B-44323, SEP 25, 1944

B-44323: Sep 25, 1944

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THE SECRETARY OF THE NAVY: I HAVE YOUR LETTER OF SEPTEMBER 4. IN DUE COURSE SUCH LETTER OF INTENT WAS SUPERSEDED BY CONTRACT NOS-575. DELIVERIES WERE TO BE MADE OVER THE PERIOD FROM 30 JUNE 1942 TO 15 DECEMBER 1942. MANY OF SUCH ARRANGEMENTS WERE REQUIRED TO BE MADE BEFORE THERE WAS AVAILABLE DETAILED INFORMATION AS TO THE EXACT NATURE AND EXTENT OF THE WORK INVOLVED. IN A FEW INSTANCES WHERE FOR THIS REASON ESTIMATED COSTS WERE NOT READILY DETERMINABLE OR ESTIMATES WERE DEEMED EXCESSIVE. SUBCONTRACTS WERE PLACED ON A COST-PLUS-PERCENTAGE-OF- COST BASIS. IT IS REPORTED THAT WHEN THE CONTRACTOR. THE SUPERVISOR REFUSED TO APPROVE THE LUMP SUM PROPOSALS WHICH WERE SUBMITTED. THE SUPERVISOR RECOMMENDED THAT THE CONTRACTOR PLACE THE SUBCONTRACTS ON A COST-PLUS-SIX-PERCENT-FEE BASIS AND THIS WAS ACCORDINGLY DONE.

B-44323, SEP 25, 1944

PRECIS-UNAVAILABLE

THE HONORABLE, THE SECRETARY OF THE NAVY:

I HAVE YOUR LETTER OF SEPTEMBER 4, 1944, AS FOLLOWS:

"BY LETTER OF INTENT DATED 9 APRIL 1942 THE NAVY DEPARTMENT AWARDED TO BISON SHIPBUILDING CORPORATION, BUFFALO, NEW YORK, A CONTRACT FOR THE CONSTRUCTION OF CERTAIN TANK LANDING CRAFT. IN DUE COURSE SUCH LETTER OF INTENT WAS SUPERSEDED BY CONTRACT NOS-575, PROVIDING FOR THE CONSTRUCTION OF FORTY OF SUCH VESSELS ON A COST-PLUS-A-FIXED-FEE BASIS AT AN ESTIMATED UNIT COST OF $100,000 AND A FIXED FEE OF $6,000 PER VESSEL. DELIVERIES WERE TO BE MADE OVER THE PERIOD FROM 30 JUNE 1942 TO 15 DECEMBER 1942.

"UNDER THE CONTRACT THE DEPARTMENT ALSO UNDERTOOK TO REIMBURSE THE CONTRACTOR FOR THE ALLOWABLE COST OF APPROXIMATELY $285,000 REQUIRED IN CONNECTION WITH THE CONSTRUCTION OF THE VESSELS. THE FACILITIES CONSISTED OF WAYS AND LAUNCHING FACILITIES, BUILDINGS, A DOCK, GRADING, MACHINERY, TOOLS AND EQUIPMENT, POWER INSTALLATIONS, OFFICE FURNITURE AND EQUIPMENT AND OTHER ITEMS OF LIKE CHARACTER.

"PROMPTLY UPON RECEIPT OF NOTICE OF THE CONTRACT AWARD, THE CONTRACTOR ENTERED INTO ARRANGEMENTS FOR THE CONSTRUCTION AND INSTALLATION OF THE FACILITIES AND THE FABRICATION OF VESSEL SECTIONS AND PARTS. DUE TO THE GREAT URGENCY OF THE PROGRAM, MANY OF SUCH ARRANGEMENTS WERE REQUIRED TO BE MADE BEFORE THERE WAS AVAILABLE DETAILED INFORMATION AS TO THE EXACT NATURE AND EXTENT OF THE WORK INVOLVED. IN A FEW INSTANCES WHERE FOR THIS REASON ESTIMATED COSTS WERE NOT READILY DETERMINABLE OR ESTIMATES WERE DEEMED EXCESSIVE, SUBCONTRACTS WERE PLACED ON A COST-PLUS-PERCENTAGE-OF- COST BASIS, APPARENTLY UPON THE ADVICE AND CERTAINLY WITH THE APPROVAL OF THE LOCAL SUPERVISOR OF SHIPBUILDING.

"IN FACT, IT IS REPORTED THAT WHEN THE CONTRACTOR, PURSUANT TO THE REQUIREMENTS OF THE NAVY REGULATIONS, SOUGHT THE SUPERVISOR'S APPROVAL OF THE LETTING OF CERTAIN SUBCONTRACTS FOR GENERAL YARD CONSTRUCTION AND FOR POWER AND LIGHTING FACILITIES, THE SUPERVISOR REFUSED TO APPROVE THE LUMP SUM PROPOSALS WHICH WERE SUBMITTED. INSTEAD THE SUPERVISOR RECOMMENDED THAT THE CONTRACTOR PLACE THE SUBCONTRACTS ON A COST-PLUS-SIX-PERCENT-FEE BASIS AND THIS WAS ACCORDINGLY DONE. PURCHASE ORDERS FOR FABRICATION OF STEEL WERE ISSUED ON A SIMILAR BASIS PURSUANT TO ADVICE OF THE SUPERVISOR AND THE COST INSPECTOR. THE COST INSPECTOR STATES THAT, DUE TO THE UNFAMILIARITY OF BOTH THE CONTRACTOR AND THE STEEL SUPPLIERS WITH SHIP CONSTRUCTION AND THE PRICING OF VESSEL PARTS, THIS WAS PROPOSED AS A TEMPORARY EXPEDIENT PENDING THE PREPARATION AND EXECUTION OF THE VESSEL CONTRACT IN DEFINITIVE FORM AND THE DETERMINATION OF A FIXED PRICE FOR THE FABRICATED STEEL. PERHAPS DUE TO THE FACT THAT THE DEFINITIVE CONTRACT WAS NOT EXECUTED UNTIL AFTER DELIVERY OF THE VESSELS HAD BEEN COMPLETED, THE BASIS FOR INVOICING THE FABRICATED STEEL WAS NEVER CHANGED. INVOICES UNDER THESE SUBCONTRACTS AND PURCHASE ORDERS WERE SUBSEQUENTLY APPROVED BOTH BY THE RESIDENT COST INSPECTOR AND THE SUPERVISOR, AND THE CONTRACTOR HAS BEEN REIMBURSED FOR ALL COSTS THEREUNDER, EXCEPT THAT IN THE CASE OF THE PURCHASE ORDERS FOR THE FABRICATED STEEL THE AGREED PROFIT PERCENTAGE WAS DISALLOWED.

"IT SHOULD, PERHAPS, BE ADDED THAT EVERYONE CONCERNED WITH THE LETTING OF THE COST-PLUS-PERCENTAGE-OF-COST SUBCONTRACTS AND PURCHASE ORDERS IS BELIEVED TO HAVE ACTED WHOLLY IN GOOD FAITH IN AN EFFORT TO GET THE JOB DONE AS QUICKLY AND ECONOMICALLY AS POSSIBLE AND IN IGNORANCE OF THE STATUTORY PROHIBITIONS AGAINST THIS METHOD OF CONTRACTING.

"SUBSEQUENTLY, BY LETTER DATED 28 APRIL 1944, THE LOCAL COST INSPECTOR INFORMED THE CONTRACTOR THAT SUBCONTRACTS AND PURCHASE ORDERS PLACED ON A COST-PLUS-PERCENTAGE-OF-COST BASIS WERE ILLEGAL, THAT COSTS INCURRED THEREUNDER WERE NOT REIMBURSABLE TO THE CONTRACTOR AND THAT IT WAS NECESSARY TO DISALLOW AND DEDUCT FROM FUTURE REIMBURSEMENTS DUE UNDER THE CONTRACT CERTAIN FACILITIES INVOICES AMOUNTING TO APPROXIMATELY $85,000 WHICH HAD BEEN PREVIOUSLY ALLOWED AND PAID. THE INVOICES COVERED CHIEFLY LABOR AND MATERIALS EXPENDED ON WAYS AND LAUNCHING FACILITIES, GRADING, PIERS, CONCRETE WORK AND POWER INSTALLATIONS, TITLE TO ALL OF WHICH, UNDER THE TERMS OF THE CONTRACT AS AMENDED 28 JUNE 1943, VESTED IN THE GOVERNMENT ON PAYMENT OF THE COST THEREOF.

"THE COST INSPECTOR HAS ALSO INFORMALLY INDICATED TO THE CONTRACTOR HIS INTENTION SIMILARLY TO DISALLOW REIMBURSEMENT FOR COSTS UNDER THE COST- PLUS-PERCENTAGE-OF-COST PURCHASE ORDER ISSUED BY THE CONTRACTOR FOR STEEL FABRICATION IN CONNECTION WITH THE CONSTRUCTION OF THE VESSELS. CONTRACTOR'S PAYMENTS UNDER THESE PURCHASE ORDERS AGGREGATED APPROXIMATELY $730,000, FOR WHICH IT HAS RECEIVED REIMBURSEMENT OF APPROXIMATELY $691,000, THE UNPAID BALANCE, REPRESENTING SIX PERCENT PROFIT ON LABOR AND OVERHEAD COSTS, HAVING BEEN DISALLOWED. THE FABRICATED STEEL ACQUIRED UNDER THESE PURCHASE ORDERS WAS INSTALLED IN THE VESSELS, ALL OF WHICH HAD BEEN COMPLETED AND DELIVERED TO THE NAVY DEPARTMENT BY 19 NOVEMBER 1942.

"THE TOTAL AMOUNT ALLOWED AND PAID UNDER ALL COST-PLUS-PERCENTAGE-OF COST SUBCONTRACTS AND PURCHASE ORDERS WHICH IT IS NOW PROPOSED TO DISALLOW IS $776,574.47. THE CONTRACTOR HAS ADVISED THE DEPARTMENT THAT IF THE PROPOSED DISALLOWANCES ARE EFFECTED, THE CONTRACTOR'S PROFIT OF $134,230.84 UNDER THE CONTRACT WILL BE CONVERTED INTO A LOSS OF $642,343.63.

"IN VIEW OF THE FACT THAT THE SUBJECT MATTER OF THE SUBCONTRACTS AND PURCHASE ORDERS WAS ENTIRELY LAWFUL AND THAT THE GOVERNMENT HAS RECEIVED AND ENJOYED THE BENEFITS THEREOF, THE DEPARTMENT BELIEVES THAT THE CONTRACTOR IS LEGALLY ENTITLED TO RECEIVE REIMBURSEMENT, AS AN ALLOWABLE COST UNDER ITS CONTRACT, FOR THE FAIR VALUE OF THE LABOR, MATERIALS AND FABRICATED PARTS WHICH IT ACQUIRED UNDER THE SUBCONTRACTS FOR THE BENEFIT OF THE GOVERNMENT.

"IT IS NOTED THAT YOU REACHED A SIMILAR CONCLUSION IN YOUR DECISION NO. B -23725 (21 COMP.GEN. 800) INVOLVING THE CLAIM OF THE ASSOCIATED BANNING CO. AGAINST THE WAR DEPARTMENT UNDER A COST-PLUS-PERCENTAGE-OF COST PRIME CONTRACT. ON THE OTHER HAND, YOUR DECISION NO. B-23293 IN THE CASE OF DAY & ZIMMERMAN, INC. (22 COMP.GEN. 784) INVOLVING A SUBCONTRACT SEEMS TO BE TO THE CONTRARY, ALTHOUGH IT IS POSSIBLE THAT THERE WERE IN THAT CASE DISTINGUISHING FACTS WHOSE SIGNIFICANCE IS NOT READILY APPARENT FROM A READING OF THE DECISION ITSELF.

"BECAUSE OF THIS SEEMING CONFLICT OF OPINION, YOUR ADVICE AS TO THE PROPER METHOD OF TREATING THE CLAIMS OF BISON SHIPBUILDING CORPORATION UNDER THE CIRCUMSTANCES OUTLINED ABOVE IS RESPECTFULLY REQUESTED."

APPEARING ON THE FACT OF THE SAID CONTRACT NOBS-575 IS THE STATEMENT THAT IT WAS NEGOTIATED PURSUANT TO "AUTHORIZING ACTS APPROVED DECEMBER 18, 1941 AND FEBRUARY 6, 1942 APPROPRIATION ACT APPROVED FEBRUARY 7, 1942." SECTION 201 OF THE FIRST WAR POWERS ACT, 1941, APPROVED DECEMBER 18, 1941, 55 STAT. 838, 839, PROVIDES THAT THE PRESIDENT MAY AUTHORIZE ANY DEPARTMENT OR AGENCY OF THE GOVERNMENT TO ENTER INTO CONTRACTS, ETC., WITHOUT REGARD TO CERTAIN DESIGNATED PROVISIONS OF LAW WHENEVER HE DEEMS SUCH ACTION WILL FACILITATE THE PROSECUTION OF THE WAR:

"*** PROVIDED, THAT NOTHING HEREIN SHALL BE CONSTRUED TO AUTHORIZE THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM TO CONTRACTING ***." EXECUTIVE ORDER 9001, DATED DECEMBER 27, 1941, THE PRESIDENT GRANTED SUCH AUTHORITY TO THE NAVY DEPARTMENT, AMONG OTHERS SUBJECT TO THE RESTRICTION CONTAINED IN THE ABOVE-QUOTED PROVISO.

A SEARCH OF THE RECORDS OF THIS OFFICE FAILS TO DISCLOSE THAT THE SUBCONTRACTS TO WHICH YOU REFER AS HAVING BEEN ENTERED INTO IN POSSIBLE VIOLATION OF THE COST-PLUS-A-PERCENTAGE-OF-COST PROHIBITION IMPOSED BY THE ACT OF DECEMBER 18, 1941, SUPRA, HAVE BEEN RECEIVED HERE. HOWEVER, IT APPEARS FROM YOUR LETTER THAT THE QUESTIONED AGREEMENTS MAY BE SAID TO FALL WITHIN TWO SEPARATE CLASSES, TO WIT, THOSE COVERING YARD CONSTRUCTION OF THE VESSELS, AND THOSE COVERING FABRICATION OF THE STEEL TO BE USED IN THEIR CONSTRUCTION. IT APPEARS FURTHER THAT DUE TO THE URGENT NEED FOR THE TANK LANDING CRAFT EXISTING AT THE TIME THE PRIME CONTRACT WAS AWARDED IT WAS NECESSARY FOR THE CONTRACTOR TO MAKE IMMEDIATE ARRANGEMENTS FOR THE PROCUREMENT OF THE FACILITIES AND STEEL WHICH WOULD BE REQUIRED BUT THAT, SINCE THE CONTRACT HAD NOT BEEN FORMALLY PREPARED AND EXECUTED, THE NATURE, QUANTITY AND PROBABLY COST THEREOF THEN WERE NOT KNOWN AND COULD NOT BE ASCERTAINED. THE SUBCONTRACTORS FOR THE FACILITIES SUBMITTED LUMP- SUM PROPOSALS BUT, APPARENTLY IN THE BELIEF THAT UNDER THE CIRCUMSTANCES THEY HAD FELT IT NECESSARY TO ENTER EXTREMELY HIGH BIDS IN ORDER TO PROTECT THEMSELVES AGAINST ALL POSSIBLE CONTINGENCIES, THE CONTRACTOR AT THE INSTANCE OF THE CONTRACTING OFFICER REJECTED THEIR PROPOSALS AND INSTRUCTED THEM TO PROCEED WITH THE WORK ON A COST-PLUS-SIX-PERCENT-FEE BASIS. THE SUBCONTRACTORS FOR THE FABRICATION OF THE STEEL, WHO, IT IS REPORTED, WERE UNFAMILIAR WITH SHIP CONSTRUCTION REQUIREMENTS AND COSTS, WERE GIVEN THEIR ORDERS ON A SIMILAR BASIS, ALSO, WITH THE UNDERSTANDING THAT FIXED-PRICE AGREEMENTS WOULD BE ENTERED INTO WHEN THE EXTENT AND COST OF THE WORK TO BE PERFORMED BY THEM COULD BE DETERMINED WITH REASONABLE ACCURACY. THE CONTEMPLATED CONVERSIONS WERE NEVER ACCOMPLISHED, HOWEVER, SINCE THE ORDERS WERE FILLED BEFORE THE PRIME CONTRACT WAS FORMALLY EXECUTED.

UNDOUBTEDLY THE PURPOSE OF THE STATUTORY PROHIBITION AGAINST THE COST- PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING IS TO PROTECT THE INTEREST OF THE GOVERNMENT BY PRECLUDING CONTRACTORS FROM INCREASING THEIR PROFITS THROUGH THE SIMPLE EXPEDIENT OF ALLOWING THEIR COSTS OF PERFORMANCE TO BE EXCESSIVE. THEREFORE, IT IS ONLY WHERE THE AGREEMENT IS SUCH AS WILL PERMIT THE CONTRACTOR OR SUBCONTRACTOR, WITHOUT RESTRICTION OR LIMITATION, TO IMPOSE UPON THE GOVERNMENT THE BURDEN OF PAYING INCREASED PROFITS AND GREATER COSTS FOR THE WORK THAN NECESSARY IS THE PURPOSE OF THE STATUTE DEFEATED. SEE 23 COMP.GEN. 410.

WHILE THE PRICES PAID UNDER THE FIRST CLASS OF SUBCONTRACTS HERE INVOLVED WERE BASED UPON PERFORMANCE COSTS PLUS A REASONABLE PROFIT, THE CONTRACTOR'S ACTION IN REJECTING THE SUBCONTRACTORS' ORIGINAL QUOTATIONS-- WHICH ACTION WAS TAKEN WITH THE APPROVAL IF NOT AT THE DIRECTION OF THE CONTRACTING OFFICER-- WOULD APPEAR TO NEGATIVE ANY PRESUMPTION THAT THE CONTRACTOR INTENDED TO COMMIT ITSELF UNQUALIFIEDLY TO THE PAYMENT OF WHATEVER COSTS MIGHT BE INCURRED BY THE SUBCONTRACTORS PLUS A PERCENTAGE THEREOF FOR PROFIT. THAT IS TO SAY, THE FACT THAT THE LUMP-SUM PROPOSALS IN THESE CASES WERE DISAPPROVED AND REJECTED BECAUSE THEY WERE CONSIDERED EXCESSIVE OR OTHERWISE NOT IN THE INTEREST OF THE GOVERNMENT WARRANTS THE INFERENCE THAT AT THAT TIME THE CONTRACTOR AND THE RESPONSIBLE GOVERNMENT OFFICIALS DECIDED TO EXERCISE SUCH SUPERVISORY CONTROL OVER THE WORK TO BE PERFORMED IN FURNISHING THE FACILITIES AS WOULD INSURE THAT THE COST OF THE WORK WOULD BE LESS THAN-- OR, AT MOST, WOULD NOT EXCEED-- THE LUMP-SUM AMOUNTS OFFERED. IN THESE CIRCUMSTANCES THE SUBCONTRACTORS OBVIOUSLY WERE NOT IN A POSITION TO INCREASE THEIR COSTS IN ORDER TO INCREASE THEIR PROFITS. MOREOVER, IT IS TO BE ASSUMED THAT THEY WERE AWARD OF THE LIMITATION PLACED UPON THEM IN THIS RESPECT AND PROCEEDED WITH PERFORMANCE ACCORDINGLY.

SIMILARLY, WITH RESPECT TO THE SECOND CLASS OF SUBCONTRACTS INVOLVED, SINCE THE PAYMENTS MADE THEREUNDER WERE INTENDED FROM THE VERY OUTSET AS PARTIAL PAYMENTS TO BE APPLIED AGAINST FIXED PRICES SUBSEQUENTLY TO BE AGREED UPON, IT WOULD APPEAR THAT THERE NEVER WAS ANY UNDERSTANDING BETWEEN, OR ANY INTENTION ON THE PART OF, THE PARTIES THAT THE FABRICATION OF THE STEEL WAS TO BE ON A COST-PLUS-A-PERCENTAGE OF-COST BASIS AND, THEREFORE, ANY INCENTIVE FOR THE SUBCONTRACTORS TO INCREASE THEIR COSTS AND PROFITS UNNECESSARILY WAS LACKING.

IN VIEW OF ALL THE FACTS AND CIRCUMSTANCES APPEARING, AND HAVING IN MIND THAT THE AMOUNT OF LABOR AND MATERIALS TO BE REQUIRED UNDER THE SUBCONTRACTS WAS NOT CAPABLE OF BEING ASCERTAINED OR EVEN ESTIMATED WITH ANY DEGREE OF ACCURACY DUE TO THE EXPERIMENTAL NATURE OF THE WORK, AND THAT PROPER SAFEGUARDS WERE TAKEN BY THE CONTRACTOR AND THE PROPER OFFICIALS OF YOUR DEPARTMENT TO INSURE THAT THE COST OF THE WORK WOULD NOT BE EXCESSIVE, THIS OFFICE IS NOT REQUIRED TO OBJECT TO OTHERWISE PROPER PAYMENTS UNDER THE PRIME CONTRACT ON THE GROUND THAT THE FORM OF SUBCONTRACTING EMPLOYED IN THESE PARTICULAR CASES WAS IN VIOLATION OF THE STATUTORY PROHIBITION AGAINST THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING, PROVIDED THE VOUCHERS EVIDENCING THE REIMBURSEMENT FOR PAYMENTS UNDER THE SUBCONTRACTS ARE ACCOMPANIED BY A CERTIFICATE OF SOME RESPONSIBLE OFFICIAL OF THE PRIME CONTRACTOR AND OF THE CONTRACTING OFFICER TO THE EFFECT THAT THE COST OF THE FACILITIES AND STEEL IS FAIR AND REASONABLE AND THAT THE NUMBER OF LABOR HOURS AND THE QUANTITY OF MATERIALS INVOLVED ARE NOT EXCESSIVE.