B-154406, AUG. 6, 1964

B-154406, AUG. 6, 1964

TO MR. JOHN R. IMMER, PRESIDENT, WORK SAVING INTERNATIONAL:

REFERENCE IS MADE TO YOUR STATEMENT OF MAY 26, 1964, SUBMITTED TO THE FEDERAL AVIATION AGENCY, AND YOUR SUBSEQUENT LETTERS TO THIS OFFICE, CONCERNING A DECISION RENDERED BY THE FEDERAL AVIATION AGENCY'S CONTRACT APPEALS PANEL ON FEBRUARY 18, 1964, WHICH DENIED YOUR CLAIM FOR $52,500.61 UNDER COST-PLUS-A-FIXED-FEE CONTRACT NO. FA-2426, DATED JUNE 30, 1961, COVERING THE PERFORMANCE OF WORK-LOAD STUDIES AT FEDERAL AVIATION AGENCY FIELD INSTALLATIONS.

THE CONTRACT WAS FUNDED AT $48,904 ($46,725 AS ESTIMATED COSTS, PLUS A FEE OF $2,179 REPRESENTING 7 PERCENT OF YOUR ESTIMATED COSTS FOR COMPANY AND NON-COMPANY DIRECT LABOR). THE CONTRACT CONTAINED A "LIMITATION OF COSTS" CLAUSE WHICH LIMITED THE GOVERNMENT'S OBLIGATION TO THE FUNDED AMOUNT OF $48,904 EXCEPT AS THAT AMOUNT MIGHT BE INCREASED BY THE CONTRACTING OFFICER TO PERMIT A CONTINUANCE OF THE WORK IF SO DESIRED AFTER RECEIPT OF NOTICE FROM YOU THAT A COST OVERRUN WOULD BE EXPERIENCED.

YOU WERE AUTHORIZED TO PROCEED WITH THE CONTRACT WORK ON JUNE 30, 1961, AND YOU WERE REQUIRED TO COMPLETE PERFORMANCE BY SUBMISSION OF A FINAL REPORT ON THE RESULTS OF THE STUDIES MADE BY SEPTEMBER 15, 1961. YOU SUBMITTED YOUR "FINAL REPORT" ON SEPTEMBER 18, 1961, BUT CERTAIN DEFICIENCIES WERE FOUND THEREIN AND IT APPEARS THAT YOU SUBMITTED A CORRECTED REPORT SOMETIME PRIOR TO OCTOBER 31, 1961, THE DATE ON WHICH TECHNICAL PERSONNEL OF THE FEDERAL AVIATION AGENCY MET TO EVALUATE THE WORK WHICH YOU PERFORMED UNDER THE CONTRACT. YOU WERE PAID AMOUNTS IN NOVEMBER AND DECEMBER 1961 TO COVER THE BALANCE OF THE CONTRACT CEILING AMOUNT EXCEPT FOR A SMALL RESERVE PENDING FINAL AUDIT OF THE ACCOUNT. DECEMBER 13, 1963, YOU SUBMITTED A "FINAL OUCHER" FOR $12,552.53, AND SUCH CLAIM WAS INCREASED FROM TIME TO TIME DURING AND AFTER AN AUDIT OF YOUR BOOKS AND RECORDS BY ASSIGNED PERSONNEL OF THE NAVY AREA AUDIT OFFICE. WAS FOUND THAT YOUR ACTUAL OVERHEAD COSTS EXCEEDED THE CONTRACT ESTIMATES FOR OVERHEAD WHICH WERE COMPUTED WITH THE USE OF PROVISIONAL OVERHEAD RATES APPLIED TO YOUR COMPANY AND NON-COMPANY DIRECT LABOR COST ESTIMATES IN THE RESPECTIVE AMOUNTS OF $7,500 AND $12,900.

THE CONTRACTING OFFICER DETERMINED THAT ADJUSTMENTS COULD BE MADE ON AN EQUITABLE BASIS FOR OVERHEAD COSTS WHICH EXCEEDED THE CONTRACT ESTIMATES, BUT HE REFUSED TO ALLOW ANY AMOUNT FOR COMPANY DIRECT LABOR WHICH EXCEEDED THE AMOUNT OF $7,500 OR ANY OVERHEAD ON SUCH EXCESS AMOUNT. HE NOTED THAT THE PAYMENTS ALREADY MADE TO YOU INCLUDED ALLOWANCES FOR COMPANY DIRECT LABOR WHICH EXCEEDED THE CONTRACT ESTIMATE OF $7,500, BUT THE DIFFERENCE INVOLVED WAS OFFSET AGAINST APPARENT UNDERCLAIMS FOR NON-COMPANY DIRECT LABOR AND TRAVEL EXPENSE. AT THIS POINT, THE SUM OF $48,826.52, PAID UNDER THE CONTRACT, INCLUDED $19,885.89 FOR DIRECT LABOR, $14,528.10 FOR OVERHEAD, $12,233.53 FOR TRAVEL AND A FEE OF $2,179. THERE REMAINED ONLY THE SUM OF $77.48 OUT OF THE TOTAL CONTRACT ALLOTMENT OF $48,904. THE CONTRACTING OFFICER THEN MADE SEPARATE ALLOWANCES OF $4,591.27 AND $5,054.82 FOR OVERHEAD WHICH HAD THE EFFECT OF INCREASING THE MAXIMUM AMOUNT OF THE CONTRACT TO $58,472.61. THERE WAS APPLIED AN OVERHEAD RATE OF 121.57 PERCENT TO THE ESTIMATE FOR COMPANY LABOR ($7,500) AND TO THE SUM OF $12,385.89, ACTUALLY PAID FOR NON-COMPANY LABOR WHICH PROVED TO BE LESS THAN THE CONTRACT ESTIMATE THEREFOR. THE TOTAL OVERHEAD ALLOWANCE WAS $24,174.19, REPRESENTING THE AGGREGATE OF THE ABOVE AMOUNTS OF $14,528.10, $4,591.27, AND $5,054.82.

IT IS YOUR CONTENTION THAT THE SCOPE OF THE CONTRACT WAS CHANGED WHEN IN JULY 1961 YOU WERE FURNISHED A REARRANGED FIELD WORKING SCHEDULE CALLING FOR FIVE WEEKS INSTEAD OF FOUR WEEKS OF FIELD OPERATIONS. AT SUCH TIME YOU SUBMITTED CERTAIN DATA, INDICATING THAT YOUR COMPANY LABOR COSTS WOULD BE INCREASED CONSIDERABLY IN WORKING UNDER THE NEW SCHEDULE, BUT THAT YOU INTENDED TO ABSORB A PART OF SUCH COSTS BY SAVINGS IN TRAVEL EXPENSE SO THAT NO MORE THAN $5,700 WOULD BE REQUIRED AS AN ADDITION TO THE ORIGINAL MAXIMUM CONTRACT AMOUNT.

ON SEPTEMBER 1, 1961, YOU REQUESTED AN ALLOWANCE OF COST NOT TO EXCEED $5,700 WITH NO ADDITION TO YOUR FEE, BUT THIS REQUEST WAS DENIED BY LETTER DATED SEPTEMBER 27, 1961, ON WHAT APPEARS TO HAVE BEEN AN ERRONEOUS BELIEF THAT THE $5,700 WAS REQUIRED FOR MAKING CORRECTIONS IN THE REPORT SUBMITTED ON SEPTEMBER 18, 1961.

IT APPEARS THAT YOU HAVE MISINTERPRETED THE FEBRUARY 18, 1964, DECISION OF THE CONTRACT APPEALS PANEL INSOFAR AS YOU SUGGEST THAT NO CONSIDERATION WAS GIVEN TO THE FACT THAT THE CONTRACTING OFFICER HAD REFUSED TO ALLOW MORE THAN $19,885.89 AS DIRECT LABOR COSTS OR MORE THAN $24,174.19 AS ACTUAL OVERHEAD COSTS, COMPUTED BY APPLYING THE 121.57 PERCENT OVERHEAD RATE TO THE SUM OF $19,885.89.

IN SUBSTANCE THE DECISION OF THE CONTRACT APPEALS PANEL APPEARS TO BE THAT THE WORK REQUIREMENTS WERE NOT CHARGED BEYOND THE GENERAL SCOPE OF THE CONTRACT AND THAT THE GOVERNMENT WAS NOT OBLIGATED TO MAKE ANY RETROACTIVE ADJUSTMENT IN THE COST LIMITATION OF THE CONTRACT, EXCEPT POSSIBLY TO THE EXTENT OF THE REQUESTED INCREASE OF $5,700, BECAUSE SUCH REQUEST WAS NOT TIMELY CONSIDERED AND THIS WAS DUE PRIMARILY TO A REORGANIZATION OF THE AGENCY'S PROCUREMENT OFFICE DURING THE RELATIVELY SHORT PERIOD OF TIME THAT THE WORK UNDER THE CONTRACT WAS BEING PERFORMED. THE CONTRACT APPEALS PANEL EVIDENTLY BELIEVED THAT, IF IN JULY 1961 THE MATTER HAD BEEN BROUGHT TO THE ATTENTION OF AN OFFICIAL WHO WAS AUTHORIZED TO ISSUE A CONTRACT AMENDMENT, HE WOULD HAVE AUTHORIZED THE CONTRACT WORK TO BE CONTINUED AND INCREASED THE MAXIMUM AMOUNT OF THE CONTRACT BY THE SUM OF $5,700. WE ALSO BELIEVE THAT, NOTWITHSTANDING THE FACT THAT NO CLAIM FOR AN ADDITIONAL FEE WAS MADE DURING JULY 1961, AND THAT THE NEW SCHEDULE OF WORK WAS TECHNICALLY WITHIN THE GENERAL SCOPE OF THE CONTRACT, IT WOULD HAVE BEEN POSSIBLE FOR THE FEDERAL AVIATION AGENCY TO HAVE GRANTED AN ADDITIONAL FEE OF ABOUT 7 PERCENT OF THE ESTIMATES FOR ADDITIONAL LABOR COSTS AND OVERHEAD EXPENSES.

WE DO NOT QUESTION THE DECISION OF THE CONTRACTING OFFICER TO MAKE REASONABLE ADJUSTMENTS FOR OVERHEAD COSTS WHICH EXCEEDED THE CONTRACT ESTIMATES, DEPENDING UPON THE REASONABLENESS OF THE OVERHEAD RATE APPLIED.

HOWEVER, IN OUR CONSIDERATION OF THE ENTIRE MATTER, IT HAS BECOME APPARENT THAT THE OVERHEAD RATE APPLIED IN THIS CASE IS SO ERRONEOUS AS TO HAVE REQUIRED THIS OFFICE TO HAVE TAKEN EXCEPTION THERETO IF THE CONTRACTING OFFICER HAD APPROVED PAYMENTS UNDER THE CONTRACT ON THIS BASIS.

THE OVERHEAD RATE OF 121.57 PERCENT OF YOUR ALLOWABLE DIRECT LABOR COSTS WAS DETERMINED ON THE BASIS THAT DURING THE YEAR 1961 YOU INCURRED $42,698.38 OF ALLOWABLE TYPES OF OVERHEAD COSTS AND PERFORMED TWO CONTRACTS AS TO WHICH YOUR COSTS FOR DIRECT LABOR AMOUNTED TO $34,117.76. THE FIRST CONTRACT WAS WITH THE PROVINCE OF NOVA SOCTIA, CANADA, AND YOU ADVISED OUR REPRESENTATIVE THAT SUCH CONTRACT WAS COMPLETED BEFORE YOU COMMENCED WORK UNDER THE CONTRACT WITH THE FEDERAL AVIATION AGENCY. THE AGENCY'S CONTRACT WAS PERFORMED DURING A PERIOD OF APPROXIMATELY THREE MONTHS AND IT WOULD SEEM TO HAVE BEEN A RELATIVELY SIMPLE MATTER DEFINITELY TO ASCERTAIN THE AMOUNTS CHARGEABLE AS OVERHEAD TO THE CONTRACT. SINCE IT APPEARS THAT THOSE COSTS PROBABLY WERE NOT CONSIDERABLY IN EXCESS OF ONE-FOURTH OF YOUR AUDITED TOTAL OVERHEAD EXPENSE FOR THE ENTIRE YEAR 1961, IT IS OBVIOUS THAT THE USE OF THE OVERHEAD RATE OF 121.57 PERCENT OF ALLOWABLE DIRECT LABOR COSTS DID NOT ACCOMPLISH A REASONABLE AND EQUITABLE RESULT. IN THE COMPUTATION OF ALLOWABLE OVERHEAD COSTS UNDER GOVERNMENT COST REIMBURSABLE TYPE CONTRACTS, AN OVERHEAD RATE WHICH WOULD CLEARLY RESULT IN PAYMENT TO A CONTRACTOR OF A SUM WHICH IS KNOWN TO EXCEED HIS ACTUAL OVERHEAD COSTS DURING THE PERIOD OF CONTRACT PERFORMANCE IS NOT A REASONABLE RATE.

AS THE MATTER NOW STANDS, IT WOULD APPEAR THAT THE ALLOWABLE CONTRACT AMOUNT SHOULD NOT HAVE BEEN INCREASED ABOVE THE APPROXIMATE SUM OF $54,832.82, WHICH WOULD COVER ALLOWABLE DIRECT LABOR CHARGES OF $24,798, APPROXIMATELY $10,673.10 ( 1/4 OF $42,692.38) FOR AUDITED OVERHEAD, $3,737.12 FOR UNAUDITED OVERHEAD, $12,233.53 FOR AUDITED TRAVEL EXPENSE AND $505.67 FOR UNAUDITED TRAVEL EXPENSE, AND A FIXED FEE OF $2,885.40.

HENCE, ON THE RECORD BEFORE US, WE MUST CONCLUDE THAT THE DECISIONS RENDERED BY THE CONTRACTING OFFICER AND THE CONTRACT APPEALS PANEL WERE NOT UNFAIR TO YOUR COMPANY, AND THAT THERE IS NO BASIS WHATEVER FOR SUCH PORTIONS OF YOUR TOTAL CLAIM AS COVER OVERHEAD EXPENSES ALLEGEDLY INCURRED IN 1962 AND 1963 WHEN YOUR PRIOR ADDITIONAL CLAIMS UNDER THIS CONTRACT WERE BEING CONSIDERED BY THE FEDERAL AVIATION AGENCY.

SINCE THERE IS PENDING BEFORE THE CONTRACT APPEALS PANEL, FEDERAL AVIATION AGENCY, YOUR REQUEST FOR RECONSIDERATION OF THE PANEL'S DECISION OF FEBRUARY 18, 1964, WE ARE RETURNING THE PAPERS OF THE CASE TO THE FEDERAL AVIATION AGENCY WITH A COPY OF THIS LETTER, SO THAT FINAL ADMINISTRATIVE ACTION ON YOUR APPEAL MAY BE TAKEN.