B-97638, JUL 2, 1951

B-97638: Jul 2, 1951

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WITH THE REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT ON THE VOUCHER IS AUTHORIZED. SUBSEQUENTLY WAS DEDUCTED FROM OTHER SUMS PAYABLE TO THE CONTRACTOR ON VOUCHER 167490 OF YOUR JUNE 1950 ACCOUNT. THE AMOUNTS INVOLVED AND THE BASIS FOR EXCEPTIONS THERETO WERE SET FORTH IN THE SAID LETTER OF JUNE 8. WHICH WAS ALREADY OPERATIVE. ARE NOT PROPERLY CHARGEABLE THERETO. ACCOUNT 500-91 DIRECTORS' FEES $ 172.32 ACCOUNT 500-92 AUDIT FEES 239.70 "THE SERVICES RENDERED ARE OF A CORPORATE NATURE AND RELATE PRIMARILY TO THE MANAGEMENT. ARE THEREFORE COVERED BY THE FIXED COMPENSATION. WERE DISCUSSED IN A REPORT BY THIS OFFICE. A COPY OF WHICH WAS FORWARDED WITH YOUR FIRST INDORSEMENT OF MARCH 27.

B-97638, JUL 2, 1951

PRECIS-UNAVAILABLE

COLONEL W. C. STEIGER, F.D., UNITED STATES ARMY:

THERE HAS BEEN RECEIVED BY SIXTH INDORSEMENT DATED FEBRUARY 12, 1951, AND SECOND INDORSEMENT DATED APRIL 10, 1951, FROM THE CHIEF OF FINANCE, YOUR FIRST INDORSEMENTS DATED SEPTEMBER 19, 1950, AND MARCH 27, 1951, TRANSMITTING AUDIT VOUCHER 177 PROPOSING PAYMENT IN THE AMOUNT OF $2,914.15 TO IRVING TRUST COMPANY, ASSIGNEE OF EDO CORPORATION, COST-PLUS- A-FIXED-FEE CONTRACTOR UNDER CONTRACT W-33-038 AC-18819 DATED SEPTEMBER 30, 1947, WITH THE REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT ON THE VOUCHER IS AUTHORIZED.

THE AMOUNT OF THE VOUCHER HAD BEEN PREVIOUSLY REIMBURSED TO THE CONTRACTOR, BUT SUBSEQUENTLY WAS DEDUCTED FROM OTHER SUMS PAYABLE TO THE CONTRACTOR ON VOUCHER 167490 OF YOUR JUNE 1950 ACCOUNT, AS: THE RESULT OF A LETTER OF EXCEPTION DATED JUNE 8, 1950, STATED AGAINST VOUCHER 58723, SEPTEMBER 1949 ACCOUNT OF J. C. KOVARIK, BY THE AUDIT DIVISION OF THE GENERAL ACCOUNTING OFFICE. THE AMOUNTS INVOLVED AND THE BASIS FOR EXCEPTIONS THERETO WERE SET FORTH IN THE SAID LETTER OF JUNE 8, 1950, AS FOLLOWS:

"1. ACCOUNT 201-77 SALES PROPOSAL & BIDDING EXPENSE $2,502.13

"COST INCURRED DURING THE CALENDAR YEAR 1948 IN CONNECTION WITH THE PREPARATION OF ENGINEERING DATA, BLUEPRINTS, COST ESTIMATES, ETC., FOR THE PURPOSE OF BIDDING AND QUOTING ON OTHER PROPOSED COST REIMBURSEMENT AND FIXED PRICE GOVERNMENT CONTRACTS, DO NOT RELATE TO THE SUBJECT CONTRACT DATED SEPTEMBER 30, 1947, WHICH WAS ALREADY OPERATIVE, AND ARE NOT PROPERLY CHARGEABLE THERETO. SEE B-73728, 6/10/48

"2. ACCOUNT 500-91 DIRECTORS' FEES $ 172.32

ACCOUNT 500-92 AUDIT FEES 239.70

"THE SERVICES RENDERED ARE OF A CORPORATE NATURE AND RELATE PRIMARILY TO THE MANAGEMENT, SUPERVISION, AND/OR CONDUCT OF THE CPFF CONTRACT RATHER THAN THE PRODUCTIVE END OF THE WORK WHICH MAY PROPERLY BE CONSIDERED OVERHEAD EXPENSE ALLOCABLE TO THE CONTRACT, AND ARE THEREFORE COVERED BY THE FIXED COMPENSATION. SEE B-70178, 1/7/48.

TOTAL AMOUNT QUESTIONED - $2,914.15"

THE ABOVE ITEMS, TOGETHER WITH SIMILAR ITEMS UNDER SEVERAL NAVY CONTRACTS WITH THE SAME CONTRACTOR, WERE DISCUSSED IN A REPORT BY THIS OFFICE, B- 97638, OCTOBER 25, 1950, TO HONORABLE JOHN SPARKMAN, CHAIRMAN OF THE SELECT SMALL BUSINESS COMMITTEE, UNITED STATES SENATE, A COPY OF WHICH WAS FORWARDED WITH YOUR FIRST INDORSEMENT OF MARCH 27, 1951. IN SUCH REPORT IT WAS STATED THAT THE EXCEPTION TO THE PAYMENT OF THE AMOUNT CLAIMED AS DIRECTORS' FEES WOULD BE REMOVED. ACCORDINGLY, IN VIEW OF SUCH DETERMINATION THAT ITEM NEED NOT BE DISCUSSED FURTHER AT THIS TIME.

TRANSMITTED WITH SECOND INDORSEMENT DATED APRIL 10, 1951, IS A COPY OF A LETTER DATED JANUARY 15, 1951, FROM THE CONTRACTOR TO THE CHIEF, NEW YORK AIR FORCE PROCUREMENT FIELD OFFICE, AIR MATERIAL COMMAND, IN WHICH IT IS STATED, AMONG OTHER THINGS, IN REGARD TO THE ITEM "SALES PROPOSAL AND BIDDING EXPENSE," THAT THE GENERAL ACCOUNTING OFFICE EXCEPTION IMPLIES THAT BIDDING EXPENSES INCURRED AFTER A CONTRACT IS IN OPERATION ARE NOT RELATED TO THE CONTRACT; THAT THE FACTS ARE THAT THE CONTRACTS INVOLVED (AND ALL SUCH CONTRACTS AS A REGULAR PRACTICE) WERE SUBJECT TO NUMEROUS AMENDMENTS AND CHANGES REQUIRING CONTINUAL BIDDING AND NEGOTIATION THROUGHOUT THEIR PERIOD OF PERFORMANCE; AND THAT THE CONTRACTING OFFICER HAS, IN WRITING, APPROVED TO THIS CONTRACTOR THE USE OF STANDARD ACCOUNTING PRACTICE WHICH INVOLVES THE APPLICATION OF CURRENT BIDDING EXPENSES TO CURRENT OPERATIONS ON THE BASIS OF PROPORTIONATE MANUFACTURING COST OF GOVERNMENT CONTRACTS.

ALSO TRANSMITTED WITH SECOND INDORSEMENT OF APRIL 10, 1951, IS A COPY OF FIRST INDORSEMENT DATED JANUARY 17, 1951, FROM THE NAVY COST INSPECTOR AT EDO CORPORATION TO THE NEW YORK AIR FORCE PROCUREMENT FIELD OFFICE, AIR MATERIAL COMMAND, IN WHICH HE STATES, IN REGARD TO THE ITEM "SALES PROPOSAL AND BIDDING EXPENSE," THAT THE DEPARTMENTS OF THE AIR FORCE AND NAVY HAVE APPROVAL OF THE CONTRACTOR'S ACCOUNTING POLICIES AND METHODS OF COST DISTRIBUTION.

IN FOURTH INDORSEMENT DATED DECEMBER 29, 1950, FROM THE DIRECTOR, PROCUREMENT AND INDUSTRIAL PLANNING, WRIGHT-PATTERSON AIR FORCE BASE, TO THE DIRECTOR OF FINANCE, WASHINGTON, D.C., TRANSMITTED WITH SIXTH INDORSEMENT OF FEBRUARY 12, 1951, IT IS STATED THAT INFORMATION IN THE DOCUMENTED FILE INDICATES THAT THE CONTRACTOR WAIVED THIS TYPE OF BIDDING EXPENSE FOR THE FISCAL YEARS OF 1946 AND 1947 INASMUCH AS IT WAS IN WHAT IT CONSIDERED TO BE A FAVORABLE TAX POSITION, AND THAT IN THIS CONNECTION THIS HEADQUARTERS DOES NOT CONSIDER THAT THE CONTRACTOR IS OBLIGATED TO WAIVE THE EXPENSE FOR THE FISCAL YEAR 1948.

SECTION 26.9(G)(2) OF T.D. 5000, WHICH IS INCORPORATED BY REFERENCE IN THE SUBJECT CONTRACT, PROVIDES AS FOLLOWS:

"(2) BIDDING AND GENERAL SELLING EXPENSES.-- BIDDING AND GENERAL SELLING EXPENSES WHICH BY REFERENCE TO ALL THE PERTINENT FACTS AND CIRCUMSTANCES REASONABLY CONSTITUTE A PART OF THE COST OF PERFORMING A CONTRACT OR SUBCONTRACT. THE TREATMENT OF BIDDING AND GENERAL SELLING EXPENSES AS A PART OF GENERAL EXPENSES IN ACCORDANCE WITH THIS PARAGRAPH IS IN LIEU OF ANY DIRECT CHARGES WHICH OTHERWISE MIGHT BE MADE FOR SUCH EXPENSES. THE TERM 'BIDDING EXPENSES' AS USED IN THIS SECTION INCLUDES ALL EXPENSES IN CONNECTION WITH PREPARING AND SUBMITTING BIDS."

PARAGRAPH (A) OF SECTION 26.9 OF T.D. 5000 STATES THAT THE COST OF PERFORMING A CONTRACT SHALL CONSIST OF THE DIRECT COSTS INCURRED BY THE CONTRACTOR, PLUS THE PROPER PROPORTION OF ANY INDIRECT COSTS, WHICH ARE "INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT," AND PARAGRAPH (J) THEREOF PROVIDES THAT "ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT SHALL BE ELIMINATED FROM THE AMOUNT ALLOCATED."

THE SUPPLEMENTAL AGREEMENTS AND CHANGE ORDERS TO THE SUBJECT CONTRACT SHOW THAT ADDITIONAL WORK WAS AUTHORIZED WHICH APPARENTLY REQUIRED CONTINUAL BIDDING AND NEGOTIATION AS STATED BY THE CONTRACTOR IN ITS LETTER OF JANUARY 15, 1951. ACCORDINGLY, AND SINCE THE CONTRACTING OFFICER HAS APPROVED THIS CONTRACTOR'S USE OF THE STANDARD ACCOUNTING PRACTICE WHICH INVOLVES THE APPLICATION OF CURRENT BIDDING EXPENSES TO CURRENT OPERATIONS ON THE BASIS OF PROPORTIONATE MANUFACTURING COST OF GOVERNMENT CONTRACTS, THE AMOUNT ALLOCATED TO THE CONTRACT MAY NOW BE CONSIDERED AS "INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT" AND, THEREFORE, REIMBURSABLE UNDER THE "BIDDING AND GENERAL SELLING EXPENSE" PROVISION OF PARAGRAPH (G)(2) OF SECTION 26.9 OF T.D. 5000, QUOTED ABOVE.

WITH RESPECT TO THE ITEM "AUDIT FEES" IT WAS STATED IN THE REFERRED TO REPORT OF OCTOBER 25, 1950, THAT WHILE THIS OFFICE WOULD NOT BE REQUIRED TO OBJECT TO REIMBURSEMENT TO THE CONTRACTOR FOR THAT PORTION OF THE SUM SHOWN TO REPRESENT REGULAR AUDITING EXPENSES AS DISTINGUISHED FROM THE SERVICES RENDERED IN CONNECTION WITH THE PREPARATION OF TAX RETURNS, THE RECORD CONTAINED NO BASIS ON WHICH SUCH PORTION COULD BE DETERMINED. HOWEVER, IT NOW IS STATED BY THE NAVY COST INSPECTOR THAT THE PUBLIC ACCOUNTANTS HAD REVIEWED THEIR BILLING AND COST OF ANNUAL AUDIT OF 1948 AND HAD DETERMINED THAT OF THE TOTAL AMOUNT OF $239.70 INVOLVED, ONLY $26.05 PERTAINED TO TAX MATTERS, AND THE BALANCE OF $213.65 REPRESENTED ANNUAL AUDIT EXPENSES. IN VIEW OF THE FOREGOING, SUCH LATTER AMOUNT NOW MAY BE CONSIDERED AS REIMBURSABLE UNDER THE CONTRACT.

ACCORDINGLY, THE INSTANT VOUCHER, LESS THE SUM OF $26.05, MAY BE CERTIFIED FOR PAYMENT, IF OTHERWISE CORRECT.

THE VOUCHER, TOGETHER WITH SUPPORTING PAPERS, IS RETURNED HEREWITH.