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NATIONAL SCIENCE FOUNDATION: REFERENCE IS MADE TO A LETTER DATED NOVEMBER 29. WAS ENTERED INTO ON A COST- PLUS-FIXED-FEE (CPFF) BASIS WITH THE AMERICAN CHEMICAL SOCIETY FOR THE DEVELOPMENT OF AN EXPERIMENTAL COMPUTER-BASED REGISTRY SYSTEM FOR RECORDING. THE ESTIMATED TOTAL COST OF THE WORK TO BE PERFORMED IN MEETING THESE OBJECTIVES WAS ESTABLISHED AT $1. ALLOWABLE COSTS AND COST ALLOCATION METHODS WERE TO BE DETERMINED IN CONFORMITY WITH THE COST PRINCIPLES CONTAINED IN PART 1 15 OF THE FEDERAL PROCUREMENT REGULATIONS. THE SOCIETY WAS TO RECEIVE A FIXED FEE OF $69. THE MORTGAGE INTEREST ATTRIBUTABLE TO THE CONTRACT WAS DETERMINED ON THE BASIS OF THE SPACE ALLOCATED TO THE CONTRACT WORK MULTIPLIED BY A FACTOR RESULTING FROM THE DIVISION OF THE ANNUAL INTEREST COSTS BY THE TOTAL SQUARE FOOTAGE OF USABLE SPACE IN THE BUILDING.

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B-157802, FEB. 24, 1967,

TO THE DIRECTOR, NATIONAL SCIENCE FOUNDATION:

REFERENCE IS MADE TO A LETTER DATED NOVEMBER 29, 1966, WITH ENCLOSURES, FROM THE DEPUTY DIRECTOR, REQUESTING, IN EFFECT, RECONSIDERATION OF OUR DECISION TO THE SECRETARY OF HEALTH, EDUCATION, AND WELFARE, B-157802, APRIL 19, 1966, 45 COMP. GEN. 638, IN LIGHT OF THE FACTS AND CIRCUMSTANCES OF CONTRACT NO. NSF-C414 WITH THE AMERICAN CHEMICAL SOCIETY.

THE SUBJECT CONTRACT, EFFECTIVE JUNE 1, 1965, WAS ENTERED INTO ON A COST- PLUS-FIXED-FEE (CPFF) BASIS WITH THE AMERICAN CHEMICAL SOCIETY FOR THE DEVELOPMENT OF AN EXPERIMENTAL COMPUTER-BASED REGISTRY SYSTEM FOR RECORDING, IDENTIFYING AND FILING DETAILED STRUCTURAL DESCRIPTIONS OF CHEMICAL COMPOUNDS AND FOR RESEARCH AND DEVELOPMENT IN SELECTED INFORMATION-HANDLING PROBLEMS. THE ESTIMATED TOTAL COST OF THE WORK TO BE PERFORMED IN MEETING THESE OBJECTIVES WAS ESTABLISHED AT $1,974,200. ALLOWABLE COSTS AND COST ALLOCATION METHODS WERE TO BE DETERMINED IN CONFORMITY WITH THE COST PRINCIPLES CONTAINED IN PART 1 15 OF THE FEDERAL PROCUREMENT REGULATIONS. AS FURTHER CONSIDERATION FOR THE PERFORMANCE OF THE WORK, THE SOCIETY WAS TO RECEIVE A FIXED FEE OF $69,400 REPRESENTING AN ALLOCABLE SHARE OF THE MORTGAGE INTEREST ON ITS CHEMICAL ABSTRACTS SERVICE BUILDING IN COLUMBUS, OHIO. TO DATE THE CONTRACT HAS BEEN AMENDED SIX TIMES INCREASING THE ESTIMATED COST OF THE WORK EXCLUSIVE OF FEES TO $3,018,600 AND INCREASING THE SOCIETY'S FIXED FEE TO A PRESENT TOTAL OF $106,450. IN EACH INSTANCE, THE FEE INCREMENT HAS BEEN BASED ENTIRELY ON AN APPROPRIATE SHARE OF THE MORTGAGE INTEREST EXPENSE ON THE BUILDING. WITH THE EXCEPTION OF AMENDMENT NO. 6, THE MORTGAGE INTEREST ATTRIBUTABLE TO THE CONTRACT WAS DETERMINED ON THE BASIS OF THE SPACE ALLOCATED TO THE CONTRACT WORK MULTIPLIED BY A FACTOR RESULTING FROM THE DIVISION OF THE ANNUAL INTEREST COSTS BY THE TOTAL SQUARE FOOTAGE OF USABLE SPACE IN THE BUILDING. THIS SPACE ASSIGNMENT WAS ALLOCATED ON THE BASIS OF THE PROPORTION OF THE OVERALL DIRECT LABOR APPLIED TO THE PROJECT WITHIN EACH OPERATING AREA DURING THE FULL TERM OF THE CONTRACT. IN AMENDMENT NO. 6, THE LAST AMENDMENT OF RECORD, A MORE DIRECT METHOD OF ALLOCATING SUCH INTEREST WAS ADOPTED. UNDER THIS AMENDMENT, THE COMPUTATION OF THE FEE INCREMENT IS BASED ON A FACTOR, REPRESENTING THE TOTAL ANNUAL PROJECTED LABOR EXPENSE DIVIDED BY THE ANNUAL MORTGAGE INTEREST COST, WHICH IS THEN MULTIPLIED BY THE PROPOSED LABOR FOR ANY UNIT OF CONTRACT WORK INVOLVED.

IT FURTHER APPEARS THAT ALTHOUGH THE AMENDMENTS WERE EXECUTED AFTER OUR DECISION OF APRIL 19, 1966, IT WAS MADE CLEAR TO THE SOCIETY THAT THE FIXED FEES WOULD BE REFUNDED IF THAT DECISION WERE DETERMINED TO BE APPLICABLE TO THE SUBJECT CONTRACT. THE CONTRACTING OFFICER'S LETTER TRANSMITTING AMENDMENT NO. 1 TO THE SOCIETY FOR EXECUTION PROVIDED FOR THE RECOVERY OF THE FIXED FEE PAID UNDER THE CONTRACT AS FOLLOWS:

"IT IS FURTHER UNDERSTOOD THAT IF THE COMPTROLLER GENERAL'S DECISION NO. B-157802, APRIL 19, 1966, IS DETERMINED TO BE APPLICABLE TO THIS CONTRACT, THE AMERICAN CHEMICAL SOCIETY WILL REFUND THE ENTIRE FIXED FEE ($92,200) TO THE FOUNDATION.' THE SOCIETY WAS SIMILARLY ADVISED WITH RESPECT TO AMENDMENTS NOS. 2 AND 4.

IN OUR DECISION OF APRIL 19, 1966, WE EXAMINED THE LEGISLATIVE HISTORY OF THE ACT (50 STAT. 798) INCORPORATING THE AMERICAN CHEMICAL SOCIETY TO DETERMINE THE PROPRIETY OF THE SOCIETY'S REQUEST FOR THE PAYMENT OF MORTGAGE INTEREST UNDER A COST-REIMBURSEMENT CONTRACT WITH THE NATIONAL INSTITUTES OF HEALTH (NIH). DURING THE CONTRACT NEGOTIATIONS, THE SOCIETY HAD REQUESTED A FIXED FEE OF $7,400 TO COVER MORTGAGE INTEREST OVER THE CONTRACT PERIOD ON THAT PORTION OF THE SOCIETY-OWNED BUILDING TO BE USED FOR THE CONTRACT OR, ALTERNATIVELY, REIMBURSEMENT FOR THE MORTGAGE INTEREST THEREON. RELYING ON THE SOCIETY'S INCORPORATING ACT, NIH DENIED THE REQUEST ON THE GROUND THAT SECTION 4 THEREOF LIMITS THE SOCIETY'S COMPENSATION FOR SERVICES PERFORMED UNDER GOVERNMENT CONTRACTS TO THE ACTUAL COST THEREOF. THE ALTERNATIVE REQUEST FOR REIMBURSEMENT WAS ALSO DENIED ON THE BASIS THAT MORTGAGE INTEREST WAS NOT A REIMBURSABLE ITEM UNDER THE COST PRINCIPLES OF PART 1-15 OF THE FEDERAL PROCUREMENT REGULATIONS INCORPORATED INTO THE CONTRACT.

THE AMERICAN CHEMICAL SOCIETY IS A NONPROFIT SCIENTIFIC ASSOCIATION ORGANIZED AND EXISTING UNDER THE ACT OF AUGUST 25, 1937, 50 STAT. 798. SECTION 4 OF THAT INCORPORATING ACT SETS FORTH THE CONTRACTUAL RELATIONSHIP BETWEEN THE SOCIETY AND THE GOVERNMENT, IN PERTINENT PART, AS FOLLOWS:

"THAT THE AMERICAN CHEMICAL SOCIETY SHALL, WHENEVER CALLED UPON BY THE WAR OR NAVY DEPARTMENT, INVESTIGATE, EXAMINE, EXPERIMENT, AND REPORT UPON ANY SUBJECT IN PURE OR APPLIED CHEMISTRY CONNECTED WITH THE NATIONAL DEFENSE, THE ACTUAL EXPENSE OF SUCH INVESTIGATIONS, EXAMINATIONS, EXPERIMENTS, AND REPORTS TO BE PAID FROM APPROPRIATIONS WHICH MAY HAVE BEEN MADE FOR THAT PURPOSE BY CONGRESS, BUT THE SOCIETY SHALL RECEIVE NO COMPENSATION WHATEVER FOR ANY SERVICES TO THE GOVERNMENT OF THE UNITED STATES * * *"

IN OUR DECISION, WE NOTED THAT BY THE TERMS OF SECTION 4 THE SOCIETY WAS UNDER NO LEGAL OBLIGATION TO RENDER THE SERVICES REQUESTED BYNIH OR, FOR THAT MATTER, BY ANY OF THE OTHER AGENCIES OF THE GOVERNMENT NOT CONCERNED WITH THE NATIONAL DEFENSE. WE CONCLUDED, HOWEVER, THAT:

"* * * WHERE THE SOCIETY ELECTS, UNDER THE SPIRIT OF THE STATUTE GRANTING A FEDERAL CHARTER, TO COOPERATE WITH RESPECT TO RENDERING SUCH SERVICES FOR OTHER AGENCIES, IT WOULD BE WHOLLY CONTRARY TO THAT SPIRIT TO ALLOW THE SOCIETY TO RECOVER MORE THAN THE ACTUAL EXPENSES IT MIGHT INCUR.'

TURNING TO THE QUESTION OF WHETHER MORTGAGE INTEREST ON THE BUILDING IN WHICH THE WORK WAS BEING PERFORMED IS A PROPER ITEM OF "ACTUAL EXPENSE" WITHIN THE MEANING OF SECTION 4, WE HELD HAT:

"* * * IN OUR OPINION, WHILE SUCH INTEREST IS, OF COURSE, AN EXPENSE TO THE SOCIETY, IT IS NOT SO RELATED TO THE CONTRACT WORK IN QUESTION AS TO CONSTITUTE PART OF THE "ACTUAL EXPENSE" INCURRED IN CONNECTION THEREWITH. WE RECOGNIZE THAT A PRECISE MEANING TO FIT ALL CASES CANNOT BE ASCRIBED TO THE TERM "ACTUAL EXPENSE.' HOWEVER, WE BELIEVE IT IS SUFFICIENTLY DESCRIPTIVE TO EXCLUDE AN ITEM OF COST TO THE SOCIETY WHICH RELATES TO THE FINANCING OF ITS REAL PROPERTIES ACQUIRED SEPARATE AND APART FROM ANY INVOLVEMENT IN CONTRACT WORK THE SOCIETY UNDERTAKES TO DO AT ACTUAL EXPENSE. THIS CONCLUSION IS SUPPORTED BY THE FOLLOWING CASES. IN RE DIRECTORS OF OLD COLONY CO., 70 N.E. 62; MAILANDER V. CONTINENTAL STATE BANK OF BECKVILLE, 11 S.W. 2D 615; LEXINGTON AND WEST CAMBRIDGE RAILROAD COMPANY V. FITCHBURG RAILROAD COMPANY, 75 MASS. (9 GRAY) 266; SEE ALSO BANGOR FRUIT EXCH. V. BANGOR CANNING CO., 201 N.W. 215. INITIALLY YOU MAINTAIN THAT: "IN CONSIDERING THE SOCIETY'S INCORPORATION STATUTE OF 1938, WHICH IN ESSENCE PROVIDES THAT THE SOCIETY SHALL BE PAID THE "ACTUAL EXPENSE" OF WORK IT PERFORMS FOR THE GOVERNMENT, BUT SHALL NOT RECEIVE ANY COMPENSATION FOR ANY SERVICES TO THE GOVERNMENT, IT IS NOTED THAT WHEN THE SOCIETY WAS INCORPORATED THE GOVERNMENT HAD NOT ISSUED ANY COST PRINCIPLES SUCH AS THOSE NOW CONTAINED IN THE ARMED SERVICES PROCUREMENT REGULATIONS OR THE FEDERAL PROCUREMENT REGULATIONS. IT IS UNLIKELY THAT THE CONGRESS IN 1938 INTENDED TO LIMIT THE MEANING OF "ACTUAL EXPENSE" TO THOSE COSTS CONSIDERED ALLOWABLE IN STATEMENTS OF COST PRINCIPLES SUBSEQUENTLY ISSUED. WE BELIEVE IT IS MORE LIKELY THAT THE CONGRESS INTENDED THAT THE ORGANIZATION SHOULD NEITHER PROFIT FINANCIALLY NOR SUFFER A LOSS IN ITS WORK FOR THE GOVERNMENT.'

IN SUPPORT OF YOUR POSITION, YOU POINT OUT THAT THE CASES OF BANGOR FRUIT EXCH. V. BANGOR CANNING CO.; LEXINGTON AND WEST CAMBRIDGE RAILROAD COMPANY V. FITCHBURG RAILROAD COMPANY; AND MAILANDER V. CONTINENTAL STATE BANK OF BECKVILLE, CITED IN OUR APRIL 19, 1966, DECISION, INVOLVED PROFIT- MAKING CORPORATIONS AND THAT WHILE "THE COSTS IN QUESTION WERE NOT PERMITTED TO BE CHARGED DIRECTLY TO THE CONTRACTS, AS IN ALL THREE CASES THE COURT STATED THAT ALTHOUGH THE COSTS WERE REAL EXPENSES, IT WAS ONE OF THE PURPOSES OF THE FEE OR COMMISSION TO COVER THESE KINDS OF EXPENSES.' ON THIS BASIS, YOU CONTEND THAT THE SUBJECT CPFF CONTRACT WOULD NOT VIOLATE THE SOCIETY'S INCORPORATING ACT IF THE "FEE DID NOT EXCEED THE "ACTUAL EXPENSE" NOT REIMBURSABLE AS ALLOWABLE CONTRACT COSTS, SINCE SUCH A FEE WOULD NOT PROVIDE A PROFIT TO THE SOCIETY.'

WE RECOGNIZE THAT AS A RULE OF STATUTORY INTERPRETATION THE SUBSEQUENTLY PROMULGATED COST PRINCIPLES CONTAINED IN PART 1-15 OF THE FEDERAL PROCUREMENT REGULATIONS WOULD NOT NECESSARILY BE DETERMINATIVE OF THE QUESTION OF WHETHER MORTGAGE INTEREST WAS AN "ACTUAL EXPENSE" WITHIN THE MEANING OF SECTION 4 OF THE SOCIETY'S INCORPORATING ACT. HOWEVER, IT SHOULD BE NOTED THAT, APART FROM ANY CONSIDERATION OF THE PERMISSIBILITY OF SUCH A COST ALLOWANCE UNDER THE TERMS OF SECTION 4, THE UNALLOWABILITY OF MORTGAGE INTEREST AS A COST UNDER THE TERMS OF THE PARTICULAR CONTRACT WOULD BE CONTROLLING. THUS, UNDER THE TERMS OF THE SOCIETY'S COST- REIMBURSEMENT CONTRACT WITH NIH, THE PAYMENT OF MORTGAGE INTEREST WOULD HAVE BEEN PRECLUDED BY FPR SEC. 1-15.205-17 WHICH WAS INCORPORATED INTO THE CONTRACT. OUR DECISION, HOWEVER, WAS NOT PREDICATED ON THAT COST PRINCIPLE. RATHER, IT WAS OUR CONCLUSION THAT THE MEANING OF THE STATUTORY TERM "ACTUAL EXPENSE" IN LIGHT OF APPLICABLE JUDICIAL AUTHORITY WOULD NOT, UNDER THE FACTUAL SITUATION PRESENTED, INCLUDE MORTGAGE INTEREST. MOREOVER, THE NATURE OF THE ORGANIZATIONS INVOLVED IN THE CITED CASES DID NOT AFFECT EITHER THE CHARACTER OF THE COSTS IN QUESTION OR THEIR RELATIONSHIP TO THE ACTUAL COST OF PERFORMING THE WORK.

IN REGARD TO THE APPLICABILITY OF OUR DECISION TO THE FOUNDATION'S CONTRACT WITH THE SOCIETY, WE NOTE THAT THE CONTRACT WORK IS BEING PERFORMED IN THE SAME SOCIETY-OWNED BUILDING WHICH WAS INVOLVED IN OUR APRIL 19, 1966, DECISION. THIS BUILDING WAS NEITHER BUILT NOR EXPANDED IN CONTEMPLATION OF EITHER CONTRACT. THE MORTGAGE INTEREST ON THIS BUILDING, WHILE ADMITTEDLY A COST TO THE SOCIETY, DID NOT ACCRUE BECAUSE OF THE CONTRACT OR THE NIH CONTRACT; IT IS PAYABLE BY THE SOCIETY IN ANY EVENT AND IS CLEARLY ATTRIBUTABLE TO THE SOCIETY'S USUAL OPERATIONS RATHER THAN TO THE FACT OF CONTRACTING WITH THE GOVERNMENT. UNDER THESE CIRCUMSTANCES, IT CANNOT FAIRLY BE SAID THAT THE PAYMENT OF A PROPORTIONATE SHARE OF THE SOCIETY'S MORTGAGE INTEREST LIABILITY IN THE FORM OF A FEE COULD CONSTITUTE AN "ACTUAL EXPENSE" TO THE SOCIETY OF PERFORMING THE CONTRACT WORK.

THEREFORE, AND SINCE PAYMENTS IN EXCESS OF THE "ACTUAL EXPENSE" OF PERFORMING THE CONTRACT WOULD, OF NECESSITY, RESULT IN "COMPENSATION" TO THE SOCIETY WITHIN THE MEANING OF SECTION 4 OF ITS INCORPORATING ACT, APPROPRIATE ACTION SHOULD BE TAKEN TO ELIMINATE THE FIXED-FEE OBLIGATION FROM THE CONTRACT AND TO RECOVER THE FIXED-FEE PAYMENTS ERRONEOUSLY MADE TO THE SOCIETY.

IT WAS FURTHER REQUESTED THAT WE ADVISE YOU OF THE PROPRIETY OF YOUR PRESENT CPFF ARRANGEMENT WITH THE SOCIETY. ON THE BASIS OF WHAT WE HAVE PREVIOUSLY STATED, IT IS APPARENT THAT CERTAIN TYPES OF CONTRACTS WOULD BE INCOMPATIBLE WITH THE SOCIETY'S STATUTORY CHARTER. IN 39 COMP. GEN. 71, WE REVIEWED A FIXED-PRICE CONTRACT ENTERED INTO BY THE DEPARTMENT OF AGRICULTURE AND THE NATIONAL ACADEMY OF SCIENCES. LIKE THE AMERICAN CHEMICAL SOCIETY, THE ACADEMY IS A NONPROFIT SCIENTIFIC INSTITUTION ESTABLISHED BY AN ACT OF THE CONGRESS. THAT ACT (36 U.S.C. 253) LIMITS THE ACADEMY'S COMPENSATION TO THE "ACTUAL EXPENSE" OF THE SERVICES IT RENDERS TO THE GOVERNMENT IN TERMS IDENTICAL TO THOSE CONTAINED IN SECTION 4 OF THE SOCIETY'S INCORPORATING ACT. UNDER THESE CIRCUMSTANCES WE CONCLUDED IN THAT DECISION THAT THE CONTRACT WAS IMPROPERLY EXECUTED SINCE THE FIXED-PRICE AGREEMENT BY ITS VERY NATURE CONTAINED AN ELEMENT OF PROFIT AND, THEREFORE, RESULTED IN COMPENSATION ABOVE THE ACTUAL COST OF PERFORMING THE CONTRACT WORK. IN REGARD TO THE USE OF A CPFF CONTRACT, IT IS EVEN MORE EVIDENT THAT AN ELEMENT OF PROFIT IS PRESENT. THE CPFF FORM OF CONTRACTING PROVIDES THE CONTRACTOR WITH A GUARANTEED PROFIT, WHICH, UNLIKE THE PROFIT ELEMENT IN A FIXED-PRICE CONTRACT, DOES NOT DEPEND UPON THE CONTRACTOR'S ABILITY TO CONTROL COSTS. MOREOVER, THE PROVISION FOR A GUARANTEED PREDETERMINED PROFIT IN A CPFF CONTRACT IS THE ONLY FACTOR WHICH DISTINGUISHES THIS FORM OF CONTRACT FROM A FIRM FIXED-PRICE OR COST- TYPE CONTRACT. SEE FPR SEC. 1-3.404-2 AND 1-3.405-2 AND -5.

IN AN ATTEMPT TO COMPLY WITH THE SOCIETY'S CHARTER, THE FOUNDATION HAS CONFINED THE FIXED FEE IN THE CONTRACT TO AN AMOUNT EQUAL TO THE ESTIMATED MORTGAGE INTEREST ON THE BUILDING--- A COST OTHERWISE UNALLOWABLE UNDER THE CONTRACT BY REASON OF FPR SEC. 1-15.205-17 WHICH PRECLUDES THE PAYMENT OF INTEREST ON BORROWINGS "HOWEVER REPRESENTED.' IT IS OUR OPINION THAT IN SO DOING, THE FOUNDATION HAS ENTERED INTO A REIMBURSEMENT-TYPE CONTRACT WHICH PROVIDES FOR THE RECOVERY OF INTEREST ON BORROWINGS UNDER THE GUISE OF A FIXED-FEE. THIS, WE BELIEVE, IS CONTRARY NOT ONLY TO SECTION 4 OF THE STATUTORY CHARTER OF THE SOCIETY BUT TO THE FEDERAL PROCUREMENT REGULATIONS.

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