B-152754, JAN. 10, 1964

B-152754: Jan 10, 1964

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TO CONTINENTAL ELECTRONICS MANUFACTURING COMPANY: REFERENCE IS MADE TO YOUR LETTERS OF OCTOBER 22 AND DECEMBER 2. FROM THE MATERIAL AND DOCUMENTS FORWARDED WITH YOUR REQUEST IT APPEARS THAT THE AMOUNT INVOLVED WAS NOT APPROVED BY THE OFFICER IN CHARGE OF CONSTRUCTION. APPEAL WAS MADE TO THE DIRECTOR. YOUR FURTHER APPEAL TO THE ARMED SERVICES BOARD OF CONTRACT APPEALS AS AUTHORIZED REPRESENTATIVE OF THE SECRETARY OF THE NAVY WAS LIKEWISE DENIED AFTER A HEARING CONDUCTED ON MAY 28. THE DECISION OF THE BOARD IS FINAL AND CONCLUSIVE. IN PASSING UPON YOUR CLAIM WE THEREFORE ARE LIMITED TO CONSIDERATION OF THE LEGAL PRINCIPLES INVOLVED. PROVISIONS PERTAINING TO THE ALLOWABLE COST OF THE CONTRACT ARE SET FORTH ON PAGE 6 OF THE SCHEDULE (DD FORM 351-1) AS FOLLOWS: "ALLOWABLE COST: PARAGRAPH (A) OF CLAUSE 4 OF THE GENERAL PROVISIONS ENTITLED "ALLOWABLE COST.

B-152754, JAN. 10, 1964

TO CONTINENTAL ELECTRONICS MANUFACTURING COMPANY:

REFERENCE IS MADE TO YOUR LETTERS OF OCTOBER 22 AND DECEMBER 2, 1963, REQUESTING OUR CONSIDERATION OF YOUR CLAIM FOR $2,088.88 REPRESENTING A BONUS PAID FOR THE YEAR ENDING NOVEMBER 30, 1958, TO CERTAIN SUPERVISORY, ENGINEERING AND ADMINISTRATIVE PERSONNEL ENGAGED IN THE CONSTRUCTION OF A VERY LOW FREQUENCY (VLF) NAVAL RADIO STATION AT CUTLER, MAINE, UNDER A COST-PLUS-A-FIXED-FEE CONTRACT NO. NOBSR 75244, DATED APRIL 29, 1958.

FROM THE MATERIAL AND DOCUMENTS FORWARDED WITH YOUR REQUEST IT APPEARS THAT THE AMOUNT INVOLVED WAS NOT APPROVED BY THE OFFICER IN CHARGE OF CONSTRUCTION, C.E.C., AS AN ALLOWABLE COST UNDER THE CONTRACT; AND, IN ACCORDANCE WITH THE TERMS OF THE "DISPUTES" CLAUSE OF THE CONTRACT CONCERNING THE ALLOWABILITY OF COSTS, APPEAL WAS MADE TO THE DIRECTOR, CONTRACT AUDIT DIVISION, FOR A DECISION. BY DECISION DATED AUGUST 31, 1962, THE DIRECTOR, CONTRACT AUDIT DIVISION, SUSTAINED THE PRIOR ACTION DISAPPROVING THE COST, AND YOUR FURTHER APPEAL TO THE ARMED SERVICES BOARD OF CONTRACT APPEALS AS AUTHORIZED REPRESENTATIVE OF THE SECRETARY OF THE NAVY WAS LIKEWISE DENIED AFTER A HEARING CONDUCTED ON MAY 28, 1963, BY DECISION OF THAT BOARD, ASBCA NO. 8668, DATED SEPTEMBER 24, 1963.

UNDER THE PROVISIONS OF THE "DISPUTES" CLAUSE OF THE CONTRACT, AND THE ACT OF MAY 11, 1954, 68 STAT. 81 (41 U.S.C. 321), THE DECISION OF THE BOARD IS FINAL AND CONCLUSIVE, AS TO ANY DISPUTE OF FACT, UNLESS FRAUDULENT, ARBITRARY, SO GROSSLY ERRONEOUS AS NECESSARILY TO IMPLY BAD FAITH, OR NOT SUPPORTED BY SUBSTANTIAL EVIDENCE. ON THE RECORD WE FIND NO BASIS FOR CONSIDERING THE DECISION DEFECTIVE IN ANY OF THOSE RESPECTS, AND IN PASSING UPON YOUR CLAIM WE THEREFORE ARE LIMITED TO CONSIDERATION OF THE LEGAL PRINCIPLES INVOLVED.

PROVISIONS PERTAINING TO THE ALLOWABLE COST OF THE CONTRACT ARE SET FORTH ON PAGE 6 OF THE SCHEDULE (DD FORM 351-1) AS FOLLOWS:

"ALLOWABLE COST: PARAGRAPH (A) OF CLAUSE 4 OF THE GENERAL PROVISIONS ENTITLED "ALLOWABLE COST, FIXED FEE AND PAYMENT" IS DELETED IN ITS ENTIRETY AND THE FOLLOWING SUBSTITUTED IN LIEU THEREOF:

"/A) FOR THE PERFORMANCE OF THIS CONTRACT, THE GOVERNMENT SHALL PAY TO THE CONTRACTOR THE COST THEREOF DETERMINED BY THE CONTRACT AUDIT DIVISION OF THE COMPTROLLER OF THE NAVY TO BE ALLOWABLE IN ACCORDANCE WITH THE PRINCIPLES FOR THE DETERMINATION OF COST AS OUTLINED IN PART 4 OF SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATION AS IN EFFECT ON THE DATE OF THIS CONTRACT, AS SUCH PRINCIPLES ARE EXPRESSLY MODIFIED BELOW, PLUS THE FIXED FEE PROVIDED FOR IN THIS SCHEDULE:

"/1) TWENTY-FIVE PERCENT (25 PERCENT) OF THE COSTS ALLOCABLE TO GENERAL AND ADMINISTRATIVE EXPENSE OF THE DALLAS OFFICE SHALL BE TREATED AS A DIRECT CHARGE UNDER THIS CONTRACT.

"/2) SALARIES OF CONTRACTOR'S INSPECTORS TO BE CHARGED DIRECTLY TO THIS CONTRACT TO THE EXTENT THAT THE SERVICES OF SUCH INSPECTORS ARE DEEMED APPROPRIATE BY THE OFFICER IN CHARGE OF CONSTRUCTION, C.E.C. AND THE BUREAU OF SHIPS, CODE 834.

"/3) FIELD OFFICE EXPENSE.

"/4) SALARIES OF THE CONTRACTOR'S OFFICERS NOT TO BE REIMBURSED AS A DIRECT CHARGE EXCEPT FOR SALARIES COVERING PERIODS OF THIRTY (30) CONSECUTIVE CALENDAR DAYS OR MORE WHEN AN OFFICER DEVOTES FULL TIME SUPERVISION TO THIS CONTRACT FOR SUCH PERIOD/S).

"/5) SALARIES OF THE CONTRACTOR'S OFFICERS FOR THE PURPOSE OF ALLOCATION OF COSTS TO THIS CONTRACT ARE SUBJECT TO THE REVIEW AND APPROVAL BY THE BUREAU OF YARDS AND DOCKS.'

PARAGRAPHS (A) AND (B) OF SPECIAL PROVISIONS ENTITLED "SERVICES AND LABOR" PROVIDE:

"/A) ALL SERVICES AND LABOR, INCLUDING PERSONAL SERVICES OF EVERY CHARACTER, EXCEPT SUCH AS MAY BE FURNISHED BY THE GOVERNMENT, REQUIRED OUTSIDE THE CENTRAL OFFICE ORGANIZATIONS OF THE CONTRACTOR FOR THE ACCOMPLISHMENT OF THE WORK UNDER THIS CONTRACT SHALL BE FURNISHED BY THE CONTRACTOR. THE SALARIES OR COMPENSATION PAID FOR SERVICES AND LABOR SHALL BE SUBJECT TO THE APPROVAL OF THE OFFICER IN CHARGE OF CONSTRUCTION, C.E.C.

"/B) NO PERSON SHALL BE ASSIGNED TO SERVICE BY THE CONTRACTOR AS SUPERINTENDENT OF CONSTRUCTION, CHIEF ENGINEER, CHIEF PURCHASING AGENT, CHIEF ACCOUNTANT, OR SIMILAR POSITION IN THE FIELD ORGANIZATIONS, OR AS PRINCIPAL ASSISTANT TO ANY SUCH PERSON, UNTIL HIS EMPLOYMENT HAS BEEN APPROVED BY THE OFFICER IN CHARGE OF CONSTRUCTION, C.E.C. THERE SHALL BE SUBMITTED TO THE OFFICER IN CHARGE OF CONSTRUCTION, C.E.C. SUCH INFORMATION AS HE MAY REQUEST AS TO THE EXPERIENCE, QUALIFICATIONS AND FORMER COMPENSATION OF SUCH PERSONS. CONTRACTS FOR SUCH SERVICES, SO FAR AS THEY SHALL CONSTITUTE ITEMS OF COST TO THE GOVERNMENT, SHALL INCLUDE PROVISIONS AS TO SALARY OR COMPENSATION AND AS TO TRAVELING, LODGING, SUBSISTENCE, LEAVES OF ABSENCE, AND SPECIAL (IF ANY) ALLOWANCES, AND SHALL BE SUBJECT TO APPROVAL BY THE OFFICER IN CHARGE OF CONSTRUCTION, C.E.C.'

THE RECORD INDICATES THAT AT THE TIME THE CONTRACT WAS ENTERED INTO THE HOME AND PRINCIPAL ORGANIZATION OF YOUR COMPANY, WHICH THERETOFORE HAD BEEN ENGAGED SOLELY IN THE DESIGN AND MANUFACTURE OF RADIO TRANSMITTERS, WAS LOCATED IN DALLAS, TEXAS, AND YOU HAD NO FIELD OFFICE OR OTHER ACTIVITY IN THE PROJECT AREA. WHILE IT HAD BEEN A GENERAL INFORMAL COMPANY POLICY TO PAY A 5 PERCENT YEARLY BONUS AT DALLAS, THE PERSONNEL RECEIVING THE BONUS HERE INVOLVED WERE HIRED SPECIFICALLY FOR THE PROJECT JOB TO BE PERFORMED UNDER THE CONTRACT AT CUTLER AND THE PAYMENT OF A BONUS IN ADDITION TO THE AGREED AND APPROVED SALARY WAS NOT A CONSIDERATION IN THE HIRING OF SUCH SUPERVISORY, ENGINEERING AND ADMINISTRATIVE PERSONNEL.

IN YOUR LETTER OF JUNE 27, 1958, TO THE DISTRICT PUBLIC WORKS OFFICE, FIRST NAVAL DISTRICT, BOSTON, MASSACHUSETTS, WHICH WAS STATED AS CONSTITUTING YOUR REQUEST FOR APPROVAL OF CERTAIN DIRECT AND INDIRECT CHARGES REQUIRING APPROVAL OF THE CONTRACTING OFFICER AS COST ITEMS, THE MATTER OF EMPLOYEES' BONUS WAS LISTED AMONG THE ITEMS WHICH YOU ASKED TO BE APPROVED AS INDIRECT COSTS CHARGEABLE TO THE COMPANY'S GENERAL AND ADMINISTRATIVE OVERHEAD POOL. IN THE REPLY OF JULY 30, 1958, SHOWING CERTAIN APPROVALS BY THE OFFICER IN CHARGE OF CONSTRUCTION OF THE ITEMS LISTED AS DIRECT CHARGES, IT WAS STATED "APPROVAL OF THE REMAINING ITEMS IN YOUR LETTER OF 27 JUNE 1958 AS COSTS CHARGEABLE TO YOUR GENERAL AND ADMINISTRATIVE OVERHEAD POOL TO BE ALLOCATED TO THE CONTRACT AS INDIRECT COSTS ARE MATTERS WHICH REQUIRE A DETERMINATION BY THE NAVY AREA AUDIT OFFICE.' THE MATERIAL WHICH YOU HAVE SUBMITTED DOES NOT SHOW THAT YOU MADE ANY FURTHER ATTEMPT TO HAVE THE COST OF THE BONUS APPROVED FOR THE SPECIFIED FIELD PERSONNEL PRIOR TO PAYMENT THEREOF ON FEBRUARY 6, 1959, WHICH COST HAD BEEN ENTERED INTO YOUR DALLAS OFFICE'S GENERAL AND ADMINISTRATIVE FIGURE AS OF NOVEMBER 30, 1958, THE END OF THE COMPANY'S FISCAL YEAR.

AS THE RESULT OF AN AIR FORCE ASSIST AUDIT OF YOUR DALLAS OFFICE PERFORMED ON MAY 1, 1959, THE COGNIZANT OFFICE OF THE AUDITOR GENERAL, U.S.A.F., RECOMMENDED THAT THE BONUSES CLAIMED FOR EMPLOYEES DIRECTLY ENGAGED IN PERFORMING WORK ON THE CUTLER PROJECT UNDER THE ABOVE CONTRACT BE CONSIDERED AS A DIRECT CHARGE TO THAT CONTRACT SINCE THE COST WAS SPECIFICALLY IDENTIFIABLE WITH THOSE EMPLOYEES. BASED ON THE AUDITOR'S RECOMMENDATION YOU SUBMITTED A VOUCHER ON MAY 20, 1959, BILLING THE AMOUNT AS A DIRECT CHARGE TO THE CONTRACT. FOLLOWING AN ENSUING SUSPENSION OF THESE COSTS, YOU APPEALED TO THE OFFICER IN CHARGE OF CONSTRUCTION TO APPROVE THE BONUS PAYMENTS. HE REFUSED TO DO SO ON SEVERAL GROUNDS WHICH INCLUDED THE REASONS THAT THE SALARIES APPROVED BY HIM FOR EMPLOYEES HIRED SPECIFICALLY FOR THE PROJECT FOR DUTY IN BOSTON OR CUTLER WHICH REQUIRED APPROVAL OF THE OFFICER IN CHARGE OF CONSTRUCTION WERE IN EXCESS OF THOSE ORDINARILY APPROVED ON NAVY CONSTRUCTION PROJECTS IN THE CONTINENTAL UNITED STATES AND THAT IN HIS APPROVAL OF THE SALARIES AND COMPENSATION FOR SERVICES TO BE PERFORMED BY YOUR COMPANY UNDER THE CONTRACT IT WAS NOT THE INTENT TO APPROVE THE PAYMENT OF ANY BONUS TO ANY EMPLOYEE HIRED SPECIFICALLY FOR WORK ON THE CUTLER PROJECT.

IT SEEMS THAT YOU BELIEVE THE CLAIM SHOULD BE ALLOWED FOR THE PRINCIPAL REASONS THAT PAYMENT OF THE BONUS TO SUCH PERSONNEL OF YOUR ORGANIZATION HAD BEEN A COMPANY POLICY FOR SEVERAL YEARS AND THAT HAD SUCH COST BEEN ACCEPTED AND ACCOUNTED FOR UNDER THE GENERAL AND ADMINISTRATIVE EXPENSE OF YOUR DALLAS OFFICE THE/OFFICER IN/CHARGE OF CONSTRUCTION WOULD NEVER HAVE HAD THE OPPORTUNITY TO APPROVE OR DISAPPROVE BECAUSE OF THE WAY THE CONTRACT IS WRITTEN.

THE CONTRACT PROVISION ON WHICH YOU RELY IS THAT QUOTED ABOVE UNDER PARAGRAPH (A) OF THE ,ALLOWABLE COST" CLAUSE AS SUBPARAGRAPH (1). SUCH PROVISION MODIFIES THE PRINCIPLES FOR DETERMINATION OF ALLOWABLE COSTS AS OUTLINED IN PART 4, SECTION XV, ARMED SERVICES PROCUREMENT REGULATION, BY AUTHORIZING AS A DIRECT CHARGE UNDER THE CONTRACT "TWENTY-FIVE PERCENT (25 PERCENT) OF THE COSTS ALLOCABLE TO GENERAL AND ADMINISTRATIVE EXPENSE OF THE DALLAS OFFICE.' BY USE OF SUCH LANGUAGE IT IS CLEAR THAT PAYMENT OF THE PERCENTAGE WAS NOT AUTOMATICALLY TO EMBRACE ALL ITEMS LISTED AS GENERAL AND ADMINISTRATIVE EXPENSE OF YOUR CENTRAL OFFICE, BUT ONLY THOSE ITEMS WHICH WERE DETERMINED UNDER THE RECOGNIZED PRINCIPLES TO BE PROPERLY ALLOWABLE AND ALLOCABLE TO THAT ACCOUNT. ALSO, IT IS FOR NOTING THAT YOUR FIELD OFFICE EXPENSES ARE PROVIDED FOR SEPARATELY IN SUBPARAGRAPH (3) OF THE CONTRACT CLAUSE.

PART 4, SECTION XV, ARMED SERVICES PROCUREMENT REGULATION, DEALING WITH CONSTRUCTION CONTRACTS AND IN EFFECT AT THE TIME OF THE CONTRACT, DOES NOT REFER TO DIRECT AND INDIRECT COSTS BUT STATES THEREIN THAT THE TOTAL COST OF A COST-REIMBURSEMENT TYPE CONTRACT FOR CONSTRUCTION IS THE SUM OF THE ALLOWABLE COSTS INCIDENT TO THE PERFORMANCE OF THE CONTRACT, LESS APPLICABLE INCOME OR OTHER CREDITS, AND THE TESTS USED IN DETERMINING THE ALLOWABILITY OF COSTS INCLUDE REASONABLENESS AND ANY LIMITATIONS AS TO TYPES OR AMOUNTS OF COST ITEMS SET FORTH THEREIN OR OTHERWISE INCLUDED IN THE CONTRACT. BONUSES OF THE TYPE HERE CONCERNED ARE NOT SHOWN UNDER THE ITEMS LISTED AS EXAMPLES OF EITHER ALLOWABLE OR UNALLOWABLE COSTS. EXAMPLES OF A CONTRACTOR'S CENTRAL OFFICE EXPENSES, WHICH ARE LISTED AS UNALLOWABLE EXCEPT TO THE EXTENT AUTHORIZED BY THE CONTRACTING OFFICER, WERE SET FORTH IN PARAGRAPH 15 404 OF THE REGULATION AS SUPPLIES, EQUIPMENT, RENT OR ANY OTHER EXPENSES INCIDENT TO "ITS" MAINTENANCE AND OPERATION.

FROM THE TESTIMONY GIVEN BEFORE THE ARMED SERVICES BOARD OF CONTRACT APPEALS IT APPEARS THAT BOTH YOU AND THE CONCERNED GOVERNMENT PERSONNEL REGARDED THE BONUS, ALTHOUGH UNPROMISED, AS A FACTOR OF COMPENSATION FOR THE SPECIFIED EMPLOYEES AND THAT SUCH EMPLOYEES WERE NOT CONSIDERED AS A PART OF YOUR PERMANENT ORGANIZATION SITUATED AT DALLAS BUT WERE IN THE NATURE OF TEMPORARY EMPLOYEES HIRED SOLELY FOR WORK ON THE CUTLER PROJECT. THUS, FROM THE INFORMATION OF RECORD IT APPEARS REASONABLE TO CONCLUDE THAT THE BONUS, BEING AN IDENTIFIABLE FACTOR OF COMPENSATION FOR THE SPECIFIED FIELD OR PROJECT EMPLOYEES, IS MORE CLOSELY RELATED TO THE PROJECT WORK THAN INCIDENT TO THE OPERATION OF YOUR CENTRAL OFFICE WITHIN THE PROVISIONS OF THE CONTRACT OR CONTEMPLATION OF THE ARMED SERVICES PROCUREMENT REGULATION, AND NO REASON IS APPARENT WHICH WOULD REQUIRE A VIEW DIFFERENT FROM THE ADMINISTRATIVE CONCLUSION THAT THE AMOUNT WAS NOT PROPERLY ALLOCABLE TO THE GENERAL AND ADMINISTRATIVE EXPENSE ACCOUNT OF YOUR DALLAS OFFICE.

IT APPEARS, AS STATED IN PARAGRAPH 11A OF THE DECISION OF THE DIRECTOR, CONTRACT AUDIT DIVISION, THAT IN THE INSTANT CASE ALLOWABLE COSTS UNDER THE CONTRACT ARE TO BE DETERMINED IN ACCORDANCE WITH PART 4, SECTION XV, ARMED SERVICES PROCUREMENT REGULATION, AS IN EFFECT ON THE DATE OF THE CONTRACT AND THE APPLICABLE CONTRACT PROVISIONS. AS INDICATED ABOVE, PART 4 OF THE REGULATION DID NOT ESTABLISH THE ALLOWABILITY OR UNALLOWABILITY OF THE TYPE OF COST HERE CONCERNED, HENCE FURTHER REFERENCE TO THE CONTRACT PROVISIONS IS REQUIRED. THE ABOVE-QUOTED ,SERVICE AND LABOR" PROVISIONS OF THE CONTRACT CLEARLY PROVIDE THAT SALARIES OR "COMPENSATION" PAID FOR SERVICES FOR ACCOMPLISHMENT OF THE WORK UNDER THE CONTRACT SHALL BE SUBJECT TO APPROVAL OF THE OFFICER IN CHARGE OF CONSTRUCTION. THAT YOU CONSIDERED AND RECOGNIZED THE EMPLOYEES' BONUS ASA COST ITEM REQUIRING APPROVAL UNDER THE TERMS OF THE CONTRACT IS APPARENT BY YOUR LETTER OF JUNE 27, 1958, SUPRA, REQUESTING SAME.

THE EVIDENT PURPOSE OF SUCH PROVISIONS WAS TO PROVIDE A MEANS FOR CURTAILING AND SUPERVISING THE REIMBURSABLE COSTS FOR PERSONAL SERVICES INCURRED BY THE CONTRACTOR FOR WORK ON THE PROJECT, AND THE GOVERNMENT MAY NOT BE DEPRIVED, BY THE CONTRACTOR'S ACTIONS, OF THE BENEFIT OF SUCH A SAFEGUARD. IN ANY EVENT, IT MUST BE ASSUMED THAT THE PARTIES IN INSERTING THE PARAGRAPHS AS SPECIAL PROVISIONS ATTACHED BOTH VALUE AND IMPORTANCE TO THEIR PRECISE TERMS, AND COMPLIANCE THEREWITH MUST BE SHOWN. UNITED STATES V. CUNNINGHAM, 125 F. 2D 28. THEREFORE, ON THE BASIS OF THE RECORD BEFORE US WE ARE OF THE OPINION THAT THE CONTRACT IS SUBJECT TO THE CONSTRUCTION THAT APPROVAL OF THE PAYMENT OF THE BONUS TO THE SPECIFIED FIELD EMPLOYEES IS IN THE NATURE OF A CONDITION PRECEDENT TO REIMBURSEMENT BY THE GOVERNMENT. IT IS WELL ESTABLISHED THAT WHERE THE TERMS OF A CONTRACT CONDITION REIMBURSEMENT FOR COSTS UPON THE RECEIPT OF APPROVAL FROM THE CONTRACTING AGENCY OR A SPECIFIED OFFICIAL 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; 42 COMP. GEN. 190, 195. COMPARE LOS ANGELES RAMS FOOTBALL CLUB V. CANNON, 185 F.SUPP. 717; FULTZ V. CONNELLY, 80 S.E.2D 428; AND DIAMOND V. HUGHES, 356 P.2D 643, 648, IN WHICH IT IS STATED "WHEN AN AGREEMENT IS MADE SUBJECT TO THE CONSENT OR APPROVAL OF A THIRD PARTY IT MUST BE VIEWED AS A CONDITIONAL AGREEMENT DEPENDENT UPON SUCH CONSENT OR APPROVAL BEING GIVEN.'

IN VIEW OF THE FOREGOING, WE CONCUR WITH THE DECISION OF THE ARMED SERVICES BOARD OF CONTRACT APPEALS, ASBCA NO. 8668, THAT THE BONUS PAID UNDER THE STATED CIRCUMSTANCES MAY NOT BE REGARDED AS AN ALLOWABLE COST ITEM UNDER THE CONTRACT. ACCORDINGLY, WE FIND NO LEGAL BASIS FOR THE ALLOWANCE OF YOUR CLAIM.

THE COMPLAINT PORTION OF THE ENCLOSURES SUBMITTED WITH YOUR LETTER IS RETURNED AS REQUESTED.