Chairman, Military Operations Subcommittee, Committee on Government Operations, House of Representatives.

DEAR MR. CHAIRMAN: We refer to your letter dated October 5, 1964, concerning the administrative suspensions of contract costs made pursuant to recommendations in our contract overpricing reports. You specifically refer to the suspensions of costs made by the Department of the Navy under certain cost-plusa-fixed-fee contracts assigned by the Westinghouse Electric Corp. to its Plant Apparatus Department (PAD). These suspensions totaling $4,225,504 were made by the Navy after consideration of our findings and recommendations included in draft reports on our examination of these contracts.

Our final reports to the Congress of these contracts dated July 23 and December 26, 1962, dealt with the pricing of subcontracts awarded by PAD to the Atomic Equipment Department (AED) of Westinghouse. In our July 23, 1962, report we concluded:

"Under the terms of the cost-plus-a-fixed-fee contract between Westinghouse and the Navy, subcontracts awarded by Westinghouse became reimbursable costs and thus, in essence, Westinghouse was buying for the Government and was receiving a fee for this service. There is considerable question as to whether the subcontract between the two divisions is a valid contract, since the law re quires two or more separate legal entities as contracting parties. However, in any case the cost-plus-a-fixed-fee contract between Westinghouse and the Navy placed great reliance upon Westinghouse and obligated it to exercise due care in the expenditure of funds to be reimbursed by the Government. In awarding this 'subcontract' to a department of its own corporation, without effective competition and without considering available cost estimates and prior-cost data, Westinghouse did not exercise the degree of care that was warranted by its contractual relationship with the Government. We believe that the Government is entitled to recover from Westinghouse on the basis of Westinghouse's failure to use due care in establishing the price for the work performed under the 'subcontract' and charged to the Government under the cost-plus-a-fixed-fee prime contract. Accordingly, we are referring copies of this report to appropriate Government agencies with the recommendation that all available and appropriate action be taken to obtain proper recovery from Westinghouse Electric Corp."

The December 26, 1962, report concluded and recommended as follows:

"It appears that Navy approval of the subcontracts was largely predicated on price breakdowns submitted by Westinghouse on prior procurements as well as on the first of these two procurements which led the Navy to believe that Westinghouse's prices consisted of anticipated cost plus a 10-percent profit when, in fact, its prices provided for about $2,241,000 more than that amount. Accordingly, it does not seem reasonable that this amount should be reimbursed to Westinghouse by the Government. Further, the cost-plus-a-fixed-fee contracts between Westinghouse and the Navy placed great reliance upon Westinghouse and obligated it to exercise due care in the expenditure of funds to be reimbursed by the Government. In awarding these subcontracts to a department

of its own corporation, without effective competition and without considering available cost estimates and prior-cost data, Westinghouse did not exercise the degree of care that was warranted by its contractual relationship with the Government. The Government is entitled to recover from Westinghouse on the basis of Westinghouse's failure to use due care in establishing the prices for the work performed under these subcontracts and charged to the Government under the cost-plus-a-fixed-fee prime contracts.

"Since the Navy has advised us that it has withheld sufficient funds from Westinghouse under the prime contracts to protect the Government's interest, we are not at this time issuing formal exceptions against the disbursing officers' accounts. We are, however, asking the Navy to advise us before taking any action to release these funds to Westinghouse. We are, also, referring copies of this report to the Department of the Navy and the Department of Justice with the recommendation that the Navy, in cooperation with the Department of Justice, take all available and appropriate action to resolve this matter and obtain proper recovery from Westinghouse Electric Corp."

As will be noted, our reports recommended that a total of $3,307,000 be recovered from Westinghouse on the basis that it failed to use that degree of care required of a cost-reimbursable contractor in awarding the subcontracts to AED without effective competition and without considering available cost estimates and prior-cost data. The Navy withheld an additional $918,504 to further protect the Government's interests pending a final determination by the Department of Justice as to actions to be taken by the Department in connection with the matters reported.

The position of Westinghouse as expressed to your subcommittee, and previously to our office (see attached copy of our letter of August 28, 1964, to Hedrick and Lane), is essentially as stated in your letter, in part as follows:

"*** Apparently Westinghouse takes the position that these suspensions involve only the question of allowability of costs under its contracts with the Navy. The company contends that the procedure for handling such question is covered by the 'allowability of costs' provisions and the 'disputes clauses' of these contracts.

"If I understand the company's position rightly, it comes to this: The effect of the General Accounting Office recommendations and the Justice Department considerations are extralegal intrusions upon an administrative process defined in the contract and subscribed to in good faith by the contracting parties. Work under the contracts was performed. If certain costs charged by the contractor are found to be excessive or unwarranted, then the Navy contracting officers, in accord with Armed Services Procurement Regulation guidance, should make determinations of allowability or unallowability. The contractor then has the right of appeal to the Armed Services Contract Board of Appeals if he is not satisfied with the decisions."

Contract No. NObs-72205 dated October 29, 1956, between Westinghouse and the Bureau of Ships, covered the design and furnishing of reactor compartment components for the aircraft carrier U.S.S. Enterprise for a total estimated cost of about $59 million. This contract is typical of the other contracts involved in the subject PAD reviews. It provided that work performed by any department or division of Westinghouse would be considered as subcontracted work or services requiring compliance with the clause of the general provisions of the contract entitled "Subcontracts," which provided in pertinent part:

"(a) The Contractor shall give advance notification to the Contracting Officer of any proposed subcontract hereunder which (i) is on a cost or cost-plus-a-fixedfee basis, or (ii) is on a fixed-price basis exceeding in dollar amount either $25,000 or 5 percent of the total estimated cost of this contract.

"(b) The Contractor shall not, without the prior written consent of the Contracting Officer, place any subcontract which (i) is on a cost or cost-plus-a-fixedfee basis, or (ii) is on a fixed-price basis exceeding in dollar amount either $25,000 or 5 percent of the total estimated cost of this contract, or (iii) provides for the fabrication, purchase, rental, installation, or other acquisition, of any item of industrial facilities, or of special tooling having a value in excess of $1,000, or (iv) is on a time-material or labor-hour basis, or (v) has experimental, developmental, or research work as one of its purposes. The Contracting Officer may, in his discretion, ratify in writing any such subcontract; such action shall constitute the consent of the Contracting Officer as required by this paragraph (b).

"(d) The Contracting Officer may, in his discretion specifically approve in writing any of the provisions of a subcontract. However, such approval or the consent of the Contracting Officer obtained as required by this clause shall not be construed to constitute a determination of the allowability of any cost under this contract, unless such approval specifically provides that it constitutes a determination of the allowability of such cost."

The particular subcontracts here involved were on a firm fixed-price basis totaling $12,200,360 for primary coolant pumps and casings. Clause 4 of the General Provisions provided that the Government shall pay to Westinghouse as follows:

"(a) For the performance of this contract, the Government shall pay to the Contractor the cost thereof determined by the Office of the Comptroller of the Navy (Contract Audit Division) to be allowable in accordance with part 2 of section XV of the Armed Services Procurement Regulation as in effect on the date of this contract and the Schedule (hereinafter referred to as 'Allowable Cost'), plus such fixed fee, if any, as may be provided for in the Schedule.

"(b) Once each month (or at more frequent intervals, if approved by the Office of the Comptroller of the Navy (Contract Audit Division)) the contractor may submit to an authorized representative of the Office of the Comptroller of the Navy (Contract Audit Division), in such form and reasonable detail as such representative may require, an invoice or public voucher supported by a statement of cost incurred by the contractor in the performance of this contract and claimed to constitute allowable cost. Each statement of cost shall be certified by an officer or other responsible official of the contractor authorized by it to certify such statements.

"(c) As promptly as may be practicable after receipt of each invoice or voucher and statement of cost, the Government shall, except as hereinafter provided and subject to the provisions of paragraph (d) below, make payment thereon as approved by the Office of the Comptroller of the Navy (Contract Audit Division). After payment of 85 percent of the fixed fee set forth in the schedule, as from time to time amended, further payment on account of the fixed fee shall be withheld until a reserve of either (i) 15 percent of the total fixed fee or (ii) $100,000, whichever amount is less, shall have been set aside, such reserve or the balance thereof to be retained until the execution and delivery of a release by the contractor as provided in paragraph (e) hereof.

"(d) At any time or times prior to final payment under this contract the Office of the Comptroller of the Navy (Contract Audit Division) may cause to be made such audit of the invoices or vouchers and statements of cost as shall be deemed necessary. Each payment theretofore made shall be subject to reduction to the extent of amounts included in the related invoice or voucher and statement of cost which are found by the Office of the Comptroller of the Navy (Contract Audit Division) on the basis of such audit not to constitute allowable cost, and shall also be subject to reduction for overpayments or to increase for underpayments on preceding invoices or vouchers. On receipt of the voucher or invoice designated by the contractor as the 'completion voucher' or 'completion invoice' and statement of cost, which shall be submitted by the contractor as promptly as may be practicable following completion of the work under this contract but in no event later than year (or such longer period as the contracting officer may, in his discretion, approve in writing) from the date of such completion, and following compliance by the contractor with all provisions of this contract * * *” The disputes clause of the contract reads as follows:

"Except as otherwise provided in this contract, any dispute (other than one concerning the allowability of cost) concerning a question of fact arising under this contract which is not disposed of by agreement shall be decided by the Contracting Officer; and any dispute concerning the allowability of cost under this contract shall be decided by the Director (Contract Audit Division). Such decision shall be reduced to writing and a copy thereof mailed or otherwise furnished to the Contractor. Within 30 days from the date of receipt of such copy, the Contractor may appeal by mailing or otherwise furnishing to the Contracting Officer or to the Director, Contract Audit Division, as the case might be, a written appeal addressed to the Secretary, and the decision of the Secretary or his duly authorized representative for the hearing of such appeals shall, unless determined by a court of competent jurisdiction to have been fraudulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or not supported by substantial evidence, be final and conclusive; provided that,

if no such appeal is taken, the decision of the Contracting Officer or the Director, Contract Audit Division, as the case may be, shall be final and conclusive. In connection with any appeal proceeding under this clause, the Contractor shall be afforded an opportunity to be heard and to offer evidence in support of its appeal. Pending final decision of a dispute hereunder, the Contractor shall proceed diligently with the performance of the contract and in accordance with the decision of the Contracting Officer or the Director, Contract Audit Division, as the case may be."

Before considering the specific questions presented in your letter, you should understand that the suspensions of costs made by the Navy were not directed by our Office but were made by that Department in carrying out its responsibilities as the Government contracting agency to protect the interests of the United States. While the suspensions of costs arose out of our draft reports on examination of the Westinghouse contracts wherein we recommended that recovery action be initiated on a breach of contract theory, the means whereby our recommendations would be effectuated were left entirely to the discretion of the Navy and the Department of Justice.

In recognition of the fact that the questions raised by you were prompted by the suspensions of costs made by the Navy, we have undertaken to consider these questions even though they may be, in part, now academic since we have recently been advised by the Navy that action has been taken to convert the suspensions of costs into disallowances. In that context, your questions are answered in the order presented.

"1. Does Westinghouse have grounds for stating that it has been subjected to undue delay in a resolution of the disputed issues?"

It appears that the Navy suspended $1,113,936 as excess profits paid to AED under purchase order No. 56-PR-3210 (contract No. NObs-72205) on December 18, 1961. This amount was increased to $1,295,309 by suspension notice dated July 25, 1962, which referenced contract No. NObs-77026. These suspensions related to our report transmitted to the Congress on July 23, 1962. Additional suspensions of costs were made by the Navy on July 25, 1962, totaling $2,930,195, under contracts Nos. NObs-77026, -72401, -72379, and -72429. These suspensions related to our draft report which was transmitted to the Congress on December 26, 1962.

We are not fully informed as to the reasons why almost 3 years have elapsed since the first suspensions of costs were issued without any affirmative actions having been taken with respect thereto. We understand, however, that the Navy has made an extensive audit of the costs incurred and has obtained additional pertinent information at the request of the Department of Justice. These circumstances, together with those inherent in an adminitsrative review of uniquely different subcontract transactions, could well mitigate against the "unreasonableness" of the delay. In our opinion, therefore, suspensions of contract costs for such periods of time as may be deemed necessary and proper would be appropriate to protect the Government's interests pending the results of audit or other administrative actions seeking to clarify the extent of the Government's ultimate liability for claimed contract costs. It is noted that the "Notice of Costs Suspended and/or Disapproved," DD Form 396, advised Westinghouse that:

"1. This notice constitutes advice of costs suspended and/or disapproved incident to the audit of the above referenced voucher. *

"2. Suspended costs, as referred to herein, are costs which, for the reasons shown below, appear questionable but on which final determination has not been made. * * *

In Oliver-Finnie Co. v. United States, 279 F. 2d 498 (Ct. Cl. 1960), the court held that where a contracting officer took an unreasonable amount of time (15 months) in issuing his findings of fact under the disputes article, the contractor was justified in bringing action in the Court of Claims for breach of contract. See, also James McHugh Sons, Inc. v. United States, 99 Ct. Cl. 414 (1943). However, what is an unreasonable amount of time would depend on the circumstances in each individual case.

From solely a time factor, Westinghouse would seem to have a persuasive argument that it has subjected to undue delay in resolving the question whether the suspensions of costs should have been terminated or converted into disallowances for purposes of application of the disputes procedure. However, as indicated above, and in our answer to question No. 3, valid and sufficient bases may have existed for the continuance of the suspensions by the Navy. Hence, the allegation of "undue delay" could be completely negated by the existence of extenuat

ing circumstances, such as the interest of the Department of Justice in possible fraud aspects of the subcontract transactions.

Also, it is pertinent to point out that the Department of Justice was considering, during this 3-year period, four other contract overpricing reports involving Westinghouse. The latest of these reports was sent to the Congress on March 6, 1964. Since these four reports, together with the two reports issued by us in July and December 1962, involved Westinghouse the Department of Justice believed it was necessary to consider them in the aggregate in determining the courses of action to be taken. Viewed in this light, it could be argued that the period of time involved in the suspensions of costs reports was not necessarily unreasonable.

"2. Do you believe that Westinghouse has been denied procedural 'due process' under the aforementioned contracts because of the Navy's decision to suspend payments rather than to make determinations of cost allowability in accord with ASPR guidance? Are the contract procedural provisions exclusive and binding on the contracting parties for the resolution of disputed issues?"

It is assumed that the term "due process" as used above has reference to the contractual right of Westinghouse to have the allowability of its contract costs finally determined by the official designated in the contracts and to the right to have any questions concerning the allowability of contract costs decided under the disputes article. We agree that these are vested contract rights which should not be denied to a contracting party for an unreasonable period of time.

We understand that the frauds section, Civil Division, Department of Justice, was primarily responsible for the continuance of the suspensions of costs. We understand further that the Department of Justice in considering the possible fraud aspects of the transactions requested certain additional information from the Navy, the development of which required considerable time and effort. Some of this information has been only recently furnished to the Department of Justice. It is in this light that we answer your question No. 2.

In decision B-154766, August 28, 1964, to the Secretary of the Army, we held: "*** it seems abundantly clear that the determination of fraud is a question of law that is beyond the power of administrative officials to determine which necessarily includes contracting officers and boards of appeal who are their representatives.

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"Furthermore, under the rule which has been judicially recognized for so long and so often declared in decisions of our office that it has become a landmark in the disposition of claims involving irregularities and possibly fraudulent practices against the United States, it is the plain duty of administrative, accounting, and auditing officers of the Government to refuse approval and to prevent payment of public moneys under any agreement on behalf of the United States as to which there is a reasonable suspicion of irregularity, collusion, or fraud, thus reserving the matter for scrutiny in the courts when the facts may be judicially determined upon sworn testimony and competent evidence and a forfeiture declared or other appropriate action taken. (Longwill v. United States, 17 Ct. Cl. 288, 291; Charles v. United States, 193 id. 316, 319; Hume v. United States, 21 id. 328, affirmed, 132 U.S. 406; United States v. Adams, 7 Wall, 463; Beard v. United States, 3 Ct. Cl. 122; McKinney v. United States, 4 Ct. Cl. 537; N.P.R.R. Co. v. United States, 15 Ct. Cl. 428; also, United States v. St. Louis Clay Products Co. (D.C. Mo., 1946), 68 F. Supp. 902, and the other cases cited above. Cf. 14 Comp. Gen. 150; 15 id. 466; 17 id. 61, id. 240; 20 id. 507; 23 id. 907; 33 id. 394; 41 id. 206, id. 185.)"

In United States v. Bianchi & Co., 373 U.S. 709 (1963), the Supreme Court, in considering whether the Court is restricted to a review of the administrative record or is free to receive new evidence in a suit governed by the "Wunderlich Act" (41 U.S.C. 321), stated at page 714:

"*** In considering this issue, we put to one side questions of fraud, which are not involved in this case, which normally require the receipt of evidence outside the administrative record for their resolution, and which could be considered in judicial proceedings even prior to the enactment of the statute."

Absent the above considerations, the contract procedural provisions are exclusive and binding on the contracting parties for the resolution of disputed contract issues. The general proposition was stated by our office in B-151935 dated September 18, 1963, as follows:

"The administrative action in this case has given rise to a dispute which we believe from a careful consideration of the foregoing comes within the purview