B-38322, DECEMBER 8, 1943, 23 COMP. GEN. 410

B-38322: Dec 8, 1943

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- WHICH SUM WAS CONSIDERED REASONABLE BY THE CONTRACTING OFFICE. IS NOT IN CONTRAVENTION OF THE ACT OF JULY 2. COVERING ACTUAL COSTS INCURRED IN THE PERFORMANCE OF THE CONTRACT IS SUBMITTED HEREWITH FOR ADVANCE DECISION PURSUANT TO SECTION 8 OF THE ACT OF 31 JULY 1894 (28 STAT. 208). THE DOUBT IN THIS CASE ARISES THRU THE FACT THAT CONTRACT WAS PREPARED ON A COST-PLUS-A-PERCENTAGE-OF-COST BASIS. A SEPARATE CLAIM IS BEING SUBMITTED BY THE CONTRACTOR FOR THE ITEM OF PROFIT. COPY OF CONTRACT AND ALL PERTINENT CORRESPONDENCE ARE ENCLOSED. THE UNDERSIGNED IS A DISBURSING OFFICER AND THE ACCOUNT IS PROPERLY BEFORE HIM FOR PAYMENT. THE RECORD DISCLOSES THAT THE WORK WAS COMPLETED AT A TOTAL COST OF $4.

B-38322, DECEMBER 8, 1943, 23 COMP. GEN. 410

CONTRACTS - COST-PLUS - COST-PLUS-A-PERCENTAGE-OF-COST BASIS A CONTRACT PROVIDING FOR THE PERFORMANCE OF CERTAIN WORK AT A TOTAL COST NOT TO EXCEED A STIPULATED SUM--- WHICH SUM WAS CONSIDERED REASONABLE BY THE CONTRACTING OFFICE--- AND WHICH AUTHORIZED REIMBURSEMENT TO THE CONTRACTOR "ON THE BASIS OF TIME AND MATERIAL, CONFORMING TO PREVAILING WAGE RATES OF UNION LABOR WITHIN THIS AREA," PLUS A CERTAIN PERCENTAGE OF COST FOR OVERHEAD, SUPERVISION AND PROFIT, IS NOT IN CONTRAVENTION OF THE ACT OF JULY 2, 1940, PROHIBITING THE USE OF THE COST-PLUS-A-PERCENTAGE-OF- COST SYSTEM OF CONTRACTING.

COMPTROLLER GENERAL WARREN TO COL. C. H. FARISH, U.S. ARMY, DECEMBER 8, 1943:

THERE HAS BEEN RECEIVED BY REFERENCE FROM THE FISCAL DIRECTOR, ARMY SERVICE FORCES, YOUR LETTER OF OCTOBER 9, 1943, AS FOLLOWS.

THE ATTACHED VOUCHER AND SUPPORTING PAPERS IN THE AMOUNT OF $4,046.49, IN FAVOR OF THE BLUMENTHAL-KAHN ELECTRIC CO., CONTRACT W 398-QM-12959 DATED 2 SEPTEMBER 1942, COVERING ACTUAL COSTS INCURRED IN THE PERFORMANCE OF THE CONTRACT IS SUBMITTED HEREWITH FOR ADVANCE DECISION PURSUANT TO SECTION 8 OF THE ACT OF 31 JULY 1894 (28 STAT. 208).

THE DOUBT IN THIS CASE ARISES THRU THE FACT THAT CONTRACT WAS PREPARED ON A COST-PLUS-A-PERCENTAGE-OF-COST BASIS, SPECIFICALLY FORBIDDEN BY ACT OF CONGRESS.

A SEPARATE CLAIM IS BEING SUBMITTED BY THE CONTRACTOR FOR THE ITEM OF PROFIT.

COPY OF CONTRACT AND ALL PERTINENT CORRESPONDENCE ARE ENCLOSED.

THE UNDERSIGNED IS A DISBURSING OFFICER AND THE ACCOUNT IS PROPERLY BEFORE HIM FOR PAYMENT.

THE VOUCHER INVOLVED COVERS THE AMOUNT CLAIMED BY THE BLUMENTHAL KAHN ELECTRIC COMPANY AS THE ACTUAL COSTS INCURRED BY IT IN THE PERFORMANCE OF CONTRACT NO. W 398-QM-12959, DATED SEPTEMBER 2, 1942, COVERING THE INSTALLATION OF LIGHTING FIXTURES AND WIRING IN A CERTAIN BUILDING LOCATED AT HOLABIRD ORDNANCE DEPOT, BALTIMORE, MARYLAND.

UNDER THE TERMS OF THE CONTRACT THE CONTRACTOR AGREED TO PERFORM THE STATED WORK FOR A TOTAL COST NOT TO EXCEED $6,000, IT BEING STIPULATED ON PAGE 2 OF THE AGREEMENT THAT:

THE WORK SHALL BE ACCOMPLISHED ON BASIS OF TIME AND MATERIAL, CONFORMING TO PREVAILING WAGE RATES OF UNION LABOR WITHIN THIS AREA, PLUS 8 PERCENT INSURANCE ON LABOR ONLY. ALL LABOR AND MATERIALS FURNISHED BY THE CONTRACTOR SHALL BE SUPPLIED AT COST, PLUS 10 PERCENT. AN ADDITIONAL 10 PERCENT, FOR OVERHEAD AND SUPERVISION, SHALL APPLY TO BOTH LABOR AND MATERIALS AS FURNISHED, EXCLUSIVE OF INSURANCE.

THE RECORD DISCLOSES THAT THE WORK WAS COMPLETED AT A TOTAL COST OF $4,403.76, OF WHICH AMOUNT $4,046.49 REPRESENTS THE ACTUAL COST OF LABOR AND MATERIAL ( PLUS 10 PERCENT FOR OVERHEAD AND SUPERVISION) AND INSURANCE. THE BALANCE, OR $357.27, REPRESENTS PROFIT AND APPARENTLY HAS BEEN MADE THE SUBJECT OF A SEPARATE CLAIM, IT APPEARING THAT THE FORM OF THE CONTRACT HAD BEEN QUESTIONED AS POSSIBLY BEING IN CONTRAVENTION OF THE ACT OF JULY 2, 1940, PUBLIC NO. 703, 54 STAT. 712, PROHIBITING THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING.

THE VIEW OF THE PURCHASING AND CONTRACTING OFFICER WITH RESPECT TO THE MATTER ARE SET FORTH IN A SIXTH INDORSEMENT OF FEBRUARY 27, 1943, TO THE FINANCE OFFICER, BALTIMORE, MARYLAND, IN PERTINENT PART, AS FOLLOWS:

(A) IN VIEW OF THE FACT THAT SUBJECT AGREEMENT WAS MADE IN GOOD FAITH AND UNDER CIRCUMSTANCES OF URGENCY WHICH PRECLUDED BIDS BEING ADVERTISED FOR OR COMPETITIVE PRICES SECURED, DUE TO THE FACT THAT THERE WAS INSUFFICIENT TIME TO MAKE NECESSARY DRAWINGS AND SPECIFICATIONS FOR THIS PURPOSE, AND THAT THE BLUMENTHAL-KAHN ELECTRIC COMPANY WAS WORKING AT THIS DEPOT WITH THEIR EQUIPMENT AND PERSONNEL ON HAND AT THE TIME THE WORK WAS COMMENCED, IT IS BELIEVED THAT THE ARRANGEMENT WAS FAIR AND IN THE BEST INTERESTS OF THE GOVERNMENT, BUT THAT SAME SHOULD HAVE BEEN MADE ON A " COST-PLUS-FIXED -FEE" BASIS. IT IS NOT BELIEVED THAT ANY MORE ECONOMICAL ARRANGEMENT FOR THE GOVERNMENT COULD HAVE BEEN ACCOMPLISHED THROUGH COMPETITIVE BIDS ON A LUMP SUM BASIS.

(B) IT IS ALSO EVIDENT THAT THE CONTRACTOR ACTED IN GOOD FAITH AND EXECUTED THE AGREEMENT PROMPTLY AND EFFICIENTLY AT A MINIMUM COST TO THE GOVERNMENT. IN THIS CONNECTION ATTENTION IS INVITED TO THE FACT THAT THE TOTAL AMOUNT OF THE ENCLOSED BILLS ($4,403.76) IS CONSIDERABLY LESS THAN THE MAXIMUM AMOUNT FOR WHICH CONTRACT WAS ORIGINALLY DRAWN (" NOT TO EXCEED $6,000.00" ).

(C) IT IS RECOMMENDED THAT SETTLEMENT ON A QUANTUM MERUIT BASIS BE MADE AND THAT THE CONTRACTOR BE REIMBURSED FOR ACTUAL WAGE PAYMENTS TO EMPLOYEES, AS EVIDENCED BY ORIGINAL PAYROLLS AND PAYROLL RECEIPTS; SOCIAL SECURITY TAXES DEDUCTED FROM WAGES, AND THOSE CONTRIBUTED BY THE CONTRACTOR WHICH HAVE ACTUALLY PAID TO THE STATE AND FEDERAL GOVERNMENTS AMOUNTS ACTUALLY BEEN PAID FOR EQUIPMENT RENTAL AND AMOUNTS EXPENDED FOR MATERIALS PURCHASED, AS EVIDENCED BY RECEIPTED BILLS; AND A FLAT OVERHEAD FIGURE ON DIRECT LABOR COSTS, PLUS A REASONABLE FEE FOR PERFORMANCE OF THE CONTRACT.

IT THUS APPEARS THAT THE CONTRACT CEILING PRICE WAS CONSIDERED BY THE CONTRACTING OFFICER AS BEING REASONABLE AND IN THE BEST INTEREST OF THE GOVERNMENT; THAT THE CONTRACTOR PERFORMED THE WORK PROMPTLY AND EFFICIENTLY, AND FOR A TOTAL COST WHICH IS, IN FACT, APPROXIMATELY 25 PERCENT LESS THAN THE STIPULATED MAXIMUM PRICE.

THE EVIDENT PURPOSE OF THE CONGRESS IN PROHIBITING CONTRACTS ON A COST- PLUS-A-PERCENTAGE-OF-COST BASIS IS TO AVOID THE EVILS WHICH MIGHT FLOW FROM A SITUATION WHEREBY A CONTRACTOR COULD PURPOSELY CAUSE TREMENDOUS INCREASE IN THE COST OF WORK IN ORDER TO INCREASE ITS PROFITS PROPORTIONATELY. SUCH A SITUATION OBVIOUSLY COULD NOT ARISE IN CONNECTION WITH PERFORMANCE OF THE INSTANT CONTRACT IN VIEW OF THE STIPULATED "CEILING" OR MAXIMUM PRICE AND THE DEFINITE AND EFFECTIVE CONTROLS OVER THE LABOR AND MATERIALS TO BE UTILIZED IN THE PERFORMANCE OF THE CONTRACT.

ACCORDINGLY, SINCE IT APPEARS FROM THE EVIDENCE OF RECORD THAT THE FORM OF AGREEMENT HERE INVOLVED DOES NOT FALL WITHIN THE SYSTEM OF CONTRACTING AT WHICH THE STATUTORY PROHIBITION WAS DIRECTED, PAYMENT ON THE VOUCHER, COVERING THE ACTUAL COSTS INCURRED BY THE CONTRACTOR, IS AUTHORIZED, IF OTHERWISE CORRECT.