B-154442, NOV. 29, 1968

B-154442: Nov 29, 1968

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SECRETARY: REFERENCE IS MADE TO LETTER DATED OCTOBER 29. A COST REIMBURSEMENT (NO FEE) CONTRACT WAS ENTERED INTO ON MARCH 28. THE COST OF THE WORK TO BE PERFORMED BY THE CONTRACTOR WAS ESTIMATED AT $30. SECTION 4.4 OF THE CONTRACT PROVIDES THAT THE CONTRACTOR WILL BE REIMBURSED FOR INDIRECT COSTS ALLOCABLE TO THE CONTRACT INCLUDING. COST OF FINANCING AND REFINANCING OPERATIONS * * * ARE UNALLOWABLE * * *.'. IT IS REPORTED THAT SINCE THE KORBLOCK CORPORATION HAD NO ASSETS OF ITS OWN. THIS WAS ACHIEVED BY ASSIGNING THE CONTRACT TO A BANK WHICH ESTABLISHED A LINE OF CREDIT. AS MONEY WAS NEEDED TO PURCHASE MATERIALS AND PAY WAGES THE BANK ADVANCED THE MONEY AND INTEREST ON THE MONEY BORROWED ACCRUED FROM THAT DATE.

B-154442, NOV. 29, 1968

TO MR. SECRETARY:

REFERENCE IS MADE TO LETTER DATED OCTOBER 29, 1968, FROM DEPUTY ASSISTANT SECRETARY GEORGE E. ROBINSON, REQUESTING A DECISION WHETHER AN ITEM OF COST CLAIMED BY THE KORBLOCK CORPORATION OF HORNELL, NEW YORK, MAY BE REIMBURSED UNDER CONTRACT NO. 14-09-0070-385.

PURSUANT TO THE SOLID WASTE DISPOSAL ACT OF 1965, A COST REIMBURSEMENT (NO FEE) CONTRACT WAS ENTERED INTO ON MARCH 28, 1967, BETWEEN THE BUREAU OF MINES AND KORBLOCK CORPORATION (FORMERLY KNOWN AS LOK-BLOK, INC.) FOR RESEARCH WORK TO STUDY THE FEASIBILITY OF UTILIZING COMPRESSED LIGHT-GAUGE STEEL AUTOMOBILE BODY SCRAP AS A REINFORCING CORE IN CONCRETE BUILDING BLOCKS.

THE COST OF THE WORK TO BE PERFORMED BY THE CONTRACTOR WAS ESTIMATED AT $30,304. SECTION 4.2 PROVIDES THAT THE CONTRACTING OFFICER MAY, BY WRITTEN NOTICE TO THE CONTRACTOR, REVISE THE ESTIMATED COST OF THE CONTRACT, AND FROM TIME TO TIME FURTHER REVISE ANY REVISED ESTIMATE OF SUCH COST, INCLUDING, BUT NOT LIMITED TO, TRANSFER OF FUNDS BETWEEN COST CATEGORIES.

SECTION 4.3 OF THE CONTRACT PROVIDES FOR REIMBURSEMENT OF DIRECT COSTS INCURRED IN THE PERFORMANCE OF THE WORK UNDER THE CONTRACT SUCH AS: SALARIES AND RELATED EXPENSES; TRAVEL; RENTAL OF SPECIALIZED EQUIPMENT; RENTAL OF SPACE AND COSTS OF UTILITY SERVICES; MATERIALS, EQUIPMENT AND SUPPLIES; AND CHARGES FOR TESTING OF THE BLOCKS BY AN ACCEPTED TESTING LABORATORY AND EXPENSES RELATED THERETO.

SECTION 4.4 OF THE CONTRACT PROVIDES THAT THE CONTRACTOR WILL BE REIMBURSED FOR INDIRECT COSTS ALLOCABLE TO THE CONTRACT INCLUDING, BUT NOT LIMITED TO, LEGAL AND TECHNICAL SERVICES, AND GENERAL LIABILITY INSURANCE. SECTION 4.5 PROVIDES THAT THE DETERMINATION AND ALLOWABILITY OF COSTS, EITHER DIRECT OR INDIRECT, FOR WHICH PAYMENTS SHALL BE MADE UNDER THE CONTRACT SHALL BE IN ACCORDANCE WITH SUBPART 1 15.2 OF THE FEDERAL PROCUREMENT REGULATIONS IN FORCE UPON THE EFFECTIVE DATE OF THE CONTRACT.

SUBSECTION 1-15.205.17 OF THE FEDERAL PROCUREMENT REGULATIONS STIPULATES "INTEREST ON BORROWINGS (HOWEVER REPRESENTED), BOND DISCOUNTS, COST OF FINANCING AND REFINANCING OPERATIONS * * * ARE UNALLOWABLE * * *.'

IT IS REPORTED THAT SINCE THE KORBLOCK CORPORATION HAD NO ASSETS OF ITS OWN, IT HAD TO GO TO A LENDING INSTITUTION AND BORROW MONEY TO PERFORM THE SERVICES REQUIRED UNDER THE CONTRACT. THIS WAS ACHIEVED BY ASSIGNING THE CONTRACT TO A BANK WHICH ESTABLISHED A LINE OF CREDIT, AND AS MONEY WAS NEEDED TO PURCHASE MATERIALS AND PAY WAGES THE BANK ADVANCED THE MONEY AND INTEREST ON THE MONEY BORROWED ACCRUED FROM THAT DATE. THE BANK CHARGED A NORMAL INTEREST RATE ON MONIES ADVANCED TO KORBLOCK CORPORATION UNTIL IT WAS REPAID BY THE GOVERNMENT ON THE BASIS OF VOUCHERS SUBMITTED BY THE CONTRACTOR UPON THE COMPLETION OF SPECIFIED PARTS OF THE WORK. THE TOTAL CHARGES BY THE BANK FOR THIS SERVICE AMOUNTED TO $839.74 AND THIS IS THE AMOUNT FOR WHICH REIMBURSEMENT IS CLAIMED.

IT IS STATED THAT SINCE THE KORBLOCK CORPORATION HAD NO ASSETS OF ITS OWN, IT WAS NECESSARY FOR IT TO GO TO A LENDING INSTITUTION AND BORROW MONEY TO PERFORM THE SERVICES UNDER THE CONTRACT; THAT THE CONTRACTOR COULD NOT HAVE PERFORMED THE SERVICES REQUIRED BY THE CONTRACT WITHOUT INCURRING THE EXPENSE IN QUESTION; AND THAT SUCH EXPENSE WAS JUST AS VITAL AS THE COST OF WAGES, SUPPLIES, AND OTHER PROJECT EXPENSES WHICH WERE PART OF THE CONTRACTOR'S COST ESTIMATE WHICH WAS MADE A PART OF THE CONTRACT. IT IS THEREFORE RECOMMENDED THAT REIMBURSEMENT OF THE BANK INTEREST AND SERVICE CHARGES BE AUTHORIZED, PARTICULARLY SINCE NO FEE WAS PROVIDED WHICH WOULD NORMALLY COVER SUCH COST.

IT DOES NOT APPEAR THAT EITHER PARTY TO THE CONTRACT CONTEMPLATED THAT NECESSARY FINANCING COSTS WOULD BE CONSIDERED NONREIMBURSABLE TO CONTRACTOR. IN SUCH CIRCUMSTANCES, SINCE THE CONTRACT AS WRITTEN DOES NOT EXPRESS THE ACTUAL INTENT OF THE PARTIES REGARDING REIMBURSEMENT OF ALL NECESSARY COSTS, WE ARE NOT REQUIRED TO OBJECT TO THE REIMBURSEMENT TO THE CONTRACTOR OF THE SUM OF $839.74 INVOLVED, AS RECOMMENDED. SEE, GENERALLY, 20 COMP. GEN. 533.

THE ENCLOSURES FORWARDED WITH THE LETTER OF OCTOBER 29, 1968, ARE RETURNED.