B-110609, JANUARY 14, 1954, 33 COMP. GEN. 291

B-110609, JANUARY 14, 1954, 33 COMP. GEN. 291

CONTRACTS - COST-PLUS - COST-PLUS-A-PERCENTAGE-OF-COST BASIS PROHIBITION WHERE COST LIMITS STIPULATED IN LETTER CONTRACTS OR LETTERS OF INTENT ARE CONSISTENTLY DISREGARDED AND INCREASED BY SUCCESSIVE AMENDMENTS AFTER THEY HAVE BEEN EXCEEDED AND EXECUTION OF THE DEFINITIVE CONTRACTS BASED ON THE LETTER CONTRACTS OR LETTERS OF INTENT IS DELAYED UNTIL THE WORK INVOLVED IS ENTIRELY OR PRACTICALLY COMPLETED, THE FINAL CONTRACTS WILL NOT BE CONSIDERED BINDING OBLIGATIONS OF THE GOVERNMENT AND CREDIT FOR PAYMENTS UNDER SUCH CONTRACTS, EQUAL TO THE PERCENTAGE FEES PROVIDED FOR IN THE PRELIMINARY AGREEMENTS, WILL BE DISALLOWED. THE USE OF LETTER CONTRACTS OR LETTERS OF INTENT, BY WHICH THE CONTRACTOR IS AUTHORIZED TO FURNISH SUPPLIES OR SERVICES AND TO ENTER INTO SUBCONTRACTS AND INCUR EXPENSES UP TO A STATED MAXIMUM PENDING NEGOTIATION OF A DEFINITIVE CONTRACT ON A LUMP-SUM BASIS, SHOULD BE RESORTED TO ONLY UNDER CONDITIONS OF THE UTMOST URGENCY AND INASMUCH AS SUCH CONTRACTS ARE NECESSARILY NEGOTIATED ALL THE CONDITIONS AND REQUIREMENTS OF SECTION 302 (C), 302 (E), AND 304, OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949 ARE APPLICABLE. THE PURPOSE OF THE BOND REQUIREMENT PROVISIONS OF THE MILLER ACT IS TO AFFORD PROTECTION FOR THE GOVERNMENT IN EVENT OF CONTRACT DEFAULT, AND THEREFORE THE REQUIREMENT THAT BONDS BE OBTAINED PRIOR TO THE EXECUTION OF THE CONTRACT REQUIRES STRICT ENFORCEMENT.

COMPTROLLER GENERAL WARREN TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, JANUARY 14, 1954:

REFERENCE IS MADE TO MEMORANDUM DATED AUGUST 31, 1953, FROM M. H. ELLIOTT, GENERAL COUNSEL, GENERAL SERVICES ADMINISTRATION, TO C. A. HURLEY, ASSISTANT DIRECTOR, DIVISION OF AUDITS, GENERAL ACCOUNTING OFFICE, IN REPLY TO INFORMAL INQUIRY CONCERNING THE PROPRIETY OF PAYMENTS UNDER CONTRACTS NOS. GS-03-B-1011, GS-00-B-269, GS-03-B-103, AND GS-03-B-1104.

THE CONTRACTS IN QUESTION ALL INVOLVE THE USE OF SO-CALLED LETTER CONTRACTS OR LETTERS OF INTENT, BY WHICH THE CONTRACTORS WERE AUTHORIZED TO UNDERTAKE REPAIRS OR ALTERATIONS TO GOVERNMENT BUILDINGS, AND TO ENTER INTO SUBCONTRACTS AND INCUR EXPENSES UP TO A STATED MAXIMUM AMOUNT, PENDING NEGOTIATION OF A DEFINITIVE CONTRACT ON A LUMP SUM BASIS. ACTUAL PERFORMANCE, EXECUTION OF THE DEFINITIVE CONTRACTS WAS NOT EFFECTED, AND THE BONDS REQUIRED BY THE MILLER ACT WERE NOT FURNISHED, UNTIL THE WORK WAS ENTIRELY OR PRACTICALLY COMPLETED IN TWO CASES, AND APPROXIMATELY FIFTY PERCENT COMPLETED IN THE OTHER TWO.

FROM THE ENCLOSURES WITH MR. ELLIOTT'S MEMORANDUM, IT APPEARS THAT QUESTIONS CONCERNING THESE CONTRACTS WERE ORIGINALLY RAISED BY THE COMPTROLLER OF YOUR AGENCY AND AN OPINION THEREON WAS RENDERED BY YOUR GENERAL COUNSEL ON MAY 5, 1952.

IN HIS OPINION, YOUR GENERAL COUNSEL CONCEDED THAT "THE PRACTICE OF NEGOTIATING AND EXECUTING THE FORMAL CONTRACTS SUBSTANTIALLY AT COMPLETION BORDERS ON ILLEGALITY, IF IT IS NOT ACTUALLY ILLEGAL.' HOWEVER, HE THEN PROCEEDED TO ARGUE, ON THE BASIS OF OFFICE DECISION B 44323 OF SEPTEMBER 25, 1944, AND THE CASE OF MUSCHANY V. UNITED STATES, 324 U.S. 49, THAT BY REASON OF THE LIMITATION OF EXPENDITURES STIPULATED IN THE LETTER CONTRACTS, AND THE PROVISIONS AUTHORIZING THEIR TERMINATION FOR THE CONVENIENCE OF THE GOVERNMENT, TOGETHER WITH COST AUDITS AND CHECKS AND CONTROL BY THE PROJECT ENGINEER, THE EVIL AIMED AT BY THE PROHIBITION AGAINST THE COST-PLUS-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING, CONTAINED IN SECTION 304 (B) OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949, 63 STAT. 395, AND OTHER ACTS, WAS NOT PRESENT.

IT IS TRUE THAT AT ONE TIME THIS OFFICE TOOK THE VIEW THAT ABSOLUTE COST LIMITATIONS, AND PROVISIONS FOR GOVERNMENT SUPERVISION OF COSTS AND EXPENDITURES, WOULD PROTECT SUFFICIENTLY THE INTEREST OF THE UNITED STATES EVEN WHERE A FEE OR PROFIT ON A PERCENTAGE BASIS WAS PROVIDED FOR. AT THE SAME TIME, THE POSITION WAS TAKEN THAT WHERE THE PROHIBITION WAS VIOLATED THE CONTRACT WAS VOID AND NO PAYMENT COULD BE MADE BY THE GOVERNMENT FOR THE SUPPLIES OR SERVICES FURNISHED UNDER IT, WHETHER BY THE PRIME CONTRACTOR OR BY A SUBCONTRACTOR. SEE 22 COMP. GEN. 784.

HOWEVER, IT WAS SUBSEQUENTLY CONCLUDED THAT THE PROHIBITION REQUIRED A MORE RIGID CONSTRUCTION BUT THAT UNDER AGREEMENTS INADVERTENTLY ENTERED INTO IN VIOLATION OF THE PROHIBITION REASONABLE PAYMENT COULD BE MADE FOR SUPPLIES OR SERVICES ACTUALLY FURNISHED TO AND ACCEPTED BY OFFICERS OF THE GOVERNMENT HAVING AUTHORITY TO PURCHASE THEM. SEE B 46232, MARCH 28, 1945, TO THE SECRETARY OF WAR.

IN CONNECTION WITH THE CONTRACTS IN QUESTION, WHERE THE COST LIMITS STIPULATED WERE CONSISTENTLY DISREGARDED AND INCREASED BY SUCCESSIVE AMENDMENTS AFTER THEY HAD ALREADY BEEN EXCEEDED, AND WHERE DEFINITIVE CONTRACTS WERE DELAYED UNTIL THE WORK WAS IN THE LAST STAGES, THE EXECUTION OF THE SO-CALLED LUMP-SUM CONTRACTS WAS MORE IN THE NATURE OF SETTLEMENT OF THE CONTRACTORS' CLAIMS THAN THE NEGOTIATION OF CONTRACTS. YOU ARE ACCORDINGLY ADVISED THAT IN THE FUTURE SUCH FINAL CONTRACTS WILL NOT BE CONSIDERED AS BINDING OBLIGATIONS OF THE GOVERNMENT, AND THAT CREDIT FOR PAYMENTS UNDER ANY SUCH CONTRACTS, EQUAL TO THE PERCENTAGE FEES PROVIDED FOR IN THE PRELIMINARY AGREEMENTS, WILL BE DISALLOWED IN THE AUDIT.

IT IS NOTED THAT ADMINISTRATIVE ORDER NO. 123, DATED APRIL 11, 1952, PRESCRIBED CERTAIN LIMITATIONS WITH RESPECT TO THE USE OF LETTER CONTRACTS, INCLUDING A PROVISION THAT THE DEFINITIVE CONTRACT SHOULD BE EXECUTED PRIOR TO THE COMPLETION OF ONE-THIRD OF THE WORK. STRICT COMPLIANCE WITH THIS REQUIREMENT WOULD APPEAR TO AVOID RECURRENCE OF SUCH CASES AS THE FOUR HERE IN QUESTION, BUT IT WOULD SEEM DESIRABLE TO PLACE GREATER EMPHASIS UPON THE FACT THAT THE USE OF LETTER CONTRACTS OF LETTERS OF INTENT SHOULD BE RESORTED TO ONLY UNDER CONDITIONS OF THE UTMOST URGENCY. CF. ARMY PROCUREMENT PROCEDURES, 1-909.1C. ALSO, SINCE SUCH CONTRACTS ARE NECESSARILY NEGOTIATED, ALL THE CONDITIONS AND REQUIREMENTS OF SECTIONS 302 (C), 302 (E), AND 304, OF THE FEDERAL PROPERTY AND ADMINISTRATIVE SERVICES ACT OF 1949 (63 STAT. 393, 394, 395, RESPECTIVELY), ARE APPLICABLE.

YOUR GENERAL COUNSEL'S OPINION STATES ONE OTHER CONCLUSION WITH WHICH THIS OFFICE IS NOT IN AGREEMENT--- THAT IS THE CONCLUSION WITH RESPECT TO THE EXECUTION OF PERFORMANCE AND PAYMENT BONDS AFTER COMPLETION OF THE WORK, AS COMPLIANCE WITH THE REQUIREMENTS OF THE MILLER ACT, 49 STAT. 793. TO SAY THAT EXPERIENCE HAS SHOWN THAT BONDS CAN BE OBTAINED EVEN AFTER COMPLETION PROVIDED THE CONTRACTOR HAS NOT BEEN IN DEFAULT, SEEMS TO BE BEGGING THE QUESTION. IF THERE HAS BEEN NO DEFAULT, THE PROTECTION INTENDED TO BE ASSURED BY THE BONDS IS NO LONGER NEEDED; IF THERE HAS BEEN DEFAULT, SUCH PROTECTION AGAINST THE CONSEQUENCES OF DEFAULT HAS NOT BEEN HAD, AND OBVIOUSLY CANNOT BE OBTAINED AFTER THE EVENT. ACCORDINGLY AND SINCE THE MILLER ACT ITSELF EXPRESSLY REQUIRES PROCUREMENT OF THE BONDS "BEFORE ANY CONTRACT" CONTEMPLATED BY THE ACT "IS AWARDED," THERE IS NO ALTERNATIVE TO THE CONCLUSION THAT FAILURE TO OBTAIN THE PRESCRIBED BONDS PRIOR TO PERFORMANCE OF THE CONTRACT IS CONTRARY TO THE REQUIREMENTS OF THE ACT. ANY SUCH FAILURE IN CONNECTION WITH FUTURE CONTRACTS ENTERED INTO BY YOUR ADMINISTRATION ALSO WILL BE QUESTIONED IN THE AUDIT.