B-126161, FEB. 17, 1956

B-126161: Feb 17, 1956

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WITH THE REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT ON THE VOUCHERS IS AUTHORIZED. THAT ALLOWABLE ITEMS OF COST WERE TO BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH PART 2 OF SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION. WHICH WERE REIMBURSED TO THE CONTRACTOR ON D.O. SUBSEQUENTLY WERE COLLECTED AND TAKEN UP IN THE JULY 1954 ACCOUNTS OF L. 121.32 SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION PROVIDES IN PARAGRAPH 15-201 THAT THE TOTAL COST UNDER A CONTRACT OF THE TYPE INVOLVED IS THE SUM OF THE ALLOWABLE DIRECT COSTS . 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.

B-126161, FEB. 17, 1956

TO OFFICER-IN-CHARGE, U.S. NAVY REGIONAL ACCOUNTS OFFICE, SAN DIEGO, CALIFORNIA, DEPARTMENT OF THE NAVY:

YOUR LETTER OF NOVEMBER 8, 1955, FD-130 NF1-11/L6 SERIAL D-6585, TRANSMITS BUREAU VOUCHERS NOS. R-119, R-125 AND R-149, IN THE RESPECTIVE AMOUNTS OF $34.97, $177.68 AND $908.67, STATED IN FAVOR OF DOUGLAS AIRCRAFT COMPANY, INC., UNDER COST-PLUS-A-FIXED-FEE CONTRACTS NOS. NOAS 51 -1061, NOAS 52-902 AND NOAS 51-252-C, DATED OCTOBER 4, 1951, MARCH 15, 1952, AND OCTOBER 10, 1950, WITH THE REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT ON THE VOUCHERS IS AUTHORIZED.

THE CONTRACTS PROVIDED, IN MATERIAL PART, THAT ALLOWABLE ITEMS OF COST WERE TO BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH PART 2 OF SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION.

THE AMOUNTS OF THE VOUCHERS REPRESENT THE PRO RATA SHARE OF THE FOLLOWING ITEMS OF OVERHEAD APPLICABLE TO THE CONTRACTOR'S SANTA MONICA DIVISION FOR THE FISCAL PERIOD DECEMBER 1, 1951, TO NOVEMBER 30, 1952, WHICH WERE REIMBURSED TO THE CONTRACTOR ON D.O. VOUCHER NO. 359155 AND OTHERS IN THE JUNE 1953 ACCOUNTS OF H. W. STEPHENS, BUT SUBSEQUENTLY WERE COLLECTED AND TAKEN UP IN THE JULY 1954 ACCOUNTS OF L. SPRATLING BECAUSE OF GAO NOTICE OF EXCEPTION NO. 400021 TO THE PAYMENTS:

TABLE

AGGREGATE AMOUNTS

RECLAIMED FOR THE ITEM ITEMS

UNDER ALL CONTRACTS 1. ADVERTISING

$ 305.75 2. AIRPLANE CRASH EXPENSE 314.56 3. MISCELLANEOUS EXPENSE:

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

OFFICE $239.53

(C) JAMES HARPER, SALES OBSERVER,

AND BROWN AND DUREAU, LTD.,

SALES CONSULTANTS 54.16

(D) EUROPEAN OFFICE EXPENSE 207.32 501.01

TOTAL AMOUNT RECLAIMED $1,121.32

SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION PROVIDES IN PARAGRAPH 15-201 THAT THE TOTAL COST 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.

UNDER PARAGRAPH 15-205 (A) OF SECTION XV "ADVERTISING, EXCEPT "HELP WANTED" ADVERTISING, AND ADVERTISING IN TRADE AND TECHNICAL JOURNALS (SEE PARAGRAPH 15-204 (A) AND (R) (," IS LISTED AS AN EXAMPLE OF UNALLOWABLE COST.

TRANSMITTED WITH THE VOUCHERS IS THE CONTRACTOR'S LETTER OF NOVEMBER 16, 1954, 4G-10-1067, 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 SUBMITTED IN SUPPORT OF ITS RECLAIM VOUCHERS R-153 AND R-227, COVERING SIMILAR ITEMS OF OVERHEAD FOR THE FISCAL YEARS 1950 AND 1951, RECENTLY UNDER CONSIDERATION BY OUR CLAIMS DIVISION AS CLAIM NO. Z-196 (62). ALSO TRANSMITTED IS A RECLAIM SCHEDULE CONTAINING A BREAKDOWN OF THE AMOUNTS INVOLVED ACCORDING TO CONTRACT.

RECLAIM VOUCHERS R-102 AND R-116 IN THE AMOUNT OF $34.97 AND $177.68, CITED IN THE RECLAIM SCHEDULE, WERE PAID IN ERROR BY THE NAVY REGIONAL ACCOUNTS OFFICE. WHEN THE ERROR WAS DISCOVERED, THE CONTRACTOR REFUNDED THESE AMOUNTS UPON REQUEST, AND THEN FILED NEW CLAIMS FOR THE SAME AMOUNTS ON VOUCHERS R-119 AND R-125, HERE INVOLVED.

SUBMITTED IN SUPPORT OF VOUCHERS R-153 AND R-227 WERE THE CONTRACTOR'S LETTERS OF APRIL 24, 1953, 3G-10-260, AND JUNE 25, 1954, 40-10-307. WITH RESPECT TO THE RECLAIM FOR THE EXPENSE OF ADVERTISING, THE CONTRACTOR CONTENDS IN ITS LETTERS THAT IT IS ERRONEOUS FOR THE GENERAL ACCOUNTING OFFICE TO ASSUME THAT THIS INDIRECT EXPENSE RELATES SOLELY TO ADVERTISING EXPENSE RECORDED IN ACCOUNT NO. 6562; THAT THIS IS NOT THE CASE SINCE EXPENSES OF DEPARTMENT 233 REPRESENT INDIRECT COSTS INCURRED IN CONNECTION WITH THE MARKETING OF THE CONTRACTOR'S PRODUCTS AND, AS SUCH, THEY WERE PROPERLY TREATED AS OVERHEAD FOR ALLOCATION TO ALL CONTRACTS; AND THAT THE CONTRACTING OFFICER DETERMINED THAT THE INDIRECT EXPENSE RESULTED FROM ACTIVITIES WHICH WERE RELATED BOTH TO THE CONTRACTOR'S GOVERNMENT CONTRACTS AND TO ITS COMMERCIAL PRODUCTS.

RELATIVE TO THE REASON FOR MAINTAINING DEPARTMENT 233, THE FOLLOWING STATEMENT IS MADE IN THE LETTER OF JUNE 25, 1954:

"IT WOULD, INDEED, BE AN UNUSUAL TYPE OF BUSINESS WHICH, HAVING A PRODUCT TO SELL (WHETHER TO THE GOVERNMENT OR TO THE GENERAL PUBLIC) DID NOT PUBLICIZE: (I) THE OUTSTANDING AND COMPETITIVE MERITS OF ITS PRODUCT, (II) ITS ABILITY TO FOLLOW-THROUGH WITH PROMPT AND EFFICIENT SERVICING OF THOSE PRODUCTS, (III) THE AREA IN WHICH SUCH DISTRIBUTION CAN BE ACCOMPLISHED, AND (IV) THE ADVANTAGES AND BENEFITS OF EMPLOYMENT BY SAID BUSINESS. IS A TOP MANAGEMENT FUNCTION TO PLAN AND DIRECT THIS TYPE OF IMPORTANT EFFORT AND THE FUNCTION OF DEPARTMENT 122/233 PERSONNEL TO ACT AS THE INSTRUMENT FOR CARRYING THROUGH SUCH PLANNING.'

THUS, THE CONTRACTOR HAS ESTABLISHED THAT DEPARTMENT 233 IS OPERATED MAINLY FOR THE PURPOSE OF PUBLICIZING, OR ADVERTISING, THE CONTRACTOR'SPRODUCTS. SINCE ADVERTISING PLACED IN NONTECHNICAL MEDIA AND EITHER NOT CLAIMED BY THE CONTRACTOR OR DELETED BY THE ADMINISTRATIVE AGENCY REPRESENTS 98.03 PERCENT OF THE ADVERTISING EXPENSE RECORDED IN ACCOUNT 6562, A LIKE PROPORTION OF THE EXPENSE OF OPERATING DEPARTMENT 233 PROPERLY MUST BE HELD NOT REIMBURSABLE UNDER THE CONTRACTS, PURSUANT TO THE PROVISION OF ASPR 15-205 (A), SUPRA.

EXCEPTION WAS TAKEN TO REIMBURSEMENT TO THE CONTRACTOR FOR THE REMAINING ITEMS OF EXPENSE ON THE BASIS THAT IT HAD NOT BEEN SHOWN THAT THEY BORE ANY RELATION TO THE PERFORMANCE OF THE WORK UNDER THE CONTRACT. HOWEVER, AS INDICATED ABOVE, PART 2 OF SECTION XV OF THE ARMED SERVICES PROCUREMENT 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. THE CONTRACTING OFFICER HAS DETERMINED THAT THE EXPENSE WAS RELATED TO CONTRACT PRODUCTS WITHIN THE MEANING OF ASPR 15-205 (Q), AND THAT IT IS OF THE TYPE WHICH WARRANTS INCLUSION IN A COMMON OVERHEAD POOL FOR PRORATION TO ALL CONTRACTS. HENCE, THE AMOUNTS RECLAIMED FOR THESE ITEMS ARE PROPER FOR REIMBURSEMENT UNDER THE CONTRACTS, IF OTHERWISE CORRECT.

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