B-119292, OCT 8, 1954

B-119292: Oct 8, 1954

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THE INTENET OF THE CONGRESS IN OPPOSING THIS SYSTEM IS CLEARLY DISCERNIBLE IN THE LEGISLATIVE HISTORY OF THIS AND OTHER ACTS REGULATING GOVERNMENT PROCUREMENT. CONDITIONS WHICH IT SOUGHT TO PREVENT ARE THOSE WHICH PROVIDE AN INCENTIVE AND AN OPPORTUNITY FOR A CONTRACTOR OR SUBCONTRACTOR TO INCREASE HIS PROFIT BY INCREASING HIS COSTS AT THE EXPENSE OF THE GOVERNMENT. THE POLICY OF THE DEPARTMENT OF DEFENSE WITH RESPECT TO THIS FORM OF CONTRACTING UNDER NEGOTIATED CONTRACTS IS STATED AS FOLLOWS: "*** EXCEPT THAT UNDER NO CIRCUMSTANCES SHALL THE COST-PLUS-A PERCENTAGE- OF-COST SYSTEM OF CONTRACTING BE USED. THIS OFFICE HAS OBSERVED INSTANCES IN WHICH COST-PLUS-A-PERCENTAGE- OF- COST SUBCONTRACTS HAVE BEEN MADE UNDER MILITARY FIXED-PRICE PRIME CONTRACTS CONTAINING PROVISIONS FOR PRICE REDETERMINATION.

B-119292, OCT 8, 1954

PRECIS-UNAVAILABLE

SECRETARY OF DEFENSE:

SECTION 4(B) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947 PROHIBITS THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING. THE INTENET OF THE CONGRESS IN OPPOSING THIS SYSTEM IS CLEARLY DISCERNIBLE IN THE LEGISLATIVE HISTORY OF THIS AND OTHER ACTS REGULATING GOVERNMENT PROCUREMENT. CONDITIONS WHICH IT SOUGHT TO PREVENT ARE THOSE WHICH PROVIDE AN INCENTIVE AND AN OPPORTUNITY FOR A CONTRACTOR OR SUBCONTRACTOR TO INCREASE HIS PROFIT BY INCREASING HIS COSTS AT THE EXPENSE OF THE GOVERNMENT.

IN PARAGRAPH 3-401 OF THE ARMED SERVICES PROCUREMENT REGULATIONS, THE POLICY OF THE DEPARTMENT OF DEFENSE WITH RESPECT TO THIS FORM OF CONTRACTING UNDER NEGOTIATED CONTRACTS IS STATED AS FOLLOWS:

"*** EXCEPT THAT UNDER NO CIRCUMSTANCES SHALL THE COST-PLUS-A PERCENTAGE- OF-COST SYSTEM OF CONTRACTING BE USED, OR ALLOWED TO BE USED FOR ANY SUBCONTRACT UNDER A DEPARTMENT CONTRACT."

UNDER THE PROCUREMENT INSTRUCTIONS IMPLEMENTING THIS POLICY, THE PROHIBITION HAS BEEN CONSTRUED BY CONTRACTING PERSONNEL AS APPLYING ONLY IN CONNECTION WITH COST-TYPE PRIME CONTRACTS.

THIS OFFICE HAS OBSERVED INSTANCES IN WHICH COST-PLUS-A-PERCENTAGE- OF- COST SUBCONTRACTS HAVE BEEN MADE UNDER MILITARY FIXED-PRICE PRIME CONTRACTS CONTAINING PROVISIONS FOR PRICE REDETERMINATION. UNDER THIS FORM OF PRIME CONTRACT, THE PRICE ULTIMATELY NEGOTIATED IS DEPENDENT LARGELY UPON THE COSTS OF PERFORMANCE. A COST-PLUS-A-PERCENTAGE-OF COST SUBCONTRACTOR IN THIS SITUATION IS IN A POSITION TO INCREASE HIS PROFIT BY INCREASING HIS COSTS, WHICH IN TURN BECOME A PART OF THE PRIME CONTRACTOR'S COST AND THEREFORE BECOME A DOMINANT FACTOR IN THE ULTIMATE NEGOTIATED PRICE TO THE GOVERNMENT. IT SEEMS CLEAR THAT THE STATUTORY PROHIBITION AGAINST THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING MUST BE CONSIDERED APPLICABLE TO SUCH SUBCONTRACTS.

I UNDERSTAND THAT CERTAIN REVISIONS OF THE ARMED SERVICES PROCURMENT REGULATIONS ARE NOW UNDER CONSIDERATION BY YOUR DEPARTMENT. IN CONNECTION THEREWITH, I SUGGEST THAT, IN ORDER TO STRENGTHEN THE PROCEDURES FOR COMPLIANCE WITH THE INTENT OF SECTION 4 (B) OF THE ARMED SERVICES PROCURMENT ACT OF 1947, THE POLICY STATED IN PARAGRAPH 3-401 OF THE ARMED SERVICES PROCURMENT REGULATION BE SUPPLEMENTED BY A SPECIFIC REQUIREMENT THAT ALL NEGOTIATED CONTRACTS, EXCEPT THOSE WITH INITIAL FIRM FIXED PRICES NOT SUBJECT TO REVISION, SHALL CONTAIN A CLAUSE PROHIBITING THE PRIME CONTRACTOR FROM MAKING COST-PLUS-A PERCENTAGE-OF-COST SUBCONTRACTS THEREUNDER.

I WOULD APPRECIATE YOUR ADVICE AS TO THE ACTION TAKEN ON THIS MATTER.