B-145384, JUN. 14, 1961

B-145384: Jun 14, 1961

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INCORPORATED: WE HAVE YOUR LETTER OF MARCH 20. THE CONTRACT WAS AWARDED AND HAS BEEN ADMINISTERED BY AEC'S SCHENECTADY NAVAL REACTORS OPERATIONS OFFICE (SNROO). IS A MORE ACCURATE AND EQUITABLE DETERMINATION OF THE REIMBURSABLE COSTS PROPERLY ALLOCABLE TO THE CONTRACT WORK THAN THE AMOUNTS CLAIMED BY CE BASED ON THE APPLICATION OF AN AVERAGE OVERHEAD RATE FOR THE ENTIRE DIVISION. THE VIEW IS EXPRESSED IN YOUR LETTER OF MARCH 20. ANY RETROACTIVE REDETERMINATION OF THE NUCLEAR DIVISION'S ACTUAL OVERHEAD COSTS PROPERLY ALLOCABLE TO CONTRACT AT (30-3/-198 ON A BASIS WHICH IS NOT CONSISTENT WITH YOUR FIRM'S CONSTRUCTION OF THE PROVISIONAL RATES SPECIFIED IN THE CONTRACT WOULD BE IN VIOLATION OF (1) THE WRITTEN CONTRACT BETWEEN THE PARTIES AND (2) THE SPIRIT OF THE AGREEMENT WHICH INDUCED YOUR INITIAL ENTRY INTO THE NAVAL NUCLEAR PROGRAM IN THE AREAS OF REACTOR DESIGN AND FUEL ELEMENT MANUFACTURE.

B-145384, JUN. 14, 1961

TO COMBUSTION ENGINEERING, INCORPORATED:

WE HAVE YOUR LETTER OF MARCH 20, 1961, TAKING EXCEPTION TO THOSE CONCLUSIONS IN OUR AUDIT REPORT OF AUGUST 10, 1960 (B-114878) DEALING WITH PROPER OVERHEAD CHARGES UNDER COST-TYPE CONTRACT AT (30-3/-198, DATED JULY 15, 1955, BETWEEN YOUR FIRM AND THE ATOMIC ENERGY COMMISSION.

THE CONTRACT WAS AWARDED AND HAS BEEN ADMINISTERED BY AEC'S SCHENECTADY NAVAL REACTORS OPERATIONS OFFICE (SNROO). IN THE REPORT, WE CONCLUDED THAT SNROO'S DETERMINATION OF NUCLEAR DIVISION'S ACTUAL CONTRACT COSTS FOR CALENDAR YEAR 1957, BASED ON THE SEGREGATION OF THE DIVISION'S OVERHEAD EXPENSES INTO TWO OVERHEAD POOLS, IS A MORE ACCURATE AND EQUITABLE DETERMINATION OF THE REIMBURSABLE COSTS PROPERLY ALLOCABLE TO THE CONTRACT WORK THAN THE AMOUNTS CLAIMED BY CE BASED ON THE APPLICATION OF AN AVERAGE OVERHEAD RATE FOR THE ENTIRE DIVISION. IN THE REPORT, WE CONCLUDED ALSO THAT CERTAIN CORRESPONDENCE BETWEEN CE AND SNROO IN 1958 WHICH INDICATED THAT JULY 1, 1958, WOULD BE THE EFFECTIVE DATE FOR SEGREGATING THE OVERHEAD EXPENSES OF THE DIVISION SHOULD NOT CONTRACTUALLY PRECLUDE SNROO FROM RETROACTIVELY DETERMINING THE 1957 ACTUAL OVERHEAD COSTS ALLOCABLE TO THE CONTRACT WORK ON THE BASIS OF SEGREGATED OVERHEAD EXPENSE POOLS.

THE VIEW IS EXPRESSED IN YOUR LETTER OF MARCH 20, 1961, THAT, ABSENT A PRIOR MUTUAL AGREEMENT TO THE CONTRARY, ANY RETROACTIVE REDETERMINATION OF THE NUCLEAR DIVISION'S ACTUAL OVERHEAD COSTS PROPERLY ALLOCABLE TO CONTRACT AT (30-3/-198 ON A BASIS WHICH IS NOT CONSISTENT WITH YOUR FIRM'S CONSTRUCTION OF THE PROVISIONAL RATES SPECIFIED IN THE CONTRACT WOULD BE IN VIOLATION OF (1) THE WRITTEN CONTRACT BETWEEN THE PARTIES AND (2) THE SPIRIT OF THE AGREEMENT WHICH INDUCED YOUR INITIAL ENTRY INTO THE NAVAL NUCLEAR PROGRAM IN THE AREAS OF REACTOR DESIGN AND FUEL ELEMENT MANUFACTURE.

THE FACTS AND ARGUMENTS STATED IN SUPPORT OF YOUR POSITION ARE LARGELY THOSE INCLUDED IN YOUR COMMENTS OF DECEMBER 15, 1959, ON THE REPORT IN DRAFT FORM. THEY WERE, OF COURSE, CONSIDERED PRIOR TO THE ISSUANCE OF THE REPORT IN FINAL FORM.

THE AUDIT REPORT DEALT PRINCIPALLY WITH THE METHOD USED TO ALLOCATE THE NUCLEAR DIVISION'S ALLOWABLE OVERHEAD COSTS BETWEEN THE DIVISION'S COST REIMBURSABLE ACTIVITIES AND THE DIVISION'S NONREIMBURSABLE COST AND FIXED- PRICE WORK. ALTHOUGH OUR DETAILED AUDIT WORK RELATED TO THE DIVISION'S ACTIVITIES DURING 1956, A REVIEW OF CE'S ACCOUNTING RECORDS AND OF THE SNROO AUDIT REPORT FOR CALENDAR YEAR 1957 DISCLOSED THAT THE CIRCUMSTANCES EXISTING IN 1956, WHICH RESULTED IN OUR CONCLUSIONS THAT THE USE OF AVERAGE DIVISION-WIDE RATES WAS AN INAPPROPRIATE AND INACCURATE METHOD OF ALLOCATING OVERHEAD COSTS TO THE VARIOUS ACTIVITIES WITHIN THE DIVISION, ALSO EXISTED DURING 1957.

DURING 1956 AND 1957, THE NUCLEAR DIVISION WAS ENGAGED IN THE FOLLOWING GENERAL AREAS OF WORK:

(1) REACTOR DESIGN AND RESEARCH AND DEVELOPMENT WORK CARRIED ON IN THE DIVISION'S LABORATORIES UNDER AEC AND NAVY COST-TYPE CONTRACTS.

(2) FUEL ELEMENT (REACTOR CORE) MANUFACTURING WORK CARRIED ON IN THE DIVISION'S FUEL ELEMENT MANUFACTURING FACILITY UNDER AEC NEGOTIATED FIXED- PRICE CONTRACTS OR, IN 1956, AS A COMPANY-FINANCED PROJECT.

OUR REVIEW OF CE'S ACCOUNTING RECORDS DISCLOSED THAT THE CONTRACTOR ACCUMULATED OVERHEAD COSTS IN AN "OVERHEAD REGISTER" WHICH SHOWED THE DETAILED EXPENSE ACCOUNTS SECTIONALIZED BY THE INDIVIDUAL PRODUCTION AND SERVICE DEPARTMENTS WITHIN THE NUCLEAR DIVISION. OUR REVIEWS OF TRANSACTIONS IN 1956 SHOWED THAT CE'S PROCEDURES AND PRACTICES FOR DISTRIBUTING OVERHEAD COSTS TO THE INDIVIDUAL PRODUCTION AND SERVICE DEPARTMENTS WERE GENERALLY SOUND AND RESULTED IN THE ACCUMULATION OF ACCURATE DEPARTMENTAL OVERHEAD COSTS.

DURING 1956 THE ALLOWABLE OVERHEAD COSTS FOR EACH DIRECT LABOR DOLLAR WERE ABOUT 70 PERCENT HIGHER FOR THE PRODUCTION DEPARTMENT (FUEL ELEMENT MANUFACTURING FACILITY) PRIMARILY ENGAGED IN FIXED-PRICE AND COMPANY- FINANCED WORK THAN THE COMPARABLE OVERHEAD COSTS FOR EACH DIRECT LABOR DOLLAR FOR THE PRODUCTION DEPARTMENTS (LABORATORIES) PRIMARILY ENGAGED IN COST-REIMBURSABLE WORK. DURING 1957 THE ALLOWABLE OVERHEAD COSTS FOR EACH DIRECT LABOR DOLLAR WERE ABOUT 100 PERCENT HIGHER FOR THE PRODUCTION DEPARTMENT PRIMARILY ENGAGED IN FIXED-PRICE WORK THAN THE COMPARABLE OVERHEAD COSTS FOR EACH DIRECT LABOR DOLLAR FOR THE PRODUCTION DEPARTMENTS ENGAGED IN COST-REIMBURSABLE WORK. ACCORDINGLY, THE USE OF AN AVERAGE RATE BASED ON THE RATIO OF THE DIVISION'S TOTAL DIRECT LABOR DOLLARS TO THE DIVISION'S TOTAL ALLOWABLE OVERHEAD COSTS RESULTS IN THE COST- REIMBURSABLE WORK BEARING A SUBSTANTIAL PORTION OF THE OVERHEAD COSTS OF THE FUEL ELEMENT MANUFACTURING FACILITY WHICH APPEARED MORE PROPERLY ALLOCABLE TO THE WORK UNDERTAKEN IN CONNECTION WITH CE'S FIXED-PRICE CONTRACTS.

FOR EXAMPLE, DURING 1957 ABOUT 15 PERCENT OF THE TOTAL DIRECT LABOR OF THE FUEL ELEMENT MANUFACTURING FACILITY WAS CHARTED TO AEC COST REIMBURSABLE WORK. HOWEVER, THE APPLICATION OF AVERAGE DIVISION-WIDE OVERHEAD RATES FOR THE PURPOSE OF ALLOCATING THE OVERHEAD COSTS HAS THE EFFECT OF CHARGING THE AEC COST-REIMBURSABLE WORK WITH OVER 40 PERCENT OF THIS DEPARTMENT'S ACTUAL OVERHEAD COSTS.

YOU IMPLY IN YOUR LETTER THAT THE KNOWLEDGE GAINED BY THE COMPANY IN CONNECTION WITH THE FUEL ELEMENT MANUFACTURING WORK CARRIED ON UNDER THE COMPANY-FINANCED PROJECT AND UNDER THE FIXED-PRICE CONTRACT FOR THE SEW REACTOR CORES, HAS RESULTED IN SUBSTANTIAL BENEFITS TO THE SIC PROJECT FINANCED BY COST-REIMBURSABLE CONTRACT AT/30-3/-198. WE DO NOT DISPUTE THIS CONTENTION. WE BELIEVE, HOWEVER, THAT THE COSTS INCURRED IN CONNECTION WITH MANUFACTURING A SPECIFIC PRODUCT SHOULD BE CHARGED TO THAT PRODUCT IRRESPECTIVE OF THE INDIRECT BENEFITS WHICH MAY ACCRUE TO OTHER ACTIVITIES AS A RESULT OF THE KNOWLEDGE GAINED BY THE CONTRACTOR IN MANUFACTURING THE SPECIFIC PRODUCT.

YOU CONTEND THAT THE ORIGINAL CONTRACT PROVIDED FOR A SINGLE OVERHEAD POOL FOR THE NUCLEAR DIVISION AND THAT A UNILATERAL DEVIATION FROM THIS PROVISION WOULD BE IN VIOLATION OF THE CONTRACT TERMS AND OF THE SPIRIT OF THE AGREEMENT WHICH INDUCED CE TO ENTER INTO THE CONTRACT.

ARTICLE III, PARAGRAPH 3 OF THE CONTRACT STATES THAT IN ORDER TO PROVIDE FOR OVERHEAD COSTS PROPERLY ALLOCABLE TO THE CONTRACT WORK, THE ALLOWABLE COSTS WOULD INCLUDE ALLOWANCES FOR A NUMBER OF CE'S "DEPARTMENTS" COMPUTED AS AMOUNTS EQUAL TO CERTAIN PERCENTAGES OF THE SALARIES AND WAGES PAID TO PERSONNEL DIRECTLY ENGAGED IN THE CONTRACT WORK. ONE OF THESE "DEPARTMENTS" WAS THE ,NUCLEAR DIVISION" WHICH WAS GIVEN A RATE OF 135 PERCENT OF DIRECT LABOR. THE PARAGRAPH ALSO PROVIDED:

"THE PERCENTAGE RATES STIPULATED ABOVE ARE PROVISIONAL ONLY, AND PAYMENTS OR CHARGES MADE IN ACCORDANCE WITH SAID RATES SHALL BE SUBJECT TO SUBSEQUENT AND RETROACTIVE ADJUSTMENT AS HEREINAFTER PROVIDED. AS SOON AS PRACTICABLE AFTER DECEMBER 31, 1955, THE PARTIES HERETO SHALL DETERMINE AND AGREE UPON A REDETERMINATION AND ADJUSTMENT OF SAID PERCENTAGE RATES ON THE BASIS OF THE ACTUAL COST EXPERIENCE, DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, OF THE CONTRACTOR DURING THE PERIOD BEGINNING WITH THE DATE OF THIS CONTRACT, AND ENDING DECEMBER 31, 1955. PAYMENTS OR CHARGES THERETOFORE MADE SHALL BE ADJUSTED RETROACTIVELY BY PAYMENT OR CREDIT AS MAY BE APPROPRIATE. SIMILARLY, AT THE END OF EACH PERIOD OF SIX (6) MONTHS AFTER DECEMBER 31, 1955, SUBSEQUENT REDETERMINATIONS AND ADJUSTMENTS OF SAID PERCENTAGE RATES SHALL BE MADE RETROACTIVELY, AND PAYMENTS OR CHARGES THERETOFORE MADE ON A PROVISIONAL BASIS SHALL BE ADJUSTED ACCORDINGLY. PERCENTAGE RATES ADJUSTED AND MADE FIRM FOR ANY OF THE PERIODS ABOVE SPECIFIED SHALL BE USED AS THE BASIS FOR PROVISIONAL PAYMENTS OR CHARGES IN SUBSEQUENT PERIODS PENDING REDETERMINATION AND ADJUSTMENT.'

IT APPEARS THAT YOU ARE INTERPRETING THE CONTRACT TO MEAN THAT, INASMUCH AS A PROVISIONAL OVERHEAD RATE WAS ESTABLISHED FOR THE COMPANY'S NUCLEAR DIVISION, IT THEREFORE FOLLOWS THAT THE CONTRACT ALSO ESTABLISHED THAT THE REDETERMINATION OF SUCH A RATE BASED ON CE'S ACTUAL COST EXPERIENCE MUST BE BASED ON THE FOLLOWING FORMULA:

TABLE

TOTAL ACTUAL ACTUAL UNALLOWABLE REDETERMINED

DIVISION OVERHEAD - DIVISION OVERHEAD EQUALS OVERHEAD

TOTAL ACTUAL DIVISION DIRECT LABOR COSTS RATE

REDETERMINED DIRECT LABOR COSTS ACTUAL OVERHEAD

OVERHEAD TIMES APPLICABLE TO THE EQUALS PROPERLY ALLOCABLE

RATE CONTRACT TO THE CONTRACT

YOU CONTEND THAT THERE CAN BE NO CHANGE FROM THE ABOVE METHOD OF COMPUTING ALLOWABLE OVERHEAD EXCEPT BY MUTUAL AGREEMENT AND THAT THIS VIEW WAS ACCEPTED BY BOTH PARTIES IN ENTERING INTO AMENDMENT NO. 3 TO THE CONTRACT DATED APRIL 25, 1956, UNDER WHICH THE "NUCLEAR DIVISION" WAS REDESIGNATED THE "REACTOR DEVELOPMENT DIVISION.' THE FACTS ARE, HOWEVER, THAT NOTWITHSTANDING THE ORIGINAL DESIGNATION IN THE CONTRACT, THE ORGANIZATION FORMED SHORTLY AFTER THE AWARD TO PERFORM THE WORK UNDER THE CONTRACT WAS CALLED THE "REACTOR DEVELOPMENT DIVISION" AND THAT NAME WAS CARRIED FOR APPROXIMATELY NINE MONTHS BEFORE THE CHANGE WAS FORMALIZED BY THE AMENDMENT. FURTHER, IN DECEMBER 1957, THE ORIGINAL NAME WAS RESTORED WITHOUT THE BENEFIT OF A FORMAL CONTRACT AMENDMENT. THUS, CHANGES IN DESIGNATION WERE MADE WITHOUT THE MUTUAL AGREEMENT OF THE PARTIES. ACCORDINGLY, WE ARE UNABLE TO AGREE THAT AMENDMENT NO. 3 HAD ANY OTHER PURPOSE OR EFFECT THAN TO CONFORM THE NOMENCLATURE IN THE CONTRACT TO THAT ACTUALLY IN USE. OUR INTERPRETATION IS CLEARLY SUPPORTED BY INFORMATION IN THE SNROO NEGOTIATION FILES WHICH SHOW THAT AMENDMENT NO. 3 WAS INITIATED AT THE REQUEST OF CE FOR THE PURPOSE OF CORRECTLY IDENTIFYING THE CE ORGANIZATION AT WINDSOR, CONNECTICUT, AS THE "REACTOR DEVELOPMENT DIVISION.'

WE HAVE BEEN ADVISED BY AEC THAT, UNDER ITS INTERPRETATION OF THE CONTRACT, A PROVISIONAL OVERHEAD RATE DOES NOT NECESSARILY ESTABLISH THE BASIS FOR DETERMINING THE ACTUAL COSTS PROPERLY ALLOCABLE TO THE CONTRACT WORK BECAUSE THE ONLY CRITERIA ESTABLISHED BY THE CONTRACT FOR SUCH REDETERMINATIONS ARE ACTUAL COST EXPERIENCE AND GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. AEC CONTENDS THAT THE ELEMENTS OF INDIRECT COST AND THE BASES USED IN COMPUTING PROVISIONAL PAYMENTS SHOULD NOT BE CONSTRUED AS INDICATING THE ELEMENTS OF INDIRECT COST TO BE DISTRIBUTED OR THE BASES OF DISTRIBUTION TO BE EMPLOYED IN THE PERIODIC DETERMINATION OF ACTUAL OVERHEAD EXPENSES OR RATES.

IN OUR JUDGMENT THE OVERHEAD DISTRIBUTION METHOD YOU ADVOCATE RESULTS IN THE USE OF AVERAGES WHERE THEY ARE OBVIOUSLY INAPPROPRIATE AND PRODUCE INACCURATE AND INEQUITABLE RESULTS. AS INDICATED PREVIOUSLY, CONTRACT AT/30-3/-198 IS OF THE COST-REIMBURSEMENT TYPE. PARAGRAPH 1, ARTICLE III OF THE CONTRACT PROVIDES THAT AS PAYMENT IN FULL FOR THE WORK TO BE PERFORMED "THE CONTRACTOR SHALL BE REIMBURSED * * * FOR ITS COSTS AND EXPENSES * * * ACTUALLY INCURRED * * * IN PERFORMING THE WORK * * *.' THE CONTRACT REQUIRES THE USE OF THE "DIVISION-WIDE RATE" IN ESTABLISHING ALLOWABLE OVERHEAD, CONSIDERATION MUST BE GIVEN TO THE OVERALL PURPOSE OF THE COMPENSATION PROVISION AS STATED ABOVE AND THE FACT THAT AT THE TIME THE CONTRACT WAS ENTERED INTO IT WAS CONTEMPLATED THAT THE EFFORTS OF THE DIVISION WOULD BE DIRECTED ENTIRELY TO THE SUCCESSFUL COMPLETION OF THE S1C CONTRACT. SEE IN THIS CONNECTION A LETTER TO SNROO FROM YOUR FIRM DATED SEPTEMBER 24, 1958, STATING IN PART:

"THE AVERAGE DIVISION OVERHEAD RATE WAS DEVELOPED BECAUSE THE COMMISSION (AEC) WAS UTILIZING THE COMPANY'S ENTIRE FACILITIES AT WINDSOR UNDER THE S1C CONTRACT * * *"

A WRITTEN CONTRACT SHOULD BE INTERPRETED IN THE LIGHT OF CIRCUMSTANCES SURROUNDING THE EXECUTION OF THE DOCUMENT IN SUCH MANNER AS TO GIVE EFFECT TO THE END THE PARTIES INTENDED TO BE ACCOMPLISHED. IF THE INSTRUMENT AS A WHOLE PRODUCES A CONVICTION THAT A PARTICULAR RESULT WAS FIXEDLY DESIRED THOUGH NOT EXPRESSED BY FORMAL WORDS, THAT DEFECT MAY BE SUPPLIED BY IMPLICATION AND THE UNDERLYING INTENTION EFFECTUATED PROVIDED IT IS SUFFICIENTLY DECLARED BY THE WHOLE INSTRUMENT. SPAULING V. MORSE, 76 N.E.2D 137, 139. FURTHER, AN AGREEMENT SHOULD BE REGARDED AS A BUSINESS TRANSACTION ENTERED INTO BY PRACTICAL MEN TO ACCOMPLISH AN HONEST AND STRAIGHTFORWARD END. KROSNOWSKI V. KROSNOWSKI, 126 A.2D 182. THE OVERALL INTENT OF THE CONTRACT IS THAT YOUR FIRM SHOULD BE REIMBURSED FOR ITS COSTS IN CONNECTION WITH CARRYING OUT ITS TERMS, WHILE THE EMPLOYMENT OF THE OVERALL DIVISION RATE WOULD RESULT, SO FAR AS THE GOVERNMENT IS CONCERNED, IN THE ABSORPTION OF COST UNDER THIS CONTRACT WHICH ARE MORE PROPERLY ATTRIBUTABLE TO WORK UNDER OTHER CONTRACTS.

THE CONTRACT DOES, OF COURSE, SPECIFICALLY PROVIDE FOR PERCENTAGE RATES FOR THE COMPUTATION OF ALLOWABLE OVERHEAD COSTS. IT ALSO PROVIDES THAT THOSE PERCENTAGE RATES SHALL BE ADJUSTED ON A RETROACTIVE BASIS. IN THIS CONNECTION IT IS PERTINENT TO POINT OUT THAT THE APPLICATION OF PERCENTAGE RATES TO EITHER DEPARTMENTAL OR DIVISIONAL DIRECT LABOR COSTS FOR THE PURPOSE OF DETERMINING THE OVERHEAD COSTS PROPERLY ALLOCABLE TO THE CONTRACT WORK IS A MATTER OF MECHANICS AND APPEARS SOMEWHAT ACADEMIC. IT WAS CONSIDERED DESIRABLE THAT THE ACTUAL OVERHEAD COSTS APPLICABLE TO CONTRACT AT/30-3/-198 BE EXPRESSED AS A SINGLE PERCENTAGE RATE OF THE DIVISIONAL DIRECT LABOR COSTS APPLICABLE TO THE CONTRACT WORK, SUCH A PERCENTAGE RATE COULD BE DEVELOPED BASED ON VARIOUS ELIMINATIONS AND ADJUSTMENTS WHICH WOULD PRODUCE SUBSTANTIALLY THE SAME RESULTS AS SNROO OBTAINED THROUGH THE APPLICATION OF SEVERAL DEPARTMENTAL RATES. DURING 1958, NEGOTIATIONS WERE ENTERED INTO BY THE PARTIES TO SEGREGATE THE NUCLEAR DIVISION'S OVERHEAD EXPENSES INTO TWO OVERHEAD POOLS. YOU CONTEND THAT AS A RESULT OF CORRESPONDENCE CARRIED ON THROUGH OCTOBER 1958, THE PARTIES ENTERED INTO A CONTRACTUAL ARRANGEMENT ESTABLISHING JULY 1, 1958, AS THE EFFECTIVE DATE FOR SEGREGATING THE OVERHEAD EXPENSES OF THE NUCLEAR DIVISION INTO TWO OVERHEAD POOLS FOR THE PURPOSE OF RETROACTIVELY DETERMINING THE ACTUAL COSTS APPLICABLE TO THE CONTRACT WORK.

IN A LETTER TO CE DATED JULY 29, 1958, THE SNROO DIRECTOR OF THE DIVISION OF BUDGET AND FINANCE STATED:

"FROM TIME TO TIME WE HAVE DISCUSSED THE DESIRABILITY OF ESTABLISHING TWO SEPARATE OVERHEAD EXPENSE POOLS FOR THE WINDSOR OPERATIONS OF THE NUCLEAR DIVISION. OUR AUDIT OF COSTS THROUGH DECEMBER 31, 1956, WHICH SHOULD BE REPORTED ON SHORTLY, ACCEPTS YOUR PROPOSAL THAT WE CONSIDER THE WINDSOR OPERATION IN TOTAL AND REIMBURSE COSTS ON THE BASIS OF A SINGLE OVERHEAD EXPENSE POOL. HOWEVER, SINCE THAT TIME YOUR DIVISION HAS BEEN MORE FIRMLY ESTABLISHED AND THE WORK HAS DIVIDED ITSELF INTO TWO MAIN FACETS: (1) THAT OF RESEARCH AND DEVELOPMENT CARRIED ON IN THE LABORATORIES AND (2) THE FUEL ELEMENT WORK CARRIED ON IN THE FUEL ELEMENT FABRICATION FACILITY.

IN THE INTERESTS OF REFINING COST ALLOCATIONS TO BOTH COST-TYPE AND FIXED -PRICE CONTRACTS CARRIED ON BY THE NUCLEAR DIVISION, IT IS REQUESTED THAT THE DIVISIONAL OVERHEAD BE SEGREGATED, EFFECTIVE AS OF JULY 1, 1958, INTO THE TWO EXPENSE POOLS STATED ABOVE.

"ACCORDINGLY, IT IS ALSO REQUESTED THAT YOU PREPARE A PROPOSAL, AS SOON AS POSSIBLE, IN ORDER THAT CURRENT BILLINGS UNDER THE CONTRACT MAY REFLECT THE TWO OVERHEAD POOLS. I UNDERSTAND THAT YOUR ACCOUNTS ARE SO ESTABLISHED AS TO MAKE THIS SEGREGATION POSSIBLE * * *.'

IN A LETTER DATED SEPTEMBER 24, 1958, THE CONTROLLER OF CE'S NUCLEAR DIVISION AGREED IN PRINCIPLE TO THE SEGREGATION OF THE DIVISION'S OVERHEAD EXPENSES BUT REQUESTED THAT THE TWO OVERHEAD POOLS BE ESTABLISHED EFFECTIVE JANUARY 1, 1959. IN A LETTER DATED OCTOBER 1, 1958, THE SNROO MANAGER, WHO WAS ALSO THE GOVERNMENT'S CONTRACTING OFFICER, REPEATED THE REQUEST THAT THE OVERHEAD EXPENSES OF THE NUCLEAR DIVISION BE SEGREGATED INTO TWO OVERHEAD POOLS EFFECTIVE JULY 1, 1958. THE SNROO MANAGER CONCLUDED BY STATING:

"IN ORDER TO EFFECT THE NECESSARY ADJUSTMENT TO BILLINGS PROCESSED SINCE JULY 1, 1958, PLEASE ADVISE ME WHEN IT IS EXPECTED THAT THE TWO OVERHEAD POOLS WILL BE ESTABLISHED AND WHEN WE MAY EXPECT TO RECEIVE YOUR PROPOSAL AS TO THE TWO PROVISIONAL OVERHEAD RATES TO BE USED FOR BILLING PURPOSES.'

IN A LETTER DATED OCTOBER 15, 1958, THE MANAGER OF CE'S NUCLEAR DIVISION STATED THAT:

"* * * WE ARE PREPARED TO ESTABLISH TWO OVERHEAD RATES FOR COSTING THE S1C CONTRACT, EFFECTIVE JULY 1, 1958.'

THE LETTER ALSO PROPOSED SPECIFIC PROVISIONAL OVERHEAD RATES FOR BILLING PURPOSES.

BY LETTER DATED OCTOBER 29, 1958, THE SNROO DIRECTOR OF THE DIVISION OF BUDGET AND FINANCE ACKNOWLEDGED CE'S LETTER OF OCTOBER 15, 1958, AND APPROVED THE PROVISIONAL RATES FOR BILLING UNDER THE CONTRACT.

IN NOVEMBER 1958, CE PRESENTED THE NUCLEAR DIVISION'S OVERHEAD PROPOSALS FOR THE TWO 6-MONTH PERIODS OF CALENDAR YEAR 1957 FOR THE PURPOSE OF DETERMINING THE ACTUAL ALLOWABLE COSTS ALLOCABLE TO GOVERNMENT COST-TYPE CONTRACTS. CE'S PROPOSALS WERE BASED ON THE USE OF AVERAGE DIVISION-WIDE OVERHEAD RATES FOR ALLOCATING THE OVERHEAD COSTS. BY LETTER DATED DECEMBER 9, 1958, THE SNROO MANAGER REJECTED CE'S AVERAGE DIVISION-WIDE OVERHEAD PRESENTATION FOR CALENDAR YEAR 1957 AS BEING NEITHER FAIR NOR EQUITABLE AND REQUESTED THAT THE 1957 OVERHEAD PRESENTATION BE RESUBMITTED ON THE BASIS OF TWO OVERHEAD POOLS.

BY LETTER DATED JANUARY 12, 1959, SNROO WAS ADVISED THAT CE COULD NOT CONSIDER IMPLEMENTING THE TWO OVERHEAD RATES PRIOR TO JULY 1, 1958. THE SNROO AUDITORS, HOWEVER, PROCEEDED TO MAKE THEIR AUDIT OF CE'S ACTIVITIES FOR CALENDAR YEAR 1957 ON THE BASIS OF TWO OVERHEAD POOLS

A REVIEW OF THE CITED CORRESPONDENCE DISCLOSES THAT IN THE LETTERS ORIGINATED BY SNROO PERSONNEL EMPHASIS WAS PLACED ON (1) THE ADAPTABILITY OF CE'S ACCOUNTING RECORDS FOR THE PURPOSE OF SEGREGATING OVERHEAD COSTS AND (2) THE USE OF TWO PROVISIONAL OVERHEAD RATES FOR BILLING PURPOSES. CE, ON THE OTHER HAND, REFERS TO TWO OVERHEAD RATES FOR "COSTING" THE CONTRACT.

IN A LETTER TO US DATED FEBRUARY 10, 1960, SNROO COMMENTED ON THIS MATTER AND STATED, IN PART, THAT:

"THE AEC HAD AGREED TO DIVISION-WIDE PROVISIONAL OVERHEAD RATES FOR THE NUCLEAR DIVISION FOR THE PERIODS FROM THE INCEPTION OF THE CONTRACT THROUGH JUNE 30, 1958. IT DOES NOT FOLLOW, HOWEVER, THAT IN THE ESTABLISHMENT OF FIXED OR FINAL OVERHEAD RATES FOR THOSE PERIODS THEY WOULD NECESSARILY BE ON THE BASIS OF DIVISION-WIDE RATES.'

IN OUR VIEW, THE CORRESPONDENCE QUOTED DID NOT EFFECT ANY BINDING AGREEMENT AS TO THE OVERHEAD POOL ARRANGEMENTS RELATING TO RETROACTIVE ADJUSTMENTS AS PROVIDED BY THE CONTRACT. AS TO THE LETTERS FROM THE SNROO DIRECTOR, DIVISION OF BUDGET AND FINANCE, WE HAVE BEEN ADVISED THAT THE NAMED INDIVIDUAL NEVER HAD AUTHORITY TO ENTER INTO CONTRACTS ON BEHALF OF THE UNITED STATES AND IT IS WELL ESTABLISHED THAT THE GOVERNMENT IS NOT BOUND BY AGREEMENTS BEYOND THE SCOPE OF THE ACTUAL AUTHORITY OF ITS AGENTS. WHITESIDE V. UNITED STATES, 93 U.S. 247. FURTHER, SUCH CORRESPONDENCE DIFFERS MATERIALLY FROM THE MORE FORMAL AGREEMENT WHICH CONTAINED THE REDETERMINED OVERHEAD RATES ACCEPTED BY THE PARTIES FOR THE THREE 6-MONTH PERIODS ENDING DECEMBER 31, 1956. THERE ARE SIGNIFICANT DIFFERENCES BETWEEN THE CONTRACT ACTION WHICH FIRMED UP THE 1956 ACTUAL OVERHEAD RATES AND THE CORRESPONDENCE WHICH YOU ASSERT BINDS THE GOVERNMENT TO A SPECIFIC BASIS FOR COMPUTING THE ACTUAL ALLOWABLE OVERHEAD COSTS FOR THE 18-MONTH PERIOD ENDING JUNE 30, 1958. THESE DIFFERENCES INDICATE THAT THE PARTIES IN THE LATTER CASE WERE, AS STATED IN THE SNROO LETTER OF FEBRUARY 10, 1960, MERELY AGREEING UPON PROVISIONAL OVERHEAD RATES FOR THE PERIOD AND ARRANGING FOR THE ACCOUNTING SYSTEM TO BE EMPLOYED DURING A PERIOD OF CONTRACT PERFORMANCE.

IN VIEW OF THE FOREGOING, IT REMAINS OUR POSITION THAT THE AEC IS NOT LIMITED, EITHER BY THE PROVISIONS OF THE CONTRACT OR THE CORRESPONDENCE CARRIED ON BETWEEN JULY AND OCTOBER 1958, IN THE RETROACTIVE ADJUSTMENT OF OVERHEAD TO ANY BASIS OTHER THAN ALLOWABLE COSTS ACTUALLY INCURRED IN PERFORMING THE WORK. IF YOUR FIRM AND THE CONTRACTING AGENCY SHOULD BE UNABLE TO AGREE ON WHAT THESE ACTUAL COSTS WERE FOR A GIVEN PERIOD, THE MATTER BECOMES SUBJECT TO HANDLING AS A DISPUTE UNDER ARTICLE XXII OF THE CONTRACT.

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