B-135465, MARCH 19, 1958, 37 COMP. GEN. 613

B-135465: Mar 19, 1958

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LEASE-PURCHASE PROGRAM - BIDS AT VARIANCE WITH CONGRESSIONAL APPROVED ESTIMATES - REASONABLE VARIATION A 15 PERCENT INCREASE IN CONSTRUCTION COSTS IN A PROPOSED LEASE PURCHASE CONTRACT FOR A POST OFFICE BUILDING OVER THE MAXIMUM ESTIMATE COSTS IN THE PROJECT PROSPECTUS WHICH WERE APPROVED BY THE SENATE AND HOUSE COMMITTEES ON PUBLIC WORKS MAY NOT BE REGARDED AS A REASONABLE VARIATION. PARTICULARLY IN VIEW OF THE FACT THAT THE HOUSE COMMITTEE APPROVAL WAS GIVEN "SUBJECT TO THE COST LIMITATION" IN THE PROSPECTUS. 1958: REFERENCE IS MADE TO YOUR LETTER OF MARCH 10. A PROSPECTUS FOR THE ABINGDON PROJECT WAS PREPARED AND SUBMITTED TO THE ABOVE COMMITTEES FOR APPROVAL IN MID-1955 AND THAT AS REQUIRED BY THE ACT THE PROSPECTUS WAS APPROVED BY THE BUREAU OF THE BUDGET ON MAY 20.

B-135465, MARCH 19, 1958, 37 COMP. GEN. 613

LEASE-PURCHASE PROGRAM - BIDS AT VARIANCE WITH CONGRESSIONAL APPROVED ESTIMATES - REASONABLE VARIATION A 15 PERCENT INCREASE IN CONSTRUCTION COSTS IN A PROPOSED LEASE PURCHASE CONTRACT FOR A POST OFFICE BUILDING OVER THE MAXIMUM ESTIMATE COSTS IN THE PROJECT PROSPECTUS WHICH WERE APPROVED BY THE SENATE AND HOUSE COMMITTEES ON PUBLIC WORKS MAY NOT BE REGARDED AS A REASONABLE VARIATION, PARTICULARLY IN VIEW OF THE FACT THAT THE HOUSE COMMITTEE APPROVAL WAS GIVEN "SUBJECT TO THE COST LIMITATION" IN THE PROSPECTUS, AND, EVEN THOUGH THERE WOULD BE AN OVERALL SAVINGS IN INTEREST AND TAXES UNDER THE PROPOSED CONTRACT AS A RESULT OF THE REDUCTION OF THE AMORTIZATION PERIOD, THIS WOULD NOT JUSTIFY PROCEEDING WITH A MORE EXTENSIVE PROJECT THAN PREVIOUSLY APPROVED.

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, MARCH 19, 1958:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 10, 1958, WITH ENCLOSURES, REQUESTING TO BE ADVISED WHETHER WE CONCUR WITH YOUR VIEW THAT THE SCOPE AND CHARACTER, TOGETHER WITH THE COST OF THE PROPOSED LEASE PURCHASE PROJECT FOR THE CONSTRUCTION OF A POST OFFICE AND COURT HOUSE BUILDING AT ABINGDON, VIRGINIA, COME WITHIN THE REASONABLE VARIATION RULE ANNOUNCED IN OUR DECISION OF OCTOBER 5, 1956, B-129326, TO THE POSTMASTER GENERAL, CONCERNING VARIATIONS BETWEEN THE ACTUAL COSTS AND ESTIMATED MAXIMUM COSTS AS SHOWN IN PROSPECTUSES SUBMITTED TO THE SENATE AND HOUSE COMMITTEES ON PUBLIC WORKS FOR APPROVAL PURSUANT TO THE REQUIREMENTS OF SECTION 202 (G) OF THE POST OFFICE DEPARTMENT PROPERTY ACT OF 1954, AS AMENDED ( TITLE II OF PUBLIC LAW 519), 39 U.S.C. 902 (G).

YOU STATE THAT PURSUANT TO THE AUTHORITY CONTAINED IN TITLE I OF PUBLIC LAW 519, KNOWN AS THE PUBLIC BUILDINGS PURCHASE CONTRACT ACT OF 1954 (68 STAT. 518, AS AMENDED), 40 U.S.C. 356 (E), A PROSPECTUS FOR THE ABINGDON PROJECT WAS PREPARED AND SUBMITTED TO THE ABOVE COMMITTEES FOR APPROVAL IN MID-1955 AND THAT AS REQUIRED BY THE ACT THE PROSPECTUS WAS APPROVED BY THE BUREAU OF THE BUDGET ON MAY 20, 1955, AND BY THE SENATE AND HOUSE COMMITTEES ON JUNE 15 AND JULY 29, 1955, RESPECTIVELY.

AS INDICATED IN YOUR LETTER THE PROPOSED PROJECT AS DESCRIBED IN THE PROSPECTUS AND UPON WHICH THE COST ESTIMATES SET FORTH THEREIN WERE PREDICATED CONTEMPLATES DEMOLITION OF AN EXISTING STRUCTURE AND ERECTION OF A NEW BUILDING ON THE PRESENT GOVERNMENT-OWNED SITE ACQUIRED AT A COST OF $13,210. THE PROPOSED BUILDING IS DESCRIBED AS A PART BASEMENT, ONE STORY, PART TWO STORIES AND PENTHOUSE STRUCTURE, BRICK FACED, STONE TRIMMED, AIR CONDITIONING IN COURTROOM ONLY, COMPRISING A GROSS FLOOR AREA OF 31,085 SQUARE FEET AND PROVIDING 19,194 SQUARE FEET OF NET SPACE. THE ESTIMATES OF MAXIMUM COSTS SET FORTH IN THE PROSPECTUS AS REQUIRED BY THE STATUTE REFLECT A TOTAL ESTIMATED COST OF $543,210, CONSISTING OF $46,000 FOR ARCHITECTURAL COSTS; $13,210 FOR THE COST OF THE SITE; $12,000 FOR CERTAIN MISCELLANEOUS COSTS AND $472,000 AS THE ESTIMATED COST OF THE IMPROVEMENT. THE CONTRACT TERM IS SPECIFIED AS FROM 10 TO 25 YEARS AND THE ESTIMATED MAXIMUM RATE OF INTEREST IS STATED AS 4 PERCENT.

YOU STATE THAT ON JANUARY 17, 1958, IN RESPONSE TO INVITATION FOR BIDS FOR FINANCING THE CONSTRUCTION, THE KANSAS LIFE INSURANCE COMPANY, KANSAS CITY, MISSOURI, SUBMITTED A BID OF 4.78 PERCENT PER ANNUM, THE LOWEST BID RECEIVED; THAT ON THE SAME DAY THAT COMPANY WAS NOTIFIED IT HAD SUBMITTED THE LOWEST ACCEPTABLE BID; AND THAT PURSUANT TO THE TERMS THEREOF THE COMPANY'S BID WOULD BE ACCEPTED OR REJECTED BY THE GOVERNMENT WITHIN 90 CALENDAR DAYS AFTER THE DATE OF BID OPENING OR PRIOR TO MIDNIGHT APRIL 18, 1958. IT IS STATED THAT THEREAFTER, ON FEBRUARY 20, 1958, THE TRAMMEL CONSTRUCTION COMPANY, INC., OF BRISTOL, TENNESSEE, SUBMITTED THE LOW BID IN THE LUMP-SUM AMOUNT OF $508,000 FOR CONSTRUCTION OF THE IMPROVEMENTS AND THAT THIS BID IS OPEN FOR ACCEPTANCE UNTIL MARCH 19, 1958.

FOR THE PURPOSE OF SHOWING THE COMPARATIVE COST BETWEEN THE ESTIMATED COST AS SHOWN IN THE APPROVED PROSPECTUS AND THE ACTUAL COST BASED UPON THE LOW BIDS YOU HAVE ENCLOSED A COMPARISON TABLE SHOWING THE COST, FINANCING AND SCOPE OF THE PROJECT. AS INDICATED IN YOUR LETTER THIS COMPARATIVE TABLE INDICATES THAT ON THE BASIS OF A CONTRACT TERM OF 25 YEARS, FORMING THE BASIS OF THE COMPUTATIONS USED IN THE PROSPECTUS, THE ACTUAL COST OF THE PROJECT WILL EXCEED THE ESTIMATED COST AS SHOWN IN THE PROSPECTUS BY $81,729 OR AN EXCESS OF 15 PERCENT; THAT THE INTEREST RATE OF 10.78 PERCENT OVER THE ESTIMATE AND THAT THE ANNUAL COST OF PRINCIPAL AND INTEREST WILL EXCEED THE PROSPECTUS ESTIMATE BY $10,602.

YOU STATE THAT IN YOUR OPINION THERE ARE SEVERAL FACTORS WHICH MUST BE CONSIDERED FOR THE PURPOSE OF DETERMINING WHETHER IN THE EVENT OF AN AWARD OF A CONTRACT THE ACTUAL COST OF THE PROJECT WOULD BE WITHIN A REASONABLE VARIATION OF THE PROSPECTUS ESTIMATES. SPECIFICALLY, YOU NOTE THAT THE BUILDING TO BE CONSTRUCTED WILL PROVIDE APPROXIMATELY 33,341 GROSS SQUARE FEET OR APPROXIMATELY 7 PERCENT MORE THAN THE ESTIMATED GROSS AREA OF 31,085 SQUARE FEET SHOWN IN THE PROSPECTUS. YOU STATE THAT THIS ADDITIONAL AREA IS NECESSARY TO PROVIDE FOR ADDITIONAL SPACE REQUIREMENTS FOR THE POST OFFICE DEPARTMENT, DETERMINED TO BE NECESSARY AFTER SENATE AND HOUSE COMMITTEES APPROVED THE PROJECT AND THAT IN YOUR JUDGMENT, THIS RELATIVELY SMALL INCREASE IN THE GROSS AREA OF THE BUILDING IS NOT SUFFICIENT TO MATERIALLY ALTER THE SCOPE AND CHARACTER OF THE PROJECT AS APPROVED.

ALSO, YOU STATE THAT AT THE TIME THE PROSPECTUS, INCLUDING THE ESTIMATES, WAS PREPARED, IT WAS CONTEMPLATED THAT THE BUILDING WOULD BE A BRICK FACED, STONE TRIMMED STRUCTURE OF CONVENTIONAL DESIGN. YOU STATE, HOWEVER, THAT LOCAL OPINION, EMPHATICALLY EXPRESSED DURING THE DESIGN STATE, NECESSITATED THAT THE DESIGN BE CHANGED TO INCLUDE A COLONIAL FACADE SO AS TO CONFORM, IN OUTWARD APPEARANCE, WITH SURROUNDING BUILDINGS IN THE TOWN AS TO ARCHITECTURAL FEATURES. YOU ASSERT THAT IT IS ESTIMATED THAT THIS CHANGE IN THE FACADE HAS ADDED APPROXIMATELY $19,000 TO THE CONSTRUCTION COST. YOU EXPRESS THE VIEW, HOWEVER, THAT THE BUILDING AS DESIGNED IS ENCOMPASSED IN THE DESCRIPTION OF THE IMPROVEMENT AS SET FORTH IN THE PROSPECTUS AND THAT THE CHANGE IN FACADE DID NOT ALTER THE SCOPE OR CHARACTER OF THE PROJECT AS APPROVED.

AS A FURTHER ARGUMENT THAT IN THE EVENT OF AN AWARD OF A CONTRACT THE ACTUAL CONSTRUCTION COST OF $508,000 AS SHOWN IN THE ABOVE COMPARISON TABLE WOULD NOT BE AN UNREASONABLE VARIATION FROM THE ESTIMATED CONSTRUCTION COST OF THE PROJECT ($437,000 EXCLUSIVE OF TAXES AND INTEREST) AS SHOWN IN THE PROSPECTUS YOU STATE THAT SINCE THE PROSPECTUS WAS PREPARED IN 1955, CONSTRUCTION COSTS HAVE INCREASED 10.97 PERCENT BASED UPON THE ENGINEERING NEWS RECORD BUILDING COSTS INDEX RESULTING IN A CURRENT COST ESTIMATE OF $520,145, ASSUMING, OF COURSE, THAT THE MAY 1955 ESTIMATE WAS REASONABLY ACCURATE. YOU STATE THAT MEASURED IN THIS MANNER THE ACTUAL CONSTRUCTION BID OF $508,000 IS A VERY FAVORABLE BID.

FINALLY, YOU REFER TO THE FACT THAT THE PROJECT AS APPROVED BY THE TWO COMMITTEES PROVIDED FOR FINANCING OVER A 25-YEAR TERM AND YOU ASSERT THAT IF THE ADMINISTRATION HAD SUCCEEDED IN MARKETING THE PROJECT AT THE ESTIMATED COST AS SHOWN IN THE PROSPECTUS ($472,000 IMPROVEMENT COST AND 4 PERCENT INTEREST), THE TOTAL COST TO THE GOVERNMENT WOULD HAVE AGGREGATED $779,700. ON THE OTHER HAND, YOU ASSERT THAT BY CONTRACTING FOR THE PROJECT AT THE PRICES AND INTEREST RATE BID OVER A 10-YEAR TERM THE TOTAL COST TO THE GOVERNMENT FOR PRINCIPAL, INTEREST AND TAXES (ESTIMATED) WILL AGGREGATE $717,614 THUS REPRESENTING A SAVING OF $62,080 OVER WHAT YOU WOULD HAVE BEEN AUTHORIZED TO EXPEND FOR THE PROJECT AS APPROVED IN THE PROSPECTUS.

FOR THE FOREGOING REASONS IT APPEARS TO BE YOUR VIEW THAT BOTH THE SCOPE AND CHARACTER, TOGETHER WITH THE COST OF THE PROJECT AS NOW PROPOSED, ARE WITHIN A REASONABLE VARIATION OF THE ESTIMATES SET FORTH IN THE APPROVED PROSPECTUS AND THAT, THEREFORE, AN AWARD OF A CONTRACT WOULD BE WITHIN THE SCOPE OF YOUR STATUTORY AUTHORITY AND THE APPROVED PROSPECTUS. IN THAT CONNECTION YOU STATE THAT PURSUANT TO THE REQUIREMENT IN SUBSECTION 411 (D) OF THE ACT, 40 U.S.C. 356 (D) YOU HAVE DETERMINED THAT THE INTEREST RATE OF 4.78 PERCENT AS BID IN THIS INSTANCE WILL PROVIDE A REASONABLE RATE OF INTEREST ON THE OUTSTANDING PRINCIPAL AND THAT PAYMENTS TO BE MADE BY THE UNITED STATES UNDER THE PURCHASE CONTRACT WILL NOT EXCEED THE AMOUNT NECESSARY TO AMORTIZE THE COST OF THE IMPROVEMENTS TO BE CONSTRUCTED.

SECTION 411 (E) OF THE ABOVE PUBLIC BUILDINGS PURCHASE CONTRACT ACT OF 1954, AS AMENDED BY THE ACT OF JULY 9, 1956, 70 STAT. 510, 40 U.S.C. 356 (E), PROVIDES THAT---

NO APPROPRIATIONS SHALL BE MADE FOR PURCHASE CONTRACT PROJECTS WHICH HAVE NOT BEEN APPROVED BY RESOLUTIONS ADOPTED BY THE COMMITTEES ON PUBLIC WORKS OF THE SENATE AND HOUSE OF REPRESENTATIVES, RESPECTIVELY, WITHIN THREE YEARS AFTER THE DATE OF ENACTMENT OF THIS ACT. FOR THE PURPOSE OF SECURING CONSIDERATION OF SAID APPROVAL THE ADMINISTRATOR SHALL TRANSMIT TO EACH SUCH COMMITTEE A PROSPECTUS OF THE PROPOSED PROJECT, INCLUDING (BUT NOT LIMITED TO/---

(2) AN ESTIMATE OF THE MAXIMUM COST OF SITE AND BUILDING TOGETHER WITH THE TERM OF YEARS OVER WHICH PAYMENTS WOULD RUN AND THE MAXIMUM RATE OF INTEREST THAT WOULD BE ACCEPTABLE FOR ANY DEFERRED PART OF SUCH COST;

(8) A STATEMENT IN WRITING BY THE DIRECTOR OF THE BUREAU OF THE BUDGET THAT THE PROJECT IS NECESSARY AND IN CONFORMITY WITH THE POLICY OF THE PRESIDENT. SUCH STATEMENT BY THE DIRECTOR SHALL BE BASED ON BUDGETARY AND RELATED CONSIDERATIONS AND SHALL NOT BE DEEMED TO CONSTITUTE APPROVAL BY THE DIRECTOR OF THE SPECIFIC TERMS OR PROVISIONS OF ANY PROPOSED AGREEMENT OR OF THE SELECTION OF ANY PARTICULAR CONTRACTOR OR LESSOR.

SIMILAR PROVISIONS ARE CONTAINED IN SECTION 202 (G) OF THE POST OFFICE DEPARTMENT PROPERTY ACT OF 1954, AS AMENDED ( TITLE II OF PUBLIC 519), 39 U.S.C. 902 (G). AS INDICATED IN YOUR LETTER, IN THE ABOVE DECISION OF OCTOBER 5, 1956, TO THE POSTMASTER GENERAL, WE CONCLUDED THAT WE WOULD NOT BE REQUIRED TO OBJECT TO AWARDS OF CONTRACTS WHERE THE ESTIMATED PURCHASE PRICE, BASIC ANNUAL PAYMENT AND INTEREST RATE, OR ANY ONE OF THESE FACTORS, EXCEEDED THE MAXIMUM ESTIMATED COST THEREOF AS CONTAINED IN THE PROSPECTUS FORMING THE BASIS OF COMMITTEE APPROVAL, PROVIDED THAT THE VARIATIONS ARE REASONABLE UNDER THE CIRCUMSTANCES AND IN ACCORD WITH THE DETERMINATION OF THE POSTMASTER GENERAL UNDER SECTION 202 (E) OF THE ABOVE POST OFFICE DEPARTMENT ACT OF 1954, PROHIBITING ANY AGREEMENT PROVIDING FOR PAYMENT IN EXCESS OF THE AMOUNT "AS DETERMINED BY THE POSTMASTER GENERAL" TO BE NECESSARY, AMONG OTHER THINGS, TO "PROVIDE A REASONABLE RATE OF INTEREST ON THE OUTSTANDING PRINCIPAL.' ALSO, AS OF PARTICULAR SIGNIFICANCE WE REFERRED TO THE FACTS THAT THE APPLICABLE APPROPRIATION ACT THERE INVOLVED CONTAINED NO LIMITATION AS TO ANY SPECIFIC PROJECT BUT ONLY AN OVER-ALL LIMITATION, THAT THE STATUTE REQUIRES APPROVAL OF THE PROJECT AND NOT THE CONTRACT; AND THAT THE STATUTE MERELY REQUIRES THAT THE PROSPECTUS TO BE SUBMITTED FOR COMMITTEE APPROVAL SHOW ONLY AN ESTIMATE OF COST OF THE SITE AND BUILDING, LEASE PURCHASE TERM AND ACCEPTABLE MAXIMUM RATE OF INTEREST FOR ANY DEFERRED PART OF SUCH COST.

IT SEEMS TO BE OF PARTICULAR SIGNIFICANCE IN THE CASE OF THE ABINGDON PROJECT TO NOTE THAT THE STATEMENT FURNISHED BY THE DIRECTOR OF THE BUREAU OF THE BUDGET PURSUANT TO THE REQUIREMENTS OF THE ABOVE SECTION 411 (E) (8), 40 U.S.C. 356 (E) (8), PRIOR TO THE AMENDMENT OF JULY 9, 1956, WAS GIVEN WITH THE UNDERSTANDING THAT THE TOTAL PROJECT COST OF "$543,210 (INCLUDING $13,210 OF LAND ALREADY ACQUIRED) IS A MAXIMUM FIGURE.' THE ABOVE STATEMENT, TOGETHER WITH THE OTHER DATA SPECIFIED IN SECTION 411 (E) FORMED THE BASIS OF THE COMMITTEE APPROVAL OF THIS PROJECT AND NECESSARILY IS FOR CONSIDERATION IN DETERMINING WHETHER THE CONTRACT MAY BE AWARDED. OF EQUAL SIGNIFICANCE IS THE FACT THAT IN THE HOUSE RESOLUTION OF JULY 29, 1955, IN APPROVING THIS PROJECT AND SEVERAL OTHERS IT IS EXPRESSLY STATED THAT---

* * * THE FOLLOWING LISTED PROJECTS, * * * ARE HEREBY APPROVED SUBJECT TO THE COST LIMITATION SPECIFIED FOR EACH IN SUCH REVISED DESCRIPTIONS AND SET FORTH BELOW:

3-VA-01 POST OFFICE AND COURT HOUSE ABINGDON, VA. $543,210

WHILE AS ABOVE INDICATED SECTION 411 (E) OF THE PUBLIC BUILDINGS ACT MERELY REQUIRES APPROVAL OF THE PROJECT AND NOT THE CONTRACT, SUCH APPROVAL NECESSARILY IS BASED UPON THE DATA IN THE PROSPECTUS FURNISHED THE COMMITTEES AS REQUIRED BY THIS SECTION. IN THIS INSTANCE THE HOUSE COMMITTEE APPROVAL WAS GIVEN "SUBJECT TO THE COST LIMITATION" OF $543,210. WHETHER THE COMMITTEE, IF NOW AUTHORIZED BY LAW, WOULD APPROVE THE PROJECT ON THE BASIS OF $624,939, REPRESENTING AN INCREASE OF $81,729 OR 15 PERCENT OVER THE PREVIOUSLY APPROVED PROJECT COST OF $543,210 IS HIGHLY SPECULATIVE. HAVING REGARD FOR THE FACT THAT A BILL (S.2261) WHICH WAS REFERRED TO THE SENATE COMMITTEE ON PUBLIC WORKS ON JUNE 27, 1957, AND WHICH WAS PASSED BY THE SENATE ON JULY 3, 1957, AFTER YOU PREVIOUSLY HAD INDICATED IN YOUR TESTIMONY BEFORE THE SENATE COMMITTEE AND PUBLIC WORKS THAT A LATITUDE OF 15 PERCENTUM WOULD BE REQUIRED, WOULD ONLY AUTHORIZE AN INCREASE OF "7 PERCENTUM OF THE MAXIMUM COSTS SET FORTH IN THE PROSPECTUS WITHOUT APPROVAL OF SUCH COMMITTEE," WE WOULD NOT BE JUSTIFIED IN AUTHORIZING THE EXECUTION OF THE CONTRACT PROPOSED IN THIS INSTANCE. WHILE IN THE DECISION OF OCTOBER 5, 1956, WE INDICATED THAT WE WOULD NOT OBJECT TO AN UPWARD VARIATION OF THE AMOUNTS APPROVED IN THE PROSPECTUS, SUCH APPROVAL WAS LIMITED TO A REASONABLE VARIATION DEPENDING UPON THE FACTS AND CIRCUMSTANCES IN EACH CASE. IN THIS CASE WE DO NOT BELIEVE THE VARIATION WOULD BE REASONABLE UNDER THE FACTS AND CIRCUMSTANCES HERE INVOLVED. THE FACT THAT THE COMPARISON TABLE SUBMITTED WITH YOUR LETTER INDICATES THAT THE OVER-ALL PROJECT COSTS TO THE GOVERNMENT ($717,620) UNDER THE CONTRACT PROPOSED WOULD BE LESS THAN WOULD HAVE BEEN INCURRED UNDER THE APPROVED PROSPECTUS ($779,700) AS A RESULT OF THE REDUCTION OF THE PERIOD OF AMORTIZATION FROM 25 TO 10 YEARS THEREBY EFFECTING A SAVING IN INTEREST AND TAX COSTS DOES NOT IN OUR OPINION JUSTIFY INCREASING THE CONSTRUCTION COST OF THE PROJECT BY 15 PERCENTUM. TO PERMIT THE SAVINGS IN INTEREST AND TAXES EFFECTED BY REDUCING THE PERIOD OF AMORTIZATION TO BE ADDED TO THE APPROVED PROJECT COST WOULD RESULT IN OBTAINING A MORE EXTENSIVE PROJECT THAN THAT APPROVED BY THE COMMITTEE. ACCORDINGLY, WE DO NOT CONCUR WITH THE CONCLUSION IN YOUR LETTER THAT YOU ARE AUTHORIZED TO PROCEED WITH THE AWARD OF THIS PARTICULAR CONTRACT.