tion of ESOP to Davis-Bacon employees which at the time constituted about half the work force on the Marshall contract. When Metro was sold by Metropolitan in July 1977 and Metro immediately established its own ESOP, Marshall suspended payment on all ESOP costs allocated to their contract pending further understanding of their nature and determination of reasonableness. Marshall also asked the Defense Contract Audit Agency (DCAA), upon whom we rely for professional audit service, to make a complete evaluation of the Metropolitan and Metro ESOPs to determine the extent to which related costs were reasonable and allowable.

Since the Metropolitan ESOP had also been implemented by Metropolitan under the contract being performed at Langley, that Center likewise became concerned about the cost increases being billed under its contract for ESOP charges. Subsequently, Langley suspended such costs. This suspension generally was for the same circumstances pertaining at Marshall but, also, included a significant and an additional issue concerning whether the ESOP had been included in the Metropolitan/IBEW Labor Agreement as a result of arms-length bargaining. This matter was initially brought to the attention of Langley officials by local IBEW union officials, representing employees of Metropolitan employed at Langley.

The DCAA submitted their report to Marshall in January 1978. In the same month Marshall received a similar report from DCAA with respect to its audit of the Metro ESOP then in effect at Marshall and Johnson. The central question raised by the DCAA in both audits related to the pricing of the stock to both ESOP trusts and to the possibility of stock overpricing in violation of the "Exclusive Benefit Rule" under IRC section 401(a). In substance, DCAA recommended that, pending further assessment of the stock value, costs relating to these plans under NASA contracts in excess of $22 per share of Metropolitan stock and $8.54 per share of Metro stock be suspended.

On January 18, 1978, within days of the receipt of these reports, NASA representatives met with representatives of Metropolitan. During the course of that meeting we discussed the results of the DCAA audit report which were known to both parties. Mindful of the fact that a further suspension of ESOP costs could prolong a withholding of reimbursement to the two companies of their billed ESOP costs, we agreed with Metropolitan that such costs would be formally disallowed to permit both Metropolitan and Metro to appeal the disallowance under the Disputes provisions of the contracts and proceed with due process administrative hearings. We also discussed means of alleviating any financial hardship that such action might have on both companies and gave assurances that we would give conscientious consideration to meaningful representations from both companies that disallowance of ESOP costs during the period involved in determination of the issue would work a hardship on the firms. At that time we further recognized that any financial hardship which might flow from this action would in all probability, impact Metro to a greater extent than Metropolitan. As a result of this meeting an exchange of correspondence between NASA and both companies took place confirming such discussions.

In the case of Metro immediate action was initiated by NASA to review the financial impact of the disallowance action. On February 24, 1978, a "token disallowance" decision on Metropolitan ESOP costs was executed permitting the flow of some $152,000 of $168,812 disallowed costs from Marshall to Metro. On April 3, 1978, similar action was taken with respect to the token disallowance on the Metro ESOP costs. Copies of these disallowance notices are provided to the Committee as previously stated.

With respect to Metropolitan, the issue was further compounded by virtue of the competition for follow-on support services at Langley subsequently addressed in this statement. Notwithstanding this matter, we moved incrementally to fulfill the understanding we had reached with the above representatives of Metropolitan on January 18, 1978. To this end, on April 24, 1978, a similar disallowance was made by Langley of Metropolitan ESOP costs. A request for assessment of financial impact on Metropolitan of this disallowance was also made to the DCAA. On two occasions, in March and May 1978, in discussions with Metropolitan officials, Langley indicated a complete willingness to consider any "token disallowance" proposals that Metropolitan might offer. None, however, were made. On June 28, 1978, representatives of Metropolitan met with the NASA Administrator and indicated for the first time to NASA Head

quarters, the nature of the financial hardship that might flow from disallowance of ESOP costs under the Langley contract. The Administrator directed that immediate action be taken to accelerate whatever relief equity dictated. The President of Metropolitan was asked to furnish in writing to NASA a detailed statement of the company's immediate need for the money being withheld by NASA, together with Metropolitan's recommendations regarding adequate security to assure the Government of recovery in the event the Government prevails after litigation.

On July 12, 1978, Metropolitan provided the requested information and on July 11, 1978, the DCAA reported their evaluation of the effect of the disallowance action on Metropolitan's financial posture. As of today we are proceeding with an appropriate agreement with Metropolitan to ensure a reasonable flow of these disputed costs to that company to alleviate the stated hardship pending resolution of the issues. In the meantime, both Metro and Metropolitan have appealed the disallowances to the NASA Board of Contract Appeals in accordance with established administrative procedures.

Mr. Chairman, NASA is fully aware of and sensitive to the fact that ESOPs are relatively new in Government contracts and that our agency has no authority or responsibility for the regulation of these plans. We also recognize that the regulation of ESOPS is in the province of the Treasury Department (Internal Revenue Service) and the Department of Labor.

Accordingly, shortly after receipt and analysis of the DCAA reports on the Metropolitan and Metro ESOP cost evaluations, we briefed personnel of the Labor-Management Services Administration of the Department of Labor and personnel of the Employee Plans Operations Branch and the Prohibited Transaction Staff of the Employee Plans Division of the Internal Revenue Service. We advised those offices of our disallowance action and of the fact that we would conform to whatever conclusions, decisions or action they determined were appropriate in the circumstances. On April 25, 1978 we were advised by the Director of Enforcement, Labor-Management Services Administration, Department of Labor, that a case had been opened by them for investigation of the administration of these ESOPS and that we would be informed of the results of their investigation. A copy of the confirming letter, dated April 25, 1978, is enclosed. We are unable to inform the Committee of what, if any, action has been taken by the IRS on this matter. We have been advised by IRS representatives that they are precluded from release of such information to us.

Mr. Chairman, I understand that the Committee has also expressed an interest in the recompetition of the Langley contract which was lost by Metropolitan. We are pleased to provide the Committee with the decision of the Comptroller General of the U.S. on a protest filed by Metropolitan against the selection of Klate Holt Company of Houston, Texas. Briefly, this selection resulted from a 1977 competition among seven firms, including Metropolitan, for performance of services at Langley following expiration of the present contract on March 24, 1978.

Selection of the Klate Holt Company was made by Langley on November 30, 1977 and unsuccessful offerors were afforded a full debriefing on the selection prior to the award of a contract in order to permit them a meaningful opportunity to protest or otherwise object to their non-selection. Metropolitan was so debriefed, and on January 24, 1978, elected to protest the selection of the Klate Holt Company to the Comptroller General of the U.S. The Comptroller General reviewed all submitted material relevant to the positions of the parties, held a conference on this protest attended by representatives of Metropolitan and NASA to sharpen the issues and received amplifying material from both parties arising from this conference. Subsequently, the Comptroller General, upon consideration of all material submitted, denied the protest of Metropolitan on June 14, 1978. During the period of this protest, Langley has successively extended the existing contract with the unsuccessful competing incumbent, Metropolitan, on a sole source basis through July 21, 1978 pending the decision by the Comptroller General. This action was taken to protect the position of Metropolitan throughout the period of protest resolution. On the basis of the Comptroller General decision on June 14, 1978, Langley awarded a contract to the Klate Holt Company on June 29, 1978 for performance of services for which they were selected in November 1977. On June 28, 1978. Metropolitan filed a request for reconsideration of the decision with the Comptroller General and on July 7, 1978, filed a complaint in the U.S. District Court, Southern District of

Texas, Houston Division, seeking a Mandamus order directing Government officials to withdraw the award of the contract with the Klate Holt Company and a preliminary injunction to maintain Metropolitan and its employees on site at Langley pending review of the above Comptroller General decision. In view of the pending litigation between the parties, it is inappropriate for NASA to address this matter further at this time.

Lastly, Mr. Chairman, I would like to bring one more aspect of the Metropolitan ESOP to the Committee's attention. Earlier in my statement, I alluded to a significant problem which was brought to NASA's attention by local IBEW officials at Langley. This problem involved the manner in which Metropolitan instituted the ESOP with the local union in the first place, and which subsequently provided the basis upon which the company began to charge ESOP costs under the Langley contract.

In the summer of 1977 Langley commenced a scheduled procurement competition for the performance of facility and equipment maintenance, rigging and hauling support services leading to the award of a contract in early 1978 upon expiration of the then current contract with Metropolitan. To this end, that Center issued a Request for Proposals (RFP) for such services to commence March 25, 1978 and, pursuant to the Service Contract Act of 1965, as amended, included therein a wage determination issued by the Department of Labor in March 1977.

This wage determination contained the wage rates and fringe benefits of the collective bargaining agreement between Metropolitan and Local Union 1340 of the International Brotherhood of Electrical Workers, AFL/CIO, but did not include ESOP since it was not a part of the collective bargaining agreement. Subsequent to the issuance of the RFP, Metropolitan advised NASA of a Letter of Understanding between the company and the union on ESOP and requested that NASA obtain from the Department of Labor a revised wage determination. A revised wage determination including ESOP was issued by the Labor Department on August 1, 1977. Although the Letter of Understanding was not dated, we later learned that it was signed by the parties in the latter part of December 1976 or early January 1977. The collective bargaining agreement became effective January 1, 1976 and had an expiration date of March 24, 1978.

On August 3, 1977, the Assistant Business Manager for the IBEW local called Langley expressing concern over the inclusion of ESOP in this wage determination and surprise that the company was charging the 8% ESOP costs to the Langley contract. He asked for a meeting to discuss the possibility of having ESOP removed from the wage determination.

In response to this request, a meeting was held August 4, 1977. At this meeting, NASA learned, among other things, that although the Letter of Understanding had been signed by the parties in late December 1976 or early January 1977 and the company began billing ESOP charges in January 1977, the union was unaware of the 8% funding until the Assistant Business Agent saw the Department of Labor wage determination in early August 1977.

The Union also advised NASA that: (1) the union was never told initially the basis or the amount of ESOP funding, and the union assumed, based on their discussions with the company, that it would be a profit-sharing plan; (2) the union did not initiate a demand for ESOP or request an opening of the labor agreement to discuss any fringe benefits at the time ESOP was discussed; (3) the company initiated its first request to the union to accept ESOP sometime in September 1976, even though the collective bargaining agreement did not expire until March 24, 1978; (4) the union did not consider ESOP as a part of the collective bargaining agreement and (5) ESOP should not be included in the wage determination. Based on the timing and the sequence of events leading to the Letter of Understanding between the company and union on ESOP, NASA requested that the Department of Labor remove ESOP from the wage determi

nation.

The issues raised by NASA to the Department of Labor with respect to ESOP were: (1) Was the inclusion of ESOP by the company during the mid-term of the collective bargaining agreement and the events leading to the Letter of Understanding with the union arrived at through arms-length bargaining; and (2) Are the ESOP costs to the Government when combined with the costs of other fringe benefits and wage rates at substantial variance with what is pre

vailing in the locality for the same or similar work. The Department of Labor, as of this date, has not made a determination on these issues.

In summation, Mr. Chairman, we believe we have acted responsibly as procurement officials on this matter. We have challenged the costs for what we think are good and sufficient reasons in accordance with well established procedures. We have advised both the Department of Labor and the Internal Revenue Service of our actions in this matter as they may relate to those agencies' statutory interests. In our view, the administrative process will ultimately settle the ESOP reimbursement issue in a manner similar to any other cost issue in dispute between the Government and one of its contractors. Meanwhile, we are working toward a sensible solution of our withholding of funds from Metropolitan pending resolution of the dispute.

This includes my prepared comments, Mr. Chairman, thank you.

Col. THOMAS F. BLAKE, Jr.,

FEBRUARY 25, 1977.

Chairman, ASPR Committee, Office of the Assistant Secretary of Defense, Installations and Logistics, The Pentagon, Washington, D.C.

DEAR COLONEL BLAKE: Reference is made to your letter, dated December 10, 1976, forwarding for our review and comment an issue paper dealing with the allowability of employer contributions to an Employee Stock Ownership Plan (ESOP).

In our opinion, ASPR should not be revised to impose any additional restrictions or prohibitions on the allowability of these costs. We take this position for the following reasons:

a. Recent legislation would indicate that ESOPS are an appropriate and even a preferred form of deferred compensation. Moreover, we believe it is the clear intent of this legislation to foster the use of ESOPS as a financing tool as well as a means of encouraging employee ownership in the corporation. We note, for example, that ERISA specifically permits an ESOP trust to borrow money from a bank or lending institution to purchase company stock, have the loan guaranteed by the company, and repay the loan out of company contributions to the trust. Congressional preference we believe can be seen in the extra 1% investment tax credit included in the Tax Reduction Act of 1975 for companies which agree to invest the tax savings in an ESOP trust. We understand that additional legislation designed to encourage the use of ESOPS is pending.

b. We believe the present cost principles, particularly the requirement that deferred compensation be deductible for income tax purposes as a condition of allowability, are adequate in terms of preventing any serious abuses in this area. In this regard, it is unlikely that ESOP contributions would qualify as a tax deductible expense if the primary purpose of the plan is intended to acquire new capital. See the exclusive benefit rule of Section 401 of the Internal Revenue Code.

c. While the ESOP concept has been around for a number of years, we know of no major defense contractor that has chosen to adopt such a plan. Perhaps the reason for this, as some authorities have suggested, is that the use of ESOP as a financing tool has limited applicability, and is not as attractive as it might seem over other, more conventional forms of raising new capital. For example, it has been pointed out that ESOP borrowing as opposed to a regular loan entails the issuance of new stock which tends to dilute owners' equity and earnings per share of stock. Also, because an ESOP transaction only results in saving the cash that would have been paid in tax dollars, the amount of capital available to a company through ESOP borrowing is only about half that available from the normal sale of stock to third parties.

In view of the foregoing, we recommend that no action be taken to amend ASPR at this time to impose any special limitations or restrictions on the allowability and treatment of employer contributions to ESOPS. Such action, in our opinion, is unnecessary and could be interpreted as being inconsistent with current economic policy.

Sincerely,

EDMOND J. GOLDEN,

(For S. J. Evans, Assistant Administrator for Procurement).

U.S. DEPARTMENT OF LABOR,
LABOR-MANAGEMENT SERVICES ADMINISTRATION,

Washington, D.C., April 25, 1978. Re Metropolitan Contract Services, Inc., and Metro Contract Services, Inc., employee stock ownership plans.

Mr. JOHN E. O'BRIEN,

Assistant General Counsel for Procurement Matters, National Aeronautics and Space Administration, Washington, D.C.

DEAR MR. O'BRIEN: For your information, in follow-up of the meeting held on March 7, 1978, attended by representatives of NASA and this Department, please be advised that we have requested our Dallas Area Office to open a case and make appropriate inquiries to determine whether the Employees Stock Ownership Plans (ESOPs) of subject organizations were instituted and are being managed consistent with the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

We will be in further contact with you when the investigation has been completed. In the meantime, if you have any questions, please contact Mr. Edward C. Kennelly of this Office, telephone number 523-8845.

EDWARD F. DALY, Director, Office of Enforcement.

DECISION OF THE COMPTROLLER GENERAL OF THE UNITED STATES

File: B-191138.

Date: July 5, 1978.

Matter of: Metro Contract Services, Inc.

DIGEST

1. Protest that applicant screening techniques should have been considered under listed evaluation factor of "Initial Staffing and Phase-In" is denied because major evaluation criteria is RFP need not be broken down to reflect each specific factor actually considered where, as here, there is sufficient correlation between stated criteria and factors actually used.

2. Offeror was not prejudiced by failure of agency to reduce cost proposal by $9,000 cost of computerized work order system, which source evaluation panel found to be more than needed, where total contract price is $2.5 million, $9,000 reduction would not have made offeror low in cost nor made cost a discriminator in contractor selection.

3. Review of protestor's proposal and source selection statement reveals nothing improper in downgrading of proposal in three areas which were not discussed or not discussed adequately in proposal, contrary to contentions of protester. Further, scoring of protestor's and successful offeror's proposals in area of past experience was not improper.

4. Where RFP contains no provision regarding minority status of offerors, it would be improper to give competitive advantage to firm based cn fact it was minority contractor.

Metro Contract Services, Inc (Metro), has protested the award of a contract to S.F. & G. Inc., d.b.a. Mercury, by the National Aeronautics and Space Administration (NASA), Langley Research Center, Hampton, Virginia, under request for proposals (RFP) No. 1-105-5715.0550.

The contract is for support services for the steam and compressed air facilities at Langley. The cost-plus-fixed-fee contract was for a 2-year base period plus 1-year priced option period and two additional 1-year unpriced options.

The RFP was issued on September 2, 1977, and seven proposals were received on the due date of October 17, 1977. Following an initial evaluation, written discussions were conducted with the five offerors determined to be in the competitive range. Award was made to Mercury on January 16, 1978.

Metro's initial basis of protest is that the Source Evaluation Panel (SEP) improperly downgraded Metro's proposal for allegedly containing a major weakness in applicant screening techniques. Metro argues that the RFP's evaluation criteria contained no mention of applicant screening techniques and, therefore, the action by the SEP was inappropriate.

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