B-146320, SEP. 27, 1963

B-146320: Sep 27, 1963

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AGENCY FOR INTERNATIONAL DEVELOPMENT: REFERENCE IS MADE TO OUR LETTER OF OCTOBER 24. IT WAS AGREED THAT PACIFIC BECHTEL CORPORATION WOULD PERFORM FOR THE GOVERNMENT OF THE REPUBLIC OF KOREA (HEREAFTER REFERRED TO AS THE GOVERNMENT) THE WORK OF DESIGNING. IT WAS AGREED THAT PACIFIC BECHTEL CORPORATION WOULD PERFORM FOR THE GOVERNMENT THE WORK OF DESIGNING. WHICH WERE OF THE COST-PLUS-FIXED-FEE TYPE. PROVIDED THAT THE CONTRACTOR WAS TO SUBCONTRACT ANY PORTION OF THE WORK IF THE CONTRACTOR CONSIDERED IT TO BE CONSISTENT WITH THE BEST INTERESTS OF THE WORK. OUR RECORDS INDICATE THAT THE THREE POWER PLANTS WERE PUT INTO OPERATION IN THE SUMMER OF 1956 AND. CONTRACT 2344 PROVIDED THAT THE CONTRACT WORK WAS TO BE COMPLETED BY DECEMBER 1.

B-146320, SEP. 27, 1963

TO ADMINISTRATOR, AGENCY FOR INTERNATIONAL DEVELOPMENT:

REFERENCE IS MADE TO OUR LETTER OF OCTOBER 24, 1962, AND PRIOR CORRESPONDENCE TO, AND BETWEEN, YOUR PREDECESSORS-IN-OFFICE AND OUR OFFICE RELATIVE TO THE "APPEAL" OF BECHTEL CORPORATION AND PACIFIC BECHTEL CORPORATION (ITS WHOLLY-OWNED SUBSIDIARY) FROM EXCEPTIONS TAKEN BY THE INTERNATIONAL COOPERATION ADMINISTRATION TO THE ALLOWANCE OF CERTAIN DOLLAR COSTS REIMBURSED TO BECHTEL CORPORATION UNDER ICA FINANCED CONTRACTS NOS. 2161 AND 2344, DATED MAY 27, 1954, AND OCTOBER 5, 1955, THE FIRST BETWEEN THE KOREA POWER COMPANY (A KOREAN CORPORATION), THE GOVERNMENT OF THE REPUBLIC OF KOREA, AND PACIFIC BECHTEL CORPORATION (A PANAMANIAN CORPORATION), AND THE SECOND BETWEEN THE GOVERNMENT OF THE REPUBLIC OF KOREA AND PACIFIC BECHTEL CORPORATION.

UNDER CONTRACT NO. 2161, AS AMENDED, IT WAS AGREED THAT PACIFIC BECHTEL CORPORATION WOULD PERFORM FOR THE GOVERNMENT OF THE REPUBLIC OF KOREA (HEREAFTER REFERRED TO AS THE GOVERNMENT) THE WORK OF DESIGNING, ENGINEERING, PROCURING MATERIALS AND EQUIPMENT, RECRUITING LABOR, CONSTRUCTING, TRAINING CREWS AND SUPERVISING INITIAL OPERATION OF THREE STEAM-ELECTRIC POWER PLANTS TO BE LOCATED IN KOREA, AND UNDER CONTRACT NO. 2344, IT WAS AGREED THAT PACIFIC BECHTEL CORPORATION WOULD PERFORM FOR THE GOVERNMENT THE WORK OF DESIGNING, ENGINEERING, PROCURING EQUIPMENT AND MATERIALS, RECRUITING LABOR AND CONSTRUCTING IN KOREA FOUR TWO-STORY MULTIPLE RESIDENCE BUILDINGS, TOGETHER WITH THE REMODELING OF AN EXISTING DINING BUILDING AND FACILITY LOCATED AT THE SITE OF THE WORK.

THE CONTRACTS, WHICH WERE OF THE COST-PLUS-FIXED-FEE TYPE, PROVIDED THAT THE CONTRACTOR WAS TO SUBCONTRACT ANY PORTION OF THE WORK IF THE CONTRACTOR CONSIDERED IT TO BE CONSISTENT WITH THE BEST INTERESTS OF THE WORK, AND SET FORTH THE FACT THAT THE CONTRACTOR HAD, IN EACH INSTANCE, ENTERED INTO A SUBCONTRACT WITH BECHTEL CORPORATION FOR THE PERFORMANCE OF SERVICES REQUIRED OR ADVISABLE TO BE PERFORMED WITHIN THE UNITED STATES OR OTHER LOCATIONS OUTSIDE OF KOREA IN CONNECTION WITH THE CONTRACTS.

CONTRACT 2161 CALLED FOR THE CONTRACTOR'S SERVICES FOR A PERIOD OF 42 MONTHS TO NOVEMBER 27, 1957, AT A MAXIMUM DOLLAR COST OF ABOUT $33,000,000, INCLUDING A FIXED FEE OF $1,500,000, AND THE EQUIVALENT OF ABOUT $2,500,000 FOR LOCAL CURRENCY COSTS TO BE FINANCED FROM COUNTERPART FUNDS GENERATED UNDER THE ICA ECONOMIC AID PROGRAM. OUR RECORDS INDICATE THAT THE THREE POWER PLANTS WERE PUT INTO OPERATION IN THE SUMMER OF 1956 AND, AFTER A PERIOD OF INITIAL OPERATIONS AND TRAINING-ON-THE-JOB OF KOREAN PERSONNEL, THE GOVERNMENT SIGNED FORMAL COMPLETION DOCUMENTS ON SEPTEMBER 25, 1957. DOLLAR COSTS FINANCED BY ICA, INCLUDING THE FIXED FEE, TOTALED $28,400,000.

CONTRACT 2344 PROVIDED THAT THE CONTRACT WORK WAS TO BE COMPLETED BY DECEMBER 1, 1956, AT AN ESTIMATED DOLLAR COST OF $1,166,000, INCLUDING A FIXED FEE OF $38,500, AND THE EQUIVALENT OF ABOUT $200,000 FOR LOCAL CURRENCY COSTS TO BE FINANCED FROM COUNTERPART FUNDS GENERATED UNDER THE ICA ECONOMIC AID PROGRAM.

BOTH OF THE ABOVE CONTRACTS PROVIDED THAT THE CONTRACTOR WOULD BE REIMBURSED FOR THE COSTS INCURRED THEREUNDER, INCLUDING THE FOLLOWING AMONG OTHER ITEMS OF COST:

"2.21 SUBCONTRACTS

ALL AMOUNTS PAID BY CONTRACTOR UNDER ANY SUBCONTRACT LET BY CONTRACTOR IN THE PERFORMANCE OF WORK UNDER THIS AGREEMENT.'

SECTION 1.27 OF CONTRACT 2161 AND SECTION 1.26 OF CONTRACT 2344 PROVIDED UNDER THE HEAD ,ACCOUNTING: "

"CONTRACTOR SHALL MAINTAIN ACCOUNTING RECORDS IN ACCORDANCE WITH CONTRACTOR'S USUAL PRACTICES.'

IN TWO LETTERS DATED JUNE 9, 1954, AND NOVEMBER 7, 1955, FROM THE FOREIGN OPERATIONS ADMINISTRATION AND THE INTERNATIONAL COOPERATION ADMINISTRATION, RESPECTIVELY, TO PACIFIC BECHTEL CORPORATION, THE FIRST WITH REFERENCES TO CONTRACT 2161 AND THE SECOND WITH REFERENCES TO CONTRACT 2344, AID'S PREDECESSOR AGENCIES REFERRED TO THE FACT THAT, AS AGENTS OF THE U.S. GOVERNMENT, THEY HAD AGREED TO FINANCE THE WORK COVERED BY THE CONTRACTS, AND STATED THAT THE PURPOSE OF THE LETTERS WAS TO OUTLINE "CERTAIN OF OUR MUTUAL UNDERSTANDINGS IN RESPECT OF, AND IN CONSIDERATION OF, SUCH FINANCING.' SET FORTH IN THE LETTERS AS TWO OF THE SO-CALLED UNDERSTANDINGS WERE THE FOLLOWING:

"II. BOOKS AND RECORDS. IT IS UNDERSTOOD THAT YOU WILL KEEP FULL AND COMPLETE RECORDS AND BOOKS OF ACCOUNT IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES COVERING THE FINANCIAL DETAILS APPLICABLE TO THE AGREEMENT AND SHALL REQUIRE ALL SUBCONTRACTORS TO MAINTAIN SIMILAR BOOKS AND RECORDS; AND THAT FOA/ICA, OR ANY OF ITS DULY AUTHORIZED REPRESENTATIVES, SHALL UNTIL THE EXPIRATION OF THREE YEARS AFTER FINAL PAYMENT UNDER THE AGREEMENT HAVE ACCESS TO AND THE RIGHT AT ALL REASONABLE TIMES TO EXAMINE AND AUDIT SUCH RECORDS AND BOOKS OF ACCOUNT (AND IN ADDITION ANY OR ALL OTHER ATTACHMENTS, CORRESPONDENCE, MEMORANDA AND OTHER RECORDS PERTAINING TO THE AGREEMENT), OR THOSE OF YOUR SUBCONTRACTORS, INVOLVING TRANSACTIONS RELATIVE TO THE EEMENT.'

"VII. REIMBURSEMENT ADJUSTMENT. IT IS UNDERSTOOD THAT FOA/ICA MAY REQUEST REIMBURSEMENT ADJUSTMENTS BASED UPON EXAMINATION OF YOUR PERFORMANCE AND RECORDS, AND TO THE EXTENT THAT WITHDRAWALS BY YOU UNDER THE LETTER OR LETTERS OF COMMITMENT ISSUED BY FOA/ICA EXCEED THE AMOUNT OF DOLLAR COSTS REIMBURSABLE UNDER THE AGREEMENT, YOU WILL PROMPTLY MAKE SUCH ADJUSTMENT, IF ANY.'

EACH OF THE SUBCONTRACTS REFERRED TO PROVIDED GENERALLY THAT BECHTEL CORPORATION WOULD PERFORM FOR PACIFIC BECHTEL CORPORATION ALL SERVICES REQUIRED TO BE DONE IN THE UNITED STATES OR OTHER LOCATIONS OUTSIDE OF KOREA IN CONNECTION WITH THE WORK UNDER THE RESPECTIVE PRIME CONTRACTS "AS CONTRACTOR SHALL DIRECT," INCLUDING ENGINEERING, PROCUREMENT, RECRUITMENT OF PERSONNEL, ACCOUNTING, PROJECT PLANNING AND SCHEDULING, AND MANAGEMENT AND COORDINATING SERVICES. SINCE THE TERMS OF THE SUBCONTRACTS, INSOFAR AS MATERIAL HERE, ARE PRACTICALLY IDENTICAL, THE FOLLOWING EXCERPTS ARE QUOTED FROM SUBCONTRACT 2161-1 TO SHOW THE PRECISE NATURE OF THE SERVICES REQUIRED TO BE RENDERED UNDER THE SUBCONTRACTS AND THE METHOD PROVIDED BY THE PARTIES FOR DETERMINING THE COMPENSATION PAYABLE TO THE SUBCONTRACTOR FOR ITS SERVICES:

"1.0 WORK TO BE DONE

"1.2 ENGINEERING

BECHTEL SHALL PERFORM ENGINEERING, INCLUDING PREPARATION OF PLANS, SPECIFICATIONS, DRAWINGS, BILLS OF MATERIAL, MATERIAL REQUISITIONS, SCHEDULES AND COST ESTIMATES, ALL AS REQUIRED TO PROPERLY DESCRIBE AND DETAIL WORK TO BE CONSTRUCTED, EMPLOYING ITS OWN STANDARDS AND PERFORMING THE WORK IN ACCORDANCE WITH ITS BEST ENGINEERING SKILL AND JUDGMENT, AND TO CONFORM WITH DEFINITIVE OUTLINE SPECIFICATIONS AND PLANS, REFERRED TO IN SECTION 1.12 OF THE PRINCIPAL CONTRACT.

"1.3 PROCUREMENT

BECHTEL SHALL PERFORM ALL PROCUREMENT SERVICES CONSISTING OF PURCHASING AND/OR SUBCONTRACTING, EXPEDITING, MAKING INSPECTIONS WITHIN THE UNITED STATES AND ELSEWHERE AND SHIPPING ALL MATERIALS, EQUIPMENT AND/OR SUPPLIES REQUIRED FOR THE WORK, INCLUDING TEMPORARY SUPPLIES REQUIRED FOR THE WORK, INCLUDING TEMPORARY JOB CAMPS OR OTHER FACILITIES, CONSTRUCTION EQUIPMENT, OPERATING SUPPLIES OR OTHER ITEMS. * * *

"1.4 RECRUITMENT OF PERSONNEL

BECHTEL SHALL FURNISH ALL SERVICES REQUIRED TO RECRUIT PERSONNEL FOR THE WORK WITHIN THE UNITED STATES OR ELSEWHERE AS DIRECTED. SUCH SERVICES SHALL INCLUDE BUT NOT BE LIMITED TO SERVICES REQUIRED TO ADVERTISE FOR, INTERVIEW, SELECT AND EMPLOY PERSONNEL FOR CONTRACTOR IN ACCORDANCE WITH THE INSTRUCTIONS OF CONTRACTOR, AND TO PROVIDE MEDICAL EXAMINATIONS, INOCULATIONS, ASSISTANCE IN SECURING PASSPORTS, ETC., AND TO ARRANGE FOR NECESSARY TRANSPORTATION FOR SUCH PERSONNEL TO THE JOB SITE AND RETURN.

"1.5 ACCOUNTING

BECHTEL SHALL FURNISH SERVICES TO PERFORM ACCOUNTING AS REQUIRED BY CONTRACTOR, INCLUDING BUT NOT LIMITED TO, ESTABLISHMENT AND MAINTENANCE OF RECORDS, PREPARATION OF BILLINGS, VOUCHERS, STATEMENTS AND SUCH OTHER WORK AS IS NECESSARY OR ADVISABLE TO BE PERFORMED IN THE UNITED STATES TO FACILITATE DOLLAR PAYMENTS AS PROVIDED IN THE PRINCIPAL CONTRACT.

"1.6 PROJECT PLANNING, SCHEDULING AND COORDINATION

BECHTEL SHALL FURNISH SERVICES TO PLAN AND SCHEDULE THE DESIGN AND CONSTRUCTION OF THE WORK AND TO COORDINATE THE EFFORTS OF THE VARIOUS SERVICES OF BECHTEL AND CONTRACTOR IN ORDER TO COMPLETE THE WORK AS EXPEDITIOUSLY AS POSSIBLE. THESE SERVICES WILL INCLUDE PREPARATION OF OVERALL AND DETAILED SCHEDULES, ANALYSIS AND SEQUENCING OF THE SERVICES REQUIRED TO ADVANCE THE WORK AND SUPPLEMENTARY CHECKING TO ASSURE SCHEDULES ARE REALIZED, AND ALL OTHER SERVICES AS MAY BE REQUIRED TO ADVANCE AND SUPERVISE THE GENERAL ADMINISTRATION AND MANAGEMENT OF THE WORK.

"2.0 CONTRACT PRICE

CONTRACTOR SHALL PAY BECHTEL AS FULL AND COMPLETE COMPENSATION FOR ITS WORK UNDER THIS AGREEMENT A TOTAL CONTRACT PRICE CONSISTING OF THE SUM TOTAL OF SECTIONS 2.1 AND 2.2. * * *

"2.1 FIXED FEE

CONTRACTOR SHALL PAY BECHTEL, IN UNITED STATES DOLLARS, A FIXED FEE OF * * *. THIS FIXED FEE SHALL CONSTITUTE BECHTEL'S ENTIRE REMUNERATION FOR PROFIT AND ANY COSTS NOT REIMBURSABLE UNDER THIS CONTRACT, FOR ALL WORK PERFORMED UNDER THIS AGREEMENT, INCLUDING SERVICES OF CONTRACTOR'S CORPORATE OFFICERS NOT REGULARLY ASSIGNED TO THE PROJECT.

"2.2 REIMBURSABLE COSTS

THE COSTS FOR WHICH BECHTEL SHALL BE REIMBURSED SHALL INCLUDE BUT NOT BE LIMITED TO THE FOLLOWING:

2.21 PERSONNEL COMPENSATION

THE ACTUAL AMOUNTS PAID BY BECHTEL IN ACCORDANCE WITH ITS CUSTOMARY RATES FOR SUCH PERSONNEL, AS COMPENSATION TO ITS PERSONNEL DIRECTLY ENGAGED IN THE ADVANCEMENT OF THE SERVICES DESCRIBED UNDER SECTION 1.0 OF THIS AGREEMENT. * * *

2.22 OVERHEAD

AN AMOUNT EQUAL TO 60 PERCENT OF THE TOTAL PERSONNEL COMPENSATION INCURRED UNDER SECTION 2.21 ABOVE. THIS AMOUNT SHALL REIMBURSE BECHTEL FOR THE INDIRECT EXPENSE OF PROVIDING AND OPERATING ITS REGULARLY ESTABLISHED OFFICES INCLUDING THE SALARIES AND EXPENSES OF EXECUTIVE AND OTHER PERSONNEL NOT DIRECTLY ENGAGED ON THE WORK, COST OF OFFICE SPACE, OFFICE GENERAL SUPPLIES, FURNISHINGS AND EQUIPMENT, LOCAL TELEPHONE AND GENERAL STENOGRAPHIC AND CLERICAL SERVICES, AND ITEMS OF COST INCURRED IN THE NORMAL CONDUCT OF THE GENERAL CORPORATE BUSINESS. ANY COSTS OR FEES DIRECTLY REIMBURSABLE HEREUNDER SHALL NOT BE INCLUDED IN OVERHEAD COSTS COVERED BY THIS SECTION NOR SHALL ITEMS OF OVERHEAD COST COVERED BY THIS SECTION BE INCLUDED IN COST OTHERWISE DIRECTLY REIMBURSABLE HEREUNDER.

2.23 RECRUITMENT

THE DIRECT COSTS INCURRED BY BECHTEL IN ADVERTISING FOR, INTERVIEWING, SELECTING AND EMPLOYING PERSONNEL FOR CONTRACTOR AS PROVIDED IN SECTION 1.4 HEREOF, * * *.

2.25 TRAVELING EXPENSES

THE ACTUAL AMOUNTS PAID BY BECHTEL TO ITS EMPLOYEES AS REIMBURSEMENT FOR TRAVEL AND TRANSPORTATION AND LIVING EXPENSES INCURRED, WHEN ENGAGED IN THE DIRECT ADVANCEMENT OF THE SERVICES UNDER THIS CONTRACT, PROVIDED, HOWEVER, THAT CONTRACTOR WILL REIMBURSE LIVING EXPENSES AT THE RATE OF $10.00 PER DAY.

2.27 OUT-OF-POCKET EXPENSES

THE COST OF POSTAGE, TELEPHONE, CABLEGRAMS AND SIMILAR OR OTHER OUT OF- POCKET EXPENSES INCURRED BY CONTRACTOR IN CONNECTION WITH THE WORK HEREUNDER, IN ACCORDANCE WITH CONTRACTOR'S USUAL ACCOUNTING PRACTICE.

2.28 CONSULTANTS AND SUBCONTRACTORS

THE COST TO BECHTEL OF EMPLOYING CONSULTANTS AND/OR SUBCONTRACTORS IN CONNECTION WITH THE WORK, INCLUDING THEIR FEES AND EXPENSES, PROVIDED HIRING OF ANY SUCH CONSULTANTS OR LETTING OF SUBCONTRACTS BY BECHTEL IS APPROVED IN ADVANCE BY CONTRACTOR.'

IN A LETTER DATED AUGUST 25, 1959, THE CHIEF, CONTRACT AUDIT BRANCH, AUDIT DIVISION, OFFICE OF THE CONTROLLER, ICA, ADVISED PACIFIC BECHTEL CORPORATION THAT HIS OFFICE HAD "FINALIZED" THE REPORT OF AUDIT ON CONTRACT 2161 AND HAD TAKEN SPECIFIC DOLLAR EXCEPTIONS TO THE FOLLOWING ITEMS (AS WELL AS ANOTHER ITEM OBJECTION TO WHICH WAS LATER REMOVED) FOR WHICH THE CONTRACTOR HAD RECEIVED PAYMENT UNDER THE CONTRACT:

"1. WASHINGTON OFFICE EXPENSES - DISALLOWED

THIS EXCEPTION REPRESENTS SALARIES AND OVERHEAD BILLINGS REIMBURSED UNDER THE CONTRACT TO WASHINGTON OFFICE PERSONNEL IN THE FOLLOWING AMOUNTS.

"PERSONNEL COSTS $15,806.84

BILLED OVERHEAD 9,484.10

TOTAL ----------

$25,290.94

"2. EXPENSES INCURRED IN OBTAINING RELEASE OF WITHHELD PORTION OF FIXED FEE

THIS EXCEPTION REPRESENTS EXPENSES REIMBURSED TO THE CONTRACTOR FOR TRIP TO WASHINGTON, D.C. TO INVESTIGATE WITHHELD PORTION OF FIXED FEE: CONTROLLER'S SALARY $147.95

BILLED OVERHEAD 83.08

TRAVEL EXPENSES AND PER DIEM 358.01

TELEPHONE AND TELEGRAPH 82.00

LEGAL FEE AND TRAVEL

EXPENSES 755.11

TOTAL ---------

$1,426.15" ALSO IN A LETTER OF THE SAME DATE THE OFFICIAL INVOLVED ADVISED THE CONTRACTOR THAT HIS OFFICE HAD FINALIZED THE REPORT OF AUDIT ON CONTRACT 2344 AND HAD TAKEN SPECIFIC DOLLAR EXCEPTION TO THE FOLLOWING ITEM FOR WHICH THE CONTRACTOR HAD BEEN REIMBURSED UNDER THE CONTRACT:

"WASHINGTON OFFICE EXPENSES - DISALLOWED

THIS DISALLOWANCE REPRESENTS SALARIES AND OVERHEAD BILLINGS REIMBURSED UNDER THE CONTRACT TO WASHINGTON OFFICE PERSONNEL IN THE FOLLOWING AMOUNTS:

PERSONNEL COSTS $2,919.71

BILLED OVERHEAD 1,682.68

OVERHEAD RECOVERED ON

VACATION ALLOWANCES 40.43

$4,642.82"

IN RESPONSE TO A LETTER WHICH HAD BEEN RECEIVED FROM PACIFIC BECHTEL REQUESTING ADDITIONAL INFORMATION RELATIVE TO THE ABOVE-STATED EXCEPTIONS, THE SAME ICA OFFICIAL ADVISED PACIFIC BECHTEL IN A LETTER DATED SEPTEMBER 21, 1959, THAT THE FIRST ITEM EXCEPTED TO UNDER CONTRACT 2161 AND THE ITEM EXCEPTED TO UNDER CONTRACT 2344 CONSISTED OF SALARIES PAID TO A "MR. ARTHUR SHAW AND HIS SECRETARIES," EMPLOYEES IN THE "CONTRACTOR'S WASHINGTON OFFICE," PLUS 60 PERCENT THEREOF FOR OVERHEAD, AND THAT EXCEPTIONS HAD BEEN TAKEN TO THESE CHARGES BECAUSE "THESE TYPES OF COSTS ARE UNREASONABLE AND NOT CUSTOMARILY PAID BY ICA.' THE LETTER FURTHER ADVISED THAT EXCEPTION HAD BEEN TAKEN TO THE SECOND, OR $1,426.15-ITEM, REIMBURSED TO THE CONTRACTOR UNDER CONTRACT 2161, BECAUSE THE TYPE OF COST INVOLVED "WAS NOT PROVIDED IN THE CONTRACT.' THE RECORD INDICATES THAT, IN REFERRING TO "CONTRACTOR'S WASHINGTON OFFICE," ICA HAD REFERENCE TO THE WASHINGTON, D.C., OFFICE OF BECHTEL CORPORATION.

BECHTEL CORPORATION REPLIED TO THE ABOVE LETTER BY LETTER OF OCTOBER 8, 1959, SETTING FORTH THE REASONS WHY THE ITEMS OF EXPENSE INVOLVED WERE CONSIDERED REIMBURSABLE UNDER THE TERMS OF THE PRIME CONTRACTS AND RELATED SUBCONTRACTS. AFTER REFERRING TO THE WORK AUTHORIZED TO BE DONE THEREUNDER, BECHTEL CORPORATION STATED THAT ITS WASHINGTON, D.C., OFFICE HAD PERFORMED THE FOLLOWING SERVICES WHICH WERE CONSIDERED TO HAVE BEEN DIRECTLY RELATED TO THE PERFORMANCE OF THE WORK:

"1. OBTAINED MILITARY SECURITY CLEARANCES FOR EACH U.S. EXPATRIATE.

2. SUBMITTED REQUESTS TO ICA FOR APPROVAL OF SALARIES, OR RATE INCREASES, IN EXCESS OF $800.00 A MONTH FOR INDIVIDUAL JOB SITE EMPLOYEES.

3. DURING THE INITIAL PERIOD OF THE WORK, OBTAINED MILITARY TRAVEL ORDERS FOR AMERICANS TRAVELING TO KOREA.

4. WORKED WITH THE JAPANESE CONSULATE IN CLEARING JOB SITE EMPLOYEES FOR TRANSIT THROUGH JAPAN.

5. SECURED PASSPORTS AND VISAS FOR JOB SITE EMPLOYEES.

6. SUBMITTED REPORTS TO ICA CONCERNING THE ARRIVAL, TRANSFER AND DEPARTURE DATES FOR EACH JOB SITE EMPLOYEE.

7. EXPEDITED ICA APPROVAL OF INSURANCE COVERAGE FOR THE PROJECT.

8. OBTAINED PROJECT EXPORT LICENSE AND RENEWALS THEREOF.

9. OBTAINED SPECIAL EXPORT LICENSES FOR CERTAIN COMMODITIES.

10. ARRANGED FOR TRANSPORTATION OF CRITICAL MATERIALS TO KOREA BY MATS.

11. ARRANGED FOR LOGISTIC SUPPORT IN KOREA FROM U.S. ARMED SERVICES.

12. ARRANGED FOR THE PERFORMANCE BY BECHTEL OF SPECIAL SERVICES REQUESTED BY ICA.

EXAMPLE: TO SUPPLY TO ICA PHOTOGRAPHS OF ICA EMBLEMS ON MATERIAL BEING SHIPPED TO KOREA.

13. OBTAINED FOR BECHTEL'S GUIDANCE COPIES OF GOVERNMENT REGULATIONS AND INTERPRETATION THEREOF.

14. WORK IN CONNECTION WITH THE CLEARANCE OF KOREAN NATIONALS FOR ENTRY TO THE U.S. UNDER THE TRAINING PROGRAM.

15. CONTACT WITH THE ICA TRAINING DIVISION IN CONNECTION WITH THE TRAINING PROGRAM.

16. WORKED IN CLOSE COORDINATION WITH THE ICA IN CONNECTION WITH ISSUANCE OF THE FOLLOWING DOCUMENTS:

10 SEPARATE PROCUREMENT AUTHORIZATIONS OR PROJECT IMPLEMENTATION ORDERS AND REVISIONS THEREOF.

19 SEPARATE LETTERS OF COMMITMENT AND REVISIONS THEREOF.

7 SEPARATE LETTERS OF CREDIT AND REVISIONS THEREOF.

17. COORDINATING WORK IN OBTAINING REQUIRED QUARTERLY CERTIFICATES OF PERFORMANCE DURING THE LIFE OF THE PROJECT.'

BECHTEL CORPORATION STATED THAT THE SERVICES WHICH THE WASHINGTON OFFICE HAD PERFORMED IN CONNECTION WITH THE WORK HERE INVOLVED EXTENDED FROM THE START OF THE STEAM ELECTRIC POWER PLANTS PROJECT IN EARLY 1954,"THROUGH TO THE EXPIRATION LETTERS OF COMMITMENT AND LETTERS OF CREDIT IN APRIL OF 1958, A PERIOD OF ABOUT FOUR YEARS.'

RELATIVE TO THE $1,426.15-ITEM FOR WHICH THE CONTRACTOR HAD RECEIVED PAYMENT IN CONNECTION WITH THE PERFORMANCE OF CONTRACT 2161, BECHTEL CORPORATION STATED:

"/A) UPON COMPLETION OF OUR WORK, PAYMENT OF RETAINED FEE WAS WITHHELD BY THE AGENCY. AFTER CONSIDERABLE CORRESPONDENCE AND TELEPHONE CONVERSATIONS BETWEEN OUR SAN FRANCISCO OFFICE AND YOUR OFFICES, NO CONCLUSION WAS REACHED OBTAINING THE RELEASE OF THESE MONIES. BY MUTUAL AGREEMENT BETWEEN BECHTEL AND ICA, MESSRS. J. E. CUSHMAN, CONTROLLER OF BECHTEL CORPORATION, AND W. S. SLUSSER OF THELEN, MARRIN, JOHNSON AND BRIDGES, BECHTEL CORPORATION'S ATTORNEYS, TRAVELED TO WASHINGTON TO FURTHER DISCUSS THE SITUATION. AS A RESULT OF THESE DISCUSSIONS, IT DEVELOPED THE AMOUNTS DUE HAD BEEN WITHHELD WITHOUT CAUSE AND THE RETAINED PORTION OF THE FIXED FEE WAS PAID. THE NECESSARY VOUCHERS AND DOCUMENTS WERE APPROVED AND RELEASED TO J. E. CUSHMAN IN WASHINGTON ON FEBRUARY 26, 1958.

"/B) IN VIEW OF THE OUTCOME OF THE TRIP, IT WOULD APPEAR THAT THE COSTS WERE INCURRED THROUGH NO FAULT OF BECHTEL CORPORATION, BUT RATHER BY VIRTUE OF ICA'S ORIGINAL ACTION AND WITH THE KNOWLEDGE AND CONSENT OF ICA.

"/C) THE WORDING OF THE CONTRACT AND SUBCONTRACT INDICATES THAT SUCH COSTS ARE PROPERLY REIMBURSABLE.'

BY LETTER OF OCTOBER 12, 1959, THE CHIEF, ADMINISTRATIVE AUDIT BRANCH, AUDIT DIVISION, OFFICE OF THE CONTROLLER, ICA, FURNISHED PACIFIC BECHTEL CORPORATION WITH BILL FOR COLLECTION NO. AUD-489-611, IN THE TOTAL AMOUNT OF $34,165.30, COVERING THE ITEMS HERE INVOLVED, AS WELL AS AN ITEM AMOUNTING TO $2,805.39 WHICH WAS SUBSEQUENTLY ELIMINATED FROM THE CLAIM, AND REQUESTED PAYMENT. ALSO, BY LETTER OF MARCH 2, 1961, THE CHIEF, CONTRACT AUDIT BRANCH, AUDIT DIVISION, OFFICE OF THE CONTROLLER, ICA, ADVISED THE CONTRACTOR THAT CONSIDERATION HAD BEEN GIVEN TO THE CONTENTIONS WHICH IT HAD ADVANCED IN SUPPORT OF ITS RIGHT TO BE REIMBURSED FOR THE ITEMS INVOLVED UNDER THE CONTRACTS AND SUBCONTRACTS, BUT THAT, EXCEPT FOR THE ITEM AMOUNTING TO $2,805.39 (WHICH THE CONTRACTOR WAS ADVISED HAD BEEN ELIMINATED FROM THE CLAIM), THE CONTRACTOR WAS CONSIDERED TO BE UNDER AN OBLIGATION TO MAKE REFUND.

IN A LETTER DATED MARCH 24, 1961, ADDRESSED TO THE INTERNATIONAL COOPERATION ADMINISTRATION, TO THE ATTENTION OF THE ASSISTANT DIRECTOR OF THE OFFICE OF CONTRACT RELATIONS, PACIFIC BECHTEL CORPORATION APPEALED FROM THE "FINDING" OF THE AGENCY'S AUDIT DIVISION THAT THE CONTRACTOR WAS NOT ENTITLED TO BE PAID FOR THE ITEMS OF EXPENSE IN QUESTION UNDER THE TERMS OF THE PRIME CONTRACTS AND SUBCONTRACTS INVOLVED. THE CONTRACTOR REITERATED ITS CONTENTION THAT THE SERVICES PERFORMED BY BECHTEL CORPORATION'S WASHINGTON OFFICE WERE DIRECTLY RELATED TO THE PERFORMANCE OF THE WORK AND THAT REIMBURSEMENT FOR THE COST THEREOF WAS PROVIDED FOR UNDER THE CONTRACTUAL DOCUMENTS. ALSO, THE CONTRACTOR CONTENDED THAT REIMBURSEMENT FOR THE COST OF PERFORMING SERVICES OF THE TYPE REPRESENTED BY THE $1,426.15-ITEM WAS PROVIDED FOR IN SECTIONS 2.21, 2.25, 2.27 AND 2.28 OF SUBCONTRACT 2161-1, AND IN SECTION 2.21 OF CONTRACT 2161, SUPRA.

BY LETTER OF MAY 22, 1961, THE ASSISTANT DIRECTOR OF THE OFFICE OF CONTRACT RELATIONS, ICA, ADVISED PACIFIC BECHTEL CORPORATION THAT ITS APPEAL WAS DENIED, WHEREUPON BOTH BECHTEL CORPORATION AND PACIFIC BECHTEL CORPORATION, IN A JOINT LETTER DATED JUNE 30, 1961, WITH SUPPORTING HIBITS,"APPEALED" TO OUR OFFICE FROM THE DEMAND MADE UPON IT BY ICA. THE CONTRACTOR'S APPEAL LETTER, WITH SUPPORTING EXHIBITS, WAS TRANSMITTED TO THE DIRECTOR OF ICA BY OUR LETTER OF AUGUST 9, 1961, FOR SUCH COMMENT ON THE CONTRACTORS' CONTENTIONS AS THE AGENCY DEEMED ADVISABLE TO MAKE, AND BY LETTER OF SEPTEMBER 21, 1961, THE DEPUTY DIRECTOR FOR OPERATIONS, ICA, FURNISHED US WITH THE AGENCY'S COMMENTS.

IN THEIR LETTER OF JUNE 30, 1961, BECHTEL CORPORATION AND PACIFIC BECHTEL CORPORATION HAD STATED THAT THE FORMER CORPORATION IS ENGAGED IN RENDERING ENGINEERING AND CONSTRUCTION SERVICES THROUGHOUT THE UNITED STATES; THAT ITS PRINCIPAL HEADQUARTERS ARE IN SAN FRANCISCOBUT SERVICES IN SUPPORT OF ENGINEERING AND CONSTRUCTION PROJECTS ARE RENDERED THROUGH OFFICES IN LOS ANGELES, HOUSTON, NEW YORK AND WASHINGTON, D.C.; THAT THE WASHINGTON OFFICE IS NOT A SALES OFFICE BUT, AS IN THE CASE OF THE OTHER REGIONAL OFFICES REFERRED TO, HAS ALWAYS BEEN OPERATED FOR THE PURPOSE OF PROVIDING IN SUPPORT OF BECHTEL'S CONSTRUCTION PROJECTS, EXPEDITING, COORDINATING, ADMINISTRATIVE AND SIMILAR SERVICES NECESSARY TO ASSURE THE PROPER AND TIMELY PERFORMANCE OF THESE PROJECTS. RELATIVE TO THE PROCEDURE FOLLOWED BY THE SUBCONTRACTOR IN ALLOCATING COSTS, THE LETTER STATES:

"TO THE EXTENT PAYROLL AND OTHER COSTS ARE INCURRED IN THESE OFFICES IN FURTHERANCE OF A SPECIFIC PROJECT, THEY ARE CHARGED AS DIRECT COSTS OF THAT PROJECT AND REIMBURSED WHERE APPLICABLE CONTRACT DOCUMENTS SO PERMIT. COSTS WHICH DO NOT DIRECTLY BENEFIT A PARTICULAR PROJECT ARE TREATED AS OVERHEAD ITEMS AND REFLECTED IN DETERMINATION OF AN OVERHEAD RATE.'

IN HIS LETTER, THE DEPUTY DIRECTOR STATED, IN PART, THAT REGARDLESS OF WHETHER THE SALARIES PAID TO THE EMPLOYEES CONCERNED IN BECHTEL CORPORATION'S WASHINGTON OFFICE OTHERWISE COULD BE CONSIDERED REIMBURSABLE AS A DIRECT COST UNDER THE TERMS OF THE SUBCONTRACTS (THE LETTER STATING THAT ICA WAS OF THE OPINION THAT THEY COULD NOT), THE SUBCONTRACTOR'S METHOD OF ALLOCATION OF SUCH COSTS WAS INEQUITABLE AND UNDULY PENALIZED CPFF CONTRACTS UNLESS SIMILAR ITEMS IN THE OVERHEAD POOL WERE ALSO ALLOCATED TO FIXED-PRICE CONTRACTS. IN THIS CONNECTION, THE DEPUTY DIRECTOR STATED THAT BECHTEL CORPORATION HAD NOT FURNISHED ANY INFORMATION WHICH WOULD INDICATE THAT ITS METHOD OF ALLOCATION OF OVERHEAD WAS FAIR AND EQUITABLE WITH RESPECT TO ICA FINANCED CONTRACTS AND THAT ,BY DENIAL OF ACCESS TO PERTINENT RECORDS, SUBCONTRACTOR HAS PREVENTED ICA FROM MAKING SUCH A DETERMINATION.'

FOLLOWING THE OPPORTUNITY WHICH WE AFFORDED BECHTEL CORPORATION TO REPLY TO THE MATTERS PRESENTED IN THE DEPUTY DIRECTOR'S LETTER, THE SUBCONTRACTOR WROTE US A LETTER UNDER DATE OF FEBRUARY 5, 1962, STATING, IN PERTINENT PART:

"AS TO THE ICA'S SECOND CONTENTION, THE DETAILED WEEKLY TIME CARDS OF ALL EMPLOYEES IN BECHTEL'S SAN FRANCISCO AND WASHINGTON OFFICES WERE MADE AVAILABLE TO BOTH ICA AND GAO AUDITORS.

"FROM THESE TIME CARDS, THE AUDITORS COULD VERIFY--- AND THESE ARE THE ONLY RECORDS FROM WHICH SUCH VERIFICATION COULD BE MADE--- THAT BECHTEL CHARGED THE SAME KIND OF COSTS CONSISTENTLY TO BOTH LUMP-SUM AND COST-PLUS -A-FIXED-FEE CONTRACTS. * * *

"THE ICA CONTENDS ALSO THAT IT HAS BEEN DENIED ACCESS TO PERTINENT RECORDS FROM WHICH IT COULD HAVE REVIEWED AND VERIFIED BECHTEL'S OVERHEAD PRACTICES. * * * THE FACT IS THAT BOTH ICA AND GAO AUDITORS WERE GIVEN ACCESS--- AND SUCH ACCESS IS AGAIN EXTENDED--- TO ALL RECORDS IN BECHTEL'S POSSESSION FROM WHICH THIS VERIFICATION COULD BE OBTAINED.'

WE TRANSMITTED THE ABOVE LETTER, TOGETHER WITH THE APPEAL FILE IN THE CASE, TO THE FORMER DIRECTOR OF ICA BY OUR LETTER OF FEBRUARY 26, 1962, STATING THAT SINCE THE CONTRACTORS NOW SEEMED WILLING TO MAKE AVAILABLE TO THE GOVERNMENT SUCH RECORDS AS WERE NECESSARY TO VERIFY THE CORRECTNESS OF THEIR CONTENTION THAT BECHTEL CORPORATION CONSISTENTLY FOLLOWED THE PRACTICE OF CHARGING ITEMS OF EXPENSE OF THE KIND HERE INVOLVED DIRECTLY TO THE COST OF PERFORMING ITS FIXED-PRICE, AS WELL AS ITS COST-PLUS-A- FIXED-FEE TYPE CONTRACTS, IT WOULD BE APPRECIATED IF ICA WOULD MAKE SUCH FURTHER EXAMINATION OF BECHTEL'S BOOKS AND RECORDS AS WAS DEEMED NECESSARY IN ORDER TO DETERMINE THE CORRECTNESS OF THE CONTRACTORS' CONTENTIONS IN THE PREMISES AND FURNISH US WITH A REPORT OF THE AGENCY'S FINDING, TOGETHER WITH SUCH FURTHER RECOMMENDATION AS IT DESIRED TO SUBMIT IN THE MATTER.

IN A LETTER DATED JULY 12, 1962, THE ACTING ASSISTANT ADMINISTRATOR FOR ADMINISTRATION, ICA, ADVISED US THAT THE AGENCY HAD MADE AN EXAMINATION OF THE RECORDS OF BECHTEL CORPORATION IN ACCORDANCE WITH OUR REQUEST, THE EXAMINATION HAVING CONSISTED MAINLY OF REVIEWING "FURTHER DETAILS MADE AVAILABLE" CONCERNING THE DISTRIBUTION OF WASHINGTON OFFICE SALARIES AS EVIDENCED BY TIME TICKETS, LABOR DISTRIBUTION SHEETS AND CONTRACTS OTHER THAN THE ONES IN QUESTION INVOLVING THE SAME TYPE OF PROBLEM. THE RESULTS OF THE EXAMINATION AND THE AGENCY'S CONCLUSIONS ARE SET FORTH IN THE LETTER AS FOLLOWS: "* * * AS A RESULT OF THE REVIEW, THE AUDITOR AGREED WITH THE PRIOR AUDIT FINDINGS ON THIS CONTRACT I.E., THAT BECHTEL'S NORMAL PRACTICE IS TO CHARGE DIRECTLY NON-TECHNICAL SALARIES WHEN IDENTIFIABLE WITH SPECIFIC JOBS PERFORMED UNDER LUMP SUM, COST-PLUS-FIXED-FEE AND COST PLUS-PERCENTAGE-OF-FEE CONTRACTS. IT WAS NOTED, HOWEVER, THAT SUCH SALARIES, EVEN THOUGH CHARGED DIRECTLY TO SUCH CONTRACTS, ARE NOT ALWAYS REIMBURSABLE AS THIS DEPENDS ON THE SPECIFIC TERMS OF THE CONTRACT DOCUMENTS.

"IN THIS CONNECTION, INFORMATION ON SIX NON-AID CONTRACTS WAS OBTAINED, FOUR OF WHICH WERE COST-PLUS-FIXED-FEE OR COST-PLUS PERCENTAGE-OF-FEE TYPES AND TWO WERE LUMP SUM. THE CONTRACTOR'S RECORDS SHOW THE JOB COST CHARGES OF THE WASHINGTON OFFICE SALARIES AND THE NUMBER OF HOURS SPENT. DESIGNATIONS ALSO ARE SHOWN TO INDICATE WHETHER THE CONTRACT PERMITTED REIMBURSEMENT OF SUCH SALARIES. BASED ON OUR REVIEW, WE NOTED THAT WASHINGTON OFFICE SALARY CHARGES SHOWN AS JOB COSTS WERE REIMBURSABLE ONLY UNDER TWO OF THE FOUR CONTRACTS.

"THE CONTRACTOR'S WASHINGTON OFFICE SALARIES WHICH ARE NOT IDENTIFIED WITH JOBS ARE CHARGEABLE TO THE OVERHEAD ACCOUNTS WHICH ARE INCLUDED IN THE OVERHEAD POOL. HOWEVER, IT COULD NOT BE DETERMINED WHETHER WASHINGTON OFFICE SALARIES CHARGED DIRECTLY TO CONTRACTS ALSO ARE INCLUDED IN THE SALARY BASE FOR THE PURPOSE OF DETERMINING OVERHEAD. THE CONTRACTOR STATED IN THIS CONNECTION THAT THE RECORDS NECESSARY TO MAKE THE OVERHEAD DETERMINATION FOR CALENDAR YEAR 1953 HAD BEEN DISCARDED AS OVER-AGED AND THAT NO OVERHEAD STUDIES WERE MADE FOR THE CALENDAR YEARS THE CONTRACT WAS IN EFFECT (1954-57) AS THE OVERHEAD RATE WAS FIXED AT 60 PERCENT AND NO SPECIFIC DETERMINATIONS OF THIS NATURE WERE REQUIRED IN CONNECTION WITH THE COMPANY'S OTHER CONTRACTS.

"IT PREVIOUSLY HAD BEEN ASSERTED THAT BECHTEL WASHINGTON OFFICE SALARIES, WERE ASSUMED TO BE COMPENSATED BY THE FIXED OVERHEAD ALLOWANCE PRESCRIBED BY THE CONTRACT. IN THE AUDIT DIVISION'S REPORT ISSUED AUGUST 10, 1959, THE AUDITOR REPORTS THAT AN EQUITABLE OVERHEAD RATE AT THE TIME THE CONTRACT WAS EXECUTED WOULD HAVE BEEN 47 PERCENT INSTEAD OF 60 PERCENT. THE DIFFERENCE IN THE OVERHEAD RATE OF 13 PERCENT IS MORE THAN ADEQUATE TO ABSORB SUCH CHARGES.

"BASED ON THE RESULTS OF THE CURRENT REVIEW, WE AGREE THAT THERE IS EVIDENCE OF CHARGING WASHINGTON OFFICE SALARIES DIRECTLY TO JOB COSTS, AS DISCLOSED BY THE ORIGINAL AUDIT AND IN THIS FOLLOW-UP EXAMINATION, BUT IT IS POINTED OUT THAT SUCH CHARGES ARE NOT ALWAYS REIMBURSABLE. THE AGENCY'S POSITION CONCERNING THE NON-REIMBURSEMENT OF SUCH CHARGES IS PREDICATED PRIMARILY UPON THE TERMS OF THE CONTRACT. THE UNDERSTANDING, AS EXPRESSED BY THE CONTRACT OFFICER, WAS THAT SECTION 2.21 OF THE CONTRACT AUTHORIZED COMPENSATION TO PERSONNEL DIRECTLY ENGAGED IN THE ADVANCEMENT OF SERVICES DESCRIBED IN THE WORK TO BE DONE (SECTION 1.0) AND THAT ADMINISTRATIVE SERVICES WERE NOT TO BE CONSIDERED IN THIS CATEGORY. THE COMBINED RESULTS OF THE EXAMINATIONS TO DATE INDICATE THAT SUFFICIENT MARGIN EXISTED TO FINANCE THE WASHINGTON OFFICE SALARIES AS CONTEMPLATED. IN ADDITION, AS EVIDENCED BY OTHER CONTRACT TRANSACTIONS OF THE COMPANY, WASHINGTON OFFICE SALARIES HAVE NOT CONSISTENTLY BEEN REIMBURSED EVEN THOUGH CHARGED AS JOB COSTS.'

IN ORDER THAT IT MIGHT HAVE AN OPPORTUNITY TO REPLY TO SUCH OF THE MATTERS SET FORTH IN THE ABOVE-QUOTED LETTER AS IT CONSIDERED DETRIMENTAL TO ITS POSITION, BECHTEL CORPORATION WAS FURNISHED A COPY THEREOF. REPLYING BY LETTER OF OCTOBER 1, 1962, BECHTEL STATED, INSOFAR AS MATERIAL, THAT WASHINGTON OFFICE SALARIES CHARGED DIRECTLY TO CONTRACTS DEFINITELY WERE ALSO INCLUDED IN THE SALARY BASE FOR THE PURPOSE OF DETERMINING OVERHEAD, STATING THAT THIS "WAS DEMONSTRATED IN THE 1953 OVERHEAD DETERMINATIONS WHICH CLEARLY SHOWED WASHINGTON OFFICE DIRECT COSTS * * * INCLUDED IN THE BASE * * *.' THE CONTRACTOR STATED THAT THIS WAS BROUGHT OUT IN THE ORIGINAL CONTRACT NEGOTIATIONS WHICH DEVELOPED THE 60 PERCENT OVERHEAD RATE.

BECHTEL'S REPLY WAS TRANSMITTED TO YOUR PREDECESSOR-IN-OFFICE WITH THE REQUEST THAT HIS AGENCY, WHICH HAD THEN BECOME THE AGENCY FOR INTERNATIONAL DEVELOPMENT, VERIFY THE CORRECTNESS OF THE CONTRACTOR'S ALLEGATIONS IN THE PREMISES, AND BY LETTER OF NOVEMBER 26, 1962, THE DEPUTY ADMINISTRATOR FOR ADMINISTRATION, AID, ADVISED US AS FOLLOWS:

"WE HAVE OBTAINED THE CONTRACT FILES FROM STORAGE AND HAVE REVIEWED IN DETAIL THE DOCUMENTS ACCUMULATED DURING THE ORIGINAL CONTRACT NEGOTIATIONS. BASED ON THIS REVIEW, WE FIND THERE IS NOTHING IN THE FILES EXAMINED TO SUPPORT THE CONTRACTOR'S STATEMENT THAT THE WASHINGTON OFFICE DIRECT COSTS HAD BEEN INCLUDED IN THE SALARY BASE. FURTHERMORE, THE NOTES OF THE CONTRACT OFFICER DATED APRIL 14, 1954 WHICH WERE INCLUDED IN THE FILE SHOW THAT THE OVERHEAD RATE OF 60 PERCENT WAS NEGOTIATED AND NOT IDENTIFIED WITH THE OVERHEAD INFORMATION FOR ANY SPECIFIC PERIOD.'

WE OBTAINED THE CONTRACT FILES PERTAINING TO THE NEGOTIATION OF THE CONTRACTS INVOLVED FROM YOUR AGENCY ON THE CHANCE THAT WE MIGHT BE ABLE TO DISCOVER SOMETHING WHICH WOULD HELP RESOLVE THE MATTERS IN DISPUTEHERE, AND WE FOUND A MEMORANDUM DATED APRIL 14, 1954, FROM EDWARD P. HERMAN (WHO SIGNED THE LETTER OF JUNE 9, 1954, FROM FOA TO PACIFIC BECHTEL CORPORATION, REFERRED TO HEREINABOVE, AS THE AGENCY'S "OFFICER FOR CONTRACT RELATIONS") TO WILLIAM M. RAND, WHO WAS ALSO APPARENTLY REPRESENTING FOA IN THE NEGOTIATIONS. THE MEMORANDUM IS ON THE SUBJECT OF THE NEGOTIATIONS WHICH WERE THEN IN PROGRESS LOOKING TO THE CONSUMMATION OF SUBCONTRACT 2161-1, AND IT READS, IN PERTINENT PART, AS FOLLOWS:

"10. ANOTHER THING TO BE CONSIDERED IN CONNECTION WITH FEE IS OVERHEAD. BECHTEL ORDINARILY CHARGES 75 PERCENT OF PRODUCTIVE ENGINEERING, PROCUREMENT, AND RECRUITMENT SALARIES. THEIR NORMAL EXPERIENCE OVER THE LAST THREE YEARS, ACCORDING TO THEIR BOOKS, HAS BEEN ABOUT 64 PERCENT, AND IN 1953 WAS HIGHER. THEY PROPOSED AFTER SOME NEGOTIATION AND WE HAVE ACCEPTED A PRE-DETERMINED OVERHEAD RATE OF 60 PERCENT FOR THE LIFE OF THE CONTRACT. THIS MATTER WAS TAKEN UP WITH THE GAO. THIS MEANS THAT WE WILL PAY A TOTAL OVERHEAD OF APPROXIMATELY $600,000 OVER THE LIFE OF THIS CONTRACT, WHICH IN MY VIEW IS REASONABLE.'

FOA THUS HAD NOTICE OF THE FACT THAT BECHTEL CORPORATION FOLLOWED THE PRACTICE OF APPLYING AN OVERHEAD PERCENTAGE FACTOR TO SALARIES OF PROCUREMENT AND RECRUITMENT PERSONNEL, AS WELL AS TO SALARIES OF PERSONNEL ENGAGED IN PRODUCTIVE ENGINEERING, PRIOR TO THE TIME THE SUBCONTRACT WAS CONSUMMATED. MOREOVER, THE CONTRACTORS HAVE FURNISHED US WITH AN AFFIDAVIT EXECUTED BY J. PERRY YATES, DIRECTOR AND EXECUTIVE VICE PRESIDENT OF BECHTEL CORPORATION, UNDER DATE OF JANUARY 23, 1963, WHEREIN MR. YATES STATES THAT IN APRIL, 1954, HE ACTIVELY PARTICIPATED IN THE NEGOTIATIONS IN WASHINGTON, D.C., WITH REPRESENTATIVES OF FOA WHICH RESULTED IN THE CONSUMMATION OF CONTRACT 2161 AND SUBCONTRACT 2161-1, AND THAT IN DISCUSSING WITH REPRESENTATIVES OF FOA WHAT WOULD BE A PROPER ALLOWANCE UNDER THE SUBCONTRACT TO COMPENSATE BECHTEL CORPORATION FOR THE EXPENSES OF MAINTAINING AND OPERATING ITS REGULARLY ESTABLISHED OFFICES, SCHEDULES DESIGNATED EXHIBITS "A" THROUGH "F" (PHOTOSTATS OF WHICH WERE FURNISHED WITH THE AFFIDAVIT) WERE PREPARED BY BECHTEL UNDER MR. YATES' SUPERVISION, PRESENTED TO REPRESENTATIVES OF FOA AND REVIEWED IN DETAIL BY THOSE PARTICIPATING IN THE NEGOTIATIONS. EXHIBIT A, ENTITLED "BECHTEL CORPORATION, DIRECT LABOR OVERHEAD RATIOS," SETS FORTH AS "DIRECT JOB LABOR COST" FOR THE CALENDAR YEAR 1953 UNDER THE CATEGORIES ,ENGINEERING," "PROCUREMENT" AND "CONSTRUCTION" THE AMOUNTS OF $6,065,066, $652,989 AND $27,525,932, RESPECTIVELY, OR TOTAL DIRECT JOB LABOR COSTS OF $34,243,987. THE EXHIBIT THEN SETS FORTH AS "OVERHEAD EXPENSES" FOR THE SAME YEAR UNDER THE CATEGORIES MENTIONED THE AMOUNTS OF $4,060,069, $494,907, AND $1,752,995, RESPECTIVELY, OR TOTAL OVERHEAD EXPENSES OF $6,307,971. OVERHEAD EXPENSES ARE FURTHER BROKEN DOWN ON EXHIBIT A UNDER THE THREE CATEGORIES OF COST TO SHOW ALLOCATIONS OF SPECIFIC AMOUNTS UNDER THE SUBHEADS "DIVISIONAL," "EXECUTIVE, GENERAL AND ADMINISTRATIVE," "ADJUSTED COMPENSATION," "STATE TAXES ON INCOME" AND "OTHER EXPENSES.' THE EXHIBIT THEN SETS FORTH THE PERCENTAGE AMOUNTS OF 66.94 PERCENT, 75.99 PERCENT AND 6.37 PERCENT AS REPRESENTING THE "PERCENT OF DIRECT LABOR" TO BE APPLIED FOR RECOVERING OVERHEAD EXPENSES UNDER THE CATEGORIES OF COST "ENGINEERING," "PROCUREMENT" AND "CONSTRUCTION," RESPECTIVELY. THESE PERCENTAGE AMOUNTS WERE DERIVED, OF COURSE, BY DIVIDING DIRECT LABOR COSTS INTO OVERHEAD EXPENSES.

BECHTEL CORPORATION'S DIRECT LABOR-OVERHEAD RATIOS FOR THE YEARS 1952 AND 1951 ARE SET FORTH IN SCHEDULES DESIGNATED EXHIBITS C AND E IN THE SAME MANNER. THE SCHEDULES DESIGNATED EXHIBITS B, D AND F CONTAIN A FURTHER BREAKDOWN OF "DIVISIONAL" OVERHEAD FOR THE YEARS 1953, 1952 AND 1951, RESPECTIVELY.

IN THE AFFIDAVIT, MR. YATES STATES THAT THE SCHEDULES AND OTHER DATA AS PRESENTED AND DISCUSSED INDICATED THAT AN AMOUNT EQUAL TO 63.2 PERCENT OF DIRECT PAYROLL WOULD BE AN APPROPRIATE ALLOWANCE TO COMPENSATE BECHTEL FOR ITS OVERHEAD COSTS, BUT THAT, AS A RESULT OF REVIEW, CONSIDERATION AND DISCUSSION DURING THE CONTRACT NEGOTIATIONS, CERTAIN OF THE OVERHEAD COSTS, SUCH AS INTEREST AND CONTRIBUTIONS, WERE CLAIMED BY FOA TO BE NONALLOWABLE AND IMPROPERLY REFLECTED IN THE SCHEDULES (EXHIBITS), AS A RESULT OF WHICH THE OVERHEAD ALLOWANCE PERCENTAGE FACTOR WAS REDUCED TO 60.9 PERCENT. THEREAFTER, MR. YATES STATES, FURTHER QUESTIONS WERE RAISED BY FOA REPRESENTATIVES WHICH MIGHT,"IF AGREED TO BY BECHTEL," HAVE HAD A FURTHER BUT INSIGNIFICANT EFFECT UPON THE OVERHEAD PERCENTAGE, AND IN THE INTEREST OF REACHING AN AGREEMENT, THE NEGOTIATORS AGREED UPON AN OVERHEAD ALLOWANCE AMOUNTING TO 60 PERCENT OF DIRECT PAYROLL. REFERRING TO THE STATEMENT IN BECHTEL'S LETTER OF OCTOBER 1, 1962, THAT THE 1953 OVERHEAD DETERMINATIONS SHOWED WASHINGTON OFFICE "DIRECT COSTS" TO BE INCLUDED IN THE BASE ON WHICH OVERHEAD WAS COMPUTED, MR. YATES STATES:

"4. IN THE PREPARATION OF THE ATTACHED SCHEDULES DIRECT COSTS BY BECHTEL'S WASHINGTON OFFICE * * * WERE INCLUDED IN THE BASE * * * IN THE ATTACHED EXHIBIT "A," THE ABOVE MENTIONED TOTAL FIGURE OF $652,989 (I.E., THE AMOUNT SHOWN AS "DIRECT JOB LABOR COST" FOR THE CALENDAR YEAR 1953 UNDER THE CATEGORY "PROCUREMENT" IN EXHIBIT A, SUPRA) INCLUDING A TOTAL OF $2,350.00 OF DIRECT LABOR CHARGES FOR EMPLOYEES OF BECHTEL'S WASHINGTON OFFICE.'

ON THE BASIS OF THE RECORD AS NOW CONSTITUTED, WE PERCEIVE NO LEGAL BASIS FOR CONCLUDING THAT BECHTEL CORPORATION WAS NOT ENTITLED TO BE REIMBURSED FOR THE FIRST ITEM EXCEPTED TO UNDER CONTRACT 2161 AND THE ITEM EXCEPTED TO UNDER CONTRACT 2344, CONSISTING OF SALARIES PAID TO EMPLOYEES IN THE CONTRACTOR'S WASHINGTON OFFICE, PLUS 60 PERCENT THEREON FOR OVERHEAD. UNDER THE TERMS OF THE SUBCONTRACTS, BECHTEL WAS EXPRESSLY REQUIRED TO PERFORM THE SERVICES WHICH WERE, IN FACT, PERFORMED BY THESE EMPLOYEES, AND SECTION 2.21 OF THE SUBCONTRACTS PROVIDED THAT BECHTEL WOULD BE REIMBURSED FOR AMOUNTS PAID BY THE SUBCONTRACTOR AS COMPENSATION TO ITS PERSONNEL DIRECTLY ENGAGED IN THE ADVANCEMENT OF THE SERVICES SET FORTH TO BE PERFORMED. IT IS OUR CONCLUSIONS, THEREFORE, THAT THE EXCEPTIONS TAKEN TO REIMBURSEMENT OF THESE ITEMS SHOULD BE WITHDRAWN.

WE DO NOT BELIEVE, HOWEVER, THAT SUBCONTRACT 2161-1, OR THE RELATED PRIME CONTRACT, REASONABLY MAY BE CONSTRUED TO PROVIDE FOR REIMBURSEMENT TO BECHTEL FOR THE $1,426.16-ITEM SET FORTH IN ICA'S LETTER OF AUGUST 25, 1959, SUPRA. THE SERVICES RENDERED BY BECHTEL'SCONTROLLER AND ATTORNEY WERE CLEARLY FOR THE BENEFIT OF THE CONTRACTOR AND IN NO WAY FURTHERED THE PERFORMANCE OF THE WORK UNDER THE CONTRACT. ACCORDINGLY, IT IS RECOMMENDED THAT YOUR AGENCY TAKE SUCH STEPS AS ARE NECESSARY TO OBTAIN A REFUND OF THE AMOUNT INVOLVED.