B-136091, MAY 26, 1958

B-136091, MAY 26, 1958

TO HONORABLE FRANKLIN FLOETE, ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

REFERENCE IS MADE TO YOUR LETTER OF MAY 8, 1958, WITH ENCLOSURES, REQUESTING TO BE ADVISED WHETHER WE CONCUR WITH YOUR CONCLUSIONS THAT THE SCOPE, CHARACTER AND COST OF THE PROPOSED LEASE-PURCHASE PROJECT FOR THE CONSTRUCTION OF A POST OFFICE AND COURT HOUSE AT BURLINGTON, VERMONT, ARE WITHIN A REASONABLE VARIATION OF THE ESTIMATES IN THE APPROVED PROSPECTUS AND, THAT THEREFORE, THE AWARD OF THE CONTRACTS IS WITHIN THE SCOPE OF YOUR AUTHORITY UNDER TITLE I OF PUBLIC LAW 519, APPROVED JULY 22, 1954, 68 STAT. 518, AS AMENDED, 40 U.S.C. 356.

THE ESTIMATES OF THE MAXIMUM COSTS SET FORTH IN THE PROSPECTUS SHOW THAT THE TOTAL ESTIMATED COST OF THE PROJECT AS $2,830,000 REPRESENTING $165,000 FOR ARCHITECTURAL, SUPERVISION, ETC., $180,000 FOR LAND AND $2,485,000 AS THE ESTIMATED MAXIMUM COST OF THE IMPROVEMENTS. THE CONTRACT TERM IS SPECIFIED AS 10 TO 25 YEARS AND THE MAXIMUM RATE OF INTEREST IS SPECIFIED AS 4 PERCENT.

YOU STATE THAT ON JANUARY 28, 1958, IN RESPONSE TO INVITATION FOR BIDS FOR FINANCING THE CONSTRUCTION, THE JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, BOSTON, MASSACHUSETTS, SUBMITTED A BID OF 4.574 PERCENT PER ANNUM, BEING THE LOWEST RECEIVED AND THAT ON APRIL 4, 1958, THE FRANCHI CONSTRUCTION COMPANY OF WEST NEWTON, MASSACHUSETTS, SUBMITTED THE LOWEST BID FOR CONSTRUCTION OF THE BUILDING IN THE LUMP SUM AMOUNT OF $2,327,408.

FOR USE IN COMPARING THE ESTIMATED COSTS AS SET FORTH IN THE PROSPECTUS WITH THE ACTUAL COSTS REPRESENTED BY THE LOW BIDS THERE WAS FORWARDED WITH YOUR LETTER A COMPARISON TABLE INDICATING THAT THE ACTUAL COST OF THE PROJECT WILL EXCEED THE ESTIMATED COST AS SHOWN IN THE PROSPECTUS BY $198,100, OR, AN EXCESS OF 7 PERCENT. THE INTEREST RATE IS STATED TO BE 0.574 PERCENT OVER THE ESTIMATED RATE AND THE ANNUAL COST OF PRINCIPAL AND INTEREST IS INDICATED AS EXCEEDING THE ESTIMATED COST THEREOF AS SHOWN IN THE PROSPECTUS BY $11,312. YOU FURTHER STATE THAT THE PRINCIPAL FACTORS WHICH CAUSED THE ACTUAL COSTS TO EXCEED THE ESTIMATED COSTS STATED IN THE APPROVED PROSPECTUS WERE THE LAND AND TAX COST INCREASES. YOU PROPOSE, THEREFORE, TO UTILIZE A PORTION OF THE TOTAL LIMIT OF COST WHICH WAS EARMARKED IN THE APPROVED PROSPECTUS AS A RESERVE FOR CONTINGENCIES TO OFFSET THE HIGHER LAND AND TAX COSTS. THIS WOULD BE ACCOMPLISHED BY REDUCING THE AMOUNT ALLOWED AS A RESERVE FOR CONTINGENCIES (5 PERCENT ROUNDED) UNDER THE ACTUAL COST COLUMN IN THE COMPARISON TABLE TO 4.52694 PERCENT OF THE ACTUAL NET CONSTRUCTION BID PLUS ESTIMATED TAXES AND INTEREST DURING CONSTRUCTION.

AS INDICATED IN YOUR LETTER IN DECISION OF OCTOBER 5, 1956, B 129326, 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 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) (2) OF THE POST OFFICE DEPARTMENT PROPERTY ACT OF 1954, AS AMENDED, 39 U.S.C. 901. FOLLOWING THE EXPIRATION OF PUBLIC LAW 519 ON JULY 22, 1957, AND THE FAVORABLE ACTION TAKEN BY THE SENATE ON S. 2261 WHICH SPECIFICALLY STIPULATES THAT "IN NO EVENT" SHALL THE PERCENTAGE INCREASE IN THE MAXIMUM COSTS AS SET FORTH IN THE PROSPECTUS EXCEED 7 PERCENTUM WITHOUT COMMITTEE APPROVAL, WE HAVE ADOPTED THE POLICY OF NOT APPROVING PROJECTS INVOLVING PERCENTAGE INCREASES IN EXCESS OF 7 PERCENTUM. UNDER THIS POLICY WE WOULD HAVE NO OBJECTION TO AN UPWARD VARIATION IN THE COST OF AN ITEM OR COMBINATION OF ITEMS SO LONG AS THE AGGREGATE UPWARD VARIATION DOES NOT EXCEED 7 PERCENTUM OF THE TOTAL ESTIMATED COSTS AS SHOWN IN THE PROSPECTUS. WE DO NOT BELIEVE, HOWEVER, THAT GENERALLY IT WOULD BE PROPER TO INCREASE THE COST OF AN ITEM OR ITEMS IN EXCESS OF 7 PERCENTUM OF THE TOTAL ESTIMATED COST AS SHOWN IN THE COMMITTEE APPROVED PROSPECTUS AND THEN BRING THE TRANSACTION WITHIN THE 7 PERCENTUM VARIATION RULE BY EITHER ELIMINATING ALTOGETHER OR REDUCING THE COST OF ANOTHER ITEM OR ITEMS. IF THIS WERE PERMITTED IT WOULD BE POSSIBLE TO INCREASE THE CHARACTER AND SCOPE OF THE PROJECT BY INCREASING THE SIZE OR QUALITY OF THE IMPROVEMENT OR BY PURCHASING MORE EXPENSIVE LAND THAN THAT FORMING THE BASIS OF THE COMMITTEES' APPROVAL. FOR EXAMPLE, ASSUME THAT THE COMMITTEES APPROVED A PROJECT BASED UPON A PROSPECTUS SHOWING THE ESTIMATED COST OF THE IMPROVEMENTS AS $1,000,000 AND THE ESTIMATED COST OF LAND AS $300,000. ASSUME FURTHER THAT YOU DECIDE TO ACQUIRE OTHER LESS EXPENSIVE LAND AT A COST OF $100,000 INSTEAD OF THE $300,000 ORIGINALLY ESTIMATED. UNDER THE THEORY ADVANCED IN YOUR LETTER IT WOULD BE POSSIBLE TO USE THE $200,000 SAVED IN ACQUIRING THE LAND FOR THE PURPOSE OF CONSTRUCTING MORE EXTENSIVE OR ELABORATE IMPROVEMENTS THAN CONTAINED IN THE PROJECT AS DESCRIBED IN THE PROSPECTUS FORMING THE BASIS OF THE COMMITTEES' APPROVAL SINCE THERE WOULD BE NO VARIATION IN THE OVER-ALL COST OF THE PROJECT EVEN THOUGH THE COST OF THE IMPROVEMENTS WOULD BE INCREASED 20 PERCENT. THUS, THE SCOPE OF THE PROJECT AS APPROVED BY THE COMMITTEES COULD BE SUBSTANTIALLY ALTERED AND WE DO NOT FEEL THAT THE CONGRESS EVER INTENDED TO PERMIT ANY SUCH RESULT.

AS STATED IN YOUR LETTER AND AS SHOWN IN THE PROSPECTUS THE BASE UPON WHICH THE AMOUNT OF THE RESERVE FOR CONSTRUCTION WAS COMPUTED INCLUDED ELEMENTS OF INTEREST AND TAX COSTS AS WELL AS CONSTRUCTION COSTS. SINCE A PORTION OF THE COST OF THE PROJECT IN EXCESS OF THE 7 PERCENT LIMITATION RULE RESULTED FROM INCREASED COSTS FOR TAXES AND INTEREST IT SEEMS CLEAR THAT THE AMOUNT RESERVED FOR CONTINGENCIES IS AT LEAST APPLICABLE TO THOSE ITEMS. IT IS NOT, HOWEVER, SO CLEAR THAT THE RESERVE FOR CONTINGENCIES PROPERLY MAY BE USED FOR ITEMS OF COSTS OTHER THAN THOSE UPON WHICH THE RESERVE WAS COMPUTED. IT IS RECOGNIZED, HOWEVER, THAT SINCE ALL ITEMS OF COST NECESSARILY ARE BASED UPON ESTIMATES, IT IS NOT UNLIKELY THAT THE ACTUAL COSTS WOULD VARY FROM THOSE ESTIMATES. THEREFORE, IN THIS INSTANCE WE WOULD NOT OBJECT TO THE USE OF THE CONTINGENT RESERVE AS PROPOSED PARTICULARLY, SINCE YOU STATE THAT ADEQUATE ADMINISTRATIVE MEASURES IN THE CONSTRUCTION OF THIS FACILITY WILL BE TAKEN TO PRECLUDE EXPENDITURES FOR CONTINGENCIES IN EXCESS OF THE REDUCED AMOUNT OF $110,195. WITH THIS UNDERSTANDING, WE DO NOT FEEL THAT WE ARE REQUIRED TO OBJECT TO YOUR CONCLUSION THAT THE SCOPE, CHARACTER, AND, COST OF THE PROJECT ARE WITHIN A REASONABLE VARIATION OF THE ESTIMATES IN THE APPROVED PROSPECTUS, AND, THAT THEREFORE, THE AWARD OF THE CONTRACTS IS WITHIN THE SCOPE OF YOUR AUTHORITY UNDER TITLE I OF PUBLIC LAW 519.