B-127863, JUN. 6, 1956

B-127863, JUN. 6, 1956

TO THE SECRETARY OF THE ARMY:

REFERENCE IS MADE TO YOUR LETTER OF MAY 7, 1956, WITH ENCLOSURES, REQUESTING ADVICE AS TO THE PROPRIETY OF APPROVING A PROPOSED MODIFICATION OF AN AGREEMENT (SUBCONTRACT NO. FY53-266-12) BETWEEN THE JOHNS HOPKINS UNIVERSITY AND INTERNATIONAL RESEARCH ASSOCIATES, INC., COVERING A PART OF THE SERVICES REQUIRED TO BE PERFORMED BY THE UNIVERSITY UNDER DEPARTMENT OF THE ARMY CONTRACT NO. DA44-109-QM-266, DATED JULY 1, 1950, AS AMENDED.

UNDER ARTICLE II/A) OF THE ORIGINAL SUBCONTRACT, ENTERED INTO ON APRIL 20, 1953, THE UNIVERSITY AGREED TO REIMBURSE THE SUBCONTRACTOR FOR THE "ACTUAL" COST OF PERFORMANCE OF ITS UNDERTAKINGS IN AN AMOUNT NOT TO EXCEED $21,310 AND TO PAY A FIXED FEE OF $1,490. ARTICLE II/B), ENTITLED "COST ESCAPE," PROVIDES THAT "* * * WHEN AND IF "ACTUAL" COST, INCLUDING FIXED FEE, IN SUCH MAXIMUM AMOUNT SHALL HAVE BEEN INCURRED OR OBLIGATED HEREUNDER, THE SUBCONTRACTOR SHALL NOT BE REQUIRED TO INCUR OR OBLIGATE FURTHER "ACTUAL" COST, INCLUDING FIXED FEE, HEREUNDER, UNLESS AND UNTIL THE UNIVERSITY SHALL FIRST AGREE IN WRITING TO REIMBURSE THE SUBCONTRACTOR THEREFOR.' WITH RESPECT TO THE MANNER OF DETERMINING COSTS OF PERFORMANCE, ARTICLE II (D) (4) PROVIDES FOR THE APPLICATION OF A PROVISIONAL ALLOWANCE FOR OVERHEAD COSTS IN AN AMOUNT EQUAL TO 65 PERCENT OF TOTAL REIMBURSABLE SALARIES AND WAGES, EXCLUDING OVERTIME PREMIUMS; AND FOR REPLACEMENT OF A FIXED PERCENTAGE "TO BE NEGOTIATED BY THE UNIVERSITY AND THE SUBCONTRACTOR, FOLLOWING AUDIT BY THE GOVERNMENT AUDIT AGENCY HAVING COGNIZANCE HEREOF, WHEREUPON APPROPRIATE RETROACTIVE ADJUSTMENT WILL BE MADE IN THE LIGHT OF SUCH FIXED PERCENTAGE.'

ALTHOUGH A COPY OF MODIFICATION "A" TO THE SUBCONTRACT WAS NOT FURNISHED WITH YOUR LETTER, YOU STATE THAT SUCH MODIFICATION INCREASES THE MAXIMUM ACTUAL COST TO $63,100. THAT AMOUNT APPEARS TO INCLUDE AN AGREED FIXED FEE OF APPROXIMATELY $4,000. IN A PROPOSED MODIFICATION "C" TO THE SUBCONTRACT, WHICH RECITES THAT THE WORK UNDER THE SUBCONTRACT HAS BEEN FULLY AND SATISFACTORILY PERFORMED, THE MAXIMUM PAYABLE TO THE SUBCONTRACTOR WOULD BE FURTHER INCREASED TO $66,650, COVERING REIMBURSEMENT FOR ACTUAL COST IN AN AMOUNT NOT EXCEEDING $62,521 AND A FIXED-FEE ALLOWANCE OF $4,129.

IT IS REPORTED THAT UPON COMPLETION OF THE ARMY AUDIT IT WAS DISCOVERED THAT THE AMOUNT OF ACTUAL OVERHEAD COSTS INCURRED BY THE SUBCONTRACTOR EXCEEDED THE PROVISIONAL ALLOWANCE OF 65 PERCENT AND THAT MODIFICATION "C" REFLECTS THE ADDITIONAL OVERHEAD COSTS ALLOWED BY THE ARMY AUDIT AGENCY. FOR THE STATED REASON THAT ARTICLES II/A) AND II/B) IMPOSE A SPECIFIC LIMITATION ON THE MAXIMUM COSTS WHICH MAY BE EXPENDED UNDER THE SUBCONTRACT, THERE IS INDICATED THE POSSIBILITY THAT THE CONTRACTING OFFICER BY APPROVING THE PROPOSED MODIFICATION "C" MAY BE CONSIDERED AS HAVING WAIVED A CONTRACTUAL RIGHT OF THE GOVERNMENT WITHOUT RECEIVING A COMPENSATING BENEFIT THEREFOR. AS SUGGESTED IN YOUR LETTER, SUCH APPROVAL WOULD RESULT IN PERMITTING THE JOHNS HOPKINS UNIVERSITY TO EXPECT REIMBURSEMENT OF AN ADDITIONAL AMOUNT AS AN ALLOWABLE COST UNDER THE PRIME CONTRACT.

THE COST ESCAPE PROVISION OF THE SUBCONTRACT WOULD HAVE PERMITTED AN ADJUSTMENT IN THE MAXIMUM SUM PAYABLE FOR PERFORMANCE OF THE SERVICES INVOLVED IF THE WORK UNDER THE SUBCONTRACT HAD BEEN SUSPENDED WHEN EXPENDITURES AND OBLIGATIONS APPROACHED THE ACTUAL COST LIMITATION INCLUDED IN THE ALLOWABLE MAXIMUM AMOUNT PAYABLE TO THE SUBCONTRACTOR UNDER MODIFICATION "A.' HOWEVER, IN CONNECTION WITH THE RESPONSIBILITY TO KEEP ITS COSTS FROM EXCEEDING THE ACTUAL COST LIMITATION PENDING ANY NEGOTIATION FOR AN INCREASE IN THE AMOUNT OF SUCH LIMITATION, IT IS APPARENT THAT THE SUBCONTRACTOR COULD NOT REASONABLY HAVE BEEN EXPECTED TO KNOW PRECISELY WHAT ITS OVERHEAD COSTS WERE AT ANY TIME DURING THE COURSE OF PERFORMING THE SUBCONTRACT. OVERHEAD COSTS ARE NOT READILY ASCERTAINABLE AND IT IS SIGNIFICANT THAT THE PROVISIONAL OVERHEAD RATE WAS NOT SUBJECT TO REPLACEMENT BY A FIXED PERCENTAGE UNTIL AN AUDIT HAD BEEN PERFORMED BY THE APPROPRIATE GOVERNMENT AUDIT AGENCY FOLLOWING THE COMPLETION OF THE SUBCONTRACT.

IN THE CIRCUMSTANCES, YOU ARE ADVISED THAT WE WILL NOT OBJECT TO THE APPROVAL OF THE PROPOSED MODIFICATION "C" TO SUBCONTRACT NO. FY53 266-12.