Assignment of Losses Incurred by the Library of Congress FEDLINK Revolving Fund.

B-301714 January 30, 2004

The Library of Congress has requested our decision concerning the assignment of losses incurred by the Federal Library and Information Network (FEDLINK) revolving fund as a result of advance payments made to a defaulting contractor. Letter from Elizabeth Pugh, General Counsel, The Library of Congress, to Anthony Gamboa, General Counsel, General Accounting Office, August 15, 2003 (Pugh Letter). Specifically, the Library asks whether the revolving fund or the specific agencies on whose behalf the Library had placed orders with the defaulting contractor should bear the cost of the losses, the Library would use the fund's reserve accumulated through the assessment of administrative fees to all of FEDLINK's customers. We conclude that the FEDLINK revolving fund should cover the losses.

The loss resulting from RoweCom's bankruptcy is related to the operation of the FEDLINK program, and is an appropriate expense of the revolving fund. The history of revolving funds in the federal government and the legislative history of the statue creating the FEDLINK fund reveal a clear intent for FEDLINK to operate similar to private enterprise. In the private sector, losses associated with a defaulting contractor are legitimate business costs of the enterprise, not costs to individual customers. The revolving fund, rather than the subscribing agency of customers, should bear the loss associated with RoweCom's default, and the library should utilize FEDLINK's administrative reserve to cover this deficit. If the library wishes to allocate the costs differently in the future, it should add a clause dealing with contractor defaults to the interagency agreements.