$2.163 per hour. However, it refused to adjust the quarterly statements for the period from January 1, 1954, through June 30, 1956, to make them conform to the same method of computation as used for the base period, or to refund any part of the referred-to sum of $113,765. Since the adjustment in the stipulated contract base rate from $2.161 to $2.163 is a matter which has been settled satisfactorily by the parties to the contract, it will not be necessary to discuss it here. It is possible to infer from your letter and International Nickel Company's letter of February 27, 1958, that the base rate was originally computed by INCO on the basis of actual cost figures. However, our Civil Accounting and Auditing Division reports that, based upon its review of GSA internal audit work papers, it would appear that GSA initiated the negotiations which led to the adjustment of the base rate because the original rate was based in part on estimated figures. INCO accounting personnel apparently used an adjustment factor to correct prior estimates in computing the base rate rather than the actual, determinable, fourth quarter, 1952, figures. When GSA brought this finding to the attention of INCO, the contractor agreed that it should have used the actual costs to determine the base rate and agreed to adjust the base rate stipulated in the contract and to refund about $19,000. The base rate was changed for periods subsequent to December 31, 1956; however, the refund was not made pending resolution of the problem in dispute. In your present letter, you state that, in the opinion of your agency, a credit is due GSA from INCO for overpayments under the contract totaling $132,765, Canadian (which includes the aforesaid sum of about $19,000 resulting from the referred-to adjustment in the fourth quarter, 1952, base rate), in connection with deliveries made prior to June 30, 1956, and that GSA is entitled to have the prices for subsequent deliveries made under the contract "similarly adjusted." As indicated above, the contractor has acknowledged liability for, and has agreed to refund, that part of the sum of $132,765 which represents the $19,000 item, and therefore the present decision will be confined to the question of whether or not the contractor may be said to be liable to the Government for refund of the balance thereof (approximately $113,765), representing the so-called overpayments which resulted from the manner in which the contractor's average hourly labor costs were computed with respect to fringe benefit payments to employees. In your letter, you take the position that the contractor should adjust the first three quarterly statements for each year to reflect actual costs when such costs are determinable, rather than adjust the fourth quarter statement for previous estimating errors. In support of this position, you state that to compute the base rate on the basis of actual costs and subsequent rates, based on estimated or adjusted costs, distorts the escalation factor and that all average hourly labor costs should be computed on the same basis. In this connection, you contend that since actual costs are not determinable until after the year is ended, the first three quarterly statements of costs must necessarily be considered provisional. You concede that the quarterly statements which INCO furnished pursuant to the provisions of Article V-B of the contract were properly prepared on the basis of information available at the time of preparation, but you point out that none of the four quarterly computations are in themselves strictly correct, except possibly through coincidence, but that they are correct only when considered on an annual basis as a whole. You draw attention to the fact that the contract provides for the calendar quarter rather than the calendar year as a unit of escalation measurement, and you conclude, in effect, that while the contract does not specifically provide for a revision of the computations, the contractor has the same implied duty to correct the incorrect quarterly computations as it had to correct its base period computation. An illustration of the effect on contract prices of using INCO's method of computing average hourly labor costs, rather than that contended for by GSA, is set forth on page 7 of your letter. The base rate of $2.163, as adjusted, was computed on the basis of average hourly labor costs incurred during the final quarter of a year (fourth quarter of 1952), when actual costs with respect to holiday pay, vacation pay and Christmas bonus payments to the contractor's employees were determinable, whereas it is admitted in your letter that "the costs to INCO in respect of holidays, vacations, and a bonus of $25 to each employee on the payroll at Christmas (which is accepted as an element of average labor costs per man-hour) are necessarily estimated for each of the first three calendar quarters on the basis of the best information available at the time the estimates are made." [Italics supplied.] In other words, while it was possible to compute the base rate on the basis of actual costs because a final quarter period of a year was involved, it would not have been possible for subsequent quarterly rates-at least those related to the first three quarters of subsequent years-to be calculated on the basis of actual costs insofar as the expense related to fringe benefits paid to employees was concerned because the items of expense are of such a nature that they are not definitely determinable until the end of the year. That a contractor may not be required to compute cost statements furnished pursuant to an escalation provision such as here involved on the identical basis upon which the base quarter rate was computed where the factors governing the determination of a particular item of ex 551978 O-61 - 4 pense are not the same for the different accounting periods involved was recognized by GSA's Board of Review in an opinion and recommendation submitted to you in connection with the Appeal of The Dow Chemical Company, Docket No. 323, dated July 3, 1957. The Board's opinion and recommendation was transmitted to us by your letter of September 5, 1957, with a request for decision on the legal issue involved, and we expressed our approval of the position taken by the Board in the matter in our letter of September 23, 1957, B133695, to you. Moreover, in our opinion no basis exists for concluding that the parties contemplated that the quarterly statements of the contractor's average hourly labor costs (as well as its invoices) would be revised at the year end on the basis of differences then determined to exist between the estimated amounts for fringe benefits which had been used in their computation and the actual costs incurred. The computations on which an escalation of prices under the contract depended clearly were intended to be made currently, on a quarterly basis. Deliveries under the contract were required to be made monthly and payment for each lot of metal delivered thereunder was to be made promptly upon the presentation to the Government of INCO's properly certified invoice satisfactory to the Government. As pointed out in INCO's letter of February 27, 1958, to your agency, setting forth its position in the matter, Article V of the contract appears to have been drawn with the view to avoiding, so far as practicable, any occasion to adjust invoices once rendered. It specifies three escalation factors. Two of the factors, which are dealt with in paragraphs A and C, are concerned with changes in indices published by the Canadian Dominion Bureau of Statistics. The third factor, which is dealt with in paragraph B, has to do with changes in the contractor's quarterly average labor costs. Paragraph D provides with respect to the published indices that a determination initially published shall stand unless upon subsequent revision and republication it is changed by more than one percent. In the same spirit, paragraph E provides that the prices for any calendar quarter shall remain the same as those for the preceding quarter unless the escalation factors work a change of at least one-half cent per pound in contract prices. In order to comply with the terms of Article V-B, the statements showing the contractor's average hourly labor costs had to be submitted on a quarterly basis, when, with reference to the first three quarters of a particular year, at least, it was impossible to determine the contractor's actual costs of labor insofar as the fringe benefits paid to employees were concerned. Under these circumstances, the only reasonable interpretation to place upon the article is that the parties intended that such element of the labor costs would be computed upon an estimated, or accrual, basis, which is in accordance with good accounting practices, a fact which is admitted by your agency. Also, see United States v. Anderson et al., 269 U.S. 422; Schuessler v. Commissioner of Internal Revenue, 230 F. 2d 722. In this connection, our Civil Accounting and Auditing Division reports that there is no indication in the GSA audit work papers that INCO's estimates were not sound at the time they were made, nor is there a consistent pattern of over-estimates of cost during the first three quarters of each year and a corresponding adjustment downward of the fourth quarter costs to compensate for the overestimates. Under the above circumstances, there would appear to be no legal basis for requiring the contractor to refund any part of the $113,765 involved. In order that you may have the same to furnish to International Nickel Company, an extra copy of the present decision in enclosed. Also, the enclosures transmitted with your letter are returned. [B-139604] Contracts-Awards-Small Business Concerns-Consideration of Low Bidders Under Set-Aside Under an invitation which provides that negotiation for the labor surplus area and small business concern set-aside portions of a procurement shall be conducted with concerns which have not been awarded under the non-set-aside portion of the full quantity which they proposed to furnish, but which also provides that the labor surplus area and small business concerns should offer the total quantity for the non-set-aside and the set-aside portions, both provisions are required to be construed together so that eligible bidders who offer the maximum quantity of the total procurement are not to be eliminated from consideration for set-aside portion. To the R. C. Bennett Box Company, July 13, 1959: Further reference is made to your telegram of May 13, 1959, protesting against the proposed award of that portion of invitation No. CML-30-070-59-96 set aside for firms in labor surplus areas to a bidder other than your company. The referred-to invitation, issued by the United States Army Chemical Procurement District, New York, on March 6, 1959, divided a procurement of wood boxes into a 60,120 unit labor surplus area concern and small business concern set-aside portion and a 60,120 unit non-set-aside portion. With regard to the portion set aside for concerns in labor surplus areas the invitation stated: NOTE B: "Set-Asides" for Firms in Labor Surplus Areas: * (c) To qualify for the set-aside portion of an Item a concern must submit a bid or proposal on the non-set-aside portion of that Item which is no greater than 120% of the highest unit price awarded on such non-set-aside portion and either must be a labor surplus area concern or must be a small business concern. A labor surplus concern or a small business should offer the total quantity of each item (including both non-set-aside and set-aside quantities) which it proposes to furnish under this solicitation. A concern which does not qualify as a labor surplus area concern or as a small business concern should limit its offer to the non-set-aside quantity of each Item. (d) The prices offered shall apply only to the non-set-aside portion. Awards for the set-aside portion of any Item shall be offered at the highest unit price awarded on the non-set-aside portion of that item. (d) After awards have been made on the non-set-aside quantities of this procurement, negotiations will be conducted with qualified concerns in the following order of priority: Group 1: Small business concerns which are also labor surplus concerns. Group 3: Small business concerns not included in Group 1. As Negotiations shall be conducted, within each of the above groups, with concerns (which have not been awarded under the non-set-aside portion the full quantity which they proposed to furnish) in the order of their bids or proposals on the non-set-aside portion, beginning with the lowest responsive bid or initial proposal on which an award for the entire quantity offered has not been made. to each bid or proposal, negotiation for the set-aside portion shall be for a quantity not in excess of (i) the total quantity proposed to be furnished less (ii) the quantity, if any, awarded under the non-set-aside portion. For the purpose of such negotiations, when a concern has offered increments at different prices, each increment will be considered as a separate bid or proposal. Forty-nine bidders were solicited and seventeen bids were received. The Ozark Box and Crating Company, Clarksville, Arkansas, was the lowest responsive bidder on the non-set-aside portion and was awarded the contract therefor at a total contract price of $33,667.20 on May 13, 1959. The record indicates that after the bid opening you advised the procuring agency that you were aware of the fact that you were the next lowest bidder on the non-set-aside portion of the invitation; that since the Ozark Box and Crating Company, the successful bidder on the non-set-aside portion of the invitation, would be receiving an award for the entire quantity of the non-set-aside portion, you and the Small Business Administration were of the opinion that under the provisions of paragraph 2 of section (d) of Note B of the invitation that company was eliminated from participating in the quantity set aside for labor surplus concerns; and that, therefore, you, as the second lowest bidder on the non-set-aside portion of the invitation, were entitled to the first priority to negotiate for the set-aside portion immediately after award of the non-set-aside portion. In response the contracting officer advised you by letter dated May 8, 1959, that you had correctly stated the content of the regulation which provides that if a bidder is awarded the full quantity he proposed to offer on both the set-aside and the non-set-aside portion, an award under either or in combination cannot exceed the quantity he proposed. The contracting officer further advised you that in the present case the Ozark Box and Crating Company did not limit the total quantity it offered |