B-23293, MARCH 13, 1942, 21 COMP. GEN. 858

B-23293, MARCH 13, 1942, 21 COMP. GEN. 858

CONTRACTS - COST-PLUS - SUBCONTRACTS ON A COST-PLUS-A-PERCENTAGE-OF-COST BASIS A SUBCONTRACT ENTERED INTO ON A COST-PLUS-A-PERCENTAGE-OF-COST BASIS BY A WAR DEPARTMENT COST-PLUS-A-FIXED-FEE CONTRACTOR IS IN CONTRAVENTION OF THE SPIRIT AND PURPOSE OF THE ACT OF JULY 2, 1940, PROVIDING THAT "THE COST- PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING SHALL NOT BE USED UNDER THIS SECTION," AND SUCH A SUBCONTRACT MAY NOT BE REGARDED AS CREATING ANY BINDING OBLIGATION ON THE UNITED STATES TO REIMBURSE THE PRIME CONTRACTOR FOR ANY PAYMENTS MADE IN ACCORDANCE WITH ITS TERMS.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF WAR, MARCH 13, 1942:

I HAVE YOUR LETTER OF JANUARY 21, 1942, TRANSMITTING FOR ADVANCE DECISION BUREAU VOUCHER NO. ORD-781, IN THE SUM OF $10,280.84, COVERING REIMBURSEMENT TO DAY AND ZIMMERMAN, INC., A COST-PLUS-A-FIXED--FEE CONTRACTOR, OF AMOUNTS PAID FOR GANG LOADING EQUIPMENT FURNISHED UNDER CONTRACT NO. W-ORD-487, DATED NOVEMBER 4, 1940.

THE CONTRACT PROVIDED FOR THE FURNISHING OF ARCHITECTURAL AND ENGINEERING SERVICES, INCLUDING THE DESIGNING OF PLANS AND SPECIFICATIONS, TECHNICAL SUPERVISION OF PLANT CONSTRUCTION, PROCUREMENT OF EQUIPMENT, AND OPERATION OF AN ORDNANCE PLANT NEAR BURLINGTON, IOWA. ARTICLE II-A PROVIDES, IN PART, AS FOLLOWS:

1. THE CONTRACTOR SHALL, AS AN INDEPENDENT CONTRACTOR AND NOT AS AN AGENT OF THE GOVERNMENT, PURCHASE OR PRODUCE, INCLUDING NECESSARY ENGINEERING AND DESIGNING, ALL MACHINERY AND THE EQUIPMENT THEREFOR, JIGS, FIXTURES, TOOLS, GAGES (BOTH WORKING AND INSPECTION), AND MISCELLANEOUS FACTORY EQUIPMENT NECESSARY FOR A PLANT OF THE TYPE AND CAPACITY DESCRIBED IN ARTICLE I-A OF TITLE I HEREOF (ALL OF THE ABOVE BEING SOMETIMES HEREINAFTER REFERRED TO AS " EQUIPMENT"); SHALL SUPERVISE ITS INSTALLATION; AND SHALL DO ALL OTHER THINGS NECESSARY AND INCIDENT TO THE ENGINEERING, DESIGNING, PURCHASE OR PRODUCTION AND SUPERVISION OF THE INSTALLATION OF THE EQUIPMENT OF THE PLANT. IN ADDITION TO THE FIXED FEE WHICH THE CONTRACTOR WAS TO BE PAID FOR ITS SERVICES THEREUNDER, ARTICLE V -A-1 OF THE CONTRACT PROVIDED THAT THE CONTRACTOR SHOULD BE REIMBURSED FOR ITS ACTUAL EXPENDITURES, INCLUDING, AMONG OTHERS, THE FOLLOWING:

A. ALL LABOR, MATERIALS, TOOLS, MACHINERY, MOTOR VEHICLES, OFFICE EQUIPMENT AND SUPPLIES, OTHER EQUIPMENT, OTHER SUPPLIES, FACILITIES, SERVICES, POWER, AND FUEL NECESSARY FOR EITHER TEMPORARY OR PERMANENT USE FOR THE BENEFIT OF THE WORK, UNDER TITLES II AND IV INCLUDING THE TRAINING OF PERSONNEL. ALL ARTICLES OF MACHINERY OR EQUIPMENT VALUED AT $300 OR LESS SHALL BE CLASSED AS TOOLS AND SHALL BE CHARGED DIRECTLY TO THE WORK. TITLE THERETO SHALL THEREUPON PASS TO THE GOVERNMENT.

B. ALL SUBCONTRACTS AND CONTRACTS FOR TECHNICAL SERVICES MADE IN ACCORDANCE WITH TITLES II AND IV.

PURSUANT TO THE PROVISIONS OF ARTICLE II-A, SUPRA, THE CONTRACTOR ENTERED INTO AN AGREEMENT DATED SEPTEMBER 29, 1941, WITH THE WESTERN ELECTRO- 1MECHANICAL CO., INC., HEREINAFTER CALLED THE COMPANY, UNDER WHICH THE COMPANY WAS TO MANUFACTURE CERTAIN EQUIPMENT, TOOLS, AND MACHINERY TO BE INSTALLED IN THE ORDNANCE PLANT, AND THE ABOVE MENTIONED BUREAU VOUCHER COVERS REIMBURSEMENT TO THE PRIME CONTRACTOR FOR PAYMENTS MADE TO THE COMPANY UNDER SAID AGREEMENT. HOWEVER, IT APPEARS THAT DOUBT HAS ARISEN IN THE FINANCE DEPARTMENT WITH RESPECT TO THE LEGALITY OF THE AGREEMENT BETWEEN THE PRIME CONTRACTOR AND THE COMPANY, FOR THE REASON THAT IN THE OPINION OF THE FINANCE DEPARTMENT THE AGREEMENT PROVIDES FOR PAYMENT TO THE COMPANY ON A COST-PLUS-A PERCENTAGE-OF-COST BASIS CONTRARY TO SECTION 1 OF THE ACT OF JULY 2, 1940, PUBLIC NO. 703, 54 STAT. 712, WHICH ACT AUTHORIZES THE SECRETARY OF WAR TO ENTER INTO VARIOUS CONTRACTS FOR THE PURPOSE OF STRENGTHENING THE NATIONAL DEFENSE. SECTION 1 THEREOF PROVIDES, IN PERTINENT PART, AS FOLLOWS:

* * * PROVIDED FURTHER, THAT THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING SHALL NOT BE USED UNDER THIS SECTION; BUT THIS PROVISO SHALL NOT BE CONSTRUED TO PROHIBIT THE USE OF THE COST-PLUS-A FIXED FEE FORM OF CONTRACT WHEN SUCH USE IS DEEMED NECESSARY BY THE SECRETARY OF WAR.

THE PERTINENT TERMS OF THE AGREEMENT BETWEEN THE PRIME CONTRACTOR AND THE COMPANY AS WELL AS THE VIEWS OF THE ORDNANCE DEPARTMENT IN THE MATTER, ARE SET FORTH IN FOURTH INDORSEMENT OF JANUARY 5, 1942, FROM THE CHIEF OF ORDNANCE TO THE CHIEF OF FINANCE, WHICH INDORSEMENT IS AS FOLLOWS:

1. IN COMPLIANCE WITH ST INDORSEMENT, OFFICE, CHIEF OF FINANCE, DATED NOVEMBER 18, REQUESTING REMARK ON VOUCHER IN FAVOR OF DAY AND ZIMMERMANN, INC., PHILADELPHIA, PENNSYLVANIA, IN THE AMOUNT OF $10,280.84, THERE IS PRESENTED HEREWITH THE OPINION OF THE ORDNANCE DEPARTMENT WITH REFERENCE TO BOTH THE LEGALITY OF THE SUBCONTRACT, AS QUESTIONED IN PARAGRAPH 2 OF BASIC COMMUNICATION, AND THE REIMBURSEMENT CLAIMED THEREUNDER.

2. IT IS THE OPINION OF THE ORDNANCE DEPARTMENT THAT THE SUBCONTRACT PROCEDURE FOLLOWED BY DAY AND ZIMMERMAN WAS WITHIN THEIR LEGAL RIGHTS CONSIDERING BOTH THE INHIBITION STATED IN PUBLIC NO. 703, 76TH CONGRESS, APPROVED JULY 2, 1940, AND SIMILAR DEFENSE LAWS. THE WAR DEPARTMENT, UNDER AUTHORITY OF THESE LAWS, DETERMINED TO HARNESS OUR NATIONAL PRODUCTIVE CAPACITY AND TO GET EXPEDITIOUS ACTION ON THESE AND OTHER PHASES OF THE NATIONAL DEFENSE WORK BY SECURING ALL AVAILABLE CONTRACTORS WHO ARE CAPABLE OF ACTING IMMEDIATELY. THESE CONTRACTORS REQUIRED GENERALLY THAT THEY BE GIVEN FULL FREEDOM OF OPERATION SO THAT THEY COULD MAKE THE BEST POSSIBLE USE OF THEIR ORGANIZATIONAL AND MANAGERIAL ABILITIES, AND OF THEIR CONTACTS WITH OTHERS WHO ARE CAPABLE OF ASSISTING IN A SUBORDINATE AND AUXILIARY WAY. IN THE NEGOTIATION OF CONTRACTS, THEREFORE, THE PRIME CONTRACTORS WERE CONSIDERED BY THE NEGOTIATORS AS INDEPENDENT CONTRACTORS AND SO DESIGNATED IN MANY CONTRACTS; THIS FOR THE FURTHER REASON THAT CONGRESS, THE WAR DEPARTMENT AND THE COUNTRY LOOK TO THESE CONTRACTORS FOR IMMEDIATE RESULTS, AND IT WAS THOUGHT BEST THAT THEY BE NOT HAMPERED IN THEIR DEFENSE CONTRACT ACTIVITIES BY INHIBITIONS AND PROHIBITORY STATUTES ENACTED TO LIMIT CERTAIN ACTION BY GOVERNMENT AGENCIES. THIS IS NOT TO SAY THAT THE LIMITATIONS IN THE DEFENSE ACTS, AND IN THE CONTRACTS THEMSELVES WERE NOT TO BE OBSERVED, WHEN APPLICABLE, BY THE VARIOUS PARTIES TO SUCH CONTRACTS. BUT, CONSISTENT WITH THE REQUIRED SCOPE OF ACTION THAT MUST OF NECESSITY BE GIVEN TO THESE PRIME AND SUBCONTRACTORS IN ORDER TO CARRY OUT THEIR DEFENSE ACTIVITIES, THERE SHOULD NOT BE APPLIED INHIBITIONS AGAINST THEM UNLESS SUCH RESTRICTIONS HAVE BEEN SPECIFICALLY ENACTED BY THE CONGRESS OR PLACED IN THE CONTRACTS WITH REFERENCE TO THESE PARTIES.

IT IS IN RESPECT TO THE APPLICATION OF SUCH AN INHIBITION THAT THE FOLLOWING CASE, ILLUSTRATIVE OF OTHERS, IS PRESENTED:

DAY AND ZIMMERMAN, INC., PRIME CONTRACTORS WITH ORDNANCE UNDER CONTRACT NO. W-ORD-487, MADE A SUBCONTRACT WITH WESTERN ELECTRO MECHANICAL COMPANY WHEREIN IT WAS PROVIDED THAT WESTERN ELECTRO WOULD

(A) MANUFACTURE TOOLS, EQUIPMENT, AND MACHINERY AS THE PRIME CONTRACTOR DIRECTED,

(B) PROCESS, CHANGE, ALTER, AND ASSEMBLE EQUIPMENT MANUFACTURED UNDER (A) ABOVE,

(C) RENT A LOFT TO PROVIDE ADDITIONAL SPACE AT A RENTAL RATE NOT IN EXCESS OF $100 PER MONTH AND PROVIDE THE NECESSARY LIGHTS, AND OTHER FACILITIES DURING THE RENTAL PERIOD,

(D) PROVIDE OFFICE FACILITIES, DRAFTING TABLES, LIGHTS, TO SUCH OF THE PRIME CONTRACTOR'S EMPLOYEES AS THE DIVISION MANAGER OF THE CALIFORNIA UNIT MAY DESIGNATE,

(E) PROVIDE SHOP FACILITIES, INCLUDING USE OF MACHINERY TO SUCH OF THE CONTRACTOR'S EMPLOYEES AS ARE DESIGNATED BY THE DIVISION MANAGER OF THE CALIFORNIA UNIT.

(G) PROVIDE THE SERVICES OF MR. W. W. SCHERER TO EXPEDITE AND SUPERVISE THE WORK BEING DONE FOR THE CONTRACTOR IN SHOPS OTHER THAN IN THE MECHANICAL COMPANY'S SHOPS.

IN CONSIDERATION, DAY AND ZIMMERMAN AGREED TO PAY TO WESTERN ELECTRO,"AS FULL COMPENSATION AND PAYMENT," THE FOLLOWING:

FOR WORK UNDER (A) AND (B): THE COST OF ALL LABOR (COMPUTED AT CURRENT UNION RATES) TIMES 2.75, PLUS THE COST OF ALL MATERIALS AND PURCHASES TIMES 1.10.

FOR WORK UNDER (C): THE ACTUAL COST OF THE RENTAL OF THE LOFT PLUS 1.10 TIMES OTHER INCIDENTAL EXPENSES IN CONNECTION WITH THE RENTAL.

FOR WORD UNDER (D): AT THE RATE OF $0.50 PER HOUR FOR EACH OF THE CONTRACTOR'S EMPLOYEES USING THE FACILITIES.

FOR WORK UNDER (E): $1.00 PER HOUR FOR EACH OF THE CONTRACTOR'S EMPLOYEES USING THE FACILITIES.

FOR WORK UNDER (G): $300.00 PER MONTH.

IT IS NOT AMISS TO SAY AS AN ASIDE THAT WESTERN ELECTRO, AND MANY OTHER SPECIALIZED MANUFACTURERS OF MACHINES, MACHINE TOOLS, JIGS, DIES, AND THE LIKE ARE GREATLY AFFECTED BY THE FLUCTUATING COSTS OF LABOR AND MATERIALS COMMON TO A WARTIME ECONOMY. AS A RESULT, THESE MANUFACTURERS REFUSE TO SET A FIXED PRICE ON THOSE SERVICES WHICH ARE SUSCEPTIBLE TO ABNORMAL VARIATION. THE PRIME CONTRACTORS ARE, THEREFORE, PUT IN THE POSITION OF HAVING TO AGREE TO THE TERMS OFFERED BY SUBCONTRACTORS, OR ALTERNATIVELY TO SEEK OTHERS IN WHAT MIGHT BE TERMED A "DEMAND MARKET" WHERE VERY FEW CAPABLE MANUFACTURERS, IF ANY, ARE AVAILABLE, AND THUS, THROUGH DELAY, SACRIFICE THE OBJECTIVE EXPEDIENCY OF THE NATIONAL DEFENSE PROGRAM.

TO GET BACK TO THE MAIN POINT, A QUESTION THEN CAME UP AS TO THE RIGHT OF REIMBURSEMENT OF THE PRIME CONTRACTOR FOR PAYMENTS MADE BY HIM TO THE SUBCONTRACTOR, WITH REFERENCE TO WORK UNDER (A), (B), AND (C) OF THE WESTERN ELECTRO CONTRACT, IN VIEW OF THE INHIBITION IN PUBLIC NO. 703, 76TH CONGRESS, APPROVED JULY 2, 1940, WHEREIN IT WAS PROVIDED "THAT THE COST PLUS A PERCENTAGE OF COST SYSTEM OF CONTRACTING SHALL NOT BE USED UNDER THIS SECTION.

ON PRESENTATION OF THE QUESTION TO THE ORDNANCE DEPARTMENT, THE MATTER WAS DULY CONSIDERED AND THE OPINION WAS REACHED THAT THE INHIBITION IN PUBLIC NO. 703 RESTRICTS ONLY THE GOVERNMENT SINCE SECTION I THEREOF SPECIFICALLY STATES:

"* * * THE SECRETARY OF WAR IS AUTHORIZED, OUT OF THE MONEYS APPROPRIATED FOR THE WAR DEPARTMENT FOR NATIONAL-DEFENSE PURPOSES FOR THE FISCAL YEAR ENDING JUNE 30, 1941 * * *, (3) TO ENTER INTO SUCH CONTRACTS (FOR CONSTRUCTION, DEVELOPMENT OF PLANTS, ETC.) * * *, AND TO AMEND OR SUPPLEMENT SUCH EXISTING CONTRACTS, AS HE MAY DEEM NECESSARY TO CARRY OUT THE PURPOSES SPECIFIED IN THIS SECTION:

"PROVIDED FURTHER, THAT THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING SHALL NOT BE USED UNDER THIS SECTION; BUT THIS PROVISO SHALL NOT BE CONSTRUED TO PROHIBIT THE USE OF THE COST-PLUS-A-FIXED FEE FORM OF CONTRACT WHEN SUCH USE IS DEEMED NECESSARY BY THE SECRETARY OF WAR.' (PARENTHETICAL STATEMENT FURNISHED.)

IT IS THE VIEW OF THIS DEPARTMENT THAT THE LANGUAGE OF THE SECTION IS CLEAR AND UNAMBIGUOUS AND THAT CONSTRUCTION TO BROADEN THE SCOPE OF THE INHIBITION IS NOT NECESSARY OR ALLOWABLE IF THE WORDS ARE GIVEN THEIR LITERAL, GENERALLY UNDERSTOOD, MEANING. THE RULE, AS GENERALLY STATED, IS THAT THE PROVINCE OF CONSTRUCTION LIES IN THE DOMAIN OF AMBIGUITY, AND THAT SUCH WORDS ARE TO BE TAKEN AND UNDERSTOOD IN THEIR PLAIN, ORDINARY AND POPULAR SENSES.

IF THIS BE ADMITTED THEN THIS SECTION BY SPECIFICALLY AUTHORIZING THE MAKING OF CONTRACTS BY THE SECRETARY OF WAR, AND SUBJECTING HIM TO THE INHIBITION THEREIN, BEING WITHOUT REFERENCE TO THE SECOND PARTY PRIME CONTRACTOR OR THIRD PARTY SUBCONTRACTOR SEEMINGLY WOULD NOT INHIBIT CONTRACTS BETWEEN THE LATTER TWO PARTIES FOR THE REASON THAT THERE IS NO PRIVITY OF CONTRACT BETWEEN THE GOVERNMENT AND THE THIRD PARTY SUBCONTRACTOR BRINGING THE SUBCONTRACTOR INTO THE CLASS COVERED BY THE INHIBITION, UNLESS IT CAN BE SAID THAT THE PRIME CONTRACTOR, UNDER WHOM THE SUBCONTRACT WAS MADE, IS ACTING AS THE GOVERNMENT, AND THIS VIEW IS NOT WARRANTED SINCE IT IS SPECIFICALLY STATED THAT THE CONTRACTOR IS AN INDEPENDENT CONTRACTOR IN PARAGRAPH 3 OF THE PRIME CONTRACT PREAMBLE IN LANGUAGE AS FOLLOWS:

"* * * THE GOVERNMENT DESIRES ALSO TO HAVE THE CONTRACTOR, AS AN INDEPENDENT CONTRACTOR AND NOT AS AN AGENT OF THE GOVERNMENT, DESIGN AND PROCURE MANUFACTURING AND SERVICE EQUIPMENT FOR, AND SUPERVISE THE INSTALLATION THEREOF IN THE PLANT TO BE CONSTRUCTED UNDER A SEPARATE CONSTRUCTION CONTRACT * * *.' ( ITALICS SUPPLIED.)

AND IN TITLE II, ARTICLE II-A-1 AS FOLLOWS:

"THE CONTRACTOR SHALL, AS AN INDEPENDENT CONTRACTOR AND NOT AS AN AGENT OF THE GOVERNMENT, PURCHASE OR PRODUCE, INCLUDING NECESSARY ENGINEERING AND DESIGNING, ALL MACHINERY AND THE EQUIPMENT THEREFOR* * *., SHALL SUPERVISE ITS INSTALLATION; AND SHALL DO ALL OTHER THINGS NECESSARY AND INCIDENT TO THE ENGINEERING, DESIGNING, PURCHASE, OR PRODUCTION AND SUPERVISION OF THE INSTALLATION OF THE EQUIPMENT OF THE PLANT.'

THE SUPREME COURT OF THE UNITED STATES UPHELD THIS VIEW THAT THE PRIME CONTRACTOR IS NOT AN AGENT OF THE GOVERNMENT IN TWO CASES, ALABAMA V. KING AND BOOZER, ET AL., 314 U.S. 1, AND CURRY V. UNITED STATES, 314 U.S. 14, BOTH DECIDED ON NOVEMBER 10, 1941. IN DISCUSSING THE STATUS OF THE COST- PLUS-A-FIXED-FEE CONTRACTOR, THE COURT SAID:

"* * * HOWEVER EXTENSIVELY THE GOVERNMENT MAY HAVE RESERVED THE RIGHT TO RESTRICT OR CONTROL THE ACTION OF THE CONTRACTORS IN OTHER RESPECTS, NEITHER THE RESERVATION NOR THE EXERCISE OF THAT POWER GAVE TO THE CONTRACTORS THE STATUS OF AGENTS OF THE GOVERNMENT TO ENTER INTO CONTRACTS OR TO PLEDGE ITS CREDIT. * * *" ( ALABAMA V. KING AND BOOZER, ET AL., CITED SUPRA). "* * * THE CONTRACTORS, IN PURCHASING AND BRINGING THE BUILDING MATERIAL INTO THE STATE AND IN APPROPRIATING IT TO THEIR CONTRACT WITH THE GOVERNMENT, WERE NOT AGENTS OR INSTRUMENTALITIES OF THE GOVERNMENT: * * *" ( CURRY V. UNITED STATES, CITED SUPRA).

IN SUBSTANTIATION OF THE POINT THAT THE PRIME CONTRACTOR DOES NOT SERVE AS A CONDUIT OF PRIVITY BETWEEN THE GOVERNMENT AND THE THIRD PARTY SUBCONTRACTOR, SEE DECISION OF THE COMPTROLLER GENERAL OF THE UNITED STATES, B-18337, DATED JULY 10, 1941, WHERE IN ANSWER TO A LETTER FROM A SUBCONTRACTOR UNDER A GOVERNMENT PRIME CONTRACTOR, AND WITH REFERENCE TO THE FORMER'S RIGHTS AGAINST THE GOVERNMENT, IT WAS SAID: "THE CONTRACT REFERRED TO IN YOUR LETTER WAS NOT ENTERED INTO BETWEEN YOUR COMPANY AND THE GOVERNMENT AND, THEREFORE, THERE IS NO PRIVITY OF CONTRACT BETWEEN YOUR COMPANY AND THE GOVERNMENT. CONSEQUENTLY, SINCE ANY CLAIM YOU MAY HAVE BY REASON OF THE ALLEGED ERROR IN BID IS NOT AGAINST THE GOVERNMENT, THERE IS NO ACTION REQUIRED BY THIS OFFICE IN THE MATTER. YOUR CLAIM APPEARS TO BE AGAINST THE PRIME CONTRACTOR AND NOT THE UNITED STATES.' ITALICS SUPPLIED.)

IT APPEARS, THEREFORE, THAT THE ACT OF JULY 2, 1940, IMPOSING AN INHIBITION UPON THE SECRETARY OF WAR ON THE MAKING OF CONTRACTS IMPOSES NO LIKE INHIBITION ON THE SECOND PARTY PRIME CONTRACTOR IN MAKING ITS CONTRACTS WITH A THIRD PARTY PRIME CONTRACTOR SINCE THERE IS NO AGENCY OF THE PRIME CONTRACTOR TO THE GOVERNMENT, AND NO PRIVITY OF THE GOVERNMENT WITH THE SUBCONTRACTORS.

TO SUMMARIZE:

A. THE INHIBITION IN THE ACT OF JULY 2, 1940, SUPRA, IS AN INHIBITION ON THE SECRETARY OF WAR (THE GOVERNMENT) MAKING A COST PLUS-A-PERCENTAGE-OF- COST CONTRACT.

B. THE SECRETARY OF WAR HAS NOT MADE SUCH A CONTRACT, THE PRIME ONE IN CASE BEING ON A COST-PLUS-A-FIXED-FEE BASIS.

C. THE INHIBITION IN THE ACT OF JULY 2, 1940, SUPRA, IS NOT AN INHIBITION ON A GOVERNMENT PRIME CONTRACTOR RESTRICTING HIM IN MAKING A COST-PLUS-A- PERCENTAGE-OF-COST CONTRACT WITH A SUBCONTRACTOR SINCE:

1. HE IS NOT COVERED BY THE ACT ITSELF,

2. HE IS AN INDEPENDENT CONTRACTOR, AND

3. HE IS NOT AN AGENT OR INSTRUMENTALITY OF THE GOVERNMENT.

D. THE SUBCONTRACTOR CAN MAKE A COST-PLUS-PERCENTAGE-OF-COST CONTRACT WITH THE PRIME CONTRACTOR SINCE:

1. HE IS DEALING WITH AN INDEPENDENT CONTRACTOR AND NOT DEALING DIRECTLY WITH THE GOVERNMENT,

2. HE HAS BEEN HELD TO BE NOT IN PRIVITY WITH THE GOVERNMENT FOR THE PURPOSE OF MAKING CLAIM THEREON, AND, THEREFORE,

3. HE IS NOT IN PRIVITY WITH THE GOVERNMENT SO AS TO BE RESTRICTED BY THE INHIBITION COVERING ITS CONTRACTUAL RELATIONS WITH THE PRIME CONTRACTOR.

FROM THE VIEWPOINT OF REIMBURSEMENT, ATTENTION IS CALLED TO THE FACT THAT THE PRIME CONTRACT, W-ORD-487, PROVIDES IN ARTICLE V-A THAT---

"1. THE CONTRACTOR SHALL BE REIMBURSED IN THE MANNER HEREINAFTER DESCRIBED FOR SUCH OF ITS ACTUAL EXPENDITURES IN THE PERFORMANCE OF THE WORK UNDER TITLES II AND IV AS MAY BE APPROVED OR RATIFIED BY THE CONTRACTING OFFICER AND AS ARE INCLUDED IN THE FOLLOWING ITEMS:

"B. ALL SUBCONTRACTS AND CONTRACTS FOR TECHNICAL SERVICES MADE IN ACCORDANCE WITH TITLES II AND IV.' ( ITALICS SUPPLIED.)

HERE THE PRIME CONTRACTOR HAS MADE ACTUAL EXPENDITURES TO COVER ITEMS FOR WHICH IT WAS LIABLE UNDER ITS SUBCONTRACT WITH A THIRD PARTY. AMONG THE ITEMS IN THIS SUBCONTRACT IS LABOR (ARTICLE I, (A) AND (B) ( WHICH ITEM IS, ACCORDING TO LETTER OF NOVEMBER 19, 1940, SUBCONTRACTOR TO PRIME CONTRACTOR, INCLUSIVE OF SHOP FACILITIES, USE OF TOOLS, AND PLANT OVERHEAD. THE COST OF THIS ITEM IS SET AT COST AT UNION RATES TIMES A FACTOR OF 2.75. ANOTHER ITEM IS RENTAL OF LOFT (ARTICLE I (C) (, THE COST OF WHICH IS ACTUAL RENTAL PLUS 1.10 TIMES OTHER INCIDENTAL EXPENSES, WHICH EXPENSES INCLUDE LIGHTS, AND PRESUMABLY WATER, HEAT, MAINTENANCE, AND LIKE CHARGES.

SUCH METHODS OF MEASURING COSTS HAVE BEEN UPHELD IN THE FOLLOWING INSTANCES:

IN COMPTROLLER GENERAL'S DECISION, B-16549, DATED MAY 29, 1941, ( COLT PATENT FIRE ARMS CO.) OVERHEAD AT A PERCENTAGE OF DIRECT LABOR COSTS WAS ALLOWED. ARTICLE II (G) OF COLT CONTRACT, W-ORD-466, PROVIDES:

"THERE SHALL BE ADDED TO ALL DIRECT LABOR COSTS FOR WHICH REIMBURSEMENT IS AUTHORIZED BY THE PROVISIONS OF ITEM (D) OF THIS SECTION 1 OF ARTICLE II, A SUM EQUAL TO THE AMOUNT OF NINETY-FIVE PERCENT (95 PERCENT) OF SUCH DIRECT LABOR COSTS; AND THERE SHALL BE ADDED TO ALL DIRECT LABOR COSTS FOR WHICH REIMBURSEMENT IS AUTHORIZED BY THE PROVISIONS OF ITEM (E) OF THIS SECTION 1 OF ARTICLE II, A SUM EQUAL TO THE ONE HUNDRED TWENTY PERCENT (120 PERCENT) OF SUCH DIRECT LABOR COSTS. THE SAID ADDED SUMS ARE THOSE DETERMINED IN ADVANCE BY THE CONTRACTING OFFICER TO REPRESENT THE PROPER PROPORTIONATE SHARE OF ALL OF THE CONTRACTOR'S OVERHEAD APPLICABLE TO THE PERFORMANCE OF THIS CONTRACT AND WHICH DO NOT INCLUDE ITEMS OF COST FOR WHICH DIRECT REIMBURSEMENT IS PROVIDED IN THIS ARTICLE II.' ( ITALICS SUPPLIED.)

WITH REFERENCE TO EVIDENCE PROPOSED TO BE FURNISHED BY THE CONTRACTOR, IT WAS SAID BY THE COMPTROLLER GENERAL:

"THE EVIDENCE PROPOSED TO BE SUBMITTED BY THE CONTRACTOR IN SUPPORT OF WORK PERFORMED ON SHOP ORDER IS IN GENERAL SATISFACTORY TO THIS OFFICE. THAT IS TO SAY, THE CONTRACTOR WILL SUBMIT AN INVOICE IDENTIFYING THE SHOP ORDER, AND CLAIMING THEREON MATERIAL TAKEN FROM STORES AT INVENTORY PRICES, ALL DIRECT LABOR AT ACTUAL PAY ROLL COSTS, TOGETHER WITH OVERHEAD AT THE PERCENTAGE OF DIRECT LABOR COSTS AS PROVIDED BY THE CONTRACT. * * *" ( ITALICS SUPPLIED.)

IN COMPTROLLER GENERAL'S DECISION, B-16954, DATED JUNE 10, 1941 ( HUMBLE OIL CO.) DISCUSSING PAYMENTS BY THE PRIME CONTRACTOR TO ITS EMPLOYEES, AND SCHEDULES OF DISTRIBUTION OF SUCH CHARGES, IT WAS SAID:

"* * * HOWEVER, NO INFORMATION HAS BEEN FURNISHED AS TO THE BASIS FOR CHARGING THE ITEMS OF PAY ROLL BURDEN AND EMPLOYEES' WELFARE EXPENSE PROPOSED TO BE ADDED TO SUCH SCHEDULES; BUT IF THOSE ITEMS REPRESENT ACTUAL COST OF THE CONTRACTOR IN A DETERMINABLE PERCENTAGE OF PAY ROLL COSTS, SUCH CHARGES WILL NOT BE QUESTIONED IF THE AMOUNT AND PAYMENT THEREOF IS VERIFIED BY THE WAR DEPARTMENT AUDITOR AND AN EXPLANATION OF THE BASIS OF THE CHARGES IS FURNISHED.' ( ITALICS SUPPLIED.)

ADMITTEDLY, THE INSTANT CASE INVOLVES A SUBCONTRACTOR UNDER A COST PLUS-A -FIXED-FEE PRIME CONTRACTOR WHILE THE DECISION ABOVE CITED COVERED THE PRIME CONTRACTOR DIRECTLY, BUT THE PRINCIPLE OF ALLOWING A PARTICULAR COST FACTOR TO BE DETERMINED ON A PERCENTAGE BASIS IS THE SAME IN ALL CASES.

4. THUS IT APPEARS TO THIS DEPARTMENT, IN VIEW OF THE PREMISES, THAT THE SUBCONTRACT IN QUESTION IS ALLOWABLE AS A CONTRACT SINCE IT IS NOT SUBJECT TO THE INHIBITION, AND THAT THE EXPENSES INCURRED IN THE PERFORMANCE OF THE SUBCONTRACT, AND WHICH HAVE ACTUALLY BEEN PAID BY THE PRIME CONTRACTOR ARE ITEMS OF EXPENSE FOR WHICH HE IS ENTITLED TO REIMBURSEMENT BY THE GOVERNMENT, BUT SINCE DIFFICULTIES IN RESPECT TO REIMBURSEMENT HAVE COME UP, THE FOREGOING IS PRESENTED AS THE REMARK REQUESTED BY THE CHIEF OF FINANCE.

5. IN VIEW OF THE CRITICAL NEED FOR THE MACHINE TOOLS, EQUIPMENT, AND THE LIKE, CONTRACTED FOR IN THE INSTANT CASE, AND OF THE FACT THAT THE CONTRACTING PARTIES CONCERNED ARE UNWILLING TO PROCEED ON THE CONTRACT IN CASE UNTIL THERE HAS BEEN A CLARIFICATION OF THE ENTIRE MATTER, YOUR EXPEDITIOUS CONSIDERATION OF THE PROBLEM, AND DISPOSITION OF THE SAME BY SUBMISSION TO THE COMPTROLLER GENERAL, IS RESPECTFULLY RECOMMENDED AND REQUESTED.

WHILE CAREFUL CONSIDERATION HAS BEEN GIVEN TO THE VIEWS OF THE ORDNANCE DEPARTMENT WITH RESPECT TO THE LEGALITY OF SUBCONTRACTS ENTERED INTO BY A PRIME CONTRACTOR ON A COST-PLUS-A-PERCENTAGE-OF-COST BASIS, I AM CONSTRAINED TO HOLD THAT SUCH TYPE OF SUBCONTRACTS ARE IN CONTRAVENTION OF THE SPIRIT AND PURPOSE OF THE ACT OF JULY 2, 1940, PROVIDING THAT "THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING SHALL NOT BE USED UNDER THIS SECTION.' IT IS EVIDENT THAT THE PROHIBITION AGAINST THIS FORM OF CONTRACTING COULD BE SUBSTANTIALLY EVADED AND THE PURPOSES THEREOF DEFEATED WERE IT NOT APPLIED TO THE PERFORMANCE OF THAT PART OF THE CONTRACT WORK SUBLET BY THE PRIME CONTRACTOR TO OTHERS. IN APPARENT RECOGNITION OF THIS POSSIBILITY, REGULATIONS HAVE BEEN ISSUED BY YOUR DEPARTMENT WHEREIN THE OFFICIALS THEREOF HAVE BEEN INSTRUCTED TO REFUSE ,TO GIVE THEIR APPROVAL TO SUBCONTRACTS PROPOSED TO BE ENTERED INTO A COST PLUS A PERCENTAGE OF COST BASIS.' SEE SUPPLEMENT NO. 6 TO THE MANUAL FOR THE CONSTRUCTION DIVISION, BOOK IV, PART II, DATED OCTOBER 15, 1941, AND CONSTRUCTION DIVISION LETTERS NOS. 340, 350, AND 478.

THEREFORE, SINCE THE AGREEMENT OF SEPTEMBER 29, 1941, BETWEEN THE PRIME CONTRACTOR AND THE WESTERN ELECTRO-1MECHANICAL CO., INC., PROVIDES FOR PAYMENT TO THE COMPANY ON A COST-PLUS-A-PERCENTAGE-OF-COST BASIS, SUCH AGREEMENT MAY NOT BE REGARDED AS CREATING ANY BINDING OBLIGATION ON THE UNITED STATES TO REIMBURSE THE PRIME CONTRACTOR FOR ANY PAYMENTS MADE TO THE COMPANY IN ACCORDANCE WITH ITS TERMS. ACCORDINGLY, ON THE PRESENT RECORD, I AM UNABLE TO AUTHORIZE THE PROPOSED PAYMENT.