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B-152462, MAY 31, 1966

B-152462 May 31, 1966
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TO THE SECRETARY OF THE ARMY: FURTHER REFERENCE IS MADE TO THE LETTER DATED MARCH 16. CONTINENTAL AVIATION AND ENGINEERING CORPORATION INCLUDED IN ITS OVERHEAD POOL INDIRECT COSTS RELATED TO THE FIRM'S INDEPENDENT RESEARCH AND DEVELOPMENT (IR AND D) ALTHOUGH THE DIRECT IR AND D COSTS WERE NOT REIMBURSABLE UNDER THEN APPLICABLE PROVISIONS OF ASPR. OUR DECISION CONCERNED THE PROPRIETY OF INCLUDING SUCH INDIRECT COSTS IN OVERHEAD WHICH WERE BORNE ALMOST ENTIRELY BY THE GOVERNMENT UNDER COST-REIMBURSABLE TYPE CONTRACTS. IT WAS OUR VIEW THAT SINCE SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION PRIOR TO REVISION 50 DID NOT AUTHORIZE PAYMENT BY THE GOVERNMENT TO CONTINENTAL FOR IR AND D COSTS.

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B-152462, MAY 31, 1966

TO THE SECRETARY OF THE ARMY:

FURTHER REFERENCE IS MADE TO THE LETTER DATED MARCH 16, 1965, FROM THE DIRECTOR OF PROCUREMENT, OFFICE OF THE ASSISTANT SECRETARY, DEPARTMENT OF THE ARMY, REQUESTING THAT WE RECONSIDER OUR DECISION TO YOU, B-152462, JANUARY 15, 1964.

FOR THE FISCAL YEAR ENDING OCTOBER 31, 1960, CONTINENTAL AVIATION AND ENGINEERING CORPORATION INCLUDED IN ITS OVERHEAD POOL INDIRECT COSTS RELATED TO THE FIRM'S INDEPENDENT RESEARCH AND DEVELOPMENT (IR AND D) ALTHOUGH THE DIRECT IR AND D COSTS WERE NOT REIMBURSABLE UNDER THEN APPLICABLE PROVISIONS OF ASPR. OUR DECISION CONCERNED THE PROPRIETY OF INCLUDING SUCH INDIRECT COSTS IN OVERHEAD WHICH WERE BORNE ALMOST ENTIRELY BY THE GOVERNMENT UNDER COST-REIMBURSABLE TYPE CONTRACTS. IT WAS OUR VIEW THAT SINCE SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION PRIOR TO REVISION 50 DID NOT AUTHORIZE PAYMENT BY THE GOVERNMENT TO CONTINENTAL FOR IR AND D COSTS, THE INCLUSION OF THE IR AND D INDIRECT COSTS IN THE OVERHEAD POOL WAS UNREASONABLE. OUR DECISION OF JANUARY 15, 1964, DEALT ONLY WITH CONTINENTAL'S FISCAL YEAR ENDING OCTOBER 31, 1960. SECTION XV OF ASPR AS REVISED BY REVISION 50 DATED NOVEMBER 2, 1959, WOULD BE APPLICABLE TO CONTINENTAL'S FISCAL YEAR BEGINNING NOVEMBER 1, 1960.

ON FEBRUARY 2, 1965, THE ARMED SERVICE BOARD OF CONTRACT APPEALS (ASBCA) IN APPEALS OF CONTINENTAL AVIATION AND ENGINEERING CORPORATION, ASBCA NOS. 9894 AND 9938, CONSIDERED CONTINENTAL'S LIABILITY FOR REPAYMENT OF THE INDIRECT IR AND D COSTS REIMBURSED BY THE GOVERNMENT AS PART OF THE OVERHEAD POOL. THE BOARD ON PAGE 8 OF ITS OPINION STATED AS FOLLOWS:

"THE OVERHEAD RATE PROVISIONS AND DISPUTES ARTICLES OF THE COST-TYPE CONTRACTS EXPRESSLY DEFINE THE RETROACTIVE ESTABLISHMENT OF FINAL ANNUAL OVERHEAD RATES AS BEING A MATTER WITHIN THE CONTRACTS DISPUTES PROCEDURE, AND SPECIFY FINALITY FOR THE FINAL RATES SO ESTABLISHED, EITHER AS THE RESULT OF AGREEMENT OR, IN THE EVENT OF DISPUTE, BY DETERMINATION ON APPEAL. IN THIS AND MANY OTHER CONTEXTS CONCERNING THE FINALITY OF AGREEMENTS REACHED WITHOUT INITIAL DISPUTE UNDER THAT PROCEDURE, WE HAVE CONSISTENTLY HELD THAT IN THE ABSENCE OF FRAUD OR OTHER SPECIAL CIRCUMSTANCES NOT SHOWN TO BE PRESENT HERE, SETTLEMENTS BY AGREEMENT OF THE PARTIES SHOULD NOT THEREAFTER BE DISTURBED UNILATERALLY BY EITHER PARTY.'

CLAUSE 42 ON PAGE 20 OF THE GENERAL PROVISIONS (DEPARTMENT OF DEFENSE COST-REIMBURSEMENT SUPPLY CONTRACT) OF CONTRACT NO. AF 33/600/ 40622 WITH CONTINENTAL PROVIDES:

"42. NEGOTIATED OVERHEAD RATES. (A) NOTWITHSTANDING THE PROVISIONS OF THE CLAUSE OF THIS CONTRACT ENTITLED "ALLOWABLE COST, FIXED FEE AND PAYMENT," THE ALLOWABLE INDIRECT COSTS UNDER THIS CONTRACT SHALL BE OBTAINED BY APPLYING NEGOTIATED OVERHEAD RATES TO BASES AGREED UPON BY THE PARTIES, AS SPECIFIED BELOW.

"/B) THE CONTRACTOR, AS SOON AS POSSIBLE BUT NOT LATER THAN NINETY (90) DAYS AFTER THE EXPIRATION OF EACH PERIOD SPECIFIED IN THE SCHEDULE,SHALL SUBMIT TO THE CONTRACTING OFFICER OR HIS AUTHORIZED REPRESENTATIVE, WITH A COPY TO THE COGNIZANT AUDIT ACTIVITY, A PROPOSED FINAL OVERHEAD RATE OR RATES FOR THAT PERIOD BASED ON THE CONTRACTOR'S ACTUAL COST EXPERIENCE DURING THAT PERIOD, TOGETHER WITH SUPPORTING COST DATA. NEGOTIATION OF FINAL OVERHEAD RATES BY THE CONTRACTOR AND THE CONTRACTING OFFICER SHALL BE UNDERTAKEN AS PROMPTLY AS PRACTICABLE AFTER RECEIPT OF THE CONTRACTOR'S PROPOSAL.

"/C) ALLOWABILITY OF COSTS AND ACCEPTABILITY OF COST ALLOCATION METHODS SHALL BE DETERMINED IN ACCORDANCE WITH ASPR, SECTION XV, PART 2, AS IN EFFECT ON THE DATE OF THIS CONTRACT.

"/D) THE RESULTS OF EACH NEGOTIATION SHALL BE SET FORTH IN AN AMENDMENT TO THIS CONTRACT, WHICH SHALL SPECIFY (I) THE AGREED FINAL RATES, (II) THE BASES TO WHICH THE RATES APPLY, (III) THE PERIODS FOR WHICH THE RATES APPLY, AND (IV) THE SPECIFIC ITEMS TREATED AS DIRECT COSTS OR ANY CHANGES IN THE ITEMS PREVIOUSLY AGREED TO BE DIRECT COSTS.

"/E) PENDING ESTABLISHMENT OF FINAL OVERHEAD RATES FOR ANY PERIOD, THE CONTRACTOR SHALL BE REIMBURSED EITHER AT NEGOTIATED PROVISIONAL RATES AS PROVIDED IN THE SCHEDULE OR AT BILLING RATES ACCEPTABLE TO THE CONTRACTING OFFICER OR HIS AUTHORIZED REPRESENTATIVE, SUBJECT TO APPROPRIATE ADJUSTMENT WHEN THE FINAL RATES FOR THAT PERIOD ARE ESTABLISHED. PREVENT SUBSTANTIAL OVER OR UNDER PAYMENT, THE PROVISIONAL OR BILLING RATES MAY, AT THE REQUEST OF EITHER PARTY, BE REVISED BY MUTUAL AGREEMENT, EITHER RETROACTIVELY OR PROSPECTIVELY. ANY SUCH REVISION OF NEGOTIATED PROVISIONAL RATES PROVIDED IN THE SCHEDULE SHALL BE SET FORTH IN AN AMENDMENT TO THIS CONTRACT.

"/F) ANY FAILURE BY THE PARTIES TO AGREE ON ANY FINAL RATE OR RATES UNDER THIS CLAUSE SHALL BE CONSIDERED A DISPUTE CONCERNING A QUESTION OF FACT FOR DECISION BY THE CONTRACTING OFFICER WITHIN THE MEANING OF THE CLAUSE OF THIS CONTRACT ENTITLED "DISPUTES.'"

THE ASBCA FOUND AS A FACT ON PAGE 2 OF ITS OPINION THAT ALL THE COST-TYPE CONTRACTS INVOLVED CONTAINED SUBSTANTIALLY THE SAME PROVISION AS CLAUSE 42, QUOTED ABOVE. NOTHING IN THE RECORD WOULD CAUSE US TO QUESTION THIS FINDING BY THE ASBCA.

THE NEGOTIATION REPORT PREPARED BY THE DETROIT ORDNANCE DISTRICT, DATED SEPTEMBER 18, 1961, STATES NEGOTIATIONS WERE HELD AMONG CONTINENTAL, THE DETROIT ORDNANCE DISTRICT, THE DETROIT PROCUREMENT DISTRICT (UNITED STATES AIR FORCE), AND THE ARMY AUDIT AGENCY FOR THE PURPOSES AS STATED ON PAGE 1:

"TO ESTABLISH NEGOTIATED FINAL OVERHEAD RATES FOR THE PERIOD 1 NOVEMBER 1959 THROUGH 31 OCTOBER 1960, AND NEGOTIATED PROVISIONAL OVERHEAD RATES BEGINNING 1 NOVEMBER 1960.'

PAGE 3 OF THE NEGOTIATION REPORT OF SEPTEMBER 18, 1961, STATES AS FOLLOWS:

"THE CONTRACTOR CONDUCTED AN INDEPENDENT RESEARCH AND DEVELOPMENT PROGRAM DURING FISCAL YEAR ENDING 31 OCTOBER 1960 IN WHICH THE FOLLOWING DIRECT COSTS WERE INCURRED:

CHART

MATERIAL $333,167

DESIGN ENGINEERING LABOR 115,607

RESEARCH ENGINEERING LABOR 63,945

TOTAL $512,719

THE CONTRACTOR DID NOT CONTEMPLATE REIMBURSEMENT FOR SUCH DIRECT COSTS AND EXCLUDED THEM FROM ITS COST SUBMISSION. HOWEVER, THE CONTRACTOR DID NOT BURDEN THESE DIRECT COSTS WITH RESPECTIVE DEPARTMENTAL RATES AND G AND A EXPENSE. THE AUDIT CONTENDED THAT SUCH PROGRAMS SHOULD REFLECT APPLICATION OF INDIRECT EXPENSE AND TO EFFECT THIS PREMISE ADDED THE LABOR AMOUNTS TO THE RESPECTIVE DEPARTMENTAL LABOR TOTALS AND THE TOTAL OF $512,719 TO THE G AND A COST INCURRED BASE. DURING NEGOTIATIONS THE CONTRACTOR FURNISHED ADEQUATE SUBSTANTIATION THAT NON-BURDENING OF SUCH COSTS IS CONSISTENT WITH ITS ESTABLISHED ACCOUNTING PRACTICES AND CONTENDED THAT THE AUDIT RECONSTRUCTION WAS INAPPROPRIATE. BASED ON GUIDANCE FURNISHED BY THE CURRENT VERSION OF ASPR 15-205.35 (F), IT WAS AGREED THAT THE CONTRACTOR'S METHOD WAS ACCEPTABLE AND REFLECTED, BY ITS APPLICATION, THE EXCLUSION OF IR AND D EXPENSES FOR REIMBURSEMENT. * *

THE LETTER TO OUR OFFICE FROM THE DEPUTY ASSISTANT SECRETARY OF THE ARMY (IANDL), LOGISTICS, DATED SEPTEMBER 9, 1963, STATES ON PAGE 2:

"THE CONTRACTING OFFICER FACED WITH THE CONTRACTOR'S AND THE USAAA'S VIEWS AND AFTER RECEIVING GUIDANCE FROM THE CHIEF OF ORDNANCE, DETERMINED THAT INDIRECT EXPENSE ATTRIBUTABLE TO THE CONTRACTOR'S IR AND D PROGRAM WAS ALLOWABLE, AND ACCEPTED IT ON THE FINAL OVERHEAD RATE, AS SHOWN BY THE NEGOTIATION REPORT, INCLOSURE 4. THE FINAL RATE AS THUS NEGOTIATED WAS INCORPORATED IN SUPPLEMENTAL AGREEMENTS AND HAS BEEN PAID.'

THERE SEEMS TO BE NO DISPUTE IN REGARD TO THE FACT THAT THE CONTRACTING OFFICER APPROVED THE NEGOTIATED OVERHEAD RATES INCLUDED IN THE SUPPLEMENTAL AGREEMENTS WITH CONTINENTAL.

THE FACTS IN ASBCA NOS. 9894 AND 9938, FEBRUARY 2, 1965, ARE STATED ON PAGE 3:

"FOR FY (FISCAL YEAR) 1961 APPELLANT'S (CONTINENTAL-S) PROPOSAL LETTER WAS DATED 24 JANUARY 1962, THE ADVISORY AUDIT REPORT RAISED THE SAME QUESTION, (WHETHER THE GOVERNMENT SHOULD ACCEPT CONTINENTAL'S ACCOUNTING PROCEDURE OF NOT ALLOCATING INDIRECT COST TO IRANDD) NEGOTIATIONS FOLLOWED THE SAME PATTERN, AND SUPPLEMENTAL AGREEMENTS WERE EXECUTED ON THE SAME BASIS (AS FOR FISCAL YEAR 1960).'

THE REPORT PREPARED BY THE UNITED STATES ARMY AUDIT AGENCY NUMBERED D-10- 2-134, DATED DECEMBER 1, 1961, IN REGARD TO CONTINENTAL'S ACCOUNTING PRACTICES, INDICATES ON PAGE 21 THAT CONTINENTAL BEGAN ITS PROGRAM OF IR AND D IN THE YEAR 1960 AND THAT FROM THE COMMENCEMENT OF THE IR AND D PROGRAM CONTINENTAL CONSISTENTLY INCLUDED ALL OF THE INDIRECT COST OF ITS IR AND D IN ITS OVERHEAD POOL FOR ALLOCATION TO CONTRACTS WITH THE GOVERNMENT.

IN UNITED STATES V. KRAUS, 61 F.2D 886, 887 (7TH CIR. 1932) THE COURT CONSIDERED THE FOLLOWING QUESTION:

"ASSUMING AS WE DO THAT APPELLEES LAWFULLY BOUND THEMSELVES BY CONTRACT WITH THE GOVERNMENT TO PAY THEIR EXCESS PROFITS TO THE WAR INDUSTRIES BOARD FOR THE BENEFIT OF THE 1918 WOOL PRODUCERS OF THE UNITED STATES, IN ACCORDANCE WITH THE REGULATIONS OF SAID BOARD, THE QUESTION STILL ARISES-- - DOES NOT THE EVIDENCE DISCLOSE THE EXISTENCE AND PRESENTATION OF A DISPUTED CLAIM WHICH WAS SETTLED AND PAID IN FULL BY APPELLEES AND A RELEASE GIVEN BY APPELLANT WHO IN SO DOING LAWFULLY ACTED FOR ITS PRINCIPALS, THE AFORESAID 1918 WOOL GROWERS OF THE UNITED STATES?

THE COURT ANSWERED THE ABOVE QUESTION--- WHETHER THERE WAS A FINAL SETTLEMENT--- IN THE AFFIRMATIVE. IN REACHING THIS CONCLUSION THE COURT CONSIDERED THE FOLLOWING QUESTIONS--- ALL OF WHICH WERE ANSWERED IN THE AFFIRMATIVE. WAS THERE A FINAL SETTLEMENT AND PAYMENT PURSUANT HERETO? WAS THE SETTLEMENT BINDING ON THE UNITED STATES? WAS THE GOVERNMENT'S AGENT AUTHORIZED TO NEGOTIATE THE SETTLEMENTS? IN THE KRAUS CASE, THE COURT FOLLOWED THE RATIONALE OF UNITED STATES V. CORLISS STEAM-ENGINE COMPANY, 91 U.S. 321, 323 (1875/--- THAT THE GOVERNMENT CANNOT REPUDIATE ITS SETTLEMENTS WHICH HAVE BEEN FAIRLY NEGOTIATED AND THAT SUCH SETTLEMENTS MUST BE EQUALLY BINDING ON THE GOVERNMENT AS UPON THE CONTRACTOR. SEE ALSO CANNON CONSTRUCTION COMPANY V. UNITED STATES, 319 F.2D 173 (CT. CL. 1963).

OUR DECISION OF JANUARY 15, 1964, DEALT ONLY WITH THE QUESTION WHETHER PURSUANT TO OUR INTERPRETATION OF SECTION XV OF ASPR, CONTINENTAL'S ACCOUNTING PROCEDURE OF NOT ALLOCATING INDIRECT COST TO IR AND D WAS REASONABLE. WE DID NOT CONSIDER WHETHER THE SUPPLEMENTAL AGREEMENTS WITH CONTINENTAL WHICH ESTABLISHED THE OVERHEAD RATES FOR FISCAL YEARS 1960 AND 1961 WERE BINDING ON THE GOVERNMENT.

THE RECORD ESTABLISHES THAT THE SUPPLEMENTAL AGREEMENTS REGARDING THE OVERHEAD RATES FOR CONTINENTAL'S FISCAL YEARS 1960 AND 1961, BETWEEN THE CONTRACTING OFFICER AND CONTINENTAL, WERE INTENDED TO BE FINAL SETTLEMENTS AND THAT PAYMENT WAS MADE TO CONTINENTAL PURSUANT TO THESE AGREEMENTS. THERE IS NO INDICATION THAT CONTINENTAL DEVIATED FROM ITS ESTABLISHED ACCOUNTING PRACTICES IN CHARGING INDIRECT COSTS TO THE GOVERNMENT'S RESEARCH AND DEVELOPMENT CONTRACTS. THE RECORD ALSO INDICATES THAT THE GOVERNMENT WAS AWARE OF CONTINENTAL'S ACCOUNTING PROCEDURE FOR INDIRECT COSTS AND THAT THESE ACCOUNTING PROCEDURES WERE GIVEN DUE CONSIDERATION BY THE GOVERNMENT'S NEGOTIATORS IN ESTABLISHING THE OVERHEAD RATES FOR FISCAL YEARS 1960 AND 1961 WHICH WERE INCLUDED IN THE SUPPLEMENTAL AGREEMENTS.

PURSUANT TO OUR RECONSIDERATION OF SECTION XV OF ASPR, BOTH BEFORE AND AFTER REVISION 50, AND THE FACTS OF THE INSTANT CASE, WE FIND NOTHING WHICH WOULD RENDER ILLEGAL THE SUPPLEMENTAL AGREEMENTS WITH CONTINENTAL REGARDING THE ESTABLISHMENT OF FINAL OVERHEAD RATES; NOR DO WE FIND ANY BASIS TO QUESTION THE AUTHORITY OF THE CONTRACTING OFFICER TO ENTER INTO SUCH SUPPLEMENTAL AGREEMENTS.

THEREFORE, THERE IS NO BASIS TO QUESTION THE BINDING EFFECT OF THE SUPPLEMENTAL AGREEMENTS ON THE GOVERNMENT. PURSUANT TO THE AUTHORITY IN THE KRAUS, CORLISS, AND CANNON CASES, SUPRA, WE FIND THAT THE GOVERNMENT CANNOT UNILATERALLY REPUDIATE ITS AGREEMENTS WITH CONTINENTAL REGARDING THE ESTABLISHMENT OF OVERHEAD RATES.

IN THESE CIRCUMSTANCES WE WILL NOT REQUIRE ANY FURTHER ACTION TO RECOVER THE PAYMENTS TO CONTINENTAL PURSUANT TO THE SUPPLEMENTAL AGREEMENTS ESTABLISHING THE OVERHEAD RATES FOR FISCAL YEARS 1960 AND 1961.

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