Validity of Method of Payment Provisions in AID Contracts

An opinion was requested on whether the method of payment provisions in two Agency for International Development (AID) contracts violated the prohibition against the cost-plus-a-percentage-of-cost system of contracting. The contracts were funded by the Bureau of International Narcotics Matters. They covered maintenance, supply, and related services necessary to operate aircraft provided to the Government of Burma for its Narcotics Control Program. AID negotiated the contracts sole-source at estimated costs of $1.5 million and $2 million. Additionally, both contracts are labeled fixed price technical service contracts. Under the contracts, certain items are fixed; but for other items, including materiel and equipment shipped to or from Burma and work performed by subcontractors, the contractors are paid actual costs and a management fee on a sliding scale. In response, GAO held that: (1) the fact that management fees were characterized as fixed fees based on different levels of effort did not prevent the contract from being contrary to statute since all elements of a cost-plus-a-percentage-of-cost system were otherwise present; (2) the fact that payment was at a predetermined dollar amount, rather than at a predetermined percentage rate, was not a meaningful distinction since the contractor's fee increased in direct proportion to actual costs incurred; and (3) administrative safeguards were not sufficient to save the contract from being construed as cost-plus-a-percentage-of-cost system of contracting. Accordingly, GAO found that the contracts were contrary to statute, and payment for the value of goods or services should be made on a quantum meruit basis.