B-58371, AUG 14, 1946

B-58371, AUG 14, 1946

PRECIS-UNAVAILABLE

COLONEL C. K. MCALISTER, F.D. U.S. ARMY:

THERE HAVE BEEN RECEIVED BY REFERENCE FROM THE CHIEF OF FINANCE, ARMY SERVICE FORCES, RECLAIM VOUCHERS 15, 17, AND 24 IN THE AMOUNTS OF $1,707, $1,815.58, AND $542.30, RESPECTIVELY, STATED IN FAVOR OF CURTISS-WRIGHT CORPORATION, AIRPLANE DIVISION, BUFFALO PLANTS, A COST PLUS-A-FIXED-FEE CONTRACTOR UNDER CONTRACT NO. W-535-AC-24581, DATED JUNE 1, 1942, WITH A REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT THEREON IS AUTHORIZED.

THE VOUCHERS COVER RECLAIM OF AMOUNTS COLLECTED FROM THE CONTRACTOR AS A RESULT OF EXCEPTIONS TAKEN BY THE AUDIT DIVISION OF THE GENERAL ACCOUNTING OFFICE. SAID AMOUNTS REPRESENT THE PORTION STATED TO BE ALLOCABLE TO THE INSTANT CONTRACT, OF EXPENDITURES BY THE CONTRACTOR FOR (1) A MEMORIAL SERVICE FOR 14 EMPLOYEES KILLED WHEN AN AIRPLANE CRASHED THROUGH THEREOF OF THE CONTRACTOR'S PLANT, INCLUDING WAGES OF EMPLOYEES FOR THE TIME SPENT IN ATTENDING THE SERVICE (VOUCHER 15, $1,707); (2) THE EXCESS COST OF TOOL SERVICE TO EMPLOYEES OVER THE AMOUNT OF TOOL SALES TO EMPLOYEES (VOUCHER 17, $1,815.58), AND (3) A TRAINING FILM RELATING TO A FIXED PRICE CONTRACT (VOUCHER 24, $542.30).

THE CONTRACT PROVIDES GENERALLY THAT THE CONTRACTOR SHALL MANUFACTURE, FURNISH, AND DELIVER TO THE GOVERNMENT CERTAIN AIRPLANES, SPARE PARTS, AND DATA MORE PARTICULARLY DESCRIBED THEREIN, IN CONSIDERATION OF REIMBURSEMENT FOR THE COST OF THE WORK AND THE PAYMENT OF A STIPULATED FIXED FEE. RELATIVE TO REIMBURSEMENT OF COSTS ARTICLE 3(B) PROVIDES, IN PART:

"FOR PURPOSES OF DETERMINING THE AMOUNTS PAYABLE TO THE CONTRACTOR UNDER THIS CONTRACT, ALLOWABLE ITEMS OF COST WILL BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH REGULATIONS FOR THE DETERMINATION OF THE COST OF PERFORMING A CONTRACT AS PROMULGATED BY THE TREASURY DEPARTMENT IN SECTION 26.9 OF CHAPTER I OF TITLE 26 OF CODE OF FEDERAL REGULATIONS, AS CONTAINED IN T.D. 5000 AND APPROVED BY THE SECRETARY OF WAR, AUGUST 2, 1940, IT BEING UNDERSTOOD AND AGREED, WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THAT:

"(9) IT BEING CONTEMPLATED BY THIS CONTRACT THAT EXCEPT AS OTHERWISE THEREIN PROVIDED THE ACTUAL COST OF THE WHOLE WORK AND THE RISK THEREOF IS TO BE ASSUMED BY THE GOVERNMENT, LOSSES, AND EXPENSES, NOT COMPENSATED BY INSURANCE OR OTHERWISE, ACTUALLY SUSTAINED BY CONTRACTOR IN CONNECTION WITH THE WORK, AND NOT FOUND BY THE CONTRACTING OFFICER TO BE UNREASONABLE UNDER ALL THE CIRCUMSTANCES INVOLVED, AND SUCH OTHER ITEMS AS SHOULD IN THE OPINION OF THE CONTRACTING OFFICER BE INCLUDED IN THE COST OF THE WORK, SHALL BE ALLOWABLE ITEMS OF COST HEREUNDER; PROVIDED, THAT LOSSES RESULTING FROM FAILURE OF THE CONTRACTOR TO INSURE AS SPECIFICALLY PROVIDED IN THIS CONTRACT SHALL BE BORNE BY THE CONTRACTOR AND SHALL NOT BE ALLOWABLE ITEMS OF COST HEREUNDER."

BY SUPPLEMENTAL AGREEMENT 2 DATED SEPTEMBER 23, 1942, THERE WAS ADDED TO ARTICLE 3(B) THE FOLLOWING PARAGRAPH:

"(11) ALL REASONABLE DISCONTINUANCE WAGES, VACATION ALLOWANCES, AND SERVICE AWARDS PAID TO THE CONTRACTOR'S EMPLOYEES IN ACCORDANCE WITH ITS POLICY ESTABLISHED PRIOR TO THE DATE HEREOF, AND THE COST OF ALL REASONABLE GROUP INSURANCE, RETIREMENT INCOME AND ALL OTHER WELFARE AND EMPLOYEE RELATION PLANS MAINTAINED BY THE CONTRACTOR, IN ACCORDANCE WITH SUCH POLICY, FOR THE BENEFIT OF EMPLOYEES ENGAGED IN THE PERFORMANCE OF THIS CONTRACT, (EXCEPT SELF-INSURANCE PLANS, THE COSTS OF WHICH SHALL BE DETERMINED IN ACCORDANCE WITH THE APPLICABLE PROVISIONS OF T.D. 5000), IT BEING UNDERSTOOD THAT IN CASE OF ANY EMPLOYEE WHO SHALL HAVE BEEN TRANSFERRED TO EMPLOYMENT BY THE CONTRACTOR FROM EMPLOYMENT BY A CORPORATION AFFILIATED WITH THE CONTRACTOR, ALLOWANCES OF COSTS HEREUNDER SHALL BE DETERMINED ON THE BASIS OF THE RATIO OF THE SERVICE OF SUCH EMPLOYEE TO THE CONTRACTOR IN THE PERFORMANCE OF THIS CONTRACT TO THE COMBINED SERVICE OF SUCH EMPLOYEE WITH ALL SUCH AFFILIATED CORPORATIONS."

PERTINENT PROVISIONS OF T.D. 5000 REFERRED TO IN THE CONTRACT ARE AS FOLLOWS:

"SEC. 26.9 COST OF PERFORMING A CONTRACT OR SUBCONTRACT.-- (A) GENERAL RULE.-- THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT SHALL BE THE SUM OF (1) THE DIRECT COSTS, INCLUDING THEREIN EXPENDITURES FOR MATERIALS, DIRECT LABOR AND DIRECT EXPENSES, INCURRED BY THE CONTRACTING PARTY IN PERFORMING THE CONTRACT OR SUBCONTRACT; AND (2) THE PROPER PROPORTION OF ANY INDIRECT COSTS (INCLUDING THEREIN A REASONABLE PROPORTION OF MANAGEMENT EXPENSES) INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT.

"(C) FACTORY COSTS.--

"(5) (E) MISCELLANEOUS INDIRECT FACTORY EXPENSES.-- MISCELLANEOUS FACTORY EXPENSES NOT DIRECTLY CHARGEABLE TO THE FACTORY COST OF PERFORMING THE CONTRACT OR SUBCONTRACT, SUCH AS *** EMPLOYEES' WELFARE EXPENSES ***.

"(J) ALLOCATION OF INDIRECT COSTS.-- NO GENERAL RULE APPLICABLE TO ALL CASES MAY BE STATED FOR ASCERTAINING THE PROPER PROPORTION OF THE INDIRECT COSTS TO BE ALLOCATED TO THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT. SUCH PROPER PROPORTION DEPENDS UPON ALL THE FACTS AND CIRCUMSTANCES RELATING TO THE PERFORMANCE OF THE PARTICULAR CONTRACT OR SUBCONTRACT. SUBJECT TO A REQUIREMENT THAT ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT SHALL BE ELIMINATED FROM THE AMOUNT TO BE ALLOCATED, THE FOLLOWING METHODS OF ALLOCATION ARE OUTLINED AS ACCEPTABLE IN A MAJORITY OF CASES."

THUS, AS A CONDITION PRECEDENT TO REIMBURSEMENT, IT IS CLEAR THAT ANY INDIRECT COST INCURRED BY THE CONTRACTOR MUST BE SHOWN TO BE INCIDENT TO, AND NECESSARY FOR, THE PERFORMANCE OF THE CONTRACT WORK.

RECLAIM VOUCHER 15 IS SUPPORTED BY STATEMENTS WHICH SHOW THAT THERE WAS EXPENDED BY THE CONTRACTOR IN CONNECTION WITH THE MEMORIAL SERVICE A TOTAL OF $14,164.82 AND THAT 12,050983 PERCENT OF INDIRECT EXPENDITURES FOR THE YEAR ENDING DECEMBER 31, 1942, IS APPLICABLE TO COST-PLUS-A-FIXED-FEE CONTRACTS. ALSO ATTACHED TO THE VOUCHER IS A STATEMENT OF THE RESIDENT AUDITOR DATED APRIL 1, 1946, WHICH READS IN PART:

"2. THE FOLLOWING EXCERPT IS TAKEN FROM THE CONTRACTOR'S LETTER DATED 25 MAY 1945, WHICH IS AN INTEGRAL PART OF SUBJECT RECLAIM VOUCHER:

"'THE EXPENSES *** WERE INCURRED IN CONNECTION WITH SPECIAL MEMORIAL SERVICES HELD IN THE CONTRACTOR'S PARKING LOT IN FINAL TRIBUTE TO FOURTEEN (14) CURTISS-WRIGHT AND GOVERNMENT EMPLOYEES KILLED WHEN AN AIRPLANE CRASHED THROUGH THE ROOF OF THE AIRPORT PLANT CAUSING AN EXPLOSION AND DISASTER. SPECIAL ALTAR AND CHANCEL EQUIPMENT WAS PREPARED FOR CATHOLICS, JEWS, AND PROTESTANTS AND THE SERVICES OF THE RESPECTIVE RELIGIOUS LEADERS WERE OBTAINED FOR SUCH CEREMONY. EMPLOYEES WERE ALLOWED A ONE-HALF (1/2) HOUR TO ATTEND SUCH SERVICES.'

"'THE EXPENSE OF SUCH CEREMONY WAS CONSIDERED IMPERATIVE TOWARDS "EMPLOYEES' MORALE" AND PROVIDING A CEREMONY IN CONTRACTOR'S PLANT AREA GREATLY REDUCED THE TIME OFF EMPLOYEES WOULD NATURALLY EXPECT TO ATTEND SERVICES AT A REMOTE LOCATION.'

"3. TM 14-1000 SPECIFICALLY STATES THAT EXPENSES OF EVENTS WHICH ARE DESIGNED TO STIMULATE THE EFFORTS OF EMPLOYEES TOWARD INCREASED PRODUCTION OR SIMILAR OBJECTIVES, ARE ALLOWABLE.

"4. CURTISS-WRIGHT RECOGNIZED THE NEED FOR A MEMORIAL SERVICE, AND BEFITTINGLY HELD THIS FINAL TRIBUTE TO ITS DECEASED PRODUCTION SOLDIERS AT THE SCENE OF THE DISASTER IN THE PLANT AREA, SO THAT ALL CURTISS EMPLOYEES COULD ATTEND WITH A MINIMUM OF LOST TIME TO THE PRODUCTION SCHEDULE. IS THE BELIEF OF THE RESIDENCY THAT THE HALF HOUR ALLOTTED EACH EMPLOYEE FOR THE CEREMONY CREATED A DEFINITE STIMULATION TO PRODUCTION. CONVERSELY, THE ADVERSE EFFECT THAT WOULD HAVE RESULTED IF THE COMPANY HAD NOT AFFORDED ITS EMPLOYEES THE OPPORTUNITY OF ATTENDING SUCH A SERVICE, WOULD HAVE IMMEASURABLY DEFLATED EMPLOYEE MORALE WITH A CORRESPONDING DECREASE IN PRODUCTION, AT A TIME WHEN THE PRODUCTION OF AIRCRAFT WAS VITALLY NEEDED IN THE PROSECUTION OF THE WAR.

"5. IT SHOULD BE NOTED THAT THE GOVERNMENT SHARED BUT A SMALL PERCENTAGE OF THE COST OF THE MEMORIAL SERVICE, THAT IS, APPROXIMATELY 12%, OR AN AMOUNT OF $1,707.00 APPLICABLE TO CPFF CONTRACTS.

"6. BASED ON THE INFORMATION SUBMITTED HEREWITH, IT IS THE OPINION OF THE RESIDENCY, THAT THE CONTRACTOR'S RECLAIM IS ELIGIBLE FOR REIMBURSEMENT, AND ACCORDINGLY, AUDIT APPROVAL WAS GIVEN TO RECLAIM VOUCHER #15 IN THE AMOUNT OF $1,707.00."

IN VIEW OF THE EVIDENCE NOW OF RECORD THAT THE SERVICES AND THE ATTENDANCE OF EMPLOYEES THEREAT "CREATED A DEFINITE STIMULATION TO PRODUCTION" THIS OFFICE WILL NOT BE REQUIRED TO FURTHER OBJECT TO REIMBURSEMENT OF THE PROPER PRO RATA SHARE OF THE COST OF SUCH SERVICE. SEE B-48982, JUNE 28, 1945: B-52057, NOVEMBER 7, 1945.

WITH RESPECT TO THE AMOUNT OF $1,815.58 (RECLAIM VOUCHER 17), REPRESENTING THE PRO RATA SHARE OF THE LOSS CHARGEABLE TO COST-PLUS-A FIXED-FEE CONTRACTS AND OCCASIONED BY REASON OF THE FACT THAT THE COST OF TOOL SALES TO EMPLOYEES EXCEEDED THE AMOUNT RECEIVED FROM SUCH SALES, THE CONTRACTOR, IN ITS LETTER OF FEBRUARY 15, 1946, STATES:

"2. PURCHASES AND SALE OF TOOLS IS CONTROLLED BY AN OVERHEAD ACCOUNT. IS THE POLICY OF THE CONTRACTOR TO FURNISH TOOLS TO THE EMPLOYEES AT COST AND IN DOING SO, SMALL LOSSES OR GAINS ARE OCCASIONED DUE TO AFFIXING UNIT PRICES.

"3. CONSIDERING THE VOLUME OF SALES INVOLVED AND THE FACT THAT IT IS A MUTUAL BENEFIT TO THE GOVERNMENT AND CONTRACTOR FOR THE EMPLOYEE TO PROVIDE HIS OR HER OWN TOOLS, IT WOULD APPEAR REASONABLE TO ASSUME THAT THE CPFF CONTRACTS WOULD ABSORB THE PROPER SHARE OF ANY DIFFERENCES, IN THIS CASE A NET LOSS.

"4. IN OTHER OVERHEAD ACCOUNTS WHERE A NET PROFIT IS SHOWN SUCH AS REVENUE FROM VENDING MACHINES, ETC., THE CPFF CONTRACTS RECEIVED THE PROPER PORTION OF CREDIT. BASICALLY THIS ACCOUNT IS SIMILAR TO THE OPERATION OF CAFETERIA WITH THE WELL SETTLED POLICY OF PROVIDING MEALS AT COST AND LOSSES ARE PROPORTIONALLY ABSORBED BY CPFF CONTRACTS."

IN APPROVING THE REIMBURSEMENT OF SAID AMOUNT OF $1,815.58, THE RESIDENT AUDITOR, ARMY AIR FORCES, STATES:

"5. THE RESIDENT AUDITOR'S REPLY DATED 15 JUNE 1945 TO INFORMAL INQUIRY NO. 943, SPECIFICALLY STATED THAT THE RESALE OF SUCH TOOLS TO EMPLOYEES REPRESENTED A WAR TIME ACTIVITY CAUSED BY THE DIFFICULTY IN SECURING NECESSARY TOOLS FOR THE PERFORMANCE OF THE CONTRACTS. IT WAS THE USUAL PRACTICE OF THE AIRCRAFT INDUSTRY TO SECURE SUCH TOOLS FOR ITS EMPLOYEES AS THESE TOOLS, WHICH WERE INCIDENT TO, AND NECESSARY FOR, THE PERFORMANCE OF THE CONTRACT, COULD ONLY BE OBTAINED THROUGH PLANT PRIORITIES DURING THAT PERIOD. SAID REPLY FURTHER STATED THAT IT WAS THE CONTRACTOR'S POLICY TO INCLUDE IN OVERHEAD, ALL EXPENSES AND INCOME IN THE PURCHASE AND SALE OF SUCH TOOLS TO EMPLOYEES. THE RESULTANT SMALL GAIN OR LOSS WOULD BE PRORATED TO FIXED PRICE AND CPFF CONTRACTS. IN THE INSTANT CASE, APPROXIMATELY 38% OF THE LOSS WAS ALLOCATED TO CPFF CONTRACTS. IT SHOULD BE NOTED THAT THE REVENUE FROM THE OPERATION OF OTHER OVERHEAD TRANSACTIONS FOR THE MUTUAL BENEFIT OF THE GOVERNMENT, THE CONTRACTOR, AND THE EMPLOYEES, SUCH AS REVENUE FROM VENDING MACHINES, ARE REFLECTED AS CREDITS TO OVERHEAD, AND PROPORTIONATELY ABSORBED BY CPFF CONTRACTS."

THUS, WHILE THERE WOULD APPEAR NO REASON WHY THE EMPLOYEES FOR WHOM THE TOOLS IN QUESTION WERE PROCURED SHOULD NOT HAVE BEEN CHARGED WITH THE ENTIRE COST OF THE TOOLS AND HANDLING THEREOF, NEVERTHELESS, THE LOSS INVOLVED IN SAID TRANSACTION WAS INDICATED TO BE COMPARATIVELY SMALL AND IT APPEARS THAT THE PROCEDURE WAS ADOPTED BY THE CONTRACTOR BECAUSE OF THE DIFFICULTY EXPERIENCED BY ITS EMPLOYEES IN SECURING NECESSARY TOOLS. HENCE, THE EXPENDITURE INVOLVED REASONABLY MAY BE REGARDED AS INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT WORK. IN VIEW WHEREOF, THIS OFFICE WILL NOT FURTHER QUESTION REIMBURSEMENT OF THE PRO RATA SHARE OF THE LOSS INCURRED BY THE CONTRACTOR IN FURNISHING TOOLS TO ITS EMPLOYEES. SEE B-53331, JANUARY 11, 1946.

WITH RESPECT TO THE ITEM OF $542.30 (RECLAIM VOUCHER 24), REPRESENTING THE PRO RATA SHARE OF THE COST OF A MOTION PICTURE, RELATING TO FIXED- PRICE CONTRACTS ALLOCATED TO GENERAL OVERHEAD, THE CONTRACTOR, IN ITS LETTER OF APRIL 23, 1946, RELATIVE TO THE MATTER, STATES:

"2. THE EXPENSE OF MOTION PICTURES, MADE AND SHOWN IN CONNECTION WITH THE P40 AIRPLANE (FIXED PRICE CONTRACTS) FOR TRAINING PURPOSES, ETC., WAS CHARGED TO OVERHEAD WHICH IS CONSISTENT WITH COMPANY POLICY. OVERHEAD EXPENSE INCURRED IN CONNECTION WITH TRAINING PROGRAMS OF THE C 46 AIRPLANE (CPFF CONTRACTS) WAS ALSO CHARGED TO OVERHEAD BY THIS CONTRACTOR, THE EXPENSE BEING ABSORBED IN FIXED PRICE CONTRACTS AND CPFF CONTRACTS."

IN APPROVING THE VOUCHER FOR REIMBURSEMENT OF THE AFORESAID AMOUNT, THE RESIDENT AUDITOR, ARMY AIR FORCE, STATES:

"2.EXCEPTION WAS TAKEN BY THE GAO TO A TRAINING FILE RELATING TO A FIXED PRICE CONTRACT. THE GAO CONTENDED THAT THE ITEM WAS THEREFORE NOT ALLOCABLE TO CPFF CONTRACTS. "3. IT IS THE CONTRACTOR'S POLICY TO INCLUDE IN OVERHEAD, FILMS OF AN INSTRUCTIONAL NATURE TO ITS EMPLOYEES, IRRESPECTIVE OF WHETHER IT RELATED TO FIXED PRICE OR CPFF CONTRACTS.

"4. AT A MIXED PLANT, OVERHEAD IS APPORTIONED TO CPFF CONTRACTS AND TO OTHER WORK. DISTRIBUTION IS EFFECTED THROUGH A SPECIFIC FORMULA, WHICH AT THIS PLANT IS BASED ON DIRECT LABOR DOLLARS. THIS METHOD OF ALLOCATION IS IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRACTICE.

"5. TO SINGLE SCREEN OVERHEAD FOR CHARGES RELATING TO FIXED PRICE CONTRACTS, AND TO ALLOCATE THE RESIDUE TO BOTH FIXED PRICE AND CPFF CONTRACTS IS INEQUITABLE.

"6. FURTHERMORE, IT WOULD NOT BE IMPROPER FOR THE CONTRACTOR TO CHARGE THIS TYPE OF COST AS A DIRECT EXPENSE TO A PARTICULAR METHOD OF HANDLING THE COST OF INDOCTRINATION FILMS, RESULTED IN A SAVINGS TO THE GOVERNMENT; THAT A DOUBLE SCREENING OF SUCH COSTS FOR DIRECT CHARGES TO BOTH FIXED PRICE AND CPFF CONTRACTS WOULD RESULT IN A GREATER COST TO THE GOVERNMENT; AND TO CHANGE THE CONTRACTOR'S POLICY WOULD ADVERSELY AFFECT THE INTEREST OF THE GOVERNMENT."

REGARDLESS OF THE VARIOUS REASONS ADVANCED IN SUPPORT OF THE CLAIM FOR REIMBURSEMENT OF SAID ITEM OF $542.30, THE FACT REMAINS, AND IT IS CONCEDED BY THE CONTRACTOR, THAT THE EXPENSE HAD "NO RELATION TO THE PERFORMANCE OF THE CONTRACT" INVOLVED. SINCE PARAGRAPH (J) OF SECTION 26.9 OF T.D. 5000, SUPRA, REQUIRES THE ELIMINATION FROM THE AMOUNT TO BE ALLOCATED AS INDIRECT COSTS, ALL SUCH ITEMS AS "HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT," IT MUST BE HELD THAT THE ITEM IN QUESTION IS NOT REIMBURSABLE UNDER THE TERMS OF THE CONTRACT.

ACCORDINGLY, YOU ARE ADVISED THAT PAYMENT ON VOUCHERS 15 AND 17 IS AUTHORIZED, IF OTHERWISE CORRECT, AND THAT PAYMENT ON VOUCHER 24 IS NOT AUTHORIZED.

THE VOUCHERS AND SUPPORTING PAPERS ARE RETURNED HEREWITH.