B-151846, AUG. 19, 1963

B-151846: Aug 19, 1963

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AGENCY FOR INTERNATIONAL DEVELOPMENT: REFERENCE IS MADE TO LETTER JUNE 17. SECTION 5.2 OF THIS CONTRACT STATES: "IT IS UNDERSTOOD AND AGREED THAT THE CONTRACTOR WILL SUB-CONTRACT TO ENGINEER. WHOSE ADDRESS IS 74 NEW MONTGOMERY STREET. IEC WAS OBLIGATED (A) TO "DESIGN AND PREPARE DETAILED CONSTRUCTION DRAWINGS. IEC WAS TO RECEIVE A FIXED FEE OF $75. CERTAIN OF THE ADMINISTRATIVE AND CLERICAL SERVICES REQUIRED OF IEC WERE. WAS BILLED BY MKIC FOR REIMBURSEMENT UNDER THE SUBCONTRACT OF SALARIES PAID TO EMPLOYEES OF THE OVERSEAS DISTRICT OFFICE FOR SERVICES TO IEC AND FOR OVERHEAD AT THE RATE OF SIXTY (60) PERCENT OF THESE SALARIES. WAS DISALLOWED BY A.I.D. ON THE GROUND THAT THE SIXTY (60) PERCENT WAS PAYABLE ONLY ON SALARIES INCURRED DIRECTLY BY IEC FOR ITS OWN PERSONNEL.

B-151846, AUG. 19, 1963

TO ADMINISTRATOR, AGENCY FOR INTERNATIONAL DEVELOPMENT:

REFERENCE IS MADE TO LETTER JUNE 17, 1963, FROM THE ASSISTANT ADMINISTRATOR FOR FAR EAST, REQUESTING OUR APPROVAL OF REIMBURSING MORRISON-KNUDSEN INTERNATIONAL COMPANY, INC., FOR CERTAIN ACTUAL OVERHEAD EXPENSES OF THE MORRISON-KNUDSEN OVERSEAS DISTRICT OFFICE, SAN FRANCISCO, CALIFORNIA, IN CONNECTION WITH A CERTAIN CONTRACT.

THE CONTRACT INVOLVED, DATED JULY 9, 1955, NAMES AS PARTIES THE GOVERNMENT OF THE REPUBLIC OF KOREA, MORRISON-KNUDSEN INTERNATIONAL COMPANY, INC., ("MKIC") AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA (THEN REPRESENTED BY THE FOREIGN OPERATIONS ADMINISTRATION, A PREDECESSOR OF A.I.D.). PURSUANT TO THIS CONTRACT, MKIC HAS PROVIDED SERVICES TO THE GOVERNMENT OF THE REPUBLIC OF KOREA AND THE GOVERNMENT OF THE UNITED STATES IN CONNECTION WITH THE REPAIR, REHABILITATION AND IMPROVEMENT OF THE HWACHON POWER DEVELOPMENT INSTALLATIONS IN KOREA.

SECTION 5.2 OF THIS CONTRACT STATES:

"IT IS UNDERSTOOD AND AGREED THAT THE CONTRACTOR WILL SUB-CONTRACT TO ENGINEER, INTERNATIONAL ENGINEERING COMPANY, INC. WHOSE ADDRESS IS 74 NEW MONTGOMERY STREET, SAN FRANCISCO 5, CALIFORNIA ON A COST PLUS FIXED FEE BASIS, FOR PROFESSIONAL ENGINEERING AND SERVICES FOR THE PREPARATION OF DESIGNS, DETAILED CONSTRUCTION DRAWINGS AND SPECIFICATIONS; AND FOR PROCUREMENT AND OTHER SERVICES WITHIN THE UNITED STATES AND ELSEWHERE. THE TOTAL COST OF THE SUB-CONTRACT MAY NOT EXCEED $375,000, INCLUDING A FIXED FEE NOT TO EXCEED $75,000 WITHOUT PRIOR APPROVAL, OF THE GOVERNMENT AND FOA.'

IN ACCORDANCE WITH THIS PROVISION, MKIC AND IEC (A SUBSIDIARY OF MORRISON -KNUDSEN COMPANY ,MK") (, ENTERED INTO A "FIXED-FEE AGREEMENT" ON JULY 15, 1955. IEC WAS OBLIGATED (A) TO "DESIGN AND PREPARE DETAILED CONSTRUCTION DRAWINGS," (B) TO "PREPARE SPECIFICATIONS FOR CONSTRUCTION" AND (C) TO PROCURE "MATERIALS AND EQUIPMENT," PROVIDE "ENGINEERING AND INSPECTION FOR PROCUREMENT OF PERMANENT MATERIALS AND EQUIPMENT" AND PROVIDE "OTHER SERVICES INCLUDING BUT NOT LIMITED TO RECRUITMENT OF PERSONNEL.'

IN RETURN, IEC WAS TO RECEIVE A FIXED FEE OF $75,000 AND TO BE REIMBURSED FOR CERTAIN DIRECT AND INDIRECT COSTS, ARTICLE IV-C PROVIDING FOR PAYMENT OF "A PREDETERMINED RATE OF SIXTY (60) PERCENT OF HIS (IEC-S) DIRECT PAYROLL COSTS TO COVER HIS (IEC-S) GENERAL OFFICE OVERHEAD OR INDIRECT EXPENSES.'

CERTAIN OF THE ADMINISTRATIVE AND CLERICAL SERVICES REQUIRED OF IEC WERE, IN FACT, PERFORMED BY THE OVERSEAS DISTRICT OFFICE OF MK IN SAN FRANCISCO. THIS OFFICE HAD BEEN ESTABLISHED BY MK (THE PARENT COMPANY) ON APRIL 6, 1955, TO FURNISH SUPPORT SERVICES FOR THE OVERSEAS OPERATIONS OF AFFILIATED COMPANIES UNDER THE DISTRICT'S JURISDICTION. PRIOR TO APRIL 6, 1955, SUCH FUNCTIONS HAD BEEN PERFORMED BY IEC. THE APRIL 6, 1955 REORGANIZATION LEFT BASICALLY THE SAME PERSONNEL PERFORMING PURCHASING PERSONNEL ACCOUNTING AND ADMINISTRATIVE FUNCTIONS, BUT WITHIN A DIFFERENT CORPORATE CONTEXT.

A.I.D. WAS BILLED BY MKIC FOR REIMBURSEMENT UNDER THE SUBCONTRACT OF SALARIES PAID TO EMPLOYEES OF THE OVERSEAS DISTRICT OFFICE FOR SERVICES TO IEC AND FOR OVERHEAD AT THE RATE OF SIXTY (60) PERCENT OF THESE SALARIES. THIS OVERHEAD PAYMENT, WHICH AMOUNTED TO $49,637, WAS DISALLOWED BY A.I.D. ON THE GROUND THAT THE SIXTY (60) PERCENT WAS PAYABLE ONLY ON SALARIES INCURRED DIRECTLY BY IEC FOR ITS OWN PERSONNEL.

A.I.D. NOW PROPOSES TO REIMBURSE MKIC FOR REASONABLE COSTS OF THIS IEC SUBCONTRACT ARRANGEMENT WITH THE MK OVERSEAS DISTRICT OFFICES. (ANY PAYMENTS WOULD, AT THIS TIME, BE MADE TO MK, SINCE MKIC HAS BEEN LIQUIDATED). WITH RESPECT TO OVERHEAD, IT IS REPORTED TO BE CONSIDERED REASONABLE TO PAY ACTUAL OVERHEAD EXPENSES, AS DETERMINED AFTER AN AUDIT TO BE PERFORMED BY A.I.D., BUT NOT TO EXCEED SIXTY (60) PERCENT OF THE OVERSEAS DISTRICT OFFICE'S DIRECT PAYROLL COSTS. IT IS REPORTED THAT MK HAS INDICATED ITS AGREEMENT TO THIS APPROACH.

THE CONTRACT TERMS, HOWEVER, INHIBIT THIS APPROACH AND, THEREFORE, THIS IS THE REASON FOR THE REQUEST FOR A DECISION. SECTION 5.1 PERMITTED MKIC, WITH THE APPROVAL OF THE GOVERNMENT OF KOREA AND A.I.D., TO SUBCONTRACT OTHER SERVICES. SECTION 12.4 STATED, HOWEVER, THAT MKIC WOULD NOT REQUEST FROM A.I.D. AND A.I.D. WOULD NOT PROVIDE,"REIMBURSEMENT IN RESPECT OF U.S. DOLLAR SUBCONTRACTS," WHETHER MADE BY MKIC OR IEC, WHICH WERE AWARDED UNDER SECTION 5 WITHOUT THE PRIOR APPROVAL OF A.I.D. NO APPROVAL OF A.I.D. WAS OBTAINED PRIOR TO THE IEC ARRANGEMENT WITH THE MK OVERSEAS DISTRICT OFFICE. HAD SUCH APPROVAL BEEN REQUESTED, IT IS REPORTED THAT A.I.D. WOULD HAVE CONSIDERED ACCEPTABLE A SUBCONTRACT ON THE TERMS NOW PROPOSED.

WHILE TECHNICALLY THE WORK PERFORMED BY MK OVERSEAS DISTRICT OFFICE MAY BE CONSIDERED AS HAVING BEEN PERFORMED UNDER A SUBCONTRACT FOR IEC IN VIOLATION OF SECTION 12.4 OF THE CONTRACT, IT APPEARS THAT ACTUALLY IT WAS MORE OF A REARRANGEMENT OF MK AND ITS SUBSIDIARIES FOR THE PURPOSE OF PERFORMING THE WORK HERE INVOLVED AND OTHER WORK IN A MORE EFFICIENT MANNER.

IN THE CIRCUMSTANCES AND SINCE IT IS REPORTED THAT A.I.D. WOULD HAVE CONSIDERED ACCEPTABLE A SUBCONTRACT ON THE TERMS NOW PROPOSED, WE HAVE NO OBJECTION TO THE REIMBURSEMENT OF MKIC FOR THE ACTUAL OVERHEAD EXPENSES OF THE MK OVERSEAS DISTRICT OFFICE IN CONNECTION WITH THE HWACHON PROJECT, TO BE DETERMINED BY AN AUDIT TO BE PERFORMED BY A.I.D., BUT NOT IN EXCESS OF A RATE OF SIXTY (60) PERCENT OF THE OVERSEAS DISTRICT OFFICE'S DIRECT PAYROLL COSTS APPLICABLE TO THE HWACHON PROJECT. THIS IS, OF COURSE, WITH THE UNDERSTANDING THAT SUCH REIMBURSEMENT WILL NOT INVOLVE ANY DUPLICATION OF OVERHEAD ALLOWED UNDER THE PRIME CONTRACT.