TO THE EXAMINATION OF INFORMATION AND MATERIAL PRESENTED BY THE CONTRACTOR, INCLUDING SOME VERIFICATION OF DIRECT COSTS AND EXAMINATION OF THE CONTRACTOR'S OVERHEAD CALCULATIONS BASED ON LABOR DOLLARS. THE CONTRACTOR'S OVERHEAD SCHEDULES INDICATED THAT THE OVERHEAD BILLED WAS LESS THAN THE OVERHEAD APPLICABLE ON THE BASIS OF LABOR DOLLARS. HOWEVER, THE FACT THAT THE CONTRACTOR'S ESTABLISHED METHOD OF DETERMINING ITS ACTUAL OVERHEAD COSTS ON THE BASIS OF LABOR HOURS WAS NOT MADE KNOWN TO THE AUDITORS, NOR WAS THIS IMPORTANT FACTOR INDICATED ON THE SCHEDULES OR OTHERWISE DISCLOSED BY THE CONTRACTOR.

IN 1953 A COST STUDY WAS PERFORMED BY THE NEW YORK REGIONAL OFFICE OF THE GENERAL ACCOUNTING OFFICE AT WHICH TIME THE CONTRACTOR'S ACCOUNTING RECORDS WERE CAREFULLY EXAMINED AND THE PRIOR AUDITS WERE REVIEWED. WAS DISCLOSED BY THIS STUDY THAT THE CONTRACTOR HAD RECEIVED REIMBURSEMENTS FOR OVERHEAD IN EXCESS OF THE ACTUAL OVERHEAD COSTS PROPERLY ALLOCABLE TO THE CONTRACT WORK, AS REFLECTED BY THE CONTRACTOR'S ESTABLISHED COST-ACCOUNTING SYSTEM IN EFFECT DURING THE ENTIRE CONTRACT PERIOD. THE CONTRACTOR'S COST RECORDS SHOWED THAT ITS ACTUAL OVERHEAD COSTS WERE DETERMINED AND DISTRIBUTED FOR ALL OF ITS OPERATIONS, INCLUDING ITS CONTRACTS WITH THE GOVERNMENT, ON THE BASIS OF DIRECT LABOR HOURS, WHICH RESULTED IN LOWER OVERHEAD COSTS THAN THE MAXIMUM AMOUNTS ALLOWABLE UNDER THE CONTRACTS ON THE BASIS OF LABOR DOLLARS. IN VIEW THEREOF, AN INFORMAL INQUIRY WAS ISSUED BY THE GENERAL ACCOUNTING OFFICE AUGUST 17, 1953, SHOWING APPARENT OVERPAYMENTS OF APPROXIMATELY $209,000 (SINCE REVISED TO $176,312.17) UNDER THE CONTRACTS INVOLVED.

FOLLOWING RECEIPT OF THE INQUIRY, THE CHIEF OF THE CONTRACT AUDIT SECTION OF THE BUREAU ADDRESSED A LETTER TO THE CONTRACTOR DATED SEPTEMBER 4, 1953, REQUESTING A REFUND OF THE AMOUNT OF THE STATED OVERPAYMENTS. THE CONTRACTOR CONTENDED IN LETTERS DATED AUGUST 10 AND SEPTEMBER 29, 1953, THAT THE AMOUNTS CLAIMED AND RECEIVED BY IT WERE CORRECT AND SHOULD NOT BE DISTURBED ON THE GROUND IT HAD FOLLOWED THE CONSISTENT PRACTICE OF DEVELOPING OVERHEAD RATES ON THE BASIS OF LABOR DOLLARS FOR GOVERNMENT WORK AS SPELLED OUT IN THE CONTRACTS. CONFERENCES WERE HELD WITH THE CONTRACTOR ATTENDED BY REPRESENTATIVES OF OUR RESPECTIVE AGENCIES. DISCUSSING THE MATTER WITH OUR AUDITORS, THE EXECUTIVE OFFICER OF THE BUREAU DURING THE PERIOD FOR WHICH THE CONTRACTS WERE EXECUTED AND THE RESPONSIBLE CONTRACTING OFFICER STATED THAT IT WAS THEIR INTENTION, UNDER THE CONTRACTS, TO ESTABLISH PROVISIONAL RATES FOR BILLING PURPOSES AND MAXIMUM AMOUNTS WHICH COULD BE REIMBURSED FOR OVERHEAD; THAT THERE WAS NO INTENTION TO SET A STANDARD FOR MAKING THE PRESCRIBED COST STUDIES ON THE BASIS OF A PERCENTAGE OF DIRECT SALARIES AND WAGES, BUT RATHER, THE AUDITORS WERE TO USE WHATEVER METHOD CONSIDERED CORRECT FOR DETERMINING THE ACTUAL OVERHEAD COSTS ALLOWABLE UNDER THE CONTRACTS. THE CONTRACTING OFFICER ALSO STATED THAT HE DID NOT ACCEPT THE WORK PERFORMED BY THE AUDITORS DURING 1946-1951, AND FURTHER THAT HE HAD MISUNDERSTOOD THE ACCOUNTING SYSTEM AND BILLING TECHNIQUE OF EMERSON DUE TO MISLEADING ASSERTIONS OF THE CONTRACTOR'S REPRESENTATIVES WHICH CAUSED HIM TO BELIEVE THAT EMERSON'S ACTUAL OVERHEAD COSTS WERE DETERMINED BY USE OF THE LABOR DOLLAR BASE. UPON THE CONTRACTOR'S CONTINUED REFUSAL TO MAKE AN ADJUSTMENT PURSUANT TO THE PROVISIONS OF THE CONTRACTS, THE CONTRACTING OFFICER ADVISED THE CONTRACTOR, BY LETTER DATED SEPTEMBER 22, 1954, OF HIS DETERMINATION THAT A REFUND WAS DUE THE GOVERNMENT, STATING IN PERTINENT PART, AS FOLLOWS:

THIS WILL CONFIRM THE FACT, REPORTED ORALLY TO YOU IN THE CONFERENCE HELD AUGUST 24, 1954, IN MY OFFICE WITH MR. LINDGREN OF THE GENERAL ACCOUNTING OFFICE, THAT THE GOVERNMENT HAS CONDUCTED THE COST STUDIES PROVIDED FOR IN ARTICLE III (A) (2) (III) OF OUR SEVERAL CONTRACTS WITH YOUR COMPANY. THESE COST STUDIES HAVE SHOWN THAT THERE HAVE BEEN SIGNIFICANT PAYMENTS IN EXCESS OF ALLOWABLE COSTS, AND THAT A REFUND IS THEREFORE DUE THE GOVERNMENT. THE OVERPAYMENTS RESULTED PRIMARILY FROM THE FACT THAT YOUR BILLINGS, AND OUR PAYMENTS, WERE BASED UPON "COSTS" WHICH INCLUDED OVERHEAD CALCULATED ON THE BASIS OF DISTRIBUTION AS A PERCENTAGE OF DIRECT LABOR COSTS. THE GOVERNMENT'S COST STUDY HAS FOUND THAT YOUR COST RECORDS ACTUALLY SHOW OVERHEAD DISTRIBUTED TO PROJECTS, INCLUDING NBS CONTRACTS, ON THE BASIS OF AN AMOUNT PER LABOR HOUR. THE ALLOWABLE COSTS DISTRIBUTED ON YOUR BOOKS ARE LOWER THAN THE AMOUNTS CALCULATED AND INVOICED TO THE GOVERNMENT. THERE IS NO BASIS FOR APPROVAL OF THE AMOUNTS ACTUALLY PAID, AND I HEREBY FIND THAT OVERPAYMENTS HAVE BEEN MADE AS SUMMARIZED BELOW:

* * * * * * * * * * * * * * (CHART OMITTED) * * * * * * * * * * * * * *

AS PROVIDED IN ARTICLE III (A) (2) (III) OF EACH OF THE CONTRACTS MENTIONED ABOVE, YOU ARE HEREBY REQUESTED TO MAKE IMMEDIATE REFUND OF $176,312.17. IF YOU SO DESIRE, THE LEGAL BRIEF MENTIONED IN YOUR LETTER OF SEPTEMBER 9, 1954, MAY BE SUBMITTED WITH A CLAIM FOR CONSIDERATION BY THE COMPTROLLER GENERAL OF THE UNITED STATES IMMEDIATELY AFTER YOUR PAYMENT OF THE AMOUNTS HERE FOUND TO BE DUE.

BY LETTER DATED OCTOBER 20, 1954, ADDRESSED TO YOUR DEPARTMENT, THE CONTRACTOR FILED ITS APPEAL UNDER THE APPLICABLE " DISPUTES" CLAUSE OF THE CONTRACTS, IN THE EVENT THE CONTRACTING OFFICER'S LETTER OF SEPTEMBER 22, 1954,"SHALL BE CONSIDERED TO BE A DETERMINATION OF ANY QUESTIONS OF FACT ARISING UNDER THE ABOVE CONTRACTS.' RECEIPT OF THE CONTRACTOR'S APPEAL WAS ACKNOWLEDGED BY THE CONTRACTING OFFICER BY LETTER DATED NOVEMBER 12, 1954, WHEREIN HE STATED " IT IS ALSO DESIRED TO CONFIRM THE FACT THAT OUR LETTER OF SEPTEMBER 22, 1954, DID CONSTITUTE THE CONTRACTING OFFICER'S DETERMINATIONS WITH RESPECT TO THE MATTERS PRESENTED THEREIN.'

IN A FURTHER LETTER OF DECEMBER 3, 1954, TO THE CONTRACTOR, THE EXECUTIVE OFFICER OF THE BUREAU REFERRED TO THE CONTRACTOR'S REQUEST FOR A "FEW MORE WEEKS" MADE AT A CONFERENCE ON AUGUST 24, 1954, WITH THE CONTRACTING OFFICER, AND ADVISED THAT A RULING WOULD BE RECOMMENDED UNLESS AN EXPLANATION WAS FURNISHED BY DECEMBER 30, 1954. FINALLY, THE CONTRACTOR'S APPEAL WAS AMPLIFIED AND SUPPLEMENTED BY ITS LETTER OF DECEMBER 27, 1954, IN WHICH THE CONTRACTOR CONTENDS THAT THE "SOLE INTERPRETATION OF THE CONTRACTS THEMSELVES * * * MANDATORILY DICTATED THAT THE ONLY METHOD OF COMPUTATION, CALCULATION OR DETERMINATION OF OVERHEAD WHICH COULD OR WOULD BE REIMBURSED BY THE GOVERNMENT TO THE CONTRACTOR FOR THE PURPOSE OF AND UNDER ALL THESE CONTRACTS WAS THAT BASED UPON A PERCENTAGE OF LABOR DOLLARS.' IN SUPPORT OF ITS CONTENTION, THE CONTRACTOR URGES THAT THE CORRECTNESS OF THIS INTERPRETATION IS CONCLUSIVELY DEMONSTRATED BY THE CONDUCT OF THE PARTIES "IN A PRACTICALLY UNBROKEN SUCCESSION OF MONTHLY VOUCHERINGS BY THE CONTRACTOR AND PAYMENTS BY THE GOVERNMENT.' THE CONTRACTOR ALSO URGES THAT "THE CONTRACTS ARE NO LONGER ACTIVE, THE TERMS HAVE BEEN SATISFIED, AND REOPENING OF CONTRACT MATTERS ARE PRECLUDED.' THE CONTRACTOR URGES FURTHER THAT THE "MANY ALLOWANCES OF PAYMENTS TO THE CONTRACTOR BASED UPON VOUCHERS SUBMITTED FOR PAYMENT WHICH INCLUDED SPECIFICALLY OVERHEAD CALCULATED UPON A PERCENTAGE OF LABOR DOLLARS" ARE "FINAL AND CONCLUSIVE, AND ARE NOT SUSCEPTIBLE OF BEING REOPENED, AS THE SEPTEMBER 22, 1954 "REDETERMINATION" HAS ATTEMPTED TO DO.'

ON THE BASIS OF THE FACTS AND CIRCUMSTANCES OF RECORD, IT SEEMS CLEAR THAT THE CONTRACTOR'S POSITION IS UNTENABLE FOR THE FOLLOWING REASONS: AS SEEN FROM THE PROVISIONS QUOTED ABOVE, THE FIRST THREE CONTRACTS PROVIDE FOR PAYMENT OF ALLOWABLE OVERHEAD COST ON THE BASIS OF A PERCENTAGE OF SALARIES AND WAGES REIMBURSABLE UNDER THE CONTRACTS, SUBJECT TO ADJUSTMENT IF EXCESSIVE; THE LAST THREE CONTRACTS PROVIDE FOR SUCH PAYMENTS ON THE SAME BASIS SUBJECT TO ADJUSTMENT IF "THIS OVERHEAD COST ALLOWANCE EXCEEDS ACTUAL OVERHEAD COSTS.' ALL OF THE CONTRACTS PROVIDE FOR COST STUDIES TO DETERMINE WHETHER THE ALLOWANCES PAID FOR OVERHEAD WERE EXCESSIVE, THAT IS, FOR PROVISIONAL PAYMENTS PENDING DETERMINATION OF THE AMOUNTS PROPERLY DUE, AND INCLUDE THE FOLLOWING STIPULATION: "THE CONTRACTOR AGREES TO RETURN ANY EXCESS OVERHEAD COST ALLOWANCE AS DETERMINED BY THE COST STUDY.'

IN EACH AND EVERY CONTRACT THE PERCENTAGE RATE DESIGNATED WAS 100 PERCENT AND THIS RATE REMAINED CONSTANT DURING THE ENTIRE PERIOD OF THE CONTRACTS. AN AGREEMENT TO PAY A STIPULATED PERCENTAGE OF COST, UNDETERMINED AT THE TIME THE CONTRACT IS NEGOTIATED, IS ILLEGAL, BEING CONTRARY TO THE LONG-ESTABLISHED POLICY OF THE GOVERNMENT, AS EVIDENCED BY THE PROVISIONS CONTAINED IN THE STATUTES AND EXECUTIVE ORDER CITED AS AUTHORIZATION FOR THE CONTRACTS INVOLVED, WHICH EXPRESSLY PROHIBIT THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING. SEE 50 U.S.C. 611 AND 41 U.S.C. 254 (B). THIS POLICY PROHIBITION NECESSARILY MUST BE REGARDED AS MANDATORY ON ALL CONTRACTING PARTIES IN THE FIELD TO WHICH IT APPLIES. WHERE A CONTRACT VIOLATIVE OF THE PROHIBITION IS MADE-- - IN WHATEVER FORM OR DISGUISE--- ITIS PLAINLY INVALID, AT LEAST INSOFAR AS ESTABLISHING AN OBLIGATION ON THE GOVERNMENT TO MAKE REIMBURSEMENT OF AN AMOUNT REPRESENTING THE CONTRACTOR'S CLAIMED COSTS PLUS A PERCENTAGE OF SUCH COSTS. IN THIS CONNECTION, SEE MUSCHANY V. UNITED STATES, 324 U.S. 49, 61-63. IN OTHER WORDS, THE PARTIES TO THE INSTANT CONTRACTS WERE OBLIGATED UNDER THE LAW, AS WELL AS BY THE EXPRESS PROVISIONS OF THE CONTRACTS THEMSELVES, TO TREAT THE PROVISIONS FOR PAYMENT OF A PERCENTAGE OF SALARIES AND WAGES AS MERELY FIXING A CEILING, WITH THE UNDERSTANDING THAT THE AMOUNTS PAID AT THE PROVISIONAL RATE WOULD BE ADJUSTED SO AS NOT TO EXCEED ACTUAL OVERHEAD COSTS ALLOCABLE TO THE CONTRACT WORK, OR THE MAXIMUM STIPULATED, WHICHEVER WAS LESS. PAYMENTS IN EXCESS OF OVERHEAD COSTS SO DETERMINED WERE NOT AUTHORIZED AND, IT SEEMS CLEAR, RESULTED IN ADDITIONAL PROFIT TO THE CONTRACTOR, OBVIOUSLY NOT INTENDED. THIS APPEARS TO BE THE CONSTRUCTION ADOPTED BY THE CONTRACTING OFFICER. IT GIVES DUE EFFECT TO THE CONTRACT TERMS CONSIDERED AS A WHOLE, AS THEY NECESSARILY MUST BE IF THE OVERHEAD PROVISIONS ARE TO BE REGARDED AS LEGALLY EFFECTIVE. ON THE OTHER HAND, THE INTERPRETATION URGED BY THE CONTRACTOR WOULD DISREGARD THE ADJUSTMENT AGREEMENT AND RENDER THE OVERHEAD PROVISIONS INVALID.

IT IS WELL ESTABLISHED THAT THE GOVERNMENT, INDEPENDENTLY OF STATUTE, MAY RECOVER FUNDS WHICH ITS AGENTS HAVE WRONGFULLY, ERRONEOUSLY, OR ILLEGALLY PAID. THIS RIGHT EXISTS WHETHER SUCH PAYMENTS WERE MADE UNDER MISTAKE OF LAW OR FACT; WHETHER BECAUSE IN EXCESS OF AUTHORITY OR BASED UPON AN ERRONEOUS INTERPRETATION OF A CONTRACT LATER FOUND TO BE INCORRECT, OR BECAUSE OF THE RELIANCE UPON FACTS FOUND SUBSEQUENTLY NOT TO EXIST. SEE CHORPENNING V. UNITED STATES, 94 U.S. 397, 399; STEELE V. UNITED STATES, 113 U.S. 128, 134; WISCONSIN CENTRAL RAILROAD V. UNITED STATES, 164 U.S. 190; PINE LOGGING COMPANY V. UNITED STATES, 186 U.S. 279; GRAND TRUNK WESTERN RAILROAD V. UNITED STATES, 252 U.S. 112; UNITED STATES V. WURTS, 303 U.S. 414; UNITED STATES V. SUTTON, 11 F.2D 24, 26 AND THE OTHER CASES COLLECTED IN 63A F.D. 268, 269, AND 63 A.L.R. 1346. MOREOVER, THE AUDITING OF A CLAIM AGAINST THE GOVERNMENT DOES NOT ORDINARILY EFFECT AN ACCOUNT STATED AGAINST IT, AND AN ACCOUNT STATED CANNOT BE MADE TO CREATE A LIABILITY WHERE NONE HAD PREVIOUSLY EXISTED. SEE RECONSTRUCTION FINANCE CORPORATION V. COMMERCIAL UNION, 123 F.1SUPP. 748, 756. FURTHERMORE, THE RULES AS TO THE BINDING EFFECT OF AN ACCOUNT STATED OR A SETTLEMENT IN ACCORD AND SATISFACTION, BETWEEN PRIVATE PARTIES, ARE NOT APPLICABLE TO THE GOVERNMENT. PAYMENTS MADE BY GOVERNMENT AGENTS ARE NOT FINAL DETERMINATIONS SO AS TO PRECLUDE JUDICIAL REVIEW, AND THE LONG CONTINUANCE OF ILLEGAL PAYMENTS, OR LACHES ON THE PART OF GOVERNMENT OFFICERS AND AGENTS, DOES NOT ESTOP THE GOVERNMENT FROM SECURING RECOVERY OF THE RESULTING OVERPAYMENTS. SEE SUTTON V. UNITED STATES, 256 U.S. 575, AND HEIDT V. UNITED STATES, 56 F.2D559; ALSO, UNITED STATES V. HOLLEY, 199 F.2D575, 578, AND THE CASES COLLECTED IN 54 AM. JUR. 630, 631. THESE RULES SEEM PARTICULARLY APPLICABLE TO THE INSTANT CASE WHERE THE EVIDENCE OF RECORD INDICATES THAT THE CONTRACTOR DID NOT MAKE THE NECESSARY INFORMATION AND DATA IN ITS POSSESSION AVAILABLE TO THE CONTRACTING OFFICER, ALTHOUGH THIS MAY BE ATTRIBUTABLE TO ERROR ON THE PART OF THE CONTRACTOR'S EMPLOYEES RATHER THAN A DELIBERATE CONCEALMENT WITH INTENT TO MISLEAD THE CONTRACTING OFFICER. CONTRACTORS ARE CHARGED UNDER GOVERNMENT COST-REIMBURSABLE CONTRACTS WITH A VERY HIGH DEGREE OF RESPONSIBILITY TO THE UNITED STATES AND ARE UNDER LEGAL OBLIGATION TO DISCLOSE ALL THE INFORMATION AVAILABLE WHICH IS NECESSARY TO A PROPER AND EFFICIENT ADMINISTRATION OF THE CONTRACT OPERATIONS. HENCE, THE MERE FACT THAT THIS CONTRACTOR WAS PAID THE STIPULATED PERCENTAGE OF SALARIES AND WAGES, AND THE FURTHER FACT THAT THE REQUIRED ADJUSTMENTS WERE NOT TIMELY ACCOMPLISHED IN ACCORDANCE WITH THE TERMS OF THE CONTRACTS, MAY NOT BE REGARDED AS VALIDATING THAT WHICH WAS PROHIBITED BY LAW; NOR IS THE GOVERNMENT THEREBY PRECLUDED, AS CONTENDED BY THE CONTRACTOR, FROM RECOVERING THE OVERPAYMENTS.

WITH PARTICULAR REFERENCE TO THE CONTRACTOR'S CONTENTIONS CONCERNING THE FINALITY OF THE ACTIONS AND DETERMINATIONS OF THE CONTRACTING OFFICER, THE CONTRACTOR REFERS TO COURT OPINIONS IN THE CASES OF GRAHAM V. UNITED STATES, 91 F.1SUPP. 715; BELL AIRCRAFT CORPORATION V. UNITED STATES, 100 F.1SUPP. 661; AND LEEDS AND NORTHROP V. UNITED STATES, 101 F.1SUPP. 999. IN THE GRAHAM CASE THE COSTS INVOLVED WERE ADMINISTRATIVELY APPROVED AND DETERMINED REIMBURSABLE, AND NO DISPUTE EXISTED BETWEEN THE AGENCY AND THE CONTRACTOR. HERE THE CONTRACTING OFFICER HAS NOT APPROVED THE PAYMENTS IN QUESTION (SEE LEY V. UNITED STATES, 273 U.S. 386), HAS DETERMINED THAT AN ADJUSTMENT IS DUE UNDER THE CONTRACTS, AND A DISPUTE BETWEEN THE CONTRACTOR AND THE CONTRACTING AGENCY EXISTS WHICH INVOLVES THE CONSTRUCTION OF THE CONTRACT TERMS. IN THE BELL AIRCRAFT CASE, THE COURT HELD THAT A DETERMINATION UNDER A " DISPUTES" ARTICLE OF THE TYPE INCLUDED IN THESE CONTRACTS, WHICH INVOLVED THE INTERPRETATION OF THE CONTRACT, WAS NOT A FINAL DECISION ON A QUESTION OF FACT, BUT WAS A DECISION ON A QUESTION OF LAW WHICH WAS SUBJECT TO JUDICIAL REVIEW. CF. UNITED STATES V. DUGGAN 210 F.2D 926, 932. THE LEEDS AND NORTHROP CASE ALSO INVOLVED DECISIONS UNDER A " DISPUTES" ARTICLE AND FOLLOWED THE RULING IN WUNDERLICH V. UNITED STATES, 342 U.S. 98, HOLDING THAT SUCH DETERMINATIONS WERE FINAL AND CONCLUSIVE IN THE ABSENCE OF PROOF OF CONSCIOUS WRONGDOING, OR AN INTENTION TO CHEAT OR BE DISHONEST. THE ONLY DETERMINATION UNDER THE " DISPUTES" ARTICLE OF RECORD IN THIS CASE IS THE CONTRACTING OFFICER'S DECISION OF SEPTEMBER 22, 1954, WHICH THE PARTIES HAVE AGREED IS FINAL AND CONCLUSIVE SUBJECT TO APPEAL BY THE CONTRACTOR, WHICH IT HAS ELECTED TO EXERCISE. IN THIS LATTER CONNECTION, OF COURSE, THERE IS FOR CONSIDERATION PUBLIC LAW 356, 83D CONGRESS, APPROVED MAY 11, 1954, 68 STAT. 81, 41 U.S.C. 321 WHICH (1) PROHIBITS THE PLEADING OF THE PROVISION OF ANY CONTRACT WITH THE UNITED STATES RELATING TO FINALITY OR CONCLUSIVENESS OF ADMINISTRATIVE DECISIONS ON DISPUTED QUESTIONS OF FACT THEREUNDER AS LIMITING JUDICIAL REVIEW TO FRAUD OF THE OFFICIALS CONCERNED, (2) MAKES SUCH ADMINISTRATIVE DECISIONS FINAL AND CONCLUSIVE UNLESS THE SAME ARE FRAUDULENT OR CAPRICIOUS OR ARBITRARY OR SO GROSSLY ERRONEOUS AS NECESSARILY TO IMPLY BAD FAITH, OR NOT SUPPORTED BY SUBSTANTIAL EVIDENCE, AND (3) PROHIBITS THE INCLUSION IN GOVERNMENT CONTRACTS OF PROVISIONS MAKING THE DECISION OF ANY ADMINISTRATIVE OFFICIAL, REPRESENTATIVE OR BOARD FINAL ON A QUESTION OF LAW. REPORTING ON THIS LEGISLATION, THE HOUSE COMMITTEE ON THE JUDICIARY STATED ITS PURPOSE WAS TO OVERCOME THE EFFECT OF THE WUNDERLICH CASE, AND TO PRESCRIBE FAIR AND UNIFORM STANDARDS FOR THE JUDICIAL REVIEW OF ADMINISTRATIVE DECISIONS UNDER GOVERNMENT CONTRACTS "IN THE LIGHT OF THE REASONABLE REQUIREMENTS OF THE VARIOUS GOVERNMENT DEPARTMENTS AND AGENCIES, OF THE GENERAL ACCOUNTING OFFICE AND OF GOVERNMENT CONTRACTORS.' SEE HOUSE REPORT NO. 1380, 83D CONGRESS, 2D SESSION.

WITH RESPECT TO QUESTION (1) PRESENTED IN YOUR LETTER AS TO THE CONTRACTING OFFICER'S AUTHORITY AFTER "ALL PAYMENTS INCLUDING FINAL PAYMENT HAVE BEEN MADE AND ACCEPTED BY THE CONTRACTOR" TO REOPEN THE CONTRACTS AND DEMAND REPAYMENT OF THE EXCESSIVE OVERHEAD REIMBURSEMENTS MADE, IT SEEMS CLEAR THAT, UNDER THE CONTRACTS INVOLVED AND THE FACTS OF RECORD IN THIS CASE, THE CONTRACTING OFFICER WAS WELL WITHIN HIS AUTHORITY IN DETERMINING THE AMOUNT OF THE OVERPAYMENTS AND REQUESTING REPAYMENT BY THE CONTRACTOR. IN FACT, HE WOULD HAVE BEEN REMISS IN HIS DUTY HAD HE NOT TAKEN THE ACTION INDICATED INASMUCH AS THE ADMINISTRATIVE AGENCY CONCERNED IS PRIMARILY RESPONSIBLE FOR RECOVERING PAYMENTS ILLEGALLY OR ERRONEOUSLY MADE UNDER ITS CONTRACTS.

WITH RESPECT TO QUESTION (2) AS TO WHETHER THE CONTRACTING OFFICER WAS AUTHORIZED IN TAKING SUCH ACTION "AFTER MORE THAN 3 YEARS FROM THE TIME OF FINAL PAYMENT," THE CONTRACTS DID NOT CONTAIN A STIPULATION AS TO WHEN THE COST STUDIES WERE TO BE MADE. IT OBVIOUSLY WOULD BE IN THE INTEREST OF THE CONTRACTOR AS WELL AS THE GOVERNMENT TO EFFECT THE ADJUSTMENTS REQUIRED UNDER SUCH CONTRACTS AS SOON AS PRACTICABLE, BUT NO SPECIFIC LIMITATION IS PRESCRIBED BY STATUTE. IN HIS BRIEF THE CONTRACTOR'S ATTORNEY MAKES REFERENCE TO THE PROVISIONS OF THE ARMED SERVICES PROCUREMENT ACT, 62 STAT. 21, AND THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT (AS AMENDED IN 1951), 64 STAT. 578, AND THE ATOMIC ENERGY ACT OF 1954, 67 STAT. 181, RELATING TO THE RETENTION OF CONTRACTOR'S RECORDS FOR AUDIT BY THE GENERAL ACCOUNTING OFFICE FOR A PERIOD OF THREE YEARS AFTER FINAL PAYMENT. IT APPARENTLY IS NOT CONTENDED THAT THESE STATUTES ARE APPLICABLE TO DETERMINATIONS BY THE CONTRACTING OFFICER, OR MAY BE REGARDED AS RESTRICTING THE GOVERNMENT'S RIGHT TO RECOVER KNOWN OVERPAYMENTS. FURTHERMORE, THE LAST THREE CONTRACTS HERE INVOLVED EXPRESSLY PROVIDE THAT THE CONTRACTOR SHALL PRESERVE ALL THE PERTINENT BOOKS, RECORDS AND OTHER PAPERS "FOR A PERIOD OF 5 YEARS AFTER COMPLETION OR TERMINATION" OF THE CONTRACTS. ( ITALICS SUPPLIED.) THE COST STUDY BY THE GOVERNMENT ( GENERAL ACCOUNTING OFFICE) AND THE DETERMINATION BY THE CONTRACTING OFFICER WERE MADE, WITH THE EXCEPTION OF THE FIRST CONTRACT, WITHIN THIS FIVE YEAR PERIOD. MOREOVER, IT SEEMS CLEAR THAT THE CONTRACTOR, HAVING SUBMITTED HIS RECORDS AND PAPERS FOR EXAMINATION, IS LEGALLY OBLIGATED TO REFUND THE AMOUNT OF THE PAYMENTS WHICH HAD BEEN ILLEGALLY OR ERRONEOUSLY RECEIVED BY IT FROM THE GOVERNMENT, AS REQUESTED BY THE CONTRACTING OFFICER. SEE THE AUTHORITIES CITED ABOVE.

WITH RESPECT TO QUESTION (3) AS TO THE COMPUTATION OF THE OVERHEAD COSTS IN QUESTION, IT SEEMS MANIFEST FOR THE REASONS STATED ABOVE THAT THE CONTRACTING OFFICER WAS ACTING REASONABLY AND WITHIN HIS AUTHORITY IN DEMANDING THAT THE CONTRACTOR COMPUTE THE OVERHEAD CHARGEABLE ON THE BASIS OF THE CONTRACTOR'S OWN COST-ACCOUNTING SYSTEM, ESTABLISHED AND USED BY IT IN DETERMINING THE ACTUAL OVERHEAD COSTS INCURRED AND DISTRIBUTED TO THE CONTRACTS. FURTHERMORE, THE RECORD ADEQUATELY SUPPORTS THE CONCLUSION THAT, HAD THE CONTRACTOR PROPERLY ADVISED AND INFORMED THE CONTRACTING OFFICER REGARDING ITS COST-ACCOUNTING PRACTICES, AS IT WAS LEGALLY OBLIGATED TO DO, APPROPRIATE ADJUSTMENTS WOULD HAVE BEEN MADE PURSUANT TO THE TERMS OF THE CONTRACTS ON A MORE CURRENT BASIS.