[Request for Advance Decision on Cost-Plus-Percentage Contract Provisions]

The Department of Labor requested an advance decision on three task order contracts for architect-engineering management services which contained provisions that Labor believed constituted an illegal cost-plus-a-percentage-of-cost system of contracting. In each contract, the agency agreed to pay the contractor per-day rates, including overhead and profit, for certain classes of employees. In addition, the three contracts contained a provision permitting the contractors to add a certain markup percentage of their basic costs which were not supervised or subcontracted for. Labor stated that it was taking action to delete the provision from the contracts and was attempting to negotiate a settlement on a quantum meruit basis on costs already incurred, with a recovery of unearned profits. The agency asked whether additional legal or administrative actions were necessary. GAO determines whether a contract constitutes a cost-plus-a-percentage-of-cost system of contracting by considering whether: (1) payment is at a predetermined rate; (2) this rate is applied to actual performance costs; (3) the contractor's entitlement is uncertain at the time of contracting; and (4) the rate increases commensurately with increased performance costs. GAO held that the markup provisions of the contract were in violation of statutory law and, therefore, void. GAO recommended that Labor attempt to recover any improper payments made under these contracts. GAO also held that the courts and GAO have recognized that, when goods are furnished or services are rendered in performance of a void contract, the Government is obliged to pay the reasonable value of the goods or services on a quantum meruit or quantum valebant basis and to recover any overpayments as expeditiously as possible.