B-133489, FEB. 11, 1958

B-133489: Feb 11, 1958

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DEPARTMENT OF THE ARMY: REFERENCE IS MADE TO YOUR LETTER OF JULY 23. WHICH WAS ENTERED INTO IN CONNECTION WITH THE RIVER AND HARBOR AND FLOOD CONTROL ACTIVITIES OF THE CORPS OF ENGINEERS. THE STATE OF SOUTH DAKOTA WAS REQUIRED TO FURNISH ALL THE SERVICES. WHICH ARE PART OF THE SOUTH DAKOTA STATE HIGHWAY SYSTEM. WHICH WAS THE SEGMENT OF THE WORK ACCORDED THE LONGEST PERIOD FOR COMPLETION IN THE SCHEDULE SET FORTH IN THE CONTRACT FOR THE PERFORMANCE OF THE WORK. WAS REQUIRED TO BE COMPLETED ON JULY 14. ADMINISTRATIVE AND OVERHEAD CHARGES WERE TO BE PRORATED ON A PROPORTIONATE BASIS. IT APPEARS THAT THE WORK UNDER THE CONTRACT WAS COMPLETED ON JULY 1. ALLEGED TO HAVE BEEN INCURRED BY IT IN CONNECTION WITH THE PERFORMANCE OF THE CONTRACT DURING THE PERIOD JULY 1.

B-133489, FEB. 11, 1958

TO MR. W. M. WILSON, DISBURSING OFFICER, OFFICE, CHIEF OF ENGINEERS, DEPARTMENT OF THE ARMY:

REFERENCE IS MADE TO YOUR LETTER OF JULY 23, 1957, REQUESTING A DECISION AS TO THE PROPRIETY OF REIMBURSING THE STATE OF SOUTH DAKOTA FOR ADMINISTRATIVE OVERHEAD COSTS AMOUNTING TO $97,235.94, AS SET FORTH IN CERTIFIED COPY OF THE RECAPITULATION COVERING THE 136TH AND FINAL PAYMENT UNDER CONTRACT NO. W-25-066-ENG-1586, DATED JULY 1, 1948.

UNDER THE CONTRACT, WHICH WAS ENTERED INTO IN CONNECTION WITH THE RIVER AND HARBOR AND FLOOD CONTROL ACTIVITIES OF THE CORPS OF ENGINEERS, THE STATE OF SOUTH DAKOTA WAS REQUIRED TO FURNISH ALL THE SERVICES, LABOR, MATERIALS AND EQUIPMENT AND/OR ENTER INTO SUCH CONTRACTS AS MIGHT BE NECESSARY TO ACCOMPLISH THE RELOCATION OR ALTERATION OF THOSE PORTIONS OF SOUTH DAKOTA STATE HIGHWAY NO. 47 AND U.S. HIGHWAYS NOS. 16, 18 AND 281, WHICH ARE PART OF THE SOUTH DAKOTA STATE HIGHWAY SYSTEM, WHICH INTERFERED WITH THE PROPOSED RESERVOIR AREA OF THE FORT RANDALL DAM AND RESERVOIR PROJECT, SOUTH DAKOTA. THE WORK INCIDENT TO THE RELOCATION OF HIGHWAY NO. 47, WHICH WAS THE SEGMENT OF THE WORK ACCORDED THE LONGEST PERIOD FOR COMPLETION IN THE SCHEDULE SET FORTH IN THE CONTRACT FOR THE PERFORMANCE OF THE WORK, WAS REQUIRED TO BE COMPLETED ON JULY 14, 1955. WITH RESPECT TO PAYMENT FOR THE PERFORMANCE OF THE WORK, ARTICLE 3 OF THE CONTRACT PROVIDED THAT THE GOVERNMENT WOULD REIMBURSE THE STATES FOR THE ACTUAL COST OF ALL WORK PERFORMED, INCLUDING, AMONG OTHER ITEMS, OVERHEAD CHARGES PROPERLY APPLICABLE TO THE WORK, UPON THE RECEIPT OF CERTIFIED INVOICES APPROVED BY THE CONTRACTING OFFICER. ADMINISTRATIVE AND OVERHEAD CHARGES WERE TO BE PRORATED ON A PROPORTIONATE BASIS.

IT APPEARS THAT THE WORK UNDER THE CONTRACT WAS COMPLETED ON JULY 1, 1956, AND THAT UNDER DATE OF MARCH 2, 1957, THE STATE SUBMITTED TO THE CONTRACTING OFFICER FOR PAYMENT, ALONG WITH OTHER INVOICES COVERING REIMBURSEMENT FOR CERTAIN DIRECT COSTS, A CERTIFIED INVOICE IN THE AMOUNT OF $158,584.13, COVERING REIMBURSEMENT TO THE STATE FOR ADMINISTRATIVE, OR OVERHEAD COSTS, ALLEGED TO HAVE BEEN INCURRED BY IT IN CONNECTION WITH THE PERFORMANCE OF THE CONTRACT DURING THE PERIOD JULY 1, 1949, TO JULY 31, 1956. AFTER GIVING EFFECT TO CERTAIN ADJUSTMENTS DETERMINED TO BE PROPER AS A RESULT OF ADMINISTRATIVE AUDIT, THE CONTRACTING OFFICER APPROVED PAYMENT ON THE INVOICE TO THE EXTENT OF $97,235.94. SUCH SUM WAS ARRIVED AT BY DIVIDING THE TOTAL ADMINISTRATIVE COSTS INCURRED BY THE STATE'S HIGHWAY COMMISSION (CONSISTING MAINLY OF SALARIES AND WAGES PAID TO OFFICIALS AND EMPLOYEES OF THE COMMISSION) DURING THE PERIOD OF TIME INVOLVED, $2,329,923.08, BY THE TOTAL CONSTRUCTION AND MAINTENANCE COSTS INCURRED BY THE STATE UNDER ITS HIGHWAY PROGRAM DURING SUCH PERIOD, $153,215,416.72, AND MULTIPLYING THE QUOTIENT THUS OBTAINED, .0152, BY THE SUM OF $6,397,101.13, REPRESENTING THE TOTAL AMOUNT REIMBURSED TO THE STATE FOR DIRECT COSTS UNDER THE CONTRACT.

YOU STATE THAT UNDER THE ACCOUNTING SYSTEM USED BY THE STATE OF SOUTH DAKOTA ADMINISTRATIVE OVERHEAD COSTS OF THE TYPE INVOLVED HAVE NEVER BEEN DISTRIBUTED TO OTHER CONSTRUCTION AND MAINTENANCE WORK ACCOMPLISHED BY THE STATE UNDER ITS HIGHWAY PROGRAM, AND SINCE THE STATE DID NOT INCLUDE ANY ADMINISTRATIVE OVERHEAD COSTS IN THE ASSET VALUE OF ITS HIGHWAY SYSTEM, IT DOES NOT SEEM PROPER THAT THE GOVERNMENT SHOULD HAVE TO BEAR A PORTION OF SUCH COSTS IN CONNECTION WITH RELOCATION OF THE HIGHWAYS INVOLVED UNDER THE INSTANT CONTRACT. YOU ALSO STATE THAT IF ADMINISTRATIVE OVERHEAD COSTS ARE CONSIDERED TO BE AN ALLOWABLE ITEM OF COST UNDER THE CONTRACT YOU WOULD LIKE TO BE ADVISED WHETHER THE AMOUNT OF $97,235,94 WOULD BE REDUCED BECAUSE THE STATE DID NOT COMPLETE THE CONTRACT ON TIME. IN THIS CONNECTION, YOU STATE:

"* * * IF THE STATE HAD COMPLETED THE CONTRACT WITHIN THE TIME ALLOWED, THE ADMINISTRATIVE OVERHEAD WOULD BE REDUCED AS FOLLOWS:

"TOTAL CONSTRUCTION AND MAINTENANCE

COSTS $153,215,416.72

LESS--- EXPERIENCE 7/1/55 - 6/30/56 27,325,499.22

NEW TOTAL $125,889,917.50

TOTAL ADMINISTRATIVE COSTS $ 2,329,923.08

LESS--- EXPERIENCE 7/1/55 - 6/30/56 497,458.66

NEW TOTAL $ 1,832,464.42

$1,832,464.42 PLUS $125,889,917.50 EQUALS 1.456 PERCENT

$6,397,101.13 TIMES 1.456 PERCENT EQUALS $93,141.79

AMOUNT RECOMMENDED FOR PAYMENT $ 97,235.94

LESS ADJUSTED AMOUNT 93,141.79

DIFFERENCE $ 4,094.15"

THE WORK REQUIRED TO BE PERFORMED UNDER THE CONTRACT WAS AUTHORIZED BY THE FLOOD CONTROL ACT OF 1944, 58 STAT. 887, 897, WHICH STATES THAT THE WORK REPRESENTS A MODIFICATION AND EXTENSION OF THE PROJECT ADOPTED BY THE ACT OF JUNE 22, 1936, TO PROVIDE FLOOD PROTECTION FOR THE KANSAS CITYS, KANSAS AND MISSOURI, AND THAT IT IS TO BE PERFORMED SUBSTANTIALLY IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE CHIEF OF ENGINEERS IN HOUSE DOCKET NO. 342, 78TH CONGRESS, 1ST SESSION. PREVIOUS AUTHORIZATION FOR THE PROJECT, PRIOR TO MODIFICATION, IS CONTAINED IN SECTION 3 OF THE FLOOD CONTROL ACT OF 1941, 55 STAT. 638, 646.

UNDER THE PROVISIONS OF SECTION 3 OF THE REFERRED-TO ACT OF JUNE 22, 1936, 49 STAT. 1570, STATES WERE REQUIRED TO PROVIDE ALL EASEMENTS AND RIGHTS OF WAY NECESSARY FOR FLOOD CONTROL PROJECTS TO THE UNITED STATES WITHOUT COST. HOWEVER, THAT SECTION WAS AMENDED BY PUBLIC LAW 761, 75TH CONGRESS, 3RD SESSION, APPROVED JUNE 28, 1938, 52 STAT. 1215, 1218, WHICH AUTHORIZED THE GENERAL COMPREHENSIVE PLAN FOR FLOOD CONTROL AND OTHER PURPOSES IN THE MISSOURI RIVER BASIN AS SET FORTH IN FLOOD CONTROL COMMITTEE DOCUMENT NO. 1, 75TH CONGRESS, 1ST SESSION. THE SAID PUBLIC LAW PROVIDES IN SECTION 2 AS FOLLOWS:

"THAT IN CASE OF ANY DAM AND RESERVOIR PROJECT * * * HEREIN AUTHORIZED OR HERETOFORE AUTHORIZED BY THE ACT OF JUNE 22, 1936 * * * TITLE TO ALL LANDS, EASEMENTS AND RIGHTS-OF-WAY FOR SUCH PROJECT SHALL BE ACQUIRED BY THE UNITED STATES OR BY STATES * * * AND CONVEYED TO THE UNITED STATES, AND PROVISIONS (A), (B), AND (C) OF SECTION 3 OF SAID ACT OF JUNE 22, 1936, SHALL NOT APPLY THERETO. NOTWITHSTANDING ANY RESTRICTIONS, LIMITATIONS, OR REQUIREMENTS OF PRIOR CONSENT PROVIDED BY ANY OTHER ACT, THE SECRETARY OF THE ARMY IS HEREBY AUTHORIZED AND DIRECTED TO ACQUIRE IN THE NAME OF THE UNITED STATES TITLE TO ALL LANDS, EASEMENTS, AND RIGHTS-OF -WAY NECESSARY FOR ANY DAM AND RESERVOIR PROJECT * * * WITH FUNDS HERETOFORE OR HEREAFTER APPROPRIATED OR MADE AVAILABLE FOR SUCH PROJECTS, AND STATES * * * SHALL BE GRANTED AND REIMBURSED, FROM SUCH FUNDS, SUMS EQUIVALENT TO ACTUAL EXPENDITURES DEEMED REASONABLE BY THE SECRETARY OF THE ARMY AND THE CHIEF OF ENGINEERS AND MADE BY THEM IN ACQUIRING LANDS, EASEMENTS, AND RIGHTS-OF-WAY FOR ANY DAM AND RESERVOIR PROJECT * * * HERETOFORE OR HEREIN AUTHORIZED; PROVIDED, THAT NO REIMBURSEMENT SHALL BE MADE FOR ANY INDIRECT OR SPECULATIVE DAMAGES: PROVIDED FURTHER, THAT LANDS, EASEMENTS AND RIGHTS-OF-WAY SHALL INCLUDE LANDS ON WHICH DAMS, RESERVOIRS * * * LOCATED; LANDS OR FLOWAGE RIGHTS IN RESERVOIRS AND HIGHWAY, RAILWAY, AND UTILITY RELOCATIONS.' 33 U.S.C. SEC. 701C-1.

ALSO, SECTION 5 OF THE SAME PUBLIC LAW, 52 STAT. 1223, AS AMENDED BY ACT APPROVED AUGUST 18, 1941, 55 STAT. 650, PROVIDES THAT IN CARRYING OUT THE PURPOSES OF THE ACT OF JUNE 22, 1936, 49 STAT. 1570, AS AMENDED AND SUPPLEMENTED, THE SECRETARY OF THE ARMY IS AUTHORIZED TO COOPERATE WITH INSTITUTIONS, ORGANIZATIONS AND INDIVIDUALS, AND TO UTILIZE THE SERVICES OF FEDERAL, STATE AND OTHER PUBLIC AGENCIES, AND TO PAY BY CHECK TO THE COOPERATING PUBLIC AGENCY, EITHER IN ADVANCE OR UPON THE FURNISHING OR PERFORMANCE OF SAID SERVICES, ALL OR PART OF THE ESTIMATED OR ACTUAL COST THEREOF. 33 U.S.C. SEC. 701B-2.

THE TERMS "ACTUAL EXPENDITURES" AND "ACTUAL COSTS" APPEARING IN SECTIONS 2 AND 5 OF PUBLIC LAW 761, WHEN USED IN CONNECTION WITH A COST- REIMBURSEMENT TYPE CONTRACT, HAVE BEEN HELD TO BE SUFFICIENTLY BROAD TO INCLUDE A PRO RATE SHARE OF OVERHEAD, OR ADMINISTRATIVE EXPENSE, PROPERLY ALLOCABLE TO THE PERFORMANCE OF THE CONTRACT. SEE FT. DEARBORN TRUST AND SAVINGS BANK V. SKELLY OIL CO., 293 P. 557, 563. IF THERE WERE ANY DOUBT AS TO WHETHER THE CONGRESS INTENDED TO USE THOSE TERMS IN THEIR BROADEST SENSE, IT WOULD BE DISPELLED BY THE LEGISLATIVE HISTORY OF THE STATUTE.

IN CONFERENCE REPORT NO. 2746 ON H.R. 10618, 75TH CONGRESS, 3RD SESSION, WHICH BECAME PUBLIC LAW 761, THE MANAGERS OF THE HOUSE AND SENATE, IN COMMENTING UPON SECTION 2 OF THE BILL, DREW ATTENTION TO THE FACT THAT THE BILL AS IT LEFT THE HOUSE PROVIDED FOR A LOCAL CONTRIBUTION OF 30 PERCENT FOR DAM AND RESERVOIR CONSTRUCTION, BUT THAT SUCH REQUIREMENT HAD BEEN ELIMINATED BY AMENDMENT OF THE BILL IN THE SENATE, AND THAT, AS REWRITTEN AND AGREED TO IN CONFERENCE, SECTION 2, ABOVE, NOW PROVIDED THAT THE UNITED STATES WAS TO PAY THE "ENTIRE COSTS" OF SUCH CONSTRUCTION.

OVERHEAD EXPENSES ACTUALLY INCURRED AND RELATED TO THE CONTRACT WORK OBVIOUSLY CONSTITUTE A PART OF THE "ENTIRE COSTS" OF PERFORMANCE JUST AS DO THE EXPENSES OF LABOR AND MATERIALS GOING INTO THE WORK, OR THE DIRECT COSTS, AND, HENCE, NO BASIS EXISTS FOR DENYING REIMBURSEMENT TO THE STATE OF SOUTH DAKOTA FOR ADMINISTRATIVE OVERHEAD COSTS UNDER THE CONTRACT. THE FACT THAT THE STATE HAS NOT FOLLOWED THE PRACTICE UNDER ITS ACCOUNTING PROCEDURES OF INCLUDING ANY ADMINISTRATIVE OVERHEAD COSTS OF THE TYPE INVOLVED IN THE ASSET VALUE OF ITS HIGHWAY SYSTEM DOES NOT AFFECT ITS RIGHT TO REIMBURSEMENT IN THE PRESENT INSTANCE.

YOUR QUESTION AS TO WHETHER THE TOTAL AMOUNT OF ADMINISTRATIVE OVERHEAD COSTS INVOLVED SHOULD BE REDUCED BECAUSE THE STATE DID NOT COMPLETE THE CONTRACT ON TIME POSES A LEGAL PROBLEM SOMEWHAT SIMILAR TO THAT INVOLVED IN THE FOLLOWING SITUATION: WHERE A FIXED-PRICE GOVERNMENT CONTRACT CONTAINING A DEFINITE DATE FOR DELIVERY OF SUPPLIES OR SERVICES REQUIRED TO BE FURNISHED THEREUNDER PROVIDES FOR AN INCREASE IN THE CONTRACT PRICE UPON THE HAPPENING OF A CERTAIN EVENT, AND THAT EVENT HAPPENS AFTER THE DATE FIXED FOR DELIVERY, IS THE CONTRACTOR ENTITLED TO THE INCREASED PRICE IN THE ABSENCE OF A LEGAL EXCUSE FOR THE DELAY? THAT QUESTION HAS ARISEN IN THIS OFFICE ON A NUMBER OF OCCASIONS AND WE HAVE UNIFORMLY HELD THAT THE INCREASE IS NOT ALLOWABLE UNDER SUCH CIRCUMSTANCES. THE BASIS FOR OUR POSITION IN THIS REGARD IS THAT WE PERCEIVE NO VALID REASON, IN LAW OR EQUITY, FOR REQUIRING THE GOVERNMENT TO ASSUME THE BURDEN OF PRICE INCREASES OCCURRING AFTER THE FINAL DATE DELIVERY WOULD HAVE BEEN MADE BUT FOR THE CONTRACTOR'S OWN FAULT OR NEGLIGENCE. TO REQUIRE THE GOVERNMENT TO PAY SUCH PRICE INCREASES WOULD PERMIT THE CONTRACTOR TO BENEFIT FROM HIS OWN DELINQUENCY AND WOULD PENALIZE THE GOVERNMENT FOR MINIMIZING THE CONTRACTOR'S LOSS WHICH WOULD HAVE RESULTED HAD THE CONTRACT BEEN TERMINATED BECAUSE OF THE CONTRACTOR'S DEFAULT. 34 COMP. GEN. 565; 33 ID. 330.

IN THE PRESENT INSTANCE, HOWEVER, WE HAVE AN ACTUAL COST, NO PROFIT, CONTRACT ENTERED INTO BETWEEN THE FEDERAL GOVERNMENT AND ONE OF THE STATES FOR THE PURPOSE OF CARRYING OUT A CONSTRUCTION PROJECT THE COMPLETION OF WHICH WOULD BE OF MUTUAL BENEFIT. THERE IS NO INDICATION IN THE RECORD THAT THE DELAY INVOLVED WAS DUE TO THE FAULT OR NEGLIGENCE OF THE STATE OF SOUTH DAKOTA, AND IT REASONABLY MAY BE ASSUMED THAT THE STATE, IS ITS OWN INTERESTS, COMPLETED THE WORK UNDER THE CONTRACT AS SOON AS POSSIBLE.

ACCORDINGLY, WE PERCEIVE AS LEGAL BASIS FOR DEDUCTING ANY AMOUNT FROM THE OVERHEAD CHARGES AS DAMAGES DUE THE GOVERNMENT BECAUSE OF THE DELAY, THERE BEING NO PROVISION IN THE CONTRACT SO AUTHORIZING. PAYMENT ON THE INVOICE WHICH, TOGETHER WITH THE OTHER PAPERS, IS RETURNED HEREWITH, IS THEREFORE AUTHORIZED IF OTHERWISE CORRECT.