B-151294, OCT. 12, 1964

B-151294: Oct 12, 1964

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

TO THE SECRETARY OF THE ARMY: REFERENCE IS MADE TO A LETTER DATED JUNE 17. THE CLAIM IS BASED UPON AN ALLEGED UNDERSTANDING AT THE TIME OF NEGOTIATING THE CONTRACT THAT THE FIXED LABOR RATE WOULD APPLY TO 60 STANDARD UNITS OF LABOR DEVELOPED UNDER THE WAGE INCENTIVE PLAN OF THE OTIS ELEVATOR COMPANY. WERE DENIED BY YOUR DEPARTMENT IN 1957 AND 1961. RECONSIDERATION OF THE CLAIM WAS REQUESTED BY OTIS IN A LETTER DATED SEPTEMBER 25. 730 WHICH WAS PRESENTED TO OUR OFFICE. THIS CHANGE IN POSITION WAS INFLUENCED BY CERTAIN OF THE FACTORS CONSIDERED BY THE ARMY CONTRACT ADJUSTMENT BOARD IN ITS DECISION OF FEBRUARY 17. WHICH EXPRESSED THE OPINION THAT THE PREPONDERANCE OF THE EVIDENCE INDICATED THAT IT WAS OTIS' INTENT AND UNDERSTANDING AT THE TIME THE CONTRACT WAS NEGOTIATED TO BILL THE GOVERNMENT ON THE BASIS OF CLOCK HOURS.

B-151294, OCT. 12, 1964

TO THE SECRETARY OF THE ARMY:

REFERENCE IS MADE TO A LETTER DATED JUNE 17, 1964, AMCGC-B, FROM HEADQUARTERS, UNITED STATES ARMY MATERIEL COMMAND, IN RESPONSE TO OUR LETTER TO YOU OF APRIL 3, 1964, REQUESTING A SUPPLEMENTAL ADMINISTRATIVE REPORT AND RECOMMENDATION ON THE CLAIM OF THE OTIS ELEVATOR COMPANY, NEW YORK, NEW YORK, FOR $114,730 UNDER DEPARTMENT OF THE ARMY, NEW YORK ORDNANCE DISTRICT, CONTRACT NO. DA 30-069-ORD-1595, DATED JUNE 30, 1955, PROVIDING FOR REPAIR AND MODIFICATION OF A MAXIMUM QUANTITY OF 1,000 T46E1 RANGE FINDERS, REIMBURSEMENT TO OTIS FOR THE NET COST OF MATERIALS AND PAYMENT OF $6.65 FOR EACH DIRECT LABOR HOUR EXPENDED IN THE PERFORMANCE OF THE CONTRACT. THE CLAIM IS BASED UPON AN ALLEGED UNDERSTANDING AT THE TIME OF NEGOTIATING THE CONTRACT THAT THE FIXED LABOR RATE WOULD APPLY TO 60 STANDARD UNITS OF LABOR DEVELOPED UNDER THE WAGE INCENTIVE PLAN OF THE OTIS ELEVATOR COMPANY, AND NOT TO AN ELAPSED CLOCK HOUR OR 60 MINUTES.

PRIOR TO THE RECEIPT OF THE CLAIM IN OUR OFFICE, APPLICATIONS BY OTIS FOR RELIEF UNDER THE PROVISIONS OF TITLE II OF THE FIRST WAY POWERS ACT, 1941, AND THE SUBSEQUENTLY ENACTED PUBLIC LAW 85-804, WERE DENIED BY YOUR DEPARTMENT IN 1957 AND 1961, FOLLOWING CONSIDERATION THEREOF BY THE ORDNANCE CONTRACT ADJUSTMENT BOARD AND THE ARMY CONTRACT ADJUSTMENT BOARD. WE DISALLOWED THE CLAIM BY SETTLEMENT DATED JULY 11, 1963, AND RECONSIDERATION OF THE CLAIM WAS REQUESTED BY OTIS IN A LETTER DATED SEPTEMBER 25, 1963. THE NEW YORK ORDNANCE DISTRICT HAD RECOMMENDED FAVORABLE ACTION ON THE APPLICATION FOR RELIEF MADE UNDER PUBLIC LAW 85- 804 BUT IT CHANGED ITS POSITION WHEN FURNISHING A REPORT ON THE CLAIM FO4 $114,730 WHICH WAS PRESENTED TO OUR OFFICE. THIS CHANGE IN POSITION WAS INFLUENCED BY CERTAIN OF THE FACTORS CONSIDERED BY THE ARMY CONTRACT ADJUSTMENT BOARD IN ITS DECISION OF FEBRUARY 17, 1961, ACAB 1023, AFFIRMED OCTOBER 17, 1961, WHICH EXPRESSED THE OPINION THAT THE PREPONDERANCE OF THE EVIDENCE INDICATED THAT IT WAS OTIS' INTENT AND UNDERSTANDING AT THE TIME THE CONTRACT WAS NEGOTIATED TO BILL THE GOVERNMENT ON THE BASIS OF CLOCK HOURS.

TASK ORDERS WERE ISSUED UNDER THE CONTRACT FOR THE REPAIR AND MODIFICATION OF 689 RANGE FINDERS OF WHICH 685 UNITS WERE REPAIRED AND MODIFIED AND FOUR UNITS WERE DEMILITARIZED AFTER INSPECTION AT THE OTIS PLANT. PAYMENTS UNDER THE CONTRACT WERE MADE IN THE APPARENT TOTAL AMOUNT OF $550,530.76 AS COMPARED WITH NET TOTAL BILLINGS OF $665,260.79 AFTER DEDUCTION OF CERTAIN UNCONTESTED AUDIT EXCEPTIONS AND WITH OTIS' ALLEGED WORK COSTS OF $718,125.63. THE DIFFERENCE OF $114,740.03 BETWEEN $550,530.76 AND $665,260.79 WAS DISALLOWED BY THE ARMY AUDIT AGENCY IN THE COMPUTATION OF AMOUNTS DUE FOR LABOR HOURS OF WORK AS DISTINGUISHED FROM THE SO-CALLED STANDARD WORK UNITS. IN CONNECTION WITH THE APPLICATION FOR RELIEF UNDER THE PROVISIONS OF PUBLIC LAW 85-804, THE ARMY AUDIT AGENCY INDICATED THAT THE COMPUTATION BY OTIS OF THE NUMBER OF STANDARD WORK UNITS WAS SUBSTANTIALLY CORRECT AND THAT NO ADDITIONAL AUDIT SHOULD BE NECESSARY.

IF PAYMENT HAD BEEN MADE UNDER THE CONTRACT ON THE BASIS OF THE NET BILLINGS TOTALING $665,260.79 FOR LABOR AND MATERIALS, THE AVERAGE UNIT COST FOR REPAIR AND MODIFICATION OF THE 685 RANGE FINDERS WOULD HAVE APPROXIMATED THE SUM OF $971 AS COMPARED WITH AN APPROXIMATE UNIT COST OF $1,016 REPORTEDLY INVOLVED IN THE REPAIR AND MODIFICATION OF 693 SIMILAR RANGE FINDERS UNDER A CONTRACT AWARDED TO THE NORTHROP AIRCRAFT COMPANY AT ABOUT THE SAME TIME THAT CONTRACT NO. DA 30-069 ORD-1595 WAS AWARDED TO OTIS. THE TWO FIRMS HAD SUBMITTED WHAT HAVE BEEN DESCRIBED AS ,HIGH COST PROPOSALS" BUT IT WAS ADMINISTRATIVELY DETERMINED THAT THE LOWER OFFERS OF THE CHRYSLER CORPORATION AND THE EASTMAN KODAK COMPANY SHOULD NOT BE GIVEN FURTHER CONSIDERATION BECAUSE AWARDS TO THOSE COMPANIES WOULD NOT FACILITATE THE MAINTENANCE OF CONTRACTOR FACILITIES FOR MOBILIZATION PURPOSES.

ALL PROPOSALS RECEIVED WERE CONSIDERED BY THE NEGOTIATOR AT THE NEW YORK ORDNANCE DISTRICT AND THE FRANKFORT ARSENAL, THE REVIEWING AUTHORITY, AS HAVING BEEN BASED UPON REIMBURSEMENT FOR COSTS OF MATERIALS, PLUS STATED HOURLY RATES FOR DIRECT LABOR. HOWEVER, IT IS CONTENDED BY THE OTIS ELEVATOR COMPANY THAT ITS PROPOSAL WAS NOT INTENDED AS OFFERING TO PROVIDE LABOR AT THE RATE OF $6.65 PER CLOCK HOUR, AND THAT THE GOVERNMENT NEGOTIATOR AND OTHER COGNIZANT GOVERNMENT OFFICIALS WERE AWARE OF THE FACT, OR SHOULD HAVE KNOWN, THAT IT WAS THE COMPANY'S INTENTION TO CHARGE $6.65 FOR 60 UNITS OF PRODUCTIVE LABOR AS DETERMINED IN ACCORDANCE WITH A WAGE INCENTIVE SYSTEM WHICH HAD BEEN IN EFFECT FOR SEVERAL YEARS AT THE COMPANY'S DOMESTIC FACTORIES.

IT WAS EXPLAINED THAT ALL PRODUCTIVE LABOR UNDER THE COMPANY'S WAGE INCENTIVE SYSTEM IS ACCOUNTED FOR IN LABOR UNITS CONSISTING OF THE AMOUNT OF WORK A SKILLED MECHANIC CAN PRODUCE IN ONE MINUTE OVER AN 8 HOUR DAY, AND THAT NORMALLY 60 STANDARD LABOR UNITS ARE PERFORMED WITHIN LESS THAN 1 HOUR. HOWEVER, WHEN A STANDARD HAS NOT BEEN ESTABLISHED FOR A PARTICULAR TYPE OF WORK, IT IS THE COMPANY'S POLICY TO ASSIGN 60 UNITS OF LABOR FOR EACH HOUR, IN WHICH EVENT THE JOB IS CLASSED AS "DAY WORK.'

OTIS' WAGE INCENTIVE SYSTEM AND METHOD OF ACCOUNTING FOR DIRECT LABOR AND FACTORY OVERHEAD COSTS APPEAR TO HAVE BEEN RECOGNIZED BY THE GOVERNMENT IN THE ADMINISTRATION OF SEVERAL REDETERMINABLE FIXED-PRICE CONTRACTS WITH OTIS. PRIOR TO AWARD OF CONTRACT NO. DA-30-069-ORD 1595, THE NEW YORK ORDNANCE DISTRICT HAD, HOWEVER, NEGOTIATED ONLY ONE OTHER CONTRACT WITH OTIS ON A TIME AND MATERIAL BASIS. THAT CONTRACT (NO. DA 30-069-ORD- 1278), COVERED THE REPAIR AND MODIFICATION OF NINE RANGE FINDERS AND SPECIFIED A DIRECT LABOR HOUR RATE OF $7.70. THE FIXED RATE FOR LABOR WAS NEGOTIATED PRIMARILY ON THE BASIS THAT THE COMPANY HAD ESTABLISHED A FACTORY COST RATE OF $107 FOR 1,000 STANDARD PRODUCTIVE UNITS OF LABOR. THE AGREED UPON RATE OF $7.70 PER DIRECT LABOR HOUR WAS COMPUTED BY CONVERTING THE FACTORY COST RATE TO $6.42 FOR 60 LABOR UNITS (60 TIMES $0.107) AND ADDING 9 PERCENT FOR GENERAL ADMINISTRATIVE EXPENSE, AND 10 PERCENT FOR PROFIT.

IN CONNECTION WITH THE AWARD OF CONTRACT NO. DA 30-069-ORD-1595, OTIS' ORIGINAL PROPOSAL INCLUDED AN OFFERED DIRECT LABOR HOUR RATE OF $7.84 AND IT WAS KNOWN TO THE GOVERNMENT'S PRICE ANALYST THAT SUCH SUM HAD BEEN COMPUTED BY USING A FACTORY COST RATE OF $109 FOR 1,000 STANDARD PRODUCTIVE UNITS OF LABOR, CONVERTED TO $6.54 FOR 60 UNITS (60 TIMES $0.109), AND ADDING 9 PERCENT ($0.59) AND 10 PERCENT ($0.71) FOR GENERAL AND ADMINISTRATIVE EXPENSES AND FOR PROFIT. THE PRICE ANALYST PROPOSED TO APPLY THE PREVIOUSLY ADOPTED FACTORY COST RATE OF $107 PER 1,000 PRODUCTIVE LABOR UNITS, TO ELIMINATE THE PROFIT FACTOR AND ALLOW 8.23 PERCENT OF $6.42 FOR GENERAL AND ADMINISTRATIVE EXPENSE. AFTER THE PRICE ANALYST'S REPORT WAS SUBMITTED TO THE GOVERNMENT'S NEGOTIATOR, OTIS WAS REQUESTED TO REDUCE ITS PROPOSED FIXED LABOR CHARGE TO $7.65 PER HOUR. HOWEVER, IT WAS FINALLY AGREED THAT THE FIXED LABOR CHARGE WOULD BE $6.65 PER HOUR AND THE $1 REDUCTION APPEARS TO HAVE BEEN AN ARBITRARY AMOUNT SUGGESTED BY THE FRANKFORT ARSENAL OSTENSIBLY FOR THE PURPOSE OF MAKING THE OTIS PROPOSAL MORE IN LINE WITH THE RATES PROPOSED BY THE TWO LOWEST OFFERORS. THE AGREED UPON RATE OF $6.65 PER HOUR WAS LOWER THAN THE RATE PROPOSED BY ONE OF THOSE OFFERORS BUT CONSIDERABLY HIGHER THAN THE RATE PROPOSED BY THE OTHER OFFEROR WHOSE PROPOSAL WAS REJECTED.

THE GOVERNMENT NEGOTIATOR WAS FURNISHED DETAILED INFORMATION IN THE REPORT OF THE PRICE ANALYST SHOWING HOW THE "HOURLY" LABOR RATES WERE COMPUTED BY OTIS IN ITS CURRENT PROPOSAL AND ITS PROPOSAL SUBMITTED ON THE PRIOR TIME AND MATERIAL CONTRACT FOR REPAIR AND MODIFICATION OF NINE RANGE FINDERS. THE GOVERNMENT'S NEGOTIATOR NEVERTHELESS HAS TAKEN THE POSITION THAT IT WAS THE FUNCTION OF THE PRICE ANALYST TO REPORT ONLY ON THE REASONABLENESS OF THE OTIS OFFER, AND THAT IT WAS NOT THE NEGOTIATOR'S RESPONSIBILITY TO QUESTION THE FIGURES USED IN THE REPORT OF THE PRICE ANALYST. APPARENTLY THE GOVERNMENT'S NEGOTIATOR CONSIDERS THAT HE WAS JUSTIFIED IN RELYING ON THE FACT THAT THE PRICE ANALYST'S REPORT INCLUDED A STATEMENT THAT THE $107 PER THOUSAND PRODUCTIVE UNITS STANDARD "IS EQUIVALENT TO $6.42 PER HOUR ($ .107 TIMES 60 MINUTES EQUALS $6.42).' AN AFFIDAVIT EXECUTED DURING THE MONTH OF APRIL 1957, THE PRICE ANALYST STATED THAT HE INTENDED TO RECOMMEND IN HIS REPORT REIMBURSEMENT OF "A CONVERSION COST OF $6.42 PER HOUR BASED ON A SIXTY (60) PRODUCTIVE UNIT HOUR.'

OTIS HAD REFERRED TO ITS FIRST TIME AND MATERIAL CONTRACT WITH THE NEW YORK ORDNANCE DISTRICT AS EVIDENCE OF THE FACT THAT THE PARTIES WHO NEGOTIATED THE SECOND TIME AND MATERIAL CONTRACT AT ALL TIMES CONSIDERED AND UNDERSTOOD THAT THE TERM "DIRECT LABOR HOUR" WAS NOT TO BE GIVEN A LITERAL INTERPRETATION BUT CONSTRUED AS BEING THE EQUIVALENT OF 60 STANDARD WORKING UNITS AS DEVELOPED UNDER OTIS' WAGE INCENTIVE SYSTEM. OTIS' NEGOTIATOR ALLEGEDLY ASSUMED THAT NO PROBLEM WOULD DEVELOP IN THE MATTER BECAUSE THERE WAS NEGOTIATED UNDER THE SECOND CONTRACT AN AGREEMENT THAT RECORDS WOULD BE MAINTAINED ON A JOB ORDER BASIS "IN KEEPING WITH THE CONTRACTOR'S ESTABLISHED ACCOUNTING SYSTEM.' OTIS ALSO HAS INVITED ATTENTION TO THE FACT THAT IN ESTIMATING COSTS FOR REPAIR AND MODIFICATION OF RANGE FINDERS DELIVERED TO ITS PLANT, SUCH ESTIMATES INCLUDED LABOR COST ESTIMATES BASED UPON CHARGES PER 1,000 STANDARD PRODUCTIVE LABOR UNITS, AND NOT UPON DIRECT LABOR HOURS EXPENDED.

OTIS CONTENDED THAT ALL LABOR BILLINGS UNDER THE FIRST TIME AND MATERIAL CONTRACT WERE MADE ON THE BASIS OF STANDARD WORK UNITS, THAT THIS CONTRIBUTED TO THE DECISION NOT TO INSIST UPON QUALIFICATION OF THE PAYMENT PROVISION OF THE SECOND CONTRACT, AND THAT, IF THE BILLINGS UNDER THE FIRST CONTRACT WERE IMPROPER IN ANY RESPECT, THE ARMY SHOULD HAVE TAKEN EXCEPTION THERETO. ON THAT POINT, INVESTIGATION DISCLOSED THAT ONLY MINOR PORTIONS OF THE BILLINGS UNDER THE FIRST CONTRACT WERE BASED UPON SO -CALLED STANDARD UNITS OF PRODUCTIVE LABOR AND THAT THE ARMY AUDIT AGENCY DID NOT RECOMMEND SUSPENSION OF THE APPARENT EXCESS CHARGES IN VIEW OF THE RELATIVELY SMALL AMOUNT INVOLVED AS A POSSIBLE OVERPAYMENT. WE DOUBT THAT THERE WAS ANY DUTY ON THE PART OF THE GOVERNMENT AUDITORS TO ADVISE OTIS OF THE POSSIBLE OVERCHARGES BUT THE SITUATION AT LEAST TENDS TO SUPPORT IN SOME DEGREE OTIS' CONTENTION THAT IT DID NOT INTEND TO PROPOSE AN HOURLY LABOR RATE AS THAT TERM IS GENERALLY UNDERSTOOD WHEN BIDDING ON THE SECOND TIME AND MATERIAL CONTRACT.

THE PERTINENT FACTS RELIED UPON BY THE ARMY CONTRACT ADJUSTMENT BOARD IN DETERMINING THAT THE PREPONDERANCE OF THE EVIDENCE DID NOT SUPPORT A FINDING THAT OTIS HAD MADE A MISTAKE IN THE MATTER ARE AS FOLLOWS:

OTIS' BILLINGS FOR WORK PERFORMED UNDER CONTRACT NO. DA 30-069-ORD 1278 CONSISTED FOR THE MOST PART OF LABOR CHARGES AT AN HOURLY RATE OF $7.70, AND WHEN PREPARING TO PERFORM THE CONTRACT HERE INVOLVED AN INTER-OFFICE ORDER WAS ISSUED WHICH INCLUDED A REQUIREMENT THAT "ALL HOURS OF LABOR ARE TO BE SUPPORTED BY INDIVIDUAL TIME CARDS.' THE FIRST 28 BILLINGS UNDER THE CONTRACT DATED FROM FEBRUARY 29, TO JULY 2, 1956, INCLUDED LABOR CHARGES COMPUTED ON AN ELAPSED TIME BASIS. BY LETTER DATED JULY 17, 1956, OTIS ALLEGED THAT IT HAD EXPERIENCED A LOSS IN CONTRACT PERFORMANCE OF APPROXIMATELY $66,000, EXCLUSIVE OF UNRECOVERED OVERHEAD EXPENSES; MADE REFERENCE TO ITS WAGE INCENTIVE SYSTEM; AND REQUESTED A CONTRACT AMENDMENT WHICH WOULD HAVE PERMITTED BILLINGS TO BE MADE AT THE RATE OF $6.65 FOR EACH DIRECT LABOR HOUR AND/OR UNIT HOUR OF LABOR EXPENDED IN CONTRACT PERFORMANCE. OTIS DID NOT AT THAT TIME ALLEGE ERROR IN BILLING AND DID NOT ATTEMPT TO CORRECT THE FIRST 28 INVOICES UNTIL ABOUT THE MONTH OF FEBRUARY 1957.

WHEN WE REQUESTED A SUPPLEMENTAL ADMINISTRATIVE REPORT ON THE CLAIM FOR $114,730, IT APPEARED TO BE QUESTIONABLE WHETHER THE STATED REASONS FOR DENIAL OF THE CLAIM FOR RELIEF UNDER PUBLIC LAW 85-804 WERE SUFFICIENT TO JUSTIFY REJECTION OF THE CLAIM BY OUR OFFICE. FIRST, IT WAS CONSIDERED THAT BOTH PARTIES HAD PLACED AN UNDUE EMPHASIS UPON THE OPERATIONS UNDER THE PREVIOUS TIME AND MATERIAL CONTRACT, SINCE THE BILLINGS UNDER THAT CONTRACTOR FOR LABOR PERFORMED WERE NOT ENTIRELY CONSISTENT AND THE QUANTITY OF WORK WAS SO SMALL THAT IT SEEMED TO BE UNREASONABLE TO REGARD SUCH BILLINGS AS A SIGNIFICANT FACTOR IN DETERMINING OTIS' INTENTION REGARDING LABOR CHARGES UNDER THE SUBSEQUENT CONTRACT WHICH INVOLVED A POSSIBLE $1 MILLION WORTH OF WORK. SECOND, IT WAS BELIEVED THAT THE LETTER OF JULY 17, 1956, REQUESTING A CONTRACT AMENDMENT NEED NOT HAVE ALLEGED A BILLING ERROR FOR THE PURPOSE OF CONTENDING AT SOME FUTURE DATE THAT THE CONTRACT AS EXECUTED DID NOT EXPRESS THE ACTUAL AGREEMENT WHICH THE PARTIES ATTEMPTED TO NEGOTIATE; THAT THE CONTRACT WHEN READ AS A WHOLE COULD BE INTERPRETED AS PERMITTING PAYMENT FOR STANDARD LABOR UNITS; OR THAT A MISTAKE WAS MADE WHICH SHOULD HAVE BEEN APPARENT TO THE GOVERNMENT'S NEGOTIATOR. THIRD, IT WAS OUR BELIEF THAT THE SECOND BASIS FOR THIS CLAIM AROSE AS THE RESULT OF AN AFTERTHOUGHT WHICH ACCOUNTED FOR THE DELAY OF OTIS IN ATTEMPTING TO CORRECT ITS FIRST 28 INVOICES. FOURTH, WE CONSIDER THAT THE INTEROFFICE MEMORANDUM CITED BY THE ARMY CONTRACT ADJUSTMENT BOARD MIGHT REASONABLY HAVE BEEN REGARDED AS HAVING BEEN MERELY A COMPOUNDING OF SUCH MISTAKE AS WAS MADE BY OTIS IN THE FIRST INSTANCE. WE RECOGNIZED, HOWEVER, THAT THE LETTER DATED JULY 17, 1956, SEEMED TO INDICATE THAT OTIS WAS NOT CONTENDING THAT THERE WAS ANY MISTAKE OR AMBIGUITY IN THE CONTRACT BUT, RATHER, THAT IT HOPED THAT THE ARMY WOULD ALLOW ADDITIONAL PAYMENTS UNDER THE CONTRACT TO BE MADE SO THAT ITS LOSSES IN CONTRACT PERFORMANCE COULD BE RECOVERED OR SUBSTANTIALLY REDUCED.

WE EXAMINED THE VOLUMINOUS REPORTS OF HEARINGS HELD BY THE ORDNANCE CONTRACT ADJUSTMENT BOARD BUT CONSIDERED THE TESTIMONY TO BE INCONCLUSIVE IN REGARD TO THE QUESTION AS TO OTIS' INTENT AT THE TIME OF ENTERING INTO CONTRACT NO. DA 30-069-ORD-1595. IN THAT CONNECTION, THERE WAS CONSIDERABLE DISCUSSION OF THE FACT THAT OTIS HAD APPARENTLY KEPT BOTH EMPLOYEE TIME RECORDS AND STANDARD PRODUCTIVE LABOR UNIT RECORDS IN CONJUNCTION WITH ACCOUNTING FOR LABOR COSTS ON PARTICULAR JOBS, AND OF THE QUESTION AS TO WHETHER REPAIR OF RANGE FINDERS WAS A TYPE OF WORK WHICH COULD HAVE BEEN STANDARDIZED SO AS TO COME WITHIN THE COMPANY'S WAGE INCENTIVE SYSTEM, OR WHETHER THE COMPANY INTENDED THAT ALL OF SUCH WORK WOULD BE TREATED AS "DAY WORK" FOR WHICH THE EMPLOYEES WOULD NOT BE PAID FOR ACCELERATED PERFORMANCE. OTIS CONTENDED THAT THE REPAIR JOBS WERE OF SUCH AN EXTENSIVE NATURE THAT THEY COULD WELL BE PLACED IN THE SAME CATEGORY AS MANUFACTURING OPERATIONS WHICH THE COMPANY HAD CONDUCTED IN PRODUCING RANGE FINDERS FOR THE GOVERNMENT.

WE INDICATED IN OUR LETTER REQUESTING A SUPPLEMENTAL ADMINISTRATIVE REPORT ON THE CLAIM THAT, IN VIEW OF THE RECORD OF NEGOTIATIONS, PARTICULARLY THE REPORT OF THE GOVERNMENT'S PRICE ANALYST, AND IN VIEW OF THE PRICE ANALYST'S AFFIDAVIT EXECUTED DURING THE MONTH OF APRIL 1957, THERE APPEARED TO BE A SUFFICIENT JUSTIFICATION FOR ALLOWANCE OF THE CLAIM.

IT IS REPORTED THAT THIS IS THE FIRST TIME THAT ANY COMPANY HAS ATTEMPTED TO OVERCOME THE ORDINARY MEANING OF THE TERM "DIRECT LABOR HOUR," AS USED IN ARMY TIME AND MATERIAL CONTRACTS; THAT THE QUOTATIONS OF CHRYSLER, EASTMAN KODAK, AND NORTHROP WERE MADE AVAILABLE TO OTIS AND THE COMPANY MADE NO INQUIRY WITH RESPECT TO WHETHER OR NOT THOSE FIRMS WERE QUOTING LABOR RATES ON A CHRONOLIGICAL HOUR BASIS; AND THAT OTIS INDICATED IN ITS PROPOSAL THAT IT WAS AGREEABLE TO QUOTING ON A "TIME AND MATERIAL BASIS.'

OTIS DENIES THAT IT WAS FURNISHED INFORMATION AS TO THE BASIS UPON WHICH ITS COMPETITORS WERE QUOTING, AND IT APPEARS THAT THE FURNISHING OF THE QUOTATIONS OF THOSE CONCERNS TO OTIS WOULD NOT HAVE BEEN PROPER UNDER THE RULES APPLICABLE TO THE MAKING OF A CONTRACT AWARD BY NEGOTIATION AS DISTINGUISHED FROM THE MAKING OF AWARDS UNDER FORMAL ADVERTISING PROCEDURES. IN ANY EVENT, WE DO NOT AGREE WITH THE SUGGESTION THAT IT WAS OTIS' RESPONSIBILITY TO MAKE INQUIRY AS TO THE EXACT TERMS OF THE QUOTATION OF ITS COMPETITORS TO INSURE THAT A COMMON DENOMINATOR WOULD BE USED BY THE GOVERNMENT IN EVALUATING THE FOUR PROPOSALS. ANY DOUBT IN THAT MATTER SHOULD HAVE BEEN RESOLVED BY THE GOVERNMENT'S NEGOTIATOR WITH THE ASSISTANCE OF THE OTHER MEMBERS OF THE GOVERNMENT'S NEGOTIATION TEAM.

IT IS TRUE THAT OTIS' ORIGINAL PROPOSAL INDICATED THAT OTIS WAS AGREEABLE TO QUOTING ON A "TIME AND MATERIAL BASIS.' HOWEVER, THIS OBVIOUSLY WOULD NOT PRECLUDE A DETERMINATION THAT OTIS HAD MADE A MISTAKE IN QUOTING AN HOURLY RATE OF $7.84 FOR LABOR EXPENDED IN CONTRACT PERFORMANCE. ON THAT POINT, IT IS OUR VIEW THAT THE RECORD OF NEGOTIATIONS, THE AFFIDAVIT OF THE PRICE ANALYST EXECUTED IN APRIL 1957, AND OTHER INFORMATION FURNISHED BY GOVERNMENT PERSONNEL WHO WERE FAMILIAR WITH OTIS' ACCOUNTING SYSTEM REASONABLY INDICATE THAT THE COMPANY DID IN FACT MAKE SUCH A MISTAKE.

BY LETTER DATED APRIL 28, 1955, SIX DAYS AFTER SUBMISSION OF ITS ORIGINAL PROPOSAL, OTIS ADVISED THE GOVERNMENT'S NEGOTIATOR THAT ITS PROPOSED LABOR RATE OF $7.84 PER HOUR INCLUDED A WORK COST PER HOUR OF $6.45, CONSISTING OF A $2.48 PRODUCTIVE DEPARTMENT RATE AND OVERHEAD OF $4.06 ON PAYROLL AND OTHER FACTORY COSTS. ALSO, THE LETTER STATED THAT THE DEVELOPMENT OF THE $7.84 LABOR HOUR RATE COMPARED DIRECTLY WITH THAT WHICH WAS APPLIED WHEN THE GOVERNMENT AND OTIS ENTERED INTO CONTRACT NO. DA 30-069-ORD-1278, AT WHICH TIME A SELLING PRICE OF $7.70 WAS ESTABLISHED.

ON THE SAME DATE THE PRICE ANALYST, WHO EVIDENTLY ALREADY WAS AWARE OF OTIS' COSTING METHODS, SUBMITTED A REPORT TO THE GOVERNMENT'S NEGOTIATOR THROUGH THE CHIEF, PRICE ANALYSIS BRANCH. THAT REPORT FURNISHED A TABULATION REFLECTING OTIS' CURRENT PROPOSAL, RECONCILIATION WITH THE PRIOR NEGOTIATED RATE AND RECOMMENDATION BY THE PRICE ANALYSIS BRANCH. WAS SHOWN THAT THE COMPANY HAD USED THE RESPECTIVE CONVERSION RATES OF $107 AND $109 "PER THOUSAND PRODUCTIVE UNITS" WHEN QUOTING ON THE PREVIOUS TIME AND MATERIAL CONTRACT FOR REPAIR AND MODIFICATION OF RANGE FINDERS AND WHEN QUOTING ON THE CURRENTLY PROPOSED PROCUREMENT. IT WAS STATED IN THE REPORT OF THE PRICE ANALYST THAT THE PREVIOUS CONTRACT CONTAINED "A NEGOTIATED TIME AND MATERIAL RATE OF $7.70 PER HOUR" AND THAT:

"FOR THE YEAR 1954, THE CONTRACTOR UTILIZED A STANDARD COSTING RATE OF $107 PER THOUSAND PRODUCTIVE UNITS. THIS STANDARD IS EQUIVALENT TO $6.42 PER HOUR ($ .107 TIMES 60 MINUTES EQUALS .642). THIS COSTING RATE HAS BEEN ACCEPTED BY AAA IN PRICE REDETERMINATION AUDIT FOR CONTRACT DA-30-069 -ORD-582. FOR THE YEAR 1955, THE CONTRACTOR PROPOSES A STANDARD COSTING RATE OF $109 PER THOUSAND PRODUCTIVE UNITS. THIS STANDARD IS EQUIVALENT TO $6.54 PER HOUR ($ .109 TIMES 60 MINUTES EQUALS $6.54). THE CONTRACTOR HAS NOT SUBMITTED ANY ACCOUNTING DOCUMENTS IN SUPPORT OF THE INCREASED CONVERSION RATE FOR 1955. THE PRICE ANALYST RECOMMENDS THE USE OF 1954 CONVERSION RATE FOR THIS PROCUREMENT.'

IN HIS AFFIDAVIT EXECUTED IN APRIL 1957 THE PRICE ANALYST STATED THAT HIS COMPUTATION OF THE $6.42 CONVERSION RATE REPRESENTS THE STANDARD COST TO OTIS FOR PRODUCING 60 PRODUCTIVE UNITS OF WORK BY PRODUCTION EMPLOYEES AT OTIS' YONKERS PLANT; THAT 60 PRODUCTIVE UNITS OF WORK ARE NOT EQUIVALENT TO 60 CHRONOLOGICAL MINUTES OF WORK IN ALL CASES; THAT, FOR DAY WORKERS, THE PRODUCTIVE UNITS AND CHRONOLOGICAL MINUTES ARE EQUIVALENT BUT, FOR INCENTIVE WORKERS, THE PRODUCTIVE UNITS AND THE CHRONOLOGICAL MINUTES OF WORK ARE NOT NECESSARILY EQUIVALENT; AND THAT IT IS NORMAL FOR INCENTIVE WORKERS TO PRODUCE MORE THAN 60 UNITS OF WORK IN A CHRONOLOGICAL HOUR.

THE AFFIDAVIT CONCLUDES WITH THE STATEMENT THAT "I INTENDED TO RECOMMEND IN MY SAID REPORT FOR REIMBURSEMENT TO OTIS ELEVATOR COMPANY A CONVERSION COST OF $6.42 PER HOUR BASED ON A SIXTY (60) PRODUCTIVE UNIT HOUR.'

THERE IS INCLUDED AMONG THE FILES SUBMITTED TO OUR OFFICE FOR USE IN THE CONSIDERATION OF THE OTIS CLAIM A MEMORANDUM PREPARED BY MR. WILLIAM G. KING ON NOVEMBER 2, 1959, STATING THAT HE HAD EXAMINED THE BOOKS OF THE OTIS ELEVATOR COMPANY ON BEHALF OF THE GOVERNMENT IN SEVERAL SUBSTANTIAL PRICE REDETERMINATIONS, AND THAT HE WAS PREPARING THE MEMORANDUMS BECAUSE HE WAS FAMILIAR WITH THE COMPANY'S ACCOUNTING SYSTEM.

WITH RESPECT TO THE COSTING RATE OF $6.54 PER THOUSAND PRODUCTIVE LABOR UNITS DISCUSSED IN CONNECTION WITH THE OTIS PROPOSAL, MR. KING STATED THAT FROM HIS EXPERIENCE IN WORKING WITH THE CONTRACTOR'S BOOKS BEFORE NEGOTIATION OF THE CONTRACT HE KNEW THAT THIS WAS THE CONTRACTOR'S NORMAL MANNER OF COMPUTING A LABOR RATE AND THAT IT RESULTED IN A RATE PER 60 STANDARD WORK UNITS SINCE THE GREAT BULK OF THE CONTRACTOR'S LABOR WAS UNDER THE INCENTIVE SYSTEM. HE NOTED THAT THE REPORT OF THE PRICE ANALYST MAKES THE SAME CALCULATION AND NOWHERE SUGGESTS A COMPUTATION FOR REACHING A RATE FOR EACH CHRONOLOGICAL HOUR. MR. KING EXPLAINED THAT HE KNEW THAT IN PRODUCTION CONTRACTS THE GREAT BULK OF THE CONTRACTOR'S LABOR WAS PAID ON AN INCENTIVE BASIS FOR THE NUMBER OF STANDARD WORK UNITS PERFORMED IN EACH HOUR; THAT AN EXPERIENCED WORKMAN COULD BE EXPECTED TO EXCEED THE STANDARD BY PRODUCING MORE THAN 60 WORK UNITS IN 60 MINUTES OF TIME; AND THAT, IF IN THIS CASE THE CONTRACTOR WAS COMPUTING A CHRONOLOGICAL HOUR RATE (OR IF THE PRICE ANALYST WAS DOING SO) HE WOULD, AFTER DIVIDING BY 1,000 HIS FIGURE OF $109 FOR 1,000 PRODUCTIVE UNITS, HAVE MULTIPLIED THE RESULTING COST PER UNIT BY A FIGURE LARGER THAN 60.

IT IS ARGUED IN THE SUPPLEMENTAL ADMINISTRATIVE REPORT ON THE CLAIM THAT THE REPORT OF THE PRICE ANALYST DOES NOT CATEGORICALLY STATE THAT THE PROPOSED LABOR RATE WOULD BE FOR 60 PRODUCTIVE UNITS OF LABOR, AND THAT THE REPORT OF THE PRICE ANALYST MUST BE INTERPRETED IN THE LIGHT OF THE GOVERNMENT NEGOTIATOR'S UNDERSTANDING SINCE THE PRICE ANALYST WAS ONLY AN ADVISORY MEMBER OF THE NEGOTIATING TEAM. IT IS ALSO ARGUED THAT THE AFFIDAVIT OF THE PRICE ANALYST IS NOT RELEVANT TO A DETERMINATION OF THE MERITS OF THE CLAIM BECAUSE THE AFFIDAVIT WAS PREPARED AND SUBMITTED TWO YEARS AFTER THE CONTRACT WAS EXECUTED. HOWEVER, WE BELIEVE THAT THOSE DOCUMENTS ARE MATERIAL IN DETERMINING THE QUESTION AS TO WHETHER OR NOT OTIS MADE A MISTAKE IN QUOTING A LABOR HOUR RATE OF $7.84, AND THE QUESTION AS TO WHETHER THE MISTAKE, IF MADE, WAS MUTUAL OR SUCH AS OTHERWISE TO HAVE PERMITTED A RESCISSION OF THE CONTRACT ON THE GROUND THAT THE GOVERNMENT HAD CONSTRUCTIVE NOTICE AS TO THE POSSIBILITY OR PROBABILITY THAT A MISTAKE HAD OCCURRED WHEN THE CONTRACT WAS ENTERED INTO.

APPARENTLY THE GOVERNMENT'S NEGOTIATOR DID NOT BELIEVE THAT ANY MISTAKE WAS MADE BY OTIS IN VIEW OF THE PRICE ANALYST'S STATEMENTS IN HIS REPORT OF APRIL 28, 1955, TO THE EFFECT THAT THE $107 AND $109 CONVERSION RATES WERE EQUIVALENT TO $0.107 AND $0.109 PER MINUTE OF LABOR. HOWEVER, IT WOULD SEEM THAT THE GOVERNMENT'S NEGOTIATOR MIGHT WELL HAVE SUSPECTED THAT A PRODUCTIVE LABOR UNIT IN A COMPANY'S ACCOUNTING FOR FACTORY COSTS WOULD NOT NECESSARILY BE THE EQUIVALENT OF ONE MINUTE OF LABOR. WE QUESTION THE VALIDITY OF THE ARGUMENT THAT THE PRICE ANALYST'S REPORT MUST BE INTERPRETED IN ACCORDANCE WITH THE NEGOTIATOR'S UNDERSTANDING AND IT APPEARS THAT, IF THE NEGOTIATOR WAS NOT FAMILIAR WITH THE OTIS COST ACCOUNTING SYSTEM, IT MUST BE PRESUMED THAT THE PRICE ANALYST WAS IN THIS CASE MADE COMPLETELY CHARGEABLE WITH THE DUTY NOT ONLY TO DETERMINE THE REASONABLENESS OF THE PROPOSED HOURLY LABOR RATE BUT TO FURNISH ACCURATE INFORMATION TO THE NEGOTIATOR AS TO THE BASIS UPON WHICH SUCH RATE WAS COMPUTED AND AS TO ANY APPARENT MISTAKE IN THE OTIS QUOTATION. IN SUCH CIRCUMSTANCES, IT SEEMS ONLY FAIR TO CONCLUDE THAT KNOWLEDGE BY THE PRICE ANALYST OF OTIS' ACCOUNTING METHODS UNDER ITS WAGE INCENTIVE SYSTEM WAS SUFFICIENT TO HAVE PLACED THE GOVERNMENT ON NOTICE OF THE POSSIBILITY OR PROBABILITY THAT A MISTAKE HAD BEEN MADE IN OTIS' PROPOSED HOURLY LABOR RATE, AND THAT, IF A MISTAKE HAD BEEN MADE, A TREMENDOUS LOSS IN PERFORMING THE CONTRACT WORK WOULD BE SUFFERED BY OTIS.

WE THEREFORE BELIEVE THAT THERE IS SUFFICIENT EVIDENCE TO JUSTIFY A CONCLUSION THAT OTIS IS ENTITLED TO PAYMENT OF THE CLAIMED AMOUNT OF $114,730 AND AS AN EQUITABLE ADJUSTMENT UNDER CONTRACT NO. DA 30-069 ORD- 1595 IN VIEW OF THE ESTABLISHED RULE THAT, IF A MATERIAL MISTAKE IS MADE BY ONE PARTY TO A CONTRACT AND THE MISTAKE IS KNOWN TO THE OTHER PARTY, OR BECAUSE OF ACCOMPANYING CIRCUMSTANCES THE OTHER PARTY HAD REASON TO KNOW OF THE MISTAKE, THE PARTY MAKING THE MISTAKE HAS THE RIGHT TO RESCISSION AND RESTITUTION. SEE C. N. MONROE MANUFACTURING COMPANY V. UNITED STATES, 143 F.SUPP. 449, 451; AND UNION PAINTING COMPANY V. UNITED STATES, 198 F.SUPP. 282.

CONCERNING THE PROPOSITION MADE IN THE SECOND TO THE LAST PARAGRAPH OF THE SUPPLEMENTAL ADMINISTRATIVE REPORT ON THE CLAIM, IT IS APPARENT THAT THE ARMY WOULD NOT HAVE AN OPPORTUNITY TO DEFEND ITS POSITION IN THE COURTS IF WE AGAIN REJECTED THE CLAIM IN VIEW OF CERTAIN OF ITS DOUBTFUL ASPECTS, BECAUSE OTIS DOES NOT NOW HAVE THE RIGHT TO BRING SUIT AGAINST THE UNITED STATES SINCE ITS CLAIM WOULD BE BARRED BY THE 6 YEAR STATUTE OF LIMITATIONS APPLICABLE TO THE JURISDICTION OF THE COURT OF CLAIMS.

ACCORDINGLY, THE AMOUNT OF $114,730 SHOULD BE PAID BY YOUR DEPARTMENT AS IN FULL AND FINAL SETTLEMENT OF ALL CLAIMS ARISING OUT OF THE CONTRACT OF JUNE 30, 1955, WITH THE OTIS ELEVATOR COMPANY.