made in advance of deliveries." Advance and progress payments, which may be made prior to any deliveries, are discussed in chapter 12, infra.

II. Required Clauses in Cost-Reimbursement Supply Contracts

9. General. As we have seen (chapter 6, supra), the cost-reimbursement type of contract is authorized for use by section 4 of the Armed Services Procurement Act 18 in negotiated procurement. The most important distinguishing feature of this type of contract is that it contemplates reimbursement of the contractor on the basis of costs incurred by him, not on the basis of a fixed price per unit of production. Because the Government is obligated to reimburse for costs, it can therefore be expected that cost-reimbursement contracts will contain provisions enabling the Government to maintain some control over costs. The Schedule of a cost contract will contain a statement of the total estimated cost of the contract, a dollar amount that is fixed in order to establish an obligation of appropriated funds and to establish a limit beyond which the Government will not bind itself to make reimbursement. The contract will include or incorporate by reference the applicable statement of cost principles contained in Section XV, Armed Services Procurement Regulation to control allowability of contract costs.19 A cost-reimbursement contract may also provide for payment to the contractor of a fee based on a percentage of the original estimated cost.20 Consequently, the amount of this fee will be stated as a dollar amount and provision will be made for the manner in which the Government will pay it. Primarily, this portion of the chapter will consist of an examination of some of the important requirements of Section 7-203 which contains clauses required in all cost-reimbursement supply contracts. Cost-reimbursement supply contracts are defined 21 as contracts (other than letter contracts, letters of intent, preliminary

17 A predecessor of Rev. Stat. § 3648 was interpreted in The Floyd Acceptances, 74 U.S. (7 Wall.) 666, (1868), to preclude the acceptance by the Secretary of War of drafts drawn by Government contractors upon commercial banks, the drafts to be purchased back by the contractors out of the payments made under their contracts. While it felt that the arrangement was more clearly a loan of the credit of the United States to assist the contractors in financing their contracts than a payment under the contracts, the Supreme Court found the transaction illegal as a direct violation of the statute (if regarded as a payment) or illegal as an evasion thereof (if regarded as accommodation paper). See also 1 Comp. Gen. 143, 145 (1921) where the Comptroller briefly discusses the purpose for which the statute was enacted.

18 Now codified in 10 U.S.C. § 2306 (1958).

10 ASPR XV contains cost principles applicable to different cost-reimbursement contracts; e.g., Part 2 deals with "Supply and Research Contracts with Commercial Organizations." Part 4 deals with "Construction Contracts." ASPR 15-102, 15-103, and 15-104 requires cost principles as stated in the section to be incorporated by reference in the contracts for which the principles were designed.

20 Differing in this respect from the prohibited cost-plus-a-percentage-of-cost contract which allows the contractor to recover a percentage of his allowable costs. ASPR 7-202.

notices of award, or amendments or modifications of contracts) which are entered into on a cost or cost-plus-a-fixed-fee basis for supplies. Contracts for the construction, alteration or repair of buildings, bridges, roads or other kinds of real property; contracts for experimental, developmental or research work; and contracts for facilities to be provided by the Government under a "facilities contract" are not included. Contract clauses required for cost-reimbursement supply contracts are set out in full text in Department of Defense Form 748.22

10. Limitation of cost (Oct 1953) (ASPR 7–203.3). The primary purpose of this clause is to establish the estimated cost (as fixed elsewhere in the contract) as the measure of the Government's liability to make payment and as a ceiling beyond which the contractor may not make expenditures except at its own risk; and to provide a method for revising the estimated cost particularly when an increase therein is indicated. The reason for such a clause is the practical necessity of keeping costs within the available appropriation.

11. Allowable cost, fixed fee, and payment (Apr 1959) (ASPR 7-203.4). The principal functions of this clause are: to establish that the contractor will be reimbursed for costs allowable under Section XV, Armed Services Procurement Regulation; to provide for the method by which the contractor can submit claims for payment of incurred costs; to provide for final payment and execution of a release by the contractor; to provide for payments on the fixed-fee, if any. The clause imposes on the Government an obligation to pay to the contractor such contract costs as are "determined by the Contracting Officer to be allowable in accordance with" applicable cost principles. While this would appear to make the Contracting Officer the final judge of the allowability of costs, the Contracting Officer's determination is subject to audit by representatives of the Army Audit Agency.23 In addition, the General Accounting Office may disallow or take exception to reimbursement of costs.2 The question of reimbursability of costs may also reach the Armed Serv

"Dated 1 July 1955. It should be observed, however, that this form, like SF 32 (containing clauses for fixed-price supply contracts) may require amendment as new clauses supersede those in effect at the time the form was promulgated.

"APP 30-207.16 (23 May 1960) provides that the cognizant audit agency (see Chap. VI, Contract Audit Manual, SR 36-70-1, 18 Jun 1952, as revised 20 Oct 1953) will receive copies of all cost-reimbursement vouchers prior to payment. If differences of opinion arise between the contracting officer and the auditor, resolution of the difference is, in general, a condition for payment. The regulation provides for submission of unresolved differences to higher echelons. APP 30-207.1c (1 Nov 1957).

While the contracting officer is charged with ascertaining the reimbursability of costs, an Army disbursing officer is charged with the duty of making payments. GAO exceptions or disallowances are addressed to the disbursing officer. The GAO is charged with the settlement of the public accounts (including those of Army disbursing officers) and certification by the GAO of balances in those accounts is final and conclusive on the executive branch of the Government (42 Stat. 24, 31 U.S.C. | 44 (1958)).

ices Board of Contract Appeals 25 or the Court of Claims.26 The contractor may submit his claims for reimbursement of costs once each month (or more frequently, if such a procedure is approved by the Contracting Officer). Cost submissions are normally made on Standard Form 1034 ("Public Voucher for Purchases and Services other than Personal")." Accompanying the voucher will be a detailed statement of the costs relied on as being allowable under the contract; and the claim will be supported by documents evidencing the costs such as purchase orders, vendors' receipts, payrolls, etc.28 12. Subcontracts (July 1960) (ASPR 7-203.8, 22 July 1960). This clause implements the provisions of section 4(b) of the Armed Services Procurement Act.29 The section provides in pertinent part: All cost and cost-plus-a-fixed-fee contracts shall provide for advance notification by the contractor to the procuring agency of any subcontract thereunder on a cost-plus-a-fixed-fee basis and of any fixedprice subcontract or purchase order which exceeds in dollar amount either $25,000 or 5 per centum of the total estimated cost of the prime contract*

One purpose of this portion of the statute is to enable the Government to control the prime contractor's costs. Thus, while it may be desirable from the prime contractor's standpoint to subcontract on a CPFF basis, Government interest may indicate that assurance be obtained that the subcontractor selected be one whose books adequately reflect his costs 30 or that the subcontract is not actually on a cost-plus-a-percentage-of-cost basis. Noteworthy among the provisions of the clause is the requirement that the contractor secure the approval of the Contracting Officer before making certain subcontract arrangements. In addition to the two types of subcontracts as to which the prime contractor must give advance notice pursuant to section 4(b), supra, subclause (b) of the "Subcontracts" clause provides that the prime contractor must obtain advance approval of the Contracting Office for subcontracts on a time and material basis and

See Hughes Aircraft Co., ASBCA No. 1933 (19 Aug 1954); Garner Aviation Service Corp., ASBCA No. 1514 (8 Dec 1953), 6 CCF 61,563.

20 See Bell Aircraft Corp. v. United States, 120 Ct. Cl. 398 (1951); 343 U.S. 913 (1952), aff'd by an equally divided court, 344 U.S. 860 (1952).

"Dated 7 Sep 1950, GAO General Regulation 51, Supplement No. 11, 30 Comp. Gen. 537 (1950). See SR 35-3210-5 (4 Aug 1954).

28 Some of the important GAO decisions relating to the evidence required in support of payments are: 23 Comp. Gen. 707 (1944), 20 Comp. Gen. 341 (1941), amplified in 21 Comp. Gen. 593 (1941) (check payment verification), 20 Comp. Gen. 632 (1941) (damage or loss to contractor's property); 20 Comp. Gen. 341 (1941) and 20 Comp. Gen. 664 (1941) (invoices); 20 Comp. Gen. 477 (1941) and 21 Comp. Gen. 788 (1942) (payrolls); 21 Comp. Gen. 180 (1941) (petty cash expenditures); 22 Comp. Gen. 14 (1942) and 22 Comp. Gen. 95 (1942) (subcontract expenditures); 21 Comp. Gen. 588 (1941); 22 Comp. Gen. 57 (1942); 22 Comp. Gen. 250 (1942); 24 Comp. Gen. 565 (1945) (Travel expenses).

Now codified in 10 U.S.C. § 2306 (e) (1958).

80 ASPR 15-102, 15-103 and 15-104 (3 Jan 1955) require that the appropriate provisions of ASPR Sec. XV be applied to cost-reimbursement type subcontracts under cost-reimbursement prime contracts.

subcontracts which provide for the fabrication, purchase, rental, etc., of industrial facilities or special tooling valued in excess of $1,000. The clause contains an agreement by the prime contractor that none of his subcontracts will be placed on a cost-plus-a-percentage-of-cost basis. In this connection, it is pertinent to observe that the prohibition against the cost-plus-a-percentage-of-cost 8y8tem of contracting contained in section 4(b) of the Armed Services Procurement Act 31 extends not only to prime contracts but also to subcontracts.32

13. Other clauses. a. Cost-reimbursement supply contracts are required to contain an "Inspections" clause (May 1960) (ASPR 7203.5) similar to the one required for fixed-price supply contracts (May 1958) (ASPR 7-103.5). Unlike the fixed-price contract clause, the cost-reimbursement contract clause permits the contractor to be reimbursed by the Government for the cost of replacement or correction of supplies which the Government has found to be unacceptable as originally tendered by the contractor. Such replacement or correction may be ordered at any time up to six months after final acceptance of the supplies last delivered in accordance with the requirements of the contract, and no additional fee may be paid for the replacement or correction. The clause also provides that the Government may require the contractor to replace or correct without charge supplies which are defective or not in compliance with contract requirements because of "fraud, lack of good faith or willful misconduct" on the part of directors and certain other officers of the contractor company. The clause further provides that the Government shall finally accept supplies as promptly as possible after their delivery and that final acceptance "shall be deemed to have been made no later than sixty (60) days after the date of such delivery, if final acceptance has not been made earlier within such period."

b. Cost-reimbursement type supply contracts are required to contain a "Records" clause (Jan 1960) (ASPR 7-203.7). This clause obligates the contractor to maintain books and records to the extent necessary to reflect all costs for which reimbursement is claimed. The contractor's accounting system is made subject to approval by the Contracting Officer. The contractor agrees to make his books and records available for inspection, audit, or reproduction by rep

a See the act of 28 August 1958, 50 U.S.C. 1431-1435 (1958) for a similar provision. 32 ASPR 3-401 provides that "The cost-plus-a-percentage-of-cost system of contracting shall not be used." "All contracts shall by an appropriate clause prohibit costplus-a-percentage-of-cost subcontracts." The Comptroller General has recognized the validity of this position. See 21 Comp. Gen. 858 (1942); 22 Comp. Gen. 784 (1943), 33 Comp. Gen. 533 (1954). It seems established that "advise price" and "price to be negotiated" subcontracts and purchase orders may constitute violations of the CPPC prohibition, depending on the facts involved in each case. 33 Comp. Gen. 533, 536 (1954).

resentatives of the Army or the Comptroller General, and to preserve the books and records for the periods of time set out in the clause. The contractor further agrees to insert record keeping and audit provisions in certain of its subcontracts.

c. Cost-reimbursement supply contracts also contain an "InsuranceLiability to Third Persons" clause (Jan 1960) (ASPR 7-203.22) which establishes the contractor's duty to maintain workmen's compensation insurance, certain types of liability insurance, and defines his right to reimbursement for the cost of such insurance and for liability to third persons on account of injury to persons or property. The clause also deals with procedures to be followed in connection with litigation against the contractor arising out of performance of the contract.

III. Clauses To Be Used When Applicable

14. General. Certain clauses contained in paragraph 7-104 of the Armed Services Procurement Regulation must be inserted in fixedprice supply contracts depending on whether the statute, regulation or other authority establishing the clause is applicable to the contract.33 For example, the "Military Security Requirements" clause (June 1958) (ASPR 7-104.12) is required for use only in contracts classified "Top Secret," "Secret," or "Confidential." Because of the limited applicability of some of these clauses and because treatment of others of them is undertaken elsewhere in this text, discussion at this point is limited to two of the clauses of more recent origin required "to be used when applicable."

34

15. Examination of records (Jan 1959) (ASPR 7-104.15, 3 Oct 1960). The "Examination of Records" clause is based on the requirement of section 4(c), Armed Services Procurement Act. In the case of cost-reimbursement contracts, the requirement of the section is met by inclusion of the "Records" clause (Jan 1959) (ASPR 7– 203.7). The clause applies to fixed-price supply contracts and purchase orders in excess of $1,000 when negotiated pursuant to the Act. Contracts and purchase orders for $1,000 35 or less are exempt as are contracts or purchase orders for public utility services when such contracts are at rates not in excess of those established for uniform applicability to the general public, or at such rates plus rea

88 A closely similar listing of clauses "to be used when applicable" is provided for cost-reimbursement type supply contracts in ASPR 7-204 (3 Oct 1960).

84 Now codified in 10 U.S.C. § 2313 (1958). A similar provision is in the Federal Property and Administrative Services Act, 63 Stat. 395, as amended, 41 U.S.C. § 254 (c) (1958).

35 This ceiling and the $1,000 floor for applying the clause to fixed-price supply contracts and purchase orders have been raised to $2,500. ASPR 7-104.15 (3 Oct 1960).