B-166235, MAR. 25, 1969

B-166235: Mar 25, 1969

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SECRETARY: REFERENCE IS MADE TO A LETTER DATED FEBRUARY 18. THE CONTRACT WAS ENTERED INTO WITH THE DISTRICT. THE DISTRICT IS A NON- PROFIT ORGANIZATION WHICH IS A POLITICAL SUBDIVISION OF THE STATE OF WEST VIRGINIA. THE CONTRACT WAS NEGOTIATED ON COST NO-FEE REIMBURSEMENT BASIS. THE CONTRACT IS IN THE ESTIMATED TOTAL AMOUNT OF $205. WHICH APPEARS TO HAVE BEEN PAID IN THE NET AMOUNT OF $1. 382.85 WAS DEDUCTED FROM THE AMOUNT CLAIMED ON THE VOUCHER FOR THE STATED REASON THAT "INTEREST ON LOANS OR MONIES BORROWED ARE NOT CONSIDERED AN ALLOWABLE COST.'. WERE MADE APPLICABLE TO CONTRACT NO. 14-12-131. IT IS CONSIDERED IN THE LETTER TO BE INEQUITABLE TO REQUIRE THE DISTRICT TO INCUR A LOSS IN THE AMOUNT OF THE INTEREST EXPENSE.

B-166235, MAR. 25, 1969

TO MR. SECRETARY:

REFERENCE IS MADE TO A LETTER DATED FEBRUARY 18, 1969, FROM DEPUTY ASSISTANT SECRETARY GEORGE E. ROBINSON, REQUESTING A DECISION WHETHER AN ITEM OF COST, REPRESENTED BY INTEREST PAID ON BORROWED MONIES, MAY BE REIMBURSED TO THE TYGART'S VALLEY SOIL CONSERVATION DISTRICT (HEREINAFTER REFERRED TO AS THE "DISTRICT"), UNDER CONTRACT NO. 14-12 131, DATED OCTOBER 10, 1967.

THE CONTRACT WAS ENTERED INTO WITH THE DISTRICT, ON BEHALF OF THE UNITED STATES, BY THE FEDERAL WATER POLLUTION CONTROL ADMINISTRATION, DEPARTMENT OF THE INTERIOR, IN CONFORMANCE WITH THE FEDERAL WATER POLLUTION CONTROL ACT, 33 U.S.C. 466, ET SEQ., FOR REVEGETATION OF THE ACID MINE DRAINAGE DEMONSTRATION SITE NEAR ELKINS, WEST VIRGINIA. THE DISTRICT IS A NON- PROFIT ORGANIZATION WHICH IS A POLITICAL SUBDIVISION OF THE STATE OF WEST VIRGINIA, AND THE CONTRACT WAS NEGOTIATED ON COST NO-FEE REIMBURSEMENT BASIS. THE CONTRACT IS IN THE ESTIMATED TOTAL AMOUNT OF $205,911.40 AND, AS STATED IN THE LETTER OF FEBRUARY 18, 1969, IT CONTAINS NO PROVISION FOR ADVANCE PAYMENTS.

IN CONNECTION WITH THE PREPARATION OF PUBLIC VOUCHER NO. 13, WHICH APPEARS TO HAVE BEEN PAID IN THE NET AMOUNT OF $1,000.36, THE DISTRICT CLAIMED REIMBURSEMENT FOR THE SUM OF $2,383.21, INCLUDING INTEREST CHARGES OF $1,382.85, STATED AS HAVING BEEN PAID ON MONIES BORROWED FOR USE AS WORKING CAPITAL ON THE REVEGETATION PROJECT. THE SUM OF $1,382.85 WAS DEDUCTED FROM THE AMOUNT CLAIMED ON THE VOUCHER FOR THE STATED REASON THAT "INTEREST ON LOANS OR MONIES BORROWED ARE NOT CONSIDERED AN ALLOWABLE COST.'

IN REGARD TO THE INTEREST CLAIM, CERTAIN PORTIONS OF THE PROVISIONS OF FORM HEW-315, REVISED AUGUST 1964, ENTITLED "GENERAL PROVISIONS (NEGOTIATED COST-REIMBURSEMENT CONTRACT)" , WERE MADE APPLICABLE TO CONTRACT NO. 14-12-131. THE UNDELETED CLAUSE 23 OF THAT FORM PROVIDES,IN PART, THAT THE GOVERNMENT SHOULD PAY TO THE CONTRACTOR THE COST OF CONTRACT PERFORMANCE DETERMINED BY THE CONTRACTING OFFICER TO BE ALLOWABLE EITHER IN ACCORDANCE WITH THE TERMS OF THE CONTRACT OR IN ACCORDANCE WITH SUBPART 1-15.2 OF PART 1-15 OF THE FEDERAL PROCUREMENT REGULATIONS (FPR), AS IN EFFECT ON THE DATE OF THE CONTRACT. SECTION 1-15.205-17, FPR, LISTS CERTAIN TYPES OF EXPENDITURES, INCLUDING "INTEREST ON BORROWINGS (HOWEVER REPRESENTED)" , AS "UNALLOWABLE" COSTS, WITH CERTAIN EXCEPTIONS NOT HERE INVOLVED; AND THE CONTRACT DOES NOT OTHERWISE PROVIDE THAT INTEREST PAID ON MONIES BORROWED BY THE DISTRICT WOULD BE CONSIDERED AS AN ALLOWABLE COST IN PERFORMING THE CONTRACT.

AS INDICATED IN THE LETTER OF FEBRUARY 18, 1969, IT WOULD APPEAR THAT THE INTEREST EXPENSE INCURRED BY THE DISTRICT DOES NOT CONSTITUTE AN ALLOWABLE ITEM OF COST UNDER THE TERMS OF THE CONTRACT, AS WRITTEN. HOWEVER, IT IS CONSIDERED IN THE LETTER TO BE INEQUITABLE TO REQUIRE THE DISTRICT TO INCUR A LOSS IN THE AMOUNT OF THE INTEREST EXPENSE, AND IT IS THEREFORE RECOMMENDED THAT WE AUTHORIZE REIMBURSEMENT TO THE DISTRICT OF THE AMOUNT OF $1,382.85 UNDER CONTRACT NO. 14-12-131. IT IS REPORTED THAT THE DISTRICT HAD ASSETS AVAILABLE AT THE TIME THE CONTRACT WAS EXECUTED BUT THEY PROVED TO BE INSUFFICIENT TO CONTINUE TO INCUR ALL NECESSARY COSTS FOR COMPLETE PERFORMANCE, PENDING THE RECEIPT OF REFUNDS FROM THE GOVERNMENT ON PROGRESS PAYMENTS UNDER THE CONTRACT; AND THAT THE DISTRICT BORROWED THE MONEY NEEDED TO FINISH THE CONTRACT WORK IN ORDER TO AVOID A DELAY IN PERFORMANCE WHILE AWAITING REIMBURSEMENTS FOR PREVIOUS EXPENDITURES. IT IS SUGGESTED THAT THE FACTS OF THE CASE ARE COMPARABLE WITH THOSE SET FORTH IN OUR DECISION OF NOVEMBER 29, 1968, B 154442, TO YOUR DEPARTMENT, IN WHICH WE APPROVED THE REIMBURSEMENT OF AN ITEM OF INTEREST EXPENSE TO A COST-NO-FEE CONTRACTOR ON THE BASIS THAT THE CONTRACT, AS WRITTEN, DID NOT EXPRESS THE ACTUAL INTENT OF THE PARTIES REGARDING REIMBURSEMENT OF ALL NECESSARY COSTS.

THE TWO CASES ARE SIMILAR SO FAR AS CONCERNS THE FACT THAT, UNDER EACH OF THE CONTRACTS INVOLVED, THE REQUIRED WORK WAS TO BE PERFORMED ON A COST-NO -FEE REIMBURSEMENT BASIS, AND THE FACT THAT, UNDER EACH CONTRACT, IT WAS BASICALLY CONTEMPLATED THAT THE CONTRACTOR WOULD BE REIMBURSED FOR ALL NECESSARY COSTS. HOWEVER, UNDER ANY SUCH COST REIMBURSABLE TYPE CONTRACT, THE CONTRACTOR ORDINARILY WOULD BE BOUND BY THE REFERENCED COST PRINCIPLES FOR DETERMINING THE ALLOWABILITY OF COSTS AND INDICATING CERTAIN CLASSES OF EXPENDITURES WHICH WOULD BE TREATED AS UNALLOWABLE COSTS.

IN OUR DECISION, B-154442, NOVEMBER 29, 1968, IT WAS CONSIDERED THAT, AS THE RESULT OF A MUTUAL MISTAKE, THE CONTRACT, AS WRITTEN, DID NOT EXPRESS THE ACTUAL INTENT OF THE PARTIES IN REGARD TO THE MATTER OF EXCLUDING INTEREST EXPENSE IN A DETERMINATION OF ALLOWABLE CONTRACT PERFORMANCE COSTS. THE CONTRACTOR REPORTEDLY HAD NO ASSETS OF ITS OWN WHEN THE CONTRACT WAS EXECUTED AND IT APPEARED REASONABLE TO CONCLUDE THAT BOTH THE GOVERNMENT AND THE CONTRACTOR KNEW THAT IT WOULD BE NECESSARY FOR THE CONTRACTOR TO BORROW MONEY IN ORDER TO PERFORM THE SERVICES REQUIRED UNDER THE CONTRACT.

THE FACTS OF THE PRESENT CASE APPEAR TO BE DISTINGUISHABLE FROM THOSE CONSIDERED IN OUR DECISION OF NOVEMBER 29, 1968. THE DISTRICT IS REPORTED TO HAVE HAD AVAILABLE ASSETS AT THE TIME THE CONTRACT WITH THE DISTRICT WAS ENTERED INTO AND, PRESUMABLY, THE PARTIES CONTEMPLATED THAT THE DISTRICT WOULD USE THOSE ASSETS TO FINANCE THE CONTRACT WORK. IT ALSO APPEARS THAT THE PARTIES CONTEMPLATED THAT THE AVAILABLE ASSETS WOULD BE ADEQUATE FOR SUCH PURPOSE, TAKING INTO CONSIDERATION THE PROVISIONS OF CLAUSE 23, FORM HEW-315, FOR THE MAKING OF CONTRACT PROGRESS PAYMENTS GENERALLY ON A MONTHLY BASIS TO COVER REIMBURSEMENT FOR EXPENDITURES PREVIOUSLY INCURRED AND DETERMINED BY THE CONTRACTING OFFICER AS CONSTITUTING ALLOWABLE CONTRACT PERFORMANCE COSTS. AT LEAST, THERE IS NO INDICATION TO THE EFFECT THAT THE GOVERNMENT KNEW THAT THE DISTRICT WOULD HAVE TO BORROW MONEY IN ORDER TO CONTINUE PERFORMANCE OF THE CONTRACT WORK WHILE AWAITING REFUNDS TO BE MADE BY THE GOVERNMENT FOR ALLOWABLE COSTS PREVIOUSLY INCURRED.

AS A GENERAL RULE, REFORMATION OF A CONTRACT CAN BE PERMITTED ONLY TO CORRECT A MISSTATEMENT IN THE CONTRACT OF THE ACTUAL TERMS AGREED UPON BETWEEN THE PARTIES, OR TO PROVIDE APPROPRIATE RELIEF IN SITUATIONS WHERE, AS IN THE CASE OF B-154442, NOVEMBER 29, 1968, IT IS OTHERWISE APPARENT THAT THE CONTRACT, AS WRITTEN, DOES NOT EXPRESS THE ACTUAL INTENT OF THE PARTIES RELATIVE TO A PARTICULAR MATTER. AS EXAMPLES OF CASES IN WHICH WE HAVE DENIED RELIEF TO GOVERNMENT CONTRACTORS BECAUSE THERE APPEARED TO BE NO LEGAL BASIS FOR CONSIDERING THAT THEIR CONTRACTS SHOULD BE REFORMED, SEE 26 COMP. GEN. 654 AND 26 ID. 744, WHEREIN COURT CASES ARE CITED TO THE EFFECT THAT A MISTAKE AS TO AN EXISTING FACT WHICH LEADS EITHER ONE OR BOTH PARTIES TO ENTER INTO A CONTRACT WHICH THEY WOULD NOT HAVE ENTERED INTO IF THEY HAD BEEN ADVISED OF THE ACTUAL FACTS WILL NOT JUSTIFY REFORMATION, AND THAT IT IS NOT WHAT THE PARTIES WOULD HAVE INTENDED HAD THEY KNOWN BETTER BUT WHAT THEY DID INTEND AT THE TIME, INFORMED AS THEY WERE.

IN REGARD TO THE CONTRACT WITH THE DISTRICT, IT APPEARS THAT THE CONTRACT, AS WRITTEN, IS IN ACCORDANCE WITH THE ACTUAL TERMS AGREED UPON BEFORE THE CONTRACT WAS EXECUTED AND THAT THE CONTRACT ALSO EXPRESSED THE ACTUAL INTENT OF THE PARTIES WITH RESPECT TO THE CLASSIFICATION OF CERTAIN ITEMS OF EXPENSE, INCLUDING INTEREST ON BORROWED MONEY, AS UNALLOWABLE COSTS. THE PARTIES MAY HAVE BEEN MISTAKEN IN THEIR OPINION OR BELIEF THAT THE DISTRICT'S AVAILABLE ASSETS WOULD BE ADEQUATE TO FINANCE THE CONTRACT WORK AND THAT IT WOULD BE UNNECESSARY FOR THE DISTRICT TO BORROW MONEY TO INCREASE ITS WORKING CAPITAL. HOWEVER, THE DISTRICT WAS IN A BETTER POSITION THAN THE GOVERNMENT TO KNOW WHETHER ITS AVAILABLE ASSETS WOULD BE ADEQUATE TO FINANCE THE CONTRACT WORK AND, IN ANY EVENT, THE APPARENTLY MISTAKEN OPINION OR BELIEF IN THE MATTER WOULD NOT APPEAR TO CONSTITUTE A MUTUAL MISTAKE WHICH IS RECOGNIZABLE AS A BASIS FOR REFORMING THE CONTRACT IN ORDER TO PERMIT PAYMENT OF THE CLAIMED INTEREST EXPENSE OF $1,382.85. IN THAT CONNECTION, SEE CHICAGO AND N.W. RY. CO. V WILCOX, 116 F. 913, WHEREIN THE COURT STATED THAT EVERYONE WHO CONTRACTS IN RELIANCE UPON OPINIONS OR BELIEFS CONCERNING THEM KNOWS THAT THESE OPINIONS AND BELIEFS ARE CONJECTURAL, AND MAKES HIS AGREEMENT IN VIEW OF THE WELL-KNOWN FACT THAT THEY MAY TURN OUT TO BE MISTAKEN, AND ASSUMES THE CHANCES THAT THEY WILL DO SO.

ALTHOUGH IT MIGHT APPEAR TO BE INEQUITABLE TO REQUIRE THE DISTRICT TO INCUR A LOSS IN THE AMOUNT OF THE INTEREST COSTS ON BORROWED MONEY NEEDED TO CONTINUE PERFORMANCE OF ITS CONTRACTS WITH THE GOVERNMENT, THE FACTS OF THE CASE ARE COMPARABLE WITH THOSE CONSIDERED BY OUR OFFICE IN OTHER CASES IN WHICH WE HAVE DENIED RELIEF TO GOVERNMENT CONTRACTORS WHOSE PERFORMANCE COSTS WERE IN EXCESS OF THE TOTAL AMOUNTS PAYABLE UNDER THE TERMS OF THEIR CONTRACTS. THUS, IN 26 COMP. GEN. 744, RELIEF WAS DENIED IN THE CASE OF A CONTRACT COST OVERRUN, NOTWITHSTANDING THE FACT THAT THE CONTRACT WAS PERFORMED AS A MATTER OF ACCOMMODATION TO THE NAVY WITHOUT ANY FEE OR PROFIT HAVING BEEN INCLUDED IN THE LUMP-SUM CONTRACT PRICE WHICH HAD BEEN BASED UPON AN ESTIMATE OF THE COST OF PERFORMING THE CONTRACT.

SINCE THE CONTRACT WITH THE DISTRICT INCORPORATED THE COST PRINCIPLES OF SUBPART 1-15.2 OF PART 1-15, FPR, AND IT DOES NOT APPEAR THAT THE PARTIES INTENDED THAT THE GENERAL CLASSIFICATION OF INTEREST EXPENSE UNDER SECTION 1-15.205-17, FPR, AS AN UNALLOWABLE COST, WOULD NOT BE APPLICABLE IN A DETERMINATION OF ALLOWABLE CONTRACT PERFORMANCE COSTS TO BE REIMBURSED TO THE DISTRICT, IT IS OUR OPINION THAT WE WOULD NOT BE WARRANTED IN AUTHORIZING PAYMENT OF THE CLAIMED INTEREST COST OF $1,382.85.

IN VIEW OF THE REPORTED INTEREST OF SENATOR JENNINGS RANDOLPH AND SENATOR ROBERT C. BYRD, IN THE DISPOSITION OF THE DISTRICT'S CLAIM FOR REIMBURSEMENT OF THE INTEREST EXPENSE, COPIES OF THIS DECISION ARE BEING MAILED TO THEM.