B-124135, AUG. 17, 1955

B-124135: Aug 17, 1955

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WITH THE REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT THEREON IS AUTHORIZED. UNDER THE CONTRACT THE CONTRACTOR WAS REQUIRED TO FURNISH CERTAIN ENGINEERING SERVICES AND DATA FOR SUPERSONIC FLIGHT RESEARCH. WHICH WAS REIMBURSED TO THE CONTRACTOR ON D.O. SUBSEQUENTLY WAS COLLECTED FROM THE CONTRACTOR AND TAKEN UP ON COLLECTION VOUCHER NO. 400. - NO DEFINITIONS OF THE ELEMENTS OF COST MAY BE STATED WHICH ARE OF INVARIABLE APPLICATION TO ALL CONTRACTORS AND SUBCONTRACTORS. WHICH ARE THE SUM OF INDIRECT ENGINEERING EXPENSES. WHICH ARE TREATED IN THIS SECTION AS A PART OF GENERAL EXPENSES IN DETERMINING THE COST OF PERFORMING A CONTRACT OR SUBCONTRACT (SEE PARAGRAPH (B) OF THIS SECTION).

B-124135, AUG. 17, 1955

TO LIEUTENANT COLONEL G. F. WANDRES, USAF, DISBURSING OFFICER, DEPARTMENT OF THE AIR FORCE:

YOUR LETTER OF MARCH 24, 1955, SBCF/LA, TRANSMITS BUREAU VOUCHER NO. R- 665 IN THE AMOUNT OF $3,421.56, STATED IN FAVOR OF DOUGLAS AIRCRAFT COMPANY, INC., COST-PLUS-A-FIXED-FEE CONTRACTOR UNDER CONTRACT NO. W33-038 -AC-10413, DATED MAY 30, 1945, WITH THE REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT THEREON IS AUTHORIZED.

UNDER THE CONTRACT THE CONTRACTOR WAS REQUIRED TO FURNISH CERTAIN ENGINEERING SERVICES AND DATA FOR SUPERSONIC FLIGHT RESEARCH. ARTICLE 3 (B) OF THE CONTRACT PROVIDED GENERALLY THAT, FOR PURPOSES OF DETERMINING THE AMOUNTS PAYABLE TO THE CONTRACTOR UNDER THE CONTRACT, ALLOWABLE ITEMS OF COST WOULD BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH SECTION 26.9 OF T.D. 5000.

THE AMOUNT OF THE VOUCHER REPRESENTS THE PRO RATA SHARE OF THE FOLLOWING ITEMS OF OVERHEAD APPLICABLE TO THE CONTRACTOR'S GENERAL OFFICE AND SANTA MONICA DIVISION FOR THE FISCAL PERIOD DECEMBER 1, 1950, TO NOVEMBER 30, 1951, WHICH WAS REIMBURSED TO THE CONTRACTOR ON D.O. VOUCHER NO. 81808, JUNE 1952 ACCOUNTS OF H. A. SOSKIN, FC SYMBOL 215-397, BUT SUBSEQUENTLY WAS COLLECTED FROM THE CONTRACTOR AND TAKEN UP ON COLLECTION VOUCHER NO. 400, IN HIS AUGUST 6, 1953 ACCOUNTS, BECAUSE OF GAO NOTICE OF EXCEPTION NO. 300041 TO THE PAYMENTS:

TABLE ITEM DESCRIPTION AMOUNT

1. CORPORATE EXPENSE $971.01

2. DUES AND SUBSCRIPTIONS 176.25

3. INSTITUTIONAL ADVERTISING 1,114.42

4. AIRPLANE CRASH EXPENSE 688.31

5. MISCELLANEOUS EXPENSE:

(A) (B) E. T. STERN, NEW

YORK OFFICE 437.06

(C) JAMES HARPER, SALES OBSERVER 34.51

TOTAL $3,421.56 TREASURY DECISION NO. 5000 PROVIDES, IN PERTINENT PART, AS FOLLOWS:

"SEC. 26.9. COST OF PERFORMING A CONTRACT OR SUBCONTRACT.--- (A) GENERAL RULE.--- THE ACT OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT SHALL BE THE SUM OF (1) THE DIRECT COSTS, INCLUDING THEREIN EXPENDITURES FOR MATERIALS, DIRECT LABOR AND DIRECT EXPENSES, INCURRED BY THE CONTRACTING PARTY IN PERFORMING THE CONTRACT OR SUBCONTRACT; AND (2) THE PROPER PROPORTION OF ANY INDIRECT COSTS (INCLUDING THEREIN A REASONABLE PROPORTION OF MANAGEMENT EXPENSE) INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT.

"/B) ELEMENTS OF COST.--- NO DEFINITIONS OF THE ELEMENTS OF COST MAY BE STATED WHICH ARE OF INVARIABLE APPLICATION TO ALL CONTRACTORS AND SUBCONTRACTORS. IN GENERAL, THE ELEMENTS OF COST MAY BE DEFINED FOR PURPOSES OF THE ACT AS FOLLOWS:

"/3) GENERAL EXPENSES, WHICH ARE THE SUM OF INDIRECT ENGINEERING EXPENSES, USUALLY TERMED ,ENGINEERING OVERHEAD" (SEE PARAGRAPH (F) OF THIS SECTION) AND EXPENSES OF DISTRIBUTION, SERVICING AND ADMINISTRATION (SEE PARAGRAPH (G) OF THIS SECTION); * * *

"/G) EXPENSE OF DISTRIBUTION, SERVICING, AND ADMINISTRATION.--- EXPENSES OF DISTRIBUTION, SERVICING, AND ADMINISTRATION, WHICH ARE TREATED IN THIS SECTION AS A PART OF GENERAL EXPENSES IN DETERMINING THE COST OF PERFORMING A CONTRACT OR SUBCONTRACT (SEE PARAGRAPH (B) OF THIS SECTION), COMPREHEND THE EXPENSES INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT, WHICH ARE INCURRED IN CONNECTION WITH THE DISTRIBUTION AND GENERAL SERVICING OF THE CONTRACTING PARTY'S PRODUCTS AND THE GENERAL ADMINISTRATION OF THE BUSINESS, SUCH AS---

"/4) OTHER EXPENSES.--- MISCELLANEOUS OFFICE AND ADMINISTRATIVE EXPENSES,

"AMONG THE ITEMS WHICH SHALL NOT BE INCLUDED AS A PART OF THE COST OF PERFORMING A CONTRACT OR SUBCONTRACT OR CONSIDERED IN DETERMINING SUCH COST, ARE THE FOLLOWING: ENTERTAINMENT EXPENSES; DUES AND MEMBERSHIPS OTHER THAN OF REGULAR TRADE ASSOCIATIONS; * * * TAXES AND EXPENSES ON ISSUES AND TRANSFER OF CAPITAL STOCK; * * *.

"/J) ALLOCATION OF INDIRECT COSTS.--- NO GENERAL RULE APPLICABLE TO ALL CASES MAY BE STATED FOR ASCERTAINING THE PROPER PROPORTION OF THE INDIRECT COSTS TO BE ALLOCATED TO THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT. SUCH PROPER PROPORTION DEPENDS UPON ALL THE FACTS AND CIRCUMSTANCES RELATING TO THE PERFORMANCE OF THE PARTICULAR CONTRACT OR SUBCONTRACT. SUBJECT TO A REQUIREMENT THAT ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT SHALL BE ELIMINATED FROM THE AMOUNT TO BE ALLOCATED, THE FOLLOWING METHODS OF ALLOCATION ARE OUTLINED AS ACCEPTABLE IN A MAJORITY OF CASES:

SUBMITTED IN SUPPORT OF THE VOUCHER IS THE CONTRACTOR'S LETTER OF MAY 18, 1954, 40-10-288, TO THE USAF RESIDENT AUDITOR AT THE CONTRACTOR'S PLANT, WHEREIN IT IS STATED THAT THE BASIS FOR THE RECLAIM IS THE SAME AS THAT SET FORTH IN ITS LETTER OF SEPTEMBER 9, 1953, 30 10-333, FURNISHED IN SUPPORT OF ITS RECLAIM VOUCHER R-636. SUCH VOUCHER COVERS SIMILAR ITEMS OF OVERHEAD EXPENSE RECLAIMED UNDER THE CONTRACT FOR THE FISCAL YEARS 1946 THROUGH 1950, AND IS NOW UNDER CONSIDERATION OF OUR CLAIMS DIVISION AS CLAIM NO. Z-196/73).

THE RECLAIM FOR CORPORATE EXPENSE INCLUDES SUCH ITEMS OF COST AS NEW YORK STATE FRANCHISE TAX, FEES PAID TO GEOFFREY MAYO FOR FINANCIAL COUNSEL, DIRECTORS' FEES, PROXY STATEMENTS, PROXY SOLICITATIONS, PRINTING AND MAILING OF ANNUAL REPORTS, DIVIDEND DISTRIBUTION COSTS, ANNUAL MEETING EXPENSE, LOS ANGELES STOCK EXCHANGE FILING FEE, NEW YORK REGISTRY OF 30,000 CAPITAL STOCK CERTIFICATES, AND FEE FOR ANNUAL STATUTORY REPRESENTATION SERVICE.

A PRO RATA PART OF THE CORPORATE EXPENSE ITEMS COMPRISING FEE FOR ANNUAL STATUTORY REPRESENTATION SERVICE, DIRECTORS' FEES, FEES PAID TO GEOFFREY MAYO FOR FINANCIAL COUNSEL, AND NEW YORK STATE FRANCHISE TAX (REIMBURSEMENT FOR WHICH IS EXPRESSLY PROVIDED FOR) PROPERLY MAY BE CONSIDERED REIMBURSABLE ITEMS OF COST UNDER THE CONTRACT. HOWEVER, THE REMAINING CORPORATE EXPENSE ITEMS ARE NOT REIMBURSABLE BECAUSE THEY REASONABLY MAY NOT BE SAID TO HAVE BORNE ANY RELATION TO THE PERFORMANCE OF THE CONTRACT WITHIN THE MEANING OF THAT REQUIREMENT OF SECTION 26.9 OF T.D. 5000.

THE COST OF DUES AND SUBSCRIPTIONS MAY BE REGARDED AS ALLOWABLE, WITH THE EXCEPTION OF THE AMOUNTS PAID FOR MEMBERSHIP IN THE VARIOUS CHAMBERS OF COMMERCE, NATIONAL ASSOCIATION OF MANUFACTURERS, CALIFORNIA MANUFACTURERS ASSOCIATION, KIWANIS CLUB, BETTER BUSINESS BUREAU AND THE NATIONAL INDUSTRIAL CONFERENCE BOARD. THESE MAY NOT BE CONSIDERED REIMBURSABLE BECAUSE SUCH ORGANIZATIONS MUST BE CLASSED AS OTHER THAN REGULAR TRADE ASSOCIATIONS WITHIN THE MEANING OF PARAGRAPH (G) (4), SUPRA. 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.

ITEM 3, INSTITUTIONAL ADVERTISING, INVOLVES THE DIRECT EXPENSE OF PLACING ADS IN TRADE AND TECHNICAL JOURNALS, AND THE RELATED INDIRECT EXPENSE OF OPERATING DEPARTMENTS 122 AND 233, SALES DEVELOPMENT. IN OUR DECISION OF AUGUST 3, 1955, B-124134, TO YOU, IT WAS EXPLAINED WHY THE CONTRACTOR'S CONTENTION THAT THE COSTS OF OPERATING THE DEPARTMENTS IN QUESTION HAD NO RELEVANT CONNECTION WITH THE AMOUNT EXPENDED FOR ADVERTISING CANNOT BE ACCEPTED. IN VIEW THEREOF, AND SINCE NONE OF THE EXPENSE CAN BE CONSIDERED AS INCIDENT TO AND NECESSARY FOR PERFORMANCE OF THE CONTRACT, ITEM 3 IS NOT REIMBURSABLE.

ITEM 4 REPRESENTS EXPENSES INCURRED IN CONNECTION WITH THE INVESTIGATION AND TRIAL OF A CASE GROWING OUT OF THE CRASH OF A DC-6 (DOUGLAS) TRANSPORT PLANE OPERATED BY UNITED AIR LINES.

IN ITS LETTER OF MAY 18, 1954, THE CONTRACTOR CONTENDS THAT THE COSTS OF PARTICIPATING IN THE INVESTIGATION OF AIRCRAFT FAILURES, ETC., CONSTITUTES NORMAL COSTS OF DOING BUSINESS IN THE CASE OF THE AIRCRAFT MANUFACTURER AND THAT THE ACTIVITIES WHICH GAVE RISE TO SUCH COSTS ALL CONTRIBUTE GENERALLY TO THE IMPROVEMENT OF THE CONTRACTOR'S PRODUCTS AND TO ITS EFFICIENCY OF OPERATION. HOWEVER, THE CONTRACT WAS FOR ENGINEERING SERVICES WHICH WOULD APPEAR TO BEAR LITTLE RELATION TO THOSE INVOLVED IN THE CONSTRUCTION OF A DC-6, AND THE CONTRACTOR DOES NOT CONTEND THAT THE EXPENSE IN QUESTION BORE ANY RELATION TO THE PERFORMANCE OF THE CONTRACT IN THE SENSE REQUIRED BY SECTION 26.9 OF T.D. 5000. THE SUBSTANCE OF THE CONTRACTOR'S ARGUMENT IN SUPPORT OF THE RECLAIM IS THAT THE ITEM IS A NORMAL EXPENSE OF DOING BUSINESS WHICH, NOT BEING CHARGEABLE TO ANY PARTICULAR CONTRACT, IS NECESSARILY PROPER FOR PRERATION TO ALL CONTRACTS THROUGH DISTRIBUTION OF OVERHEAD. SUCH CONTENTION IS UNTENABLE IN VIEW OF THE CLEAR LANGUAGE OF T.D. 5000, WHICH REQUIRES ITEMS OF OVERHEAD, AS WELL AS DIRECT COSTS, TO BEAR SOME RELATION TO THE PERFORMANCE OF THE CONTRACT IF THEY ARE TO QUALIFY FOR REIMBURSEMENT. THE REQUIREMENT OF SUCH COST DETERMINANT IS DIFFERENT IN THIS RESPECT FROM THE PROVISIONS OF PART 2 OF SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION, WHICH WAS INVOLVED IN THE DECISION OF AUGUST 3, TO YOU. HENCE, THE ITEM OF EXPENSE, WHICH APPEARS TO HAVE BEEN INCURRED BY THE CONTRACTOR IN ORDER TO PROTECT ITS OWN INTERESTS, MAY NOT BE CONSIDERED REIMBURSABLE UNDER THE CONTRACT.

ON THE BASIS OF INFORMATION SUBMITTED IN SUPPORT OF THE RECLAIM, AND IN VIEW OF THE CONTRACTING OFFICER'S APPROVAL OF THE EXPENSE FOR REIMBURSEMENT, ITEMS 5 (A) (B) MAY BE CONSIDERED PROPER FOR REIMBURSEMENT UNDER THE CONTRACT. ITEM 5 (C), OR THE PRERATED AMOUNT PAID JAMES HARPER AS RETAINER FEE FOR SERVICES AS A SALES OBSERVER, IN SIAM, MAY NOT BE SAID TO BEAR ANY RELATION TO THE PERFORMANCE OF THE CONTRACT AND DOES NOT, THEREFORE, CONSTITUTE AN ALLOWABLE COST THEREUNDER.

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