B-26605, JULY 31, 1942, 22 COMP. GEN. 95

B-26605: Jul 31, 1942

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1942: REFERENCE IS MADE TO YOUR LETTER OF JUNE 5. TO SUBMIT ALTERNATIVE SUGGESTIONS ON THE PRESENTATION OF EVIDENCE WHERE IT IS IMPRACTICAL TO FURNISH SOME OF THE DATA REQUIRED IN SUPPORT OF VOUCHERS COVERING PAYMENTS. THE FOLLOWING MATTER IS PRESENTED FOR YOUR CONSIDERATION IN CONNECTION WITH PRIME CONTRACTS ENTERED INTO UNDER THE PROVISIONS OF PUBLIC RESOLUTION NO. 703. PRIME CONTRACTS WERE ENTERED INTO BY THE ORDNANCE DEPARTMENT FOR THE PURPOSE OF INCREASING THE SMALL ARMS PRODUCTION CAPACITY OF THE NATION. WITH WHOM THIS WAVE OF CONTRACTS WERE MADE. ARE THE REMINGTON ARMS COMPANY. THERE WAS DISCUSSED THE NECESSITY OF THE PRIME CONTRACTOR USING CAPABLE SUBCONTRACTORS IF THERE WERE ANY AVAILABLE FOR THE REQUIRED WORK.

B-26605, JULY 31, 1942, 22 COMP. GEN. 95

CONTRACTS - COST-PLUS - EVIDENCE IN SUPPORT OF PAYMENTS - LUMP-SUM SUBCONTRACTS INVOLVING LABOR-COST "ESCALATOR" CLAUSES THE EVIDENCE TO BE SUBMITTED IN SUPPORT OF PAYMENTS TO PRIME COST-PLUS A- FIXED-FEE CONTRACTORS ON ACCOUNT OF PAYMENTS MADE BY THEM UNDER LUMP SUM SUBCONTRACTS INVOLVING "ESCALATOR" CLAUSES PROVIDING FOR BASE PRICE ADJUSTMENTS ON ACCOUNT OF VARIANT LABOR COSTS MUST INCLUDE SUBCONTRACTOR'S ORIGINAL PAID INVOICE AND A NOTARIZED STATEMENT BY HIM SHOWING SUBSTANTIALLY (A) NUMBER OF HOURS FOR WEEK OF EMPLOYEES ENGAGED ON WORK; (B) AGGREGATE OF WAGES PAID SUCH EMPLOYEES FOR WEEK; (C) WEIGHTED WEEKLY BASE WAGE RATE AVERAGES BASED ON WAGES PAID FROM DATE OF COMMENCEMENT OF WORK; (D) REVISED AVERAGE HOURLY BASE WAGE RATE COMPUTED FROM A, B, AND C; AND (E) A STATEMENT SHOWING COMPUTATION AND AMOUNT OF INCREASE OR DECREASE DUE TO CHANGES IN LABOR COSTS.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF WAR, JULY 31, 1942:

REFERENCE IS MADE TO YOUR LETTER OF JUNE 5, 1942, AS FOLLOWS:

PURSUANT TO AUTHORITY CONTAINED IN THE ACT OF JULY 31, 1894 (28 STAT. 208) AND TO THE INVITATION CONTAINED IN THE LAST PARAGRAPH OF YOUR DECISION, B-14020, DATED JANUARY 2, 1941, TO SUBMIT ALTERNATIVE SUGGESTIONS ON THE PRESENTATION OF EVIDENCE WHERE IT IS IMPRACTICAL TO FURNISH SOME OF THE DATA REQUIRED IN SUPPORT OF VOUCHERS COVERING PAYMENTS, THE FOLLOWING MATTER IS PRESENTED FOR YOUR CONSIDERATION IN CONNECTION WITH PRIME CONTRACTS ENTERED INTO UNDER THE PROVISIONS OF PUBLIC RESOLUTION NO. 703, 76TH CONGRESS, APPROVED JULY 2, 1940, AND SIMILAR ACTS.

AT THE START OF THE WAR PRODUCTION PROGRAM, AND CONSTITUTING THE FIRST OF FOUR WAVES OF CONTRACTUAL ACTIVITY, PRIME CONTRACTS WERE ENTERED INTO BY THE ORDNANCE DEPARTMENT FOR THE PURPOSE OF INCREASING THE SMALL ARMS PRODUCTION CAPACITY OF THE NATION. THE PARTIES, WITH WHOM THIS WAVE OF CONTRACTS WERE MADE, ON A COST-PLUS-A-FIXED-FEE BASIS, ARE THE REMINGTON ARMS COMPANY, THE FEDERAL CARTRIDGE CORPORATION, THE WESTERN CARTRIDGE COMPANY, AND THE UNITED STATES RUBBER COMPANY. IT MIGHT BE WELL TO STATE THAT DURING THE NEGOTIATIONS OF THESE AND OTHER PRIME CONTRACTS, THERE WAS DISCUSSED THE NECESSITY OF THE PRIME CONTRACTOR USING CAPABLE SUBCONTRACTORS IF THERE WERE ANY AVAILABLE FOR THE REQUIRED WORK. THESE SUBCONTRACTORS WERE TO BE GIVEN FULL RESPONSIBILITY FOR PRODUCING MACHINES, TOOLS, JIGS, DIES, AND THE LIKE, USED IN SMALL ARMS MANUFACTURE, AND IN LINE WITH THIS POLICY, SUCH SUBCONTRACTS WERE AUTHORIZED.

THIS OFFICE LATER LEARNED THAT MANUFACTURERS OF THE MACHINES, MACHINE TOOLS, JIGS, AND DIES, USED IN THE SMALL-ARMS PRODUCTION REFUSED TO ENTER INTO FIXED PRICE SUBCONTRACTS WITH PRIME CONTRACTORS GIVING AS A REASON FOR SUCH REFUSAL THE ABNORMAL CHANGES IN THE PRICES OF LABOR AND MATERIAL DUE TO THE UNSETTLED STATE OF THE MARKET, WITH THE RESULTING INABILITY ON THEIR PART OF ASCERTAINING MANUFACTURING COSTS.

TO MEET THIS CONDITION, THE PRIME CONTRACTORS WERE ADVISED THAT THEY MIGHT ENTER INTO SUBCONTRACTS WHEREIN A BASE PRICE WAS ESTABLISHED FOR THE MACHINE AND/OR PARTS AND PROVIDING BY ESCALATOR CLAUSE FOR AN INCREASE OR DECREASE OF THE BASE PRICE, DEPENDING ON THE VARIANCE OF SOME COST FACTOR, USUALLY WAGES. SUBCONTRACTORS WERE ALSO ADVISED THAT THEY MIGHT UTILIZE THIS PROCEDURE WITH SUB-SUBCONTRACTORS.

AS A RESULT, WE HAVE THE SITUATION EXISTING, WHEREIN THE PRIME CONTRACTOR, OPERATING ON A COST-PLUS-A-FIXED-FEE BASIS, HAS MADE SUBCONTRACTS UTILIZING "THE BASE PRICE AND ESCALATOR CLAUSE" FEATURE, AND IN TURN THESE SUBCONTRACTORS HAVE MADE "BASE PRICE AND ESCALATOR CLAUSE" SUB-SUBCONTRACTS. THE ONE CASE HERE PRESENTED ARISES OUT OF THIS SITUATION, WITH THE PROBLEMS OF THE ONE PRIME CONTRACTOR USED ILLUSTRATING THOSE COMMON TO ALL.

THE REMINGTON ARMS COMPANY, INC., IN CONTRACTS NOS. W-ORD-484, DATED NOVEMBER 20, 1940; W-ORD-495, DATED DECEMBER 10, 1940; AND W-ORD 573, DATED JULY 30, 1941, AGREED TO FURNISH MANAGEMENT SERVICE AND PROCURE ALL EQUIPMENT FOR SMALL ARMS PLANTS AT KANSAS CITY, MISSOURI; DENVER, COLORADO; AND SALT LAKE CITY, UTAH. IN CARRYING OUT THE EQUIPMENT PROCURING PHASE OF THESE CONTRACTS REMINGTON MADE SUBCONTRACTS WITH THE WATERBURY FARREL FOUNDRY AND MACHINE COMPANY, SO THAT THE EQUIPPING PROGRAM COULD GO ABOUT AS EXPEDITIOUSLY AS POSSIBLE. IN TURN THE LATTER SUBCONTRACTOR HAD UNDER NUMEROUS PURCHASE ORDERS CONTRACTED WITH APPROXIMATELY EIGHT FIRMS FOR MACHINES AND COMPONENT PARTS THEREOF. FEDERAL CARTRIDGE CORPORATION, WESTERN CARTRIDGE COMPANY, AND UNITED STATES RUBBER COMPANY, WITH PLANTS AT MINNEAPOLIS, MINNESOTA; ST. LOUIS, MISSOURI, AND DES MOINES, IOWA, AND OTHERS, AS PRIME CONTRACTORS, FOLLOWED A LIKE COURSE.

SOME OF THE SUBCONTRACTS AND PURCHASE ORDERS, DUE TO INSISTENCE ON THE PART OF THE VENDOR SUBCONTRACTORS, CONTAINED AN "ESCALATOR CLAUSE" USING THE AVERAGE HOURLY WAGE DIFFERENTIAL AS THE FACTOR FOR INCREASING OR DECREASING THE CONTRACT BASE PRICES, WHICH PRICES WERE ESTABLISHED ON THE BASIS OF PRESENT COSTS WHICH ARE DETERMINED BY AN AVERAGE HOURLY BASE WAGE RATE AT POINT OF MANUFACTURE AT TIME ORDER WAS ENTERED INTO AND INCLUDED IN THE ORDER. A TYPICAL ESCALATION CLAUSE IS SET FORTH BELOW:

" ESCALATOR CLAUSE.--- THE PRICES SHOWN IN THIS ORDER ARE BASED UPON PRESENT COSTS WHICH ARE DETERMINED BY AN AVERAGE HOURLY BASE WAGE RATE OF 74 CENTS PER HOUR AT POINT OF MANUFACTURE. THE PORTION OF THE CONTRACT PRICES SHOWN IN THIS ORDER REPRESENTING ALL ITEMS OF LABOR IS FIXED FOR THE PURPOSE OF THIS ESCALATOR CLAUSE AT 79 1/2 PERCENT.

"SHOULD THE AVERAGE HOURLY BASE WAGE RATE OF THE SHOP ENGAGED IN THE MANUFACTURE OF EQUIPMENT ON THIS ORDER BE INCREASED OR DECREASED ON ANY ONE MACHINE OR GROUP OF MACHINES DURING THE PERIOD FROM DATE OF ORDER TO DATE OF COMPLETION, THE CHANGE SHALL BE FOR THE ACCOUNT OF THE BUYER AND SHALL AFFECT THE PORTION OF THE PRICES NAMES HEREIN REPRESENTING LABOR TO THE SAME EXTENT AS THE AVERAGE OF THIS RATE MAY BE AFFECTED DURING THE PROGRESS OF THE WORK.

"THE AVERAGE HOURLY BASE WAGE RATE IS TO BE DETERMINED BY DIVIDING THE TOTAL NUMBER OF WAGE ROLL HOURS INTO TOTAL HOURLY WAGE ROLL AND CERTIFIED COPIES OF PAY ROLLS MAY BE REQUESTED BY US FOR USE IN DETERMINING THIS RATE.

"THE PERCENTAGE OF CHANGE AS DETERMINED BY LABOR COST WILL APPLY TO THE PORTION OF THE CONTRACT PRICE REPRESENTING ALL ITEMS OF LABOR AND NO ADDITIONAL CHARGE IS TO BE CONSIDERED FOR ANY VARIATION IN MATERIAL PRICES.

"ANY INCREASE IN PRICE ON MACHINES DELIVERED ON THIS ORDER ARISING OUT OF THE OPERATION OF THIS CLAUSE SHALL BE LIMITED TO 10 PERCENT OF THE QUOTED PRICE UNLESS NEGOTIATED WITH THE BUYER AND AN ALTERATION OF THIS ORDER IS RECEIVED DIRECTING YOU TO PROCEED.'

AS MACHINES OR PARTS WERE COMPLETED AND DELIVERED TO THE PRIME CONTRACTOR'S SMALL ARMS DEFENSE PLANTS, THE AGREED BASE PRICE PLUS OR MINUS THE ESCALATION WAS PAID TO THE SUBCONTRACTORS OUT OF THE PRIME CONTRACTOR'S REVOLVING FUND. THE LATTER, TO KEEP THE FUND SOLVENT, IMMEDIATELY SOUGHT REIMBURSEMENT FROM THE GOVERNMENT, PRESENTING AS SUPPORTING DATA ONLY THE PAID INVOICE OF THE SUBCONTRACTOR, AND IT WAS AT THIS POINT THAT THE QUESTION AROSE AS TO WHAT OTHER SUPPORTING DATA WOULD BE CONSIDERED SUFFICIENT TO SUPPORT THE REIMBURSEMENT VOUCHERS WHICH INCLUDED PRICE INCREASES DUE TO ESCALATION.

THAT THE PROBLEM IS NO SMALL ONE MAY BE BETTER APPRECIATED IF IT IS BORNE IN MIND THAT THE REMINGTON CASE USED ABOVE IS MERELY ILLUSTRATIVE, AND THAT MANY OTHER THAN THE EIGHT SUB-SUBCONTRACTORS IN CASE ARE ENGAGED IN MAKING AND SHIPPING MACHINES AND PARTS TO SIX SMALL ARMS DEFENSE PLANTS OF THE FOUR PRIME CONTRACTORS LOCATED IN DIFFERENT SECTIONS OF THE COUNTRY; THAT THEY SEEK PAYMENT AS SOON AS POSSIBLE FROM THE PRIME CONTRACTOR, WHO, UNLESS HE GETS EXPEDITIOUS REIMBURSEMENT FROM THE GOVERNMENT CANNOT MEET HIS SUBCONTRACTUAL OBLIGATIONS. THERE SHOULD BE CONSIDERED TOO, THE FACT THAT THE PROBLEM IS NOT CONFINED SOLELY TO THE ABOVE MENTIONED PLANTS SINCE THERE ARE ALREADY THREE ADDITIONAL WAVES OF CONTRACT ACTIVITY UNDER WAY OR CONTEMPLATED, TO FURTHER INCREASE THIS SMALL ARMS PRODUCTION PROGRAM, THUS MAKING THE SECURING OF SUPPORTING DATA WHERE THERE HAS BEEN ESCALATION AN EXTREMELY COMPLEX PROBLEM.

A PROCEDURE SIMILAR TO THAT STATED IN B-14830, DATED FEBRUARY 25, 1941 ( BALDWIN LOCOMOTIVE WORKS) OF HAVING REIMBURSEMENT VOUCHERS OF THE PRIME CONTRACTOR SUPPORTED BY A CERTIFIED SCHEDULE OF DISBURSEMENT OF WAGES, ALONG WITH A CERTIFICATE TO THE EFFECT THAT A DETAILED AUDIT AT THE PLANT OF THE SUPPLYING VENDOR HAS BEEN MADE AND THE INCREASE OR DECREASE FROM THE BASE PRICE DUE TO ESCALATION HAS BEEN VERIFIED, EXECUTED BY THE FIELD AUDITOR OF THE PARTICULAR PRIME CONTRACTOR'S PLANT TO WHICH THE MACHINE OR PART WAS SENT, HAS BEEN CONSIDERED BUT DOES NOT APPEAR FEASIBLE IN THE CLASS OF CASE HERE INVOLVED SINCE THE DELAY INCIDENT TO, AND DIFFICULTIES ATTENDANT UPON, CONDUCTING A DETAILED AUDIT IN EACH ONE OF THE SUPPLIER'S PLANTS WOULD APPEAR TO BE SO GREAT AS TO OBVIATE ANY BENEFIT WHICH REASONABLY COULD BE EXPECTED THROUGH SUCH A PROCEDURE. IN OTHER WORDS, AS MANY VISITS WOULD BE REQUIRED OF SUCH GOVERNMENT REPRESENTATIVES AS THERE ARE SUPPLIERS, MULTIPLIED BY THE NUMBER OF DELIVERIES AND BILLINGS TO THE PLANTS OF THE CONTRACTORS (A MINIMUM OF 48 IF, AND THIS IS NOT THE CASE, THERE WERE JUST ONE DELIVERY AND BILLING TO EACH PLANT). CONSIDERING THE TIME AND INCUMBENT EXPENSE OF SUCH VISITS, IT SEEMS CLEAR THAT SUCH PROCEDURE WOULD BE BURDENSOME, COSTLY AND IMPRACTICABLE.

IT IS PROPOSED, SUBJECT TO YOUR APPROVAL, AS AN ALTERNATIVE PROCEDURE WHICH WOULD PERMIT A MORE EXPEDITIOUS REIMBURSEMENT TO THE PRIME CONTRACTOR OF THE AMOUNTS INVOLVED, TO SUPPORT THE VOUCHER ON WHICH THE PRIME CONTRACTOR SEEKS REIMBURSEMENT WITH THE FOLLOWING:

1. SUPPLYING SUBCONTRACTOR'S ORIGINAL PAID INVOICE GIVING BASIC UNIT PRICE AND AMOUNT COVERING INCREASE OR DECREASE DUE TO ESCALATION,

2. A NOTARIZED AND CERTIFIED STATEMENT GIVING---

(A) THE REVISED AVERAGE HOURLY BASE WAGE INCLUDED IN THE ORDER,

(B) THE WEEKLY CHANGES IN BASE WAGE RATES FROM DATE OF ISSUANCE OF ORDER TO DATE OF SHIPMENT OF MACHINE OR COMPONENT PART,

(C) THE AMOUNT OF INCREASE OR DECREASE DUE TO ESCALATION AND THE COMPUTATION THEREOF.

IT IS UNDERSTOOD, OF COURSE, THAT THE ABOVE CERTIFICATE IS NOT TO BE IN LIEU OF, OR TO DISPENSE WITH, EITHER THE CERTIFICATION ON THE VOUCHER REQUIRED TO BE MADE BY THE CONTRACTING OFFICER, OR HIS AUTHORIZED REPRESENTATIVE, OR ANY APPROVAL OR RATIFICATION REQUIRED BY THE PRIME CONTRACT. ILLUSTRATIVE COPIES OF THE ABOVE DATA AS PREPARED BY SUPPLYING SUBCONTRACTOR, WATERBURY FARREL FOUNDRY AND MACHINE COMPANY, ALONG WITH COPY OF ESCALATOR CLAUSE, WAGE ROLL OF NOVEMBER 23, 1940, AND SUMMARY THEREOF TO SHOW HOW AVERAGE HOURLY WAGE BASE WAS DETERMINED, AS FURNISHED TO THE PRIME CONTRACTOR, REMINGTON ARMS COMPANY, INC., IS SUBMITTED HEREWITH.

IN THE EVENT THAT THE ABOVE MENTIONED SUPPORTING DATA IS NOT SATISFACTORY IT IS REQUESTED THAT THE MINIMUM EVIDENCE DESIRED UNDER THE CIRCUMSTANCES BE SUGGESTED. INASMUCH AS THIS PHASE OF THE DEFENSE PROGRAM IS GOING FORWARD RAPIDLY, YOUR PROMPT ACTION ON THE MATTER WOULD BE GREATLY APPRECIATED.

THE EVIDENCE TO BE FURNISHED BY SUBCONTRACTORS TO A PRIME CONTRACTOR UNDER THE COST-PLUS-A-FIXED-FEE SYSTEM OF CONTRACTING MUST BE SUCH AS TO ENABLE THE PRIME CONTRACTOR TO OBTAIN REIMBURSEMENT FROM THE GOVERNMENT AND IT NECESSARILY FOLLOWS THAT THE GENERAL REQUIREMENT WITH RESPECT TO THE DOCUMENTS TO BE SUBMITTED BY SUBCONTRACTORS IN SUPPORT OF VOUCHERS CLAIMING REIMBURSEMENT UNDER SUCH CONTRACTS, CONTEMPLATES THE FURNISHING OF EVIDENCE OF THE SAME GENERAL NATURE AND PURPORT AS THAT REQUIRED TO BE FURNISHED BY THE PRIME CONTRACTOR IN ORDER TO OBTAIN REIMBURSEMENT FROM THE GOVERNMENT FOR ITS EXPENDITURES. SEE PARAGRAPH H OF SECTION VI OF MANUAL OF INSTRUCTIONS FOR THE ADMINISTRATION OF CONTRACTS, WAR DEPARTMENT, OFFICE OF THE CHIEF OF ORDNANCE.

WHILE IT APPEARS FROM THE ILLUSTRATIVE CASE PRESENTED IN YOUR SUBMISSION THAT THE PRIME CONTRACTS WITH THE REMINGTON ARMS COMPANY, INC., WERE ENTERED INTO ON A COST-PLUS-A-FIXED-FEE BASIS, YOU STATE THAT THE SAID PRIME CONTRACTOR ENTERED INTO "SUBCONTRACTS UTILIZING "THE BASE PRICE AND ESCALATOR CLAUSE" FEATURE, AND IN TURN THESE SUBCONTRACTORS HAVE MADE "BASE PRICE AND ESCALATOR CLAUSE" SUB SUBCONTRACTS.' IN OTHER WORDS, WHILE THE PRIME CONTRACTS WERE ENTERED INTO ON A COST-PLUS-A-FIXED-FEE BASIS, SUBCONTRACTS AND SUB SUBCONTRACTS WERE APPARENTLY AWARDED ON A UNIT PRICE OR LUMP-SUM BASIS, RESULTING IN AGREEMENTS EACH OF WHICH CONTAINS A SO-CALLED "ESCALATOR CLAUSE" WHICH PROVIDES GENERALLY FOR THE ADJUSTMENT OF THE CONTRACT PRICE, EITHER UP OR DOWN, WHEN DUE TO FLUCTUATIONS IN LABOR COSTS. SUCH AGREEMENTS PROVIDING FOR AN ADJUSTMENT OF MATERIAL AS WELL AS LABOR COSTS, WHEN ENTERED INTO WITH THE GOVERNMENT, HAVE BEEN HELD BY THIS OFFICE TO BE UNOBJECTIONABLE WHERE IT IS ADMINISTRATIVELY DETERMINED TO BE NECESSARY OR DESIRABLE IN THE INTERESTS OF THE UNITED STATES, THE EVIDENT PURPOSE OF THE ADJUSTMENT PROVISION IN SUCH CONTRACTS BEING TO PROTECT THE GOVERNMENT IN CASE OF A DECREASE IN THE COST OF LABOR OR MATERIAL AND THE CONTRACTOR IN THE EVENT OF AN INCREASE IN SUCH COST. 20 COMP. GEN. 695; AND 21 ID. 31.

ACCORDINGLY, IN VIEW OF THE REPRESENTATIONS MADE BY YOU, AND HAVING REGARD FOR THE FACT THAT SUBCONTRACTS AND SUB-SUBCONTRACTS AWARDED ON A UNIT PRICE OR LUMP-SUM BASIS ARE INVOLVED, EVIDENCE OF THE NATURE PROPOSED BY YOU WILL BE ACCEPTABLE IN THE AUDIT OF PAYMENTS UNDER THESE AND SIMILAR CONTRACTS. HOWEVER, IN LIEU OF THE CERTIFICATE SUGGESTED IN YOUR SUBMISSION, THE SUPPLIER'S ORIGINAL PAID INVOICE SHOULD BE SUPPORTED BY A NOTARIZED STATEMENT CERTIFIED TO BY A DULY AUTHORIZED REPRESENTATIVE OF THE SUPPLIER GIVING SUBSTANTIALLY THE FOLLOWING INFORMATION: (A) THE NUMBER OF HOURS FOR THE WEEK OF EMPLOYEES ENGAGED IN THE WORK UNDER EACH SUBCONTRACT;

(B) THE AGGREGATE OF THE WAGES PAID SUCH EMPLOYEES FOR THE WEEK;

(C) A STATEMENT OF WEIGHTED WEEKLY BASE WAGE RATE AVERAGES BASED UPON THE WAGES PAID EMPLOYEES ENGAGED IN THE WORK UNDER EACH SUBCONTRACT FROM DATE OF COMMENCEMENT OF WORK TO DATE OF COMPLETION OF MACHINE OR COMPONENT PART;

(D) THE REVISED AVERAGE HOURLY BASE WAGE RATE COMPUTED FROM A, B, AND C;

(E) A STATEMENT SHOWING THE COMPUTATION OF THE INCREASE OR DECREASE DUE TO CHANGES IN LABOR COSTS AND THE AMOUNT OF SUCH INCREASE OR DECREASE DUE TO SUCH CHANGES.