B-139417, APR. 26, 1960

B-139417, APR. 26, 1960

TO MAJOR M. J. MOSBY, USAF, ACCOUNTING AND DISBURSING OFFICER:

BY LETTER DATED MARCH 7, 1960, FROM THE OFFICE OF THE SECRETARY OF THE AIR FORCE, THERE WAS FORWARDED TO OUR OFFICE YOUR LETTER OF FEBRUARY 20, 1959, WITH ENCLOSURES, REQUESTING AN ADVANCE DECISION AS TO THE PROPRIETY OF MAKING PAYMENT ON A VOUCHER IN THE AMOUNT OF $353,818.39, COVERING A CLAIM OF THE REPUBLIC AVIATION CORPORATION, FARMINGDALE, LONG ISLAND, NEW YORK, UNDER SUPPLEMENTAL AGREEMENTS NOS. 20 AND 21 TO CONTRACT NO. AF 33/600/22708, DATED OCTOBER 27, 1952.

UNDER THE TERMS OF THE CONTRACT, THE GOVERNMENT PROPOSED TO MAKE CALLS FOR DELIVERY OF ITEMS OF MISCELLANEOUS ASSEMBLIES, KITS, DATA AND SPARE PARTS FOR INCORPORATION IN OR TO BE USED IN CONNECTION WITH F-84 SERIES AIRCRAFT. AS A GENERAL RULE, EXHIBITS OF THE ITEMS ORDERED, SHOWING ESTIMATED COSTS AND PROPOSED PRICES, WERE TO BE PREPARED AND SUBMITTED BY THE CONTRACTOR ON OR BEFORE THE EXPIRATION OF 90 DAYS AFTER RECEIPT OF EACH CALL AND SUCH EXHIBITS WERE REQUIRED TO BE APPROVED IN WRITING BY THE CONTRACTING OFFICER. THE PRICES ESTABLISHED IN THE APPROVED EXHIBITS WERE TO BE SUBJECT TO ADJUSTMENT UPON COMPLETION OF TERMINATION OF THE CONTRACT IN ACCORDANCE WITH THE CLAUSE OF THE CONTRACT, ENTITLED "PRICE REDETERMINATION.'

THE PRICE-REDETERMINATION CLAUSE HAD THE EFFECT OF MAKING THE CONTRACT ONE OF AN INCENTIVE TYPE, WITH THE GOVERNMENT GUARANTEEING THAT THE CONTRACTOR WOULD BE REIMBURSED FOR ALL COSTS OF PERFORMANCE NOT IN EXCESS OF 115 PERCENT OF THE TARGET PRICE ESTABLISHED IN THE EXHIBITS PREVIOUSLY APPROVED BY THE CONTRACTING OFFICER. SUBJECT TO SUCH LIMITATION, THE TOTAL REDETERMINED PRICE WAS TO BE COMPUTED BY ADDING TO THE TOTAL COST OF PERFORMANCE AN ALLOWANCE FOR PROFIT, REPRESENTING 8.26 PERCENT OF THE TARGET PRICE, AND BY ADDING OR DEDUCTING 5 PERCENT OF THE DIFFERENCE BETWEEN THE ACTUAL AND TARGET COSTS. THE CONTRACTOR WOULD BE ENTITLED TO THE 5 PERCENT INCREASE IF THE ACTUAL COST WERE LESS THAN THE TARGET COST, BUT WOULD BE ASSESSED 5 PERCENT OF THE DIFFERENCE BETWEEN SUCH COSTS IF THE ACTUAL COST EXCEEDED THE TARGET COST.

SUPPLEMENTAL AGREEMENT NO. 20 SETS FORTH THAT THE PARTIES HAVE NEGOTIATED AND AGREED UPON A REVISED TOTAL CONTRACT PRICE OF $10,742, 205 AND SUPPLEMENTAL AGREEMENT NO. 21 WAS ENTERED INTO FOR THE PURPOSE OF INDICATING THAT THE CORRECT BALANCE DUE THE CONTRACTOR IS $353,818.39, INSTEAD OF THE SUM OF $352,852.08 APPEARING IN THE "CHANGE IN PRICE" SECTION OF SUPPLEMENTAL AGREEMENT NO. 20.

IN THE COMPUTATION OF THE REVISED TOTAL CONTRACT PRICE THE ACTUAL COST OF PERFORMANCE RELATING TO MOST OF THE DELIVERIES MADE UNDER THE CONTRACT IS STATED AS $9,877,909. THERE WAS ADDED TO THAT FIGURE A TARGET PROFIT OF $848,510 AND DEDUCTED THE AMOUNT OF $18,622 AS A PENALTY OF 5 PERCENT ON THE DIFFERENCE OF $372,440 BETWEEN THE COST OF COMPLETION $49,877,090), AND A TARGET COST OF $9,505,469. THE TOTAL REVISED TARGET PRICE IS SHOWN TO BE $10,707,797 AND THERE WAS ADDED TO THAT AMOUNT THE SUM OF $34,408 WHICH APPEARS TO COVER CERTAIN PURCHASES AS TO WHICH THE ORIGINALLY AGREED UPON TARGET PRICES WERE ACCEPTED BECAUSE THERE HAD NOT BEEN DEVELOPED SUFFICIENT INFORMATION CONCERNING THE CONTRACTOR'S ACTUAL COSTS ON THE ITEMS INVOLVED, OR FOR SOME OTHER APPROPRIATE REASON.

THE RECORD INDICATES THAT THERE WERE NUMEROUS CALLS MADE UNDER THE CONTRACT AND THAT DELIVERIES WERE MADE DURING A PERIOD OF ABOUT 4 YEARS. IT APPEARS THAT THE DETERMINED ACTUAL COST FOR MOST OF THE ITEMS DELIVERED WAS BASED SUBSTANTIALLY UPON THE RESIDENT AUDITOR'S REPORT ON THE CONTRACTOR'S OPERATIONS FROM JULY 1952 THROUGH FEBRUARY 1956, WHICH PROPOSED TO ALLOW $9,874,729 OF CLAIMED COSTS IN THE TOTAL AMOUNT OF $9,945,084. AT THAT TIME THE CONTRACTOR ESTIMATED THAT THE COSTS FOR ITEMS REMAINING TO BE COMPLETED WOULD TOTAL THE SUM OF $3,155.

A PROPOSED UPWARD PRICE REVISION IN THE AMOUNT OF $364,511.08 WAS SUBMITTED FOR LEGAL REVIEW TO THE MOBILE AIR MATERIEL AREA STAFF JUDGE ADVOCATE SOMETIME PRIOR TO NOVEMBER 12, 1957, ON WHICH DATE HE FURNISHED A WRITTEN OPINION, QUESTIONING THE LEGALITY OF THE PROPOSED CONTRACT AMENDMENT BUT SUGGESTING THAT SETTLEMENT ON A QUANTUM MERUIT BASIS WAS NOT PRECLUDED.

THE BASIC PROBLEM IN THE CASE RELATES TO THE FACT THAT IN MANY CASES THE INITIAL OR TARGET PRICES WERE NOT ESTABLISHED WITHIN A REASONABLE TIME PRIOR TO DELIVERY, DUE TO THE FAILURE OF THE CONTRACTOR TO SUBMIT TIMELY EXHIBITS AFTER RECEIPT OF CALLS OR TO DELAYS IN THE CONTRACTING OFFICER'S APPROVAL OF EXHIBITS, INCLUDING THE PRICES STATED THEREON. IF IT SHOULD BE ASSUMED THAT THE ACTUAL COSTS OF PERFORMANCE OR THE APPROXIMATE ACTUAL COSTS WERE KNOWN AT THE TIME OF THE ESTABLISHMENT OF PRICES ON THE ITEMS INVOLVED, WITH SUCH PRICES FOR EACH CALL, THE CONTRACTOR WOULD HAVE BEEN PRACTICALLY GUARANTEED A PROFIT OF 9 PERCENT OF THE ACTUAL COST OF PRODUCING AND DELIVERING THE PARTICULAR ARTICLES. THE QUESTION WAS, THEREFORE, RAISED BY THE STAFF JUDGE ADVOCATE AS TO WHETHER, IN THE NEGOTIATION OF THE INITIAL PRICES FOR ITEMS DELIVERED UNDER A CONSIDERABLE NUMBER OF THE CALLS, THERE WAS A VIOLATION OF THE STATUTORY PROHIBITION AGAINST THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING WHICH, AS RELATED TO MILITARY PROCUREMENTS, IS NOW CONTAINED IN SECTION 2306 (B) OF TITLE 10, UNITED STATES CODE.

THE OFFICE OF THE SECRETARY OF THE AIR FORCE HAS CONSIDERED THE STAFF JUDGE ADVOCATE'S OPINION AND THERE WAS ENCLOSED WITH THE DEPARTMENTAL LETTER OF MARCH 7, 1960, A MEMORANDUM PREPARED BY THE DEPUTY GENERAL COUNSEL OF THE DEPARTMENT OF THE AIR FORCE, EXPRESSING THE VIEW THAT IT WOULD BE LEGALLY JUSTIFIABLE, AND THE MOST PRACTICAL METHOD OF SETTLEMENT, FOR US TO PERMIT PAYMENT UNDER SUPPLEMENTAL AGREEMENTS NOS. 20 AND 21.

PRIOR TO THE TRANSMITTAL OF YOUR REQUEST FOR AN ADVANCE DECISION IN THIS MATTER, A COPY OF THE STAFF JUDGE ADVOCATE'S OPINION DATED NOVEMBER 12, 1957, WAS RECEIVED FROM OUR FIELD OFFICE IN DAYTON, OHIO. AT THAT TIME WE CONSIDERED THAT THERE IS NOTHING ILLEGAL ABOUT THE TERMS SET OUT IN THE CONTRACT AND THAT, IF THE PARTIES DID NOT COMPLY STRICTLY WITH THE PRICING PROVISIONS THEREOF, THE GOVERNMENT NEVERTHELESS WOULD BE OBLIGATED TO PAY FAIR AND REASONABLE PRICES FOR THE EQUIPMENT FURNISHED. OUR AUDITORS HAVE NOT REVIEWED THE SPECIFIC COSTS ALLOWED IN THE SUPPLEMENTAL AGREEMENTS BUT IT APPEARS THAT THE AGREEMENTS WERE NEGOTIATED SUBSTANTIALLY IN ACCORDANCE WITH THE PRICE REDETERMINATION PROVISIONS OF THE CONTRACT. FURTHER, IT APPEARS THAT WE WOULD NOT BE WARRANTED IN CONCLUDING THAT THERE WAS ANY VIOLATION OF THE PRINCIPLE OF THE STATUTORY PROHIBITION AGAINST THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING, IN THE ABSENCE OF CLEAR AND CONVINCING EVIDENCE THAT THE CONTRACTOR'S TARGET COSTS WERE NOT TRUE ESTIMATES BUT WERE BASED UPON ARBITRARY ADJUSTMENTS OF KNOWN COSTS OF PERFORMANCE. NO INFORMATION HAS BEEN DEVELOPED TO SHOW THAT THIS WAS THE SITUATION WITH RESPECT TO THE DELAYS IN THE ESTABLISHMENT OF THE INITIAL PRICES FOR ITEMS DELIVERED UNDER THE CONTRACT. ON THE OTHER HAND, THE MEMORANDUM SUBMITTED BY THE DEPARTMENT OF THE AIR FORCE CONTAINS CERTAIN INFORMATION RELATIVE TO THE CONTRACTOR'S ACCOUNTING PROCEDURES WHICH WOULD TEND TO SUPPORT THE CONCLUSION THAT THE CONTRACTOR DID NOT KNOW WHAT THE ACTUAL COSTS OF PERFORMANCE WERE AT THE TIME OF SUBMITTING THE LATE PRICING EXHIBITS.

ACCORDINGLY, WITH THE RETURN OF THE ENCLOSURES OF YOUR LETTER DATED FEBRUARY 20, 1959, YOU ARE ADVISED THAT PAYMENT OF THE VOUCHER IN THE CLAIMED AMOUNT OF $353,818.39 IS AUTHORIZED.