B-143892, OCT. 31, 1960

B-143892: Oct 31, 1960

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THERE WAS SUBMITTED FOR OUR CONSIDERATION AN INVOICE FOR $1. EACH OF THOSE CONTRACTS WAS NEGOTIATED ON A COST-REIMBURSABLE BASIS. THAT OVERHEAD COSTS WERE TO BE ALLOWED IN AN AMOUNT EQUAL TO 20 PERCENT OF ANNUAL COSTS WITHOUT AUDIT FOR GENERAL OVERHEAD. MOST OF THE TERMS AND CONDITIONS OF THE FORMER CONTRACTS WERE INCORPORATED IN THE CONTRACT OF JANUARY 28. WHICH IS. AS FOLLOWS: "* * * THE CONTRACTOR SHALL NOTIFY THE CONTRACTING OFFICER IN WRITING WHENEVER IT APPEARS TO THE CONTRACTOR THAT THE COST OF COMPLETING THE PERFORMANCE OF THIS CONTRACT WILL EXCEED SAID STATED COST. THE CONTRACTOR SHALL NOT BE OBLIGATED TO INCUR EXPENDITURES IN THE PERFORMANCE OF THE WORK COMTEMPLATED BY THIS CONTRACT IN EXCESS OF THE COST UNLESS AND UNTIL SUCH COST SHALL HAVE BEEN INCREASED BY AMENDMENT OF THE CONTRACT.'.

B-143892, OCT. 31, 1960

TO THE SECRETARY OF THE INTERIOR:

BY LETTER DATED SEPTEMBER 2, 1960, FROM THE AUTHORIZED CERTIFYING OFFICER, FISH AND WILDLIFE SERVICE, BUREAU OF COMMERCIAL FISHERIES, THERE WAS SUBMITTED FOR OUR CONSIDERATION AN INVOICE FOR $1,668.10, PRESENTED BY TULANE UNIVERSITY, NEW ORLEANS, LOUISIANA, AS A CLAIMED ADJUSTMENT FOR WORK PERFORMED UNDER DEPARTMENT OF THE INTERIOR CONTRACT NO. 14-19-008- 9319, DATED JANUARY 28, 1957, COVERING THE CONTINUANCE DURING THE PERIOD JANUARY 28, 1957, THROUGH JUNE 30, 1958, OF AN INVESTIGATION OF THE PROCESSING AND HANDLING OF SOUTHERN OYSTERS.

THE GOVERNMENT PREVIOUSLY HAD ENTERED INTO TWO CONTRACTS WITH THE UNIVERSITY RELATING TO THE SAME RESEARCH PROBLEM. THE FIRST CONTRACT COVERED WORK TO BE PERFORMED DURING THE PERIOD JANUARY 28, 1955, THROUGH JANUARY 27, 1956, AND THE SECOND CONTRACT COVERED SERVICES TO BE PERFORMED DURING THE PERIOD JANUARY 28, 1956, THROUGH JANUARY 27, 1957. EACH OF THOSE CONTRACTS WAS NEGOTIATED ON A COST-REIMBURSABLE BASIS, SUBJECT TO THE CONDITIONS THAT THE TOTAL COST OF THE CONTRACT WORK SHOULD NOT EXCEED $7,600, UNLESS THE GOVERNMENT PERMITTED THE UNIVERSITY TO CONTINUE PERFORMANCE WHEN NOTIFIED THAT THE COST OF COMPLETING PERFORMANCE PROBABLY WOULD EXCEED THE STATED AMOUNT; AND THAT OVERHEAD COSTS WERE TO BE ALLOWED IN AN AMOUNT EQUAL TO 20 PERCENT OF ANNUAL COSTS WITHOUT AUDIT FOR GENERAL OVERHEAD. HOWEVER, IN THE CASE OF CONTRACT NO. 14-19-008-9319, WHICH SPECIFIED A MAXIMUM COST OF $15,125, THE PARTIES AGREED THAT AN AMOUNT EQUAL TO 25 PERCENT OF DIRECT COSTS WOULD BE ALLOWED PROVISIONALLY FOR GENERAL OVERHEAD, SUBJECT TO RETROACTIVE ADJUSTMENT OF THE CHARGES TO ACTUAL COST AS DETERMINED BY GOVERNMENT AUDIT.

MOST OF THE TERMS AND CONDITIONS OF THE FORMER CONTRACTS WERE INCORPORATED IN THE CONTRACT OF JANUARY 28, 1957, INCLUDING ARTICLE II OF CONTRACT NO. 14-19-008-2291, DATED JANUARY 28, 1955, WHICH IS, IN PERTINENT PART, AS FOLLOWS:

"* * * THE CONTRACTOR SHALL NOTIFY THE CONTRACTING OFFICER IN WRITING WHENEVER IT APPEARS TO THE CONTRACTOR THAT THE COST OF COMPLETING THE PERFORMANCE OF THIS CONTRACT WILL EXCEED SAID STATED COST. THE GOVERNMENT SHALL NOT BE OBLIGATED TO REIMBURSE THE CONTRACTOR FOR, AND THE CONTRACTOR SHALL NOT BE OBLIGATED TO INCUR EXPENDITURES IN THE PERFORMANCE OF THE WORK COMTEMPLATED BY THIS CONTRACT IN EXCESS OF THE COST UNLESS AND UNTIL SUCH COST SHALL HAVE BEEN INCREASED BY AMENDMENT OF THE CONTRACT.'

AFTER COMPLETION OF THE CONTRACT, AN AUDIT WAS PERFORMED BY THE ATLANTA REGIONAL OFFICE, FISH AND WILDLIFE SERVICE, WHICH RESULTED IN DETERMINATIONS THAT THE UNIVERSITY HAD INCURRED DIRECT COSTS OF $12,001.58, INCLUDING THE SUM OF $9,887.91 PAID AS SALARIES, AND THAT THE GOVERNMENT HAD REIMBURSED THE UNIVERSITY FOR SUCH COSTS, PLUS $3,000.40 AS A PROVISIONAL ALLOWANCE FOR OVERHEAD. ACCORDING TO AUDIT REPORT, THE UNIVERSITY WAS PAID THE TOTAL SUM OF $15,001.98, AS COMPARED WITH THE STATED MAXIMUM COST FIGURE OF $15,125, AND THERE WAS LEFT ONLY THE SUM OF $123.02 FOR PAYMENT TO THE UNIVERSITY IN THE EVENT THAT ITS ACTUAL OVERHEAD COSTS WERE LATER FOUND TO BE IN EXCESS OF THE SUM OF $3,000.40 WHICH WAS PAID AS A PROVISIONAL OVERHEAD ALLOWANCE.

APPARENTLY, THE ATLANTA REGIONAL OFFICE, FISH AND WILDLIFE SERVICE, CONSIDERED THAT NO ADJUSTMENT FOR OVERHEAD SHOULD BE MADE UNTIL FINAL OVERHEAD RATES, REFLECTING ACTUAL OVERHEAD COSTS, WERE ESTABLISHED IN AUDITS OF THE UNIVERSITY'S RECORDS BY THE ARMY AUDIT AGENCY. SUBSEQUENTLY, IT WAS INDICATED THAT THE ARMY AUDIT AGENCY DETERMINED THAT THE UNIVERSITY'S OVERHEAD COSTS FOR THE FISCAL YEAR ENDING JUNE 30, 1957, APPROXIMATED 34.26 PERCENT OF SALARIES AND WAGES PAID, AND THAT FOR THE FISCAL YEAR ENDING JUNE 30, 1958, THE UNIVERSITY'S OVERHEAD COSTS WERE APPROXIMATELY EQUAL TO 49.53 PERCENT OF SALARIES AND WAGES PAID DURING THAT PERIOD.

THOSE RATES WERE USED IN THE COMPUTATION OF THE CLAIM FOR $1,668.10. HOWEVER, THERE IS A DISCREPANCY BETWEEN THE TOTAL OF THE SUM ALLEGEDLY PAID AS SALARIES ($9,762.50) AND THE AMOUNT OF $9,887.91, FOUND IN THE ADMINISTRATIVE AUDIT AS HAVING BEEN REIMBURSED FOR DIRECT SALARY COSTS. THUS, IT APPEARS THAT THE CLAIM IS EITHER UNDERSTATED OR THAT THE UNIVERSITY HAS FAILED TO ALLOW CREDIT FOR THE SUM OF $125.41 AS AN EXCESS REIMBURSEMENT FOR SALARY EXPENSES INCURRED DURING THE ENTIRE CONTRACT PERIOD.

THE MATTER WAS SUBMITTED FOR OUR CONSIDERATION IN VIEW OF THE FACT THAT PAYMENT OF AN AMOUNT OVER $123.02 ON THE CLAIM WOULD CONSTITUTE PAYMENT UNDER THE CONTRACT OF AN AMOUNT WHICH WOULD EXCEED THE AGREED MAXIMUM COST OF PERFORMANCE.

SINCE THE STATED MAXIMUM COST WAS SUBJECT TO ADJUSTMENT UPON RECEIPT OF NOTICE FROM THE UNIVERSITY THAT ACTUAL COSTS OF PERFORMANCE WERE LIKELY TO EXCEED THE INDICATED MAXIMUM AMOUNT, AND SINCE IT APPEARS THAT THE UNIVERSITY WAS NOT IN A POSITION TO KNOW PRECISELY WHAT ITS OVERHEAD COSTS WERE AT ANY STAGE OF PERFORMING THE CONTRACT, BUT KEPT ITS DIRECT COSTS REASONABLY BELOW THE STATED MAXIMUM WITH THE PROVISIONAL ALLOWANCE OF 25 PERCENT FOR OVERHEAD, WE ARE OF THE OPINION THAT THE CONTRACT SHOULD NOT BE CONSTRUED IN SUCH A MANNER AS TO PRECLUDE FULL REIMBURSEMENT FOR THE UNIVERSITY'S OVERHEAD EXPENSES. OBVIOUSLY, A LITERAL CONSTRUCTION OF THE CONTRACT PROVISIONS RELATING TO A POSSIBLE INCREASE IN THE STATED MAXIMUM COST OF PERFORMANCE WOULD GIVE THE GOVERNMENT AN UNFAIR AND UNREASONABLE ADVANTAGE UNDER THE CIRCUMSTANCES HERE INVOLVED, AND IT HAS BEEN HELD THAT, WHERE WORDS IN A CONTRACT, IF CONSTRUED LITERALLY, WOULD PRODUCE AN UNFAIR, UNUSUAL OR IMPROBABLE RESULT, SUCH CONSTRUCTION IS TO BE AVOIDED IF POSSIBLE. A. E. WEST PETROLEUM COMPANY V. ATCHISON, T. AND S.F.RY.CO., 212 F.2D 812.

ACCORDINGLY, WE ARE ENCLOSING THE INVOICE FOR $1,668.10 AND A COPY OF THE LETTER DATED SEPTEMBER 2, 1960, AND YOU ARE ADVISED THAT WE WOULD NOT BE REQUIRED TO OBJECT TO THE PROCESSING OF THE CLAIM BY YOUR DEPARTMENT WITH A VIEW TOWARD MAKING FULL REIMBURSEMENT TO THE UNIVERSITY FOR ITS ACTUAL OVERHEAD COSTS IN PERFORMING CONTRACT NO. 14 19-008-9319, LESS SUCH AMOUNT, IF ANY, AS MAY BE DUE THE GOVERNMENT BY REASON OF HAVING OVERPAID THE UNIVERSITY AS REIMBURSEMENT FOR DIRECT COSTS OF PERFORMANCE.