CONTRACTS RT-1943 AND IK-4666 - THE DETERMINATION OF PERCENTAGE COMPLETION AND DERIVATION OF INCENTIVE FEE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP66B00728R000400070037-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 4
• Document Creation Date: December 12, 2016
• Document Release Date: July 19, 2002
• Sequence Number: 37
• Publication Date: July 15, 1964
• Content Type: MF

Approved 8r i
25X1A
0
0/8/42 :[QO7~24OOO70'IP-9- 6 ~" ~G3
`` Cpl 'vv vv ~` 11 ~?.
~C1
W
15 July 1964
DOCUMINT NO,
NO CH.+MNEti IN CUM
CLASS. WNAEIt ;ia TO: TS S C
NEXT REMiL-* UdI:3:
RUTH: HR70.2
DATES 1881 HEVIEWER:_06454Q
SUBJECT: Contracts BT-1943 and IK-4666 - The Determination of Percentage
Completion and Derivation of Incentive Fee
In accordance with the GENERAL PROVISIONS, Clause 10.(3), (i)
entitled TERMINATION, it is necessary to determine the physical percent-
age completion of the contract work. In addition, it is also necessary
to determine the estimated costs for the completed portion of the work
with which the "actuals" can be compared for the purpose of determining
incentive fee debits or credits in accordance with the incentive fee
formula.
Before discussing the details of the analysis for each contract,
it is worthwhile to review several subjects discussed with you immediately
following the terminations.
Contract BT-1943 was partially terminated to the extent that we
were directed to complete the remaining units to have been delivered
under that contract through final acceptance at Boston. Following this
acceptance, the units were then to have been shipped to storage. In
order to ease our administrative task, we stopped all labor charges against
our internal cost center Project 9040 and established cost center Project
9099 to identify the costs associated with the continued portion of the
work. From an analysis of the total work it became quite clear that a
relatively insignificant amount of Itek's work remained to be accomplished
under the total Contract. This minor amount of work remaining was the
ruling factor in establishing our technique for presenting our analysis
of the per cent complete.
Cost center Project 9093 was established for the collection of
Termination Costs and cost center Project 9094 was established for the
collection of Termination Settlement Expenses. If you will recall, there
was some discussion as to our reasons for identifying these types of work/
SPECIAL HANDLING
Approved For Release 2002/08/12 : CIA-RDP66BOO728ROOO4OOO7OO37=
 Approved S p O l e r? ?8112 : f9L00 400070037-9
25X1A
0
costs separately. I have enclosed as Attachments A and B a copy of each
of the internal WORK AUTHORIZATION ORDERS which were issued as part of my
internal direction for the accomplishment of the termination activities.
These serve to define the different types of work involved. Single cost
centers for Termination Costs and Termination Settlement Expenses would
be the more efficient way to treat such expenses considering administra-
tive ease. The reasons for this decision are the relatively minor amount
of work which would not be accomplished under Contract BT-1943 and, more
importantly, that any residual inventory from that contract was to have
been transferred in total for accountability under Contract IK-4666. An
additional reason was that it would be difficult to derive an equitable
formula for the distribution of such costs between the two contracts
without being somewhat arbitrary.
Another subject to which we devoted some time was our inten-
tion to apply full burdens to our Termination Cost activities as opposed
to the Termination Settlement Expenses which would not bear burdens. As
a premise for this discussion, it was stated that the course of direction
which we proposed in this respect required your agreement at that time
since our alternative to the "full burdens" approach would be to direct
all persons engaged in the termination activities (including "indirect"
personnel) to charge their proper termination account and not apply
burdens to any labor or material. More importantly, once any direction
had been issued, it would be impossible to reasonably, let alone accu-
rately, reconstruct the proper charges if subsequent changes were neces-
sary.
In presenting our reasons for full burdens, we cited the fact
that this technique had been used in the accomplishment of the termina-
tion of a major subcontract which was terminated for convenience 8 Decem-
ber 1961. Since almost two years had elapsed from that time until the
termination of the LANYARD Program (late October 1963), we felt that this
technique appeared valid since we had not been apprised of its unaccept-
ability by any organization that was involved in the settlement of our
claim for the program. However, regardless of this reason, it is my
conviction that the nature of the work being performed as a result of
your formal termination for convenience is no different from the nature
of the work we would have accomplished in the event the contracts had
been allowed to terminate naturally at completion.
In our cost estimates and negotiations for these contracts, we
made clear that there were provisions for work to be accomplished following
the shipment of the last piece of hardware from Boston. This is evidenced
by our applying some six to eight weeks of minimum manpower beyond that
point for the purposes of prudently identifying our residual inventory,
the orderly disposition of paper work (both classified and unclassified),
the orderly closing of our security document control files, the anticipa-
tion of disposing of the residual inventory in accordance with
r. tEl
z "'N
-2- 15 July 1964
SECRET
Approved bEQ 1240188/12 : Vim00070037-9
 ApprovedSFJ e fA2(08112 wI [MOT 400070037-9
25X1A
Ei
-3- 15 July 1964
instructions we would have received from you, the preparation for
shipment of the inventory, and the orderly closing of our outstanding
commitments, establishment of appropriate burdens for the fiscal periods
in consideration, the preparation and submission of our final invoices
and other accounting and administrative responsibilities which were ex-
pected of us as a responsible contractor.
In determining the accounting techniques to be used for the
purposes of that work, it is considered normal accounting practice to
expect "direct" personnel to charge "directly" and "indirect" personnel
to charge "indirectly" in the accomplishment of these tasks. That is to
say, that no unusual accounting practices were contemplated.
Termination Settlement Expenses are, by definition, the direct
result of the unusual circumstances of a formal termination of the contract
prior to its completion. More specifically, it requires that our
purchasing department take unusual measures in stopping the work of our
second tier subcontractors and vendors and then analyzing and negotiating
settlements that are fair and reasonable reimbursement for the work com-
pleted by those subcontractors. Further, it places an unusual demand on
our contracts and other administrative personnel to prepare and analyze
our position relating to percentage completion and the submission and
negotiation of our settlement claim. We recognize these as unusual re-
quirements and, for this reason, agree that such expenses incurred by
normally "indirect" personnel should, by definition, not bear burdens.
Therefore, it has been determined that the nature of the work
performed under our Termination Cost account is no different from that
which would have been performed had the contract not been terminated.
It has also been determined that the work performed under Termination
Settlement Expense is unusual work directly resulting from the termina-
tion. Any discussion of the Termination Cost work must then relate to
the magnitude of the work resulting from termination as opposed to the
nature of the work. We recognize that the magnitude is significantly
greater since our "material in process" is greatly in excess of the re-
sidual inventory had the equipment been delivered complete. In inven-
torying and preparing for disposition of this material, we must then
recognize that certain of our personnel must be retained beyond the time
that they would have been required and were not, therefore, available for
transfer to other programs within the company which could have better
utilized their talents in the accomplishment of fee-bearing work. In the
instance of this termination, our job was made more complicated because
the termination of Contract BT-1943 was partial and deterred us from accom-
plishing a total termination inventory until the last of the equipments
were, in fact, shipped from Boston.
;AURET
Approved F$REssb 12 : URDPAQ'U-61R00Q0070037-9
 Approved 8rp J f O 8/12 :19L 2tML 400070037-9
25X1A
-4- 15 July 1964
As a result of the completion of all termination activities
15 July 1964, we have enclosed our final invoices for your review, approval,
and payment. Our cost invoices have been prepared to include a summary
cost statement for each of the contracts. Beneath each summary sheet is
a supporting cost statement for each fiscal period by internal project
phase. Our direct labor dollars and material expenses have been taken
directly from our books of account. We have included a reserve for our
outstanding commitments which have been specifically identified as a re-
sult of an exhaustive review of our liabilities to each of our subcon-
tractors. To these direct labor and material expenses, we have applied
burdens which we believe are consistent with a similarly thorough review
of our burden centers. These rates include provisions for the Independent
Research and Development portion of those expenses which are not applic-
able to cost type contracts in accordance with our agreement with Boston
Air Procurement District. This provision accounts for the major difference
between the rates used and our "actual" rates which we have or expect to
experience in each of the fiscal periods. We trust that we will be able to
review the derivation of these rates with you and reach agreement in order
that our invoices may be cleared promptly to allow complete settlement of
these contracts. We make this request realizing that our fiscal 1964 rates,
at least, will not be negotiated with the Boston Air Procurement District
for several months hence.
Our fee invoices request payment of fee dollars which were
derived by Attachments C and D. These attachments are detailed analyses
of the physical/fiscal percentage completion. The explanations of the
derivations of these calculations are contained within each attachment.
Also enclosed are the various releases submitted in accordance
with the GENERAL PROVISIONS which concern themselves with patents, future
claims, etc.
We understand that you will desire some period of time to ana-
lyze this presentation. However, our personnel will be available to meet
and discuss with you any portions of the submission which may require
further explanation.
DJ:njv
Attachments - A,B,C,D
cc: I 13 w/3 each
25X1A I I e
c
Very truly yours,
Itek Corporation
SECRET
25X1A
Approvecdr FecJ A68/12 FdI D~MC)ta81RQb400070037-9