B-35893, AUG 2, 1943

B-35893: Aug 2, 1943

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WHICH PARAGRAPH WAS ISSUED UNDER DATE OF MAY 6. (1) UNDER THE USUAL COST-PLUS-A FIXED- FEE CONTRACT THE CONTRACTOR IS OBLIGATED TO PROCURE MATERIALS AND SERVICES AT THE MOST ADVANTAGEOUS PRICES AVAILABLE WITH DUE REGARD TO SECURING PROMPT DELIVERY OF SATISFACTORY MATERIALS. IF COST-PLUS-A-FIXED-FEE CONTRACTORS ARE PERMITTED TO MAKE SUCH ADJUSTMENTS IN APPROPRIATE CASES. IT IS BELIEVED THAT. THEY WILL BE ABLE TO BUY FROM THEIR SUPPLIERS AT CLOSER PRICES IN THE FIRST INSTANCE. THE MAXIMUM USE OF AVAILABLE FACILITIES THROUGH SUBCONTRACTING WILL BE MAINTAINED. THIS WILL BENEFIT THE GOVERNMENT BY SAVINGS IN TOTAL COSTS UNDER SUCH CONTRACTS AND WILL FACILITATE THE PROSECUTION OF THE WAR. "(2) ACCORDINGLY.

B-35893, AUG 2, 1943

PRECIS-UNAVAILABLE

THE HONORABLE, THE SECRETARY OF WAR:

THERE HAS COME TO MY ATTENTION PARAGRAPH 248.2 OF WAR DEPARTMENT PROCUREMENT REGULATIONS, GENERAL PURCHASE POLICIES, WHICH PARAGRAPH WAS ISSUED UNDER DATE OF MAY 6, 1943, AND PROVIDES AS FOLLOWS:

"PARAGRAPH 248.2 - ADJUSTMENT OF PRICES OF SUBCONTRACTS AND PURCHASE ORDERS UNDER FIXED-FEE CONTRACTS.-- (1) UNDER THE USUAL COST-PLUS-A FIXED- FEE CONTRACT THE CONTRACTOR IS OBLIGATED TO PROCURE MATERIALS AND SERVICES AT THE MOST ADVANTAGEOUS PRICES AVAILABLE WITH DUE REGARD TO SECURING PROMPT DELIVERY OF SATISFACTORY MATERIALS. UNDER SOME CIRCUMSTANCES AND ADJUSTMENT OF THE PRICE OR TERMS OF AN OUTSTANDING SUBCONTRACT OR PURCHASE ORDER MAY BE NECESSARY OR DESIRABLE IN ORDER TO CONTINUE OR INCREASE SATISFACTORY PRODUCTION OF ESSENTIAL SUPPLIES, OR TO INSURE THEIR TIMELY DELIVERY, OR TO MAINTAIN FAIR AND EQUITABLE RELATIONS WITH SUPPLIERS IN ACCORDANCE WITH SOUND BUSINESS PRACTICE, OR MAY BE OTHERWISE ADVANTAGEOUS TO THE GOVERNMENT. IN SIMILAR CASES MANY COMMERCIAL CONCERNS FOLLOW THE POLICY OF APPROPRIATELY ADJUSTING THE PRICE OR OTHER TERMS OF THEIR SUPPLIER. IF COST-PLUS-A-FIXED-FEE CONTRACTORS ARE PERMITTED TO MAKE SUCH ADJUSTMENTS IN APPROPRIATE CASES, IT IS BELIEVED THAT, IN VIEW OF CURRENT CONDITIONS AND ACCEPTED BUSINESS PRACTICES, THEY WILL BE ABLE TO BUY FROM THEIR SUPPLIERS AT CLOSER PRICES IN THE FIRST INSTANCE, AND THE MAXIMUM USE OF AVAILABLE FACILITIES THROUGH SUBCONTRACTING WILL BE MAINTAINED. THIS WILL BENEFIT THE GOVERNMENT BY SAVINGS IN TOTAL COSTS UNDER SUCH CONTRACTS AND WILL FACILITATE THE PROSECUTION OF THE WAR.

"(2) ACCORDINGLY, IN ORDER EXPRESSLY TO AUTHORIZE SUCH ADJUSTMENTS THE CHIEF OF A SUPPLY SERVICE MAY INCLUDE IN ANY COST-PLUS-A-FIXED-FEE CONTRACT SUBSTANTIALLY THE FOLLOWING PROVISION:

"'WITH THE APPROVAL OF THE CONTRACTING OFFICER, THE CONTRACTOR MAY MODIFY A SUBCONTRACT OR PURCHASE ORDER UNDER THIS CONTRACT TO INCREASE THE PRICE OR EXTEND MORE FAVORABLE TERMS TO THE SUBCONTRACTOR.' THE CHIEF OF A SUPPLY SERVICE MAY AMEND ANY EXISTING COST-PLUS-A-FIXED-FEE CONTRACT TO INCLUDE THIS PROVISION WHENEVER IN HIS OPINION SUCH ACTION WILL BE ADVANTAGEOUS TO THE GOVERNMENT AND WILL FACILITATE THE PROSECUTION OF THE WAR.

"(3) PURSUANT TO A PROVISION IN THE FORM SET FORTH IN SUB-PARAGRAPH (2) ABOVE, THE CONTRACTING OFFICER MAY APPROVE AN INCREASE IN PRICE OR OTHER ADJUSTMENT IN THE TERMS OF A SUBCONTRACT OR PURCHASE ORDER WHEN EVER HE DEEMS SUCH ACTION TO BE CONSISTENT WITH THE POLICY STATED IN SUBPARAGRAPH (1) ABOVE. UPON SUCH ADJUSTMENT IN PRICE OR TERMS THE CONTRACTOR SHALL BE REIMBURSED ON THE BASIS OF THE ADJUSTED PRICE OR TERMS. WHENEVER THE ADJUSTMENT IS SUBSTANTIAL, IT IS RECOMMENDED THAT THE CONTRACTING OFFICER PREPARE A BRIEF RECORD OF THE CIRCUMSTANCES INVOLVED FOR USE IN CASE THE ACTION IS LATER QUESTIONED."

IT IS RECOGNIZED THAT PURSUANT TO THE AUTHORITY OF SECTION 201 OF THE FIRST WAR POWERS ACT, 1941, 55 STAT. 838, 839, AND EXECUTIVE ORDER NO. 9001, DATED DECEMBER 27, 1941, THE WAR DEPARTMENT MAY ENTER INTO AN AMENDMENT TO A PARTICULAR CONTRACT PROVIDING FOR AN INCREASE IN THE PRICE ORIGINALLY AGREED UPON, OR FOR AN EXTENSION OF THE TIME STIPULATED FOR PERFORMANCE, IF IT BE DETERMINED BY THE CONTRACTING OFFICER THAT THE TAKING OF SUCH ACTION WILL FACILITATE THE PROSECUTION OF THE WAR. HOWEVER, THE PRACTICE WHICH THE ABOVE-QUOTED PARAGRAPH OF THE WAR DEPARTMENT PROCUREMENT REGULATIONS PURPORTS TO AUTHORIZE, WOULD APPEAR TO GO BEYOND THE EXTENT OF THE AUTHORITY TO AMEND CONTRACTS, GRANTED TO YOUR DEPARTMENT BY THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9001.

IT IS TO BE NOTED THAT THE PARAGRAPH IN QUESTION PERTAINS TO THE ADJUSTMENT OF THE PRICES OF SUBCONTRACTS AND PURCHASE ORDERS ENTERED INTO OR ISSUED BY COST-PLUS-A-FIXED-FEE CONTRACTORS, RATHER THAN TO THE ADJUSTMENT OF THE TERMS OF PRIME CONTRACTS ENTERED INTO BY THE WAR DEPARTMENT WITH CONTRACTORS. IT IS TO BE NOTED FURTHER THAT UNDER THE TERMS OF THE PROVISION, PURSUANT TO WHICH THE SAID PARAGRAPH OF THE REGULATION WOULD BE INCLUDED IN COST-PLUS-A-FIXED-FEE CONTRACTS, THE MODIFICATION OF SUBCONTRACTS OR PURCHASE ORDERS ISSUED THEREUNDER, TO PROVIDE FOR AN INCREASE IN THE PRICES TO BE PAID OR OTHERWISE TO EXTEND MORE FAVORABLE TERMS TO THE SUBCONTRACTORS, WOULD NOT BE LIMITED TO INSTANCES WHERE THE CONTRACTING OFFICER MADE A DETERMINATION THAT SUCH ACTION WAS NECESSARY IN ORDER TO FACILITATE THE PROSECUTION OF THE WAR. RATHER, THE SAID PROVISION PURPORTS TO AUTHORIZE THE PRIME CONTRACTOR TO INCREASE THE PRICES TO BE PAID UNDER SUBCONTRACTS OR PURCHASE ORDER, OR TO EXTEND MORE FAVORABLE TERMS TO THE SUBCONTRACTORS, SUBJECT ONLY TO THE LIMITATION THAT SUCH MODIFICATION OF THE SUBCONTRACT OR PURCHASE ORDER BE APPROVED BY THE CONTRACTING OFFICER. SUBPARAGRAPH 3 OF THE SAID REGULATION, IN TURN, PROVIDES THAT THE "CONTRACTING OFFICER MAY APPROVE AN INCREASE IN PRICE OR OTHER ADJUSTMENT IN THE TERMS OF A SUBCONTRACT OR PURCHASE ORDER WHENEVER HE DEEMS SUCH ACTION TO BE CONSISTENT WITH THE POLICY STATED IN SUBPARAGRAPH (1) ABOVE." THUS, IT IS SEEN THAT THE REGULATION, IN EFFECT, UNDERTAKES TO EFFECT AN ABSOLUTE DETERMINATION THAT, AS A MATTER OF GENERAL POLICY AND WITHOUT REGARD TO THE FACTS AND CIRCUMSTANCES THAT MAY BE PRESENT IN EACH PARTICULAR CASE, THE MODIFICATION OF SUBCONTRACTS AND PURCHASE ORDERS BY PRIME CONTRACTORS TO PROVIDE FOR AN INCREASE IN THE STIPULATED PRICE OR FOR SOME OTHER ADJUSTMENT IN THEIR TERMS FAVORABLE TO THE SUBCONTRACTORS, UNDER THE CONDITIONS SET FORTH IN SUBPARAGRAPH 1, WILL RESULT, IPSO FACTO, IN A SAVINGS IN THE TOTAL COSTS TO THE GOVERNMENT UNDER COST-PLUS-A-FIXED FEE CONTRACTS AND WILL FACILITATE THE PROSECUTION OF THE WAR. FURTHERMORE, CONSIDERATION OF THE PROVISIONS OF SAID SUBPARAGRAPH 1 OF THE REGULATION REVEALS THAT IT PURPORTS TO AUTHORIZE INCREASES IN THE PRICES STATED IN SUBCONTRACTS AND PURCHASE ORDERS, OR OTHER ADJUSTMENT OF THEIR TERMS, NOT ONLY IN THOSE CASES WHERE SUCH ACTION MAY BE NECESSARY OR DESIRABLE IN ORDER TO CONTINUE OR TO INCREASE THE SATISFACTORY PRODUCTION OF ESSENTIAL SUPPLIES, OR TO INSURE THEIR TIMELY DELIVERY BUT, ALSO, IN ORDER "TO MAINTAIN FAIR AND EQUITABLE RELATIONS WITH SUPPLIERS IN ACCORDANCE WITH SOUND BUSINESS PRACTICE."

WHILE THERE IS NO PROVISION IN THE FIRST WAR POWERS ACT, 1941, OR IN EXECUTIVE ORDER NO. 9001 STIPULATING THAT THE AUTHORITY GRANTED THEREUNDER TO YOUR DEPARTMENT TO ENTER INTO CONTRACTS AND INTO AMENDMENTS AND MODIFICATIONS TO CONTRACTS WITHOUT REGARD TO THE PROVISIONS OF LAW RELATING TO THE MAKING OR AMENDING OF CONTRACTS, WHENEVER SUCH ACTION WILL FACILITATE THE PROSECUTION OF THE WAR, IS TO EXTEND TO SUBCONTRACTS, IT IS RECOGNIZED THAT, IN SOME CASES, THE CONTINUED PERFORMANCE OF SUBCONTRACTS MAY BE AS VITAL TO THE WAR EFFORT AS THAT OF PRIME CONTRACTS. ACCORDINGLY, WHERE IT APPEARS THAT THE CONTRACTING OFFICER HAS MADE A PROPER DETERMINATION IN A PARTICULAR CASE, THAT, IN ORDER TO FACILITATE THE PROSECUTION OF THE WAR, IT IS NECESSARY FOR A PRIME CONTRACTOR, WHO IS ENGAGED IN THE PERFORMANCE OF A COST-PLUS-A-FIXED-FEE CONTRACT, TO INCREASE THE PRICE STATED IN A SUBCONTRACT OR PURCHASE ORDER IN ORDER THAT THE CONTINUED PRODUCTION OF ESSENTIAL SUPPLIES WILL BE INSURED, THIS OFFICE WILL NOT BE REQUIRED TO OBJECT TO REIMBURSEMENT TO THE PRIME CONTRACTOR AT THE INCREASED PRICE, PROVIDED THERE BE FURNISHED EVIDENCE OF THE AMENDMENT OF SUCH SUBCONTRACT OR PURCHASE ORDER AND OF THE CONTRACTING OFFICER'S DETERMINATION IN THE MATTER.

HOWEVER, THERE IS A MATERIAL DIFFERENCE BETWEEN THE AMENDMENT OR MODIFICATION OF A SUBCONTRACT OR PURCHASE ORDER PURSUANT TO A DETERMINATION OF A CONTRACTING OFFICER THAT, AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES INVOLVED IN THE PARTICULAR CASE, THE PROSECUTION OF THE WAR WILL BE FACILITATED BY SUCH ACTION, AND THE ISSUANCE OF A GENERAL REGULATION WHICH PURPORTS TO DETERMINE AS A MATTER OF POLICY-- AND APART FROM THE SPECIFIC FACTS OR CIRCUMSTANCES IN EACH CASE-- THAT THE PROSECUTION OF THE WAR WILL BE FACILITATED IN ALL CASES BY PERMITTING PRIME CONTRACTORS TO AMEND OR MODIFY THE TERMS OF A SUBCONTRACTS OR PURCHASE ORDERS IN FAVOR OF THE SUBCONTRACTOR-- ESPECIALLY WHERE THE ADJUSTMENT OF THE SUBCONTRACT OR PURCHASE ORDER IS MADE FOR THE PURPOSE OF MAINTAINING EQUITABLE RELATIONS WITH THE SUBCONTRACTOR OR SUPPLIER. OTHER WORDS, WHILE UNDER THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9001, THERE IS VESTED IN YOUR DEPARTMENT THE AUTHORITY TO ENTER INTO AMENDMENTS OR MODIFICATIONS OF PARTICULAR CONTRACTS, THERE IS NOTHING IN THE SAID ACT OR EXECUTIVE ORDER WHICH MAY BE SAID TO AUTHORIZE THE ISSUANCE OF A DIRECTIVE TO CONTRACTING OFFICERS GENERALLY INSTRUCTING THEM THAT, IN ALL CASES, THE AMENDMENT OF SUBCONTRACTS OR PURCHASE ORDERS ENTERED INTO BY PRIME CONTRACTORS TO PROVIDE FOR AN INCREASE IN THE PRICE OR SOME OTHER ADJUSTMENT OF THEIR TERMS, IS TO BE APPROVED AS A MATTER OF POLICY AND WITHOUT REGARD TO THE FACT AS TO WHETHER, AFTER CONSIDERING THE CIRCUMSTANCES OF THE PARTICULAR CASE, THE CONTRACTING OFFICER, IN HIS INDEPENDENT JUDGMENT DEEMS, THAT THE PROSECUTION OF THE WAR WILL BE FACILITATED BY SUCH ACTION. ON THE CONTRARY, BOTH THE ACT AND THE EXECUTIVE ORDER CLEARLY CONTEMPLATE THAT THE AMENDMENT OR MODIFICATION OF ANY INDIVIDUAL CONTRACT, SUBCONTRACT, OR PURCHASE ORDER BY YOUR DEPARTMENT TO PROVIDE FOR AN INCREASE IN PRICE OR SOME OTHER ADJUSTMENT OF TERMS FAVORABLE TO THE CONTRACTOR OR SUBCONTRACTOR, IS TO BE MADE ONLY AFTER THE PERSON CHARGED WITH THE DUTY OF APPROVING THE AMENDMENT OR MODIFICATION, UPON A REVIEW OF ALL THE FACTS IN THE PARTICULAR CASE, DETERMINES THAT SUCH ACTION WILL FACILITATE THE PROSECUTION OF THE WAR. MOREOVER, IN THE MEMORANDUM, DATED SEPTEMBER 15, 1942, FROM THE UNDER SECRETARY OF WAR TO THE COMMANDING GENERAL, SERVICES OF SUPPLY-- DELEGATING TO THE LATTER OFFICIAL THE AUTHORITY CONFERRED ON THE SECRETARY OF WAR BY THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9001-- IT IS STATED, IN PART, AS FOLLOWS:

"WHENEVER, IN THE JUDGMENT OF THE COMMANDING GENERAL, SERVICES OF SUPPLY (OR OF AN OFFICER OR CIVILIAN EMPLOYEE OF THE WAR DEPARTMENT TO WHOM AUTHORITY HAS BEEN DELEGATED TO EXERCISE SUCH POWERS), THE PROSECUTION OF THE WAR IS THEREBY FACILITATED, HE MAY AMEND OR MODIFY CONTRACTS HERETOFORE OR HEREAFTER MADE ***.

"SUCH AMENDMENTS AND MODIFICATIONS OF CONTRACTS MAY BE MADE WITHOUT CONSIDERATION, OTHER THAN THE DETERMINATION THAT THE PROSECUTION OF THE WAR WILL THEREBY BE FACILITATED ***."

THUS, IT IS SEEN THAT THE DELEGATION OF AUTHORITY BY THE UNDER SECRETARY OF WAR TO THE COMMANDING GENERAL, SERVICES OF SUPPLY, CONTEMPLATES ALSO, THAT THE OFFICER OR CIVILIAN EMPLOYEE OF THE WAR DEPARTMENT TO WHOM THERE MAY BE REDELEGATED THE POWER TO APPROVE AMENDMENTS OR MODIFICATIONS OF CONTRACTS, SHALL AS A PREREQUISITE TO THE EXERCISE OF SUCH POWER, MAKE A DETERMINATION IN EACH CASE THAT THE PROSECUTION OF THE WAR WILL BE FACILITATED THEREBY. ALSO, SEE THE OPINION OF THE ATTORNEY GENERAL OF AUGUST 29, 1942, TO YOU, 40 OPS. ATTY. GEN. NO. 53.

HENCE, WHILE A PROCUREMENT REGULATION MAY CONTAIN A STATEMENT OF POLICY TO BE USED BY THE CONTRACTING OFFICER AS A GUIDE IN DETERMINING THE EXTENT TO WHICH A CONTRACT OR SUBCONTRACT MAY BE AMENDED OR MODIFIED, THE AUTHORITY TO ENTER INTO SUCH AMENDMENT OR MODIFICATION EXISTS ONLY IF THE CONTRACTING OFFICER, IN THE EXERCISE OF HIS INDEPENDENT JUDGMENT IN ANY PARTICULAR CASE, DETERMINES THAT SUCH ACTION WILL FACILITATE THE PROSECUTION OF THE WAR; AND THE PROCUREMENT REGULATION IN QUESTION, INSOFAR AS IT MAY PURPORT TO DISPENSE WITH THE NECESSITY OF SUCH A DETERMINATION BY THE CONTRACTING OFFICER, IS UNAUTHORIZED.

FURTHERMORE, THERE WOULD APPEAR TO BE NO AUTHORITY UNDER THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9001 FOR THE DIRECTIONS IN SUBPARAGRAPH 1 OF THE REGULATION IN QUESTION THAT COST-PLUS-A-FIXED-FEE PRIME CONTRACTORS ARE TO BE PERMITTED TO ADJUST THE PRICES AND TERMS OF SUBCONTRACTS OR PURCHASE ORDERS MERELY FOR THE PURPOSE OF MAINTAINING FAIR AND EQUITABLE RELATIONS WITH THEIR SUPPLIERS. WHILE IT MAY BE, AS IS STATED IN THE SAID SUBPARAGRAPH 1, THAT MANY COMMERCIAL FIRMS FOLLOW THE PRACTICE, AS A MATTER OF EQUITY, OF MAKING APPROPRIATE ADJUSTMENTS IN THE PRICES OR OTHER TERMS OF THEIR AGREEMENTS WITH SUBCONTRACTORS OR SUPPLIERS, SUCH HAS NOT BEEN THE POLICY OF THE UNITED STATES UNDER ITS CONTRACTS. ON THE CONTRARY, IT IS WELL SETTLED THAT OFFICERS OF THE GOVERNMENT ARE NOT AUTHORIZED TO MODIFY THE TERMS OF A CONTRACT BY A SUPPLEMENTAL OR SUBSTITUTE AGREEMENT, IF SUCH A MODIFICATION IS PREJUDICIAL TO THE INTEREST OF THE UNITED STATES. SEE THE PACIFIC HARDWARE & STEEL COMPANY V. UNITED STATES, 49 C.CLS. 327, 335, AND BAUSCH & LOMB OPTICAL COMPANY V. UNITED STATES, 78 C.CLS. 584, 607. MOREOVER, WHILE THE UNITED STATES ORDINARILY IS NOT INTERESTED IN THE POLICIES GOVERNING THE RELATIONS BETWEEN A CONTRACTOR AND ITS SUBCONTRACTORS OR SUPPLIERS, YET SINCE UNDER COST-PLUS-A-FIXED-FEE CONTRACTS THE TOTAL COSTS OF PERFORMING THE SUBCONTRACTS AND PURCHASE ORDERS ARE BORNE BY THE UNITED STATES, THE GOVERNMENT PROPERLY MAY INQUIRE INTO THE LEGALITY OF OR NECESSITY FOR ANY MODIFICATION OF THE TERMS OF ANY SUBCONTRACT OR PURCHASE ORDER, WHERE, AS A RESULT OF SUCH ACTION, THE COSTS ARE INCREASED. SEE 22 COMP.GEN. 367. THE ONLY AUTHORITY FOR DEPARTING FROM THE RULE AGAINST THE MODIFICATION OF CONTRACTS TO THE PREJUDICE OF THE INTERESTS OF THE UNITED STATES IS THAT CONTAINED IN THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9001; THAT IS, WHEN TO DO SO WILL FACILITATE THE PROSECUTION OF THE WAR. IT IS RECOGNIZED THAT UNDER EXECUTIVE ORDER NO. 9001 THE AMENDMENT OR MODIFICATION OF CONTRACTS IS TO BE MADE "WHENEVER, IN THE JUDGMENT OF THE WAR DEPARTMENT, *** THE PROSECUTION OF THE WAR IS THEREBY FACILITATED." IT IS RECOGNIZED FURTHER THAT NO DEFINITE RULE OR STANDARD MAY BE LAID DOWN AS TO WHEN AN AMENDMENT OR MODIFICATION OF A CONTRACT IS AUTHORIZED AS FACILITATING THE PROSECUTION OF THE WAR. HOWEVER, IT MAY NOT BE SAID THAT EITHER THE ACT OR EXECUTIVE ORDER CONTEMPLATES THAT EVERY POSSIBLE ACTION, WHICH IN SOME REMOTE WAY MIGHT BE SAID TO BE RELATED TO THE WAR EFFORT, AFFORDS A JUSTIFICATION FOR THE RELINQUISHMENT BY THE GOVERNMENT OF VESTED RIGHTS ACQUIRED UNDER ITS CONTRACTS. RATHER, IT SEEMS THAT THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9001 CONTEMPLATE THAT, IN ORDER FOR A MODIFICATION OF A CONTRACT TO BE AUTHORIZED, SUCH MODIFICATION SHOULD RESULT IN SOME REAL AND TANGIBLE CONTRIBUTION TO THE PROSECUTION OF THE WAR-- SUCH AS THE EARLIER DELIVERY OR INCREASED PRODUCTION OF ESSENTIAL SUPPLIES-- RATHER THAN SOME INTANGIBLE OR INDEFINITE CONTRIBUTION. SEE THE OPINION OF THE ATTORNEY GENERAL OF AUGUST 29, 1942, SUPRA. IT DOES NOT APPEAR FROM SUBPARAGRAPH 1 OF THE REGULATION IN QUESTION THAT THE GRANTING TO PRIME CONTRACTORS OF THE AUTHORITY TO MODIFY THE TERMS OF SUBCONTRACTS AND PURCHASE ORDERS IN FAVOR OF THEIR SUBCONTRACTORS, IN ORDER TO MAINTAIN FAIR AND EQUITABLE RELATIONS WITH THEIR SUPPLIERS, IS NECESSARY IN ORDER TO INSURE THE CONTINUED PARTICIPATION OF SUBCONTRACTORS AND SUPPLIERS IN THE WAR EFFORT. THE ONLY JUSTIFICATION SUGGESTED FOR THE GRANTING OF SUCH AUTHORITY TO PRIME CONTRACTORS IS THE STATEMENT IN THE REGULATION THAT IT IS BELIEVED THAT SUCH ACTION WILL ENABLE PRIME CONTRACTORS TO BUY FROM THEIR SUPPLIERS AT LOWER PRICES IN THE FIRST INSTANCE, AND THAT THE MAXIMUM USE OF AVAILABLE FACILITIES THROUGH SUBCONTRACTING WILL BE MAINTAINED. THIS WOULD APPEAR TO BE THEORETICAL RATHER THAN REAL. THEREFORE, SINCE THERE NOW IS NOTHING BEFORE THIS OFFICE TO INDICATE IN ANY MANNER THAT THE ADOPTION OF THE POLICY OF PERMITTING PRIME CONTRACTORS TO ADJUST THE TERMS OF THEIR SUBCONTRACTS AND PURCHASE ORDERS FOR THE PURPOSE OF MAINTAINING EQUITABLE RELATIONS WITH THEIR SUPPLIERS WILL RESULT IN ANY DIRECT OR REAL CONTRIBUTION TO THE WAR EFFORT, SUCH AS IS CONTEMPLATED BY THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9001, I AM CONSTRAINED TO HOLD THAT THE AMENDMENT OF COST-PLUS-A-FIXED-FEE CONTRACTS TO AUTHORIZE THE TAKING OF SUCH ACTION BY PRIME CONTRACTORS IS UNAUTHORIZED.

ACCORDINGLY, YOU ARE ADVISED THAT, IN THE AUDIT BY THIS OFFICE OF VOUCHERS COVERING REIMBURSEMENTS TO PRIME CONTRACTORS, CREDIT WILL BE WITHHELD IN THE ACCOUNTS OF THE DISBURSING OFFICERS INVOLVED FOR ANY INCREASES IN PRICES PAID TO SUBCONTRACTORS OR SUPPLIERS WHERE IT APPEARS THAT THE MODIFICATION OF THE SUBCONTRACT OR PURCHASE ORDER WAS NOT APPROVED BY THE CONTRACTING OFFICER AS BEING NECESSARY TO FACILITATE THE PROSECUTION OF THE WAR, OR WHERE IT APPEARS THAT SUCH INCREASE WAS PAID SOLELY FOR THE PURPOSE OF MAINTAINING FAIR AND EQUITABLE RELATIONS BETWEEN THE CONTRACTOR AND ITS SUPPLIER.