B-130786, OCT. 3, 1957

B-130786, OCT. 3, 1957

TO MR. EDWARD F. CANTILIN:

REFERENCE IS MADE TO YOUR LETTER OF SEPTEMBER 3, 1957, RELATIVE TO THE CLAIM OF JOHN J. MCDONNEL, INC., IN THE AMOUNT OF $36,782.51, FOR COMPENSATION FOR INCREASED COSTS ALLEGED TO HAVE BEEN INCURRED AS THE RESULT OF DELAYS CAUSED BY THE GOVERNMENT, OR FOR WHICH THE GOVERNMENT WAS OTHERWISE RESPONSIBLE, IN THE PERFORMANCE OF DEPARTMENT OF THE NAVY CONTRACT NOY-71171, DATED FEBRUARY 6, 1953, COVERING CERTAIN CONSTRUCTION WORK AT THE NAVAL AIR STATION, WILLOW GROVE, PENNSYLVANIA.

THE CONTRACT ORIGINALLY PROVIDED FOR COMMENCEMENT OF THE WORK ON FEBRUARY 6, 1953, AND COMPLETION ON AUGUST 10, 1953. ON FEBRUARY 12, THE CONTRACTOR WAS NOTIFIED THAT THE PROJECT SITE WAS NOT AVAILABLE AND IT WAS NOT UNTIL OCTOBER 26 THAT THE CONTRACTOR WAS GIVEN ACCESS TO THE SITE. FOR THIS DELAY OF THE GOVERNMENT AND AN ADDITIONAL PERIOD OF 41 DAYS OF DELAY CAUSED BY INTERFERENCE OF ANOTHER GOVERNMENT CONTRACTOR, THE CONTRACTING OFFICER EXTENDED THE CONTRACT PERIOD OF PERFORMANCE FOR A TOTAL OF 303 DAYS. A FURTHER EXTENSION IN TIME FOR PERFORMANCE WAS GRANTED FOR 173 DAYS OF DELAY DUE TO A LACK OF AVAILABLE FUEL WITH WHICH TO TEST THE INSTALLATION. THE CONTRACT COMPLETION DATE WAS ALSO EXTENDED FOR A TOTAL PERIOD OF 70 DAYS IN CONNECTION WITH THE ISSUANCE OF CHANGE ORDERS WHICH INCREASED THE CONTRACT CONSIDERATION FROM $137,988 TO $142,094. APPARENTLY, ALL OF THE REQUIRED WORK WAS COMPLETED ON OR BEFORE FEBRUARY 7, 1955, THE EXTENDED COMPLETION DATE OF THE CONTRACT.

UPON CONSIDERATION OF THE ORIGINAL REPORT SUBMITTED BY THE DEPARTMENT OF THE NAVY ON THE CLAIM, IT WAS BELIEVED THAT THE MATTER WARRANTED FURTHER INVESTIGATION AND WE REQUESTED THE DEPARTMENT TO FURNISH ADDITIONAL INFORMATION CONCERNING THE VARIOUS ITEMS OF THE CLAIM. WE WERE FURNISHED A REPORT OF AUDIT DATED MAY 10, 1957, PREPARED BY THE U.S. NAVY BRANCH AUDIT OFFICE, PHILADELPHIA, PENNSYLVANIA. A COPY OF THAT REPORT WAS FORWARDED TO THE CONTRACTOR ON JULY 10, 1957, WITH THE ADVICE THAT WE WOULD WITHHOLD ACTION ON THE CLAIM PENDING THE RECEIPT OF THE CONTRACTOR'S COMMENTS CONCERNING THE FINDINGS MADE IN THE REPORT OF AUDIT. THIS WAS IN ACCORDANCE WITH AN UNDERSTANDING REACHED AT A CONFERENCE HELD IN OUR OFFICE ON JULY 9, 1957.

YOU NOW PROPOSE THAT THE CLAIM BE SETTLED ON THE BASIS OF PAYMENT BY THE GOVERNMENT OF THE AMOUNT OF $21,739.05 WHICH WOULD INCLUDE PAYMENT OF THE RESPECTIVE AMOUNTS OF $1,737.31, $4,262.39, $2,483.17, $10,385, $2,622.53 AND $248.65 ON THE ITEMS LISTED IN EXHIBITS I TO VI SUBMITTED WITH THE ORIGINAL CLAIM FOR $36,782.51.

IN YOUR REVISED COMPUTATIONS OF THE ITEMS OF CLAIM FOR WAGE INCREASES (EXHIBIT I), STAND-BY LABOR COSTS (EXHIBIT III), AND INCREASED SUBCONTRACTORS' COSTS (EXHIBIT V), IT APPEARS THAT YOU HAVE OVERLOOKED THE FACT THAT THE ORIGINAL ITEMS OF CLAIM INCLUDED 12 1/2 PERCENT FOR PAYROLL TAXES AND INSURANCE WHEREAS THE REPORT OF AUDIT INDICATES THAT THE ACTUAL EXPENDITURES FOR PAYROLL TAXES AND INSURANCE AMOUNTED TO 7.97 PERCENT OF WAGES FOR THE PERIOD NOVEMBER 8, 1953, TO APRIL 30, 1954, AND TO 6.26 PERCENT OF WAGES FOR THE PERIOD MAY 1, 1954 THROUGH OCTOBER 15, 1954. SEEMS, THEREFORE, THAT THESE ITEMS OF CLAIM CLEARLY SHOULD BE REDUCED TO THE APPROXIMATE SUMS OF $1,718.11, $1,963.90 AND $2,543.53, COMPUTED AS FOLLOWS:

CHART

REVISED CLAIM - EXHIBIT I TOTAL WAGE INCREASES

$1,679.23 LESS: ADJUSTMENTS OF $154.22, $62.70 AND $1.72

218.64

$1,460.59 PAYROLL TAXES AND INSURANCE

7.97 PERCENT OF $579.09 - $46.15 6.26 PERCENT OF $881.50 - $55.18 101.33

$1,561.92 PROFIT - 10 PERCENT

156.19

TOTAL REVISED CLAIM $1,718.11

REVISED CLAIM - EXHIBIT III PAYROLL OF STAND-BY LABOR FORCE

$2,641.45 LESS: ADJUSTMENTS $231.70 AND $882.32 1,114.02

$1,527.43 INSURANCE AND TAXES - 6.26 PERCENT 95.62

$1,623.05 OVERHEAD - 10 PERCENT

162.31

$1,785.36 PROFIT - 10 PERCENT

178.54

TOTAL REVISED CLAIM $1,963.90

REVISED CLAIM - EXHIBIT V LABOR PAYROLL INCREASES

$1,187.00 INSURANCE AND TAXES - APPROX. 7 PERCENT 83.09

$1,270.09 MATERIAL COSTS INCREASE

832.00

$2,102.09 OVERHEAD - 10 PERCENT

210.21

$2,312.30 PROFIT - 10 PERCENT

231.23

TOTAL REVISED CLAIM $2,543.53

WE WOULD NOT BE REQUIRED TO OBJECT TO THE INCLUSION OF A PROFIT OF 10 PERCENT ON THESE ITEMS, BUT IT IS APPARENT THAT THE CLAIMS FOR STAND-BY LABOR COSTS AND INCREASED SUBCONTRACTORS' COSTS SHOULD BE RECOMPUTED ON THE BASIS OF ELIMINATING ANY AMOUNTS FOR OVERHEAD IF FAVORABLE CONSIDERATION IS TO BE GIVEN TO THE SEPARATE CLAIM FOR ADDITIONAL OVERHEAD EXPENSE AS LISTED IN EXHIBIT IV. WITH RESPECT TO EXHIBIT V, IT IS NOT OUR POLICY TO ALLOW CLAIMS FOR INCREASED SUBCONTRACTORS' COSTS IN THE ABSENCE OF EVIDENCE THAT THE PRIME CONTRACTOR HAS ACTUALLY PAID SUCH INCREASED COSTS TO HIS SUBCONTRACTOR.

THE REVISED CLAIM FOR LOSS OF EFFICIENCY IN OUTSIDE LABOR DURING WINTER MONTHS (EXHIBIT II) IS BASED UPON AN ALLEGED TOTAL WAGE COST OF $10,655.97 FOR THE PERIOD NOVEMBER 7, 1953 TO MARCH 27, 1954, AND THE APPLICATION OF A 40 PERCENT EFFICIENCY LOSS RATE. ORIGINALLY, AN EFFICIENCY LOSS RATE OF 30 PERCENT WAS CLAIMED AND WE WERE ADVISED THAT THE CONTRACTOR HAD ESTABLISHED TO ITS SATISFACTION THAT ITS COSTS CAN BE EXPECTED TO RUN 30 PERCENT HIGHER FOR WORK REQUIRED TO BE PERFORMED UNDER ADVERSE CLIMATIC CONDITIONS.

OBVIOUSLY AN ARBITRARY INCREASE IN SUCH CLAIMED RATE WOULD NOT BE JUSTIFIED ON THE BASIS OF THE STATEMENT MADE IN THE REPORT OF AUDIT INDICATING THAT THE RATE CLAIMED BY THE CONTRACTOR WAS REASONABLE. THE NAVY AUDITOR DID NOT QUESTION THE RATE CLAIMED BUT STATED THAT HE HAD BEEN ADVISED BY A REPRESENTATIVE OF THE DISTRICT PUBLIC WORKS OFFICER 4 ND THAT "ESTIMATES ARE SOMETIMES INCREASED AS MUCH AS 35 PERCENT TO 40 PERCENT BECAUSE OF ADVERSE WEATHER CONDITIONS.' WE WOULD ACCEPT THIS STATEMENT ONLY AS A BASIS FOR NOT REQUIRING MORE SUBSTANTIAL EVIDENCE AS TO THE INCREASED COSTS INCURRED BY THE CONTRACTOR ON ACCOUNT OF PERFORMING SOME OF THE CONTRACT WORK DURING WINTER MONTHS. ACCORDINGLY, IT IS CONSIDERED THAT, ON THE PRESENT RECORD, THE MAXIMUM ALLOWABLE ON THE CLAIM LISTED IN EXHIBIT II, WOULD BE 30 PERCENT OF $10,655.97 OR $3,196.79.

THE CLAIM FOR ADDITIONAL OVERHEAD (EXHIBIT IV) HAS BEEN REDUCED FOR THE PURPOSE OF THE PROPOSED SETTLEMENT FROM $21,041.67 TO $10,385. WITH RESPECT TO YOUR CONTENTIONS IN THIS MATTER, WE ARE OF THE OPINION THAT THE NAVY AUDITOR USED THE PREFERRED METHOD OF ATTEMPTING TO DETERMINE WHAT PORTIONS OF THE CONTRACTOR'S OVERHEAD EXPENSES DURING THE TWO-YEAR PERIOD OF PERFORMANCE OF CONTRACT NOY-71171 WERE PROPERLY CHARGEABLE TO THAT CONTRACT. WE ARE ALSO OF THE OPINION THAT HE WAS CORRECT IN ELIMINATING FROM THE OVERHEAD EXPENSE ACCOUNTS CERTAIN CHARGES WHICH HAD NO REASONABLE RELATIONSHIP TO THE PERFORMANCE OF CONTRACT NOY-71171.

FOR THE CONTRACTOR'S FISCAL YEAR ENDED APRIL 30, 1954, THE OVERHEAD ALLOCATED TO CONTRACT NOY-71171 IN THE REPORT OF AUDIT AMOUNTED TO $6,190 AND FOR THE FISCAL YEAR ENDED APRIL 30, 1955, THE OVERHEAD ALLOCATED TO THAT CONTRACT AMOUNTED TO $3,074. THE TOTAL CONTRACT PERIOD OF PERFORMANCE WAS 731 DAYS OF WHICH A DELAY OF 476 DAYS IS CHARGEABLE TO THE GOVERNMENT. IT WOULD APPEAR, THEREFORE, THAT PAYMENT OF THE APPROXIMATE SUM OF $5,974.37, OR 476/731 OF $9,264, LESS THE AMOUNT OF $58 ALLOWED AS OVERHEAD UNDER CHANGE ORDER C, WOULD REPRESENT A REASONABLE ADJUSTMENT TO COVER ADDITIONAL OVERHEAD EXPENSE INCURRED AS THE RESULT OF THE DELAYS FOR WHICH THE GOVERNMENT WAS RESPONSIBLE.

ON THE BASIS OF ALL THE INFORMATION PRESENTLY BEFORE US, IT IS OUR VIEW THAT THE SUM OF $12,923.28 WOULD REPRESENT THE MAXIMUM AMOUNT ALLOWABLE BY OUR OFFICE FOR THE ADDITIONAL EXPENDITURES ACTUALLY RESULTING FROM THE DELAYS IN PERFORMANCE WHICH WERE CAUSED BY THE GOVERNMENT OR FOR WHICH THE GOVERNMENT WAS OTHERWISE RESPONSIBLE. THAT SUM INCLUDES THE FOLLOWING AMOUNTS:

CHART

EXHIBIT I $1,718.11

EXHIBIT II 3,196.79

EXHIBIT III 1,785.36

EXHIBIT IV 5,974.37

EXHIBIT VI 248.65

TOTAL $12,923.28

THERE IS SOME DOUBT AS TO THE PROPRIETY OF ALLOWING SUCH MAXIMUM AMOUNT, PARTICULARLY IN VIEW OF THE FACT THAT A COMPLETE INVESTIGATION HAS NOT BEEN MADE CONCERNING SOME OF THE ITEMS OF CLAIM. HOWEVER, WEARE INCLINED TO THE VIEW THAT PAYMENT OF THE SUM OF $12,928.28 WOULD REPRESENT A REASONABLE SETTLEMENT, IF ACCEPTED AS COMPLETE SATISFACTION OF THE CLAIM. ALTHOUGH SUCH FACTORS WOULD NOT BE CONTROLLING IN THE MATTER, IT IS INTERESTING TO NOTE THAT THE CONTRACTOR EXPECTED TO REALIZE A PROFIT OF $5,000 ON THE CONTRACT AND THAT, ACCORDING TO THE AUDIT REPORT, A LOSS OF $6,047 WAS SUSTAINED.

IN THE CIRCUMSTANCES, IT IS SUGGESTED THAT YOU CONSIDER THE MATTER FURTHER AND ADVISE US WHETHER YOUR CLIENT WILL ACCEPT PAYMENT OF THE AMOUNT OF $12,923.28 AS IN FULL AND FINAL SETTLEMENT OF ALL CLAIMS ARISING OUT OF THE CONTRACT.