B-149893, OCTOBER 5, 1962, 42 COMP. GEN. 190

B-149893: Oct 5, 1962

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CONTRACTS - PAYMENTS - FAILURE TO OBTAIN PRIOR APPROVAL OF EXPENDITURES CONTRACTS - CONSTRUCTION - GENERAL RULES WHERE A CONTRACT PROVIDES THAT THE COST PER POUND OF FERRO-NICKEL TO THE GOVERNMENT WILL BE BASED ON THE ACTUAL COST OF PRODUCTION AND WILL INCLUDE AN AMOUNT THAT IS SUFFICIENT TO AMORTIZE THE CAPITAL ADVANCES MADE FOR THE PURCHASE OF NEW CAPITAL ASSETS. WHICH ARE NOT ITEMS OF PRODUCTION. IS NOT CHARGEABLE UNDER THE CONTRACT. THE FAILURE OF THE CONTRACTOR TO COMPLY WITH THE REQUIREMENT FOR PRIOR APPROVAL BY THE GOVERNMENT FOR EXPENDITURES OF A CAPITAL NATURE IS SUFFICIENT TO PREVENT THE RECOVERY OF THE EXPENDITURES. UNDER A CONTRACT PROVIDING THAT THE PRICE OF THE PRODUCT WILL BE BASED ON THE ACTUAL COST OF PRODUCTION AND WILL INCLUDE AN AMOUNT THAT IS SUFFICIENT TO AMORTIZE THE CAPITAL ADVANCES FOR THE PURCHASE OF NEW AND THE IMPROVEMENT OR REPLACEMENT OF OLD CAPITAL ASSETS.

B-149893, OCTOBER 5, 1962, 42 COMP. GEN. 190

CONTRACTS - PAYMENTS - FAILURE TO OBTAIN PRIOR APPROVAL OF EXPENDITURES CONTRACTS - CONSTRUCTION - GENERAL RULES WHERE A CONTRACT PROVIDES THAT THE COST PER POUND OF FERRO-NICKEL TO THE GOVERNMENT WILL BE BASED ON THE ACTUAL COST OF PRODUCTION AND WILL INCLUDE AN AMOUNT THAT IS SUFFICIENT TO AMORTIZE THE CAPITAL ADVANCES MADE FOR THE PURCHASE OF NEW CAPITAL ASSETS, OR THE IMPROVEMENT OR REPLACEMENT OF OLD CAPITAL ASSETS, UPON APPROVAL OF THE GOVERNMENT, ANY EXPENDITURE TO BE REFLECTED IN THE PRICE OF THE PRODUCT MUST COME EITHER WITHIN THE ACTUAL COST OF PRODUCTION OR THE AMORTIZATION OF THE CAPITAL ADVANCES; THEREFORE, THE COST OF INSTALLING AND REPLACING CAPITALIZATION ITEMS, WHICH ARE NOT ITEMS OF PRODUCTION, WITHOUT THE PRIOR APPROVAL OF THE GOVERNMENT, A CONDITION PRECEDENT TO RECOVERY, IS NOT CHARGEABLE UNDER THE CONTRACT, AND THE FAILURE OF THE CONTRACTOR TO COMPLY WITH THE REQUIREMENT FOR PRIOR APPROVAL BY THE GOVERNMENT FOR EXPENDITURES OF A CAPITAL NATURE IS SUFFICIENT TO PREVENT THE RECOVERY OF THE EXPENDITURES. UNDER A CONTRACT PROVIDING THAT THE PRICE OF THE PRODUCT WILL BE BASED ON THE ACTUAL COST OF PRODUCTION AND WILL INCLUDE AN AMOUNT THAT IS SUFFICIENT TO AMORTIZE THE CAPITAL ADVANCES FOR THE PURCHASE OF NEW AND THE IMPROVEMENT OR REPLACEMENT OF OLD CAPITAL ASSETS, EVEN IF THE EXPENDITURES FOR THE CAPITAL ASSETS COULD BE CONSIDERED PRODUCTION COSTS UNDER RECOGNIZED ACCOUNTING PROCEDURES, THE FACT THAT THE CAPITAL ADVANCES COME WITHIN THE PURVIEW OF THE SPECIFIC PROVISION OF THE CONTRACT GOVERNING SUCH ADVANCES, THE FAMILIAR RULE OF CONSTRUCTION THAT IN CASE OF CONFLICT THE MORE SPECIFIC PREVAILS OVER THE GENERAL IS FOR APPLICATION AND, THEREFORE, THE COST OF IMPROVING AND REPLACING CAPITAL ASSETS MAY NOT BE CONSIDERED IN THE COST OF PRODUCTION.

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, OCTOBER 5, 1962:

WE HAVE YOUR LETTERS OF SEPTEMBER 12 AND 28, 1962, REQUESTING OUR ADVICE AS TO WHETHER CERTAIN COSTS INCURRED BY THE CONTRACTOR IN 1957 AND 1960 WERE PROPERLY CHARGED UNDER CONTRACT NO. DMP-50.

UNDER THE TERMS OF THE CONTRACT ENTERED INTO EFFECTIVE JANUARY 16, 1953, THE HANNA NICKEL SMELTING COMPANY SUPPLIES FERRO-NICKEL TO GSA. ARTICLE VIII OF THE CONTRACT SETS OUT TWO FACTORS ON WHICH THE PRICE OF THE COMMODITY FURNISHED IS BASED. THESE FACTORS ARE STATED IN THE ORIGINAL CONTRACT PROVISION AS FOLLOWS:

1. THE CONTRACTOR WILL SELL TO THE GOVERNMENT, AND THE GOVERNMENT WILL PURCHASE FROM THE CONTRACTOR, ALL SALEABLE FERRO-NICKEL PRODUCED BY THE FACILITY DURING THE PERIOD OF THIS CONTRACT UP TO A MAXIMUM OF 125,000,000 POUNDS OF CONTAINED NICKEL IN FERRO-NICKEL AT PRICES FOR FERRO-NICKEL PER POUND OF CONTAINED NICKEL DETERMINED BY ADDING (A) THE CONTRACTOR'S ACTUAL COST OF PRODUCTION PER POUND OF CONTAINED NICKEL (BUT NOT MORE THAN AN AVERAGE OF 79.39 CENTS ON THE FIRST 5,000,000 POUNDS TO THE EXTENT SOLD DURING PERIOD 1 AND DURING PERIOD 2 PRIOR TO THE COMPLETION OF ADDITIONAL ELECTRIC MELTING FURNACES AND RELATED EQUIPMENT, NOR MORE THAN 60.5 CENTS ON THE REMAINDER, CALCULATED, AFTER THE BEGINNING OF PERIOD 3, BY AVERAGING THE THREE YEAR PERIOD FROM THE CALENDAR QUARTER BEGINNING CLOSEST TO THE BEGINNING OF PERIOD 3, AND AFTER SAID THREE-YEAR PERIOD BY AVERAGING EACH RUNNING PERIOD OF THREE CONSECUTIVE YEARS, BOTH CEILINGS ESCALATED AS PROVIDED IN PARAGRAPH 2 OF THIS ARTICLE VIII) AND (B), BUT ONLY IN THE CASE OF THE FIRST 95,000,000 POUNDS OF CONTAINED NICKEL IN FERRO-NICKEL SOLD HEREUNDER, AN AMOUNT PER POUND OF CONTAINED NICKEL (HEREINAFTER CALLED "AMORTIZATION PAYMENT") SUFFICIENT TO AMORTIZE THE CAPITAL ADVANCES MADE PURSUANT TO ARTICLE VI PLUS INTEREST THEREON. * *

THE ARTICLE WAS CHANGED BY PARAGRAPH 6 OF AMENDMENT NO. 3, DATED APRIL 22, 1955, TO PROVIDE FOR A DIFFERENT PRICE FOR FERRO-NICKEL PRODUCED DURING THE BREAK-IN PERIOD. BY PARAGRAPH 5 OF AMENDMENT NO. 4, DATED NOVEMBER 8, 1957, A CHANGE WAS MADE IN THE CEILING PRICE. FINALLY, THE PROVISION WAS MATERIALLY CHANGED BY THE TERMS OF AMENDMENT NO. 5, DATED APRIL 20, 1961, WITHOUT AFFECTING THE PERIOD WITH WHICH WE ARE CONCERNED. THE SIGNIFICANT LANGUAGE FOR THE PURPOSES OF THIS INQUIRY WAS, AT THE TIME OF THE EXPENDITURES UNDER CONSIDERATION, NOT MATERIALLY DIFFERENT FROM THE ORIGINAL PROVISION.

THE CAPITAL ADVANCES REFERRED TO IN ARTICLE VIII ARE OBTAINED BY THE CONTRACTOR UNDER ARTICLE VI 1 WHICH PROVIDED IN ITS ORIGINAL FORM AS FOLLOWS:

1. UPON THE CONTRACTOR'S WRITTEN REQUEST, THE GOVERNMENT WILL MAKE ADVANCES (HEREINAFTER CALLED "CAPITAL ADVANCES") OF THE ENTIRE AMOUNT UP TO A TOTAL OF $22,000,000 (INCLUDING THE AMOUNT TO BE REIMBURSED TO THE CONTRACTOR UNDER ARTICLE II) REQUIRED (A) TO TEST THE PROCESS AS PROVIDED IN ARTICLE II, INCLUDING THE COST OF MINING AND OF SHIPPING TO FRANCE THE QUANTITY OF ORE FROM THE MINE REQUIRED FOR SUCH TESTS AND INCLUDING THE REASONABLE EXPENSES OF TECHNICAL OBSERVERS TO ATTEND SUCH TESTS ON BEHALF OF THE CONTRACTOR, (B) TO CONSTRUCT, EQUIP, DESIGN AND REBUILD THE FACILITY CONTEMPLATED BY ARTICLE IV (INCLUDING ALL COSTS AND EXPENSES INCURRED DURING OR IN RESPECT OF ANY PERIODS OF TIME WITHIN PERIOD 1 THAT PRODUCTION OF SALEABLE FERRO-NICKEL HAS CEASED BY REASON OF CONSTRUCTING, EQUIPPING, DESIGNING, REBUILDING OR REPAIRING THE FURNACES OR RELATED EQUIPMENT), (C) FOR SUCH REPLACEMENTS OR IMPROVEMENTS OF THE FACILITY WHICH ARE AGREED BY THE CONTRACTOR AND THE GOVERNMENT TO BE NECESSARY OR ADVISABLE DURING THE PERIOD OF THIS CONTRACT, AND (D) FOR SUCH OTHER NECESSARY AND SO AGREED UPON EXPENDITURES WHICH, IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRACTICE, ARE CAPITALIZED. REQUESTS SHALL BE SUPPORTED BY A CASH FLOW SHEET SHOWING ESTIMATED REQUIREMENTS OVER REASONABLE FUTURE PERIODS, AND CAPITAL ADVANCES WILL BE MADE AT RATES COVERING THE CONTRACTOR'S REQUIREMENTS FOR A FORWARD PERIOD OF NOT LESS THAN THIRTY DAYS. AS SOON AS PRACTICABLE AFTER THE END OF EACH CALENDAR MONTH, THE CONTRACTOR WILL SUBMIT TO THE GOVERNMENT A CUMULATIVE STATEMENT OF THE COST OF THE FACILITY IN SUCH DETAIL AS THE GOVERNMENT MAY REASONABLY REQUEST.

THE ARTICLE WAS CHANGED BY PARAGRAPH 4 OF AMENDMENT NO. 3, DATED APRIL 22, 1955, TO EFFECT CHANGES IN THE INCLUSIONS AND EXCLUSIONS UNDER (B) AND, BY PARAGRAPH 3 OF AMENDMENT NO. 4, DATED NOVEMBER 8, 1957, TO INCREASE THE TOTAL AMOUNT ALLOWABLE UP TO $22,875,000.

IT IS STATED IN YOUR LETTER THAT IN 1957 THE CONTRACTOR REPLACED DUTCH OVENS IN THE SMELTING PLANT WITHOUT OBTAINING THE APPROVAL OF THE GOVERNMENT AND THAT THESE OVENS WERE INCLUDED, UNDER ARTICLE VIII 1 (A), AS A COST OF PRODUCTION IN 1957 AT $86,356. IT IS FURTHER NOTED THAT THE OVENS REPLACED HAD BEEN ACQUIRED THROUGH THE USE OF CAPITAL ADVANCES. THE JUSTIFICATION PRESENTED BY THE CONTRACTOR FOR THE INCLUSION OF THE REPLACEMENT OVENS IN ACTUAL COST OF PRODUCTION FOR PURPOSES OF DETERMINING THE UNIT PRICE AND YOUR COMMENTS THEREON ARE STATED IN YOUR LETTER AS FOLLOWS:

WITH RESPECT TO REPLACEMENT TRANSACTIONS SUCH AS THE DUTCH OVEN TRANSACTION, HANNA'S POSITION IS BASED ON THE PREMISE, AS EXPRESSED BY THE AUDITORS ENGAGED BY HANNA, THAT SINCE THE GOVERNMENT REQUESTED HANNA TO BUILD THE NICKEL SMELTING PLANT IMMEDIATELY, WITHOUT HAVING FIRST SET UP AND RUN A PILOT PLANT OPERATION, MANY CAPITAL ASSETS WOULD HAVE TO BE REPLACED OR REBUILT. THUS HANNA HAS FOLLOWED THE POLICY OF CHARGING TO EXPENSE COSTS APPLICABLE TO MODIFYING, CHANGING, OR REPLACING THOSE CAPITAL ASSETS FOR WHICH THE ORIGINAL PLAN DID NOT FULLY WORK OUT AND CHANGE OR REPLACEMENT WAS NECESSARY, IN SPITE OF THE SPECIFIC LANGUAGE OF ARTICLE VI 1 (C) WHICH PROVIDES FOR THE GOVERNMENT TO MAKE ADVANCES FOR "SUCH REPLACEMENTS OR IMPROVEMENTS OF THE FACILITY WHICH ARE AGREED BY THE CONTRACTOR AND THE GOVERNMENT TO BE NECESSARY OR ADVISABLE DURING THE PERIOD OF THIS CONTRACT.'

IN 1960 THE CONTRACTOR, WITHOUT OBTAINING GOVERNMENT APPROVAL, INSTALLED A SAWDUST SYSTEM FOR USE IN THE CALCINING OPERATION AND CHARGED THE COST, $92,833, AS AN ACTUAL COST OF PRODUCTION PURSUANT TO ARTICLE VIII 1 (A). YOU STATE THAT THIS WAS AN ADDITION OF A CAPITALIZABLE NATURE WHICH WAS CONSTRUCTED TO EFFECT A SAVING IN THE AMOUNT OF FERROSILICON CONSUMED IN THE SMELTING PROCESS. THE JUSTIFICATION PRESENTED BY THE CONTRACTOR FOR THE INCLUSION OF THE COST AS A COST OF PRODUCTION IS STATED IN YOUR LETTER TO BE AS FOLLOWS:

WITH RESPECT TO TRANSACTIONS INVOLVING ADDITIONS SUCH AS THE SAWDUST SYSTEM TRANSACTION, HANNA'S POSITION IS BASED ON THE PRINCIPLE, AS EXPRESSED BY THE AUDITORS ENGAGED BY HANNA, ADOPTED IN 1960 AS A SUPPLEMENT TO THE EARLIER POLICY, THAT BY PURCHASING THE EQUIPMENT OF A CAPITALIZABLE NATURE MORE MONEY WOULD BE SAVED THROUGH THE INCREASED EFFICIENCY OF OPERATIONS THAN THE COST OF THE NEW EQUIPMENT.

BOTH OF THE CITED EXPENDITURES WERE MADE WELL AFTER THE CONCLUSION OF THE "BREAK-IN-PERIOD" WHICH PRECEDED PERIOD 1 (SEE ARTICLE IV); THE DISCUSSION WHICH FOLLOWS, THEREFORE, IS INTENDED TO APPLY ONLY TO THE POST-BREAK-IN- PERIOD. WE DO NOT DETERMINE WHETHER THE CONCLUSIONS EXPRESSED BELOW WOULD BE EQUALLY APPLICABLE TO EXPENDITURES MADE AT AN EARLIER TIME.

IT IS CLEAR FROM THE QUOTED TERMS OF THE CONTRACT THAT THE PRICE OF THE PRODUCT SUPPLIED INCLUDES BASICALLY ONLY TWO FACTORS: (1) ACTUAL COST OF PRODUCTION AND (2) AMORTIZATION OF CAPITAL ADVANCES. YOU HAVE CONCLUDED THAT THE EXPENDITURES MENTIONED ABOVE PROPERLY COME WITHIN ARTICLE VI 1 AND MAY NOT BE REGARDED AS PRODUCTION EXPENSES UNDER THE TERMS OF THE CONTRACT. EVEN IF IT MIGHT BE CONTENDED THAT THESE EXPENDITURES COULD BE CONSIDERED PRODUCTION EXPENSES UNDER RECOGNIZED ACCOUNTING PROCEDURES, THE FACT THAT THEY COME WITHIN THE PURVIEW OF THE MORE SPECIFICALLY DELIMITED PROVISIONS OF ARTICLE VI 1 REQUIRES THE CONCLUSION, UNDER THE FAMILIAR RULE OF CONSTRUCTION THAT IN CASE OF CONFLICT THE MORE SPECIFIC PREVAILS OVER THE GENERAL, AND THAT THE CONTRACT SHOULD BE CONSTRUED TO BRING THEM WITHIN THE PROVISIONS OF SUCH ARTICLE. ACCORDINGLY, ON THE BASIS OF THE PRESENTATION IN YOUR LETTER, AND THE PROVISIONS OF THE CONTRACT, WE ARE OF THE OPINION THAT THE ITEMS IN QUESTION MAY NOT PROPERLY BE REGARDED AS COSTS OF PRODUCTION UNDER ARTICLE VIII.

AS INDICATED EARLIER, ANY EXPENDITURE TO BE REFLECTED IN THE PRICE OF THE PRODUCT MUST COME EITHER WITHIN THE ACTUAL COST OF PRODUCTION OR AMORTIZATION OF CAPITAL ADVANCES. SINCE, AS WE HAVE CONCLUDED, IT DOES NOT COME UNDER THE FIRST IT MUST, IF PAYMENT MAY BE CLAIMED AT ALL, COME WITHIN THE SECOND. SPECIFICALLY, WE BELIEVE THAT THE DUTCH OVENS AND THE SAWDUST SYSTEM COME UNDER ARTICLE VI 1 (C) AS REPLACEMENTS OR IMPROVEMENTS. UNDER THIS PROVISION THE GOVERNMENT'S APPROVAL WOULD BE REQUIRED TO AUTHORIZE THE EXPENDITURE OF CAPITAL ADVANCES.

IN THE CASE OF BOTH VI 1 (C) AND (D), CAPITAL ADVANCES ARE AVAILABLE ONLY FOR SUCH EXPENDITURES AS "ARE AGREED BY THE CONTRACTOR AND THE GOVERNMENT TO BE NECESSARY OR ADVISABLE.' WHILE THE LANGUAGE IS NOT AS SPECIFIC AS MIGHT BE DESIRABLE, GOVERNMENT APPROVAL SEEMS TO HAVE BEEN INTENDED AS A CONDITION PRECEDENT TO THE EXPENDITURE OF CAPITAL ADVANCES FOR EITHER OF THE TWO CATEGORIES OF ITEMS. THIS IS APPARENT FROM THE LANGUAGE OF THE ARTICLE ITSELF, WHICH STATES IN EFFECT THAT UPON THE CONTRACTOR'S WRITTEN REQUEST THE GOVERNMENT WILL MAKE ADVANCES REQUIRED FOR SUCH REPLACEMENTS, IMPROVEMENTS, AND OTHER EXPENDITURES AGREED ON BY THE CONTRACTOR AND THE GOVERNMENT. THE CLEAR IMPLICATION IS THAT THE AGREEMENT WILL PRECEDE THE REQUEST AND THE ADVANCES.

AN OBVIOUS PURPOSE OF THE ARTICLE IS TO CONTROL THE EXPENDITURE OF THE CAPITAL ADVANCE ACCOUNT. UNLESS APPROVAL BY THE GOVERNMENT IS REGARDED AS A CONDITION PRECEDENT, THE CONTROL PROCEDURE COULD NOT BE EFFECTIVE.

IT MAY BE ARGUED THAT THE FOREGOING CONCLUSION IS NOT VALID, SINCE APPROVAL IS REQUIRED ONLY FOR (C) AND (D), WHILE (A) AND (B), WHICH REPRESENT THE LARGEST PORTION OF THE EXPENDITURES, INCLUDE NO SUCH APPROVAL REQUIREMENT. HOWEVER, THIS REASONING OVERLOOKS THE LANGUAGE OF ARTICLE IV, WHICH STATES IN PERTINENT PART (THE ORIGINAL PROVISION WAS MODIFIED BY AMENDMENT NOS. 3 AND 4 WITHOUT CHANGE IN THE QUOTED PORTION) AS FOLLOWS:

WITH ADVANCES MADE BY THE GOVERNMENT AS PROVIDED IN ARTICLE VI, THE CONTRACTOR WILL CONSTRUCT AND EQUIP (INCLUDING ANY NECESSARY REDESIGNING, REBUILDING AND REPAIR) AS PROMPTLY AS POSSIBLE A FACILITY FOR THE CONVERSION OF ORE FROM THE MINE INTO SALEABLE FERRO-NICKEL. THE PERIOD FROM THE FIRST EXPERIMENTAL PRODUCTION OF FERRO-NICKEL IN THE FACILITY, OR ANY PART THEREOF, TO AND INCLUDING DECEMBER 31, 1954 IS HEREINAFTER CALLED THE "BREAK-IN-PERIOD.' DURING THE PERIOD BEGINNING JANUARY 1, 1955 AND ENDING UPON A PRELIMINARY DETERMINATION OF TECHNICAL FEASIBILITY AS CONTEMPLATED BY ARTICLE V BUT NOT LATER THAN SEPTEMBER 30, 1955 (HEREINAFTER CALLED "PERIOD 1") THE FACILITY SHALL CONSIST OF ONE ELECTRIC REFINING FURNACE, TWO ELECTRIC MELTING FURNACES, ONE ELECTRIC FERRO- SILICON FURNACE, ONE ELECTRIC SLAG MELTING FURNACE, A SLAG-DISPOSAL SITE AND EQUIPMENT, A STOCKPILE SITE AND STOCKPILING EQUIPMENT, SEWAGE-DISPOSAL PLANT, RAILROAD SPURS, HOUSING FOR PERSONNEL, PRELIMINARY CONSTRUCTION AND FOUNDATIONS FOR TWO ADDITIONAL ELECTRIC MELTING FURNACES AND FACILITIES AS MAY BE REQUIRED AFTER PERIOD 1, AND ALL EQUIPMENT AND FACILITIES AGREED TO BY THE GOVERNMENT AS NECESSARY FOR SUCH CONVERSION OF ORE FROM THE MINE INTO SALEABLE FERRO-NICKEL. THE CONTRACTOR WILL PLACE ORDERS FOR THE EQUIPMENT AND SUPPLIES NECESSARY FOR THE ERECTION OF TWO ADDITIONAL ELECTRIC MELTING FURNACES AT SUCH TIME OR TIMES AS WILL ASSURE SO FAR AS POSSIBLE DELIVERY THEREOF IMMEDIATELY AFTER A PRELIMINARY DETERMINATION OF TECHNICAL FEASIBILITY AS CONTEMPLATED BY ARTICLE V. IN SUCH EVENT, WITH FURTHER ADVANCES MADE BY THE GOVERNMENT AS CONTEMPLATED BY ARTICLE VI, THE CONTRACTOR WILL PROMPTLY CONSTRUCT, EQUIP AND COMPLETE NOT LATER THAN MARCH 31, 1956, SAID TWO ADDITIONAL ELECTRIC MELTING FURNACES (TOGETHER WITH ANY ADDITIONAL FACILITIES AND EQUIPMENT MADE NECESSARY THEREBY). * * * THE FACILITY, AS IT EXISTS FROM TIME TO TIME AS CONTEMPLATED BY THIS ARTICLE OR AS IT MAY BE SUBSTITUTED FOR FROM TIME TO TIME WITH THE APPROVAL OF THE GOVERNMENT, IS HEREINAFTER CALLED "THE FACILITY.'

READING ARTICLES IV AND VI TOGETHER MAKES IT CLEAR THAT ONLY THE TESTING OF THE PROCESS DID NOT REQUIRE SPECIFIC APPROVAL. OTHER MAJOR ITEMS INCLUDED IN THE FACILITY REQUIRE APPROVAL EITHER BY SPECIFIC DESIGNATION IN ARTICLE IV OR BY THE TERMS OF THE ITALICIZED PROVISIONS FOR GOVERNMENT CONCURRENCE STATED IN ARTICLE IV.

ARTICLE XIV 2 GIVES THE CONTRACTOR THE OPTION TO PURCHASE THE PLANT UPON TERMINATION OF THE CONTRACT FOR 7.5 PERCENT OF THE TOTAL CAPITAL ADVANCES "EXCLUDING ADVANCES FOR CAPITAL REPLACEMENTS.' THE PARTIES COULD HARDLY HAVE CONSIDERED THAT ITEMS PURCHASED OUT OF CAPITAL ADVANCES, WHICH COULD SUBSEQUENTLY BE ACQUIRED BY THE CONTRACTOR FOR ONLY 7.5 PERCENT OF THE COST--- EXCEPT FOR REPLACEMENTS FOR WHICH THE CONTRACTOR WOULD PAY ONLY 7.5 PERCENT OF THE ITEM REPLACED WITHOUT REGARD TO THE TIME OF REPLACEMENT OR ITS VALUE--- SHOULD NOT BE SUBJECT TO PRIOR APPROVAL OF THE GOVERNMENT. THEREFORE, IT IS OUR OPINION THAT THE CONTRACT SHOULD BE CONSTRUED THAT GOVERNMENT AGREEMENT IS A CONDITION PRECEDENT TO THE EXPENDITURE OF CAPITAL ADVANCES. IT IS WELL ESTABLISHED THAT WHERE THE TERMS OF A CONTRACT CONDITION REIMBURSEMENT FOR COSTS UPON THE RECEIPT OF APPROVAL FROM THE CONTRACTING AGENCY THE FAILURE TO OBTAIN SUCH APPROVAL IS SUFFICIENT WITHOUT ANYTHING ELSE TO PREVENT RECOVERY. HAWKINS V. UNITED STATES, 96 U.S. 689 (1877); 24 COMP. GEN. 565, 572; B-134232, DECEMBER 6, 1957.

ACCORDINGLY, THE SPECIFIC QUESTIONS RAISED IN YOUR LETTER ARE ANSWERED AS FOLLOWS:

A. UNDER THE TERMS OF THE CONTRACT, PRIOR GOVERNMENT APPROVAL WAS REQUIRED FOR THE PURCHASE OF NEW CAPITAL ASSETS, OR FOR THE REDESIGN, MODIFICATION, REBUILDING, IMPROVEMENT OR REPLACEMENT OF OLD CAPITAL ASSETS COMING WITHIN THE PURVIEW OF ARTICLE VI 1 (C), VI 1 (D), OR THE APPROVAL REQUIREMENT OF ARTICLE IV.

B. ALL EXPENDITURES OF A CAPITAL NATURE, WHETHER FOR NEW ASSETS OR FOR THE IMPROVEMENT, REDESIGN, REBUILDING, MODIFICATION OR COMPLETE OR PARTIAL REPLACEMENT OF AN EXISTING ASSET, IN ORDER TO HAVE BEEN INCLUDED IN THE PRICE PER POUND--- THE ONLY VEHICLE UNDER THE TERMS OF THE CONTRACT FOR COMPENSATING THE CONTRACTOR OTHER THAN CHARGING THE ITEMS TO COST OF PRODUCTION WHICH IS NOT APPLICABLE UNDER THE CIRCUMSTANCES--- MUST HAVE BEEN MADE FROM CAPITAL ADVANCES.