How do share-in-savings contracts work?

A government official raised the following topic: I have heard a lot about "share-in-savings" provisions in government contracts. What are these and how do they work?

For several years a number of commentators have been promoting the idea that a government agency and a contractor should share the savings that would occur from reengineering agency operations. Traditionally the parties have shared these savings only indirectly. The agency's share of the savings is in the form of lower prices for the contract work and the contractor's share is in the form of higher profits made possible by the innovative approach.

The Energy Department has done the most in this area. Several years ago DOE initiated the use of energy-savings contracts under which the contractor would re-engineer the lighting and other energy-intensive operations of federal buildings to use energy-saving technologies and equipment . The prospective contractors compete for the opportunity to perform this work on the basis of the projected savings associated with the designs and their proposed fees. An offeror with a superior approach could be evaluated as the lowest cost to the government even though its fee might be comparatively high. The agency benefits through lower power bills which leaves a larger portion of its operation and maintenance appropriations for other use.

Proponents of the more radical share-in-savings ideas are not satisfied with such indirect benefits. They want the agency to benefit more by allowing the agencies to retain and use its share of the savings in addition to the amounts appropriated by Congress for normal operations. However unless explicitly authorized by a special statute the use of such monies by the agency can constitute an impermissible "augmentation" of its appropriations.

Each year Congress and the president negotiate— and eventually agree to— specific appropriations for each federal agency and program. In general an agency may not augment its appropriations with funds from any other source without explicit statutory authorization. Unless otherwise statutorily authorized "an official or agent of the government receiving money for the government from any source shall deposit the money in the treasury as soon as practicable without deduction for any charge or claim" [31 U.S.C. : 3302(b) known commonly as the "miscellaneous receipts" statute].

For example in Securities and Exchange Commission (B-265734 Feb. 13 1996) the comptroller determined that a special statute allowed the SEC to retain 50 percent of an energy-efficiency rebate received from a local utility company. However the SEC was required to deposit the balance into the general revenue fund.

There is only one exception to this requirement. Receipts that are properly classified as "repayments" or "refunds" to an appropriation may be retained to the credit of that appropriation. [See for example 6 Comp. Gen. 337 (1 926).] For example the recovery of an erroneous payment or overpayment that was erroneous at the time it was made should be considered a refund which may be credited to the appropriation from which the payment originally came. [See for example B-138942-O.M. Aug. 26 1976 referring to a utility overcharge refund.] Such credits may be used by the agency under the same conditions as the original appropriation.

The refund of an overpayment that is made under a government contract falls within this exception. This is true even when the "overpayment" results from the application of a price adjustment provision in the contract [33 Comp. Gen. 176 (1953)]. Refunds and credits received by the government under a contractual warranty clause also are considered to fit within the exception. [See 34 Comp. Gen. 145 (1954).]

By contrast a payment that cannot reasonably be considered a refund is outside the exception. For example compensation paid by an insurance company for damage to government property caused by a contractor must be credited to the general revenue fund absent an explicit statutory authority in order to credit a specific appropriation [67 Comp. Gen. 129 (1987) 48 Comp. Gen. 209 (1968)].

Attempts to manipulate contract terms to augment an agency's appropriations will not be countenanced. For example the comptroller general rejected a U.S. Forest Service proposal to require timber sales purchasers to pay for property surveys which the Forest Service ordinarily acquired using appropriated funds and deduct the cost from the price of the timber. According to the comptroller the proposal would have improperly augmented the Forest Service's appropriations [53 Comp. Gen. 872 (1974)].

Agencies that are considering the use of share-in-savings ideas beyond the traditional approaches would be well-advised to analyze these issues carefully before proceeding very far.

-- Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn Washington D.C.