B-138335, JULY 9, 1959, 39 COMP. GEN. 11

B-138335: Jul 9, 1959

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ACTUAL COSTS - QUARTERLY COMPUTATIONS WHERE THE METHOD OF COMPUTING QUARTERLY LABOR COSTS UNDER A CONTRACT FOR FURNISHING METALS TO THE GOVERNMENT WAS BASED ON ESTIMATES FOR CERTAIN FRINGE BENEFITS (HOLIDAY PAY. BECAUSE THE ACTUAL COSTS WERE NOT KNOWN UNTIL THE LAST QUARTER OF THE YEAR AND THEN THE DIFFERENCE BETWEEN THE ACTUAL AND ESTIMATED COSTS OF THE FRINGE BENEFITS WAS INCLUDED IN THE FOURTH QUARTER AVERAGE HOURLY LABOR COSTS SO THAT UNDER THE ESCALATION CLAUSE AND DUE TO UNEVEN DELIVERIES BETWEEN QUARTERS THIS METHOD RESULTED IN GREATER OVERALL PAYMENTS BY THE GOVERNMENT. 1959: REFERENCE IS MADE TO YOUR LETTER OF JANUARY 2. - WHICH WAS ENTERED INTO PURSUANT TO THE AUTHORITY CONTAINED IN THE DEFENSE PRODUCTION ACT OF 1950.

B-138335, JULY 9, 1959, 39 COMP. GEN. 11

CONTRACTS - LABOR COSTS - ESTIMATES V. ACTUAL COSTS - QUARTERLY COMPUTATIONS WHERE THE METHOD OF COMPUTING QUARTERLY LABOR COSTS UNDER A CONTRACT FOR FURNISHING METALS TO THE GOVERNMENT WAS BASED ON ESTIMATES FOR CERTAIN FRINGE BENEFITS (HOLIDAY PAY, VACATION PAY AND CHRISTMAS BONUS), BECAUSE THE ACTUAL COSTS WERE NOT KNOWN UNTIL THE LAST QUARTER OF THE YEAR AND THEN THE DIFFERENCE BETWEEN THE ACTUAL AND ESTIMATED COSTS OF THE FRINGE BENEFITS WAS INCLUDED IN THE FOURTH QUARTER AVERAGE HOURLY LABOR COSTS SO THAT UNDER THE ESCALATION CLAUSE AND DUE TO UNEVEN DELIVERIES BETWEEN QUARTERS THIS METHOD RESULTED IN GREATER OVERALL PAYMENTS BY THE GOVERNMENT, NO OBJECTION TO THE USE OF SUCH METHOD BASED ON ESTIMATES NEED BE MADE IN THE ABSENCE OF A PROVISION REQUIRING A UNIFORM BASIS FOR EACH QUARTERLY COMPUTATION.

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, JULY 9, 1959:

REFERENCE IS MADE TO YOUR LETTER OF JANUARY 2, 1959, WITH ENCLOSURES, REQUESTING OUR OPINION CONCERNING THE MANNER IN WHICH ONE OF THE THREE ESCALATION FACTORS PROVIDED IN CONTRACT NO. DMP-80, DATED MAY 29, 1953, WITH INTERNATIONAL NICKEL COMPANY OF CANADA, LIMITED, SHOULD BE APPLIED IN MAKING ADJUSTMENTS IN THE CONTRACT PRICE OF THE METALLIC NICKEL AND COPPER FURNISHED THEREUNDER TO THE UNITED STATES.

UNDER THE CONTRACT--- WHICH WAS ENTERED INTO PURSUANT TO THE AUTHORITY CONTAINED IN THE DEFENSE PRODUCTION ACT OF 1950, 50 U.S.C. APP. 2061--- IT WAS AGREED THAT INCO WOULD FURNISH TO THE GOVERNMENT 120,000,000 POUNDS OF NICKEL AND 100,000,000 POUNDS OF COPPER CONFORMING TO CERTAIN SPECIFICATIONS, TO BE DELIVERED F.O.B. CERTAIN OF THE CONTRACTOR'S PLANTS IN CANADA IN NOT LESS THAN MINIMUM CARLOAD LOTS AT OR BEFORE THE EXPIRATION OF FIVE YEARS AND SEVEN MONTHS FROM THE FIRST DAY OF THE MONTH NEXT SUCCEEDING THE MONTH DURING WHICH THE CONTRACTOR RECEIVED AN EXECUTED COUNTERPART OF THE CONTRACT, AT THE RATE OF AT LEAST 2,000,000 POUNDS A MONTH FOR THE NICKEL AND AT THE RATE OF AT LEAST 1,666,666 POUNDS A MONTH FOR THE COPPER. THE PRICES PER POUND TO BE PAID FOR THE NICKEL AND COPPER, RESPECTIVELY, WERE FIXED BY THE CONTRACT AT 87.70 CENTS ( CANADIAN) AND 27 CENTS ( CANADIAN). OF THOSE PRICES, 78 CENTS OF THE PRICE FOR NICKEL AND 20 CENTS OF THE PRICE FOR COPPER WAS MADE SUBJECT TO ESCALATION UPWARD OR DOWNWARD ON THE BASIS OF THREE FACTORS, ONLY ONE OF WHICH HAS BECOME THE SUBJECT OF DISPUTE BETWEEN GSA AND INCO. THAT FACTOR IS CONTAINED IN ARTICLE V-B OF THE CONTRACT, WHICH IS AS FOLLOWS:

ONE-THIRD OF THE ABOVE 78 CENTS OR 20 CENTS, AS THE CASE MAY BE, SHALL BE ADJUSTED TO REFLECT THE PERCENTAGE INCREASE OR DECREASE OF (1) THE CONTRACTOR'S AVERAGE LABOR COSTS PER MAN HOUR ON ITS OVERALL OPERATIONS FOR THE CALENDAR QUARTER NEXT PRECEDING THE CALENDAR QUARTER IMMEDIATELY PRECEDING THE CALENDAR QUARTER IN WHICH SAID DELIVERY IS MADE, ABOVE OR BELOW (2) SAID AVERAGE LABOR COSTS PER MAN HOUR FOR THE LAST CALENDAR QUARTER OF 1952. THE CONTRACTOR'S AVERAGE LABOR COSTS PER MAN HOUR SHALL BE THE COSTS IN CANADIAN CURRENCY WITH RESPECT TO HOURLY-PAID EMPLOYEES SPREAD OVER THE HOURS WORKED BY SAID EMPLOYEES, AND SHALL INCLUDE BASIC WAGES, PREMIUM PAY, PRODUCTION AND OTHER BONUSES, HOLIDAYS AND VACATIONS, PENSION PLANS, GOVERNMENT SOCIAL SECURITY OR INSURANCE OR BENEFIT SCHEMES, WORKMEN'S COMPENSATION AND UNEMPLOYMENT INSURANCE, MEDICAL AND HOSPITALIZATION SERVICE, AND OTHER COSTS WITH RESPECT TO SAID EMPLOYEES. THE CONTRACTOR'S OVERALL OPERATIONS SHALL MEAN THE ENTIRE OPERATIONS OF ITS MINING, SMELTING AND COPPER REFINING DIVISIONS IN THE SUDBURY DISTRICT AND OF ITS NICKEL REFINING DIVISION AT PORT COLBORNE. SAID AVERAGE LABOR COSTS PER MAN HOUR FOR THE LAST CALENDAR QUARTER OF 1952 WERE $2.161.

THE CONTRACTOR SHALL FURNISH THE GOVERNMENT, WITHIN THREE (3) MONTHS AFTER THE CLOSE OF EACH CALENDAR QUARTER WHILE THIS CONTRACT IS IN FORCE, WITH A STATEMENT SHOWING THE CONTRACTOR'S AVERAGE LABOR COST PER MAN HOUR ON ITS OVERALL OPERATIONS FOR SAID CALENDAR QUARTER, AND SHALL WITHIN THREE (3) MONTHS AFTER THIS CONTRACT BECOMES EFFECTIVE, FURNISH THE GOVERNMENT WITH A STATEMENT, CERTIFIED BY THE FIRM OF INDEPENDENT PUBLIC ACCOUNTANTS WHICH AUDITS ITS BOOKS, CONFIRMING ITS SAID COST FOR THE LAST QUARTER OF 1952. THEREAFTER, THE STATEMENT FOR THE LAST QUARTER IN EACH CALENDAR YEAR SHALL BE SO CERTIFIED, AND AT THE SAME TIME, THE STATEMENTS WITH RESPECT TO THE THREE PREVIOUS CALENDAR QUARTERS SHALL ALSO BE SO CERTIFIED.

HOWEVER, IT WAS PROVIDED IN PARAGRAPH E OF ARTICLE V THAT NO CHANGE WAS TO BE MADE IN THE PRICES BECAUSE OF ESCALATION UNLESS THE TOTAL OF THE THREE ESCALATION FACTORS INDICATED A CHANGE OF ONE-HALF CENT OR MORE FROM THE PRICE FOR THE PRECEDING QUARTER FOR THE PARTICULAR METAL INVOLVED.

IN ARTICLE VI-A OF THE CONTRACT, IT WAS PROVIDED THAT PAYMENT FOR EACH LOT OF METAL DELIVERED THEREUNDER WAS TO BE MADE PROMPTLY UPON THE PRESENTATION TO THE GOVERNMENT OF INCO'S PROPERLY CERTIFIED INVOICE SATISFACTORY TO THE GOVERNMENT, TOGETHER WITH CERTAIN OTHER DOCUMENTS NOT HERE MATERIAL.

IT APPEARS THAT INCO HAS MADE PERIODIC DELIVERIES UNDER THE CONTRACT AS REQUIRED AND THAT THE GOVERNMENT HAS PAID FOR THE DELIVERIES AS MADE AT UNIT PRICES DETERMINED IN ACCORDANCE WITH THE ESCALATION PROVISIONS OF THE CONTRACT WHERE THE GOVERNING FACTORS WERE FOR APPLICATION. CERTAIN QUANTITIES OF NICKEL OTHERWISE DELIVERABLE TO THE GOVERNMENT UNDER THE CONTRACT HAVE BEEN OFFERED FOR SALE AND DELIVERED TO PRIVATE CONSUMERS PURSUANT TO AUTHORIZATIONS OF GSA, IN ORDER TO DIVERT THE METAL TO UNITED STATES INDUSTRY, IN ACCORDANCE WITH INSTRUCTIONS RECEIVED FROM THE OFFICE OF DEFENSE MOBILIZATION, NOW THE OFFICE OF CIVIL AND DEFENSE MOBILIZATION.

IN DETERMINING THE AVERAGE HOURLY LABOR COSTS FOR THE FOURTH QUARTER OF 1952, THE BASE QUARTER, INCO HAD AVAILABLE THE ACTUAL LABOR COSTS FOR THE ENTIRE CALENDAR YEAR AND USED THESE ACTUAL COSTS TO COMPUTE THE AMOUNT OF THE AVERAGE HOURLY LABOR COSTS FOR THE BASE PERIOD. HOWEVER, SUBSEQUENT COMPUTATIONS WERE TO BE MADE QUARTERLY UNDER THE CONTRACT, AND SINCE ACTUAL FIGURES FOR CERTAIN FRINGE BENEFITS (HOLIDAY PAY, VACATION PAY AND CHRISTMAS BONUS) WERE ONLY DETERMINABLE AT THE END OF THE YEAR, INCO USED ESTIMATES IN THE FIRST THREE QUARTERLY COMPUTATIONS EACH YEAR. WHEN ACTUAL COSTS FOR THESE FRINGE BENEFITS BECAME KNOWN AFTER THE END OF THE YEAR, INCO DETERMINED THE DIFFERENCE BETWEEN THE COST OF THESE BENEFITS AS ESTIMATED FOR THE PRIOR THREE QUARTERLY COMPUTATIONS AND THE ACTUAL COSTS FOR THE YEAR AND INCLUDED THIS DIFFERENCE AS THE COST OF THE FRINGE BENEFITS INCLUDED IN THE FOURTH QUARTER AVERAGE HOURLY LABOR COSTS. DELIVERIES HAD BEEN UNIFORM IN EACH QUARTER, AND THERE HAD BEEN NO OTHER COMPLICATING FACTORS SUCH AS THE OTHER TWO BASES FOR ESCALATION AND THE ONE-HALF CENT LIMITATION, INCO'S METHOD OF ADJUSTING THE FOURTH QUARTER COMPUTATION WOULD HAVE HAD NO EFFECT ON THE PRICES PAID BY THE GOVERNMENT. IN PRACTICE, HOWEVER, BECAUSE OF THE UNEVEN DELIVERIES BETWEEN QUARTERS AND THE OTHER COMPLICATING FACTORS, INCO'S METHOD OF COMPUTATION RESULTED IN GREATER OVERALL PAYMENTS BY THE GOVERNMENT THAN WOULD HAVE BEEN THE CASE IF THE ACTUAL FRINGE BENEFIT COSTS HAD BEEN USED IN MAKING THE QUARTERLY AVERAGE HOURLY LABOR COST COMPUTATIONS. THE TOTAL AMOUNT IN CONNECTION WITH DELIVERIES WHICH HAD BEEN MADE UNDER THE CONTRACT UP TO AND INCLUDING JUNE 30, 1956, IS STATED TO BE APPROXIMATELY $113,765, I GIVING EFFECT TO AN ADJUSTMENT IN THE FOURTH QUARTER, 1952,"BASE RATE" OF AVERAGE HOURLY LABOR COSTS, REFERRED TO BELOW.

IN THE NEGOTIATIONS WHICH HAVE TAKEN PLACE BETWEEN YOUR AGENCY AND INCO WITH REFERENCE TO THE QUESTION OF THE LATTER'S LIABILITY TO REFUND THIS SUM, GSA HAS TAKEN THE POSITION THAT ALL QUARTERLY COMPUTATIONS OF AVERAGE HOURLY LABOR COSTS MUST BE COMPUTED ON THE SAME BASIS AS THE BASE QUARTER COMPUTATION, WHEREAS INCO ARGUES THAT THERE IS NO CONTRACTUAL REQUIREMENT TO THAT EFFECT, AND THAT IT MUST, OF NECESSITY, USE ESTIMATES FOR THE FIRST THREE QUARTERLY COMPUTATIONS OF COST EACH YEAR. THE ISSUE AROSE AFTER GSA CONDUCTED AN AUDIT OF THE CONTRACTOR'S RECORDS. DURING THE AUDIT, IT WAS NOTED THAT THE AVERAGE HOURLY LABOR COST FOR THE BASE QUARTER (FOURTH QUARTER OF 1952) HAD BEEN COMPUTED ON A DIFFERENT BASIS FROM THAT USED FOR ALL SUBSEQUENT CONTRACT QUARTERS, AND IN ADDITION AN ERROR HAD BEEN MADE IN COMPUTING THE BASE QUARTER FIGURE. GSA OBJECTED TO THE DIFFERENT METHODS USED TO COMPUTE THE BASE QUARTER'S LABOR COST AND THAT OF THE SUBSEQUENT CALENDAR QUARTERS AND TO THE ACTUAL AMOUNT OF THE BASE PERIOD LABOR RATE. THE CONTRACTOR AGREED TO ADJUST THE BASE RATE FROM $2.161 TO $2.163 PER HOUR. HOWEVER, IT REFUSED TO ADJUST THE QUARTERLY STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1954, THROUGH JUNE 30, 1956, TO MAKE THEM CONFORM TO THE SAME METHOD OF COMPUTATION AS USED FOR THE BASE PERIOD, OR TO REFUND ANY PART OF THE REFERRED-TO SUM OF $113,765.

SINCE THE ADJUSTMENT IN THE STIPULATED CONTRACT BASE RATE FROM $2.161 TO $2.163 IS A MATTER WHICH HAS BEEN SETTLED SATISFACTORILY BY THE PARTIES TO THE CONTRACT, IT WILL NOT BE NECESSARY TO DISCUSS IT HERE. IT IS POSSIBLE TO INFER FROM YOUR LETTER AND INTERNATIONAL NICKEL COMPANY'S LETTER OF FEBRUARY 27, 1958, THAT THE BASE RATE WAS ORIGINALLY COMPUTED BY INCO IN THE BASIS OF ACTUAL COST FIGURES. HOWEVER, OUR CIVIL ACCOUNTING AND AUDITING DIVISION REPORTS THAT, BASED UPON ITS REVIEW OF GSA INTERNAL AUDIT WORK PAPERS, IT WOULD APPEAR THAT GSA INITIATED THE NEGOTIATIONS WHICH LED TO THE ADJUSTMENT OF THE BASE RATE BECAUSE THE ORIGINAL RATE WAS BASED IN PART ON ESTIMATED FIGURES. INCL ACCOUNTING PERSONNEL APPARENTLY USED AN ADJUSTMENT FACTOR TO CORRECT PRIOR ESTIMATES IN COMPUTING THE BASE RATE RATHER THAN THE ACTUAL, DETERMINABLE, FOURTH QUARTER, 1952, FIGURES. WHEN GSA BROUGHT THIS FINDING TO THE ATTENTION OF INCO, THE CONTRACTOR AGREED THAT IT SHOULD HAVE USED THE ACTUAL COSTS TO DETERMINE THE BASE RATE AND AGREED TO ADJUST THE BASE RATE STIPULATED IN THE CONTRACT AND TO REFUND ABOUT $19,000. THE BASE RATE WAS CHANGED FOR PERIODS SUBSEQUENT TO DECEMBER 31, 1956; HOWEVER, THE REFUND WAS NOT MADE PENDING RESOLUTION OF THE PROBLEM IN DISPUTE.

IN YOUR PRESENT LETTER, YOU STATE, THAT, IN THE OPINION OF YOUR AGENCY, A CREDIT IS DUE GSA FROM INCO FOR OVERPAYMENTS UNDER THE THE CONTRACT TOTALING $132,765, CANADIAN (WHICH INCLUDES THE AFORESAID SUM OF ABOUT $19,000 RESULTING FROM THE REFERRED-TO ADJUSTMENT IN THE FOURTH QUARTER, 1952, BASE RATE), IN CONNECTION WITH DELIVERIES MADE PRIOR TO JUNE 30, 1956, AND THAT GSA IS ENTITLED TO HAVE THE PRICES FOR SUBSEQUENT DELIVERIES MADE UNDER THE CONTRACT "SIMILARLY ADJUSTED.' AS INDICATED ABOVE, THE CONTRACTOR HAS ACKNOWLEDGED LIABILITY FOR, AND HAS AGREED TO REFUND, THAT PART OF THE SUM OF $132,765 WHICH REPRESENTS THE $19,000 ITEM, AND THEREFORE THE PRESENT DECISION WILL BE CONFINED TO THE QUESTION OF WHETHER OR NOT THE CONTRACTOR MAY BE SAID TO BE LIABLE TO THE GOVERNMENT FOR REFUND OF THE BALANCE THEREOF (APPROXIMATELY $113,765), REPRESENTING THE SO-CALLED OVERPAYMENTS WHICH RESULTED FROM THE MANNER IN WHICH THE CONTRACTOR'S AVERAGE HOURLY LABOR COSTS WERE COMPUTED WITH RESPECT TO FRINGE BENEFIT PAYMENTS TO EMPLOYEES.

IN YOUR LETTER, YOU TAKE THE POSITION THAT THE CONTRACTOR SHOULD ADJUST THE FIRST THREE QUARTERLY STATEMENTS FOR EACH YEAR TO REFLECT ACTUAL COSTS WHEN SUCH COSTS ARE DETERMINABLE, RATHER THAN ADJUST THE FOURTH QUARTER STATEMENT FOR PREVIOUS ESTIMATING ERRORS. IN SUPPORT OF THIS POSITION, YOU STATE THAT TO COMPUTE THE BASE RATE ON THE BASIS OF ACTUAL COSTS AND SUBSEQUENT RATES, BASED ON ESTIMATED OR ADJUSTED COSTS, DISTORTS THE ESCALATION FACTOR AND THAT ALL AVERAGE HOURLY LABOR COSTS SHOULD BE COMPUTED ON THE SAME BASIS. IN THIS CONNECTION, YOU CONTEND THAT SINCE ACTUAL COSTS ARE NOT DETERMINABLE UNTIL AFTER THE YEAR IS ENDED, THE FIRST THREE QUARTERLY STATEMENTS OF COSTS MUST NECESSARILY BE CONSIDERED PROVISIONAL. YOU CONCEDE THAT THE QUARTERLY STATEMENTS WHICH INCO FURNISHED PURSUANT TO THE PROVISIONS OF ARTICLE V B OF THE CONTRACT WERE PROPERLY PREPARED ON THE BASIS OF INFORMATION AVAILABLE AT THE TIME OF PREPARATION, BUT YOU POINT OUT THAT NONE OF THE FOUR QUARTERLY COMPUTATIONS ARE IN THEMSELVES STRICTLY CORRECT, EXCEPT POSSIBLY THROUGH COINCIDENCE, BUT THAT THEY ARE CORRECT ONLY WHEN CONSIDERED ON AN ANNUAL BASIS AS WHOLE. YOU DRAW ATTENTION TO THE FACT THAT THE CONTRACT PROVIDES FOR THE CALENDAR QUARTER RATHER THAN THE CALENDAR YEAR AS A UNIT OF ESCALATION MEASUREMENT, AND YOU CONCLUDE, IN EFFECT, THAT WHILE THE CONTRACT DOES NOT SPECIFICALLY PROVIDE FOR A REVISION OF THE COMPUTATIONS, THE CONTRACTOR HAS THE SAME IMPLIED DUTY TO CORRECT THE INCORRECT QUARTERLY COMPUTATIONS AS IT HAD TO CORRECT ITS BASE PERIOD COMPUTATION. AN ILLUSTRATION OF THE EFFECT ON CONTRACT PRICES OF USING INCO'S METHOD OF COMPUTING AVERAGE HOURLY LABOR COSTS, RATHER THAN THAT CONTENDED FOR BY GSA, IS SET FORTH ON PAGE 7 OF YOUR LETTER.

THE BASE RATE OF $2.163, AS ADJUSTED, WAS COMPUTED ON THE BASIS OF AVERAGE HOURLY LABOR COSTS INCURRED DURING THE FINAL QUARTER OF A YEAR (FOURTH QUARTER OF 1952), WHEN ACTUAL COSTS WITH RESPECT TO HOLIDAY PAY, VACATION PAY AND CHRISTMAS BONUS PAYMENTS TO THE CONTRACTOR'S EMPLOYEES WERE DETERMINABLE, WHEREAS IT IS ADMITTED IN YOUR LETTER THAT "THE COSTS TO INCO IN RESPECT OF HOLIDAYS, VACATIONS, AND A BONUS OF $25 TO EACH EMPLOYEE ON THE PAYROLL AT CHRISTMAS (WHICH IS ACCEPTED AS AN ELEMENT OF AVERAGE LABOR COSTS PER MAN-HOUR) ARE NECESSARILY ESTIMATED FOR EACH OF THE THREE CALENDAR QUARTERS ON THE BASIS OF THE BEST INFORMATION AVAILABLE AT THE TIME THE ESTIMATES ARE MADE.' ( ITALICS SUPPLIED.) IN OTHER WORDS, WHILE IT WAS POSSIBLE TO COMPUTE THE BASE RATE ON THE BASIS OF ACTUAL COSTS BECAUSE A FINAL QUARTER PERIOD OF A YEAR WAS INVOLVED, IT WOULD NOT HAVE BEEN POSSIBLE FOR SUBSEQUENT YEARS--- TO BE CALCULATED ON THE BASIS OF ACTUAL COSTS INSOFAR AS THE EXPENSE RELATED TO FRINGE BENEFITS PAID TO EMPLOYEES WAS CONCERNED BECAUSE THE ITEMS OF EXPENSE ARE OF SUCH A NATURE THAT THEY ARE NOT DEFINITELY DETERMINABLE UNTIL THE END OF THE YEAR. THAT A CONTRACTOR MAY NOT BE REQUIRED TO COMPUTE COST STATEMENTS FURNISHED PURSUANT TO AN ESCALATION PROVISION SUCH AS HERE INVOLVED ON THE IDENTICAL BASIS UPON WHICH THE BASE QUARTER RATE WAS COMPUTED WHERE THE FACTORS GOVERNING THE DETERMINATION OF A PARTICULAR ITEM OF EXPENSE ARE NOT THE SAME FOR THE DIFFERENT ACCOUNTING PERIODS INVOLVED WAS RECOGNIZED BY GSA'S BOARD OF REVIEW IN AN OPINION AND RECOMMENDATION SUBMITTED TO YOU IN CONNECTION WITH THE APPEAL OF THE DOW CHEMICAL COMPANY, DOCKET NO. 323, DATED JULY 3, 1957. THE BOARD'S OPINION AND RECOMMENDATION WAS TRANSMITTED TO US BY YOUR LETTER OF SEPTEMBER 5, 1957, WITH A REQUEST FOR DECISION ON THE LEGAL ISSUE INVOLVED, AND WE EXPRESSED OUR APPROVAL OF THE POSITION TAKEN BY THE BOARD IN THE MATTER IN OUR LETTER OF SEPTEMBER 23, 1957, B-133695, TO YOU.

MOREOVER, IN OUR OPINION NO BASIS EXISTS FOR CONCLUDING THAT THE PARTIES CONTEMPLATED THAT THE QUARTERLY STATEMENTS OF THE CONTRACTOR'S AVERAGE HOURLY LABOR COSTS (AS WELL AS ITS INVOICES) WOULD BE REVISED AT THE YEAR END ON THE BASIS OF DIFFERENCES THEN DETERMINED TO EXIST BETWEEN THE ESTIMATED AMOUNTS FOR FRINGE BENEFITS WHICH HAD BEEN USED IN THEIR COMPUTATION AND THE ACTUAL COSTS INCURRED. THE COMPUTATIONS ON WHICH AN ESCALATION OF PRICES UNDER THE CONTRACT DEPENDED CLEARLY WERE INTENDED TO BE MADE CURRENTLY, ON A QUARTERLY BASIS. DELIVERIES UNDER THE CONTRACT WERE REQUIRED TO BE MADE MONTHLY AND PAYMENT FOR EACH LOT OF METAL DELIVERED THEREUNDER WAS TO BE MADE PROMPTLY UPON THE PRESENTATION TO THE GOVERNMENT OF INCO'S PROPERLY CERTIFIED INVOICE SATISFACTORY TO THE GOVERNMENT. AS POINTED OUT IN INCO'S LETTER OF FEBRUARY 27, 1958, TO YOUR AGENCY, SETTING FORTH ITS POSITION IN THE MATTER, ARTICLE V OF THE CONTRACT APPEARS TO HAVE BEEN DRAWN WITH THE VIEW TO AVOIDING, SO FAR AS PRACTICABLE, ANY OCCASION TO ADJUST INVOICES ONCE RENDERED. IT SPECIFIES THREE ESCALATION FACTORS. TWO OF THE FACTORS, WHICH ARE DEALT WITH IN PARAGRAPHS A AND C, ARE CONCERNED WITH CHANGES IN INDICES PUBLISHED BY THE CANADIAN DOMINION BUREAU OF STATISTICS. THE THIRD FACTOR, WHICH IS DEALT WITH IN PARAGRAPH B, HAS TO DO WITH CHANGES IN THE CONTRACTOR'S QUARTERLY AVERAGE LABOR COSTS. PARAGRAPH D PROVIDES WITH RESPECT TO THE PUBLISHED INDICES THAT A DETERMINATION INITIALLY PUBLISHED SHALL STAND UNLESS UPON SUBSEQUENT REVISION AND REPUBLICATION IT IS CHANGED BY MORE THAN ONE PERCENT. IN THE SAME SPIRIT, PARAGRAPH E PROVIDES THAT THE PRICES FOR ANY CALENDAR QUARTER SHALL REMAIN THE SAME AS THOSE FOR THE PRECEDING QUARTER UNLESS THE ESCALATION FACTORS WORK A CHANGE OF AT LEAST ONE-HALF CENT PER POUND IN CONTRACT PRICES.

IN ORDER TO COMPLY WITH THE TERMS OF ARTICLE V-B, THE STATEMENTS SHOWING THE CONTRACTOR'S AVERAGE HOURLY LABOR COSTS HAD TO BE SUBMITTED ON A QUARTERLY BASIS, WHEN, WITH REFERENCE TO THE FIRST THREE QUARTERS OF A PARTICULAR YEAR, AT LEAST, IT WAS IMPOSSIBLE TO DETERMINE THE CONTRACTOR'S ACTUAL COSTS OF LABOR INSOFAR AS THE FRINGE BENEFITS PAID TO EMPLOYEES WERE CONCERNED. UNDER THESE CIRCUMSTANCES, THE ONLY REASONABLE INTERPRETATION TO PLACE UPON THE ARTICLE IS THAT THE PARTIES INTENDED THAT SUCH ELEMENT OF THE LABOR COSTS WOULD BE COMPUTED UPON AN ESTIMATED, OR ACCRUAL, BASIS, WHICH IS IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICES, A FACT WHICH IS ADMITTED BY YOUR AGENCY. ALSO, SEE UNITED STATES V. ANDERSON ET AL., 269 U.S. 422; SCHUESSLER V. COMMISSIONER OF INTERNAL REVENUE, 230 F.2D 722. IN THIS CONNECTION, OUR CIVIL ACCOUNTING AND AUDITING DIVISION REPORTS THAT THERE IS NO INDICATION IN THE GSA AUDIT WORK PAPERS THAT INCO'S ESTIMATES WERE NOT SOUND AT THE TIME THEY WERE MADE, NOR IS THERE A CONSISTENT PATTERN OF OVER-ESTIMATES OF COST DURING THE FIRST THREE QUARTERS OF EACH YEAR AND A CORRESPONDING ADJUSTMENT DOWNWARD OF THE FOURTH QUARTER COSTS TO COMPENSATE FOR THE OVERESTIMATES.

UNDER THE ABOVE CIRCUMSTANCES, THERE WOULD APPEAR TO BE NO LEGAL BASIS FOR REQUIRING THE CONTRACTOR TO REFUND ANY PART OF THE $113,765 INVOLVED.

IN ORDER THAT YOU MAY HAVE THE SAME TO FURNISH TO INTERNATIONAL NICKEL COMPANY, AN EXTRA COPY OF THE PRESENT DECISION IS ENCLOSED. ALSO, THE ENCLOSURES TRANSMITTED WITH YOUR LETTER ARE RETURNED.