[Disposition of Funds Paid in Settlement of Breach of Contract Action]

A GAO decision was requested as to whether certain funds, which were paid by a contractor in settlement of the Government's claim for breach of contract, could be used to replace defective work completed by the breaching contractor, without constituting an illegal augmentation of the appropriation from which the breached contract was initially funded. In the breach of contract settlement, the Government was awarded substantially more than the amount of the original contract because of inflation and substantial underbidding by the defaulting contractor, and the settlement was based upon the cost to secure a replacement contract. The court ruled that settlement must be used to replace windows to meet contract specifications and that any remaining funds would be turned over to the Bureau of Prisons. The Department of Justice proposed to deposit any residue amounts into the Treasury as miscellaneous receipts. However, Justice fears that an illegal augmentation of the appropriation might result. Unless expressly authorized by statute or representing repayments of amounts which were erroneously paid from an appropriation, money received by the Government must be deposited into the Treasury as miscellaneous receipts. GAO held that, since the amount of the original contract would fall far short of the amount needed to replace the defective work in this case, the proposed use of the recovered excess reprocurement costs would not constitute an illegal augmentation of the agency's appropriation, although GAO has held in the past that only the dollar amount of the original contract may be used to correct defective work. Accordingly, to the extent necessary to cover the full costs of a replacement contract, excess reprocurement costs recovered by an agency from a breaching contractor need not be deposited in the Treasury as miscellaneous receipts, but may be applied to the costs of the replacement contract. Any recovered costs in excess of the amount needed for the replacement contract must still be deposited in the Treasury as miscellaneous receipts. To the extent that they were inconsistent with this decision, several prior GAO decisions were modified.