B-136138, JUN. 10, 1958

B-136138: Jun 10, 1958

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GENERAL SERVICES ADMINISTRATION: REFERENCE IS MADE TO YOUR LETTERS OF MAY 13 AND MAY 22. A REVIEW OF THE COST DATA AS SHOWN IN THE COMPARISON TABLES TRANSMITTED WITH YOUR LETTER DISCLOSES THAT IN EACH INSTANCE THE PERCENTAGE INCREASE OF THE ACTUAL COST OVER THE ESTIMATED COST AS TABULATED IN THE PROSPECTUS IS IN EXCESS OF 7 PERCENT. PROVIDED 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 WE HAVE PREVIOUSLY STATED 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.

B-136138, JUN. 10, 1958

TO HONORABLE FRANKLIN FLOETE, ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

REFERENCE IS MADE TO YOUR LETTERS OF MAY 13 AND MAY 22, 1958, WITH ENCLOSURES, REQUESTING TO BE ADVISED WHETHER THE AWARD OF CONTRACTS IN SEVEN LEASE-PURCHASE PROJECTS APPROVED BY THE SENATE AND HOUSE COMMITTEES ON PUBLIC WORKS WOULD BE 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.

YOUR DOUBT AS TO THE PROPRIETY OF AWARDING CONTRACTS INCIDENT TO THE CONSTRUCTION OF THE PROJECTS ARISES BECAUSE OF THE VARIATIONS BETWEEN THE ESTIMATED COSTS AS SHOWN IN THE PROSPECTUSES AND THE ACTUAL COSTS REPRESENTED BY THE LOW FINANCING AND CONSTRUCTION BIDS. A REVIEW OF THE COST DATA AS SHOWN IN THE COMPARISON TABLES TRANSMITTED WITH YOUR LETTER DISCLOSES THAT IN EACH INSTANCE THE PERCENTAGE INCREASE OF THE ACTUAL COST OVER THE ESTIMATED COST AS TABULATED IN THE PROSPECTUS IS IN EXCESS OF 7 PERCENT. THE EXCESS VARIATION FOR EACH PROJECT APPEARS TO BE SUBSTANTIALLY AS FOLLOWS:

TABLE

PROJECT PERCENTAGE INCREASE

CARTHAGE, TENNESSEE 23.496

RONCEVERTE, WEST VIRGINIA 10.644

LAFAYETTE, TENNESSEE 14.215

CAMDEN, ALABAMA 15.766

DAINGERFIELD, TEXAS 16.937

JAMESTOWN, NEW YORK 13.632

LAFAYETTE, LOUISIANA 8.630

AS INDICATED IN YOUR LETTER OF MAY 13, IN OUR 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 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 ADOPTED THE POLICY OF CONSIDERING PERCENTAGE INCREASES IN EXCESS OF 7 PERCENTUM AS BEING UNREASONABLE. AS WE HAVE PREVIOUSLY STATED 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.

WITH RESPECT TO THE PROJECT AT CARTHAGE, TENNESSEE, IT IS POINTED OUT IN YOUR LETTER THAT THE ESTIMATES OF THE MAXIMUM COSTS SET FORTH IN THE PROSPECTUS SHOW A TOTAL ESTIMATED COST OF $272,000 COMPRISING $24,500 FOR ARCHITECTURAL COSTS, $6,000 FOR THE COST OF LAND, AND $241,500 AS THE ESTIMATED COST OF THE IMPROVEMENTS TOGETHER WITH AN ESTIMATED MAXIMUM RATE OF INTEREST OF 4 PERCENT. YOU STATE THAT ADVERTISING FOR FINANCING AND CONSTRUCTION OF THE PROJECT RESULTED IN A LOW INTEREST BID OF 4.38 PERCENT PER ANNUM AND A LOW BID FOR CONSTRUCTION IN THE LUMP-SUM AMOUNT OF $271,000. THE COMPARISON TABLE SHOWS THAT THE ACTUAL COST OF THE PROJECT WILL EXCEED THE ESTIMATED COST BY $63,910, OR AN EXCESS OF 23.496 PERCENT; THAT THE INTEREST RATE IS 0.38 PERCENT OVER THE ESTIMATE; AND THAT THE ANNUAL COST OF PRINCIPAL AND INTEREST WILL EXCEED THE PROSPECTUS ESTIMATE BY $6,206.

YOU STATE THAT IN YOUR VIEW SEVERAL FACTORS ARE FOR CONSIDERATION IN DETERMINING WHETHER THE ACTUAL COSTS OF THE CARTHAGE PROJECT MAY BE REGARDED AS REASONABLE VARIATIONS OF THE PROSPECTUS ESTIMATES. YOU STATE THAT THE BUILDING TO BE CONSTRUCTED WILL PROVIDE APPROXIMATELY 836 GROSS SQUARE FEET OR ABOUT 6 PERCENT AND 642 NET SQUARE FEET OF SPACE LESS THAN WAS ESTIMATED IN THE PROSPECTUS; THAT THIS REDUCTION IN AREA RESULTED FROM ADJUSTING SPACE REQUIREMENTS TO THE DESIGN; AND THAT IN YOUR JUDGMENT THE RELATIVE SMALL DECREASE IN SPACE IS NOT SUFFICIENT TO ALTER THE SCOPE AND CHARACTER OF THE PROJECT AS APPROVED.

WITH RESPECT TO THE INCREASED CONSTRUCTION COSTS YOU STATE THAT IN JUNE 1955 IN ESTIMATING THE COST OF THE PROJECT INCIDENT TO PREPARATION OF THE PROSPECTUS THE ACTUAL COST OF THE CONSTRUCTION OF THE IMPROVEMENTS, EXCLUSIVE OF TAXES AND INTEREST DURING CONSTRUCTION, WAS ESTIMATED AT $226,000; THAT THE ENGINEERING NEWS RECORD BUILDING COSTS INDEX SHOWS THAT SINCE THAT DATE, CONSTRUCTION COSTS HAVE INCREASED 11.47 PERCENT; THAT THE ARCHITECTURAL ENGINEER CONTRACT FOR DESIGN OF THE BUILDING WAS ENTERED INTO ON APRIL 18, 1956; THAT THE PLANS AND SPECIFICATIONS WERE COMPLETED ON NOVEMBER 27, 1957; AND THAT, WHILE INVITATIONS FOR FINANCING WERE ISSUED ON DECEMBER 18, 1957, NO ACCEPTABLE BIDS WERE RECEIVED THUS REQUIRING RENEWAL OF THE INVITATION ON MARCH 13, 1958. YOU STATE THAT UNDER THESE CIRCUMSTANCES THE PROJECT WAS IMPLEMENTED AS EXPEDITIOUSLY AS POSSIBLE AFTER APPROVAL WAS OBTAINED AND THAT OBVIOUSLY THE RISE IN CONSTRUCTION COSTS IS AN ECONOMIC FACTOR OVER WHICH THE ADMINISTRATION HAS NO CONTROL. IN ADDITION TO THE FOREGOING YOU STATE THAT ANOTHER FACTOR WHICH HAS CONTRIBUTED TO THE PERCENTAGE INCREASE IN THE CASE OF THE CARTHAGE PROJECT IS THE FACT THAT SOME OF THE GENERAL EXPENSES NOT INCLUDED IN THE PURCHASE CONTRACT EITHER WERE NOT ANTICIPATED OR TURNED OUT TO BE IN EXCESS OF ANTICIPATED COSTS, RESULTING IN AN OVERAGE OF $13,300 OR APPROXIMATELY 44 PERCENT OF THE ESTIMATED AMOUNT STIPULATED IN THE APPROVED PROSPECTUS FOR SUCH COSTS. IN ADDITION TO THE FOREGOING YOU STATE, IN EFFECT, THAT IF THIS TOTAL EXCESS OF $13,300 PROPERLY COULD BE CHARGED TO THE AMOUNT EARMARKED IN THE PROSPECTUS AS A RESERVE FOR CONTINGENCIES, NAMELY $13,500, THE TOTAL COST OF THE PROJECT WOULD THEREBY BE REDUCED TO $322,610 REPRESENTING AN EXCESS OF $50,610 OVER THE ESTIMATED COST OF THE PROJECT ($272,000) OR A VARIATION OF 18.6 PERCENT.

WE HAVE CAREFULLY CONSIDERED THE VARIOUS FACTORS STATED TO HAVE CONTRIBUTED TO THE INCREASED COSTS INCIDENT TO THE CARTHAGE PROJECT, WHICH FACTORS YOU INDICATE ARE APPLICABLE ALSO TO THE SIX OTHER PROJECTS, BUT WE DO NOT FEEL THEY FURNISH SUFFICIENT JUSTIFICATION FOR DEPARTING FROM OUR PREVIOUSLY ANNOUNCED GENERAL POLICY OF NOT APPROVING PROJECTS INVOLVING PERCENTAGE INCREASES IN EXCESS OF 7 PERCENTUM. ESPECIALLY IS THIS SO SINCE THE MATTER OF INCREASED COSTS OCCURRING AFTER THE TRANSMITTAL OF THE PROSPECTUS TO THE SENATE AND HOUSE COMMITTEES ON PUBLIC WORKS AND OTHER MATTERS AFFECTING LEASE PURCHASE PROJECTS PRESENTLY IS PENDING BEFORE THE CONGRESS. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AWARD OF CONTRACTS IN THESE SEVEN CASES MAY NOT REASONABLY BE CONSIDERED AS WITHIN THE SCOPE OF YOUR AUTHORITY PARTICULARLY SINCE EVEN IF THE PENDING BILL S. 2261 SHOULD BE ENACTED INTO LAW IN ITS PRESENT FORM NO INCREASE WOULD BE AUTHORIZED IN EXCESS OF 7 PERCENTUM. IT IS UNDERSTOOD THAT IN SOME INSTANCES THE SUGGESTION HAS BEEN MADE THAT NEGOTIATIONS WITH THE LOW BIDDERS MIGHT HAVE THE EFFECT OF REDUCING THE COSTS OF THE PROJECT SO THAT THE ACTUAL COSTS WOULD NOT BE IN EXCESS OF 7 PERCENT OF THE MAXIMUM ESTIMATED COSTS AS SHOWN IN THE PROSPECTUSES. IN SUCH EVENT, WE WOULD NOT BE REQUIRED TO OBJECT TO THE EXECUTION OF CONTRACTS IN ANY OF THE ABOVE REFERRED-TO CASES SO LONG AS THE SCOPE AND CHARACTER OF THE PROJECT REMAINS UNCHANGED AND PROVIDED THAT IN THE MEANTIME NO LEGISLATION IS ENACTED SUCH AS CONTAINED IN H.R. 11574 WHICH WOULD PRECLUDE THE USE OF APPROPRIATED FUNDS FOR THE EXECUTION OF LEASE PURCHASE CONTRACTS SUCH AS HERE INVOLVED.

REGARDING YOUR GENERAL QUESTION IN THE NEXT TO LAST PARAGRAPH OF YOUR LETTER OF MAY 13 BECAUSE OF THE PROPOSED LEGISLATION NOW PENDING BEFORE THE CONGRESS AND FOR THE REASONS PREVIOUSLY STATED IN OUR DECISIONS OF MARCH 19, 1958, B-135465, AND APRIL 24, 1958, B-135782, TO YOU, WE WOULD NOT BE JUSTIFIED IN APPROVING A FORMAL FIXED PATTERN OF AUTHORIZED VARIATIONS REGARDLESS OF THE PERTINENT FACTS AND CIRCUMSTANCES IN EACH CASE.