B-159141, APR 23, 1971

B-159141: Apr 23, 1971

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CONTRACTS - TERMINATION - REFUND OF ALLOWABLE CONTRACT COSTS - SST DECISION OUTLINING THE CONDITIONS UPON WHICH THE GOVERNMENT SHOULD REFUND ALLOWABLE CONTRACT COSTS SHARED BY THE CONTRACTORS (BOEING COMPANY AND GENERAL ELECTRIC COMPANY) IN THE SITUATION WHERE THE CONTRACTS (FOR THE CIVILIAN SUPERSONIC AIRCRAFT DEVELOPMENT) ARE TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT. SECRETARY: REFERENCE IS MADE TO THE LETTER DATED MARCH 31. REQUESTING OUR DECISION WHETHER THE GOVERNMENT IS OBLIGATED UNDER ITS CONTRACTS FOR THE CIVILIAN SUPERSONIC AIRCRAFT DEVELOPMENT (SST) WITH THE BOEING COMPANY. TO REFUND ALLOWABLE CONTRACT COSTS SHARED BY THE CONTRACTORS IN THE SITUATION WHERE THE CONTRACTS ARE TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT.

B-159141, APR 23, 1971

CONTRACTS - TERMINATION - REFUND OF ALLOWABLE CONTRACT COSTS - SST DECISION OUTLINING THE CONDITIONS UPON WHICH THE GOVERNMENT SHOULD REFUND ALLOWABLE CONTRACT COSTS SHARED BY THE CONTRACTORS (BOEING COMPANY AND GENERAL ELECTRIC COMPANY) IN THE SITUATION WHERE THE CONTRACTS (FOR THE CIVILIAN SUPERSONIC AIRCRAFT DEVELOPMENT) ARE TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT.

TO MR. SECRETARY:

REFERENCE IS MADE TO THE LETTER DATED MARCH 31, 1971, WITH ENCLOSURE, FROM THE UNDER SECRETARY OF TRANSPORTATION, REQUESTING OUR DECISION WHETHER THE GOVERNMENT IS OBLIGATED UNDER ITS CONTRACTS FOR THE CIVILIAN SUPERSONIC AIRCRAFT DEVELOPMENT (SST) WITH THE BOEING COMPANY, (CONTRACT NUMBER FA-SS-67-3) AND THE GENERAL ELECTRIC COMPANY, (CONTRACT NUMBER FA- SS-67-7), TO REFUND ALLOWABLE CONTRACT COSTS SHARED BY THE CONTRACTORS IN THE SITUATION WHERE THE CONTRACTS ARE TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT.

ARTICLE IV, PARAGRAPH B.1 OF BOEING'S PHASE III CONTRACT (THE PROTOTYPE CONTRACT) PROVIDES THAT IF THE GOVERNMENT TERMINATES THE CONTRACT FOR ITS CONVENIENCE THE CONTRACTOR SHALL BE REFUNDED (A) ITS SHARE OF ALLOWABLE COSTS UNDER THE THREE RESEARCH AND DEVELOPMENT CONTRACTS (PHASE II) AND (B) ITS SHARE OF ALLOWABLE COSTS UNDER THE PHASE III CONTRACT LESS AN ALLOCABLE FEE CREDIT IN ACCORDANCE WITH CERTAIN PROVISIONS WHICH DEFINE THE GOVERNMENT'S MAXIMUM LIABILITY FOR REFUND OF SUCH COST SHARES.

THE TERM "ALLOWABLE COST" IS DEFINED IN CLAUSE 2(A) OF THE GENERAL PROVISIONS (GP) AS A COST WHICH THE CONTRACTING OFFICER DETERMINES IS IN ACCORDANCE WITH:

(I) SUBPART 1-15.2 OF PART 1-15 OF THE FEDERAL PROCUREMENT REGULATIONS AS IN EFFECT ON THE DATE OF THE CONTRACT WHICH ARE COST PRINCIPLES AND PROCEDURES GOVERNING THE ALLOWABILITY OF COSTS IN COST REIMBURSEMENT TYPE SUPPLY AND RESEARCH CONTRACTS WITH COMMERCIAL ORGANIZATIONS; AND

(II) THE TERMS OF THE CONTRACT.

CLAUSE GP-2(B) PROVIDES THAT THE CONTRACTOR MAY SUBMIT AN INVOICE OR PUBLIC VOUCHER AT DESIGNATED INTERVALS, SUPPORTED BY A STATEMENT OF COST INCURRED BY THE CONTRACTOR. CLAUSE GP-2(C) PROVIDES THAT THE GOVERNMENT SHALL MAKE PAYMENT ON THE INVOICE OR VOUCHER OF ALLOWABLE COSTS INCURRED AS APPROVED BY THE CONTRACTING OFFICER.

ARTICLE IV PROVIDES THAT THE ARRANGEMENT FOR THE ALLOWABLE COSTS SHALL BE SHARED BY THE GOVERNMENT AND THE CONTRACTOR WITH 80 PERCENT TO BE PAID BY THE GOVERNMENT AND 20 PERCENT TO BE PAID BY THE CONTRACTOR LESS A FEE CREDIT WHICH IS APPROXIMATELY 10 PERCENT, WHICH RESULTS IN A 90-10 PERCENT SHARING. THE FEE CREDIT APPLIES UNTIL COSTS REACH $625.5 MILLION WHICH IS THE COST INCENTIVE POINT OF THE CONTRACT. AT THAT POINT THE CONTRACTOR IS NO LONGER ENTITLED TO A FEE CREDIT AND THE SHARING ARRANGEMENT OF ALLOWABLE COSTS BECOMES 75 PERCENT FOR THE GOVERNMENT AND 25 PERCENT FOR THE CONTRACTOR. THE SHARING ARRANGEMENT PRESENTLY IN EFFECT IS 90 PERCENT FOR THE GOVERNMENT AND 10 PERCENT FOR THE CONTRACTOR SINCE THE COST INCENTIVE POINT OF THE CONTRACT WAS NOT REACHED ON THE DATE OF TERMINATION.

WE HAVE BEEN ADVISED THAT THE DEPARTMENT OF TRANSPORTATION ISSUED NOTICES OF TERMINATION FOR CONVENIENCE WITH RESPECT TO THE AIRFRAME AND ENGINE CONTRACTS ON MARCH 25, 1971. THE LANGUAGE OF ARTICLE IV, B.1 OF BOEING'S CONTRACT PROVIDES FOR REIMBURSEMENT OF THE CONTRACTOR'S SHARE OF ALLOWABLE COSTS UPON SUCH A TERMINATION FOR CONVENIENCE SUBJECT TO CERTAIN LIMITATIONS IN ARTICLE IV, B.5 AND ARTICLE IV, F.1 OF THE CONTRACT. UNDER THESE PROVISIONS THE GOVERNMENT'S MAXIMUM LIABILITY TO BOEING FOR REFUND OF ITS ALLOWABLE COST SHARE IS $52.145 MILLION.

THE CONTRACT WITH GE CONTAINS PROVISIONS SUBSTANTIALLY SIMILAR TO THE BOEING CONTRACT. UNDER THAT CONTRACT THE GOVERNMENT'S MAXIMUM LIABILITY FOR REFUND OF GE'S ALLOWABLE COST SHARE IS $33.185 MILLION.

THE $97.3 MILLION REQUESTED BY DOT INCLUDES THE GOVERNMENT'S COMBINED MAXIMUM COST SHARE LIABILITY TO THE CONTRACTORS AMOUNTING TO $85.33 MILLION AND APPROXIMATELY $12.0 MILLION IN TERMINATION COSTS TO CLOSE OUT THE SST PROGRAM. THESE COSTS INCLUDE SUCH ITEMS AS INVENTORY TRANSPORTATION, STORAGE AND DISPOSITION COSTS, CLAIMS FROM SUBCONTRACTORS, REIMBURSEMENT FOR AUDIT ASSISTANCE FROM THE DEFENSE CONTRACT AUDIT AGENCY, AND THE DEFENSE CONTRACT ADMINISTRATIVE SERVICES REGION, AND DOT'S IN- HOUSE EXPENSES ASSOCIATED WITH THE TERMINATION.

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