B-35488, AUGUST 15, 1944, 24 COMP. GEN. 125

B-35488, AUGUST 15, 1944, 24 COMP. GEN. 125

CONTRACTS - COST-PLUS - CHARITABLE DONATIONS A COST-PLUS-A-FIXED-FEE CONTRACTOR ENTITLED TO REIMBURSEMENT OF OVERHEAD EXPENSES IN ACCORDANCE WITH TREASURY DECISION 5000 MAY BE REIMBURSED FOR CHARITABLE DONATIONS NOT CONTRIBUTING TO THE PERFORMANCE OF THE CONTRACT WORK, UNDER PARAGRAPH (G) (4), SECTION 26.9, OF SAID DECISION, WHICH PARAGRAPH--- WHILE RECOGNIZING CHARITABLE DONATIONS CONSTITUTING ORDINARY AND NECESSARY BUSINESS EXPENSES AS INDIRECT COSTS OF PERFORMANCE--- IS LIMITED BY THE PROVISIONS OF PARAGRAPH (A) THAT THE EXPENSE MUST HAVE BEEN "INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT," AND PARAGRAPH (J) THAT "ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT * * * SHALL BE ELIMINATED * * *.'

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF WAR, AUGUST 15, 1944:

REFERENCE IS MADE TO YOUR LETTER OF JUNE 15, 1944, WHEREIN YOU REQUEST RECONSIDERATION OF THE NOTICE OF EXCEPTION ISSUED AUGUST 5, 1943, ON VOUCHER NO. 19995, PAID JULY 29, 1942, BY COLONEL F. E. COYNE, JR., COVERING REIMBURSEMENT TO THE GLENN L. MARTIN COMPANY FOR LABOR AND GENERAL OVERHEAD EXPENSES ALLEGED TO HAVE BEEN INCURRED BY THE COMPANY FOR THE MONTH OF JUNE, 1942, UNDER ITS COST-PLUS-A-FIXED-FEE CONTRACT NO. W- 535-AC-24555, DATED JANUARY 12, 1942.

IN EFFECT YOU STATE IN YOUR LETTER THAT SINCE THE VOUCHER MERELY WAS A PROGRESS PAYMENT ON ACCOUNT OF THE CONTRACTOR'S ENTIRE OVERHEAD EXPENSES FOR THE CALENDAR YEAR 1942 AND THE CERTIFICATION THEREBY BY THE CONTRACTING OFFICER DID NOT PURPORT TO APPROVE THE INDIVIDUAL ITEMS INVOLVED, THE EXCEPTION, AT BEST, WAS OF DOUBTFUL PROPRIETY AT ITS INCEPTION; THAT SUBSEQUENT TO THE FILING OF THE VOUCHER THE CONTRACTOR SUBMITTED A STATEMENT OF REIMBURSABLE OVERHEAD FOR THE CALENDAR YEAR 1942 WHEREUPON CERTAIN CLASSES OF THE ITEMS WERE EXCLUDED AND DISALLOWED; THAT IN THE NEGOTIATION OF THE ABOVE CONTRACT AND OTHER SUPPLY CONTRACTS--- AS DISTINGUISHED FROM CONSTRUCTION CONTRACTS--- IT WAS INTENDED TO REIMBURSE THE CONTRACTORS FOR ALL REASONABLE OVERHEAD EXPENSES IN THE ABSENCE OF ANY SPECIFIC CONTRACTUAL PROVISION TO THE CONTRARY; THAT THE TERMS OF THE CONTRACT WERE DESIGNED TO ALLOW FLEXIBILITY TO THE CONTRACTING OFFICER IN ALLOWING OVERHEAD IN ACCORDANCE WITH SOUND ACCOUNTING PRACTICES AND CUSTOMS IN THE INDUSTRY RATHER THAN TO IMPOSE ANY RIGID RESTRICTIONS ON THE CONTRACTING OFFICER IN DETERMINING ALLOWABLE OVERHEAD; AND THAT, ACCORDINGLY, ITEMS OF OVERHEAD ESPECIALLY CONTRIBUTIONS TO CHARITABLE ORGANIZATIONS SUCH AS THOSE COVERED BY THE VOUCHER--- ARE PROPER FOR PAYMENT TO THE EXTENT ALLOWED BY THE CONTRACTING OFFICER.

AT THE TIME THE NOTICE OF EXCEPTION WAS ISSUED IT WAS REALIZED THAT THE VOUCHER COVERED MERELY A PROGRESS PAYMENT OF THE OVERHEAD EXPENSES CLAIMED UNDER THE CONTRACT FOR THE CALENDAR YEAR 1942 AND THAT A YEAR END ADJUSTMENT VOUCHER SUBSEQUENTLY WOULD BE SUBMITTED. HOWEVER, IT WAS CONSIDERED NECESSARY TO ISSUE THE NOTICE OF EXCEPTION IN THE TENTATIVE AMOUNT OF $100,000, WHICH WAS CONSIDERED SUFFICIENT TO COVER THE OVERHEAD EXPENSES FOUND NOT TO REPRESENT PROPER CHARGES UNDER THE CONTRACT, IN ORDER TO PROTECT THE INTERESTS OF THE GOVERNMENT IN THE MATTER AND TO BRING THE MATTER TO THE IMMEDIATE ATTENTION OF YOUR DEPARTMENT AND OF THE CONTRACTOR. IT IS TO BE NOTED THAT WHILE THE FINAL STATEMENT OF REIMBURSABLE OVERHEAD FOR THE CALENDAR YEAR 1942, REFERRED TO IN YOUR LETTER, APPARENTLY IS ATTACHED TO VOUCHER NO. 11908 IN THE JULY, 1943, ACCOUNTS OF COLONEL A. C. HARDIN, THE SAID ADJUSTMENT VOUCHER HAS NOT BEEN SUBMITTED TO THIS OFFICE FOR AUDIT. SUCH BEING THE CASE, THIS OFFICE NATURALLY COULD NOT HAVE TAKEN EXCEPTION TO THE QUESTIONABLE ITEMS ON THAT VOUCHER AND EVEN NOW IS NOT IN A POSITION TO VERIFY THE STATEMENT THAT MANY OF THE ITEMS COVERED BY THE EXCEPTION WERE EXCLUDED OR DISALLOWED BY THE CONTRACTING OFFICER WITHOUT REFERENCE TO THE EXCEPTION. ALSO, IT WILL BE NOTED THAT THERE WAS ATTACHED TO VOUCHER NO. 19995 A STATEMENT OF OVERHEAD EXPENSES ITEMIZED BY CLASSIFICATIONS, A SUMMARY STATEMENT BEARING THE CERTIFICATE OF THE CONTRACTOR'S COMPTROLLER AND OF THE RESIDENT AUDITOR TO THE EFFECT THAT THE AMOUNTS CLAIMED AS PROGRESS PAYMENTS ON ACCOUNT OF OVERHEAD WERE LESS THAN THE ESTIMATED AMOUNTS CHARGEABLE TO THE CONTRACT, AND A FURTHER CERTIFICATE OF THE RESIDENT AUDITOR TO THE EFFECT THAT HE HAD AUDITED AND FOUND CORRECT THE ATTACHED SUBVOUCHER. THESE CERTIFICATES INDICATED THAT IN EACH INSTANCE THE ITEMS CLAIMED ON THE VOUCHER HAD BEEN DETERMINED TO BE PROPER FOR INCLUSION THEREON. CONSEQUENTLY, AND SINCE, AS A MATTER OF FACT, AIR CORPS AUDIT INSTRUCTIONS " CP" NO. 4-B REQUIRE THE SUBMISSION OF PRELIMINARY OVERHEAD STATEMENTS APPARENTLY FOR THE PURPOSE OF ENABLING A DETERMINATION OF WHETHER THE ITEMS ARE REIMBURSABLE UNDER THE TERMS OF THE APPLICABLE CONTRACTS, IT CANNOT BE CONCEDED THAT THE EXCEPTION QUESTIONING CERTAIN OF THE ITEMS REIMBURSED ON VOUCHER NO. 19995 WAS PREMATURE IN ANY WAY.

IN CONTENDING THAT THE ALLOWANCES MADE FOR THE OVERHEAD EXPENSES ON VOUCHER NO. 19995 SHOULD BE RECOGNIZED TO THE EXTENT ALLOWED BY THE CONTRACTING OFFICER YOU HAVE TREATED THE QUESTION AS TO THE REIMBURSABILITY OF DONATIONS TO THE BALTIMORE COMMUNITY FUND, THE U.S.O. NAVY RELIEF FUND AND THE AMERICAN RED CROSS AS ILLUSTRATIVE OF YOUR POSITION IN THE MATTER. ACCORDINGLY, THIS DECISION WILL BE LIMITED TO A CONSIDERATION OF SUCH ITEMS, ONLY.

YOU URGE THAT THE DONATIONS WERE ALLOWED AS PROPER ITEMS OF COST IN ACCORDANCE WITH PARAGRAPH (G) (4), SECTION 26.9 OF T.D. 5000, FORMING A PART OF THE CONTRACT, AND COST INTERPRETATION, S.C.I. NO. 9, DATED DECEMBER 9, 1942. YOU URGE FURTHER THAT THE DONATIONS CONSTITUTED ORDINARY AND NECESSARY BUSINESS EXPENSES, SINCE IT HAD BEEN THE CONTRACTOR'S PRACTICE TO MAKE DONATIONS TO CHARITY IRRESPECTIVE OF WHETHER IT WAS ENGAGED UPON PUBLIC OR PRIVATE WORK; THAT SUCH DONATIONS ARE FACTOR IN MAINTAINING EMPLOYEE MORALE, SINCE IN MANY CASES THE SERVICES OF THE CHARITABLE ORGANIZATIONS ARE AVAILABLE TO THE CONTRACTOR'S EMPLOYEES; AND THAT BY MAKING THE DONATIONS THE CONTRACTOR'S STANDING IN THE COMMUNITY AT LARGE IS MAINTAINED OR IMPROVED WHICH RESULTS IN THE FURTHERANCE OF THE CONTRACTOR'S ABILITY TO OBTAIN NEW EMPLOYEES AS WELL AS THE COOPERATION OF THE LOCAL AUTHORITIES.

WHILE S.C.I. NO. 9 PROVIDES THAT CONTRIBUTIONS TO RECOGNIZED CHARITABLE INSTITUTIONS SHALL BE CONSIDERED AS ALLOWABLE ITEMS OF COST UNDER WAR DEPARTMENT COST-PLUS-A-FIXED-FEE CONTRACTS, THE SAID INTERPRETATION WAS NOT ISSUED UNTIL SOME SIX MONTHS AFTER THE QUESTIONED CONTRIBUTIONS WERE MADE BY THE CONTRACTOR. BUT ASIDE FROM THAT THIS OFFICE HAS CONSISTENTLY HELD THAT THE RIGHT OF COST-PLUS-A FIXED-FEE CONTRACTORS TO RECEIVE REIMBURSEMENT FOR EXPENDITURES ALLEGED TO HAVE BEEN MADE UNDER THEIR CONTRACTS AND THE AUTHORITY OF CONTRACTING OFFICERS TO APPROVE SUCH EXPENDITURES FOR REIMBURSEMENT MUST BE DETERMINED SOLELY ON THE BASIS OF THE OBLIGATIONS IMPOSED UPON THE GOVERNMENT AND THE CONTRACTORS BY THE TERMS OF THE PARTICULAR CONTRACTS INVOLVED. SEE 21 COMP. GEN. 447; 22 ID. 349; ID. 1096. UNDER THIS VIEW, WHICH IS PREMISED UPON PRINCIPLES OF CONTRACT LAW SUPPORTED BY AUTHORITIES TOO NUMEROUS TO CITE, THE INTERPRETATION OF THE CONTRACTING OFFICER IS NOT CONCLUSIVE OF WHETHER THE DONATIONS REPRESENT PROPER CHARGES UNDER THE CONTRACT.

MOREOVER, WHILE PARAGRAPH (G) (4), SECTION 26.9, OF T.D. 5000 INCLUDES "CONTRIBUTIONS TO LOCAL CHARITABLE OR COMMUNITY ORGANIZATIONS TO THE EXTENT CONSTITUTING ORDINARY AND NECESSARY BUSINESS EXPENSES" AMONG THE EXPENSES OF "DISTRIBUTION, SERVICING AND ADMINISTRATION" UNDER THE CONTRACT, THERE MAY NOT BE OVERLOOKED THE OTHER PERTINENT PROVISIONS OF THE SAID T.D. 5000 AS FOLLOWS:

SEC. 26.9 COST OF PERFORMING A CONTRACT OR SUBCONTRACT.--- (A) GENERAL RULE.--- THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT SHALL BE THE SUM OF (1) THE DIRECT COSTS, INCLUDING THEREIN EXPENDITURES FOR MATERIALS, DIRECT LABOR AND DIRECT EXPENSES INCURRED BY THE CONTRACTING PARTY IN PERFORMING THE CONTRACT OR SUBCONTRACT; AND (2) THE PROPER PROPORTION OF ANY INDIRECT COSTS (INCLUDING THEREIN A REASONABLE PROPORTION OF MANAGEMENT EXPENSES) INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT. ** * *

(J) ALLOCATION OF INDIRECT COSTS.--- NO GENERAL RULE APPLICABLE TO ALL CASES MAY BE STATED FOR ASCERTAINING THE PROPER PROPORTION OF THE INDIRECT COSTS TO BE ALLOCATED TO THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT. SUCH PROPER PROPORTION DEPENDS UPON ALL THE FACTS AND CIRCUMSTANCES RELATING TO THE PERFORMANCE OF THE PARTICULAR CONTRACT OR SUBCONTRACT. SUBJECT TO A REQUIREMENT THAT ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT SHALL BE ELIMINATED FROM THE AMOUNT TO BE ALLOCATED, THE FOLLOWING METHODS OF ALLOCATION ARE OUTLINED AS ACCEPTABLE IN A MAJORITY OF CASES: (ITALICS SUPPLIED.)

IN OTHER WORDS, WHILE STANDING ALONE PARAGRAPH (G) (4), SUPRA, MIGHT BE CONSTRUED AS AUTHORIZING REIMBURSEMENT UNDER THE CONTRACT OF A PROPORTIONATE SHARE OF THE CONTRACTOR'S CHARITABLE DONATIONS, WHEN THERE ARE APPLIED THE WELL-SETTLED RULES THAT THE RIGHTS AND LIABILITIES OF THE PARTIES TO A FORMAL CONTRACT ARE TO BE DETERMINED FROM THE CONTEXT OF THE WRITING AS A WHOLE AND THAT WHERE ONE CLAUSE OF A CONTRACT LIMITS ANOTHER IT MUST BE REGARDED AS INCORPORATED INTO AND MADE A PART OF SUCH OTHER CLAUSE, IT SEEMS CLEAR THAT, AS A PREREQUISITE TO THE APPROVAL AND ALLOWANCE OF CONTRIBUTIONS UNDER THE SAID PARAGRAPH, THE CONTRIBUTIONS MUST HAVE BEEN "INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT," AS REQUIRED BY PARAGRAPH (A), SUPRA, WHICH SETS FORTH THE GENERAL RULE FOR APPLICATION IN DETERMINING ALLOWABLE ITEMS OF COST. CERTAINLY ANY DOUBT WHICH OTHERWISE MIGHT BE SAID TO EXIST IN THIS CONNECTION IS ENTIRELY REMOVED BY PARAGRAPH (J) SUPRA, PROVIDING, AS IT DOES, IN SPECIFIC REFERENCE TO THE ALLOCATION OF INDIRECT COSTS, THAT "ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT * * * SHALL BE ELIMINATED FROM THE AMOUNT TO BE ALLOCATED.'

IT IS NOT PERCEIVED IN WHAT MANNER THE DONATIONS HERE INVOLVED COULD BE CONSIDERED AS NECESSARY OR EVEN INCIDENTAL TO THE PERFORMANCE OF THE CONTRACT. THE DONATIONS, BY THEIR VERY NATURE, CONSTITUTED NOTHING MORE THAN VOLUNTARY PAYMENTS ON THE PART OF THE CONTRACTOR. FURTHERMORE, IT IS NOT UNDERSTOOD THAT, EXCEPT IN CERTAIN ISOLATED INSTANCES PERHAPS, THE SERVICES OF CHARITABLE ORGANIZATIONS ARE MADE AVAILABLE TO INDIVIDUALS WHO ARE GAINFULLY EMPLOYED AND THEREFORE, ARE SELF-SUPPORTING, OR THAT A CONTRIBUTION TO SUCH ORGANIZATIONS IS A CONDITION PRECEDENT TO THE RECEIPT OF BENEFITS. IT REASONABLY WOULD SEEM TO FOLLOW THAT THE EXTENT OF THE CONTRACTOR'S CONTRIBUTIONS TO SUCH ORGANIZATIONS WOULD BE A MATTER OF NO MATERIAL CONCERN TO EITHER THE ACTUAL OR PROSPECTIVE EMPLOYEES OF THE CONTRACTOR. IF SO, ANY RELATIONSHIP WHICH THE DONATIONS HEREIN CONSIDERED MAY HAVE HAD TO THE CONTRACTOR'S ABILITY TO PROCURE LABOR OR TO MAINTAIN THE MORALE OF ITS EMPLOYEES MUST BE ASSUMED TO HAVE BEEN ENTIRELY TOO REMOTE TO WARRANT THE CONCLUSION THAT THEY WERE INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT. FINALLY, ALTHOUGH MORE THAN ONE FULL YEAR NOW HAS ELAPSED SINCE THE NOTICE OF EXCEPTION TO VOUCHER NO. 19995 WAS ISSUED, THE RECORD DOES NOT SHOW THAT THE CONTRACTOR HAS RAISED ANY OBJECTION TO THE POSITION TAKEN BY THIS OFFICE THEREIN, THAT THE GOVERNMENT SHOULD NOT BE CALLED UPON TO BEAR THE EXPENSE OF WHATEVER DONATIONS THE CONTRACTOR MAY HAVE DECIDED TO MAKE TO CHARITY.

ACCORDINGLY, I AM UNABLE TO AGREE THAT THE REPRESENTATIONS CONTAINED IN YOUR LETTER PROPERLY CAN BE ACCEPTED AS AFFORDING ANY LEGAL BASIS FOR ALLOWANCE OF THE CHARITABLE CONTRIBUTIONS OR OTHER ITEMS QUESTIONED IN THE NOTICE OF EXCEPTION. OF COURSE, THE NOTICE OF EXCEPTION WILL BE SUBJECT TO SUCH REVISION AS MAY BE FOUND NECESSARY IN THE LIGHT OF THE ADJUSTMENTS WHICH MAY HAVE BEEN MADE IN THE QUESTIONED ITEMS ON VOUCHER NO. 11908 WHEN THAT VOUCHER IS RECEIVED IN THE AUDIT.