B-132441, SEP. 6, 1957

B-132441, SEP. 6, 1957

TO THE SECRETARY OF THE INTERIOR:

FURTHER REFERENCE IS MADE TO YOUR LETTER OF JULY 2, 1957, REQUESTING OUR CONSIDERATION OF CERTAIN QUESTIONS WHICH HAVE ARISEN IN CONNECTION WITH THE AUDIT OF CONTRACTS ENTERED INTO BY THE DEFENSE MINERALS EXPLORATION ADMINISTRATION WITH INDIVIDUALS, PARTNERSHIPS AND CORPORATIONS THAT HAVE LEGAL RIGHTS TO EXPLORE FOR MINERALS ON CERTAIN PROPERTIES.

UNDER THE PROVISIONS OF THE TWO FORMS OF CONTRACTS, MF-200, REVISED JUNE 1954, AND MF-200A, REVISED APRIL 1956, ENCLOSED WITH YOUR LETTER AND STATED TO BE CURRENTLY USED IN THE PROGRAM, THE GOVERNMENT AGREES TO PAY A CERTAIN PERCENTAGE OF THE OPERATOR'S COSTS, AND THE OPERATOR AGREES, IF THE OPERATION IS SUCCESSFUL, TO PAY ROYALTIES ON PRODUCTION FOR A PERIOD OF 10 YEARS FROM THE DATE OF THE CONTRACT OR UNTIL THE GOVERNMENT'S CONTRIBUTION HAS BEEN FULLY REPAID, WHICHEVER FIRST OCCURS. UNDER THE PROVISIONS OF FORM MF-200, THE GOVERNMENT'S CONTRIBUTION IS BASED UPON A PERCENTAGE OF "ALLOWABLE COSTS AS THEY ARE INCURRED," AND SUCH CONTRIBUTION UNDER THE TERMS OF FORM MF-200A IS BASED UPON A PERCENTAGE OF "THE FIXED COST FOR EACH UNIT OF WORK TO BE PERFORMED.'

YOUR LETTER SETS FORTH THAT IN REPAYING THE GOVERNMENT'S ADVANCE THROUGH ROYALTIES BASED ON A VARIANT OF NET RETURNS THE OPERATOR SOMETIMES PAYS MORE THAN IS DUE UNDER THE TERMS OF THE CONTRACT. IT IS ALSO INDICATED THAT IN CERTAIN CASES THE OPERATORS HAVE NOT CLAIMED ON THEIR MONTHLY BILLINGS THE FULL AMOUNTS DUE THEM ON THE BASIS OF THE PERCENTAGE OF COST WHICH THE GOVERNMENT HAS AGREED TO CONTRIBUTE FOR THE PERFORMANCE OF THE EXPLORATION WORK.

YOU STATE THAT THE ADMINISTRATION HAS MADE A PRACTICE OF REFUNDING ANY EXCESS ROYALTY PAYMENTS AND CONTRIBUTING TO ANY ADDITIONAL COSTS DISCLOSED BY AUDITS; THAT THE GUIDING FACTORS FOR THIS PRACTICE ARE EMBODIED IN THE ADMINISTRATION'S TWO AUDIT MANUALS,"AUDIT PROCEDURE FOR EXPLORATION WORK UNDER DMEA EXPLORATION CONTRACTS," AND "PROCEDURE FOR ROYALTY AUDITS OF DMEA EXPLORATION CONTRACTS," FORMALLY ISSUED JULY 1, 1954, AND JANUARY 1, 1956, RESPECTIVELY; AND THAT THESE MANUALS WERE ISSUED AFTER AUDIT REPRESENTATIVES OF THE GENERAL ACCOUNTING OFFICE INFORMALLY REVIEWED THE PROCEDURES AND FURNISHED ADVICE IN DETERMINING THEIR GENERAL PATTERN. HOWEVER, IT APPEARS THAT YOU HAVE SOME DOUBT AS TO THE PROPRIETY OF THE ACTIONS TAKEN BY THE ADMINISTRATION IN THESE MATTERS AND THE FOLLOWING SPECIFIC QUESTIONS ARE PRESENTED IN YOUR LETTER:

1. SHOULD THE GOVERNMENT RETURN ANY AMOUNTS PAID AS ROYALTIES THAT ARE FOUND BY THE AUDITORS TO BE IN EXCESS OF THE AMOUNTS DUE AT THE PARTICULAR TIME?

2. SHOULD THE GOVERNMENT ALLOW ADDITIONAL COSTS INCURRED BUT NOT CLAIMED AND PAY THE AGREED PERCENTAGE OF SUCH ADDITIONAL COSTS WHEN DISCLOSED IN THE AUDIT?

3. WHEN THE CONTRIBUTION OF THE GOVERNMENT IS TO BE BASED ON PERCENTAGES OF FIXED UNIT COSTS, SHOULD THE GOVERNMENT PAY THE OPERATOR FOR COMPLETED UNITS OF WORK AT THE CONTRACT RATES WHEN THE OPERATOR HAS NEGLECTED THROUGH ERROR OR OTHERWISE TO CLAIM IN FULL?

4. IF DETERMINED THAT PAYMENT OF AMOUNTS EARNED BUT NOT CLAIMED BY THE OPERATOR WOULD NOT BE PROPER, MAY THE GOVERNMENT ALLOW SUCH ADDITIONAL COSTS UP TO THE AMOUNT OF OFFSETTING DISALLOWANCES IN THE OPERATOR'S ACCOUNT?

WITH RESPECT TO PAYMENT OF THE GOVERNMENT'S CONTRIBUTION TO THE PROJECT, IT IS CLEARLY PROVIDED BOTH BY ARTICLE 4 OF FORM MF-200A AND BY ARTICLE 5 OF FORM MF-200 THAT ALL PAYMENTS MADE BY THE GOVERNMENT ARE "PROVISIONAL ONLY, SUBJECT TO AUDIT, UNTIL THE ACCOUNT BETWEEN THE OPERATOR AND THE GOVERNMENT IS FINALLY AUDITED AND SETTLED.' IN THE LIGHT OF THIS PROVISION IT SEEMS OBVIOUS THAT THE GOVERNMENT'S OBLIGATION IS TO PAY THE AGREED PERCENTAGE OF COSTS, WHETHER ON THE ACTUAL OR UNIT COST BASIS, AS DETERMINED BY THE AUDIT. THE FACT THAT THE OPERATOR HAD ERRONEOUSLY CLAIMED A SMALLER AMOUNT WOULD NOT AFFECT HIS RIGHT TO RECEIVE THE AMOUNT FOUND DUE ON THE AUDIT, UNLESS HE CHOSE VOLUNTARILY TO ACCEPT A SMALLER CONTRIBUTION FROM THE GOVERNMENT.

YOUR QUESTIONS NUMBERED 2 AND 3 ARE THEREFORE ANSWERED IN THE AFFIRMATIVE, SUBJECT TO THE QUALIFICATION THAT THE PAYMENT SHOULD BE MADE ONLY UPON THE CLAIM OR REQUEST OF THE OPERATOR AFTER NOTICE OF THE AUDIT FINDINGS, AND SHOULD BE SUPPORTED BY A PROPER VOUCHER OR INVOICE REFERRING TO THE AUDIT FINDING.

AS TO QUESTION NUMBERED 4 WE ARE OF THE OPINION THAT IT WOULD NOT BE PROPER FOR THE GOVERNMENT TO ATTEMPT COLLECTION OF AN AMOUNT OVERPAID FOR A PORTION OF THE WORK PERFORMED BY THE OPERATOR WITHOUT ALLOWING CREDIT FOR AMOUNTS SHOWN TO BE DUE THE OPERATOR FOR PERFORMANCE OF OTHER PORTIONS OF THE CONTRACT WORK, WHETHER OR NOT SPECIFICALLY CLAIMED AS SUGGESTED IN THE ANSWER TO QUESTIONS 2 AND 3. QUESTION NO. 4 IS THEREFORE ANSWERED IN THE AFFIRMATIVE.

WITH RESPECT TO QUESTION 2, SINCE THE ACCOUNT BETWEEN THE GOVERNMENT AND THE OPERATOR MIGHT NOT BE FINALLY AUDITED AND SETTLED UNTIL THE LAPSE OF AS MUCH AS 10 YEARS, IT IS OUR VIEW THAT AN ATTEMPT TO KEEP THE ACCOUNT AS CURRENT AS POSSIBLE BY THE PAYMENT OF SUCH AMOUNTS AS MIGHT BE FOUND DUE THE OPERATOR BY REASON OF ROYALTY OVERPAYMENTS AT ANY PARTICULAR STAGE OF PERFORMANCE UNDER HIS CONTRACT WOULD CLEARLY BE WITHIN THE SCOPE OF A PROPER DISCHARGE OF OFFICIAL DUTIES. IF IT SHOULD HAPPEN, AS SUGGESTED IN YOUR LETTER, THAT A ROYALTY OVERPAYMENT SHOULD BE INVOLVED IN A FINAL PAYMENT OF ROYALTY UNDER THE TERMS OF AN OPERATORS AGREEMENT, IT WOULD BE INEQUITABLE FOR THE GOVERNMENT TO TAKE ADVANTAGE OF ANY MISTAKE MADE BY AN OPERATOR IN THE MAKING OF EITHER AN INTERIM OR FINAL PAYMENT OF ROYALTY. QUESTION 1 IS ALSO ANSWERED IN THE AFFIRMATIVE. REFUND OF ANY ROYALTY PAYMENT SHOULD, OF COURSE, BE SUPPORTED BY A PROPER VOUCHER OR INVOICE.