B-126794(1),L/M, NOV 10, 1982, OFFICE OF GENERAL COUNSEL

B-126794(1),L/M: Nov 10, 1982

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WE HELD THAT THE USE OF A PREDETERMINED OVERHEAD RATE TO BE APPLIED TO SOME ELEMENT OF DIRECT COST WHICH IS UNDETERMINED AT THE TIME THE RATE IS SET. WE HELD THAT THE PRACTICE OF REIMBURSING OVERHEAD COSTS ON THE BASIS OF SUCH PREDETERMINED RATES IS ILLEGAL AND SHOULD BE DISCONTINUED. 35 COMP.GEN. 434 AT 436. SEC. 254A CLEARLY INDICATE THAT THE EXCEPTION IS TO BE APPLIED ONLY TO EDUCATIONAL INSTITUTIONS AND THAT FURTHER EXCEPTIONS WOULD REQUIRE ADDITIONAL LEGISLATION. WE DID NOT OBJECT TO A PROPOSED AMENDMENT TO FEDERAL PROCUREMENT REGULATIONS (FPR) SEC. 1- 3.704-1(B) WHICH ADDED A CLAUSE TO BE INCLUDED WHEN PREDETERMINED OVERHEAD RATES ARE USED IN CONTRACTS WITH NONPROFIT ORGANIZATIONS. WHICH IS THE SUBJECT OF THE PROPOSED CLAUSE.

B-126794(1),L/M, NOV 10, 1982, OFFICE OF GENERAL COUNSEL

PRECIS-UNAVAILABLE

PHILIP G. READ, GENERAL SERVICES ADMINISTRATION:

YOUR LETTER DATED AUGUST 27, 1982, REQUESTS OUR VIEWS ON WHETHER THE PROPOSED USE OF PREDETERMINED OVERHEAD RATES IN CONTRACTS WITH NONPROFIT ORGANIZATIONS, STATE AND LOCAL GOVERNMENTS, AND FEDERALLY RECOGNIZED INDIAN TRIBAL GOVERNMENTS CONSTITUTES A PROHIBITED COST-PLUS A-PERCENTAGE- OF-COST (CPPC) SYSTEM OF CONTRACTING. YOU ENCLOSED A COPY OF AN OFFICE OF MANAGEMENT AND BUDGET (OMB) LETTER OF AUGUST 24 IN WHICH OMB'S DEPUTY ASSOCIATE DIRECTOR STATES THAT SINCE OUR OFFICE HAS NOT OBJECTED TO OMB CIRCULARS A-87 AND A-122, WHICH AUTHORIZE THE USE OF SUCH PREDETERMINED OVERHEAD RATES, THE USE OF SUCH RATES MUST NOT CONFLICT WITH OUR DECISIONS.

IN 35 COMP.GEN. 434 (1956), WE HELD THAT THE USE OF A PREDETERMINED OVERHEAD RATE TO BE APPLIED TO SOME ELEMENT OF DIRECT COST WHICH IS UNDETERMINED AT THE TIME THE RATE IS SET, WITH NO PROVISION FOR RETROACTIVE ADJUSTMENT TO THE ACTUAL COST, VIOLATES THE EXPRESS STATUTORY PROHIBITIONS AGAINST CPPC SYSTEMS OF CONTRACTING CONTAINED IN 41 U.S.C. SEC. 254(B) (1976) AND 10 U.S.C. SEC. 2306(A) (1976). THUS, WE HELD THAT THE PRACTICE OF REIMBURSING OVERHEAD COSTS ON THE BASIS OF SUCH PREDETERMINED RATES IS ILLEGAL AND SHOULD BE DISCONTINUED. 35 COMP.GEN. 434 AT 436.

SUBSEQUENT TO OUR 1956 DECISION, CONGRESS EXPRESSLY AUTHORIZED THE USE OF PREDETERMINED OVERHEAD RATES IN RESEARCH AND DEVELOPMENT CONTRACTS AND GRANTS WITH EDUCATIONAL INSTITUTIONS WHEN, IN 1962, IT ENACTED PUB.L. 87-638, 41 U.S.C. SEC. 254A. THE EXPRESS LANGUAGE AS WELL AS THE LEGISLATIVE HISTORY OF 41 U.S.C. SEC. 254A CLEARLY INDICATE THAT THE EXCEPTION IS TO BE APPLIED ONLY TO EDUCATIONAL INSTITUTIONS AND THAT FURTHER EXCEPTIONS WOULD REQUIRE ADDITIONAL LEGISLATION. SEE H.R. REP. NO. 1485, 87TH CONG., 2D SESS. (1962) AT PAGE 3. THERE HAS BEEN NO ADDITIONAL LEGISLATION AND OUR OFFICE HAS REAFFIRMED 35 COMP.GEN. 434 IN LIGHT OF 41 U.S.C. SEC. 254A. SEE B-157584, JANUARY 8, 1971.

IN OUR JULY 6, 1982, LETTER TO YOU (B-207250), HOWEVER, WE DID NOT OBJECT TO A PROPOSED AMENDMENT TO FEDERAL PROCUREMENT REGULATIONS (FPR) SEC. 1- 3.704-1(B) WHICH ADDED A CLAUSE TO BE INCLUDED WHEN PREDETERMINED OVERHEAD RATES ARE USED IN CONTRACTS WITH NONPROFIT ORGANIZATIONS, STATE AND LOCAL GOVERNMENTS AND CERTAIN INDIAN TRIBAL GOVERNMENTS. WE TAKE THIS OPPORTUNITY TO AMEND OUR COMMENTS OF JULY 6 AND TO OBJECT TO PROPOSED FPR SEC. 1-3.704-1(B) BECAUSE, AS DISCUSSED ABOVE, THE USE OF SUCH PREDETERMINED OVERHEAD RATES, WHICH IS THE SUBJECT OF THE PROPOSED CLAUSE, WOULD VIOLATE STATUTORY PROHIBITIONS AGAINST A CPPC SYSTEM OF CONTRACTING. WHILE WE DO NOT THINK IT IS A GOOD PRACTICE, IT IS PERMISSIBLE TO USE PREDETERMINED OVERHEAD RATES IN GRANTS MADE TO NONPROFIT, NONEDUCATIONAL ORGANIZATIONS.

MOREOVER, TO THE EXTENT THAT FPR SUBPART 1-3.7 AND PART 1-15 ALREADY HAVE BEEN REVISED TO AUTHORIZE THE USE OF PREDETERMINED OVERHEAD RATES IN CONTRACTS WITH OTHER THAN EDUCATIONAL INSTITUTIONS (THOSE REVISIONS BASED ON OMB CIRCULARS A-87 AND A-122) WE RECOMMEND SUCH AUTHORIZATION BE ELIMINATED FROM THE FPR.

OUR OFFICE WOULD HAVE NO OBJECTION TO THE USE OF PREDETERMINED INDIRECT COST RATES IN CONTRACTS WITH NONPROFIT, NONEDUCATIONAL ORGANIZATIONS IF SUCH RATES WOULD BE SUBJECT TO A ROLL FORWARD ARRANGEMENT SUCH AS THAT AUTHORIZED IN OMB CIRCULAR A-21 AND WOULD BE USED ONLY WHERE THE FEDERAL GOVERNMENT HAS A RELATIVELY CONTINUOUS AND STABLE MONETARY LEVEL OF COST- TYPE CONTRACTS AND/OR GRANTS FROM YEAR TO YEAR WITH THE ORGANIZATION AS WILL AVOID FLUCTUATIONS WHICH WOULD SIGNIFICANTLY DISTORT THE INDIRECT COST RATES. SEE B-157584 SUPRA. IN OUR VIEW, THEREFORE, WHEN A PREDETERMINED OVERHEAD RATE IS USED IN APPROPRIATE CIRCUMSTANCES AND IN CONJUNCTION WITH A ROLL FORWARD PROVISION, WHICH IS A FORM OF RETROACTIVE ADJUSTMENT TO ACTUAL COSTS (SEE 35 COMP.GEN. 434 SUPRA), THERE WOULD BE NO VIOLATION OF THE STATUTORY PROHIBITION AGAINST A CPPC SYSTEM OF CONTRACTING.

WE ARE PROVIDING A COPY OF THIS LETTER TO OMB.