B-60751, JUN. 6, 1955

B-60751: Jun 6, 1955

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THE INDEBTEDNESS REFERRED TO WAS REPORTED BY THE TREASURY DEPARTMENT. IN EXCESS OF THE AMOUNT TO WHICH THE CONTRACTOR WAS ENTITLED UNDER THE TERMS OF THE CONTRACT. - WAS EMPLOYED UNDER THAT CONTRACT TO ACT AS CONSULTING ENGINEER IN CONNECTION WITH THE PROCUREMENT OF OIL REFINERIES FOR SHIPMENT TO THE U.S.S.R. BY ARTICLE 4 OF AMENDMENT NO. 4 TO THE CONTRACT IT WAS PROVIDED THAT THE CONTRACTOR SHOULD BE PAID "AS COMPLETE COMPENSATION FOR ALL OF ITS UNDERTAKINGS" A FIXED FEE OF $1. WORK UNDER THE CONTRACT WAS TERMINATED AS OF APRIL 26. IN THE EARLY PART OF 1948 YOU WERE ADVISED THAT THE GOVERNMENT HAD DETERMINED THAT THE FIXED FEE PAYMENTS ALREADY RECEIVED BY YOU WERE IN EXCESS OF THE AMOUNT PROPERLY PAYABLE.

B-60751, JUN. 6, 1955

TO THE STONE AND WEBSTER ENGINEERING CORPORATION:

PURSUANT TO LETTER DATED DECEMBER 5, 1952, FROM YOUR ATTORNEYS, AS SUPPLEMENTED BY LETTER OF MAY 1, 1953, AND ACCOMPANYING MEMORANDUM, THE ACTION OF OUR CLAIMS DIVISION, ON CERTIFICATE OF SETTLEMENT NO. 207153, DATED NOVEMBER 12, 1952, IN APPLYING THE SUM OF $24,490 DUE E. B. BADGER AND SONS COMPANY IN PARTIAL SATISFACTION OF A REPORTED INDEBTEDNESS OF THAT CORPORATION TO THE GOVERNMENT IN THE AMOUNT OF $226,377.41, HAS BEEN REVIEWED AND THE FOLLOWING CONCLUSIONS REACHED.

THE INDEBTEDNESS REFERRED TO WAS REPORTED BY THE TREASURY DEPARTMENT, BUREAU OF FEDERAL SUPPLY, AS THE AMOUNT OF THE FIXED FEE PAID UNDER CONTRACT NO. DA-TPS-17000, DATED JANUARY 28, 1943, IN EXCESS OF THE AMOUNT TO WHICH THE CONTRACTOR WAS ENTITLED UNDER THE TERMS OF THE CONTRACT. THE BADGER COMPANY--- WHICH HAS SINCE BEEN INTEGRATED INTO YOUR CORPORATION BY CORPORATE MERGER--- WAS EMPLOYED UNDER THAT CONTRACT TO ACT AS CONSULTING ENGINEER IN CONNECTION WITH THE PROCUREMENT OF OIL REFINERIES FOR SHIPMENT TO THE U.S.S.R. UNDER THE LEND-LEASE PROGRAM.

BY ARTICLE 4 OF AMENDMENT NO. 4 TO THE CONTRACT IT WAS PROVIDED THAT THE CONTRACTOR SHOULD BE PAID "AS COMPLETE COMPENSATION FOR ALL OF ITS UNDERTAKINGS" A FIXED FEE OF $1,877,417, SUBJECT, HOWEVER, TO REDUCTION IN ACCORDANCE WITH SECTION 2 OF THE ARTICLE, READING AS FOLLOWS:

"THE AFOREMENTIONED FIXED FEE SET FORTH IN SECTION 1 OF THIS ARTICLE SHALL BE REDUCED IN THE EVENT THAT THE ACTUAL COST (EXCLUSIVE OF ALL COMPENSATION FOR ARCHITECTURAL OR ENGINEERING SERVICES) TO BE PAID BY THE TREASURY DEPARTMENT FROM LEND-LEASE FUNDS ON ACCOUNT OF THE ENTIRE PROJECT, BOTH AS DESCRIBED IN THE CONTRACT AS HERETOFORE AMENDED, AND AS EXPANDED IN THE MANNER DESCRIBED IN THIS AMENDMENT, SHALL BE LESS THAN THE ESTIMATED COST OF $70,000,000. IN SUCH EVENT, THERE SHALL BE DEDUCTED FROM SUCH FIXED FEE, 2.68 PERCENT OF THE DIFFERENCE BETWEEN SUCH ESTIMATED COST AND SUCH ACTUAL COST.'

WORK UNDER THE CONTRACT WAS TERMINATED AS OF APRIL 26, 1947, AT WHICH TIME THE PROJECT HAD BEEN SUBSTANTIALLY COMPLETED. UNDER DATE OF MAY 10, 1947, YOU SUBMITTED TO THE BUREAU A STATEMENT CLAIMING AN AGGREGATE FIXED FEE, UNDER THE ADJUSTMENT FORMULA ABOVE, IN THE AMOUNT OF $1,685,706.69, COMPUTED ON A TOTAL COST OF $62,846,630.03. PAYMENTS AGGREGATING $1,682,621.57 HAD ALREADY BEEN MADE, LEAVING A BALANCE DUE YOU OF $3,085.12, ACCORDING TO YOUR STATEMENT.

IN THE EARLY PART OF 1948 YOU WERE ADVISED THAT THE GOVERNMENT HAD DETERMINED THAT THE FIXED FEE PAYMENTS ALREADY RECEIVED BY YOU WERE IN EXCESS OF THE AMOUNT PROPERLY PAYABLE, AND BY LETTER DATED JUNE 29, 1948, DEMAND WAS MADE ON YOU BY THE BUREAU OF FEDERAL SUPPLY FOR REFUND OF $224,871 AS EXCESS FEES PAID. PAYMENT WAS REFUSED BY YOUR LETTER OF JULY 1, 1948, AND THE MATTER WAS REPORTED TO THIS OFFICE FOR COLLECTION UNDER DATED OF NOVEMBER 16, 1948, THE AMOUNT HAVING THEN BEEN RECOMPUTED AS $226,377.41.

BY REASON OF THE PENDENCY OF INVESTIGATIONS THEN IN PROCESS INVOLVING THE ENTIRE RUSSIAN REFINERY PROGRAM, WITH PARTICULAR REFERENCE TO PATENT ROYALTY AND LICENSING FEATURES INVOLVED, NO FORMAL ACTION CONCERNING THE REPORTED INDEBTEDNESS WAS TAKEN HERE UNTIL NOVEMBER 12, 1952, ON WHICH DATE THE AMOUNT OF $24,490 PAYABLE TO THE BADGER COMPANY UNDER A WHOLLY UNRELATED CONTRACT WAS APPLIED AGAINST THE DEBT, AS ABOVE STATED.

THE GOVERNMENT'S CLAIM FOR REFUND OF A PART OF THE FEES PAID IS BASED UPON THE CONTENTION THAT THE QUOTED LANGUAGE OF SECTION 2 OF ARTICLE 4 OF THE FOURTH AMENDMENT MEANS THAT ONLY THE COST OF MATERIAL FOR THE CONTRACT PROJECT SHOULD BE CONSIDERED AS "ACTUAL COST" FOR THE PURPOSE OF THE ADJUSTMENT OF YOUR FEE, AND THAT YOUR OWN EXPENSES IN THE PERFORMANCE OF THE CONTRACT, WHICH WERE REIMBURSABLE TO YOU AT ACTUAL COST, WERE A PART OF YOUR "COMPENSATION FOR ARCHITECTURAL OR ENGINEERING SERVICES" WHICH WERE EXCLUDED FROM THE "ACTUAL COST" FOR THAT PURPOSE. YOUR VIEWS, AS FULLY DEVELOPED BY YOUR COUNSEL, ARE DIAMETRICALLY OPPOSED TO THIS CONTENTION.

THE BUREAU'S CONTENTION IS SUPPORTED BY STATEMENTS FROM A. J. WALSH, THE CONTRACTING OFFICER WHO EXECUTED BOTH THE ORIGINAL CONTRACT AND AMENDMENT 4, AND LOUIS ZINGESSER, A MEMBER OF THE STAFF OF THE BUREAU OF FEDERAL SUPPLY, BOTH OF WHOM DEFINITELY RECALL THAT IT WAS NOT THEIR INTENTION TO INCLUDE THE CONTRACTOR'S REIMBURSABLE EXPENSES IN THE COST BASE FOR THE PURPOSE OF DETERMINING OR ADJUSTING THE FIXED FEE.

THESE STATEMENTS, HOWEVER, WERE FURNISHED IN 1948, AND THE BUREAU'S FILES OF CORRESPONDENCE AND MEMORANDA CONTEMPORANEOUS WITH THE EXECUTION OF THE ORIGINAL CONTRACT IN 1943 AND AMENDMENT NO. 4 IN 1944 DO NOT CONTAIN ANY CLEAR STATEMENT BY ANY GOVERNMENT REPRESENTATIVE THAT THE FEES--- WHICH APPEAR TO HAVE BEEN THE SUBJECT OF EXTENDED NEGOTIATIONS--- WERE ARRIVED AT ON THE BASIS OF MATERIAL COST ALONE. ON THE CONTRARY, A MEMORANDUM OF FEBRUARY 11, 1943, FROM THE DIRECTOR OF PROCUREMENT--- MR. WALSH'S IMMEDIATE SUPERIOR--- TO THE SECRETARY OF THE TREASURY, RECOMMENDING APPROVAL OF THE FEE INCORPORATED IN THE ORIGINAL CONTRACT, AFTER POINTING OUT THE DIFFICULTIES IN APPLYING THE EXISTING SCALE OF FIXED FEE ALLOWANCES TO THE PECULIAR CIRCUMSTANCES OF THIS CONTRACT, STATED THAT THE PROCUREMENT DIVISION AGREED TO A DETERMINATION OF THE FEE BY THE APPLICATION OF THE SCALE TO THE ESTIMATED "ERECTED" COST OF EACH OF THE SIX PLANTS, WITH AN ADDITION-- SUBJECT TO AUDIT--- OF $400,000 TO COVER THE CONTRACTOR'S INDIRECT OVERHEAD. AND THE DIRECTOR'S MEMORANDUM OF JUNE 30, 1944, RECOMMENDING APPROVAL OF AMENDMENT NO. 4, UNDERTOOK TO JUSTIFY THE FEE PROVIDED FOR ON A SIMILAR BASIS, STATING THE CONCLUSION THAT THE TOTAL EXPANDED PROJECT, ESTIMATED TO COST $70,000,000, THE CONTRACTOR'S ALLOWABLE INDIRECT COST WOULD APPROXIMATE $939,000, AND THE REMAINDER OF THE FIXED FEE WOULD AMOUNT TO SLIGHTLY OVER 1.3 PERCENT OF THE ESTIMATED COST OF THE ENTIRE EXPANDED PROJECT. THIS LATTER MEMORANDUM APPEARS TO HAVE BEEN DRAFTED BY MR. ZINGESSER.

IT IS THUS CLEARLY INDICATED THAT THE ESTIMATED COST OF $70,000,000 WAS FULLY RECOGNIZED AS THE TOTAL OVERALL COST, OTHER THAN THE CONTRACTOR'S FEE, AND NOT MERELY THE BARE MATERIAL COST. SINCE THE SEVENTH "WHEREAS" CLAUSE OF THE AMENDMENT RECITED THAT "THE ESTIMATED COST (EXCLUSIVE OF ALL COMPENSATION FOR ARCHITECTURAL OR ENGINEERING SERVICES) * * * IS $70,000,000; " AND ARTICLE II STATED THAT "THE TOTAL ESTIMATED COST (EXCLUSIVE OF ALL COMPENSATION FOR ARCHITECTURAL OR ENGINEERING SERVICES) * * * IS $70,000,000," AND THE $70,000,000 FIGURE, AS SHOWN, REPRESENTED ALL COSTS EXCEPT THE FIXED FEE, IT NECESSARILY FOLLOWS THAT THE LANGUAGE OF PARAGRAPH 2 OF ARTICLE IV PROVIDING FOR REDUCTION OF THE FEE "IN THE EVENT THAT THE ACTUAL COST (EXCLUSIVE OF ALL COMPENSATION FOR ARCHITECTURAL OR ENGINEERING SERVICES) * * * SHALL BE LESS THAN THE ESTIMATED COST OF $70,000,000," MUST BE GIVEN THE SAME MEANING. CONSTRUE THIS LANGUAGE IN THE FEE ADJUSTMENT CLAUSE AS MEANING ONLY ACTUAL COST OF MATERIALS---SOME $13,000,000 LESS THAN THE FINAL AGGREGATE COST, ACCORDING TO THE ADMINISTRATIVE COMPUTATION--- CANNOT BE JUSTIFIED ON THE RECORD.

IT MAY BE ADDED THAT THE ADMINISTRATIVE INTERPRETATION OF THE WORD "COMPENSATION," AS INCLUDING THE CONTRACTOR'S REIMBURSABLE EXPENSES AS WELL AS ITS FIXED FEE, IS CONTRARY TO THE MORE GENERALLY ACCEPTED MEANING OF THE TERM AS USED IN CONNECTION WITH PAYMENT FOR SERVICES. SO, WHEN IN THE FEE PROVISION OF THE FOURTH AMENDMENT WE FIND THE WORDS "AS COMPLETE COMPENSATION FOR ALL OF ITS UNDERTAKINGS, BOTH UNDER THE ORIGINAL CONTRACT AS HERETOFORE AMENDED, AS WELL AS FOR ITS UNDERTAKINGS UNDER THIS AMENDMENT, THE CONTRACTOR SHALL BE PAID A FIXED FEE OF $1,877,417," ONLY SOME CLEAR AND CONVINCING INDICATION TO THE CONTRARY WOULD LEAD US TO THE CONCLUSION THAT THE SAME WORD IN THE NEXT SECTION WAS INTENDED TO COVER NOT ONLY THE FIXED FEE BUT THE CONTRACTOR'S COSTS, MADE REIMBURSABLE BY A SEPARATE ARTICLE OF THE CONTRACT. FINDING NO SUCH INDICATION EITHER WITHIN THE FOUR CORNERS OF THE INSTRUMENT OR IN ANY OF THE RECORD OF NEGOTIATIONS LEADING UP TO ITS EXECUTION, WE MUST CONCLUDE THAT THE WORD "COMPENSATION" MEANS THE CONTRACTOR'S FIXED FEE, BOTH IN SECTION 1 AND IN SECTION 2 OF ARTICLE II, AND THAT THE INTERPRETATION OF THE ADMINISTRATIVE OFFICE, NOWHERE EXPRESSED UNTIL MORE THAN A YEAR AFTER COMPLETION OF THE CONTRACT PROJECT AND FOUR YEARS AFTER EXECUTION OF THE PERTINENT DOCUMENT, IS WITHOUT SUBSTANTIAL FOUNDATION.

HOWEVER, THE RECORDS FAIL TO SUBSTANTIATE YOUR COMPUTATION OF A FINAL FEE OF $1,685,706.69. THE COST FIGURES PRESENTED BY YOU DO NOT AGREE WITH THE COSTS REPORTED BY THE ADMINISTRATIVE OFFICE, AND IT APPEARS THAT IT WOULD BE IMPOSSIBLE TO OBTAIN A RECONCILIATION OF THE DIFFERENCES EXCEPT BY A COMPLETE REAUDIT OF MORE THAN TWENTY THOUSAND INDIVIDUAL VOUCHERS, MANY OF WHICH IT WOULD NOW BE DIFFICULT, IF NOT IMPOSSIBLE, EVEN TO LOCATE.

IN THE CIRCUMSTANCES, THE BEST AVAILABLE EVIDENCE OF THE PROJECT COST IS THE COMPILATION BY THE BUREAU OF FEDERAL SUPPLY, CONSISTING OF A BOUND VOLUME OF NEARLY 500 PAGES OF VOUCHER LISTINGS CLASSIFIED BY TYPES OF EXPENDITURES AS MATERIAL, SERVICES, REIMBURSABLES, FIXED FEES, AND LICENSE AGREEMENTS. THE MAJOR PART OF THE DIFFERENCE BETWEEN THE AGGREGATE COST OF $67,971,218.64 SHOWN BY THAT RECORD AND THE $70,636,230.33 FIGURES STATED BY YOU MAY WELL BE IN THE ITEM OF FREIGHT COSTS, STATED BY YOU TO AMOUNT TO $4,428,476.85, SINCE IT APPEARS FROM A TREASURY DEPARTMENT REPORT THAT A GREAT PORTION OF THE FREIGHT BILLS PAID IN CONNECTION WITH THE PROJECT WERE NOT INCLUDED IN THE COMPILATION. INASMUCH AS YOU HAVE ELIMINATED THIS ITEM FROM THE FEE BASE, THIS DIFFERENCE IS THUS MINIMIZED.

YOU HAVE NOT IN YOUR COMPUTATION USED THE SAME CLASSIFICATION OF COSTS AS WAS MADE BY THE ADMINISTRATIVE AGENCY AND THERE IS, ACCORDINGLY, NO BASIS FOR EXACT COMPARISON. HOWEVER, ACCEPTING THE ADMINISTRATIVE FIGURES, AS WE MUST IN THE CIRCUMSTANCES, IT APPEARS THAT THE PROPER BASE FOR ADJUSTMENT OF THE FIXED FEE SHOULD INCLUDE MATERIAL COSTS, $54,705,879.39; REIMBURSABLES, $5,698,548.08; AND THE MATERIAL COST INVOLVED IN THE PURCHASE OF THE DOUGLAS REFINERIES, WHICH WAS INCLUDED BY THE ADMINISTRATIVE OFFICE IN THE ITEM OF "SERVICES" ALONG WITH OTHER COLLATERAL CONTRACTS. THIS AMOUNT IS REPORTED TO HAVE BEEN $1,900,000, LESS $115,393.69 REALIZED FROM SALES OF SURPLUS PROPERTY INCLUDED, OR $1,784,606.31. ON THIS BASIS, THE COST FIGURE BECOMES---

TABLE

MATERIAL $54,705,879.39

MATERIAL 5,698,548.08

COST OF DOUGLAS PLANT 1,784,606.31

TOTAL $62,189,033.78

APPLYING THE CONTRACT FORMULA, YOUR FIXED FEE OF $1,877,417 SHOULD BE REDUCED BY 2.68 PERCENT OF THE DIFFERENCE BETWEEN THIS COST FIGURE AND $70,000,000.

TABLE

ESTIMATED COST $70,000,000.00

ACTUAL COST 62,189,033.78

DIFFERENCE $ 7,810,966.22

TIMES .0268

REDUCTION OF FEE $ 209,333.89

ADJUSTED FEE 1,668,083.11

$ 1,877,417.00

THE ADJUSTED FEE IS SUBJECT TO A FURTHER REDUCTION OF $1,000 BY REASON OF A FINDING AND DECISION OF THE CONTRACTING OFFICER UNDER ARTICLE 3 OF AMENDMENT 4 ON ACCOUNT OF CERTAIN SUBCONTRACTS NOT INCLUDED IN SCHEDULE B.

THE AMOUNT OF FIXED FEE PAID TO YOU--- $1,682,621.57, AS REPORTED BOTH BY YOU AND BY THE ADMINISTRATIVE OFFICE--- WAS THEREFORE $15,538.46 IN EXCESS OF THE AMOUNT DUE. THE DIFFERENCE BETWEEN THAT AMOUNT AND THE AMOUNT OF $24,490 WITHHELD BY THIS OFFICE ON CERTIFICATE OF SETTLEMENT NO. 207153, DATED NOVEMBER 12, 1952, WILL BE REFUNDED TO YOU AS FULL AND FINAL SETTLEMENT OF FIXED FEE UNDER CONTRACT NO. DA-TPS-17000.