ALLOWABLE COST PRINCIPLES

Our February 27 report noted that the allowable cost principles contained in the proposed contract applied only to the use of the initial $92 million to be provided by AEC. We stated that it did not appear that these principles would apply to funds provided by BRC from utility contributions or to any subsequent funds AEC may provide to the project. We expressed the belief that the parties to the proposed contract should consider the desirability of adopting AEC's cost principles and making them applicable to all funds received or expended for the project.

Ambiguity as to future funding of certain unallowable costs

The proposed contract has been changed to make ABC's cost principles, with certain exceptions, applicable to the expenditure of all project funds. Two of these exceptions relate to items that are allowable under the contract cost principles only to the extent that they are not paid from the initial $92 million to be provided by AEC. These two cost items are

1. Interest, fees, and other charges for loans obtained by PMC; and

2. Certain costs incurred by PMC of the kind normally recovered by a contractor from his fee but which are not allowable under AEC's cost principles.

If additional AEC funds are required to complete the project, the proposed contract does not specifically prohibit the use of these additional AEC funds to pay these costs. Although AEC has informed us that it does not intend that such additional funds would be made available to pay for such costs, we believe it is desirable to clarify the contract to remove this ambiguity.

Arrangements for funding unallowable costs

The proposed contract (section E-13.2.14) allows PMC to incur costs and be reimbursed from project funds--other than AEC funds--for costs which are unallowable under

Under the

In addi

section E-13.3 of the contract's cost principles. contract, PMC must incur such costs in good faith. tion, not more than $250,000 a year during the term of the contract will be available for defraying such costs and these costs cannot be paid from the $92 million to be provided by AEC.

This provision was not contained in the contract previously proposed by the parties. According to the proposed contract, this provision was included in view of the fact that PMC is a nonprofit corporation which is not receiving any fee or management allowance for its role in the management of the project.

Area of concern

For certain unallowable costs specified in sec

tion E-13.3 of the contract, PMC has the authority to charge certain of these costs against any project funds at its discretion. For example, section 13.3.17 of appendix E cites as unallowable "Foreign travel, except as PMC may otherwise specifically approve." (underscoring supplied.)

The effect of exceptions of this type in the unallowable costs provisions of appendix E-13.3 is to permit certain unallowable costs to be charged either to (1) the $250,000 allowance which excludes use of AEC funds or (2) general project funds which include use of AEC funds. Therefore, under this situation, PMC could incur unallowable costs in excess of the $250,000 limitation provided for under section E-13.2.14.

If the parties consider the $250,000 to be a reasonable annual allowance for the types of unallowable costs which PMC should be reimbursed for under normal business practices, we question the need for PMC's additional authority to also charge such costs, at its discretion. against general funds which include funds provided by AEC.

With regard to the $250,000 allowance for costs which would not be allowable under the contract's cost principles, we believe that, in the interest of promoting prudent business management and assisting in controlling such expenditures, it would be desirable for the parties to establish appropriate policies governing the incurrence and reimbursement of the various types of costs chargeable to the $250,000

allowance which could reasonably be anticipated under normal business practices. On April 17, 1973, in a communication to officials of TVA and Commonwealth, AEC recognized the need for actions along these lines.

In addition, the contract does not specifically state whether any remaining part of the $250,000, may be carried over to the next year. AEC officials told us that the parties did not intend that unex ended portions of each year's funds be carried over to the following year. We believe it desirable to modify the contract language to clearly reflect this intent.

Deviation from AEC cost principles

concerning allowability of litigation costs

The proposed contract deviates from AEC cost principles in that it allows all litigation costs related to obligations under the contract. Section E-13.2.7 indicates that litigation expenses shall be allowable costs. Section E-13.3.12 makes unallowable the costs of prosecuting claims against or contesting actions of the United States, but only insofar as they are unrelated to obligations under the contract..

However, under AEC procurement regulation (AECPR) 9-7.5006-9(e) (16), all costs incurred in connection with prosecuting claims against, or contesting actions of the United States are unallowable. Furthermore, under AECPR 9-7.5006-9 (d) (4) and AECPR 9-7.5006-50, only the expense of litigation specifically approved by the AEC contracting officer is allowable. The cost of defending an action would not be allowable, however, if such cost would have been compensated by insurance which the contractor failed to obtain although it was required to do so.

Thus, under the proposed contract, the cost of litigation against the United States and the cost of prosecuting and defending all other claims and actions related to the contract would be allowable, whether or not AEC approved such litigation and whether or not PMC obtained insurance to cover such cost.

Clarification needed concerning interest from investment of utility contributions

Section 7.3 of the contract states that the allowable cost principles in appendix E will apply to PMC's use of all project funds. The contract is not clear, however, as to whether interest earned from the investment of utility contributions would be considered part of project funds.

Section 1.1.13 defines project funds as "all funds made available to PMC including proceeds from loans and contributions to the project." While this definition of project funds could be interpreted to include the interest earned by investing utility contributions, the contract does not specifically state that such interest would be considered project funds subject to the contract's cost principles. It is our understanding that the parties to the contract intended that earned interest would be included as part of project funds and subject to the contract's cost principles. We believe the contract should be clarified to indicate this intent.

INDEMNITY PROVISIONS

AEC has changed the language of the indemnity provisions back to the more narrow provisions initially proposed, so that AEC would indemnify the other parties against claims, liabilities, and those expenses incurred in connection with such claims and liabilities. Language has also been added specifically excluding indemnification for any unallowable cost. However, the possible risk to the Government is still extensive, since the indemnity provisions appear to cover any allowable expenses incurred in good faith even though incurred negligently and even though project funds are insufficient to meet such expenses.

Section E-13.2.15 provides that claims, liabilities, and associated expenses, including claims asserted against PMC by TVA and Commonwealth, may be paid so long as PMC certifies that they are just and reasonable and properly allowable under section E-13.2. Under AEC's cost principles, such certifications would be made by AEC's contracting officer. If PMC certifies costs which the AEC contracting officer would not certify in the same circumstances, it is still possible that the Government would have to indemnify PMC for costs which would not be considered allowable under AEC's interpretation of its cost principles. In addition, the Government would have to indemnify PMC for costs even though negligently incurred since the indemnification provision excludes claims resulting from the willful misconduct or bad faith of certain officers mentioned in the contract, but does not exclude claims resulting from negligent acts. believe that AEC should be represented on the body within PMC which would certify costs to provide AEC a greater degree of control.

INDEPENDENCE OF LICENSING REVIEW

We

The proposed contract (app. D, sec. 8.4) provides that AEC shall assist, "as appropriate", PMC and TVA in applying for all permits and licenses necessary for constructing and operating the breeder reactor plant. Our February 27 report pointed out that, under this provision, AEC regulatory personnel could possibly review the application during the licensing process and defend it before a hearing or review body, such as the Atomic Safety and Licensing Board. We expressed concern over the possibility of the regulatory