B-24602, JULY 10, 1942, 22 COMP. GEN. 14

B-24602: Jul 10, 1942

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CONTRACTS - COST-PLUS - FIXED-FEE ADJUSTMENTS BECAUSE OF SUBCONTRACTING WHERE WORK WHICH IS SPECIFICALLY REQUIRED BY A COST-PLUS-A-FIXED-FEE CONTRACT. TO BE PERFORMED BY THE PRIME CONTRACTOR'S OWN FORCES IS SUBCONTRACTED ON A LUMP SUM OR UNIT PRICE BASIS. NO REDUCTION IN THE FIXED FEE IS REQUIRED IF THE PARTIES DEFINITELY CONTEMPLATED AT THE TIME OF NEGOTIATION. WHETHER A REDUCTION SHOULD BE MADE IN THE FEE STIPULATED IN A COST- PLUS/A/FIXED-FEE CONTRACT BECAUSE OF THE SUBCONTRACTING OF WORK DURING THE COURSE OF PERFORMANCE IS NOT FOR DETERMINATION UNTIL THE CONTRACT IS COMPLETED AND THE EXTENT OF THE SUBCONTRACTING WHICH ACTUALLY TOOK PLACE IS COMPARED AND CONSIDERED IN CONNECTION WITH THE AMOUNT OF SUBCONTRACTING THE PARTIES CONTEMPLATED MIGHT TAKE PLACE AT THE TIME THE CONTRACT WAS NEGOTIATED AND WITH RESPECT TO WHICH THE FIXED FEE WAS ORIGINALLY AGREED UPON.

B-24602, JULY 10, 1942, 22 COMP. GEN. 14

CONTRACTS - COST-PLUS - FIXED-FEE ADJUSTMENTS BECAUSE OF SUBCONTRACTING WHERE WORK WHICH IS SPECIFICALLY REQUIRED BY A COST-PLUS-A-FIXED-FEE CONTRACT, OR CONTEMPLATED BY THE PARTIES AT THE TIME OF NEGOTIATION, TO BE PERFORMED BY THE PRIME CONTRACTOR'S OWN FORCES IS SUBCONTRACTED ON A LUMP SUM OR UNIT PRICE BASIS, THE PRIME CONTRACTOR'S FIXED FEE SHOULD BE REDUCED BY AN AMOUNT AT LEAST EQUAL TO THE SUBCONTRACTOR'S PROFIT, BUT NO REDUCTION IN THE FIXED FEE IS REQUIRED IF THE PARTIES DEFINITELY CONTEMPLATED AT THE TIME OF NEGOTIATION, OR THE CONTRACT SPECIFICALLY PROVIDED FOR, THE SUBLETTING OF SUCH WORK. WHETHER A REDUCTION SHOULD BE MADE IN THE FEE STIPULATED IN A COST- PLUS/A/FIXED-FEE CONTRACT BECAUSE OF THE SUBCONTRACTING OF WORK DURING THE COURSE OF PERFORMANCE IS NOT FOR DETERMINATION UNTIL THE CONTRACT IS COMPLETED AND THE EXTENT OF THE SUBCONTRACTING WHICH ACTUALLY TOOK PLACE IS COMPARED AND CONSIDERED IN CONNECTION WITH THE AMOUNT OF SUBCONTRACTING THE PARTIES CONTEMPLATED MIGHT TAKE PLACE AT THE TIME THE CONTRACT WAS NEGOTIATED AND WITH RESPECT TO WHICH THE FIXED FEE WAS ORIGINALLY AGREED UPON. THE AMOUNT, IF ANY, THAT SHOULD BE DEDUCTED FROM THE FEE OF A COST PLUS-A -FIXED-FEE CONTRACTOR BECAUSE OF THE SUBCONTRACTING OF WORK IN ADDITION TO THAT CONTEMPLATED AT THE TIME OF NEGOTIATING THE PRIME CONTRACT IS, IN THE FIRST INSTANCE, FOR DETERMINATION BY THE CONTRACTING OFFICER, BUT IT IS THE DUTY OF THIS OFFICE, IN AUDITING VOUCHERS COVERING PAYMENTS UNDER THE CONTRACT, TO INQUIRE INTO THE REASONABLENESS OF THE DETERMINATION. IN THE NEGOTIATION OF A COST-PLUS-A-FIXED-FEE CONTRACT, CARE SHOULD BE EXERCISED TO DETERMINE INSOFAR AS POSSIBLE WHAT PART OF THE CONTRACT WORK IS TO BE PERFORMED BY THE PRIME CONTRACTOR, WHAT PART DEFINITELY IS TO BE SUBCONTRACTED AND WHAT PART MAY BE THE SUBJECT OF FURTHER SUBCONTRACTING, AND A PROVISION SETTING FORTH THE UNDERSTANDING OF THE PARTIES IN REGARD TO THESE MATTERS AND THAT THE CONTRACTOR'S FEE WAS FIXED ON SUCH BASIS SHOULD BE INCORPORATED INTO THE PRIME CONTRACT. IF DURING THE COURSE OF PERFORMING A COST-PLUS-A-FIXED-FEE CONTRACT IT IS DETERMINED THAT IT WOULD BE IN THE GOVERNMENT'S INTEREST TO SUBCONTRACT PORTIONS OF THE WORK NOT DEFINITELY INTENDED TO BE SUBCONTRACTED WHEN THE PRIME CONTRACT WAS NEGOTIATED AND THE CONTRACTOR'S FEE FIXED, A REPORT OF THE FACTS UPON WHICH SUCH DETERMINATION WAS BASED, TOGETHER WITH THE CONTRACTING OFFICER'S APPROVAL OF THE SUBCONTRACTS AND A STATEMENT OF HIS DETERMINATION AS TO WHAT ADJUSTMENT, IF ANY, SHOULD BE MADE IN THE FIXED FEE AND OF THE FACTS ON WHICH THAT DETERMINATION IS BASED, SHOULD BE ATTACHED TO COPIES OF THE SUBCONTRACTS WHEN FORWARDED TO THIS OFFICE.

COMPTROLLER GENERAL WARREN TO THE FEDERAL WORKS ADMINISTRATOR, JULY 10, 1942:

I HAVE YOUR LETTER OF JUNE 30, 1942, AS FOLLOWS:

RECEIPT IS ACKNOWLEDGED OF YOUR LETTER OF APRIL 7, 1942 (B-24602), IN WHICH YOU CONCLUDE THAT YOU ARE "UNABLE TO AUTHORIZE THE PAYMENT OF THE BALANCE OF $3,091.67 TO THE CONTRACTOR,"AS PROPOSED IN OUR LETTER OF MARCH 12, AND ALSO THAT YOU "HAVE TO ADVISE THAT CREDIT WILL BE WITHHELD BY THIS (YOUR) OFFICE ON VOUCHERS MAKING REIMBURSEMENT TO THE CONTRACTOR OF AMOUNTS WHICH ARE PAID TO SUBCONTRACTORS UNDER LUMP SUM OR UNIT PRICE CONTRACTS UNLESS THERE BE A SATISFACTORY SHOWING THATA PROPORTIONATE REDUCTION HAS BEEN MADE IN THE CONTRACTOR'S FIXED FEE.'

SUPPLEMENT C TO THE MACEVOY CONTRACT PROVIDED FOR $186,954.36 OF ADDITIONAL WORK FOR WHICH THE CONTRACTOR WAS PAID A FIXED FEE OF $8,910. OF THIS SUM $87,875 OF THE WORK WAS SUBCONTRACTED. IN DETERMINING THE FIXED FEE, IT IS SUBMITTED THAT DUE CONSIDERATION WAS GIVEN TO THE FACT THAT A LARGE PORTION OF THIS WORK WAS TO BE SUBCONTRACTED. YOUR ATTENTION IS DIRECTED TO THE FACT THAT IF YOU COMPUTE 6 PERCENT OF THE COST OF THE WORK DONE BY THE PRIME CONTRACTOR WITH HIS OWN FORCES AND SUBTRACT THE RESULTING FIGURE FROM THE FIXED FEE PROVIDED BY SUPPLEMENT C, YOU WILL FIND THAT THERE WAS PAID THE PRIME CONTRACTOR FOR HIS WORK OF NEGOTIATING AND SUPERVISING THE SUBCONTRACTS THE SUM OF $2,965.24 OR A PERCENTAGE OF 3.37, WHICH IS SUBSTANTIALLY LESS THAN 6 PERCENT.

THE PAYMENT OF AN ADDITIONAL FIXED FEE UPON WORK PERFORMED BY JOSEPH SHUR, THE PLUMBING CONTRACTOR, WILL NOT VIOLATE THE PROVISION OF THE SUBSTITUTED SECTION 5 OF ADDENDUM 1, WHICH DS,"SUBJECT TO THE PRIOR WRITTEN APPROVAL OF THE CONTRACTING OFFICER THE CONTRACTOR MAY AWARD SUBCONTRACTS FOR ANY PORTION OF THE WORK WITH THE EXCEPTION OF PLUMBING WORK.' ( ITALICS SUPPLIED.)

ORIGINALLY IT WAS CONTEMPLATED THAT THE WPA SHOULD DO THE PLUMBING WORK OUTSIDE OF THE BUILDINGS. AS A RESULT OF PRESSURE BY LABOR UNIONS, IT WAS DETERMINED THAT WPA EMPLOYEES COULD NOT DO ANY WORK WHICH WAS CUSTOMARILY DONE BY UNION PLUMBERS. ACCORDINGLY, ARRANGEMENTS WERE MADE WITH THE MACEVOY COMPANY TO SUBCONTRACT AND SUPERVISE THIS PLUMBING WORK. THE WPA DUG THE DITCHES, THE PLUMBING WORK WAS DONE BY THE MACEVOY COMPANY ACTING THROUGH ITS SUBCONTRACTOR, JOSEPH SHUR, AND THE DITCHES WERE REFILLED BY THE WPA. THUS THIS ADDITIONAL WORK DONE BY SHUR COULD NOT HAVE BEEN CONTEMPLATED.

IT IS SUBMITTED THAT SUPPLEMENT C ITSELF SHOWS THAT WHEN THE FIXED FEE WAS DETERMINED, DUE CONSIDERATION WAS GIVEN TO THE FACT THAT A SUBSTANTIAL PORTION OF THIS WORK WAS TO BE SUBCONTRACTED. THIS SUPPLEMENT WAS DRAFTED AND THE ADDITIONAL FEE FIXED THROUGH NEGOTIATION AFTER THE WORK WAS PERFORMED. IT IS BELIEVED THAT NO DECISION OF YOURS HOLDS THAT NO PAYMENT CAN BE MADE TO A PRIME CONTRACTOR FOR HIS WORK IN NEGOTIATING AND SUPERVISING SUBCONTRACTS. IN THE PAST WORLD WAR, THE CONTRACTOR'S PERCENTAGE ON COST-PLUS-A-PERCENTAGE CONTRACTS WAS COMPUTED ON THE BASIS OF THE WHOLE COST OF THE WORK, INCLUDING THAT DONE BY THE PRIME CONTRACTOR'S OWN FORCES AND THAT DONE BY THE SUBCONTRACTOR. HOWEVER, A LOWER PERCENTAGE WAS PAID THE CONTRACTOR UPON THE COST OF THE WORK SUBCONTRACTED. A SIMILAR METHOD WAS HERE FOLLOWED.

WE REALIZE THAT STATEMENTS BY COLONEL WESTBROOK, THE CONTRACTING OFFICER, WOULD BE BETTER EVIDENCE THAN THE STATEMENTS MADE HEREIN. HOWEVER, THE COLONEL IS NO LONGER WITH THE FEDERAL WORKS AGENCY, AND IS NOW BELIEVED TO BE SERVING IN AUSTRALIA. UNDER THE CIRCUMSTANCES, IT IS HOPED THAT THE EVIDENCE WHICH WE ARE SUBMITTING WILL BE ACCEPTABLE.

YOUR STATEMENT THAT YOU HAVE TO ADVISE THAT CREDIT WILL BE WITHHELD BY YOUR OFFICE ON VOUCHERS MAKING REIMBURSEMENT TO THE CONTRACTOR OF AMOUNTS WHICH ARE PAID TO A SUBCONTRACTOR UNDER LUMP SUM OR UNIT PRICE CONTRACTS UNLESS THERE IS A SATISFACTORY SHOWING THAT A PROPORTIONATE REDUCTION HAS BEEN MADE IN THE CONTRACTOR'S FIXED FEE HAS CAUSED US SOME CONCERN. THE MACEVOY CONTRACT YOUR ATTENTION IS DIRECTED TO THE FACT THAT ALTHOUGH THE FIXED FEE EXCEEDS 6 PERCENT OF THE COST OF THE WORK DONE BY THE PRIME CONTRACTOR, THIS FEE IS SUBSTANTIALLY LESS THAN 6 PERCENT OF THE ESTIMATED COST OF THE WORK. IF YOU WILL COMPUTE 6 PERCENT OF THE COST OF THE WORK DONE BY THE PRIME CONTRACTOR, DEDUCT IT FROM THE FIXED FEE, AND COMPUTE THE PERCENTAGE THAT THE REMAINDER BEARS TO THE WORK SUBCONTRACTED, YOU WILL NOTE THAT THE RESULT IS SUBSTANTIALLY LESS THAN 6 PERCENT WHICH WAS PAID FOR WORK DONE BY THE CONTRACTOR WITH HIS OWN FORCES. THE PRIME CONTRACT WAS ENTERED INTO WITH KNOWLEDGE THAT CERTAIN SUBCONTRACTING WOULD TAKE PLACE AND THAT IT WOULD PROBABLY BE ADVANTAGEOUS TO THE GOVERNMENT TO SUBCONTRACT CERTAIN OTHER PORTIONS OF THE WORK, AND THE FEE WAS FIXED WITH ALL THOSE FACTS IN VIEW. PERMISSION WAS GIVEN TO THE CONTRACTOR TO AWARD SUBCONTRACTS FOR ANY PORTION OF THE WORK (WITH THE EXCEPTION OF PLUMBING WORK) "SUBJECT TO THE PRIOR WRITTEN APPROVAL OF THE CONTRACTING OFFICER.' THIS APPROVAL WAS GIVEN ONLY WHEN IN THE CONTRACTING OFFICER'S OPINION THE WORK WHICH WAS SUBCONTRACTED WAS WORK WHICH IT WAS ORIGINALLY CONTEMPLATED WOULD BE SUBCONTRACTED OR WHICH IT WAS DEEMED ADVANTAGEOUS TO THE GOVERNMENT TO SUBCONTRACT IN SPITE OF THE FACT THAT NO REDUCTION IN THE FIXED FEE TOOK PLACE. IT THEREFORE SEEMS INEQUITABLE TO US TO REQUEST THE CONTRACTOR TO REDUCE HIS FEE.

WE EARNESTLY REQUEST THAT YOU WITHDRAW YOUR DISAPPROVAL OF THE MACEVOY VOUCHERS WHICH PROVIDE FOR THE PAYING OF FIXED FEES TO THE CONTRACTOR WITHOUT REDUCTION OF THE FIXED FEE BECAUSE, ON THE BASIS OF THE ABOVE INFORMATION, THE CONTRACTOR'S FEE (BOTH IN THE ORIGINAL AND THE SUPPLEMENTAL CONTRACTS) WAS FIXED AT A LEVEL WHICH THE CONTRACTING OFFICER DETERMINED FAIR ON THE BASIS OF THE WORK WHICH WOULD BE SUBCONTRACTED, AND THEREFORE IT IS INEQUITABLE TO ASK A FURTHER REDUCTION.

SINCE YOUR RULING ALSO INDICATES THAT CERTAIN AMOUNTS SHOULD BE DEDUCTED ON ACCOUNT OF PROFITS OF LUMP-SUM SUBCONTRACTORS, $45,000 IS AT PRESENT BEING WITHHELD FROM THE MACEVOY COMPANY. IN ORDER THAT WE MAY REACH A FINAL DECISION REGARDING THE FEE TO BE PAID THE CONTRACTOR, WE ASK YOU TO STATE SPECIFICALLY, ON THE BASIS OF THE ADDITIONAL FACTS SUBMITTED, WHAT AMOUNTS, IF ANY, WE MUST CONTINUE TO WITHHOLD.

AT THE TIME THE REFERRED-TO LETTER OF APRIL 7, 1942, WAS WRITTEN, THE VARIOUS FACTS NOW SET FORTH IN YOUR LETTER OF JUNE 30, SUPRA, WERE NOT PRESENT IN THE RECORD BEFORE THIS OFFICE. IN OTHER WORDS, WHILE IT APPEARED FROM SUPPLEMENT C, DATED JANUARY 5, 1942, THAT THE CONTRACTOR WAS TO BE PAID AN ADDITIONAL FIXED FEE OF $8,910 FOR THE PERFORMANCE OF 12 ITEMS OF ADDITIONAL WORK AT AN ESTIMATED COST OF $186,954.36, IT APPEARED FURTHER THAT FOUR ITEMS OF SUCH WORK, TOTALING APPROXIMATELY $87,875, WERE TO BE PERFORMED BY SUBCONTRACTORS UNDER LUMP-SUM HOWEVER, THERE WAS NOTHING IN SAID SUPPLEMENT C, OR OTHERWISE OF RECORD, INDICATING THAT AT THE TIME THE ADDITIONAL FEE OF $8,910 WAS FIXED THE PARTIES CONTEMPLATED THAT THE FOUR ITEMS OF WORK INVOLVED WOULD BE PERFORMED BY SUBCONTRACTORS FOR LUMP-SUM PRICES.

ALSO, IT APPEARED AT THAT TIME THAT WHILE CONTRACT NO. WA-17, AS ORIGINALLY EXECUTED, STIPULATED THAT THE ESTIMATED COST OF THE WORK THEREUNDER WAS $2,000,000, FOR THE PERFORMANCE OF WHICH THE CONTRACTOR WAS TO RECEIVE A FIXED FEE OF $84,000, SAID CONTRACT AUTHORIZED THE CONTRACTOR TO SUBCONTRACT ANY PART OF THE WORK--- EXCEPT THE PLUMBING-- EITHER ON A LUMP SUM, A UNIT PRICE, OR A COST-PLUS-A-FIXED-FEE BASIS. FURTHERMORE, THE CONTRACT PROVIDED THAT WHILE IN THE LATTER CASE THE SUBCONTRACTOR'S FEE SHOULD BE PAID BY THE PRIME CONTRACTOR OUT OF ITS FIXED FEE, YET EXPENDITURES BY THE PRIME CONTRACTOR OF PAYMENTS TO SUBCONTRACTORS ON ACCOUNT OF "LUMP SUM" SUBCONTRACTS WERE TO BE REIMBURSED TO THE CONTRACTOR BY THE GOVERNMENT AS A PART OF THE COST OF THE WORK. HOWEVER, THERE WAS NOTHING IN THE CONTRACT OR OTHERWISE OF RECORD SHOWING WHAT PORTION OF THE WORK THE PARTIES CONTEMPLATED WOULD BE SUBCONTRACTED NOR ANY EVIDENCE SHOWING ON WHAT BASIS THE FIXED FEE AGREED TO BE PAID TO THE PRIME CONTRACTOR WAS DETERMINED.

AS WAS POINTED OUT IN MY LETTER OF APRIL 7, THERE IS NO QUESTION BUT THAT WHERE SUBCONTRACTS ARE ENTERED INTO ON EITHER A LUMP SUM OR A UNIT PRICE BASIS SUCH PRICES INCLUDE ITEMS OF OVERHEAD AND PROFIT TO THE SUBCONTRACTORS; WHEREAS THE FIXED FEE AGREED TO BE PAID TO THE PRIME CONTRACTOR INCLUDES (1) ITEMS OF OVERHEAD AND ADMINISTRATIVE EXPENSE, TOGETHER WITH PROFIT ON THE WORK WHICH THE PARTIES CONTEMPLATE IS TO BE PERFORMED BY THE PRIME CONTRACTOR AND (2) OVERHEAD AND ADMINISTRATIVE EXPENSE ON AND COMPENSATION FOR NEGOTIATING, SUPERVISING, AND COORDINATING WORK WHICH IS TO BE PERFORMED UNDER SUBCONTRACTS. ACCORDINGLY, IT SEEMS APPARENT--- AND IT IS NOT DISPUTED IN THE ABOVE QUOTED LETTER--- THAT WHERE WORK, WHICH THE CONTRACT EXPRESSLY PROVIDES, OR WHICH THE PARTIES CONTEMPLATE DURING THE NEGOTIATIONS, WILL BE PERFORMED BY THE PRIME CONTRACTOR WITH ITS OWN FORCES, IS SUBCONTRACTED ON A LUMP SUM OR UNIT PRICE BASIS, THERE SHOULD BE A REDUCTION IN THE PRIME CONTRACTOR'S FIXED FEE IN AN AMOUNT AT LEAST EQUAL TO THE AMOUNT OF THE SUBCONTRACTOR'S PROFIT. OTHERWISE, THE GOVERNMENT WOULD BE REQUIRED TO PAY DUPLICATE PROFIT FOR THE PERFORMANCE OF THE SAME WORK. SEE B-23215, FEBRUARY 26, 1942 (21 COMP. GEN. 813), AND B-22963, JANUARY 24, 1942. IT IS EQUALLY CLEAR, OF COURSE, THAT NO REDUCTION IN THE PRIME CONTRACTOR'S FIXED FEE IS REQUIRED WHERE THERE IS SUBCONTRACTED CERTAIN DEFINITE AND PARTICULAR PORTIONS OF THE WORK WHICH THE PRIME CONTRACT STIPULATED WOULD BE SUBCONTRACTED OR WHICH THE PARTIES DEFINITELY CONTEMPLATED DURING THE NEGOTIATIONS WOULD BE SUBCONTRACTED.

THEREFORE, SINCE THERE WAS NOTHING EITHER IN CONTRACT NO. WA-17 OR IN SUPPLEMENT C SHOWING THAT THE PARTIES CONTEMPLATED AND AGREED DURING THE NEGOTIATIONS THEREOF THAT CERTAIN DEFINITE PORTIONS OF THE WORK THEREUNDER WOULD BE SUBCONTRACTED, AND THAT THE PRIME CONTRACTOR'S FIXED FEES WERE DETERMINED ACCORDINGLY, IT NECESSARILY WAS ASSUMED BY THIS OFFICE THAT THE FIXED FEES AGREED TO BE PAID TO THE CONTRACTOR WERE DETERMINED IN CONTEMPLATION OF THE PERFORMANCE OF THE ENTIRE WORK BY THE PRIME CONTRACTOR WITH HIS OWN FORCES. UNDER SUCH CIRCUMSTANCES, THERE WAS NO ALTERNATIVE BUT FOR THIS OFFICE TO WITHHOLD APPROVAL OF THE PAYMENT OF $3,091.67 PROPOSED TO BE MADE TO THE CONTRACTOR AS THE BALANCE DUE FOR WORK PERFORMED UNDER SUPPLEMENT C AND TO ADVISE YOU THAT CREDIT WOULD BE WITHHELD ON OTHER PERTINENT VOUCHERS MAKING PAYMENTS UNDER THE CONTRACT UNLESS THERE WAS A SATISFACTORY SHOWING THAT SOME PROPORTIONATE REDUCTION HAD BEEN MADE IN THE PRIME CONTRACTOR'S FIXED FEE BECAUSE OF THE SUBCONTRACTING OF WORK ON A LUMP SUM OR UNIT PRICE BASIS.

HOWEVER, IT NOW APPEARS FROM YOUR LETTER OF JUNE 30, SUPRA, THAT AT THE TIME SUPPLEMENT C WAS EXECUTED IT WAS KNOWN BY THE GOVERNMENT THAT ITEMS 1, 2, 5, AND 6 THEREOF WOULD BE SUBCONTRACTED AND IT IS REPORTED THAT THE ADDITIONAL FIXED FEE OF $8,910 WAS DETERMINED ON THAT BASIS. IT APPEARS FURTHER THAT THE SUBCONTRACTING OF THE OUTSIDE PLUMBING WORK AS PROVIDED FOR BY ITEM 5 OF SAID SUPPLEMENT C WILL NOT VIOLATE THE STIPULATION IN THE CONTRACT PROHIBITING THE SUBCONTRACTING OF PLUMBING WORK, SINCE IT WAS NOT CONTEMPLATED THAT THIS WORK WOULD BE PERFORMED BY THE PRIME CONTRACTOR WITH ITS OWN FORCES BUT THAT IT WOULD BE PERFORMED BY THE WORK PROJECTS ADMINISTRATION. THEREFORE, SINCE THE RECORD NOW SHOWS WITH RESPECT TO SUPPLEMENT C THAT THE PARTIES DEFINITELY KNEW AT THE TIME OF THE EXECUTION THEREOF THAT FOUR ITEMS OF WORK THEREUNDER WOULD BE PERFORMED BY SUBCONTRACTORS, AND THAT THE ADDITIONAL FIXED FEE OF $8,910 WAS COMPUTED ACCORDINGLY, NO REDUCTION IN SAID FIXED FEE IS REQUIRED AND, IF OTHERWISE CORRECT, THE BALANCE OF $3,091.67 MAY BE PAID TO THE PRIME CONTRACTOR.

WITH RESPECT TO THE SUBCONTRACTING OF WORK UNDER THE ORIGINAL CONTRACT WA -17, IT IS REPORTED IN YOUR LETTER OF JUNE 30 THAT SAID CONTRACT WAS ENTERED INTO WITH KNOWLEDGE THAT CERTAIN DEFINITE ITEMS OF WORK THEREUNDER WOULD BE SUBCONTRACTED AND THAT, IN ADDITION THERETO, IT WAS CONTEMPLATED THAT CIRCUMSTANCES MIGHT ARISE DURING THE COURSE OF THE PERFORMANCE OF THE CONTRACT WHICH WOULD RENDER IT MORE ADVANTAGEOUS TO THE GOVERNMENT, BOTH IN THE INTEREST OF ECONOMY AND IN ORDER TO EXPEDITE COMPLETION OF THE CONTRACT, TO SUBCONTRACT CERTAIN OTHER PORTIONS OF THE WORK, ALTHOUGH THE EXTENT THEREOF WAS NOT DEFINITELY KNOWN AT THE TIME THE CONTRACT WAS EXECUTED. IT IS STATED FURTHER THAT THE FIXED FEE AGREED TO BE PAID TO THE CONTRACTOR WAS DETERMINED WITH THE UNDERSTANDING THAT FURTHER SUBCONTRACTING MIGHT TAKE PLACE DURING THE COURSE OF PERFORMING THE CONTRACT, AND THAT PERMISSION WAS GIVEN TO THE CONTRACTOR TO SUBCONTRACT WORK ONLY WHEN IN THE CONTRACTING OFFICER'S OPINION THE WORK SUBCONTRACTED WAS WORK WHICH THE PARTIES ORIGINALLY CONTEMPLATED WOULD BE SUBCONTRACTED OR WORK WHICH IT WAS DEEMED ADVANTAGEOUS TO THE GOVERNMENT'S INTEREST TO SUBCONTRACT AFTER PERFORMANCE OF THE CONTRACT WAS UNDERTAKEN. THE QUESTION AS TO WHETHER A PRIME CONTRACTOR'S FIXED FEE IS REQUIRED TO BE REDUCED AS A RESULT OF SUBCONTRACTING IS ONE TO WHICH A GENERAL ANSWER APPLICABLE TO ALL CASES MAY NOT BE GIVEN, SINCE THE ANSWER THERETO APPEARS TO BE DEPENDENT ON AND IS FOR DETERMINATION IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF EACH INDIVIDUAL CASE. AS IS STATED ABOVE, THE FIXED FEE OF THE PRIME CONTRACTOR INCLUDES NOT ONLY OVERHEAD AND PROFIT ON THAT PART OF THE WORK WHICH THE PRIME CONTRACTOR IS TO PERFORM WITH ITS OWN FORCES, BUT, ALSO, OVERHEAD EXPENSES AND COMPENSATION FOR THE NEGOTIATION OF SUBCONTRACTS AND THE SUPERVISION AND COORDINATION OF THE WORK TO BE PERFORMED THEREUNDER. THEREFORE, IT IS TO BE PRESUMED THAT IN DETERMINING THE AMOUNT OF THE FIXED FEE TO BE PAID TO THE PRIME CONTRACTOR THE PARTIES CONSIDER THE PORTION OF THE WORK WHICH IS TO BE PERFORMED BY SAID CONTRACTOR WITH ITS OWN FORCES, THE PORTION WHICH THE PARTIES DEFINITELY KNOW AT THE TIME WILL BE PERFORMED BY SUBCONTRACTORS, AND THE FURTHER FACT THAT CERTAIN OTHER PORTIONS OF THE WORK--- THE EXTENT OF WHICH IS UNKNOWN AT THE TIME--- ALSO MAY BE PERFORMED BY SUBCONTRACTORS IF THE INTEREST OF THE GOVERNMENT SO REQUIRES.

ACCORDINGLY, WHETHER A REDUCTION SHOULD BE MADE IN THE FIXED FEE ORIGINALLY AGREED UPON DUE TO THE FACT THAT THERE WAS A FURTHER SUBCONTRACTING OF THE WORK DURING THE COURSE OF PERFORMING THE CONTRACT IS A QUESTION WHICH PROPERLY MAY NOT BE DETERMINED UNTIL THE CONTRACT IS COMPLETED AND THE EXTENT OF THE SUBCONTRACTING WHICH ACTUALLY TOOK PLACE IS COMPARED AND CONSIDERED IN CONNECTION WITH THE AMOUNT OF FURTHER SUBCONTRACTING WHICH THE PARTIES CONTEMPLATED MIGHT TAKE PLACE AT THE TIME THE CONTRACT WAS NEGOTIATED, AND WITH RESPECT TO WHICH THE FIXED FEE WAS ORIGINALLY AGREED UPON. FURTHERMORE, THE AMOUNT, IF ANY, BY WHICH THE PRIME CONTRACTOR'S FIXED FEE SHOULD BE REDUCED BY VIRTUE OF FURTHER SUBCONTRACTING DURING THE COURSE OF PERFORMING THE CONTRACT IS FOR DETERMINATION IN THE FIRST INSTANCE BY THE CONTRACTING OFFICER OR HIS AUTHORIZED REPRESENTATIVE. HOWEVER, IN THE PERFORMANCE OF ITS STATUTORY DUTY OF AUDITING VOUCHERS OF DISBURSING OFFICERS COVERING EXPENDITURES OF PUBLIC MONEYS, IT IS A PROPER FUNCTION OF THIS OFFICE TO INQUIRE INTO THE QUESTION AS TO WHETHER THE DETERMINATION OF THE CONTRACTING OFFICER WITH RESPECT TO THE AMOUNT, IF ANY, BY WHICH THE PRIME CONTRACTOR'S FIXED FEE SHOULD BE REDUCED AS A RESULT OF FURTHER SUBCONTRACTING DURING THE COURSE OF PERFORMANCE IS REASONABLE. ALSO, FOR USE IN CONSIDERING THE REASONABLENESS OF THE CONTRACTING OFFICER'S DETERMINATION IN SUCH CASES, IT IS NECESSARY THAT THERE BE FORWARDED HERE A REPORT SHOWING WHAT DETERMINATION THE CONTRACTING OFFICER'S DETERMINATION IN SUCH CASES, IT IS NECESSARY THAT THERE BE FORWARDED HERE A REPORT SHOWING WHAT DETERMINATION THE CONTRACTING OFFICER MADE IN THIS RESPECT AND CONTAINING A STATEMENT OF THE FACTS ON WHICH SUCH DETERMINATION IS BASED. WHEN, UPON SUCH SHOWING, IT APPEARS THAT THE AMOUNT OF THE FIXED FEE AS FINALLY DETERMINED BY THE CONTRACTING OFFICER TO BE PROPER FOR PAYMENT TO THE CONTRACTOR--- THAT IS, AS TO WHETHER AND, IF SO, TO WHAT EXTENT AN ADJUSTMENT IN THE AMOUNT OF THE FEE AS ORIGINALLY FIXED IS TO BE MADE--- IS REASONABLE ON THE BASIS OF A COMPARISON OF THE DUTIES, RESPONSIBILITIES, ETC., OF THE CONTRACTOR UNDER THE CONTRACT AS AFFECTED BY THE ADDITIONAL SUBCONTRACTING, WITH ITS DUTIES, RESPONSIBILITIES, ETC., AS CONTEMPLATED AT THE TIME THE FEE WAS ORIGINALLY FIXED, THIS OFFICE WILL NOT TAKE EXCEPTION TO PAYMENTS MADE IN ACCORDANCE WITH THE CONTRACTING OFFICER'S DETERMINATION IN THE MATTER.

WITH RESPECT TO THE INSTANT MATTER, A FINAL AUDIT OF THE VOUCHERS COVERING PAYMENTS UNDER THE CONTRACT INVOLVED HAS NOT BEEN MADE BY THIS OFFICE AS YET. HOWEVER, IF, AS IS UNDERSTOOD FROM YOUR LETTER, THE ENTIRE AMOUNT OF THE FEE FIXED FOR PAYMENT TO THE PRIME CONTRACTOR IS WELL WITHIN THE STATUTORY LIMIT OF 6 PERCENT AND THE AMOUNT THEREOF APPORTIONABLE TO THE TOTAL COST OF THE WORK WHICH WAS SUBCONTRACTED DOES NOT EXCEED A REASONABLE ALLOWANCE TO THE CONTRACTOR AS REIMBURSEMENT OF THE EXPENSE OF NEGOTIATING THE SUBCONTRACTS AND SUPERVISING THE WORK PERFORMED THEREUNDER, THIS OFFICE WOULD NOT OBJECT TO THE PAYMENT OF THE BALANCE OF THE FIXED FEE NOW BEING WITHHELD BY YOUR OFFICE WITHOUT ANY REDUCTION THEREIN, IF IT BE DETERMINED BY THE PROPER OFFICIALS OF YOUR AGENCY THAT NO DEDUCTION IS WARRANTED UNDER ALL OF THE FACTS AND CIRCUMSTANCES.

IT MAY BE STATED IN THIS CONNECTION THAT THE AUDIT OF VOUCHERS COVERING THE PAYMENTS OF FIXED FEES TO PRIME CONTRACTORS WOULD BE FACILITATED IF CARE SHOULD BE EXERCISED IN THE NEGOTIATION OF THE PRIME CONTRACT TO DETERMINE, INSOFAR AS IS POSSIBLE, WHAT PART OF THE CONTRACT WORK IS TO BE PERFORMED BY THE PRIME CONTRACTOR, WHAT PORTION THEREOF DEFINITELY IS TO BE SUBCONTRACTED, AND WHAT PORTION THEREOF MAY BE THE SUBJECT OF FURTHER SUBCONTRACTING, AND IF THERE SHOULD BE INCORPORATED INTO THE PRIME CONTRACT A PROVISION SETTING FORTH THE UNDERSTANDING OF THE PARTIES IN THIS REGARD AND THAT THE FEE WAS FIXED ON SUCH BASIS. THEN, IF DURING THE COURSE OF PERFORMING THE CONTRACT IT DEVELOPS THAT THE SUBCONTRACTING OF FURTHER PORTIONS OF THE WORK WOULD BE IN THE INTEREST OF THE UNITED STATES --- IN THAT IT WOULD SERVE TO EXPEDITE PERFORMANCE OF THE CONTRACT OR WOULD BE MORE ECONOMICAL, OR FOR SOME OTHER REASON--- A REPORT OF SUCH FACTS, TOGETHER WITH THE APPROVAL OF THE SUBCONTRACTS BY THE CONTRACTING OFFICER AND A STATEMENT OF THE DETERMINATION OF SAID OFFICIAL AS TO WHAT ADJUSTMENT, IF ANY, IN THE FIXED FEE SHOULD BE MADE, AND OF THE FACTS ON WHICH SUCH DETERMINATION IS BASED, SHOULD BE ATTACHED TO THE COPY OF THE SUBCONTRACT WHEN FORWARDED TO THIS OFFICE.