B-25275, OCTOBER 19, 1942, 22 COMP. GEN. 367

B-25275, OCTOBER 19, 1942, 22 COMP. GEN. 367

CONTRACTS - COST-PLUS - EXCESSIVE WAGE RATES PAID BY LUMP SUM SUBCONTRACTOR A PROVISION OF COST-PLUS-A-FIXED-FEE CONTRACT THAT WAGES PAID BY THE CONTRACTOR OR A SUBCONTRACTOR TO LABORERS OR MECHANICS AT RATES IN EXCESS OF THOSE ESTABLISHED BY THE SECRETARY OF LABOR SHALL BE AT THE EXPENSE OF THE PRIME CONTRACTOR IS APPLICABLE TO LUMP SUM, AS WELL AS COST-PLUS, SUBCONTRACTS, AND WHERE A LUMP SUM SUBCONTRACTOR PAID ITS EMPLOYEES AT RATES HIGHER THAN THE ESTABLISHED RATES--- REQUIRING THE PRESUMPTION THAT THE SUBCONTRACT PRICE WAS COMPUTED ON THE BASIS OF THE HIGHER RATES--- THE EXCESS WAGES MUST BE AT THE EXPENSE OF THE PRIME CONTRACTOR RATHER THAN THE GOVERNMENT.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF WAR, OCTOBER 19, 1942:

REFERENCE IS MADE TO CONTRACT NO. W-7011-QM-2, DATED DECEMBER 27, 1940, WITH THE H. K. FERGUSON COMPANY AND THE OMAN CONSTRUCTION COMPANY, COVERING THE CONSTRUCTION OF A PLANT FOR THE LOADING OF FIXED ROUNDS, SHELLS, BOOSTERS AND FUSES AT MILAN, TENNESSEE, ON A COST-PLUS A- FIXED- FEE BASIS.

ARTICLE II OF THE CONTRACT PROVIDES, IN PART, AS FOLLOWS:

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

(A) ALL LABOR, MATERIAL, TOOLS, MACHINERY, EQUIPMENT, SUPPLIES,SERVICES, POWER, AND FUEL NECESSARY FOR EITHER TEMPORARY OR PERMANENT USE FOR THE BENEFIT OF THE WORK. 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 MADE IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT.

ARTICLE V, PARAGRAPH 1 (D) PROVIDES AS FOLLOWS:

1.THE CONTRACTOR HEREBY AGREES THAT HE WILL:

(D) ENTER INTO NO SUBCONTRACT FOR ANY PORTION OF THE WORK, EXCEPT IN THE FORM PRESCRIBED BY THE SECRETARY OF WAR, NOR WITHOUT THE WRITTEN APPROVAL OF THE CONTRACTING OFFICER. SUBCONTRACTS ARE DEFINED AS CONTRACTS ENTERED INTO BY THE CONTRACTOR WITH OTHERS WHICH INVOLVE THE PERFORMANCE, WHOLLY OR IN PART AT THE SITE OF THE WORK, OF SOME PART OF THE WORK DESCRIBED IN ARTICLE I HEREOF.

ARTICLE IX, PARAGRAPH 2, PROVIDES:

2. SHOULD THE CONTRACTOR OR ANY SUBCONTRACTOR PAY TO ANY LABORER OR MECHANIC A WAGE BASED UPON A RATE IN EXCESS OF THE WAGE RATE FOR THE CLASSIFICATION IN WHICH SAID LABORER OR MECHANIC IS INCLUDED AS ESTABLISHED FOR THE WORK BY THE SECRETARY OF LABOR, SUCH INCREASED WAGE SHALL BE AT THE EXPENSE OF THE CONTRACTOR AND SHALL NOT BE REIMBURSED BY THE UNITED STATES. WHEN, IN CONNECTION WITH THE AUDIT AND CHECK BY THE CONTRACTING OFFICER OF HIS AUTHORIZED REPRESENTATIVE OF THE CONTRACTOR'S PAY ROLLS, PRIOR TO REIMBURSEMENT AS CONTEMPLATED IN PARAGRAPH 1 OF ARTICLE II HEREOF, IT IS FOUND THAT ONE OR MORE LABORERS AND/OR MECHANICS HAVE BEEN PAID WAGES AT RATES IN EXCESS OF THE WAGE RATES, ESTABLISHED FOR SUCH LABORERS AND/OR MECHANICS, THE REIMBURSEMENT MADE TO THE CONTRACTOR ON ACCOUNT OF SUCH PAY ROLLS WILL NOT INCLUDE SUCH EXCESS PAYMENTS. THE PROVISIONS OF THIS SECTION SHALL NOT APPLY WHEN WAGE RATES FOR A PARTICULAR CLASSIFICATION GREATER THAN THOSE PRESCRIBED BY THE SECRETARY OF LABOR HAVE BEEN APPROVED IN WRITING BY THE CONTRACTING OFFICER WHO EXECUTED THIS CONTRACT OR HIS SUCCESSOR.

IT APPEARS THAT ON JULY 30, 1941, THE PRIME CONTRACTOR ENTERED INTO SUBCONTRACT NO. 6 WITH THE MIDWEST CONSTRUCTION AND ASPHALT COMPANY FOR THE FURNISHING BY THE SUBCONTRACTOR OF ALL THE LABOR, INCLUDING SUPERVISION, NECESSARY FOR THE BUILDING OF THE WOOD FRAMES FOR FOUNDATIONS, ERECTION OF FOUNDATION FORMS, SETTING OF REINFORCING STEEL, POURING CONCRETE, ETC., FOR APPROXIMATELY 700 IGLOOS FOR A LUMP SUM PRICE OF $2,432,520. THE SUBCONTRACT WAS APPROVED BY THE CONSTRUCTING QUARTERMASTER WHO APPARENTLY WAS ACTING AS THE REPRESENTATIVE OF THE CONTRACTING OFFICER. IN CONNECTION WITH SAID SUBCONTRACT, THE RECORDS OF THIS OFFICE SHOW THAT UPON AN AUDIT OF THE SUBCONTRACTOR'S PAY ROLLS IT WAS FOUND THAT THE SUBCONTRACTOR PAID LABORERS AND MECHANICS EMPLOYED BY IT ON THE PROJECT AT WAGE RATES IN EXCESS OF THOSE ESTABLISHED BY THE SECRETARY OF LABOR FOR SIMILAR LABOR CLASSIFICATIONS. HOWEVER, THERE IS NO SHOWING THAT THE CONTRACTING OFFICER APPROVED THE PAYMENT OF ANY INCREASED WAGE RATES FOR THE LABOR CLASSIFICATIONS INVOLVED, NOR DOES IT APPEAR THAT IN REIMBURSING THE PRIME CONTRACTOR FOR THE COST OF THE SUBCONTRACT ANY STEPS WERE TAKEN BY YOUR DEPARTMENT TO WITHHOLD THE DIFFERENCE BETWEEN THE WAGES WHICH WERE ACTUALLY PAID BY THE SUBCONTRACTOR TO ITS EMPLOYEES AND THE AMOUNTS THAT SHOULD HAVE BEEN PAID COMPUTED AT THE WAGE RATES PRESCRIBED BY THE SECRETARY OF LABOR.

THE MATTER WAS THE SUBJECT OF MY LETTER OF APRIL 22, 1942, TO THE CHAIRMAN OF THE SPECIAL COMMITTEE INVESTIGATING THE NATIONAL DEFENSE PROGRAM, UNITED STATES SENATE, A COPY OF WHICH IS ENCLOSED FOR YOUR INFORMATION. IT APPEARS THEREFROM THAT IN REPLY TO A REQUEST FOR A DECISION AS TO WHETHER, UNDER THE TERMS OF ARTICLE IX, PARAGRAPH 2, OF THE PRIME CONTRACT, SUPRA, THE INCREASED WAGES PAID BY THE SUBCONTRACTOR TO ITS EMPLOYEES SHOULD BE AT THE EXPENSE OF THE PRIME CONTRACTOR, THE COMMITTEE WAS ADVISED THAT UNDER THE TERMS OF SAID PROVISION THERE WAS NO OBLIGATION ON THE UNITED STATES TO REIMBURSE THE PRIME CONTRACTOR FOR THE COST OF A SUBCONTRACT, THE CONSIDERATION OF WHICH WAS BASED ON THE PAYMENT BY THE SUBCONTRACTOR OF WAGES IN EXCESS OF THOSE ESTABLISHED BY THE SECRETARY OF LABOR. THE COMMITTEE WAS ADVISED FURTHER THAT SINCE THE SUBCONTRACT IN QUESTION COVERED THE FURNISHING OF LABOR, ONLY, IT MUST BE ASSUMED--- IN THE ABSENCE OF EVIDENCE TO THE CONTRARY--- THAT THE LUMP SUM PRICE TO BE PAID THEREUNDER WAS BASED ON A PAYMENT BY THE SUBCONTRACTOR OF THE INCREASED WAGE RATES; AND, THEREFORE, THAT ANY INCREASED WAGES PAID BY THE SUBCONTRACTOR SHOULD BE AT THE EXPENSE OF THE PRIME CONTRACTOR AS PROVIDED IN ARTICLE IX, PARAGRAPH 2, OF THE PRIME CONTRACT.

SUBSEQUENTLY, THE CHIEF OF ENGINEERS, WAR DEPARTMENT, WAS REQUESTED BY THE AUDIT DIVISION OF THIS OFFICE TO FURNISH AN EXPLANATION AS TO THE AUTHORITY FOR REIMBURSING THE PRIME CONTRACTOR FOR THE FULL CONTRACT PRICE OF THE SUBCONTRACT, IN VIEW OF THE APPARENT PAYMENT BY THE SUBCONTRACTOR OF WAGE RATES IN EXCESS OF THOSE PRESCRIBED BY THE SECRETARY OF LABOR. THE CHIEF OF ENGINEERS REPLIED BY LETTER OF AUGUST 8, 1942, AS FOLLOWS:

REFERENCE IS MADE TO YOUR UNDATED LETTER (A-AWP-ED) ENCLOSING A COPY OF A LETTER DATED APRIL 22, 1942 (B-25275) FROM THE COMPTROLLER GENERAL TO HONORABLE HARRY S. TRUMAN, CHAIRMAN OF THE SPECIAL COMMITTEE INVESTIGATING THE NATIONAL DEFENSE PROGRAM, UNITED STATES SENATE, AND YOUR LETTER OF JULY 22, 1942, ALL CONCERNING COST-PLUS-A FIXED-FEE CONTRACT NO. W-7011 QM -2 WITH THE H.K. FERGUSON COMPANY AND OMAN CONSTRUCTION COMPANY, FOR THE CONSTRUCTION OF AN ORDNANCE PLANT AT MILAN, TENNESSEE.

THE QUESTION PRESENTED TO THE COMPTROLLER GENERAL BY SENATOR TRUMAN IS WHETHER WAGE RATES IN EXCESS OF THE MINIMUM RATES ESTABLISHED BY THE SECRETARY OF LABOR FOR THE PRIME CONTRACT PAID BY THE LUMP SUM SUBCONTRACTOR SHOULD BE AT THE EXPENSE OF THE FIXED-FEE PRIME CONTRACTOR UNDER SECTION 2, ARTICLE IX OF THE PRIME CONTRACT. BY YOUR UNDATED LETTER YOU REQUEST AN EXPLANATION AS TO THE AUTHORITY RELIED UPON IN REIMBURSING THE PRIME FIXED-FEE CONTRACTOR FOR THE CONTRACT PRICE OF THE LUMP SUM SUBCONTRACT WHEN THE LUMP SUM SUBCONTRACTOR IN FACT PAID WAGES IN EXCESS OF THOSE PRESCRIBED BY THE SECRETARY OF LABOR FOR THE PROJECT IN QUESTION.

THE AUTHORITY FOR MAKING REIMBURSEMENT TO THE FIXED-FEE PRIME CONTRACTOR FOR THE CONTRACT PRICE OF THE LUMP SUM SUBCONTRACT IN QUESTION IS CONTAINED IN PARAGRAPH B, SECTION 1, ARTICLE II OF THE PRIME CONTRACT WHICH PROVIDES FOR REIMBURSING THE PRIME FIXED-FEE CONTRACTOR FOR THE COST OF ALL SUBCONTRACTS MADE IN ACCORDANCE WITH THE PROVISIONS OF THE PRIME CONTRACT. IT IS TRUE THAT BY THE OPENING SENTENCE OF SECTION 1, ARTICLE II, NO SUBCONTRACT CAN BE THE PROPER SUBJECT OF REIMBURSEMENT UNLESS IT IS APPROVED OR RATIFIED BY THE CONTRACTING OFFICER. THE SUBCONTRACT IN QUESTION WAS APPROVED BY THE CONTRACTING OFFICER.

THE CONTRACTING OFFICER CAN APPROVE ANY LUMP SUM SUBCONTRACT ENTERED INTO BY THE FIXED-FEE PRIME CONTRACTOR FOR THE PERFORMANCE OF, AND FOR THE BENEFIT OF, THE WORK IN THE ABSENCE OF A LIMITATION UPON HIS AUTHORITY TO SO APPROVE SUCH LUMP SUM SUBCONTRACT CONTAINED IN THE PROVISIONS OF THE PRIME FIXED-FEE CONTRACT. AN EXAMINATION OF THE PRIME CONTRACT DOES NOT REVEAL ANY RESTRICTION UPON THE AUTHORITY OF THE CONTRACTING OFFICER TO APPROVE A LUMP SUM SUBCONTRACT OF THE KIND IN QUESTION, EXCEPT THAT IT BE ON A FORM PRESCRIBED BY THE SECRETARY OF WAR.

IT IS SUGGESTED IN THE LETTER DATED APRIL 22, 1942 (B-25275) THAT THE WORDING OF PARAGRAPH (B), SECTION 1, ARTICLE II MAKES THE PROVISIONS OF SECTION 2, ARTICLE IX APPLICABLE TO LUMP SUM SUBCONTRACTS. HOWEVER, BOTH A CONSIDERATION OF THE UNDERLYING NATURE OF LUMP SUM CONTRACTS AND AN EXAMINATION OF THE WORDING OF THE LATTER PROVISION IN THE PRIME CONTRACT MAKES IT CLEAR THAT THAT PROVISION HAS NO APPLICATION TO LUMP SUM SUBCONTRACTS.

THE PURPOSE OF ANY LUMP SUM CONTRACT OR SUBCONTRACT IS TO FINALLY FIX AND LIMIT IN ADVANCE THE COST OF THE WORK TO BE PERFORMED. IN THE MAKING OF LUMP SUM CONTRACTS AND SUBCONTRACTS THE INTERESTS OF THE GOVERNMENT ARE PROTECTED THROUGH OBTAINING THE MAXIMUM AMOUNT OF COMPETITION AND THEREBY PROCURING THE BEST PRICE OBTAINABLE IN THE MARKET. IN THE PARTICULAR CASE MENTIONED IN YOUR LETTERS, THE LUMP SUM SUBCONTRACT WAS LET AFTER ADVERTISING AND COMPETITIVE BIDDING TO THE LOWEST OF THREE BIDDERS. THE RESULTING PRICE NECESSARILY INCLUDED EVERY ITEM OF COST ANTICIPATED BY THE SUCCESSFUL BIDDER, INCLUDING ITEMS FOR CONTINGENCIES, PROFIT, ETC. IT HAS NEVER BEEN THE PRACTICE, NOR HAS IT BEEN DEEMED FEASIBLE OR DESIRABLE, IN GOVERNMENT LUMP SUM CONTRACTING, TO REQUIRE BIDDERS TO ITEMIZE COSTS AND OTHER FACTORS GOING TO MAKE UP THEIR BID PRICES. SUCH ITEMS AND OTHER FACTORS CONSIDERED BY THE PROSPECTIVE LUMP SUM CONTRACTORS HAVE NEVER BEEN SEGREGATED AND IT WOULD BE BOTH IMPOSSIBLE TO OBTAIN AND IMPRACTICABLE TO REQUIRE SUCH SEGREGATION.

IT IS SUGGESTED IN THE LETTER OF APRIL 22, 1942 (B-25275) THAT ONE OF THE PRIMARY MATTERS FOR CONSIDERATION IS WHETHER THE LUMP SUM PRICE WAS BASED ON THE PAYMENT BY THE SUBCONTRACTOR OF THE WAGE RATES ESTABLISHED BY THE SECRETARY OF LABOR OR ON THE PAYMENT OF WAGE RATES IN EXCESS THEREOF. ACCORDANCE WITH THE USUAL PROCEDURE, NEITHER THIS NOR ANY OTHER ITEM OF COST WAS SEGREGATED IN THE MAKING OF THIS PARTICULAR SUBCONTRACT AND THERE IS NOTHING IN THE WRITTEN RECORDS IN ANY CONNECTION TO INDICATE THAT THE BID WAS SUBMITTED OR THE CONTRACT MADE ON THE BASIS OF ANY PARTICULAR WAGE SCALE. SINCE THE SUBCONTRACT WAS LET AFTER COMPETITIVE BIDDING, THE ONLY REASONABLE ASSUMPTION IS THAT THE CONTRACT WAS BASED ON THE BIDDER'S ESTIMATE OF WHAT IT WOULD BE NECESSARY TO PAY IN ORDER TO OBTAIN THE NECESSARY LABOR SO THAT THE CONTRACT MIGHT BE COMPLETED WITHIN THE TIME REQUIRED.

IN EXAMINING THE SPECIFIC WORDING OF SECTION 2, ARTICLE IX OF THE PRIME CONTRACT, THE BASIC PRINCIPLES RELATIVE TO LUMP SUM CONTRACTS, AS STATED ABOVE, SHOULD BE BORNE IN MIND. IT WILL BE NOTED THAT THE FIRST SENTENCE OF THE SECTION PROVIDES THAT WAGES IN EXCESS OF THE MINIMUM "SHALL NOT BE REIMBURSED.' ( ITALICS SUPPLIED.) LIKEWISE, IN THE SECOND SENTENCE, THE WORD ,REIMBURSEMENT" IS USED TWICE TO THE EFFECT THAT IF WAGES IN EXCESS OF THE MINIMUM ARE FOUND TO HAVE BEEN PAID, THE "REIMBURSEMENTS * * * WILL NOT INCLUDE SUCH EXCESS PAYMENTS.' THE MEANING OF THE WORD "REIMBURSEMENT" IS WELL UNDERSTOOD, BEING DEFINED IN BOUVIER'S DICTIONARY, BALDWIN'S EDITION, 1934, AS "TO PAY BACK" AND IN WEBSTER'S NEW INTERNATIONAL DICTIONARY, SECOND EDITION, UNABRIDGED, 1937, AS "TO MAKE RESTORATION OR PAYMENT OF AN EQUIVALENT * * *.'

THERE IS NOTHING IN THE PRIME OR IN THE LUMP SUM SUBCONTRACT CONCERNING THE PAYMENT BACK OR REIMBURSEMENT OF WAGES PAID BY THE LUMP SUM SUBCONTRACTOR AS SUCH, WHETHER EXCESSIVE OR NOT. INASMUCH AS WAGES AND OTHER ITEMS OF THE LUMP SUM SUBCONTRACTOR'S COST ARE NOT SEGREGATED, IT COULD NOT HAVE BEEN INTENDED THAT ANY SUCH ITEMS BE PAID BACK OR REIMBURSED OR THAT THE GOVERNMENT BE OBLIGATED TO MAKE RESTORATION THEREOF TO ANY PARTY. THE PRIME CONTRACT UNDER THE PROVISIONS OF PARAGRAPH (B), SECTION 1, ARTICLE II REQUIRES REIMBURSEMENT OF THE PRIME CONTRACTOR FOR THE LUMP SUM SUBCONTRACT PRICE, BUT ANY SUCH SUMS THUS PAID ARE NOT A PAYMENT BACK OR RESTORATION OF WAGES OR OTHER ITEMS OF COST INTO WHICH THE LUMP SUM SUBCONTRACT PRICE MIGHT THEORETICALLY BE SEGREGATED. THUS, IT SEEMS CLEAR THAT THE PROVISIONS OF SECTION 2, ARTICLE IX, WHILE HAVING OBVIOUS MEANING IN THE CASE OF A COST-PLUS-A-FIXED-FEE SUBCONTRACT WHERE THE PRIME CONTRACTOR IS ENTITLED TO REIMBURSEMENT FOR WAGES AND OTHER EXPENSES OF THE SUBCONTRACTOR, ARE ALTOGETHER MEANINGLESS WHEN APPLIED TO A LUMP SUM SUBCONTRACTOR WHO SEEKS NO REIMBURSEMENT FOR WAGES AND WHO IS ENTITLED TO NONE.

THE PRINCIPAL PURPOSE OF THE PROVISIONS OF SECTION 2, ARTICLE IX WAS TO PROTECT THE GOVERNMENT AGAINST EXORBITANT EXPENDITURES FOR LABOR. IN THE CASE OF FIXED-FEE PRIME CONTRACTS AND SUBCONTRACTS, WHERE THE PRIME CONTRACTOR IS ENTITLED TO REIMBURSEMENT FOR ACTUAL EXPENDITURES FOR WAGES AND OTHER COSTS, SUCH A PROVISION AS IS FOUND IN SECTION 2, ARTICLE IX IS OBVIOUSLY NECESSARY TO PREVENT THE GOVERNMENT'S BEING BURDENED WITH INCREASED WAGE RATES WITHOUT ITS CONSENT. IN THE CASE OF A LUMP SUM SUBCONTRACT, WHERE THE CONTRACTOR IS ENTITLED ONLY TO RECEIVE THE CONTRACT PRICE, THE TERMS OF THE CONTRACTS AND THE UNDERLYING NATURE OF THE LUMP SUM SUBCONTRACT PREVENT THE GOVERNMENT'S BEING BURDENED WITH ANY INCREASED EXPENDITURES MADE BY THE LUMP SUM SUBCONTRACTOR, WHETHER FOR WAGES OR SOME OTHER ITEM OF COST. THUS, THE PAYMENT BY THE SUBCONTRACTOR OF WAGES IN EXCESS OF THE RATES PERMITTED COULD NOT OPERATE TO INCREASE THE COST OF THE PROJECT TO THE GOVERNMENT, AS IT WOULD IN THE CASE OF A FIXED-FEE SUBCONTRACT, BUT WOULD MERELY DIMINISH THE PROFITS OF THE SUBCONTRACTOR. IN THE DRAFTING AND ADMINISTRATION OF FIXED-FEE CONTRACTS, SECTION 2, ARTICLE IX WAS NEVER CONSIDERED, EITHER BY THE GOVERNMENT OR BY CONTRACTORS, AS APPLICABLE TO LUMP SUM SUBCONTRACTS. THE MANUAL FOR THE CONSTRUCTION DIVISION, OFFICE OF THE QUARTERMASTER GENERAL, IN USE AT THE TIME THE ABOVE-MENTIONED CONTRACTS WERE ENTERED INTO, PROVIDED, IN DEALING WITH PROVISIONS CONCERNING WAGE RATES, ONLY FOR MINIMUM RATES UNDER LUMP SUM CONTRACTS, WHILE IN DEALING WITH FIXED-FEE CONTRACTS, MAXIMUM RATES ARE REQUIRED AS WELL. (SEE SECTIONS 2303.03 AND 2303.05; 2301.06 AND 2301.07.) IN ANY EVENT, THE AUTHORITY FOR REIMBURSING FIXED-FEE PRIME CONTRACTORS FOR THE FULL PRICE OF LUMP SUM SUBCONTRACTS, IRRESPECTIVE OF THE WAGE RATES PAID BY THE LUMP SUM SUBCONTRACTORS, IS FOUND IN THE TERMS OF THE FIXED-FEE PRIME CONTRACT ITSELF.

WHILE ARTICLE II OF THE PRIME CONTRACT PROVIDES FOR REIMBURSING THE PRIME CONTRACTOR FOR THE COST OF SUBCONTRACTS MADE WITH THE APPROVAL OF THE CONTRACTING OFFICER OR HIS REPRESENTATIVE, THERE IS FOUND NO BASIS FOR THE STATEMENT OF THE CHIEF OF ENGINEERS, IN HIS LETTER OF AUGUST 8, SUPRA, THAT THE CONTRACTING OFFICER CAN APPROVE ANY LUMP SUM CONTRACT ENTERED INTO BY THE PRIME CONTRACTOR IN THE ABSENCE OF SOME LIMITATION ON THE CONTRACTING OFFICER'S AUTHORITY IN THE PROVISIONS OF THE PRIME CONTRACT. THE AUTHORITY OF THE CONTRACTING OFFICER TO APPROVE ANY SUBCONTRACT IS SUBJECT TO THE FURTHER LIMITATION THAT OFFICERS OF THE GOVERNMENT ARE NOT AUTHORIZED TO MODIFY THE TERMS OF A CONTRACT BY A SUPPLEMENTAL OR SUBSTITUTE AGREEMENT IF SUCH MODIFICATION IS PREJUDICIAL TO THE INTERESTS OF THE UNITED STATES. SEE PACIFIC HARDWARE AND STEEL COMPANY V. UNITED STATES, 49 C.1CLS. 327, 335; BAUSCH AND LOMB OPTICAL COMPANY V. UNITED STATES, 78 C.1CLS. 584, 607, AND 19 COMP. GEN. 48. IN THIS CONNECTION, IT APPEARS THAT UNDER THE PROVISIONS OF THE PRIME CONTRACT THE GOVERNMENT ACQUIRED THE RIGHT TO HAVE THE PRIME CONTRACTOR FURNISH ALL LABOR NECESSARY FOR THE PERFORMANCE OF THE WORK COVERED BY THE SUBCONTRACT FOR WHICH THE PRIME CONTRACTOR WAS TO BE REIMBURSED AT THE WAGE RATES ESTABLISHED BY THE SECRETARY OF LABOR. HOWEVER, AS A RESULT OF THE PRIME CONTRACTOR'S ENTERING INTO THE SUBCONTRACT IN QUESTION, THE GOVERNMENT BECAME OBLIGATED TO PAY FOR SAID LABOR AT A CONTRACT PRICE WHICH MUST BE PRESUMED TO HAVE INCLUDED WAGE RATES HIGHER THAN THOSE ESTABLISHED BY THE SECRETARY OF LABOR. HENCE, THE INSTANT SUBCONTRACT CLEARLY WAS PREJUDICIAL TO THE RIGHT ACQUIRED BY THE UNITED STATES UNDER THE PRIME CONTRACT; AND IF SUCH SUBCONTRACT WERE RECOGNIZED AS BINDING ON THE UNITED STATES IT WOULD RESULT IN THE GOVERNMENT'S BEING REQUIRED TO PAY GREATER COSTS FOR THE WORK WITHOUT ITS RECEIVING ANY VALID CONSIDERATION FOR SUCH INCREASED COSTS. ACCORDINGLY, THE APPROVAL OF THE SUBCONTRACT IN QUESTION BY THE CONTRACTING OFFICER MAY NOT BE RECOGNIZED AS IMPOSING ANY BINDING OBLIGATION ON THE UNITED STATES TO REIMBURSE THE PRIME CONTRACTOR FOR THE WORK PERFORMED THEREUNDER AT THE PRICE STATED THEREIN.

FURTHERMORE, IT CANNOT BE SAID THAT THE TERMS OF THE PRIME CONTRACT ITSELF IMPOSED NO LIMITATION ON THE CONTRACTING OFFICER'S AUTHORITY TO APPROVE THE MAKING OF ANY LUMP SUM CONTRACT DEEMED NECESSARY FOR THE PERFORMANCE OF THE WORK. IN THIS CONNECTION, IT IS TO BE NOTED THAT THE PURPOSE AND INTENT OF ARTICLE IX, PARAGRAPH 2, OF THE PRIME CONTRACT IS TO PROTECT THE GOVERNMENT FROM BEING REQUIRED TO REIMBURSE THE PRIME CONTRACTOR FOR ANY EXCESSIVE WAGES PAID EITHER BY THE PRIME CONTRACTOR OR THE SUBCONTRACTOR. THAT SUCH WAS THE INTENTION OF SAID CONTRACT PROVISION IS ADMITTED BY THE CHIEF OF ENGINEERS IN HIS LETTER OF AUGUST 8, SUPRA. HOWEVER, IT IS URGED BY THE CHIEF OF ENGINEERS THAT WHILE THE TERMS OF ARTICLE IX, PARAGRAPH 2, WOULD PROHIBIT REIMBURSING A PRIME CONTRACTOR FOR EXCESSIVE WAGES PAID BY A SUBCONTRACTOR ON A COST-PLUS-A-FIXED-FEE SUBCONTRACT, SUCH PROVISION IS NOT APPLICABLE TO LUMP SUM SUBCONTRACTS SINCE THE REIMBURSEMENT IN THE LATTER CASE IS NOT FOR WAGES BUT REPRESENTS THE PAYMENT OF A CONTRACT PRICE WHICH INCLUDES OTHER ITEMS IN ADDITION TO ACTUAL WAGE COSTS.

HOWEVER, THERE APPEARS NO BASIS FOR RESTRICTING THE LIMITATION CONTAINED IN ARTICLE IX, PARAGRAPH 2, ON THE GOVERNMENT'S LIABILITY FOR REIMBURSEMENT OF WAGES, TO SUBCONTRACTS ENTERED INTO ON A COST-PLUS-A FIXED-FEE BASIS. THE CONTRACT PROVISION ITSELF CONTAINS NO SUCH DISTINCTION, AND THE INTERPOLATION OF SUCH A MEANING INTO THE LANGUAGE OF THE PROVISION WOULD TEND TO DEFEAT THE VERY PURPOSE INTENDED TO BE ACCOMPLISHED THEREBY. IN OTHER WORDS, THERE IS NO QUESTION BUT THAT UNDER A CONTRACT WHICH CONTEMPLATES THE FURNISHING OF LABOR, ONE OF THE FACTORS ENTERING INTO THE LUMP SUM PRICE OF A SUBCONTRACTOR IS THE COST OF WAGES OF LABORERS AND MECHANICS AND, CONSEQUENTLY, A LUMP SUM PRICE OF A SUBCONTRACTOR NECESSARILY MUST BE COMPUTED ON AND MUST REFLECT WAGE RATES AT WHICH THE SUBCONTRACTOR INTENDED TO PAY ITS LABORERS AND MECHANICS--- PARTICULARLY IN A SUBCONTRACT SUCH AS THE INSTANT ONE UNDER WHICH THERE IS FURNISHED LABOR, ONLY, AND FEW, IF ANY, OTHER ITEMS ARE INCLUDED IN THE LUMP SUM CONTRACT PRICE. AS WAS STATED IN MY LETTER OF APRIL 22, 1942, TO THE SPECIAL COMMITTEE INVESTIGATING THE NATIONAL DEFENSE PROGRAM, ABOVE REFERRED TO, SINCE AN AUDIT OF THE SUBCONTRACTOR'S PAY ROLL REVEALS THAT PAYMENTS ACTUALLY WERE MADE TO ITS EMPLOYEES AT RATES IN EXCESS OF THOSE ESTABLISHED BY THE SECRETARY OF LABOR, IT MUST BE PRESUMED THAT THE SUBCONTRACTOR INTENDED TO PAY THE HIGHER WAGE RATES AT THE TIME ITS CONTRACT PRICE WAS DETERMINED AND, CONSEQUENTLY, THAT THE LUMP SUM PRICE CONTAINED IN THE SUBCONTRACT INCLUDED THE HIGHER WAGE RATES. THEREFORE, THE REIMBURSEMENT OF THE PRIME CONTRACTOR FOR THE FULL AMOUNT OF THE LUMP SUM PRICE CONTAINED IN THE SUBCONTRACT WILL RESULT IN THE GOVERNMENT'S BEING REQUIRED TO BEAR THE COST OF THE INCREASED WAGES AND WOULD DEFEAT THE PURPOSE WHICH WAS INTENDED TO BE ACCOMPLISHED BY THE TERMS OF ARTICLE IX, PARAGRAPH 2, SUPRA.

MOREOVER, THE FACT THAT, IN THE ADMINISTRATION OF FIXED-FEE CONTRACTS, ARTICLE IX, PARAGRAPH 2, WAS NEVER CONSIDERED BY THE REPRESENTATIVES OF YOUR DEPARTMENT AS BEING APPLICABLE TO LUMP SUM SUBCONTRACTS IS IMMATERIAL, SINCE IT APPEARS FROM THE FOREGOING THAT IN ORDER TO EFFECT THE PURPOSE INTENDED TO BE ACCOMPLISHED BY SUCH PROVISION IT MUST BE CONSIDERED AS APPLICABLE TO LUMP SUM SUBCONTRACTS.

IN VIEW OF THE FOREGOING IT MUST BE HELD THAT ANY AMOUNTS PAID BY THE SUBCONTRACTOR TO ITS EMPLOYEES IN EXCESS OF THE WAGE RATES ESTABLISHED BY THE SECRETARY OF LABOR MUST BE AT THE EXPENSE OF THE PRIME CONTRACTOR AND ARE NOT REIMBURSABLE BY THE GOVERNMENT. ACCORDINGLY, YOU ARE ADVISED THAT UNLESS EVIDENCE IS FURNISHED THIS OFFICE SHOWING THAT COLLECTION HAS BEEN MADE BY YOUR DEPARTMENT FROM THE PRIME CONTRACTOR OF THE DIFFERENCE BETWEEN THE AMOUNTS PAID AS WAGES UNDER THE SUBCONTRACTS INVOLVED AND THE AMOUNTS WHICH WOULD HAVE BEEN PAID AT THE WAGE RATES ESTABLISHED BY THE SECRETARY OF LABOR, CREDIT WILL BE WITHHELD ON THE PERTINENT DISBURSING OFFICER'S VOUCHERS FOR THE AMOUNT OF THE EXCESS WAGES PAID UNDER THE SUBCONTRACT IN QUESTION.