B-120942, SEP 27, 1954

B-120942: Sep 27, 1954

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USAF: REFERENCE IS MADE TO YOUR INDORSEMENT OF AUGUST 5. REQUESTING AN ADVANCE DECISION AS TO WHETHER PAYMENT IS AUTHORIZED ON A VOUCHER IN THE AMOUNT OF $84. THE CONTRACT AS ORIGINALLY AWARDED WAS ON A STRAIGHT FIXED-PRICE BASIS. UNDER CLAUSE 22 PROVISION WAS MADE FOR SUBCONTRACTING. THE GOVERNMENT WILL NOT FURNISH TO THE CONTRACTOR. THE CONTRACT AMOUNT WILL BE REDUCED BY THE CURRENT MARKET VALUE OF THE MATERIAL AND/OR EQUIPMENT SO FURNISHED. THIS OPTION IS RESERVED TO THE GOVERNMENT AND WILL NOT BE INTERPRETED AS GRANTING TO THE CONTRACTOR ANY RIGHT OR PRIVILEGE WITH REFERENCE TO REQUESTING OR REQUISITIONING ANY ADDITIONAL GOVERNMENT FURNISHED MATERIAL AND/OR EQUIPMENT.". SPECIAL CLAUSE 24 WAS ADDED TO THE CONTRACT.

B-120942, SEP 27, 1954

PRECIS-UNAVAILABLE

MAJOR E.J. KROCKER, USAF:

REFERENCE IS MADE TO YOUR INDORSEMENT OF AUGUST 5, 1954, WITH ENCLOSURES (OCCF/EJK/MRS), TRANSMITTED BY LETTER OF AUGUST 18, 1954, FROM THE DEPUTY DIRECTOR OF FINANCE, USAF, REQUESTING AN ADVANCE DECISION AS TO WHETHER PAYMENT IS AUTHORIZED ON A VOUCHER IN THE AMOUNT OF $84,912.27, ADMINISTRATIVELY APPROVED FOR $82,806.48, STATED IN FAVOR OF THE AMERICAN NATIONAL BANK OF BEAUMONT, TEXAS, ASSIGNEE OF EAST TEXAS ENGINEERING COMPANY, UNDER CONTRACT NO. AF 41(608)-6196 DATED JULY 25, 1952, COVERING THE MANUFACTURE, DELIVERY, AND ERECTION OF CERTAIN SERVICE DOCKS AT KELLY, BIGGS, AND CARSWELL AIR FORCE BASES, ALL IN THE STATE OF TEXAS.

THE CONTRACT AS ORIGINALLY AWARDED WAS ON A STRAIGHT FIXED-PRICE BASIS, HAVING BEEN NEGOTIATED PURSUANT TO SECTION 2(C)(1) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947, 62 STAT. 21. UNDER CLAUSE 22 PROVISION WAS MADE FOR SUBCONTRACTING. CLAUSE 13 OF SPECIAL CLAUSES PROVIDES AS FOLLOWS:

"13. GOVERNMENT FURNISHED MATERIALS OF EQUIPMENT:

"A. THE GOVERNMENT WILL NOT FURNISH TO THE CONTRACTOR, AS A FREE ISSUE, ANY MATERIALS OR EQUIPMENT IN CONNECTION WITH THIS CONTRACT.

"B. THE GOVERNMENT RESERVES THE RIGHT, AT ITS CONVENIENCE, TO FURNISH TO THE CONTRACTOR ANY MATERIAL AND/OR EQUIPMENT NECESSARY FOR PERFORMANCE OF THE WORK, IN ADDITION TO ANY GOVERNMENT FURNISHED MATERIAL AND/OR EQUIPMENT SPECIFIED ELSEWHERE HEREIN, WHEN DEEMED IN THE INTEREST OF THE GOVERNMENT. IN ANY SUCH CASE, THE CONTRACT AMOUNT WILL BE REDUCED BY THE CURRENT MARKET VALUE OF THE MATERIAL AND/OR EQUIPMENT SO FURNISHED. THIS OPTION IS RESERVED TO THE GOVERNMENT AND WILL NOT BE INTERPRETED AS GRANTING TO THE CONTRACTOR ANY RIGHT OR PRIVILEGE WITH REFERENCE TO REQUESTING OR REQUISITIONING ANY ADDITIONAL GOVERNMENT FURNISHED MATERIAL AND/OR EQUIPMENT."

BY SUPPLEMENTAL AGREEMENT NO. 1 DATED AUGUST 5, 1952, SPECIAL CLAUSE 24 WAS ADDED TO THE CONTRACT. IN THAT CLAUSE DETAILED PROVISIONS WERE MADE WITH RESPECT TO PROPERTY WHICH THE GOVERNMENT MIGHT DELIVER TO THE CONTRACTOR FOR USE IN CONNECTION WITH AND UNDER THE TERMS OF THE CONTRACT. NO MENTION WAS MADE THEREIN OF THE GOVERNMENT FURNISHING ANY EQUIPMENT. BY SUPPLEMENTAL AGREEMENT NO. 3, DATED SEPTEMBER 24, 1952, THERE WAS ADDED TO THE CONTRACT A PRICE REDETERMINATION CLAUSE, IN PERTINENT PART, AS FOLLOWS:

"2. PRICE REDETERMINATION:

"A. BECAUSE OF THE DEVELOPMENTAL NATURE OF THE WORK CALLED FOR BY THIS CONTRACT AND THE UNCERTAINTY AS TO THE COST OF PERFORMANCE HEREUNDER, THE PARTIES AGREE THAT THE CONTRACT PRICE FIXED IN SCHEDULE OF WORK TO BE PERFORMED HEREOF MAY BE INCREASED OR DECREASED IN ACCORDANCE WITH THE PROVISIONS OF THIS CLAUSE.

"B. WITHIN 30 DAYS AFTER THE COMPLETION OR TERMINATION OF THIS CONTRACT, THE CONTRACTOR WILL FILE WITH THE CONTRACTING OFFICER A STATEMENT SHOWING, IN SUCH FORM AND DETAIL AS THE CONTRACTING OFFICER MAY PRESCRIBE, THE CONTRACTOR'S COST OF PRODUCING THE SUPPLIES OR FURNISHING THE SERVICES CALLED FOR HEREUNDER, TOGETHER WITH SUCH OTHER INFORMATION AS MAY BE PERTINENT IN THE NEGOTIATIONS FOR A REVISED PRICE PURSUANT TO THIS CLAUSE. THE CONTRACTOR WILL ESTABLISH AND MAINTAIN SUCH RECORDS OF THE COSTS OF PERFORMING THIS CONTRACT AS THE CONTRACTING OFFICER MAY REQUIRE IN WRITING. THE CONTRACTING OFFICER SHALL HAVE THE RIGHT AT ALL REASONABLE TIMES TO MAKE OR CAUSE TO BE MADE SUCH EXAMINATIONS AND AUDITS OF THE CONTRACTOR'S BOOKS, RECORDS AND ACCOUNTS AS HE MAY REQUEST.

"C. UPON THE FILING OF THE STATEMENT AND OTHER PERTINENT INFORMATION REQUIRED BY PARAGRAPH B OF THIS CLAUSE THE CONTRACTOR AND THE CONTRACTING OFFICER WILL PROMPTLY NEGOTIATE IN GOOD FAITH TO AGREE UPON A REASONABLE REVISED PRICE FOR THE ENTIRE CONTRACT WHICH, UPON THE BASIS OF SUCH STATEMENT AND OTHER PERTINENT INFORMATION, WILL CONSTITUTE FAIR AND JUST COMPENSATION TO THE CONTRACTOR FOR THE PERFORMANCE OF THIS CONTRACT. DETERMINING THE EXTENT OF ANY ESTIMATED ALLOWANCE FOR PROFIT TO BE TAKEN INTO ACCOUNT IN FIXING SUCH REVISED PRICE, CONSIDERATION WILL BE GIVEN TO THE EXTENT TO WHICH THE CONTRACTOR HAS PERFORMED THE CONTRACT WITH EFFICIENCY, ECONOMY AND INGENUITY. IN NO EVENT SHALL THE REVISED PRICE EXCEED THE SUM OF ONE HUNDRED AND FIVE PERCENT (105%) OF THE CONTRACT PRICE. THE REVISED PRICE SHALL BE EVIDENCED BY A SUPPLEMENTAL AGREEMENT TO THIS CONTRACT.

"D. IF WITHIN 60 DAYS AFTER THE COMPLETION OR TERMINATION OF THIS CONTRACT, THE PARTIES SHALL FAIL TO AGREE UPON A REVISED PRICE IN ACCORDANCE WITH THE PROVISIONS OF THIS CLAUSE, THE FAILURE TO AGREE SHALL BE DEEMED TO BE A DISAGREEMENT AS TO A QUESTION OF FACT WHICH SHALL BE DISPOSED OF IN ACCORDANCE WITH CLAUSE 12 (DISPUTES)."

IT APPEARS THAT ON OCTOBER 15, 1952, THE CONTRACTOR NEGOTIATED AND ENTERED INTO A CONTRACT WITH AUTREY CONSTRUCTION COMPANY TO FURNISH ALL LABOR AND SUPERVISION FOR THE ERECTION OF THE STEEL FRAME WORK AND APPLICATION OF THE CORRUGATED SHEETING FOR 10 SERVICE DOCKS AT KELLY AIR FORCE BASE FOR WHICH THE SUBCONTRACTOR WAS TO BILL THE PRIME CONTRACTOR THE DIRECT LABOR COSTS "PLUS DIRECT INSURANCE AND PAYROLL" PLUS 10 PERCENT FOR OVERHEAD PLUS 10 PERCENT FOR PROFIT. ON JANUARY 22, 1953, THE PRIME CONTRACTOR ISSUED A PURCHASE ORDER TO THE SUBCONTRACTOR FOR PERFORMING SIMILAR WORK ON EIGHT SERVICE DOCKS AT CARSWELL AIR FORCE BASE AND FOR WHICH THE SUBCONTRACTOR WAS TO RECEIVE PAYMENT ON THE SAME BASIS. WORK WAS PERFORMED UNDER THESE SUBCONTRACTS AND PROGRESS PAYMENTS WERE MADE FOR THE WORK ON THE AGREED BASIS FROM TIME TO TIME UNTIL AUGUST 10, 1953, WHEN THE PRIME CONTRACTOR SUBMITTED AN INVOICE FOR ANOTHER PROGRESS PAYMENT (NO. 27), AT WHICH TIME AIR FORCE AUDITORS WERE CALLED UPON TO AUDIT THE SCHEDULE SUPPORTING THE PROPOSED PARTIAL PAYMENT. THE AUDITORS DISCOVERED THAT THE SUBCONTRACTS WITH AUTREY AND WITH ARLINGTON HEIGHTS ELECTRIC COMPANY WERE IN FACT COST-PLUS-A-PERCENTAGE-OF-COST CONTRACTS. SINCE SECTION 4(B) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947, 62 STAT. 23, PROHIBITS THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING, THE PRIME CONTRACTOR WAS NOTIFIED THAT SUBCONTRACTS ON THIS BASIS WERE PROHIBITED. THEREAFTER ON SEPTEMBER 10, 1953, THE PRIME CONTRACTOR CANCELED ITS TWO SUBCONTRACTS WITH AUTREY AND EXECUTED AN AGREEMENT TO PERFORM THE SAME WORK AS WELL AS ERECTION OF 8 SETS OF SERVICE DOCKS AT BIGGS AIR FORCE BASE ON A COST-PLUS-A-FIXED-FEE BASIS, THE FIXED-FEE TO BE INCREASED BY AN EFFICIENCY BONUS. AFTER COMPLETION OF THE CONTRACT WORK, A PRICE REDETERMINATION WAS MADE PURSUANT TO THE TERMS OF THE PRIME CONTRACT AND A SUPPLEMENTAL AGREEMENT DATED JULY 19, 1954, WAS ENTERED INTO BY THE CONTRACTING OFFICER AND CONTRACTOR. THE REDETERMINED CONTRACT PRICE WAS THE CEILING PRICE OF $1,783,157.59 WHICH WAS 105 PERCENT OF THE CONTRACT PRICE. IN A SETTLEMENT MEMORANDUM OF THE SAME DATE, SIGNED BY THE CONTRACTING OFFICER, WHICH WAS IN EXPLANATION OF THE REDETERMINATION, IT WAS POINTED OUT THAT THE ENTIRE MATTER HAD BEEN CONSIDERED ON THE BASIS OF DECISION OF THIS OFFICE DATED MAY 3, 1954, B- 118109. IT WAS ALSO POINTED OUT THAT THERE HAD BEEN ELIMINATED IN DETERMINING THE PRIME CONTRACTOR'S COST UNDER SUBCONTRACTS THE ENTIRE AMOUNT OF THE PROFIT ($14,059) WHICH HAD BEEN PAID ON A PERCENTAGE-OF-COST BASIS AND THAT THE NET AMOUNT OF $432,813 PAID TO SUBCONTRACTORS HAD BEEN DETERMINED TO BE FAIR AND REASONABLE BASED UPON THE CONSIDERATIONS SET FORTH IN SAID DECISION. THE CONTRACTOR'S COSTS WERE DETERMINED TO BE $1,750,337.20 AND, SINCE THE REDETERMINATION PRICE WAS LIMITED TO 105 PERCENT OF THE CONTRACT PRICE, OR $1,783,157.59, THE CONTRACTOR'S PROFIT AMOUNTED TO ONLY $32,820.39 OR LESS THAN 2 PERCENT. IN THESE CIRCUMSTANCES, AND SINCE IT APPEARS THAT APPROPRIATE STEPS HAVE BEEN TAKEN TO PROTECT THE INTERESTS OF THE GOVERNMENT IN LINE WITH THE PROCEDURES LAID DOWN IN B-118109, MAY 3, 1954, THE PROPOSED PAYMENT NEED NOT BE DENIED ON THE GROUND THAT THE SUBCONTRACTS WITH TWO FIRMS HAD ORIGINALLY BEEN ENTERED INTO ON A COST PLUS-A-PERCENTAGE-OF-COST BASIS.

WITH REGARD TO THE FREE USE OF AIR FORCE EQUIPMENT, WHILE THE USE OF SUCH EQUIPMENT WITH NO CHARGE TO THE CONTRACTOR MAY HAVE BEEN PERMITTED WITH A SINCERE AND HONEST DESIRE ON THE PART OF GOVERNMENT OFFICIALS TO EXPEDITE THE WORK AND TO AVOID THE NECESSITY OF CLEARING PERSONNEL FOR SECURITY PURPOSES, AS INDICATED BY SOME OF THE CORRESPONDENCE IN THE CASE, THE FACT REMAINS THAT THE CONTRACTOR PROFITED TO THE EXTENT THAT HE DID NOT HAVE TO PAY ANYTHING UNDER THE CONTRACT FOR EQUIPMENT WHICH HE WAS OBLIGATED TO FURNISH. WHILE IT HAS BEEN STATED THAT CLAUSE 13 - GENERALLY USED IN CONSTRUCTION CONTRACTS - WHICH PROVIDES FOR A REDUCTION IN THE CONTRACT PRICE FOR THE USAGE OF GOVERNMENT MATERIALS OR EQUIPMENT SHOULD NOT HAVE BEEN USED IN THIS CONTRACT, WHICH WAS DETERMINED TO BE A "SUPPLY AND SERVICE" CONTRACT RATHER THAN A CONSTRUCTION CONTRACT, THE SCHEDULE PROVIDED THAT THE CONTRACTOR SHOULD FURNISH "ALL PLANT, LABOR, EQUIPMENT AND MATERIALS AND PERFORM ALL WORK IN STRICT ACCORDANCE WITH THE SPECIFICATIONS." THEREFORE, EVEN IN THE ABSENCE OF CLAUSE 13 IF THE GOVERNMENT HAD FURNISHED EQUIPMENT WHICH THE CONTRACTOR WAS OBLIGATED TO FURNISH AT THE CONTRACT PRICE, A REDUCTION IN THE CONTRACT PRICE TO COVER THE RENTAL VALUE OF THE EQUIPMENT WOULD HAVE BEEN REQUIRED. IT HAS BEEN STATED BY THE CONTRACTING OFFICER IN HIS FIRST INDORSEMENT OF JULY 20, 1954, TO THE CHIEF, DALLAS AIR PROCUREMENT DISTRICT, SAN ANTONIO AIR MATERIEL AREA, THAT IF GOVERNMENT EQUIPMENT HAD NOT BEEN USED AND THE CONTRACTOR HAD BEEN REQUIRED TO PURCHASE THE SERVICES THROUGH SUBCONTRACTING, THE RESULTING EXPENSE WOULD HAVE BEEN AN ALLOWABLE ITEM OF COST UNDER PRICE REDETERMINATION AND TO ATTEMPT "TO CHARGE THE CONTRACTOR BACK" FOR THE RENTAL VALUE OF THE GOVERNMENT EQUIPMENT WOULD IN EFFECT BE CHARGING THE CONTRACTOR FOR A COST THAT WAS NOT CHARGED TO THE GOVERNMENT UNDER PRICE REDETERMINATION. THIS ARGUMENT WOULD BE A VALID ONE IF THE GOVERNMENT WERE REIMBURSING THE CONTRACTOR ON A COST BASIS, WITHOUT LIMITATION. THAT IS NOT THE CASE, HOWEVER. THE PRICE ALLOWED THE CONTRACT ($1,783,157.59), YET THE GOVERNMENT HAS RELIEVED THE CONTRACTOR OF PAYING RENT FOR EQUIPMENT WHICH CLEARLY WAS HIS OBLIGATION UNDER THE CONTRACT. IT SEEMS APPARENT, THEREFORE, THAT TO ALLOW THE CONTRACTOR TO RETAIN THE REASONABLE RENTAL VALUE OF THE GOVERNMENT EQUIPMENT WOULD BE TO INCREASE HIS PROFIT TO THAT EXTENT. ACCORDINGLY, THERE SHOULD BE DEDUCTED FROM THE BALANCE OF $82,806.48, APPROVED AS BEING DUE THE CONTRACTOR, AN AMOUNT DETERMINED TO REPRESENT THE REASONABLE RENTAL VALUE OF GOVERNMENT EQUIPMENT USED BY THE CONTRACTOR ON THE THREE BASES INVOLVED.

IT IS NOTED THAT SEVERAL SUBCONTRACTORS HAVE PRESENTED CLAIMS FOR BALANCES DUE THEM FOR LABOR AND MATERIALS FURNISHED IN CONNECTION WITH THE CONTRACT BUT, SINCE THE CONTRACT WAS DETERMINED TO BE A SUPPLY CONTRACT, A PAYMENT BOND SUCH AS REQUIRED BY THE MILLER ACT OF AUGUST 24, 1953, 40 U.S.C. 270A-E, WAS NOT EXECUTED AND THERE APPEARS NO AUTHORITY TO WITHHOLD MONEY OWING A CONTRACTOR TO SATISFY THE CLAIMS OF A SUBCONTRACTOR.

THE VOUCHER, WITH ACCOMPANYING PAPERS, IS RETURNED AND PAYMENT THEREON MAY BE MADE AFTER MAKING THE DEDUCTION INDICATED.