B-151611, JUN. 21, 1963

B-151611, JUN. 21, 1963

TO THE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO A LETTER DATED MAY 17, 1963, FROM THE ASSISTANT SECRETARY, REQUESTING OUR CONSIDERATION OF A PROPOSED AMENDMENT TO COST- PLUS-A-FIXED-FEE CONTRACT NO. 14-01-0001-275, DATED AUGUST 22, 1962, ENTERED INTO BY YOUR DEPARTMENT ON BEHALF OF THE UNITED STATES WITH THE SPENCER CHEMICAL COMPANY, KANSAS CITY, MISSOURI, FOR THE PERFORMANCE OF CERTAIN RESEARCH AND DEVELOPMENT WORK.

THE CONTRACT NEGOTIATIONS WERE CONDUCTED BY THE OFFICE OF COAL RESEARCH AND THE SPENCER CHEMICAL COMPANY ON THE BASIS OF A PROPOSAL SUBMITTED BY THAT COMPANY. PART VIII OF THE SPENCER PROPOSAL SETS OUT ESTIMATED COSTS, WITH OVERHEAD COSTS FOR PHASE 1 OF THE PROJECT BEING ESTIMATED AT 102 PERCENT OF "MONTHLY BASE SALARY.' THAT ESTIMATE FORMED THE BASIS DURING NEGOTIATIONS FOR ESTIMATING AND PROVIDING FOR TOTAL OVERHEAD COSTS FOR THE FIRST TWO PHASES OF THE PROJECT. WORK ON THE THIRD AND FINAL PHASE OF THE PROJECT WAS NOT INCLUDED IN THE CONTRACT BUT THE CONTRACTOR AGREED TO NEGOTIATE IN GOOD FAITH FOR THE DESIGN, CONSTRUCTION AND OPERATION OF A SEMI-WORKS PLANT (PHASE III), IF PHASES I AND II WERE CONSIDERED BY THE OFFICE OF COAL RESEARCH TO HAVE BEEN SUCCESSFUL.

IN CONNECTION WITH THE WORK REQUIRED TO BE PERFORMED UNDER PHASES I AND II OF THE PROJECT, ARTICLE IV, PARAGRAPH F-2-A, OF THE CONTRACT PROVIDES FOR REIMBURSEMENT OF "A PROPORTIONATE SHARE OF THE CONTRACTOR'S INDIRECT OVERHEAD COSTS ESTIMATED AT $360,000.00 AND COMPUTED AT THE PROVISIONAL RATE OF 100 PERCENT OF THE TOTAL COST OF DIRECT SALARIES ACTUALLY PAID BY THE CONTRACTOR TO ITS EMPLOYEES ASSIGNED TO THE WORK UNDER THIS CONTRACT, BASED UPON THE CONTRACTOR'S ESTABLISHED POLICY, BUT IN NO EVENT TO EXCEED THE MAXIMUM RATE OF 102 PERCENT.'

IT IS REPORTED THAT THE MONTHLY BASE SALARY FIGURES USED IN THE CONTRACTOR'S PROPOSAL INCLUDED ESTIMATED AMOUNTS FOR PAYROLL COSTS OTHER THAN SALARIES AND WAGES, SUCH AS PENSION CONTRIBUTIONS, PAYROLL TAXES AND VACATION PAY. THIS FACT WAS NOT DISCLOSED DURING THE NEGOTIATIONS OR PRIOR TO THE EXECUTION OF THE CONTRACT, AND THE MISUNDERSTANDING WITH RESPECT TO THE BASE FOR APPLYING THE MAXIMUM PERCENTAGE RATE FOR OVERHEAD WAS NOT DISCOVERED UNTIL THE SUBMISSION OF THE CONTRACTOR'S INITIAL REIMBURSEMENT VOUCHER ON WHICH THE CONTRACTOR APPLIED THE OVERHEAD FACTOR NOT ONLY TO BASE SALARIES BUT ALSO TO THE VARIOUS OTHER PAYROLL COSTS. EXCLUSION OF SUCH PAYROLL EXPENSES FROM THE BASE FOR COMPUTATION OF ALLOWABLE OVERHEAD WOULD PREVENT THE CONTRACTOR FROM RECOUPING ACTUAL INDIRECT OVERHEAD COSTS IN AN AMOUNT CLOSELY APPROXIMATING THE ESTIMATED AMOUNT OF $360,000.

ON THE BASIS OF INFORMATION CONCERNING THE CONTRACTOR'S OPERATIONS FOR THE YEAR ENDED JUNE 30, 1962, IT HAS BEEN ESTIMATED THAT THE CONTRACTOR WILL FAIL TO RECOVER APPROXIMATELY $35,280 OF INDIRECT OVERHEAD COSTS INCURRED IN PERFORMING THE GOVERNMENT CONTRACT IF NO ADJUSTMENT IS MADE IN THE MAXIMUM OVERHEAD PERCENTAGE RATE (102 PERCENT OF DIRECT SALARIES ACTUALLY PAID), OR IF THE CONTRACT IS NOT OTHERWISE MODIFIED SO AS TO PERMIT THE APPLICATION OF THE EXISTING MAXIMUM OVERHEAD PERCENTAGE RATE TO A BASE WHICH WOULD INCLUDE FRINGE BENEFITS AND PAYROLL TAXES IN ADDITION TO DIRECT SALARIES. IN THAT CONNECTION, IT WAS FOUND THAT FOR THE YEAR ENDED JUNE 30, 1962, THE CONTRACTOR'S INDIRECT OVERHEAD COSTS APPROXIMATED 102.9 PERCENT OF TOTAL PAYROLL EXPENSES AND 112.7 PERCENT OF DIRECT SALARIES PAID.

IT IS PROPOSED TO AMEND THE CONTRACT TO PROVIDE FOR A PROVISIONAL OVERHEAD RATE OF 110 PERCENT AND FOR A MAXIMUM RATE OF 112 PERCENT, RATHER THAN CHANGING THE BASE FOR THE COMPUTATION OF OVERHEAD ALLOWANCES TO INCLUDE FRINGE BENEFITS AND PAYROLL TAXES, WHICH WOULD ACCOMPLISH PRACTICALLY THE SAME RESULT.

THE LETTER DATED MAY 17, 1963, STATES THAT IT WAS THE INTENTION OF BOTH PARTIES THAT SPENCER BE FAIRLY AND EQUITABLY REIMBURSED FOR ACTUAL INDIRECT OVERHEAD COSTS IN AN AMOUNT APPROXIMATING THE ESTIMATE OF $360,000, AND THAT THE PROPOSED AMENDMENT WOULD CARRY OUT THE INTENT OF THE PARTIES WITHOUT INCREASING THE COST TO THE GOVERNMENT OVER THAT ESTIMATED.

IT IS APPARENT THAT THE CONTRACT AS REDUCED TO WRITING DOES NOT REFLECT THE INTENTION OF THE PARTIES TO PROVIDE A MAXIMUM OVERHEAD PERCENTAGE RATE BASED ESSENTIALLY UPON PRIOR COST EXPERIENCE OF THE CONTRACTOR IN PERFORMING RESEARCH AND DEVELOPMENT WORK. ALSO, IT IS EVIDENT THAT THE PROPOSED INCREASE OF 10 PERCENT IN THE MAXIMUM PERCENTAGE FOR OVERHEAD WOULD CONSTITUTE NO MORE THAN WHAT WOULD HAVE BEEN AGREED UPON EXCEPT FOR THE MISUNDERSTANDING BY THE GOVERNMENT AS TO THE COST ELEMENTS INVOLVED IN THE BASE SALARY FIGURES SUBMITTED WITH THE CONTRACTOR'S PROPOSAL.

ACCORDINGLY, YOU ARE ADVISED THAT WE WOULD HAVE NO OBJECTION TO THE EXECUTION OF THE PROPOSED AMENDMENT TO ARTICLE IV, PARAGRAPH F-2-A, OF THE CONTRACT.