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section shall be construed as authorizing the Commission to approve a construction differential in excess of 50 per centum of the construction cost of the vessel paid by the Commission. And section 504 of the act provides as follows:

Where an eligible applicant under the terms of this title desires to finance the construction of a proposed vessel according to approved plans and specifications rather than purchase the same vessel from the Commission as hereinabove authorized, the Commission may permit the applicant to obtain and submit to it competitive bids from domestic shipyards for such work. If the Commission considers the bid of the shipyard in which the applicant desires to have the vessel built fair and reasonable, it may approve such bid and become a party to the contract or contracts or other arrangements for the construction of such proposed vessel and may agree to pay a construction-differential subsidy in an amount determined by the Commission in accordance with section 502 of this title, and for the cost of national-defense features. The construction-differential subsidy and payments for national-defense features shall be based on the lowest responsible domestic bid. No construction-differential subsidy, as provided in this section, shall be paid unless the said contract or contracts or other arrangements contain such provisions as are provided in this title to protect the interests of the United States as the Commission deems necessary. Such vessel shall be documented under the laws of the United States as provided in section 503 of this title. The contract of sale, and the mortgage given to secure the payment of the unpaid balance of the purchase price, shall not restrict the lawful or proper use or operation of the vessel, except to the extent expressly required by law.

We believe it important to note that the construction-differential subsidy provisions of Title V of the act, 46 U.S.C. 1151, provide alternate methods of financing the construction of a vessel for which a construction-differential subsidy is sought. Either the Federal Maritime Board may build the vessel and sell it to the applicant under section 502 (a), 46 U.S.C. 1152 (a), or the applicant may finance the construction of the vessel and the Board may permit the applicant to obtain and submit competitive bids from domestic shipyards for such work under section 504. With respect to the latter, if the Board considers the bid of the shipyard in which the applicant desires to have the vessel built fair and reasonable, it may approve the bid, become a party to the contract, and agree to pay a construction-differential subsidy in an amount determined in accordance with section 502 of the act, and for the cost of national defense features.

Under either method of financing, however, the shipowner is an “applicant” for a construction-differential subsidy under Title V of the act, and under either plan the subsidy payment is absorbed by the Government. The basic difference between the two sections is in the method of financing the construction of the vessel. However, section 502(d) prescribes an added provision requiring the approval of a bid

a from the lowest responsible Pacific coast bidder if the amount of his bid does not exceed the amount of the lowest responsible bid of the shipbuilder on the Atlantic coast by more than 6 per centum of the amount of such Atlantic coast bid. In addition, in order to clarify the calculation of the construction-differential subsidy in such a cir

a

cumstance, section 502 (d) further provides that the subsidy payment shall not exceed 50 per centum of the construction cost of the vessel.

A review of the legislative history of the two sections fails to disclose any conclusive evidence as to whether the provisions of section 502(d) are or are not intended to apply in the case of construction under section 504. The language of section 502(d) read literally would seem to be applicable in any case where a construction differenential subsidy is applied for under this title by an applicant who has as his principal place of business a place on the Pacific coast of the United States. The last sentence of 502(d), however, which was added by the 1938 amendments and which limits the subsidy, including the Pacific coast preference, to 50 percent of the construction cost, uses the phrase "cost of the vessel paid by the Commission.” Under section 504 such total cost is not paid by the Commission since the applicant pays his portion. However, similar inconsistencies are found in other sections of Title V. We are not inclined to give as much weight to the phrase "paid by the Commission”, which was added in 1938, as we are to the phrase “under this title”, which was a part of the original act.

American Mail Line, Ltd. has its principal place of business on the Pacific coast and has applied for a construction differential subsidy under Title V of the act. While such application involves private financing under section 504, the fact remains that section 504 is a part of Title V and, therefore, the application is made under Title V. In view of the precise language of section 502(d) which states: “(d) In case a construction-differential subsidy is applied for under this title by an applicant who has as his principal place of business a place on the Pacific coast of the United States * * *.”

[Italics supplied], and the absence of any legislative history to the effect that section 502(d) is not intended to apply where application is made under section 504, we agree with the opinion of your General Counsel that section 502(d) is for application in the American Mail Line

case.

It is recognized that the effect of applying section 502(d) results in additional cost to the Government and could result in additional cost to the applicant where, as in the present case, the acceptance of the

, Pacific coast bid may result in the difference between foreign costs and domestic costs exceeding the 50 percent construction differential limitation. However, this would also be the result in the case of public financing where a Pacific coast preference is for application. Application of section 502(d) would also make inoperative, in Pacific coast preference cases, that part of section 504 which gives the applicant a right to construct a vessel in a yard of his choice. However, it must be noted that such right did not exist under section 504 as originally enacted, and we are unable to locate any convincing evidence that Public Law 705, 75th Congress, 46 U.S.C. 1112 which amended section 504 in 1938 to give an applicant the right to accept a higher bid if he paid the difference, was intended to override, replace, or repeal the application of section 502(d) to section 504 construction. While these factors are of serious consequence, we do not believe they can serve to overcome the specific provisions of section 502(d). The remedy for any inequities that result, or for any adverse effect on new construction, lies in amendment of the act.

[B–138335] Contracts—Labor Costs—Estimates v. Actual Costs—Quar- . terly Computations Where the method of computing quarterly labor costs under a contract for furnishing metals to the Government was based on estimates for certain fringe benefits (holiday pay, vacation pay and Christmas bonus), because the actual costs were not known until the last quarter of the year and then the difference between the actual and estimated costs of the fringe benefits was included in the fourth quarter average hourly labor costs so that under the escalation clause and due to uneven deliveries between quarters this method resulted in greater overall payments by the Government, no objection to the use of such method based on estimates need be made in the absence of a provision requiring a uniform basis for each quarterly computation. To the Administrator, General Services Administration, July 9, 1959:

Reference is made to your letter of January 2, 1959, with enclosures, requesting our opinion concerning the manner in which one of the three escalation factors provided in contract No. DMP-80, dated May 29, 1953, with International Nickel Company of Canada, Limited, should be applied in making adjustments in the contract price of the metallic nickel and copper furnished thereunder to the United States.

Under the contract—which was entered into pursuant to the authority contained in the Defense Production Act of 1950, 50 U.S.C. App. 2061—it was agreed that INCO would furnish to the Government 120,000,000 pounds of nickel and 100,000,000 pounds of copper conforming to certain specifications, to be delivered f.o.b. certain of the contractor's plants in Canada in not less than minimum carload lots at or before the expiration of five years and seven months from the first day of the month next succeeding the month during which the contractor received an executed counterpart of the contract, at the rate of at least 2,000,000 pounds a month for the nickel and at the rate

. of at least 1,666,666 pounds a month for the copper. The prices per pound to be paid for the nickel and copper, respectively, were fixed by the contract at 87.70 cents (Canadian) and 27 cents (Canadian). Of

those prices, 78 cents of the price for nickel and 20 cents of the price for copper was made subject to escalation upward or downward on the basis of three factors, only one of which has become the subject of dispute between GSA and INCO. That factor is contained in Article V-B of the contract, which is as follows:

One-third of the above 78 cents or 20 cents, as the case may be, shall be adjusted to reflect the percentage increase or decrease of (1) the Contractor's average labor costs per man hour on its overall operations for the calendar quarter next preceding the calendar quarter immediately preceding the calendar quarter in which said delivery is made, above or below (2) said average labor costs per man hour for the last calendar quarter of 1952. The Contractor's average labor costs per man hour shall be the costs in Canadian currency with respect to hourly-paid employees spread over the hours worked by said employees, and shall include basic wages, premium pay, production and other bonuses, holidays and vacations, pension plans, Government social security or insurance or benefit schemes, workmen's compensation and unemployment insurance, medical and hospitalization service, and other costs with respect to said employees. The Contractor's overall operations shall mean the entire operations of its mining, smelting and copper refining divisions in the Sudbury District and of its nickel refining division at Port Colborne. Said average labor costs per man hour for the last calendar quarter of 1952 were $2.161.

The Contractor shall furnish the Government, within three (3) months after the close of each calendar quarter while this Contract is in force, with a statement showing the Contractor's average labor cost per man hour on its overall operations for said calendar quarter, and shall within three (3) months after this Contract becomes effective, furnish the Government with a statement, certified by the firm of Independent Public Accountants which audits its books, confirming its said cost for the last quarter of 1952. Thereafter, the statement for the last quarter in each calendar year shall be so certified, and at the same time, the statements with respect to the three previous calendar quarters shall also be so certified. However, it was provided in paragraph E of Article V that no change was to be made in the prices because of escalation unless the total of the three escalation factors indicated a change of one-half cent or more from the price for the preceding quarter for the particular metal involved.

In Article VI-A of the contract, it was provided that payment for each lot of metal delivered thereunder was to be made promptly upon the presentation to the Government of INCO's properly certified invoica satisfactory to the Government, together with certain other documents not here material.

It appears that INCO has made periodic deliveries under the contract as required and that the Government has paid for the deliveries as made at unit prices determined in accordance with the escalation provisions of the contract where the governing factors were for application. Certain quantities of nickel otherwise deliverable to the Government under the contract have been offered for sale and delivered to private consumers pursuant to authorizations of GSA, in order to divert the metal to United States industry, in accordance with instructions received from the Office of Defense Mobilization, now the Office of Civil and Defense Mobilization.

In determining the average hourly labor costs for the fourth quarter of 1952, the base quarter, INCO had available the actual labor costs for the entire calendar year and used these actual costs to compute the amount of the average hourly labor costs for the base period. However, subsequent computations were to be made quarterly under the contract, and since actual figures for certain fringe benefits (holiday pay, vacation pay and Christmas bonus) were only determinable at the end of the year, INCO used estimates in the first three quarterly computations each year. When actual costs for these fringe benefits became known after the end of the year, INCO determined the difference between the cost of these benefits as estimated for the prior three quarterly computations and the actual costs for the year and included this difference as the cost of the fringe benefits included in the fourth quarter average hourly labor costs. If deliveries had been uniform in each quarter, and there had been no other complicating factors such as the other two bases for escalation and the one-half cent limitation, INCO's method of adjusting the fourth quarter computation would have had no effect on the prices paid by the Government. In practice, however, because of the uneven deliveries between quarters and the other complicating factors, INCO's method of computation resulted in greater overall payments by the Government than would have been the case if the actual fringe benefit costs had been used in making the quarterly average hourly labor cost computations. The total amount in connection with deliveries which had been made under the contract up to and including June 30, 1956, is stated to be approximately $113,765, after giving effect to an adjustment in the fourth quarter, 1952, “base rate” of average hourly labor costs, referred to below.

In the negotiations which have taken place between your agency and INCO with reference to the question of the latter's liability to refund this sum, GSA has taken the position that all quarterly computations of average hourly labor costs must be computed on the same basis as the base quarter computation, whereas INCO argues that there is no contractual requirement to that effect, and that it must, of necessity, use estimates for the first three quarterly computations of cost each year. The issue arose after GSA conducted an audit of the contractor's records. During the audit, it was noted that the average hourly labor cost for the base quarter (fourth quarter of 1952) had been computed on a different basis from that used for all subsequent contract quarters, and in addition an error had been made in computing the base quarter figure. GSA objected to the different methods used to compute the base quarter's labor cost and that of the subsequent calendar quarters and to the actual amount of the base period labor rate. The contractor agreed to adjust the base rate from $2.161 to

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