Skip to main content

B-168106, APR 4, 1975, 54 COMP GEN 824

B-168106 Apr 04, 1975
Jump To:
Skip to Highlights

Highlights

ASSUME RISK OF LOSS FOR CONTRACTOR-OWNED PROPERTY WHICH IS USED SOLELY IN PERFORMANCE OF GOVERNMENT CONTRACTS SINCE REIMBURSEMENT FOR LOSS OF PROPERTY ARISING DURING PERFORMANCE OF GOVERNMENT CONTRACT IS NECESSARY AND PROPER EXPENSE CHARGEABLE TO APPROPRIATION SUPPORTING GOVERNMENT CONTRACT. ETC. - CONTRACTOR'S PROPERTY - GOVERNMENT LIABILITY WHERE AMOUNT OF CONTRACTOR'S COMMERCIAL WORK IS INSIGNIFICANT WHEN COMPARED TO AMOUNT OF GOVERNMENT WORK AND GOVERNMENT AS PRACTICAL MATTER IS BEARING ENTIRE RISK OF LOSS OF CONTRACTOR'S PROPERTY IN THAT GOVERNMENT IS. NO COMPELLING REASON IS SEEN WHY THE GOVERNMENT MAY NOT. APPROPRIATIONS - OBLIGATION - CONTRACTS - CONTRACTOR'S EQUIPMENT - DAMAGE OR LOSS - GOVERNMENT INDEMNIFICATION BECAUSE OF STATUTORY PROHIBITIONS AGAINST ENTERING INTO OBLIGATIONS IN EXCESS OF APPROPRIATIONS CONTRACT MAY NOT PROVIDE FOR GOVERNMENT'S ASSUMPTION OF RISK OF LOSS OF GOVERNMENT CONTRACTOR'S EQUIPMENT AND FACILITIES UNLESS AVAILABLE APPROPRIATIONS ARE SUFFICIENT TO COVER GOVERNMENT'S MAXIMUM LIABILITY UNDER CONTRACT OR UNLESS CONTRACT LIMITS INDEMNITY PAYMENTS TO AVAILABLE APPROPRIATIONS AND PROVIDES THAT NOTHING THEREIN MAY BE CONSIDERED AS IMPLYING THAT CONGRESS WILL APPROPRIATE FUNDS TO MEET ANY DEFICIENCY. 42 COMP.

View Decision

B-168106, APR 4, 1975, 54 COMP GEN 824

APPROPRIATIONS - AVAILABILITY - EXPENSES INCIDENT TO SPECIFIC PURPOSES - NECESSARY EXPENSES GOVERNMENT AGENCY MAY, WITHIN APPROPRIATION LIMITS, ASSUME RISK OF LOSS FOR CONTRACTOR-OWNED PROPERTY WHICH IS USED SOLELY IN PERFORMANCE OF GOVERNMENT CONTRACTS SINCE REIMBURSEMENT FOR LOSS OF PROPERTY ARISING DURING PERFORMANCE OF GOVERNMENT CONTRACT IS NECESSARY AND PROPER EXPENSE CHARGEABLE TO APPROPRIATION SUPPORTING GOVERNMENT CONTRACT. B-168106 DATED JULY 3, 1974, MODIFIED. PROPERTY - PRIVATE - DAMAGE, LOSS, ETC. - CONTRACTOR'S PROPERTY - GOVERNMENT LIABILITY WHERE AMOUNT OF CONTRACTOR'S COMMERCIAL WORK IS INSIGNIFICANT WHEN COMPARED TO AMOUNT OF GOVERNMENT WORK AND GOVERNMENT AS PRACTICAL MATTER IS BEARING ENTIRE RISK OF LOSS OF CONTRACTOR'S PROPERTY IN THAT GOVERNMENT IS, IN ESSENCE, PAYING FULL INSURANCE PREMIUM UNDER ITS COST TYPE CONTRACT, NO COMPELLING REASON IS SEEN WHY THE GOVERNMENT MAY NOT, WITHIN APPROPRIATION LIMITS, AGREE TO ASSUME SUCH RISK OF LOSS. B 168106 DATED JULY 3, 1974, MODIFIED. APPROPRIATIONS - OBLIGATION - CONTRACTS - CONTRACTOR'S EQUIPMENT - DAMAGE OR LOSS - GOVERNMENT INDEMNIFICATION BECAUSE OF STATUTORY PROHIBITIONS AGAINST ENTERING INTO OBLIGATIONS IN EXCESS OF APPROPRIATIONS CONTRACT MAY NOT PROVIDE FOR GOVERNMENT'S ASSUMPTION OF RISK OF LOSS OF GOVERNMENT CONTRACTOR'S EQUIPMENT AND FACILITIES UNLESS AVAILABLE APPROPRIATIONS ARE SUFFICIENT TO COVER GOVERNMENT'S MAXIMUM LIABILITY UNDER CONTRACT OR UNLESS CONTRACT LIMITS INDEMNITY PAYMENTS TO AVAILABLE APPROPRIATIONS AND PROVIDES THAT NOTHING THEREIN MAY BE CONSIDERED AS IMPLYING THAT CONGRESS WILL APPROPRIATE FUNDS TO MEET ANY DEFICIENCY. 42 COMP. GEN. 708, OVERRULED, IN PART.

IN THE MATTER OF PROPOSED ASSUMPTION OF PROPERTY RISK ON REAL AND PERSONAL PROPERTY OWNED BY CERTAIN CONTRACTORS, APRIL 4, 1975:

THE DEPARTMENT OF THE NAVY (DEPARTMENT) REQUESTS RECONSIDERATION OF OUR DECISION OF JULY 3, 1974, B-168106, IN WHICH WE HELD THAT WE COULD NOT CONCUR IN THE DEPARTMENT'S PROPOSAL TO ASSUME COMPLETE RISK OF LOSS OF CONTRACTOR-OWNED REAL AND PERSONAL PROPERTY AT FACILITIES WHERE PRACTICALLY ALL CONTRACTOR'S WORK IS DONE FOR THE GOVERNMENT.

ONE OF THE CONTRACTORS FOR WHICH THE DEPARTMENT IS CONSIDERING SUCH PROPOSAL IS THE ELECTRIC BOAT DIVISION OF GENERAL DYNAMICS CORPORATION. OVER THE PAST 5 YEARS THE ELECTRIC BOAT DIVISION HAS RECEIVED PAYMENT OF $212,000 FROM THE GOVERNMENT FOR INSURANCE PREMIUMS TO COVER PROPERTY RISKS IN CONNECTION WITH CONTRACTOR-OWNED REAL AND PERSONAL PROPERTY, SUCH AS PLANT AND EQUIPMENT, LOCATED AT THE GROTON, CONNECTICUT, SHIPYARD. ACCORDING TO THE DEPARTMENT APPROXIMATELY 99 PERCENT OF THE ELECTRIC BOAT DIVISIONS' SALES ARE TO THE GOVERNMENT SO THAT THE GOVERNMENT IS, IN EFFECT, PAYING THE ENTIRE INSURANCE BILL.

OUR UNDERSTANDING OF THE DEPARTMENT'S PROPOSAL WAS THAT IT INTENDED TO ASSUME THE COMPLETE RISK OF LOSS TO GENERAL DYNAMICS PROPERTY AT THE SHIPYARD FACILITY IRRESPECTIVE OF WHETHER THE PROPERTY WAS BEING USED IN CONNECTION WITH THE CONTRACTOR'S GOVERNMENT WORK OR IN ITS OTHER COMMERCIAL ACTIVITIES. IN DENYING CONCURRENCE TO THAT PROPOSAL WE STATED:

*** THAT AN APPROPRIATION IS PROPERLY CHARGEABLE WITH ALL EXPENSES NECESSARY TO ACCOMPLISH THE OBJECT FOR WHICH MADE, UNLESS PARTICULAR ITEMS OF EXPENSE ARE SPECIFICALLY PROVIDED FOR BY SOME OTHER APPROPRIATION OR SPECIFICALLY PROVIDED FOR BY LAW. *** ALTHOUGH THE PROPERTY IN QUESTION IS USED FOR COMMERCIAL ACTIVITIES ONLY ONE PERCENT OF THE TIME, WE FAIL TO SEE HOW REIMBURSEMENT FOR LOSS OCCURRING DURING COMMERCIAL ACTIVITIES WOULD BE AN EXPENSE NECESSARY TO ACCOMPLISH ANY OF THE COMPANY'S GOVERNMENT CONTRACTS OR, CONSEQUENTLY, AN EXPENSE PROPERLY CHARGEABLE TO THE APPROPRIATIONS SUPPORTING THE CORPORATION'S GOVERNMENT CONTRACTS.

CONSEQUENTLY, AND SINCE WE ARE NOT GIVEN ANY ADVICE AS TO THE SPECIFIC APPROPRIATIONS THAT ARE CONTEMPLATED FOR PAYMENT OF SUCH LOSS, WE CANNOT CONCUR IN THE PROPOSAL TO ASSUME THE COMPLETE RISK OF LOSS TO THE CORPORATION'S PROPERTY IN THE ABSENCE OF EXPRESS STATUTORY AUTHORITY AUTHORIZING SUCH ASSUMPTION.

ABSENT EXPRESS STATUTORY AUTHORITY, WE FIND NO BASIS FOR THE ASSUMPTION BY A GOVERNMENT AGENCY OF THE RISK OF LOSS FOR A CONTRACTOR'S PROPERTY NOT BEING USED IN CONNECTION WITH GOVERNMENT BUSINESS.

THE DEPARTMENT BELIEVES IT MAY NOT HAVE SUFFICIENTLY DESCRIBED (IN ITS PRIOR LETTER) THE FACTUAL CIRCUMSTANCES WHICH WOULD PROMPT IT TO ASSUME THE RISK OF LOSS OF A CONTRACTOR'S PROPERTY. IN ITS REQUEST FOR RECONSIDERATION THE DEPARTMENT INDICATES THAT IT IS NOT PROPOSING TO ASSUME THE RISK OF LOSS OF CONTRACTOR-OWNED PROPERTY WHICH IS BEING USED STRICTLY FOR NON-GOVERNMENT COMMERCIAL CONTRACTS BUT IS LIMITING ITS ASSUMPTION OF RISK TO THE FOLLOWING:

*** FIRST, CONTRACTOR-OWNED PROPERTY USED SOLELY IN THE PERFORMANCE OF GOVERNMENT CONTRACTS; AND SECOND, CONTRACTOR-OWNED PROPERTY USED IN THE PERFORMANCE OF WORK WHICH IS INDISTINGUISHABLE AS BEING GOVERNMENT OR COMMERCIAL AND WHERE THE AMOUNT OF THE COMMERCIAL WORK IS INSIGNIFICANT IN COMPARISON TO THE AMOUNT OF THE GOVERNMENT WORK.

IN SUPPORT OF ITS PROPOSAL, THE DEPARTMENT STATES:

WE BOTH AGREE THAT THERE IS NO LEGAL BAR TO THE GOVERNMENT'S ASSUMPTION OF THE RISK OF LOSS OF CONTRACTOR-OWNED PROPERTY WHERE THE FACILITY IS DEVOTED ENTIRELY TO THE PERFORMANCE OF GOVERNMENT CONTRACTS. MOREOVER, WE ARE IN FULL AGREEMENT THAT THE GOVERNMENT MAY NOT ASSUME THE RISK OF LOSS OF CONTRACTOR-OWNED PROPERTY USED SOLELY IN THE PERFORMANCE OF COMMERCIAL BUSINESS. WE HAVE NO INTENTION OF ASSUMING SUCH A RISK.

ON THE OTHER HAND, THERE ARE INSTANCES WHERE CERTAIN CONTRACTOR PROPERTY IS USED IN THE PERFORMANCE OF BOTH GOVERNMENT AND COMMERCIAL WORK. OBVIOUSLY, TO THE EXTENT THAT SUCH WORK IS SEPARABLE THE GOVERNMENT MAY NOT ASSUME THE RISK OF LOSSES WHICH OCCUR DURING THE PERFORMANCE OF COMMERCIAL CONTRACTS. BUT WHERE THE GOVERNMENT WORK IS OVERWHELMINGLY PREPONDERANT AND IT IS NOT POSSIBLE TO SEGREGATE THE COMMERCIAL WORK FROM THE GOVERNMENT WORK, I.E., THE LOSS COULD NOT BE IDENTIFIED AS CHARGEABLE TO EITHER A GOVERNMENT OR COMMERCIAL CONTRACT, WE FEEL THERE IS NO BAR TO GOVERNMENT ASSUMPTION OF THE TOTAL RISK OF LOSS. AS A PRACTICAL MATTER UNDER THESE CIRCUMSTANCES WE PRESENTLY ARE BEARING THE TOTAL RISK OF LOSS. INSURANCE PREMIUMS AND LOSSES WHICH ARE DEDUCTIBLE UNDER THE CONTRACTOR'S INSURANCE POLICIES ARE INCLUDED IN HIS OVERHEAD. DUE TO THE OVERWHELMING PROPORTION OF GOVERNMENT WORK TO COMMERCIAL WORK (I.E. 99% GOVERNMENT TO 1% COMMERCIAL IN THE CASE OF THE ELECTRIC BOAT DIVISION OF GENERAL DYNAMICS CORP), THE CONTRACTOR'S OVERHEAD IS ALMOST ENTIRELY ALLOCATED TO GOVERNMENT CONTRACTS. SINCE THE GOVERNMENT IS, IN ESSENCE, PAYING FOR THE FULL INSURANCE PREMIUM THERE APPEARS NO SOUND BUSINESS REASON WHY WE SHOULD NOT ASSUME THE TOTAL RISK OF LOSS. ON THE CONTRARY, UNDER THESE CIRCUMSTANCES, WE THINK WE WOULD BE REMISS IF WE FAILED TO DO SO. MOREOVER, IN THE LIMITED CIRCUMSTANCES WHICH WE HAVE DESCRIBED THERE IS NO LEGAL OBJECTION, IN OUR OPINION, TO THE GOVERNMENT ASSUMPTION OF THE RISK.

THUS, IN THE TWO SITUATIONS SET FORTH ABOVE THE DEPARTMENT URGES THAT "REIMBURSEMENT FOR LOSSES IS SURELY AN EXPENSE NECESSARY TO ACCOMPLISH THE GOVERNMENT CONTRACT."

SUBJECT TO WHAT IS HEREINAFTER SET FORTH, WE AGREE THAT THE GOVERNMENT PROPERLY MAY ASSUME THE RISK FOR CONTRACTOR-OWNED PROPERTY WHICH IS USED SOLELY IN THE PERFORMANCE OF GOVERNMENT CONTRACTS, IF IT IS ADMINISTRATIVELY DETERMINED TO BE IN THE INTEREST OF THE GOVERNMENT TO DO SO, AND IN SUCH A CIRCUMSTANCE, REIMBURSEMENT FOR LOSS OF PROPERTY ARISING DURING PERFORMANCE OF A GOVERNMENT CONTRACT WOULD BE A NECESSARY AND PROPER EXPENSE PROPERLY CHARGEABLE TO THE APPROPRIATION SUPPORTING THE GOVERNMENT'S CONTRACTS.

ALSO, AFTER CAREFUL RECONSIDERATION OF OUR ABOVE-CITED DECISION OF JULY 3, 1974, IT IS NOW OUR VIEW THAT WHERE THE AMOUNT OF A CONTRACTOR'S COMMERCIAL WORK IS SO INSIGNIFICANT WHEN COMPARED TO THE AMOUNT OF THE CONTRACTOR'S GOVERNMENT WORK THAT THE GOVERNMENT AS A PRACTICAL MATTER IS BEARING THE ENTIRE RISK OF LOSS OF CONTRACTOR-OWNED PROPERTY BY IN ESSENCE PAYING THE FULL INSURANCE PREMIUMS, THE GOVERNMENT MAY ASSUME THE RISK OF SUCH LOSS, IF IT IS ADMINISTRATIVELY DETERMINED TO BE IN THE INTEREST OF THE GOVERNMENT TO DO SO, SUBJECT, HOWEVER, TO WHAT IS SET FORTH BELOW. THE EXTENT THAT B-168106, JULY 3, 1974, MAY BE CONTRARY TO THE HOLDING HEREIN IT WILL NO LONGER BE FOLLOWED.

AS YOU NO DOUBT ARE AWARE, WE HAVE IN A NUMBER OF CASES DISAPPROVED OF AGREEMENTS TO INDEMNIFY USUALLY ON THE BASES OF 31 U.S.C. 627, 31 U.S.C. 665 AND 41 U.S.C. 11, FOR THE REASON THAT THE AGREEMENTS WOULD SUBJECT THE UNITED STATES TO A CONTINGENT LIABILITY IN AN INDETERMINATE AMOUNT WHICH COULD EXCEED THE APPROPRIATION. SEE 7 COMP. GEN. 507 (1928) AND 16 ID. 803 (1937). WHILE IN THE SITUATIONS REFERRED TO IN THE DEPARTMENT'S LETTER THE MAXIMUM INDEMNITY LIABILITY IS APPARENTLY DETERMINABLE (THE FAIR MARKET VALUE OF THE CONTRACTOR'S PROPERTY), IT IS OF COURSE CONCEIVABLE THAT THE INDEMNITY PAYMENTS COULD BE OF SUCH MAGNITUDE AS TO EXCEED AVAILABLE APPROPRIATIONS. IN SUCH CASE THERE WOULD BE NEED FOR DEFICIENCY APPROPRIATIONS TO FULLY COVER PROPERTY LOSSES. HOWEVER, THE DEPARTMENT MAY NOT ASSUME OBLIGATIONS TO MEET SUCH LOSSES BECAUSE OF THE PROHIBITION AGAINST ENTERING INTO OBLIGATIONS IN EXCESS OF THE FUNDS AVAILABLE. SEE 31 U.S.C. 665(A) AND 41 U.S.C. 11. ACCORDINGLY, ANY CONTRACTS PROVIDING FOR ASSUMPTION OF RISK BY THE GOVERNMENT FOR CONTRACTOR-OWNED PROPERTY MUST CLEARLY PROVIDE THAT: (1) IN THE EVENT THAT THE GOVERNMENT HAS TO PAY FOR LOSSES, SUCH PAYMENTS WILL NOT ENTAIL EXPENDITURES WHICH EXCEED APPROPRIATIONS AVAILABLE AT THE TIME OF THE LOSSES; AND (2) NOTHING IN THE CONTRACT MAY BE CONSIDERED AS IMPLYING THAT THE CONGRESS WILL, AT A LATER DATE, APPROPRIATE FUNDS SUFFICIENT TO MEET DEFICIENCIES. ABSENT INCLUSION OF PROVISIONS ALONG THESE LINES, THE DEPARTMENT WILL HAVE TO OBTAIN LEGISLATIVE EXEMPTION FROM THE APPLICATION OF THE STATUTORY PROHIBITIONS AGAINST OBLIGATIONS EXCEEDING APPROPRIATIONS. SEE 31 U.S.C. 627. CF. 10 U.S.C. 2354. TO THE EXTENT OUR ANSWER TO QUESTION THREE IN 42 COMP. GEN. 708 (1963) IS CONTRARY TO WHAT IS SET FORTH IN THIS PARAGRAPH, IT IS OVERRULED.

GAO Contacts

Office of Public Affairs