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B-167941, SEP 13, 1974

B-167941 Sep 13, 1974
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WHERE CONTRACT PROVIDING FOR GOVERNMENT COST SHARING OF FLOOD CONTROL PROJECT CONTAINS STANDARD DISPUTES CLAUSE AND PROVIDES THAT PAYMENTS WILL BE MADE UPON SUBMISSION TO CONTRACTING OFFICER AND VERIFICATION BY GOVERNMENT OF CERTIFIED STATEMENTS OF EXPENDITURES MADE BY CONTRACTOR. THAT GOVERNMENT'S CONTRIBUTION IS TO BE MADE ON THE BASIS OF LINE ITEM PRICES IN THE CONSTRUCTION BID ACCEPTED BY CONTRACTOR IS FINAL IN THE ABSENCE OF FRAUD OR OVERREACHING. GAO BELIEVES THAT THE CORPS' METHOD OF DETERMINING THE AMOUNT OF THE FEDERAL CONTRIBUTION IS QUESTIONABLE BECAUSE IT DOES NOT ASSURE THAT THE FEDERAL REIMBURSEMENT OF COSTS INCURRED BY CONTRACTOR IS APPLIED ONLY TO THE SHARABLE PORTION OF THE CONSTRUCTION PROJECT.

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B-167941, SEP 13, 1974

WHERE CONTRACT PROVIDING FOR GOVERNMENT COST SHARING OF FLOOD CONTROL PROJECT CONTAINS STANDARD DISPUTES CLAUSE AND PROVIDES THAT PAYMENTS WILL BE MADE UPON SUBMISSION TO CONTRACTING OFFICER AND VERIFICATION BY GOVERNMENT OF CERTIFIED STATEMENTS OF EXPENDITURES MADE BY CONTRACTOR, THAT GOVERNMENT'S CONTRIBUTION IS TO BE MADE ON THE BASIS OF LINE ITEM PRICES IN THE CONSTRUCTION BID ACCEPTED BY CONTRACTOR IS FINAL IN THE ABSENCE OF FRAUD OR OVERREACHING. JAMES GRAHAM MFG. CO. V. UNITED STATES, 91 F. SUPP. 715 (N.D. CAL. 1950). HOWEVER, AS A MATTER OF POLICY, GAO BELIEVES THAT THE CORPS' METHOD OF DETERMINING THE AMOUNT OF THE FEDERAL CONTRIBUTION IS QUESTIONABLE BECAUSE IT DOES NOT ASSURE THAT THE FEDERAL REIMBURSEMENT OF COSTS INCURRED BY CONTRACTOR IS APPLIED ONLY TO THE SHARABLE PORTION OF THE CONSTRUCTION PROJECT. SEE REPORT N-167941, JULY 30, 1970.

MERCED IRRIGATION DISTRICT:

A DISBURSING OFFICER OF THE U.S. ARMY CORPS OF ENGINEERS HAS REQUESTED AN ADVANCE DECISION PURSUANT TO 31 U.S.C. 74 AS TO THE PROPER METHOD OF DETERMINING THE ENTITLEMENT OF THE MERCED (CALIFORNIA) IRRIGATION DISTRICT (MID) TO PAYMENT UNDER CONTRACT NO. DA-04-167 CIVENG-64-66.

THE CONTRACT, PROVIDING FOR GOVERNMENT COST-SHARING OF THE FLOOD CONTROL ASPECTS OF THE NEW EXCHEQUER RESERVOIR PROJECT, WAS ENTERED INTO ON APRIL 28, 1964, PURSUANT TO THE FLOOD CONTROL ACT OF 1960, PUB. LAW. 86-645, 74 STAT. 499. PAYMENTS TOTALING $10,630,153.09, REPRESENTING 37.6 PERCENT OF THE COST OF DAM AND RESERVOIR CONSTRUCTION, HAVE BEEN MADE TO MID TO DATE, AND THE CONTRACTING OFFICER HAS AUTHORIZED FINAL PAYMENT IN THE AMOUNT OF $187,645.28. HOWEVER, THE PROPRIETY OF SUCH A PAYMENT IS QUESTIONED BY THE DISBURSING OFFICER BECAUSE THE CONTRACTING OFFICER'S AUDIT STAFF RECOMMENDED THAT THE FEDERAL SHARE OF CONSTRUCTION COSTS BE BASED ON THE CONSTRUCTION CONTRACTOR'S ACTUAL COSTS RATHER THAN THE UNBALANCED BID SUBMITTED TO AND ACCEPTED BY MID. UNDER THAT METHOD OF DETERMINING THE FEDERAL SHARE, MID WOULD OWE THE GOVERNMENT A NET REFUND OF $329,416.31.

THE FILE SHOWS THAT AFTER RECEIVING THE FEDERAL PARTNERSHIP CONTRACT, MID AWARDED A FIXED-PRICE CONTRACT FOR THE REQUIRED PROJECT CONSTRUCTION WORK. THAT CONTRACT PRICE WAS BASED UPON THE AGGREGATE OF VARIOUS LINE ITEM BIDS, NOT ALL OF WHICH WERE ELIGIBLE FOR FEDERAL COST SHARING. SUBSEQUENT REVIEW OF THE LINE ITEM BID PRICES INDICATED THAT THE PRICES WERE UNBALANCED WITH REGARD TO SHARABLE (DAM AND RESERVOIR ASPECTS) AND NONSHARABLE (POWER AND RECREATION ASPECTS) ITEMS IN THAT THE BID PRICES FOR THE SHARABLE ITEMS WERE CONSIDERABLY HIGHER THAN THE CONTRACTOR'S OWN COST ESTIMATES FOR THE WORK REPRESENTED BY THOSE ITEMS AND REPRESENTED A DISPROPORTIONATELY GREATER SHARE OF THE TOTAL COSTS ACTUALLY INCURRED (IT IS REPORTED THAT THE CONTRACTOR'S TOTAL COST ESTIMATE WAS $27,939,242, ITS AGGREGATE BID PRICE WAS $31,557,714, AND ITS ACTUAL COSTS INCURRED WERE $34,148,351.). THE CONTRACTING OFFICER'S AUDIT STAFF RECOMMENDED PAYMENT TO MID ON THE BASIS OF EITHER AN ADJUSTED "BALANCED BID" COMPUTED BY THE CONTRACTOR FOR ITS OWN USE OR THE ACTUAL RECORDED COST TO THE CONSTRUCTION CONTRACTOR, RATHER THAN ON THE BASIS OF THE BID UNIT PRICES.

THE CORPS CONTRACT WITH MID PROVIDED THAT THE GOVERNMENT WOULD, WITH WITH CERTAIN EXCLUSIONS, PAY 37.6 PERCENT OF "THE ACTUAL CONSTRUCTION COST" OF THE DAM AND RESERVOIR. THE CONTRACT FURTHER PROVIDED:

"ACTUAL CONSTRUCTION COST IS CONSIDERED TO INCLUDE ALL PROJECT COSTS *** INCURRED BY THE MERCED IRRIGATION DISTRICT SUBSEQUENT TO JULY 1, 1962 ***. THE DERIVATION OF THE FORMULA WHICH WILL BE UTILIZED IN DETERMINING THE TOTAL GOVERNMENT CONTRIBUTION TO BE PAID TO THE DISTRICT WILL BE BASED ON FINAL ACTUAL CONSTRUCTION COSTS ***."

IN FORMULATING OUR RESPONSE TO THE DISBURSING OFFICER'S REQUEST, WE MUST CONSIDER WHETHER THE MATTER IS ONE WHICH THE CONTRACTING OFFICER CAN DETERMINE WITH FINALITY PURSUANT TO THE CONTRACT. IF THE CONTRACT PROVIDES FOR SUCH CONTRACTING OFFICER DECISIONMAKING, THEN, IN THE ABSENCE OF FRAUD OR OVERREACHING, THE CONTRACTING OFFICER'S DECISION MUST BE REGARDED AS CONCLUSIVE AND BINDING ON THE GOVERNMENT. BELL AIRCRAFT CORP. V. UNITED STATES, 120 CT. CL. 398, 100 F. SUPP. 661 (1951), AFF'D PER CURIAM 344 U.S. 860 (1952). IN THAT CASE, IT WAS HELD THAT A DECISION OF THE CONTRACTING OFFICER MADE PURSUANT TO A CONTRACT PROVISION STATING THAT "ALLOWABLE ITEMS OF COST WILL BE DETERMINED BY THE CONTRACTING OFFICER" WAS CONCLUSIVE AND NOT SUBJECT TO EXCEPTION BY THIS OFFICE. THE COURT RELIED ON JAMES STEWARD & CO. V. UNITED STATES, 741 CT. CL. 126 (1930), IN WHICH IT WAS ALSO HELD THAT A CONTRACTING OFFICER'S DECISION UNDER A CONTRACT CLAUSE PROVIDING FOR CONTRACTOR REIMBURSEMENT "FOR SUCH OF ITS ACTUAL NET EXPENDITURES *** AS MAY BE APPROVED OR RATIFIED BY THE CONTRACTING OFFICER" WAS FINAL AND CONCLUSIVE. SEE ALSO LEEDS & NORTHROP V. UNITED STATES, 101 F. SUPP. 999 (E.D. PA. 1951). THE RATIONALE OF THESE CASES IS THAT WHERE PARTIES TO A CONTRACT PROVIDE A SPECIFIC METHOD OR FORUM (THE CONTRACTING OFFICER) FOR DECISIONMAKING WITH RESPECT TO SOME PARTICULAR MATTER, THOSE PARTIES, INCLUDING THE GOVERNMENT AS REPRESENTED BY THE CONTRACTING AGENCY, ARE BOUND TO THAT METHOD AND TO ANY RESULTING DECISION. CONVERSELY, IF THE PARTIES DO NOT SO PROVIDE, THEN THE CONTRACTING OFFICER CANNOT BE REGARDED AS A FINAL DECISIONMAKER SO AS TO PRECLUDE THIS OFFICE FROM RENDERING AN OPINION IN ACCORDANCE WITH 31 U.S.C. 74 AS TO THE PROPRIETY OF A PROPOSED PAYMENT UNDER THE CONTRACT.

AN EXAMINATION OF THE CORPS CONTRACT WITH MID SHOWS THAT CONTRACTING OFFICER DECISIONMAKING IS PROVIDED FOR EXPLICITYLY IN TWO CLAUSES. ONE IS THE STANDARD DISPUTES CLAUSE WHICH, AS DESCRIBED ABOVE, RELATES TO FACTUAL QUESTIONS WHICH ARE NOT DISPOSED OF BY AGREEMENT. THE OTHER PROVIDES FOR CONTRACTING OFFICER "APPROVAL OF THE FUNCTIONAL ASPECTS" OF PLANS AND SPECIFICATIONS RELATING TO THE FLOOD CONTROL SERVICES TO BE PROVIDED IN ADDITION THE CONTRACT PROVIDES THAT "PAYMENTS WILL BE MADE UPON SUBMISSION TO THE CONTRACTING OFFICER AND VERIFICATION BY THE GOVERNMENT OF CERTIFIED STATEMENTS OF EXPENDITURES MADE BY THE DISTRICT." ESSENTIALLY SIMILAR CONTRACTUAL PROVISIONS HAVE BEEN REGARDED AS ESTABLISHING THE CONTRACTING PARTIES' INTENT THAT ALL SUCH DECISIONS (AGREEMENTS) UNDER THE CONTRACT ARE TO BE MADE WITH FINALITY BY THE CONTRACTING OFFICER. JAMES GRAHAM MFG. CO. V. UNITED STATES, 91 F. SUPP. 715 (N.D. CAL. 1950). IT IS OUR OPINION THAT, UNDER THE PROVISIONS OF THE INSTANT CONTRACT, AGREEMENT BETWEEN THE CONTRACTING OFFICER AND MID THAT THE GOVERNMENT'S CONTRIBUTION IS TO BE MADE ON THE BASIS OF THE LINE ITEM PRICES IN THE CONSTRUCTION BID ACCEPTED BY MID IS FINAL IN THE ABSENCE OF FRAUD OR OVERREACHING.

WE NOTE THAT THIS OFFICE REVIEWED VARIOUS CORPS COST SHARING CONTRACTS IN IN 1970, INCLUDING THE ONE WITH MID, AND RECOMMENDED THAT THE CORPS CHANGE ITS METHOD OF DETERMINING THE AMOUNT OF THE FEDERAL CONTRIBUTION UNDER SUCH CONTRACTS SO AS TO PROTECT THE GOVERNMENT AGAINST POSSIBLE UNBALANCED BIDDING. SEE REPORT B-167941, JULY 30, 1970. WE ALSO NOTE THAT THE RECOMMENDATION OF THE CORPS AUDIT STAFF IS BASED AT LEAST IN PART ON THE CORPS' STATEMENT IN 1973 TO OUR SAN FRANCISCO REGIONAL OFFICE THAT IT WOULD TAKE STEPS "TO ASSURE THAT THE FEDERAL PARTICIPATION PERCENTAGE IS APPLIED ONLY TO VALID SHARABLE FLOOD CONTROL ACTUAL COSTS" TO MID. THIS STATEMENT WAS MADE IN RESPONSE TO OUR QUESTIONING WHETHER THE CORPS INTENDED TO OBTAIN "ACTUAL 'AS BUILT' COST AS A BASIS FOR MAKING THE NECESSARY ALLOCATIONS FOR THE FINAL SETTLEMENT OF THE NEW EXCHEQUER PROJECT ON WHICH UNBALANCED BIDDING WAS *** EVIDENT." IT SEEMS TO US THAT THE CORPS' METHOD OF DETERMINING THE AMOUNT OF THE FEDERAL CONTRIBUTION IS QUESTIONABLE BECAUSE IT DOES NOT ASSURE THAT THE FEDERAL REIMBURSEMENT OF COSTS INCURRED BY MID IS APPLIED ONLY TO THE SHARABLE PORTION OF THE CONSTRUCTION PROJECT. WE BELIEVE THAT THE "ACTUAL CONSTRUCTION COST" SUBJECT TO FEDERAL SHARING SHOULD HAVE BEEN COMPUTED BASED ON THE ACTUAL COSTS OF CONSTRUCTION AND NOT BASED ON LINE ITEM BID PRICES WHICH DO NOT ACCURATELY REFLECT THE ACTUAL COSTS OF THE ITEMS SUBJECT TO FEDERAL SHARING. THUS WE REMAIN OF THE VIEW THAT AS A MATTER OF POLICY THE ACTUAL COSTS OF THE CONSTRUCTION CONTRACTOR SHOULD HAVE BEEN USED TO DETERMINE THE PROPER SHARABLE/NONSHARABLE COST RATIO, AND THAT RATIO SHOULD THEN HAVE BEEN APPLIED TO THE FIXED-PRICE CONSTRUCTION CONTRACT TO ASCERTAIN THE COST ACTUALLY INCURRED BY MID FOR THE SHARABLE PORTION OF THE PROJECT. HOWEVER, FOR THE REASONS STATED THE VOUCHER SUBMITTED BY THE DISBURSING OFFICER MAY BE CERTIFIED FOR PAYMENT.

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