Urban Data Systems, Inc. (Urban) seeks review of a decision of the General Services Administration (GSA) Board of Contract Appeals (Board) rejecting Urban’s appeal from a GSA contracting officer’s decision of June 1979. The contracting officer had denied Urban’s claim for $144,429 under two Small Business Administration (SBA) contracts with GSA, involving two subcontracts between petitioner Urban and the SBA. We affirm the Board’s decision that the subcontracts had invalid price terms, and remand for determination of the amount of recovery to which Urban is properly entitled.
I
Urban is a small business located in Newark, New Jersey, eligible for consideration under the § 2[8](a) program of the Small Business Act, 15 U.S.C. §§ 631
et seq.
(1970).
1
Section 637 of the Act empowers the SBA to enter into contracts with federal agencies and departments and then to subcontract the work to small businesses coming within the bounds of the Act. On August 12, 1975 and February 9,1976, SBA and GSA entered into contracts GS-OOS-01562 (01562) and GS-OOS-01904 (01904), which called for the supply of specific quan
The price agreed to on this contract has been arrived at on the basis of information presented by the SBA as their cost of performance. By mutual agreement between SBA and GSA this price may be decreased by any amount or increased by not more than 30% based on verified decreases or increases in SBA’s cost of performance.
SBA then subcontracted the performance of these paper supply contracts to Urban. On the same day that GSA awarded contract 01562 to SBA, the latter entered into subcontract SB2-10-8(a) 76C-016 (016) with Urban under which Urban agreed to “fulfill and perform all of the requirements of” contract 01562, which was incorporated therein; similarly, on the same day that GSA awarded contract 01904 to SBA, that agency entered into subcontract SB2-108(a)76C-103 (103) with Urban under which that subcontractor agreed to “fulfill and perform all of the requirements of” contract 01904, also incorporated. Under the terms of the GSA/SBA contracts, the SBA/Urban subcontracts were to be administered by GSA except with respect to price adjustments, and any cognizable dispute was to be resolved by the GSA contracting officer with right of appeal to the GSA Board of Contract Appeals.
The current controversy arises out of the price adjustment clauses in each of the SBA/Urban subcontracts. With respect to the August agreements (contract 01562 and subcontract 016), Urban had proposed a price of $1,352,728, which apparently included a profit equal to approximately 5 percent of the total cost per unit. The proposed price was later raised to $1,699,064, corresponding to a modification increasing the quantity of paper to be provided. In subcontract 016 as written and executed, however, that price was not fixed as final. Rather, the parties included the following specially typed-in price adjustment clause:
(5) It is understood by and between the parties hereto that the individual prices for the items as stated herein will be subject to a post-award audit.
It is further agreed that in the event the findings as contained in the audit report indicates [sic] that a reduction in all or any of the unit prices is in order such prices shall be reduced accordingly (utilizing the proposed 5% profit factor) and the total contract value adjusted.
In the negotiations for the February agreements (contract 01904 and subcontract 103), GSA first rejected Urban’s original price proposal of $1,544,943, which apparently included approximately 10 percent in profit per unit cost. Negotiations resulted in agreement on a “base price” of $1,193,-672, which could be adjusted upward but not above Urban’s originally proposed price, according to the following price adjustment provision:
It is further agreed that in the event the findings as contained in the audit report indicates [sic] that an increase in the unit price is in order such price shall be increased accordingly (utilizing the proposed 10% profit factor) and the total contract value adjusted. The price will not be increased in any amount above the price offered in the proposal.
In short, Urban agreed in subcontract 103 to increase its price, following an audit, with a 10 percent profit above actual costs, while in subcontract 016 it agreed to decrease its price in accordance with an audit, utilizing a 5 percent profit relative to actual costs.
Post-performance audits revealed a cost overrun of $81,254 on subcontract 103 and a cost underrun of $64,318 on subcontract 016. Based on these reports, Urban claimed it was due a net amount of $144,429, calculated as the cost overrun of subcontract 103 plus profit at 10 percent of the total costs
This claim was forwarded to the GSA contracting officer, who issued a final decision in June 1979 that Urban was due $21,-846 under the subcontracts’ price adjustment provisions. This figure was based on findings that Urban was entitled not to 10 percent profit on the total costs of performance but only on the cost overrun of subcontract 103, and that a 5 percent reduction was to be applied to the cost underrun on subcontract 016. 3
Urban appealed that decision to the GSA Board of Contract Appeals. In its ruling of July 31, 1981, * the Board agreed with Urban’s method of calculating the amounts due on the subcontracts, but determined that both subcontracts were void ab initio because the price adjustment clauses are “cost-plus-a-percentage-of-cost” provisions in violation of 41 U.S.C. § 254(b) (1976). The Board further held that because performance had been completed on both contracts and the supplies had been accepted, Urban would be entitled to a recovery on a quantum valebant basis upon the submission of a claim to the contracting officer.
Urban requests reversal of the Board’s decision, claiming that (1) neither subcontract is a cost-plus-a-percentage-of-cost contract within the meaning of 41 U.S.C. § 254(b); (2) section 254(b) is not applicable to contracts entered into under section 2[8](a) of the Small Business Act; (3) the Government is estopped to deny the validity of the subcontracts; and (4) Urban is in any event entitled to a quantum valebant recovery for the reasonable value of the services, including a 10 percent profit above costs. We consider these contentions in turn.
II
We must disagree with Urban that the Board erred in concluding that both subcontracts constitute cost-plus-a-percentage-of-cost contracts proscribed by 41 U.S.C. § 254(b) (1976). Section 254(b) provides (in pertinent part) that “[t]he cost-plus-a-percentage-of-cost system of contracting shall not be used,” and is incorporated into the Federal Procurement Regulations at 41 C.F.R. § l-3.401(b) (1976).
We accept, at the outset, the general criteria (adopted by the Board) which were developed by the Comptroller General for determining whether a contract is a cost-plus-a-percentage-of-cost contract: (1) payment is on a predetermined percentage rate; (2) the predetermined percentage rate is applied to actual performance costs; (3) the contractor’s entitlement is uncertain at the time of contracting and (4) the contractor’s entitlement increases commensurately with increased performance costs. 55 Comp.Gen. 554, 562 (1975). These standards incorporate the common understanding of the “cost-plus-a-percentage-of-cost system of contracting,” an understanding which was undoubtedly in Congress’s mind when it enacted the prohibition.
These gauges squarely apply to the subcontracts before us. Subcontract 103 provides for payment at a predetermined 10 percent rate to be applied to actual performance costs, and Urban’s entitle
A comparable defect exists in subcontract 016. In the Board’s words: “Contract 016 constitutes a unique but nonetheless prohibited cost-plus-a-percentage-of-cost contract. The contract is unique in that its provisions provide for reductions rather than increases in the contract price. ***** jn ¡fgjjt of the circumstances surrounding the negotiation of the contract; i.e., the apparent total reliance upon the appellant’s cost data; after the fact auditing; and the tacit but consistent agreement of the parties that the contract price was to be reduced by the amount of the costs included in the price but not in fact incurred plus the amount of profit applicable to such unincurred costs; we can but conclude that the contractual scheme envisioned by appellant was that the appellant was to be paid its audited costs plus five percent of those costs. We are driven to this conclusion by the mathematics of the contractual mechanism by which a contract price is calculated on estimated costs plus a five percent profit with the contractor to receive payment of the contract price less its unincurred costs which were included in the contract price together with the profit applicable to such unincurred costs. This results in the contract price paid [emphasis in original] (which is, after all, what counts) being the costs actually incurred plus five percent of those costs. We do not consider that contract number 016 ever had a contract price in any true sense of that term. The contract price was stated as $1,352,728. Had it been stated as $2,352,728, under the contractual scheme the result would have been the same. In short, the appellant, under contract number 016, was at all times under an incentive to incur costs to within ninety-five percent of the original contract price i.e., its estimated costs plus five percent. Consequently, the contract, in light of its interpretation by appellant, falls squarely within the prohibition.” (emphasis added, except as indicated).
Urban stresses that its original proposals were fixed in amount and not subject to change. But the record is plain that the Government was dissatisfied with those proposed prices, and neither contract as written established a contract price fixed in amount and free from change.
See Muschany v. United States,
Where a subcontract violative of the prohibition is made — in whatever form or disguise — it is plainly invalid at least insofar as establishing an obligation on the Government to make reimbursement of an amount representing the subcontractor’s claimed costs plus a percentage of such costs.
33 Comp.Gen. 533, 536 (1954).
Urban urges, too, that the specific contractual provisions provide not for cost-plus-a-percentage-of-costs but for “price re-determination” consistent with section 254(b) and similar to an arrangement sanctioned by the Court of Claims in
National Electronic Laboratories, Inc. v. United States,
Moreover, the ceiling prices designated in both Urban subcontracts did not remove those agreements from the injunction against cost-plus-a-percentage-of-cost contracting. There is nothing in the statute, or its background or objectives, to distinguish a “cost-plus-a-percentage-of-cost-up-to-a-designated-limit” system of contracting from an unlimited cost-plus-a-percentage-of-cost system. Neither the method of computing final cost to the Government nor the evils inherent in such a process are significantly altered by the inclusion of an upper limit.
Cf.
38 Comp.Gen. 38, 40 (1958) (cost limitations are not sufficient to save such contracts from violating the prohibition.) As in any cost-plus-a-percentage-of-cost contract, there still remains an incentive to the contractor “to pay liberally for reimbursable items because higher costs mean a higher fee to him, his profit being determined by a percentage of cost.”
Muschany v. United States,
The prohibition against cost-plus-a-percentage-of-cost contracts protects against exploitation of the government’s resources by contractors who might take advantage of the open-ended system by unduly increasing costs — and thus their profits — or might simply enjoy the spur of an incentive to increase costs (deliberately or carelessly) by being unconcerned, profligate, or wasteful. At the same time, Congress’s prohibition tends to prevent the development of a “buddy system” between contractors and government procurement officials in which the latter might favor some contractors with the well-known advantages of that form of contracting. Were the statutory prohibition inapplicable to agreements stipulating a ceiling price, the contracting parties could avoid the legislative stricture simply by setting high ceilings. We cannot imagine that Congress envisioned such a loophole in establishing protection for the Government against’ the exploitation possible in cost-plus-a-percentage-of-cost contracts. 4
Ill
As for the point that, even if the particular subcontract provisions would ordinarily violate section 254(b) they do not do so here because of “special consideration afforded 8(a) [2[8](a)J companies by the Small Business Act,” we find no indication that Congress excepted 2[8](a) companies from the broad proscription of section 254(b) when contracting with the Government. The Small Business Act does entail a system of contracting in which small businesses are not required to be price competitive with larger, established businesses in order to contract with the Government.
See Eastern Canvas Products, Inc. v. Brown,
Urban suggests that authority to engage in cost-plus-a-percentage-of-cost contracts was given by 15 U.S.C. § 637(a)(1)(A) (1980), granting procurement officers the power to contract with the SBA (which then subcontracts to an 2[8](a) business) “upon such terms and conditions as shall be agreed upon between the ... [SBA] and the procurement officer.”
5
There is, however, nothing in that language (or any other provision in the Act) to suggest that the SBA Administrator was immune to otherwise generally applicable procurement laws, including the proscription of 41 U.S.C. § 254(b) against cost-plus-a-percentage-of-cost contracts. The discretion to contract “upon such terms and conditions as shall be agreed upon .... ” allows the acceptance of contract prices not competitive with non-2[8](a) businesses, but does not suggest that otherwise illegal terms or conditions would be permissible under the small business statute.
Cf. Yosemite Park and Curry Co. v. United States,
IV
Urban asserts that, in any event, the Government is estopped from raising this defense of invalidity because (1) the 2[8](a) program is aimed at encouraging SBA and government agencies to help small businesses achieve a competitive position in the marketplace,
see Ray Baillie Trash Hauling, Inc. v. Kleppe,
Even if we accept the truth of these contentions
6
we cannot estop the Government from showing that it had no power to enter into the challenged price terms. As stated by the Court of Claims in
Yosemite Park and Curry
v.
United States,
Any consideration of this problem must begin with the maxim that the United States is not bound by its agents acting beyond their authority and contrary to regulation. See Federal Crop Ins. Corp. v. Merrill,332 U.S. 380 , 384 [,68 S.Ct. 1 , 3,92 L.Ed. 10 ] (1947); Porter v. United States,204 Ct.Cl. 355 , 366,496 F.2d 583 , 590 (1974), cert. denied,420 U.S. 1104 [,95 S.Ct. 1446 ,43 L.Ed.2d 761 ] (1975).“One who purports to contract with the United States assumes the risk that the official with whom he deals is clothed with actual authority to enter the contract alleged.” Haight v. United States, 209 Ct.Cl. 698 ,538 F.2d 346 , cert. denied,429 U.S. 841 [,97 S.Ct. 116 ,50 L.Ed.2d 110 ] (1976), and the United States will not be estopped to deny the acts of its agents who have acted beyond the scope of their actual authority. Putnam Milis Corp. v. United States,202 Ct.Cl. 1 , 9,479 F.2d 1334 , 1338 (1973); California-Pacific Util. Co. v. United States,194 Ct.Cl. 703 , 720 (1971).
The Supreme Court most recently reasserted this principle in
Schweiker v. Hansen,
Urban cites cases from the Court of Claims and the Court of Appeals for the Ninth Circuit, but we find no support for petitioner in those decisions. The present litigation is unlike
Nash v. United States,
V
It is clear, however, that the Government bargained for, agreed to pay for, and accepted the supplies delivered by Urban. It is also plain that only the price terms of the two subcontracts were invalid — not any other part of those agreements. We agree with the Board that Urban is entitled to reimbursement on a
quantum valebant
basis for the reasonable value in the marketplace of the supplies and concomitant services.
See Cities Service Gas Co. v. United States,
We leave it to the Board to determine whether the value to the Government in these circumstances included the 10 percent profit claimed by Urban, or some other amount of profit. In similar circumstances the Court of Claims noted that “[n]o better answer [to the question of fair compensation] can be given than what the parties
We affirm the opinion of the GSA Board of Contract Appeals and remand to that Board the question of quantum valebant for consideration in accordance with this opinion.
AFFIRMED AND REMANDED.
Notes
. Because the contracts were negotiated and signed in August 1975 and February 1976, we apply the Small Business Act and regulations which were in effect at that time.
. Urban’s computation was as follows:
(a) Contract price as awarded (103) $1,193,672
(b) Costs incurred (per audit) 1,274,926
(c) Cost overrun (b-a) 81,254
(d) 10% profit (10% of b) 127,493
(e) Total owed Urban on 103 (c + d) 208,747
(f) Deduct cost underrun on 016 64,318
(g) Net amount owing Urban (e-f) 144,429
. This was the contracting officer’s calculation:
Subcontract 103
Cost overrun $81,254
Profit (10% of overrun) 8,125
Total owing Urban Data on subcontract 103 $89,379
Subcontract 016
Cost underrun $64,318
Profit reduction (5% of underrun) 3,215
Total owing Government on subcontract 016 $67,533
Set-off
Total owing Urban Data $89,379
Total owing Government 67,533
Net total owed Urban Data $21,846
Urban Data Systems, Inc. v. United States,
. There has never been any doubt that the statutory prohibition applies to individual agreements which are not part of a contractual series used regularly or from time to time by the procuring agency. The statutory phrase “system of contracting” refers to the general format of the particular agreement and was intended, we think, to include all agreements subject to the vice against which Congress aimed (including subcontracts and contracts of that character with a ceiling on the ultimate price).
. Section 637(a)(1) of the 1970 Act, in effect at the time these subcontracts were executed, contains language identical to that quoted by Urban from the 1980 statute.
. The Board found as a matter of fact that “[i]t is impossible to discern from the record whether these additional provisions were added at the instigation of the appellant or the respondent.” We reach the same conclusion upon examination of the record.
. The Court suggested that evidence of “affirmative misconduct” by a government agent might be sufficient to estop the Government from insisting upon compliance with otherwise valid statutes or regulations,
.
Cities Service
discusses a
quantum meruit
rather than a
quantum valebant
basis for recovery. The difference is of no significance
. If the Board wishes, it may first require an initial determination by the contracting officer, but we do not direct it to take that step.
. The pertinent provision reads:
25. Payment of Interest on Contractors’ Claims
(a) If an appeal is filed by the Contractor from a final decision of the Contracting Officer under the Disputes clause of this contract, denying a claim arising under the contract, simple interest on the amount of the claim finally determined owed by the Government shall be payable to the Contractor. Such interest shall be at the rate determined by the Secretary of the Treasury pursuant to Public Law 92^tl, 35 Stat. 97, from the date the Contractor furnishes to the Contracting Officer his written appeal under the Disputes clause of this contract, to the date of (1) a final judgment by a court of competent jurisdiction, or (2) mailing to the Contractor of a supplemental agreement for execution either confirming completed negotiations between the parties or carrying out a decision of a board of contract appeals.
(b) Notwithstanding (a), above, (1) interest shall be applied only from the date payment was due, if such date is later than the filing of appeal, and (2) interest shall not be paid for any period of time that the Contracting Officer determines the Contractor has unduly delayed in pursuing his remedies before a board of contract appeals or a court of competent jurisdiction.