B-122689, JUL. 29, 1955

B-122689: Jul 29, 1955

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

WHICH WERE ALLOCATED TO VARIOUS COST-PLUS-A-FIXED-FEE CONTRACTS AS INDICATED: CONTRACT NO. 734.42 THE ITEMS RECLAIMED ARE LISTED BELOW AND ARE NUMBERED TO CORRESPOND WITH THE CONTRACTOR'S LETTER AND ENCLOSURES SUPPORTING THE RECLAIMS. THE CONTRACTOR'S RIGHT TO REIMBURSEMENT FOR THE ITEMS RECLAIMED UNDER CONTRACTS NOA (S) 52-066 AND NOA (S) 52-067 IS DEPENDENT UPON THE TERMS OF CONTRACTS NOA (S) 9027 AND NOA (S) 9351. WHICH WERE TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT ON JUNE 30. CONTRACT NOA (S) 9027 PROVIDED THAT THE "EXPLANATION OF PRINCIPLES" WAS TO BE THE COST DETERMINANT FOR REIMBURSABLE COSTS INCURRED PRIOR TO MARCH 1. - THAT PART 2 OF SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION WAS TO BE THE CRITERION FOR ESTABLISHING REIMBURSABLE COSTS INCURRED SUBSEQUENT TO THAT DATE.

B-122689, JUL. 29, 1955

TO LIEUTENANT L. SPRATLING, SC, U.S. NAVY, CENTRAL DISBURSING OFFICER, DEPARTMENT OF THE NAVY:

THERE HAS BEEN RECEIVED BY REFERENCE FROM THE OFFICE OF THE COMPTROLLER (FILE NCT 1322) YOUR REQUEST FOR A DECISION AS TO THE PROPRIETY OF MAKING PAYMENT ON THE FOLLOWING BUREAU VOUCHERS, IN THE AGGREGATE AMOUNT OF $36,734.42, COVERING RECLAIMS BY DOUGLAS AIRCRAFT COMPANY, INC., FOR CERTAIN PORTIONS OF OVERHEAD EXPENSES FOR THE COMPANY'S FISCAL YEARS 1946 THROUGH 1950, WHICH WERE ALLOCATED TO VARIOUS COST-PLUS-A-FIXED-FEE CONTRACTS AS INDICATED:

CONTRACT NO. BUREAU VOUCHER AMOUNT

NOA (S) 8269 6 $ 13.20

NOA (S) 7203 1595.04

NOA (S) 10119 31 51.12

NOA (S) 268 49 46.15

NOA (S) 8990 123 106.12

NOA (S) 6539 153 17,167.54

NOA (S) 52-066 154 1,659.87

NOA (S) 52-067 203 3,724.29

NOA (S) 743 216 4,553.12

NOA (S) 10414 358 1,338.15

NOA (S) 6850 394 7,979.82

$36,734.42

THE ITEMS RECLAIMED ARE LISTED BELOW AND ARE NUMBERED TO CORRESPOND WITH THE CONTRACTOR'S LETTER AND ENCLOSURES SUPPORTING THE RECLAIMS. THE CONTRACTOR'S RIGHT TO REIMBURSEMENT FOR THE ITEMS RECLAIMED UNDER CONTRACTS NOA (S) 52-066 AND NOA (S) 52-067 IS DEPENDENT UPON THE TERMS OF CONTRACTS NOA (S) 9027 AND NOA (S) 9351, DATED JUNE 16, 1947, AND SEPTEMBER 25, 1947, RESPECTIVELY, WHICH WERE TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT ON JUNE 30, 1951. CONTRACT NOA (S) 9027 PROVIDED THAT THE "EXPLANATION OF PRINCIPLES" WAS TO BE THE COST DETERMINANT FOR REIMBURSABLE COSTS INCURRED PRIOR TO MARCH 1, 1949, BUT PROVIDED--- BY AMENDMENT NO. 6--- THAT PART 2 OF SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION WAS TO BE THE CRITERION FOR ESTABLISHING REIMBURSABLE COSTS INCURRED SUBSEQUENT TO THAT DATE. CONTRACT NOA (S) 9351 INCORPORATED THE "EXPLANATION OF PRINCIPLES" AS THE COST DETERMINANT. THE "EXPLANATION OF PRINCIPLES" IS THE COST DETERMINANT IN ALL THE OTHER CONTRACTS EXCEPT NOA (S) 10414 AND AMENDMENT NO. 19, DATED NOVEMBER 25, 1949, TO CONTRACT NOA (S) 6850, WHICH STIPULATE THE ARMED SERVICES PROCUREMENT REGULATION AS THE COST DETERMINANT.

CHART

1. CORPORATE EXPENSE $11,207.54

2. DUES AND SUBSCRIPTIONS 3,038.68

3. INSTITUTIONAL ADVERTISING 4,052.20

4. PUBLIC RELATIONS EXPENSE 764.60

5. MISCELLANEOUS EXPENSE

(A) MILTON S. PLESSETT $ 51.81

(B) SPARE PARTS PRICE

LIST 163.92

(C) REPAIR PROGRAM FOR

EASTERN AIR LINES 414.79

(D) TED STERN--- NEW YORK

OFFICE EXPENSE 2,555.22

(E) JAMES C. ELDER

RETAINER FEE 344.83

(F) OTHER MISCELLANEOUS

EXPENSE 249.73 3,780.30

6. DEPRECIATION 2,058.58

7. AUDITING FEES AND EXPENSE 6,548.10

8. LEGAL FEES AND EXPENSE 5,284.42

$36,734.42

THE APPLICABLE GENERAL PROVISIONS OF THE "EXPLANATION OF PRINCIPLES" WERE SET FORTH IN DECISION B-119951, FEBRUARY 1, 1955, 34 COMP. GEN. 357, TO YOU, AND NEED NOT BE REPEATED HERE. SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION PROVIDES IN PARAGRAPH 15-201 THAT THE TOTAL COSTS UNDER A CONTRACT OF THE TYPE INVOLVED IS THE SUM OF THE ALLOWABLE DIRECT COSTS "INCIDENT TO THE PERFORMANCE OF THE CONTRACT," PLUS "THE PROPERLY ALLOCABLE PORTION OF ALLOWABLE INDIRECT COSTS.' SUBJECT TO ANY LIMITATIONS AS TO TYPES OR AMOUNTS OF COST ITEMS SET FORTH IN PART 2 OF SECTION XV OR OTHERWISE INCLUDED IN THE CONTRACT. ALSO, IT IS STATED IN PARAGRAPH 15-203 OF SECTION XV THAT ALLOWABLE INDIRECT COSTS MAY FALL INTO ONE OR MORE CATEGORIES: (A) MANUFACTURING AND PRODUCTION EXPENSES, WHICH ARE THE INDIRECT COSTS INCURRED IN THE OPERATION OF PRODUCTION DEPARTMENTS; (B) SELLING AND DISTRIBUTION EXPENSES, WHICH ARE COSTS INCURRED IN CONNECTION WITH THE MARKETING OF THE CONTRACTOR'S PRODUCTS; AND (C) GENERAL AND ADMINISTRATIVE EXPENSES, WHICH ARE COSTS INCURRED IN THE GENERAL MANAGEMENT, SUPERVISION AND CONDUCT OF THE BUSINESS AS A WHOLE.

ENCLOSURE (N-3) OF THE CONTRACTOR'S LETTER OF NOVEMBER 30, 1953, B108-CCN -1035, SUBMITTED IN SUPPORT OF THE VOUCHERS, INDICATES THAT NONE OF THE CORPORATE EXPENSE RECLAIMED WAS REIMBURSED TO THE CONTRACTOR UNDER CONTRACTS NUMBERED NOA (S) 52-066 AND NOA (S) 10414. COPY OF GAO EXCEPTION DATED SEPTEMBER 15, 1952, ATTACHED TO VOUCHER NO. 394, SHOWS THAT THE AMOUNT OF $721.93 INCLUDED IN THAT RECLAIM REPRESENTS THE PRO RATA AMOUNT OF OVERHEAD COSTS, INCLUDING CORPORATE EXPENSE, FOR THE FISCAL YEAR 1950 WHICH WAS CHARGED AGAINST CONTRACT NOA (S) 6850. CONTRACTOR'S FISCAL YEAR ENDS ON NOVEMBER 30.

THE RECLAIM FOR CORPORATE EXPENSE--- MADE UNDER CONTRACTS NOA (S) 52-067, NOA (S) 268, NOA (S) 743, NOA (S) 6539, NOA (S) 6850, NOA (S) 7203, NOA (S) 8269, NOA (S) 8990 AND NOA (S) 10119--- INCLUDES SUCH ITEMS OF COST AS ANNUAL MEETINGS, PRINTING AND MAILING OF ANNUAL REPORTS, PROXY STATEMENTS, PROXY SOLICITATIONS, STOCKHOLDERS' LISTS, TRANSFER AGENTS' COSTS, DIVIDEND DISBURSING EXPENSE, STATUTORY REPRESENTATION FEES, FRANCHISE TAXES, DIRECTORS' FEES, AND FEES FOR FINANCIAL COUNSEL.

ON THE BASIS OF THE REASONING APPLIED IN THE REFERRED-TO DECISION OF FEBRUARY 1, 1955, A PRORATED PART OF THE CORPORATE EXPENSE ITEMS COMPRISING FEES FOR STATUTORY REPRESENTATION, FEES FOR FILING REPORTS WITH THE SECRETARY OF STATE OF DELAWARE, DIRECTORS' FEES, FEES PAID TO GEOFFRY MAYO FOR FINANCIAL COUNSEL, AND STATE FRANCHISE TAXES (REIMBURSEMENT FOR WHICH IS EXPRESSLY PROVIDED FOR) PROPERLY MAY BE CONSIDERED ALLOWABLE ITEMS OF COST UNDER ALL OF THE CONTRACTS. ALSO, THAT PART OF THE CORPORATE EXPENSE ITEMS IN ACCOUNT NO. 6074 WHICH ARE SET FORTH IN THE NOTICE OF EXCEPTION DATED SEPTEMBER 15, 1952, WHICH IS ALLOCABLE TO THE WORK REQUIRED UNDER AMENDMENT NO. 19 TO CONTRACT NOA (S) 6850 ARE PROPER FOR REIMBURSEMENT IN VIEW OF THE INCLUSION OF THE ARMED SERVICES PROCUREMENT REGULATION AS THE COST DETERMINANT. PART 2, SECTION XV, OF THAT REGULATION CONTAINS NO GENERAL PROVISIONS REQUIRING THAT ITEMS OF OVERHEAD, AS DISTINGUISHED FROM DIRECT COSTS, BE RELATED TO THE PARTICULAR CONTRACT IN ORDER TO BE REIMBURSABLE. MOREOVER, ASPR 15-204 (E) LISTS AS AN EXAMPLE OF ALLOWABLE COST "THE EXPENSES OF STOCKHOLDERS MEETINGS, ANNUAL REPORTS, * * * AND REGISTRY AND TRANSFER CHARGES RESULTING FROM CHANGES IN OWNERSHIP OF SECURITIES ISSUED BY THE CONTRACTOR.' HOWEVER, THE REMAINING CORPORATE EXPENSE ITEMS HERE RECLAIMED, SO FAR AS THEY ARE NOT ALLOCABLE TO THE WORK REQUIRED BY THAT AMENDMENT, ARE NOT REIMBURSABLE BECAUSE THEY MAY NOT BE SAID TO HAVE BORNE ANY RELATION TO THE PERFORMANCE OF THE CONTRACTS WITHIN THE MEANING OF THAT REQUIREMENT OF THE "EXPLANATION OF PRINCIPLES.' SEE 34 COMP. GEN. 357.

THE COST OF DUES AND SUBSCRIPTIONS INCLUDED IN THE RECLAIM, WHICH INVOLVES CONTRACTS NOA (S) 52-067, NOA (S) 268, NOA (S) 743, NOA (S) 6539, NOA (S) 6850, NOA (S) 7203, NOA (S) 8269 AND NOA (S) 8990, MAY BE REGARDED AS ALLOWABLE UNDER ALL OF THE CONTRACTS, WITH THE EXCEPTION OF THE AMOUNTS PAID FOR MEMBERSHIP IN THE VARIOUS CHAMBERS OF COMMERCE, NATIONAL ASSOCIATION OF MANUFACTURERS, MERCHANTS AND MANUFACTURERS ASSOCIATIONS, THE NATIONAL INDUSTRIAL CONFERENCE BOARD, THE INDEX NUMBER INSTITUTE, INC., AND THE NATIONAL SECURITY INDUSTRIAL ASSOCIATION. SEE 34 COMP. GEN. 357. ALSO, SEE PAGE 2 OF THE DIRECTORY ENTITLED "TRADE AND PROFESSIONAL ASSOCIATIONS OF THE UNITED STATES" PUBLISHED BY THE U.S. DEPARTMENT OF COMMERCE, 1942, WHERE IT IS STATED THAT SUCH GENERAL BUSINESS ORGANIZATIONS AS THE CHAMBER OF COMMERCE OF THE UNITED STATES, OR THE NATIONAL ASSOCIATION OF MANUFACTURERS, OR CORRESPONDING LOCAL ORGANIZATIONS, CANNOT BE CLASSIFIED AS TRADE ASSOCIATIONS. HOWEVER, ALL OF THE DUES AND SUBSCRIPTIONS EXPENSE ALLOCABLE TO THE WORK REQUIRED UNDER AMENDMENT NO. 19 TO CONTRACT NO. NOA (S) 6850, NAMELY, THOSE SET FORTH IN THE NOTICE OF EXCEPTION DATED SEPTEMBER 15, 1952, MAY BE CONSIDERED REIMBURSABLE BECAUSE SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION DOES NOT RESTRICT ALLOWABLE COSTS IN THE CASE OF MEMBERSHIP DUES TO REGULAR TRADE ASSOCIATIONS. ASPR 15-204 (1) LISTS AS AN EXAMPLE OF ALLOWABLE COST ,MEMBERSHIPS IN TRADE, BUSINESS AND PROFESSIONAL ORGANIZATIONS.'

WITH RESPECT TO THE RECLAIM FOR THE EXPENSE OF INSTITUTIONAL ADVERTISING- -- MADE UNDER ALL OF THE CONTRACTS--- PARAGRAPH 51 OF THE "EXPLANATION OF PRINCIPLES" AND ASPR 15-204 (A) AUTHORIZE REIMBURSEMENT TO THE CONTRACTOR FOR THE COSTS OF INSTITUTIONAL ADVERTISING, BUT PARAGRAPH 54 (T) OF THE "EXPLANATION OF PRINCIPLES" LISTS COMMERCIAL ADVERTISING AND COMMERCIAL SELLING EXPENSES AS INADMISSIBLE COSTS, AND ASPR 15-205 (A) LISTS ADVERTISING, EXCEPT "HELP WANTED" ADVERTISING AND ADVERTISING IN TRADE AND TECHNICAL JOURNALS, AS AN INADMISSIBLE COST. OF THE AMOUNT RECLAIMED FOR THIS ITEM, $2,483.98 REPRESENTS DIRECT COSTS OF ADVERTISING PLACED IN TRADE OR TECHNICAL JOURNALS (ACCOUNT NO. 6562), AND THE BALANCE, OR $1,568.22, REPRESENTS 97.47 PERCENT OF THE ADMINISTRATIVE COSTS OF OPERATING DEPARTMENT 122, SALES DEVELOPMENT. EXCEPTIONS WERE TAKEN TO PAYMENT OF THE LATTER AMOUNT BECAUSE ADVERTISING PLACED IN NONTECHNICAL MEDIA AND EITHER NOT CLAIMED BY THE CONTRACTOR OR DELETED BY THE ADMINISTRATIVE AGENCY REPRESENTED 97.47 PERCENT OF THE CONTRACTOR'S DIRECT ADVERTISING EXPENSE DURING THE PERIOD OF TIME INVOLVED, AND IT WAS CONSIDERED THAT A LIKE PROPORTION OF THE ADMINISTRATIVE EXPENSE OF OPERATING DEPARTMENT 122 COULD NOT BE REGARDED AS REIMBURSABLE.

IN ITS LETTER OF NOVEMBER 30, 1953, THE CONTRACTOR CONTENDS THAT THE ADMINISTRATIVE EXPENSE OF OPERATING DEPARTMENT 122 HAS NO RELEVANT CONNECTION WITH THE AMOUNT OF DOLLAR VOLUME OF ADVERTISING EXPENSE DELETED, DISALLOWED, OR APPROVED IN ANY PARTICULAR YEAR'S OVERHEAD SETTLEMENT. HOWEVER, IN EXPLAINING THE FUNCTIONS OF THAT DEPARTMENT, THE CONTRACTOR STATES:

"* * * IT CAN BE STATED UNEQUIVOCALLY THAT THE CHIEF FACTORS WHICH INFLUENCE SALES OF THE CONTRACTOR'S PRODUCT ARE (1) PRODUCT PERFORMANCE, (2) COST OF PRODUCTION, (3) OPERATING AND MAINTENANCE COSTS OF PRODUCT, AND (4) ABILITY TO DELIVER ON SCHEDULE. THE FUNCTIONS OF CONTRACTOR'S DEPARTMENT 122, REGARDLESS OF THE DESCRIPTIVE NAME GIVEN TO IT, CAN ONLY AFFECT ITEMS (2) AND (4) AND THAT IS BY TRYING TO PRESENT THE CONTRACTOR AND ITS PRODUCTS, ACTIVITIES AND PERSONNEL IN THE MOST FAVORABLE LIGHT POSSIBLE TO THE COMMUNITIES AND STATES IN WHICH IT IS VARIOUSLY LOCATED (AND TO THE WORLD IN GENERAL BECAUSE OF ITS INTERNATIONAL CHARACTER) FOR THE PURPOSE OF ACHIEVING PRESTIGE AND STANDING IN SUCH AREAS. THE PRESTIGE AND STANDING WHICH RESULTS FROM THESE EFFORTS IS THE MAGNET WHICH HELPS ATTRACT THE NECESSARY TECHNICAL AND SKILLED PERSONNEL REQUIRED BY THE CONTRACTOR AND THE AIRCRAFT INDUSTRY. IN ORDER TO MAINTAIN CONTRACTOR'S POSITION IN A LABOR MARKET OF A HIGHLY COMPETITIVE NATURE, IT IS NECESSARY TO STRESS CONSTANTLY TO THE PUBLIC THE PRODUCTS OF THE CONTRACTOR AND THE AID RENDERED TO THE NATIONAL DEFENSE BY IT. THE BENEFITS DERIVED FROM ANY RESULTING PRESTIGE AND GOOD-WILL AMONG THOSE FROM WHOM THE CONTRACTOR MUST RECEIVE COOPERATION OR SERVICES TENDS TO REDUCE THE COSTS OF PRODUCTION AND IN TURN ENABLES THE CONTRACTOR TO SELL ITS PRODUCT AT A LOWER PRICE. UNDER CPFF CONTRACTS THE GOVERNMENT OBVIOUSLY BENEFITS BY ANY REDUCED COSTS OF OPERATIONS.'

REGARDLESS OF THE POSSIBLE BENEFITS ACCRUING TO THE GOVERNMENT FROM ITS OPERATIONS, IT SEEMS CLEAR FROM THE CONTRACTOR'S LETTER THAT THE FUNCTIONS OF DEPARTMENT 122--- WHICH WERE TO PUBLICIZE THE CONTRACTOR AND ITS PRODUCTS TO THE PUBLIC--- BORE A DIRECT RELATIONSHIP TO THAT PART OF THE ADVERTISING EXPENSE INCLUDED IN ACCOUNT NO. 6562 WHICH WAS NOT REIMBURSABLE, AND HENCE, THAT 97.47 PERCENT OF THE INDIRECT COSTS OF OPERATING THE DEPARTMENT CANNOT BE CONSIDERED A REIMBURSABLE COST. HOWEVER, THE REFERRED-TO SUM OF $2,483.98 IS PROPER FOR REIMBURSEMENT UNDER THE CONTRACTS.

ITEM 4, PUBLIC RELATIONS EXPENSE, WHICH IS RECLAIMED UNDER CONTRACTS NOA (S) 268, NOA (S) 743, NOA (S) 6539, NOA (S) 6850, NOA (S) 7203 AND NOA (S) 8269 AND INVOLVES THE FISCAL YEAR 1946, MAY BE REGARDED AS REIMBURSABLE UNDER THE CONTRACTS. GRAMP SHIPBUILDING COMPANY V. UNITED STATES, 122 C.CLS. 72, 93. ITEM 5, MISCELLANEOUS EXPENSES, IS RECLAIMED UNDER ALL OF THE CONTRACTS. ON THE BASIS OF INFORMATION SUBMITTED N SUPPORT OF THE RECLAIM, AND IN VIEW OF THE CONTRACTING OFFICER'S APPROVAL OF THE EXPENDITURES FOR REIMBURSEMENT, ITEMS 5 (A), (B), (C), (D) AND (F) MAY BE CONSIDERED PROPER FOR REIMBURSEMENT UNDER THE CONTRACTS. ITEM 5 (E), OR THE AMOUNT PAID JAMES C. ELDER AS RETAINER FEE FOR SERVICES AS CONSULTANT PERTAINING TO THE SALE OF AIRPLANES TO CONCERNS IN THE FAR EAST, MAY NOT BE SAID TO BEAR ANY RELATION TO THE PERFORMANCE OF THE CONTRACTS WITHIN THE MEANING OF THE "EXPLANATION OF PRINCIPLES," AND DOES NOT CONSTITUTE AN ALLOWABLE COST UNDER THE CONTRACTS CONTAINING THAT COST DETERMINANT. HOWEVER, THE PRO RATE PART OF SUCH EXPENSE WHICH IS ALLOCABLE TO THE CONTRACTS INCORPORATING THE ARMED SERVICES PROCUREMENT REGULATION AND THE WORK REQUIRED BY AMENDMENT NO. 19 TO CONTRACT NOA (S) 6850 MAY BE CONSIDERED REIMBURSABLE FOR REASONS HERETOFORE STATED.

ITEM 6, DEPRECIATION, IS SIMILAR TO THE THIRD ITEM CONSIDERED IN THE DECISION OF FEBRUARY 1, 1955, AND MAY BE REGARDED AS AN ALLOWABLE COST FOR THE REASONS THERE STATED. ALSO, ITEMS 7 AND 8 MAY BE CONSIDERED AS REIMBURSABLE COSTS UNDER THE CONTRACTS TO WHICH THEY RELATE.

ACCORDINGLY, THE VOUCHERS, TOGETHER WITH SUPPORTING PAPERS, ARE RETURNED HEREWITH, AND YOU ARE ADVISED THAT PAYMENT THEREON OF THE VARIOUS ITEMS IS AUTHORIZED TO THE EXTENT INDICATED, IF OTHERWISE CORRECT.