B-32480, MARCH 13, 1943, 22 COMP. GEN. 892

B-32480: Mar 13, 1943

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THERE IS NO LEGAL OBJECTION TO INCLUDING IN COST-PLUS-A-FIXED-FEE CONTRACTS HEREAFTER EXECUTED BY THE UNITED STATES MARITIME COMMISSION A PROVISION THAT THE COMMISSION SHALL REIMBURSE SUCH CONTRACTORS ALL COSTS INCURRED BY THEM IN CONNECTION WITH LIABILITIES TO THIRD PARTIES ARISING IN CONNECTION WITH PERFORMANCE OF A PORTION OF THE CONTRACT WORK. THERE IS NO OBJECTION TO REIMBURSING A COST-PLUS-A-FIXED-FEE CONTRACTOR THE COST OF PREMIUMS PAID ON PUBLIC LIABILITY INSURANCE. EVEN THOUGH THE GENERAL INSURANCE COVERAGE MAY INCIDENTALLY INCLUDE AS A PART THEREOF INSURANCE AGAINST LIABILITY TO THIRD PARTIES FOR ACTS OF THE CONTRACTOR'S EMPLOYEES WHICH COULD HAVE BEEN AVOIDED BY THE EXERCISE OF DUE CARE AND DILIGENCE ON THE PART OF THE CONTRACTOR IN HIRING AND RETAINING EMPLOYEES.

B-32480, MARCH 13, 1943, 22 COMP. GEN. 892

CONTRACTS - COST-PLUS - REIMBURSEMENT OF COSTS IN CONNECTION WITH LIABILITIES TO THIRD PARTIES FOR EMPLOYEES' NEGLIGENCE IF IT BE ADMINISTRATIVELY DETERMINED AS IN THE GOVERNMENT'S INTEREST, THERE IS NO LEGAL OBJECTION TO INCLUDING IN COST-PLUS-A-FIXED-FEE CONTRACTS HEREAFTER EXECUTED BY THE UNITED STATES MARITIME COMMISSION A PROVISION THAT THE COMMISSION SHALL REIMBURSE SUCH CONTRACTORS ALL COSTS INCURRED BY THEM IN CONNECTION WITH LIABILITIES TO THIRD PARTIES ARISING IN CONNECTION WITH PERFORMANCE OF A PORTION OF THE CONTRACT WORK, EVEN THOUGH SUCH LIABILITIES ARISE FROM THE NEGLIGENCE OF THE CONTRACTORS' EMPLOYEES, BUT DUE REGARD SHOULD BE GIVEN TO THE DEGREE OF RISK AND RESPONSIBILITY OF SUCH CONTRACTORS IN FIXING THE FEES PAYABLE UNDER THE CONTRACTS. THERE IS NO OBJECTION TO REIMBURSING A COST-PLUS-A-FIXED-FEE CONTRACTOR THE COST OF PREMIUMS PAID ON PUBLIC LIABILITY INSURANCE, ETC., WHEN AUTHORIZED BY THE CONTRACT, EVEN THOUGH THE GENERAL INSURANCE COVERAGE MAY INCIDENTALLY INCLUDE AS A PART THEREOF INSURANCE AGAINST LIABILITY TO THIRD PARTIES FOR ACTS OF THE CONTRACTOR'S EMPLOYEES WHICH COULD HAVE BEEN AVOIDED BY THE EXERCISE OF DUE CARE AND DILIGENCE ON THE PART OF THE CONTRACTOR IN HIRING AND RETAINING EMPLOYEES, AND EVEN THOUGH THE CONTRACTOR'S DERELICTION IN THAT RESPECT MAY HAVE BEEN A BREACH OF THE PRINCIPAL CONTRACT. 21 COMP. GEN. 149, AMPLIFIED. IF IT BE ADMINISTRATIVELY DETERMINED AS IN THE GOVERNMENT'S INTEREST, EXISTING COST-PLUS-A-FIXED-FEE CONTRACTS OF THE UNITED STATES MARITIME COMMISSION WHICH AUTHORIZE REIMBURSING THE CONTRACTORS THE COST OF PREMIUMS PAID ON PUBLIC LIABILITY INSURANCE--- WHICH INSURANCE INCLUDES COVERAGE PROTECTING THE CONTRACTORS AGAINST LIABILITY TO THIRD PARTIES FOR ACTS OF THEIR EMPLOYEES EVEN THOUGH THE CONTRACTORS MAY HAVE FAILED TO EXERCISE DUE CARE IN HIRING AND RETAINING EMPLOYEES--- MAY BE AMENDED TO PROVIDE THAT THE GOVERNMENT WILL ASSUME SUCH LIABILITY AND THAT THE COST OF PREMIUMS SHALL NO LONGER BE REIMBURSABLE, PROVIDED THE GOVERNMENT'S LIABILITY UNDER SUCH AMENDMENTS WILL NOT EXCEED THE COVERAGE OF THE INSURANCE POLICIES AS TO WHICH REIMBURSEMENT OF PREMIUMS IS DISCONTINUED.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE CHAIRMAN, UNITED STATES MARITIME COMMISSION, MARCH 13, 1943:

THERE HAS BEEN CONSIDERED YOUR LETTER OF FEBRUARY 12, 1943, AS FOLLOWS:

THE COMMISSION HAS DETERMINED THAT IT IS IN THE BEST INTEREST OF THE GOVERNMENT TO ASSUME RISKS ARISING FROM LIABILITIES USUALLY COVERED BY TRIAL RISK INSURANCE IN CONNECTION WITH THE TRIALS AND TESTS OF VESSELS TO BE PERFORMED BY THE CONTRACTOR IN ACCORDANCE WITH THE REQUIREMENTS OF CERTAIN COST-PLUS-A-FIXED-FEE CONTRACTS. SUCH LIABILITIES INCLUDE THOSE WHICH MAY ARISE FROM THE NEGLIGENCE OF THE CONTRACTOR'S EMPLOYEES, AND UNDER EXISTING CONTRACTS THE CONTRACTOR IS ENTITLED TO REIMBURSEMENT FOR PREMIUMS PAID IN CONNECTION WITH INSURANCE AGAINST RISKS ARISING THEREFROM. THE COMMISSION HAS, THEREFORE, OFFERED TO AMEND THE AFOREMENTIONED CONTRACTS SO AS TO PROVIDE THAT IT WILL INCLUDE AS AN ITEM OF COST ALL EXPENSES INCURRED BY THE CONTRACTOR AS A RESULT OF LIABILITIES ARISING WHILE TRIALS AND TESTS ARE BEING PERFORMED UPON THE VESSELS, AND TO FURTHER PROVIDE THAT THE CONTRACTOR SHALL HAVE NO RIGHT TO REIMBURSEMENT FOR PREMIUMS PAID IN CONNECTION WITH INSURANCE AGAINST RISK ARISING FROM SUCH LIABILITIES.

IT IS THE OPINION OF THE COMMISSION THAT THE AFOREMENTIONED AMENDMENTS TO ITS CONTRACTS ARE AUTHORIZED IN VIEW OF ITS AUTHORITY TO ENTER INTO COST- PLUS-A-FIXED-FEE CONTRACTS, AS WELL AS THE AUTHORITY CONFERRED UPON IT UNDER SECTION 207 OF THE MERCHANT MARINE ACT, 1936, TO ENTER INTO SUCH CONTRACTS AS MAY IN ITS DISCRETION BE NECESSARY TO CARRY ON THE ACTIVITIES AUTHORIZED BY SUCH ACT. IT SHOULD BE NOTED THAT THE PROVISIONS OF SAID SECTION 207 ARE UNDER THE TERMS OF PUBLIC LAWS NOS. 5, 247, 474 AND 630 (77TH CONGRESS) MADE APPLICABLE TO THE ACTIVITIES WHICH THE COMMISSION IS AUTHORIZED TO CARRY ON UNDER SUCH LAWS. ATTENTION, HOWEVER HAS BEEN CALLED TO YOUR DECISION REPORTED IN 21 COMP. GEN. 149, WHICH APPEARS TO THROW CONSIDERABLE DOUBT ON THE QUESTION OF WHETHER A GOVERNMENT AGENCY UNDER ITS AUTHORITY TO ENTER INTO A COST-PLUS-A-FIXED-FEE CONTRACT MAY AGREE TO PAY COSTS WHICH ARISE DUE TO THE CONTRACTOR'S FAILURE TO USE REASONABLE CARE IN THE SELECTION AND EMPLOYMENT OF WORKERS, AND IN VIEW OF SUCH DECISION IT APPEARS DESIRABLE TO SUBMIT TO YOU THE QUESTION AS TO THE AUTHORITY OF THE COMMISSION TO ENTER INTO THE AFOREMENTIONED AMENDMENTS TO CERTAIN OF ITS CONTRACTS.

IT IS, THEREFORE, REQUESTED THAT YOU ADVISE THE COMMISSION WHETHER COST- PLUS-A-FIXED-FEE CONTRACTS FOR THE CONSTRUCTION OF VESSELS ENTERED INTO BY IT MAY CONTAIN, OR BE AMENDED TO CONTAIN, A PROVISION WHEREUNDER THE COMMISSION AGREES TO PAY TO THE CONTRACTOR ALL COSTS INCURRED BY IT IN CONNECTION WITH LIABILITIES TO THIRD PARTIES ARISING IN CONNECTION WITH THE PERFORMANCE OF A PORTION OF THE CONTRACT WORK, IRRESPECTIVE OF WHETHER SUCH LIABILITIES ARISE FROM THE NEGLIGENCE OF THE CONTRACTOR'S EMPLOYEES.

SINCE YOU DO NOT SUBMIT FOR CONSIDERATION ANY PARTICULAR CONTRACT, OR THE FACTS PERTAINING TO ANY PARTICULAR VOUCHER WHICH HAS BEEN PRESENTED FOR PAYMENT INVOLVING THE QUESTION, YOUR INQUIRY MAY BE ANSWERED IN GENERAL TERMS ONLY. IN THIS CONNECTION, IT MAY BE STATED AT THE OUTSET THAT THE PROPRIETY OF REIMBURSEMENT OF COSTS SUCH AS ARE HERE INVOLVED, LIKE ALL OTHER COSTS FOR WHICH CONTRACTORS ARE TO BE REIMBURSED BY THE GOVERNMENT UNDER COST-PLUS-A-FIXED-FEE CONTRACTS, IS DEPENDENT PRIMARILY ON THE TERMS OF THE PARTICULAR CONTRACT INVOLVED AND ON THE FACTS PERTAINING TO PARTICULAR TRANSACTION RATHER THAN ON ANY GENERAL THEORIES RELATING TO THE STATUS OF COST-PLUS-A-FIXED-FEE CONTRACTORS OR THEIR EMPLOYEES. ALABAMA V. KING AND BOOZER, ET AL., 314 U.S. 1; 21 COMP. GEN. 273.

AS A GENERAL PROPOSITION IT MAY BE SAID THAT PROPER COST-PLUS-A FIXED-FEE CONTRACTS HEREAFTER EXECUTED BY THE UNITED STATES MARITIME COMMISSION MAY BE ENTERED INTO ON SUCH TERMS AND CONDITIONS AS DEEMED NECESSARY AND PROPER, IF NOT OTHERWISE PROHIBITED OR RESTRICTED BY LAW; AND IF IT BE DETERMINED AS IN THE GOVERNMENT'S INTEREST TO PROVIDE THAT THE COMMISSION SHALL REIMBURSE CONTRACTORS ALL COSTS INCURRED BY THEM IN CONNECTION WITH LIABILITIES TO THIRD PARTIES ARISING IN CONNECTION WITH PERFORMANCE OF A PORTION OF THE CONTRACT WORK--- IRRESPECTIVE OF WHETHER SUCH LIABILITIES ARISE FROM THE NEGLIGENCE OF THE CONTRACTORS' EMPLOYEES--- THERE APPEARS NO LEGAL OBJECTION TO REIMBURSING THE CONTRACTORS IN ACCORDANCE WITH THE TERMS OF SUCH CONTRACTS TO THE EXTENT APPROPRIATIONS ARE AVAILABLE THEREFOR. WHETHER NEW CONTRACTS SHOULD BE EXECUTED ON SUCH BASIS, AS IN THE GOVERNMENT'S INTEREST, IS, OF COURSE, PRIMARILY FOR DETERMINATION BY THE COMMISSION. IN THE EVENT IT BE DETERMINED TO ENTER INTO CONTRACTS ON SUCH BASIS, IT IS ASSUMED, OF COURSE, THAT DUE REGARD WILL BE HAD TO THE DEGREE OF RISK AND RESPONSIBILITY OF SUCH CONTRACTORS IN FIXING THE FEES PAYABLE UNDER THE CONTRACTS.

AS TO EXISTING CONTRACTS WHICH IT IS PROPOSED TO AMEND, IT IS ASSUMED THAT THEY ARE SUBSTANTIALLY SIMILAR TO OTHER CURRENT TYPES OF COST-PLUS-A- FIXED-FEE CONTRACTS WHICH ARE DESIGNED PRIMARILY TO OBTAIN THE SERVICES OF COMPETENT CONTRACTORS TO PERFORM THE NEEDED WORK IN RETURN FOR A LIMITED FIXED FEE COVERING COMPENSATION FOR THEIR SERVICES AND GENERAL OVERHEAD AND TO PROVIDE THAT THE ACTUAL COST OF THE WHOLE WORK AND THE RISK THEREOF, GENERALLY, SHALL BE BORNE BY THE GOVERNMENT. ALSO, IT IS ASSUMED THAT THEY CONTAIN PROVISIONS FOR REIMBURSING THE CONTRACTORS THE COST OF PREMIUMS PAID FOR LIABILITY INSURANCE, ETC., INCLUDING TRIAL RISK INSURANCE. SEE IN THIS CONNECTION THE DECISION REPORTED AT 21 COMP. GEN. 149, WHEREIN IT WAS STATED WITH RESPECT TO THE FORM OF COST-PLUS-A-FIXED- FEE CONTRACT THERE CONSIDERED THAT---

THE GENERAL STATEMENT THAT SUCH CONTRACTS BASICALLY CONTEMPLATE THAT THE ACTUAL COST OF THE WHOLE WORK AND THE RISK THEREOF ARE TO BE ASSUMED BY THE GOVERNMENT AND THAT THE CONTRACTOR IS TO COME OUT WHOLE REGARDLESS OF CONTINGENCIES, PLUS ONLY A LIMITED FIXED FEE AS COMPENSATION FOR HIS SERVICES, GENERAL OVERHEAD, ETC., DOES NOT MEAN THAT THE GOVERNMENT IS TO ASSUME THE RISK OF THE CONTRACTOR'S OWN FAULT OR FOLLY, OR THAT THE CONTRACTOR IS TO COME OUT WHOLE REGARDLESS OF CARELESS CONDUCT OF THE WORK OR OTHER DISREGARD OF HIS CONTRACTUAL DUTIES. WHILE SUCH CONTRACTS IN EFFECT GUARANTEE THE CONTRACTOR A LIMITED FIXED FEE FOR HIS SERVICES IN ADDITION TO REIMBURSEMENT OF THE ACTUAL COST OF THE WORK, THE FEE IS PAID TO OBTAIN THE COMPETENT AND FAITHFUL SERVICES OF THE CONTRACTOR; AND THE PROVISIONS FOR REIMBURSEMENT OF ACTUAL COSTS ARE NOT TO BE TAKEN AS A SHIELD FOR INCOMPETENCE OR AN EXCUSE FOR CARELESSNESS. NOR IS IT TO BE INFERRED FROM SUCH BASIC CONCEPT OF THIS TYPE OF CONTRACT THAT THE GOVERNMENT IS TO ASSUME ANY RISKS OR BEAR ANY LOSSES WHICH THE CONTRACTOR HAS EXPRESSLY OR IMPLIEDLY AGREED TO ASSUME OR BEAR UNDER PARTICULAR PROVISIONS OF THE CONTRACT. THUS IT WAS POINTED OUT IN THE DECISION OF APRIL 14, 1941, SUPRA (20 COMP. GEN. 632), THAT THE CONTRACTOR WOULD NOT BE ENTITLED TO REIMBURSEMENT FOR THE LOSS OR DAMAGE OF EQUIPMENT NOT CAUSED BY THE NEGLIGENCE OF THE GOVERNMENT WHERE THE CONTRACTOR WAS BEING PAID ON A RENTAL BASIS FOR THE USE OF SUCH EQUIPMENT AT RATES "IN CONFORMITY WITH SIMILAR RATES OF RENTAL CHARGED IN THE PARTICULAR TERRITORY," FOR THE REASON THAT SUCH RATES NORMALLY INCLUDE A MARGIN TO COMPENSATE THE OWNER FOR THE RISK OF LOSS AND DAMAGE EXCEPT THAT RESULTING FROM THE NEGLIGENCE OF THE BAILEE.

YOUR DOUBT AS TO WHETHER YOU ARE AUTHORIZED TO AMEND THE EXISTING CONTRACTS IN THE MANNER DESIRED EVIDENTLY ARISES FROM THE HOLDING IN THE CITED DECISION, 21 COMP. GEN. 149, TO THE EFFECT THAT A COST-PLUS-A FIXED- FEE CONTRACTOR MAY NOT BE REIMBURSED LOSSES OR DAMAGES, NOT COVERED BY INSURANCE, CAUSED BY THE NEGLIGENCE OF EMPLOYEES OF THE CONTRACTOR, IF THE PROXIMATE CAUSE OF THE LOSS WAS THE CONTRACTOR'S BREACH OF HIS CONTRACTUAL DUTIES AND OBLIGATIONS, INCLUDING THE DUTY TO EXERCISE DUE DILIGENCE TO EMPLOY AND RETAIN COMPETENT, TRUSTWORTHY, AND CAREFUL EMPLOYEES. THE SOUNDNESS OF SUCH CONCLUSION APPEARS TO BE BEYOND QUESTION BUT IT WAS BASED, OF COURSE, ON THE PARTICULAR PROVISIONS OF THE FORM OF CONTRACT THERE CONSIDERED AND IS NOT NECESSARILY APPLICABLE TO OTHER CONTRACTS CONTAINING DIFFERENT PROVISIONS. ALSO, IT IS TO BE NOTED THAT THE DECISION WAS WITH RESPECT TO LOSS AND DAMAGE NOT COVERED BY INSURANCE AND RELATED, GENERALLY, TO LOST TOOLS, DAMAGED AND DESTROYED EQUIPMENT AND BUILDINGS OF THE CONTRACTOR, ETC., AS DISTINGUISHED FROM THE LIABILITY OF THE CONTRACTOR TO THIRD PARTIES, WHICH ORDINARILY WOULD BE COVERED BY INSURANCE.

ON THE OTHER HAND, AS TO LOSSES COVERED BY INSURANCE, THERE APPEARS NO OBJECTION TO REIMBURSING THE CONTRACTOR THE COST OF PREMIUMS PAID ON PUBLIC LIABILITY INSURANCE, ETC., WHEN AUTHORIZED BY THE CONTRACT, EVEN THOUGH THE GENERAL INSURANCE COVERAGE MAY INCIDENTALLY INCLUDE AS A PART THEREOF INSURANCE AGAINST LIABILITY FOR ACTS OF THE CONTRACTOR'S EMPLOYEES WHICH COULD HAVE BEEN AVOIDED BY THE EXERCISE OF DUE CARE AND DILIGENCE ON THE PART OF THE CONTRACTOR IN HIRING AND RETAINING EMPLOYEES, AND EVEN THOUGH THE CONTRACTOR'S DERELICTION IN THAT RESPECT MAY HAVE BEEN A BREACH OF THE PRINCIPAL CONTRACT. IT IS UNDERSTOOD THAT IS THE SITUATION EXISTING WITH RESPECT TO THE CONTRACTS YOU WISH TO AMEND, THAT IS, THAT THE GENERAL INSURANCE CARRIED BY THE CONTRACTORS INCLUDES COVERAGE OF SUCH LIABILITY AND THAT THE CONTRACTS AUTHORIZE REIMBURSEMENT OF THE COST OF THE PREMIUMS THEREFOR. IF SO, THE CONTRACTORS APPEAR LEGALLY ENTITLED, AS A MATTER OF CONTRACT, TO COVERAGE OF SUCH LIABILITIES, AND TO REIMBURSEMENT OF THE COST OF THE INSURANCE PREMIUMS. THEREFORE, IF THE CONTRACTS BE AMENDED TO PROVIDE THAT THE COST OF PREMIUMS NO LONGER SHALL BE REIMBURSABLE IT SEEMS EVIDENT THAT THE CONTRACTORS SHOULD BE ENTITLED TO REIMBURSEMENT OF COSTS RESULTING FROM LIABILITIES TO THIRD PARTIES TO THE EXTENT OF THE INSURANCE COVERAGE NOW PROVIDED.

IN VIEW OF THE FOREGOING, IF THE CIRCUMSTANCES AND PROVISIONS OF THE CONTRACTS ARE AS INDICATED ABOVE, THIS OFFICE WILL NOT BE REQUIRED TO OBJECT TO AMENDMENTS OF THE EXISTING CONTRACTS AS PROPOSED, PROVIDED THE LIABILITY OF THE GOVERNMENT UNDER THE AMENDMENTS WILL NOT EXCEED THE COVERAGE OF THE INSURANCE POLICIES AS TO WHICH REIMBURSEMENT OF THE COST OF PREMIUMS IS DISCONTINUED AND PROVIDED FURTHER THAT IT BE ADMINISTRATIVELY DETERMINED, FROM PAST EXPERIENCE OR OTHERWISE THAT SUCH AMENDMENTS ARE IN THE INTEREST OF THE UNITED STATES.