GAO Reactions to Certain Department of Transportation Cost Accounting Procedures

Published by the Government Accountability Office on 1971-10-13.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                       OOMlTWOUER          GENERAL      OF      THE       UMI
                                                         WASHIMGTON.     D.C.         20548

        B-173639                                                                                           T a 8 Em

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        Dear    Senator       Dominick:

               By letter    dated July 8, 1971, you requested             that we provide          you
    !   with a report     on our reactions       to certain    Department
                                                                1 __--=-- _     of  Tran.sp-ortation
                                                                                                .-  1_ ^.                               -,"
/       cost accounting       procedures.    Your letter      enclosed      copies    of letters         to
        you from Mr, 0. E, Bartoe         of Ball   Brothers     Research      Corporation       and from
        the Office     of the Secretary     of Transportation        concerning       the Department's
        policy   on allowable      costs under prime contracts          for systems management.

                Mr, Bartoe,        in his letter         to you, expressed        his concern       that the
        Department      of Transportation            was deviating        from uniform     Government_pro- _-.
        curement     practices        in a manner which could             result    in (1) a contractor
        not recovering         all    reasonable       and necessary        costs associated       with a con-
        tract,     or (2) an inequitable             allocation      of a contractor's         costs among its
        various     customers.          Mr. Bartoe's         concern   arose from a provision           in a
        request     by the Department            for proposals       for management       services      which

                "It   is the governments           desire     to subcontract     as much of
                the effort        as possible.        In addition,      the Department        of
                Transportation        does not wish to pay the prime               contractor
                a fixed      fee, overhead        or G&A charges      on subcontract        work.
                In order       to benefit      from the contractor's         organization,
                a fixed      amount or nominal          charge arrangement       may be con-
                sidered      against    subcontracts."

                 Department         officials        advised      us that this            provision           was not included
        in the request            in an attempt           to preclude         any contractor               from recovering
        the reasonable            and necessary           costs associated              with a contract.                They stated
        that the provision                was included         because of the Department's                        recognition
        that the type of systems                   management         contract        it planned            to award varied
        considerably           from conventional             research        and development                type contracts--
        which call         for extensive           in-house       effort--and           that under the planned                  con-
        tracting       arrangements,            up to 80 percent             of the total            prime contract           dollars
        would relate           to subcontractors'             work.        The Department              has indicated          that a
        considerable          portion         of a contractor's            indirect        costs,        necessary        and rea-
        sonable      to support           in-house      work, would not be of direct                          benefit     in the
        management         of the subcontracts,               and has concluded                that,       if it followed
        the normal         contracting          practice       of applying          a standard           fixed      rate to sub-
        contract       dollars        for a contractor's              overhead       and general              and administrative
        expense,       a very substantial               and unwarranted             additional          cost to the Govern-
        ment would be incurred,

                                                50 TH ANNIVERSARY                        1921-   1971
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               The Department's  actions in this case meet the requirements         of
        Government procurement regulations.        Paragraph 1-15.203(d)     of the
        Federal Procurement Regulations,      which are applicable    to civil    agen-
        cies, provides    that a contractor's   method of allocating     indirect   costs
        (i.e.,   overhead, and general and administrative      expense) shall gener-
        ally be acceptable unless:

                 --a      particular contract calls for a significant                 departure
                       from the normal work of the contractor;

                 --a      significant change occurs in the nature                 of the contractor's
                       business, the extent of subcontracting...or                  other relevant

        Comparable sections of the Armed Services Procurement Regulations              and
        the National Aeronautics        and Space Administration     Procurement Regulations
        contain wording identical         to the Federal Procurement Regulations.       Con-
        sidering      the circumstances     of the procurement and the authority    contained
        in the Federal Procurement Regulations,           it appears that the Department
        was fulfilling       its responsibility    for obtaining   a fair and reasonable
        price to the Government for services.

              We have discussed the problem of allocating       indirect    costs to
        Government contracts with representatives        of the Cost Accounting
        Standards Board,      They have informed us that circumstances       such as
        those outlined     in Mr. Bartoe's   letter will be carefully    considered in
        the development of any cost accounting       standard covering    the allocation
        of indirect    costs.

                 We trust     the information     furnished     will      serve     your purposes.

                                                              Sincerely      yours,

                                                [DsplItYT     Comptroller  General
                                                              of the United States

        The Honorable Peter H. Dominick
        United States Senate