B-201825.OM, FEB 12, 1981

B-201825.OM: Feb 12, 1981

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THERE WAS NO EXPRESS PROVISION IN THE AGREEMENTS THAT WOULD LIMIT THE CONTRACTORS' PROFIT UNDER THE CONTRACTS. WAS PASSED CONTAINING A PROVISION TO LIMIT THE COMBINED TOTAL PROFIT ON EACH SETTLEMENT. SHALL BE SUBJECT TO SUCH AUDITS AND REVIEWS BY THE COMPTROLLER GENERAL OF THE UNITED STATES AS THE COMPTROLLER GENERAL SHALL DETERMINE NECESSARY TO INSURE THAT SUCH FUNDS ARE USED ONLY IN CONNECTION WITH SUCH CONTRACTS AND TO INSURE THAT THE PRIME CONTRACTORS CONCERNED DO NOT REALIZE ANY TOTAL COMBINED PROFIT ON SUCH CONTRACTS. ONE OF OUR MANDATED AUDIT OBJECTIVES IS "TO INSURE THAT THE PRIME CONTRACTORS CONCERNED DO NOT REALIZE ANY TOTAL COMBINED PROFIT ON THE CONTRACTS.". OUR AUDITS HAVE DISCLOSED THAT THE CONTRACTORS ARE MAKING SIGNIFICANT PROFITS ON CHANGES WHICH WERE ORDERED BY THE NAVY SUBSEQUENT TO THE CONTRACT SETTLEMENT.

B-201825.OM, FEB 12, 1981

SUBJECT: AUDIT OF SHIPBUILDING SETTLEMENTS UNDER PUB. L. NO. 85-804 (B-201825 O.M.; CODE 950625)

DIRECTOR, PLRD:

THE NAVY NEGOTIATED CONTRACT CHANGE SETTLEMENTS WITH GENERAL DYNAMICS AND LITTON UNDER PUB. L. NO. 85-804. THERE WAS NO EXPRESS PROVISION IN THE AGREEMENTS THAT WOULD LIMIT THE CONTRACTORS' PROFIT UNDER THE CONTRACTS.

SUBSEQUENTLY, THE DOD APPROPRIATION AUTHORIZATION ACT, 1979, WAS PASSED CONTAINING A PROVISION TO LIMIT THE COMBINED TOTAL PROFIT ON EACH SETTLEMENT. SECTION 821 OF THE ACT PROVIDES:

"(A) ANY FUNDS AUTHORIZED BY THIS OR ANY OTHER ACT TO PROVIDE RELIEF TO CONTRACTORS UNDER AUTHORITY OF THE FIRST SECTION OF THE ACT ENTITLED 'AN ACT TO AUTHORIZE THE MAKING, AMENDMENT, AND MODIFICATION OF CONTRACTS TO FACILITATE THE NATIONAL DEFENSE,' APPROVED AUGUST 28, 1958 (72 STAT. 972; 50 U.S.C. 1431), IN CONNECTION WITH CONTRACTS NUMBERED N00024-69-C-0283, N00024-70-C-0275, N00024-71-C-0268, AND N00024-74-C-0206 FOR THE PROCUREMENT FOR THE UNITED STATES OF LANDING HELICOPTER ASSAULT VESSELS (LHA), DD-963 VESSELS, AND SSN 688 NUCLEAR ATTACK SUBMARINES, AND PAID BY THE UNITED STATES TO SUCH CONTRACTORS, SHALL BE SUBJECT TO SUCH AUDITS AND REVIEWS BY THE COMPTROLLER GENERAL OF THE UNITED STATES AS THE COMPTROLLER GENERAL SHALL DETERMINE NECESSARY TO INSURE THAT SUCH FUNDS ARE USED ONLY IN CONNECTION WITH SUCH CONTRACTS AND TO INSURE THAT THE PRIME CONTRACTORS CONCERNED DO NOT REALIZE ANY TOTAL COMBINED PROFIT ON SUCH CONTRACTS.

"(B) NO FUNDS DESCRIBED IN SUBSECTION (A) MAY BE USED TO PROVIDE RELIEF TO ANY CONTRACTOR DESCRIBED IN SUBSECTION (A), IN CONNECTION WITH CONTRACTS DESCRIBED IN SUCH SUBSECTION, TO THE EXTENT THAT THE USE OF SUCH FUNDS WOULD RESULT IN ANY TOTAL COMBINED PROFIT ON SUCH CONTRACTS AS DETERMINED BY THE COMPTROLLER GENERAL OF THE UNITED STATES.

"(C) THE COMPTROLLER GENERAL OF THE UNITED STATES SHALL KEEP THE APPROPRIATE COMMITTEES OF THE CONGRESS CURRENTLY INFORMED REGARDING THE EXPENDITURE OF FUNDS REFERRED TO IN SUBSECTION (A) AND SHALL SUBMIT TO THE CONGRESS ANNUALLY, UNTIL THE COMPLETION OF THE CONTRACTS REFERRED TO IN SUBSECTION (A), A WRITTEN REPORT ON THE STATUS OF THE CONTRACTS REFERRED TO IN SUBSECTION (A), ON THE EXPENDITURE OF THE FUNDS REFERRED TO IN SUCH SUBSECTION, AND ON THE RESULTS OF THE AUDITS AND REVIEWS CONDUCTED BY THE COMPTROLLER GENERAL UNDER AUTHORITY OF THIS SECTION."

AS INDICATED ABOVE, ONE OF OUR MANDATED AUDIT OBJECTIVES IS "TO INSURE THAT THE PRIME CONTRACTORS CONCERNED DO NOT REALIZE ANY TOTAL COMBINED PROFIT ON THE CONTRACTS."

OUR AUDITS HAVE DISCLOSED THAT THE CONTRACTORS ARE MAKING SIGNIFICANT PROFITS ON CHANGES WHICH WERE ORDERED BY THE NAVY SUBSEQUENT TO THE CONTRACT SETTLEMENT. BOTH THE CONTRACTORS AND THE NAVY HAVE TAKEN THE POSITION THAT PROFIT ON CHANGE ORDERS WHICH TOOK EFFECT AFTER THE SETTLEMENT SHOULD NOT BE CONSIDERED IN OUR DETERMINATION OF WHETHER A TOTAL COMBINED PROFIT WAS MADE. IN SUPPORT OF THIS POSITION, THEY CITE THE LEGISLATIVE HISTORY OF SECTION 821.

MEMBERS OF THE AUDIT STAFF DISAGREE WITH THIS POSITION. ACCORDINGLY, THEY REQUEST OUR OPINION WHETHER "TOTAL COMBINED PROFIT ON SUCH CONTRACTS" INCLUDES PROFIT ACHIEVED ON CHANGE ORDERS WHICH TOOK EFFECT AFTER THE CONTRACT SETTLEMENTS.

WE BELIEVE IT DOES. THE LEGISLATIVE HISTORY OF SECTION 821 INDICATES THAT THE ACT WAS NOT INTENDED TO PROHIBIT PAYMENT OF PROFIT ON FUTURE CHANGE ORDERS. THIS IS ONLY TRUE, HOWEVER, TO THE EXTENT THAT PAYMENT OF SUCH PROFITS DOES NOT RESULT IN AN OVERALL PROFIT ON THE CONTRACTS. THE LEGISLATIVE HISTORY DOES NOT SUPPORT THE VIEW THAT PROFITS ON FUTURE CHANGES SHOULD BE EXCLUDED FOR THE PURPOSE OF DETERMINING WHETHER A "TOTAL COMBINED PROFIT" WAS ACHIEVED.

SECTION 821 OF THE DOD APPROPRIATION AUTHORIZATION ACT, 1979, WAS FIRST SUBMITTED BY SENATOR PROXMIRE AS A FLOOR AMENDMENT. THE ORIGINAL LANGUAGE OF SUBSECTION (A) CONCLUDED AS FOLLOWS:

"*** TO INSURE THAT THE PRIME CONTRACTORS CONCERNED DO NOT REALIZE ANY PROFIT ON SUCH CONTRACTS."

127 CONG. REC. S16109 (DAILY ED., SEPT. 26, 1978) THIS LANGUAGE WAS LATER CHANGED TO THE PRESENT VERSION:

"*** TO INSURE THAT THE PRIME CONTRACTORS CONCERNED DO NOT REALIZE ANY TOTAL COMBINED PROFIT ON SUCH CONTRACTS."

THE CHANGE FROM "PROFIT" TO "TOTAL COMBINED PROFIT" WAS MADE IN RESPONSE TO A QUESTION RAISED BY SENATOR STENNIS CONCERNING INTERPRETATION OF THE LANGUAGE.

"MR. STENNIS. *** THE AMENDMENT IS NOT CLEAR, AS I AM ADVISED, AS TO JUST HOW THIS WOULD APPLY TO PROFIT THAT WAS MADE IN THE FUTURE, AFTER ONE OF THESE SETTLEMENTS IS ALREADY MADE.

"I REPEAT, MR. PRESIDENT, JUST THIS: THAT FUTURE CHANGE ORDERS SHOULD BE ALLOWED TO INCLUDE A SMALL PROFIT FOR THAT SPECIFIC WORK. THE AMENDMENT MAY PROHIBIT THAT EVEN THOUGH IT WOULD NOT RESULT IN AN OVERALL PROFIT."

IN RESPONSE SENATOR PROXMIRE STATED:

"MR. PROXMIRE. MAY I SAY IT WOULD NOT RESULT IN NO PROFIT ON FUTURE CHANGE ORDERS. ALL I SAY BY THIS AMENDMENT IS THAT THEY SHALL NOT HAVE AN OVERALL PROFIT ON SOMETHING THEY SAID WOULD RESULT IN A BIG LOSS.

"YES, IN OFFERING THE AMENDMENT, I WANT TO MAKE IT CLEAR IT IS NOT THE INTENTION TO PREVENT PROFITS ON FUTURE CHANGE ORDERS. I WANT TO MAKE CLEAR THAT ON THESE CONTRACTS, OVERALL, WE WILL NOT HAVE GENERAL DYNAMICS AND LITTON COMING IN WITH A PROFIT ON THE OVERALL SITUATION ON WHICH WE HAVE PAID THEM $541 MILLION." 127 CONG. REC. S16111 (DAILY ED., SEPT. 26, 1978).

AFTER CHANGING THE AMENDMENT AS SET FORTH ABOVE, SENATOR PROXMIRE DESCRIBED IT AS FOLLOWS:

"SO THAT IT IS NOT SIMPLY A MATTER OF MY EXPRESSED INTENT, WHICH WAS THAT, BUT THAT THE STATUTORY LANGUAGE SPECIFY THAT I AM TALKING ABOUT TOTAL OVERALL PROFIT, NOT PROFIT ON SPECIFIC FUTURE CHANGES."

127 CONG. REC. S16114 (DAILY ED., SEPT. 26, 1978).

IN OUR VIEW, THE INTENT OF SECTION 821 IS CLEAR AS TO TREATMENT OF CHANGE ORDERS. THE CONTRACTORS ARE PERMITTED TO MAKE PROFITS ON CHANGES, BUT ONLY TO THE EXTENT THAT SUCH PROFITS DO NOT RESULT IN A "TOTAL OVERALL PROFIT ON THE CONTRACTS."

SEE MR. EVERS' MEMORANDUM TO MR. FLYNN, B-133170, APRIL 2, 1979, FOR A DISCUSSION OF OTHER ISSUES RELEVANT TO SECTION 821 DETERMINATIONS.

DIGEST

"TOTAL COMBINED PROFIT" AS USED IN SECTION 821 OF 1979 DOD APPROPRIATION AUTHORIZATION ACT INCLUDES PROFIT ACHIEVED ON CHANGE ORDERS WHICH TOOK EFFECT AFTER CONTRACT SETTLEMENTS UNDER PUB. L. 85 804.