B-118109, MAY 3, 1954, 33 COMP. GEN. 533

B-118109, MAY 3, 1954, 33 COMP. GEN. 533

CONTRACTS - COST REIMBURSABLE - COST-PLUS-PERCENTAGE-OF-COST PROHIBITION - PAYMENT PROCEDURE PRIME CONTRACTORS HOLDING COST REIMBURSABLE CONTRACTS ENTERED INTO WITH THE DEPARTMENT OF THE ARMY DURING THE KOREAN EMERGENCY, WHO PROCURED INSTALLATION OF FACILITIES AND OTHER SERVICES ON A ,COST-PLUS A-PERCENTAGE -OF-COST," "ADVISE-PRICE," OR "PRICE TO BE NEGOTIATED" BASIS MAY BE REIMBURSED THE REASONABLE PRICE FOR THE SERVICES AND SUPPLIES AS DETERMINED OR AGREED UPON BY THE CONTRACTING OFFICER BASED UPON RECOGNIZED COMMERCIAL STANDARDS AND PROCEDURES AS PRESCRIBED BY THIS OFFICE; THIS PROCEDURE EXCLUDES TRANSACTIONS WHERE COLLUSION OR FRAUD MAY BE INDICATED.

ACTING COMPTROLLER GENERAL WEITZEL TO THE SECRETARY OF THE ARMY, MAY 3, 1954:

REFERENCE IS MADE TO SECOND ENDORSEMENT DATED DECEMBER 18, 1953, FROM THE OFFICE OF THE CHIEF OF FINANCE, DEPARTMENT OF THE ARMY (FINELY 167/81290 CHRYSLER CORPORATION), TRANSMITTING A REQUEST BY COLONEL J. B. ROTHNIE, F.O., U.S. ARMY, PHILADELPHIA, PENNSYLVANIA, FOR AN ADVANCE DECISION AS TO WHETHER PAYMENT IS AUTHORIZED ON THE ACCOMPANYING NINE VOUCHERS IN THE TOTAL SUM OF $734,259.60 STATED IN FAVOR OF CHRYSLER CORPORATION, DETROIT, MICHIGAN, UNDER CONTRACT NO. DA-36-034-ORD-740 DATED FEBRUARY 1, 1952, COVERING PROCUREMENT AND INSTALLATION ON A COST REIMBURSEMENT BASIS OF CERTAIN FACILITIES IN THE CONTRACTOR'S PLANT AT NEWARK, DELAWARE, OR ELSEWHERE, AS APPROVED BY THE CONTRACTING OFFICER.

IT APPEARS THAT AS THE CONTRACTOR CLAIMED REIMBURSEMENT OF PAYMENTS MADE TO VARIOUS SUBCONTRACTORS, THE ARMY AUDIT AGENCY ISSUED DISALLOWANCES OF THE COSTS INVOLVED--- " NOTICE OF COSTS SUSPENDED AND/OR DISAPPROVED" ( DD FORM 396/--- FOR THE STATED REASON THAT THE " SUBJECT COSTS REPRESENT WORK PERFORMED ON A COST PLUS A PERCENTAGE OF COST BASIS, WHICH IS SPECIFICALLY PROHIBITED BY SECTION 4 (B) OF PL 413 1947.' FOLLOWING THESE DISALLOWANCES, APPARENTLY REQUIRED UNDER GENERAL AUDIT POLICIES INITIATED IN JANUARY 1953 AND FINALIZED IN AUDIT INSTRUCTION NO. 200-17, DATED JULY 24, 1953, AS AMENDED BY CHANGE NO. 1, DATED DECEMBER 8, 1953, DEDUCTIONS OF THE AMOUNTS CLAIMED WERE EFFECTED ADMINISTRATIVELY FROM REIMBURSEMENT VOUCHERS PAID FROM TIME TO TIME EXTENDING BACK TO JANUARY 1953, WHICH AMOUNTS ARE NOW RECLAIMED.

AT A CONFERENCE WITH REPRESENTATIVES OF YOUR DEPARTMENT ON APRIL 8, 1954, IT WAS DISCLOSED THAT PROBLEMS SIMILAR TO THOSE PRESENTED FOR CONSIDERATION IN COLONEL ROTHNIE'S REQUEST WITH RESPECT TO THE VOUCHERS UNDER THE CHRYSLER CONTRACT HAVE BEEN ENCOUNTERED UNDER MANY OTHER CONTRACTS. IT WAS BROUGHT OUT THAT A SURVEY TO DATE SHOWS THAT THERE ARE INVOLVED THOUSANDS OF VOUCHERS COVERING PROPOSED PAYMENTS UNDER 56 PRIME CONTRACTS TO APPROXIMATELY 400 SUBCONTRACTORS IN A TOTAL AMOUNT ESTIMATED IN EXCESS OF $5,000,000, SOME OF WHICH HAVE ALSO BEEN SUBMITTED FOR ADVANCE DECISION OR DIRECT SETTLEMENT BY THIS OFFICE. IN VIEW OF THE VOLUME OF THE TRANSACTIONS INVOLVED AND THE REPRESENTATIONS AND RECOMMENDATIONS PRESENTED ON BEHALF OF THE DEPARTMENT OF THE ARMY AT THE CONFERENCE, I AM ADDRESSING THIS TO YOUR PERSONAL ATTENTION.

THE GENERAL SITUATION WHICH EXISTED AT THE TIME THE EXPENSES WERE INCURRED UNDER THE CHRYSLER AND SIMILAR UNDERTAKINGS IS DESCRIBED IN A MEMORANDUM SUBMITTED AT THE CONFERENCE. BRIEFLY, IT APPEARS THAT ALL OF THE PRIME CONTRACTS INVOLVED WERE ENTERED INTO DURING THE KOREAN EMERGENCY AND AT A TIME WHEN THE DEPARTMENT OF THE ARMY WAS MOBILIZING EVERY RESOURCE IN AN EFFORT TO CREATE A PRODUCTION BASE CAPABLE OF TURNING OUT MUNITIONS IN QUANTITIES DEEMED ESSENTIAL FOR THE ADEQUATE DEFENSE OF THE UNITED STATES. IN THAT EMERGENCY IT WAS NECESSARY FOR THE CONTRACTORS TO MAKE IMMEDIATE ARRANGEMENTS FOR THE EXPANSION OF PRIVATE AND GOVERNMENTAL PRODUCTION FACILITIES FOR THE FULFILLMENT OF ARMY REQUIREMENTS.

DUE TO THE EXIGENCIES OF THE SITUATION, IN MANY CASES THE NATURE, QUANTITY AND PROBABLE COST OF THE WORK, ESPECIALLY FOR INSTALLATION AND REHABILITATION OF EQUIPMENT AND MACHINERY, WERE NOT KNOWN AND COULD NOT BE ASCERTAINED WITH ANY REASONABLE DEGREE OF ACCURACY. SUBCONTRACTORS EITHER WOULD NOT PERFORM INSTALLATION WORK ON A FIXED-PRICE BASIS OR ELSE WOULD REQUEST EXORBITANT PRICES IN ORDER TO PROTECT THEMSELVES AGAINST ALL THE POSSIBLE CONTINGENCIES ACCOMPANYING A RISING MARKET IN LABOR AND MATERIALS AND UNANTICIPATED WORK. PRIME CONTRACTORS, FREQUENTLY AT THE INSISTENCE OF THE CONTRACTING OFFICER, REJECTED SUCH EXORBITANT PROPOSALS AND INSTRUCTED THE WORK TO PROCEED SUBJECT TO LATER PRICE DETERMINATIONS. SUCH INSTANCES THE PRIMARY CONCERN WAS THE REDUCTION OF COST TO THE GOVERNMENT. MANY SUBCONTRACTORS WERE AUTHORIZED TO START WORK WITH THE UNDERSTANDING THAT PRICE AGREEMENTS WOULD SUBSEQUENTLY BE NEGOTIATED WHEN THE EXTENT AND COST OF THE WORK TO BE PERFORMED COULD BE DETERMINED. SUCH CASES PURCHASE ORDERS WERE ISSUED AND SUBCONTRACTS WERE EXECUTED AFTER THE WORK WAS DONE, BASED ON NEGOTIATION OF A FAIR AND REASONABLE PRICE. IT IS STATED FURTHER THAT, NOTWITHSTANDING SUCH FREEDOM OF ACTION, THE PRIME CONTRACTORS WERE REQUIRED BY THE CONTRACTING OFFICERS TO MAKE EVERY EFFORT TO PROTECT THE INTERESTS OF THE GOVERNMENT IN SUBCONTRACTING SO AS TO INSURE THAT THE EXPENDITURES MADE WERE REASONABLE AND PROPERLY ALLOCABLE TO THE CONTRACTS.

THE FACE SHEET OF THE CHRYSLER CONTRACT SHOWS THAT IT WAS ENTERED INTO UNDER AUTHORITY OF TITLE II OF THE FIRST WAR POWERS ACT, 55 STAT. 838, AS AMENDED BY PUBLIC LAW 921, 81ST CONGRESS, 64 STAT. 1257, AND EXECUTIVE ORDER NO. 10210, DATED FEBRUARY 2, 1951, WHICH CONTAIN PROVISIONS EXPRESSLY PROHIBITING THE USE OF THE COST-PLUS-A-PERCENTAGE OF-COST SYSTEM OF CONTRACTING. THIS PROHIBITION IS ALSO SET OUT IN THE APPLICABLE REGULATIONS--- JOINT REGULATIONS OF THE ARMED FORCES--- TO THE EFFECT THAT NEGOTIATED CONTRACTS MAY BE OF ANY TYPE WHICH WILL PROMOTE THE BEST INTERESTS OF THE GOVERNMENT,"EXCEPT THAT UNDER NO CIRCUMSTANCES SHALL THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING BE USED, OR ALLOWED TO BE USED FOR ANY SUBCONTRACT UNDER A DEPARTMENT CONTRACT.' 32 C.F.R. 402.401.

ARTICLE I-A-6 OF THE CHRYSLER CONTRACT PROVIDES THAT ALL PURCHASE ORDERS ISSUED BY THE CONTRACTOR FOR THE INSTALLATION, ACQUISITION, OR MANUFACTURE OF THE FACILITIES SHALL BE SUBJECT TO WRITTEN APPROVAL OF THE CONTRACTING OFFICER, AND ARTICLE I-C," CONSIDERATION," PROVIDES THAT "THE CONTRACTOR SHALL RECEIVE REIMBURSEMENT FOR ALL EXPENDITURES AS PROVIDED IN ARTICLE II OF TITLE I OF THIS CONTRACT.' ARTICLE II-A," REIMBURSEMENT FOR CONTRACTOR'S EXPENDITURES," PROVIDES IN PART:

1. THE CONTRACTOR SHALL BE REIMBURSED, IN THE MANNER HEREINAFTER PROVIDED, FOR ALL SUCH COSTS AND EXPENDITURES UNDER THIS CONTRACT AS MAY BE APPROVED OR RATIFIED BY THE CONTRACTING OFFICER. THE PRINCIPLES FOR DETERMINATION OF COSTS OUTLINED IN PART 2, SECTION XV OF THE ARMED SERVICES PROCUREMENT REGULATIONS IN EFFECT AS OF THE DATE THIS CONTRACT IS EXECUTED SHALL BE BINDING UPON THE GOVERNMENT AND UPON THE CONTRACTOR AND SAID PRINCIPLES ARE HEREBY INCORPORATED BY REFERENCE IN AND MADE A PART OF THIS CONTRACT. IN ACCORDANCE WITH SAID PRINCIPLES THE CONTRACTOR SHALL BE REIMBURSED FOR, BUT NOT LIMITED TO, THE FOLLOWING COSTS:

E. FOR THE INSTALLATION OF FACILITIES ACQUIRED OR MANUFACTURED HEREUNDER, WHEN EFFECTED BY PERSONS OTHER THAN THE CONTRACTOR: THE NET INVOICE PRICE TO THE CONTRACTOR OF THE INSTALLATION.

ARTICLE V-E," DEFINITIONS," PROVIDES THAT THE TERM "SUBCONTRACTS" INCLUDES PURCHASE ORDERS UNDER THIS CONTRACT.

THE VOUCHERS SUBMITTED BY COLONEL ROTHNIE COVER THE ALLEGED COST OF FACILITY AND MACHINE TOOL INSTALLATIONS MADE BY VARIOUS SUBCONTRACTORS OF CHRYSLER AND HAVE BEEN CERTIFIED BY THE CONTRACTING OFFICER'S REPRESENTATIVE UNDER THE CONTRACT AS BEING CORRECT AND PROPER FOR PAYMENT SUBJECT TO THE ADVANCE DECISION REQUESTED. THEY ARE SUPPORTED BY COPIES OF PURCHASE ORDERS RANGING FROM A FEW DOLLARS TO OVER $50,000, EACH ISSUED BY THE CONTRACTOR AND APPROVED BY THE CONTRACTING OFFICER'S REPRESENTATIVE, AND BY ORIGINAL INVOICES COVERING THE SUPPLIES AND SERVICES IDENTIFIED IN THE PURCHASE ORDERS. EXAMINATION OF ONE OF THE PURCHASE ORDERS, NO. TAE 51189, AND ATTACHED EXHIBITS INDICATES THAT THE CONTRACTOR'S UNDERSTANDING WITH THIS SUBCONTRACTOR WAS TO MAKE PAYMENT OF CERTAIN UNDETERMINED COSTS TO BE INCURRED IN THE FUTURE, PLUS A PERCENTAGE OF SUCH FUTURE COSTS--- THE FORM OF CONTRACTING WITH ITS ATTENDANT VICE WHICH IS CONDEMNED BY THE COST-PLUS A-PERCENTAGE-OF-COST PROHIBITION. MUSCHANY V. UNITED STATES, 324 U.S. 49, 61-63. SOME OF THE OTHER PURCHASE ORDERS SUBMITTED APPARENTLY REPRESENT NEGOTIATED SETTLEMENTS OF THE CLAIMS OF THE SUBCONTRACTORS INVOLVED, AFTER COMPLETION OF THE WORK, SO AS TO REDUCE TO FIXED AMOUNTS THE SUMS TO BE PAID ON ACCOUNT OF TRANSACTIONS ENTERED INTO ON AN "ADVISE PRICE" OR "PRICE TO BE NEGOTIATED" BASIS. ALL THE PURCHASE ORDERS ARE SUPPORTED BY INVOICES WHICH BEAR CERTIFICATIONS ON BEHALF OF THE GOVERNMENT AND THE CONTRACTOR INDICATING RESPECTIVELY THAT THE WORK HAS BEEN SATISFACTORILY COMPLETED AND THAT THE CONTRACTOR HAS ISSUED ITS CHECKS IN PAYMENT THEREFOR.

TWO GROUNDS ARE ADVANCED BY THE CONTRACTOR FOR PAYMENT OF THE AMOUNTS CLAIMED ON THE VOUCHERS, AS SET OUT IN A BRIEF SUBMITTED THEREWITH. THE FIRST AND PRIMARY GROUND IS THAT CHRYSLER, HAVING DILIGENTLY PROTECTED THE GOVERNMENT'S INTERESTS BY ARRIVING AT FIXED PRICES WITH EACH SUBCONTRACTOR AND CERTIFYING TO THE REASONABLENESS OF SUCH PRICES, THE CHARGES INCURRED AND APPROVED BY THE CONTRACTING OFFICER'S REPRESENTATIVE CLEARLY ARE ALLOWABLE ITEMS OF COST FOR WHICH THE GOVERNMENT IS OBLIGATED TO MAKE REIMBURSEMENT UNDER THE TERMS OF THE PRIME CONTRACT. THE SECOND OR ALTERNATIVE GROUND, IN THE EVENT THE PURCHASE ORDERS ARE FOUND TO BE VOID BECAUSE OF THE USE OF AN UNAUTHORIZED SYSTEM OF CONTRACTING, IS THAT THE FACTS GIVE RISE TO AN IMPLIED CONTRACT OBLIGATING THE GOVERNMENT TO PAY THE REASONABLE VALUE OF THE ITEMS FURNISHED FOR ITS BENEFIT, AS EVIDENCED BY THE FIXED PRICES AGREED UPON BETWEEN THE PARTIES STIPULATED IN THE PURCHASE ORDERS.

A POLICY PROHIBITION SUCH AS HAS BEEN ESTABLISHED BY THE PROVISIONS OF THE STATUTE CITED AS AUTHORIZATION FOR THE CHRYSLER CONTRACT AND SIMILAR STATUTES DEALING WITH GOVERNMENT PROCUREMENT, E.G., SECTION 4 (B) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947, 62 STAT. 23 (41 U.S.C. 153), CITED AS THE BASIS FOR THE ARMY AUDIT AGENCY ACTION, TOGETHER WITH THE IMPLEMENTING REGULATIONS, CAN HARDLY BE REGARDED AS A MERE DIRECTIVE TO THE CONTRACTING AGENCY BUT NECESSARILY MUST BE TREATED AS A PROHIBITION TO ALL CONTRACTING PARTIES IN THE FIELD TO WHICH IT APPLIES, CONTRACTORS AND SUBCONTRACTORS ALIKE. WHERE A SUBCONTRACT VIOLATIVE OF THE PROHIBITION IS MADE--- IN WHATEVER FORM OR DISGUISE--- IT IS PLAINLY INVALID AT LEAST INSOFAR AS ESTABLISHING AN OBLIGATION ON THE GOVERNMENT TO MAKE REIMBURSEMENT OF AN AMOUNT REPRESENTING THE SUBCONTRACTOR'S CLAIMED COSTS PLUS A PERCENTAGE OF SUCH COSTS. THE QUESTION PRESENTED IS ONE OF PUBLIC POLICY--- NOT A MERE SETTLEMENT OF ADVERSARY RIGHTS BETWEEN THE SUBCONTRACTOR AND THE CONTRACTOR, OR THE CONTRACTOR AND THE GOVERNMENT. HENCE, THE REASONABLENESS OF EXCESSIVENESS OF THE ULTIMATE SUBCONTRACT AMOUNT IS WITHOUT LEGAL SIGNIFICANCE. EVEN IN INSTANCES WHERE THE RESULT MIGHT APPEAR FAVORABLE TO THE GOVERNMENT, ENFORCEMENT OF SUCH SUBCONTRACTS AS LEGAL OBLIGATIONS MANIFESTLY WOULD SERVE TO DESTROY THE SAFEGUARDS INTENDED BY THE PROHIBITION AND LESSEN ITS EFFECTIVENESS IN THE PREVENTION OF ABUSES IN OTHER CASES. FURTHERMORE, I CONCUR IN THE VIEW EXPRESSED IN THE OPINION OF THE PROCUREMENT LAW DIVISION, TJAGO, QUOTED IN CHANGE 1 OF THE AUDIT INSTRUCTION NO. 200-17, THAT "ADVISE PRICE" AND ,PRICE TO BE NEGOTIATED" SUBCONTRACTS, AS WELL AS TRANSACTIONS EVIDENCED BY CONTRACTS OR PURCHASE ORDERS ISSUED AFTER PERFORMANCE HAS BEEN SUBSTANTIALLY COMPLETED, HAVE ATTRIBUTES WHICH, DEPENDING UPON THE PARTICULAR FACTUAL SITUATION, MAY CONSTITUTE A VIOLATION OF THE STATUTORY PROHIBITION, POINTING UP THE NECESSITY OF APPROPRIATE DETERMINATIONS ON A CASE-BY-CASE BASIS. CF. B-115690, JULY 21, 1953, AND B-110609, JANUARY 14, 1954 (33 COMP. GEN. 291).

AS URGED IN CHRYSLER'S BRIEF, IT IS WELL ESTABLISHED THAT WHERE GOODS ARE FURNISHED OR SERVICES ARE RENDERED ON THE REQUEST OR ORDER OF AN OFFICER AUTHORIZED TO CONTRACT FOR THE UNITED STATES, BUT THE CONTRACT ITSELF IS VOID, THERE IS RECOGNIZED AN OBLIGATION ON THE UNITED STATES TO PAY THE VALUE OF SUCH GOODS AND SERVICES ACTUALLY FURNISHED AS UPON AN IMPLIED CONTRACT FOR A QUANTUM MERUIT. SEE PACIFIC MARITIME ASSOCIATION V. UNITED STATES, 123 C.1CLS. 667, 675 677, AND AUTHORITIES THERE CITED. CF. BALTIMORE AND OHIO RAILROAD COMPANY V. UNITED STATES, 261 U.S. 592, 597- 598.

THUS, HOLDINGS IN DECISIONS OF THIS OFFICE, PORTIONS OF WHICH ARE QUOTED IN AUDIT INSTRUCTION NO. 200-17, HAVE AUTHORIZED REIMBURSEMENT, AS UPON AN IMPLIED CONTRACT FOR QUANTUM MERUIT, WHERE THE SUBCONTRACTS WERE FOUND UNDER THE FACTS AND CIRCUMSTANCES CONSIDERED IN THOSE CASES TO BE VIOLATIVE OF THE COST-PLUS-A-PERCENTAGE-OF-COST PROHIBITION. THESE DECISIONS, OF COURSE, WERE NOT INTENDED AS PRESCRIBING A RULE OR METHOD FOR MEASURING QUANTUM MERUIT OR REASONABLE VALUE FOR APPLICATION GENERALLY, OR AS PRECLUDING THE ADOPTION OF APPROPRIATE MEASURES DESIGNED TO PROTECT THE INTEREST OF THE GOVERNMENT IN CASES OF THIS CHARACTER.

IN CONNECTION WITH CHRYSLER'S CONTENTIONS TO THE EFFECT THAT, BY THE EXERCISE OF CONTROL THROUGH CLOSE SUPERVISION OVER THE SUBCONTRACTORS, FAIR AND REASONABLE PRICES HAD BEEN NEGOTIATED TO THE BEST INTERESTS OF THE THE UNITED STATES, THE ARMY AUDITOR HAS FURNISHED THE FOLLOWING PERTINENT INFORMATION. THE FAIRNESS AND REASONABLENESS OF THE PRICES IN QUESTION WERE CHRYSLER'S DETERMINATIONS, SOLELY, AND IN NO INSTANCES WAS ANY AUDIT WORK, INCLUDING FLOOR CHECKS, PERFORMED ON THE RECORDS OF THE SUBCONTRACTORS BY CHRYSLER'S INTERNAL AUDIT STAFF. HENCE, CONSIDERABLE DOUBT ARISES AS TO WHETHER THE CONTRACTOR EXERCISED THE DEGREE OF SKILL AND CARE COMMENSURATE WITH ITS RESPONSIBILITIES UNDER THE PRIME CONTRACT SO AS TO ADEQUATELY PROTECT THE GOVERNMENT'S INTERESTS. FURTHERMORE, THERE HAS BEEN SUBMITTED NO EVIDENCE TO SHOW THAT--- BEFORE APPROVING THE PURCHASE ORDERS OR AFTER THE AMOUNTS THEREOF WERE DISALLOWED BY THE ARMY AUDIT AGENCY AND DEDUCTED FROM THE VOUCHERS PAID IN REIMBURSEMENT OF COSTS CLAIMED BY THE CONTRACTOR--- APPROPRIATE FINDINGS WERE MADE BY THE DEPARTMENT OF THE ARMY THAT THE PRICE DETERMINATIONS BY CHRYSLER ARE IN FACT FAIR AND REASONABLE. IT SEEMS EVIDENT THAT SUCH FINDINGS SHOULD BE REGARDED AS A PREREQUISITE TO PAYMENT IN EACH CASE; THAT THE FINDINGS SHOULD BE PREDICATED UPON A CAREFUL CONSIDERATION OF ALL THE FACTS AND CIRCUMSTANCES INVOLVED, INCLUDING THOSE ESTABLISHED THROUGH APPROPRIATE ENGINEERING ANALYSES AND DETERMINATIONS, AND BY THE UTILIZATION OF REGULAR AUDIT INVESTIGATIONS AND PROCEDURES AVAILABLE AT THE CONTRACT SITE. THE ABSENCE OF SUCH FINDERS, THERE EXISTS A REASONABLE BASIS FOR THE CONCLUDING THAT THE CONTRACTING OFFICER HAS NOT FULLY PERFORMED HIS DUTIES.

AT THE RECENT CONFERENCE, IT WAS SUGGESTED THAT PRESENT PROCEDURES ARE UNFAIR TO ARMY CONTRACTORS WHO ENTERED INTO THE NONPROFIT FACILITY CONTRACTS INVOLVED BECAUSE THEY ARE REQUIRED TO WAIT MANY MONTHS FOR REIMBURSEMENT AND MUST ENGAGE SPECIAL COUNSEL TO PROSECUTE CLAIMS FOR RECOVERY OF MONEY TO WHICH THEY ARE ENTITLED. IT WAS URGED THAT THIS HAS TENDED TO STRAIN ARMY-CONTRACTOR RELATIONSHIPS, AND THAT SERIOUS CONSEQUENCES MAY RESULT FROM FAILURE ON THE PART OF THE DEPARTMENT TO MAKE PAYMENT IN THAT THE GOVERNMENT MAY BE SUBJECT TO ACTIONS FOR BREACH OF CONTRACT. IN THE LIGHT OF THESE CONSIDERATIONS, THE ADOPTION OF A SPECIAL PROCEDURE FOR PROCESSING REIMBURSEMENTS CLAIMED IN THESE CASES WAS RECOMMENDED, RECOGNIZING THAT SUCH ACTION WOULD BE DESIRABLE FROM THE STANDPOINT OF THE GOVERNMENT AS WELL AS THE CONTRACTORS INVOLVED, THE FOLLOWING PROCEDURE IS APPROVED, PROVIDED ITS APPLICATION IS LIMITED TO EXISTING CASES SIMILAR IN NATURE AND ORIGIN TO THE PARTICULAR TRANSACTIONS PRESENTLY FOR CONSIDERATION, BUT NOT INCLUDING THOSE TRANSACTIONS WHERE COLLUSION OR FRAUD MAY BE INDICATED, AND PROVIDED ALSO THAT SUCH OTHER APPROPRIATE STEPS ARE TAKEN AS MAY BE NECESSARY TO PROTECT THE INTERESTS OF THE GOVERNMENT:

A. THE CONTRACTING OFFICER OR HIS AUTHORIZED REPRESENTATIVE WILL REVIEW THE SUBCONTRACTS AND PURCHASE ORDERS AND WILL AGREE UPON OR DETERMINE THE PRICES TO BE PAID WHERE FOUND TO BE FAIR AND REASONABLE, BASED UPON THE FOLLOWING CONSIDERATIONS:

(1) COMPARISON OF SUBCONTRACTORS' RATES WITH RATES CHARGED FOR COMMERCIAL WORK.

(2) COMPARISON OF SUBCONTRACTORS' RATES WITH APPROPRIATE PREVAILING RATES FOR THE SAME TYPE OF WORK PERFORMED WITHIN THE GEOGRAPHICAL AREA.

(3) THE CONTROLS EXERCISED BY PRIME CONTRACTOR OVER COSTS INCURRED BY ITS SUBCONTRACTORS.

(4) ENGINEERING EVALUATION AND PRICE ANALYSIS OF THE WORK PERFORMED TO DETERMINE THE FAIRNESS AND REASONABLENESS OF THE SUBCONTRACTOR'S TOTAL PRICE FOR WHICH THE PRIME CONTRACTOR SEEKS REIMBURSEMENT.

(5) WHETHER THE COST FOR WHICH THE PRIME CONTRACTOR SEEKS REIMBURSEMENT IS ACTUALLY HIGHER OR LOWER THAN THE INITIAL PRICE PROPOSAL REQUESTED BY THE SUBCONTRACTOR WHERE ONE WAS MADE.

(6) WHETHER THE SUBCONTRACTOR IS AFFILIATED WITH THE PRIME CONTRACTOR AS A SUBSIDIARY COMPANY OR OPERATES UNDER COMMON MANAGEMENT OF OWNERSHIP.

(7) AUDIT REPORT OF SUBCONTRACTOR'S RECORDS AND ACCOUNTS.

B. A RESPONSIBLE OFFICIAL OF THE PRIME CONTRACTOR WILL CERTIFY THAT THE SUBCONTRACT PRICE IS FAIR AND REASONABLE AND THAT THE NUMBER OF HOURS AND THE QUANTITY OF MATERIALS INVOLVED ARE NOT EXCESSIVE. SUCH CERTIFICATIONS WILL BE ATTACHED TO THE VOUCHERS FOR REIMBURSEMENT.

C. PRIOR TO FINAL DETERMINATION BY THE CONTRACTING OFFICER, REVIEW WILL BE ACCOMPLISHED BY BOARDS OF AWARD AND/OR BOARDS OF REVIEW, AS APPROPRIATE.

D. THE CONTRACT FILE WILL BE COMPLETELY DOCUMENTED TO REFLECT THE FINDINGS OF THE CONTRACTING OFFICER AND THE BASIS FOR APPROVAL OF EACH SUBCONTRACT PRICE, AND REIMBURSEMENT WILL BE MADE UPON EXECUTION OF A RELEASE BY THE PRIME CONTRACTOR.

E. THE GENERAL ACCOUNTING OFFICE REGIONAL AUDIT OFFICES HAVING COGNIZANCE OF THE PRIME CONTRACTS INVOLVED WILL BE NOTIFIED OF ALL CASES HANDLED UNDER THIS PROCEDURE, AND IT IS UNDERSTOOD THAT THE APPROVAL OF THIS PROCEDURE WILL NOT BE CONSTRUED AS RESTRICTING THE FUNCTIONS OF THE GENERAL ACCOUNTING OFFICE.

THE CHRYSLER VOUCHERS SUBMITTED WITH COLONEL ROTHNIE'S REQUEST ARE RETURNED HEREWITH IN ORDER THAT THEY MAY RECEIVE FURTHER ADMINISTRATIVE CONSIDERATION UNDER THE FOREGOING PROCEDURE.