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Equitable Adjustment Due to a Non-contracting Agency's Action
By Chuck Solloway on Wednesday, April 17, 2002 - 12:20 pm:

What if the government had a contract for the production of widgets. It was firm fixed price.
EPA - who is not a party to the contract - changes emission standards thus increasing the costs of the contractor in producing the widgets. The contractor asks the contracting officer for an extension of time (no problem here). The contractor also asks for additional monies under the widget contract. The questions are:
a. Should the contracting officer agree to an equitable adjustment in monies because of the EPA change?
b. Can the contracting officer agree to an equitable adjustment in monies because of the EPA change?
c. Would any such adjustment be characterized as a "constructive change" caused by action on the part of the government, or - perhaps - reformation of a mutual mistake since neither the contractor nor the contracting officer could have reasonably foreseen the EPA change.
d. Is the government as a contracting party responsible for the acts of the government as a sovereign? Always? Sometimes? Never?


By Vern Edwards on Wednesday, April 17, 2002 - 12:54 pm:

Chuck:

Is the contractor producing the widgets to a government specification or a commercial specification?


By Anonymous on Wednesday, April 17, 2002 - 01:08 pm:

Actually in your (c) paragraph the parties would have reasonably forseen the change as the publication of rules in the Federal Register is required.


By Chuck Solloway on Wednesday, April 17, 2002 - 01:34 pm:

Vern,

It is to government specs.

Anon,

I guess that could be correct depending on the timing.


By Vern Edwards on Wednesday, April 17, 2002 - 01:41 pm:

Chuck:

If you have a copy handy, take a look at Administration of Government Contracts, 3d ed., by Cibinic and Nash, pp. 365-373. In that text the authors report that the government may be able to avoid liability for actions that are considered to be "sovereign acts." It appears that as a general rule the government does not have to compensate a contractor for public and general acts that are not directed specifically at the contractor. However, the government may have to compensate the contractor if a contract clause entitles the contractor to compensation for a the impact of a sovereign act.

If the specification is a government specification, the EPA's rule may not apply to the contractor. The government may have to change the specification in order to comply with the EPA's rule. It depends on the rule.

Administration cites several cases that could be the starting point for further research.


By Vern Edwards on Wednesday, April 17, 2002 - 01:43 pm:

Chuck:

Since the contractor is producing to a government spec, I'll bet that the EPA's rule does not apply to the contractor and that the government must issue a change order. After all, can the contractor change the government's spec at its own initiative? If the government has to issue a change order, then the contractor will be entitled to an equitable adjustment.

However, I suppose that the answer depends in part on the applicability of the EPA's rule.


By Dave Barnett on Wednesday, April 17, 2002 - 01:55 pm:

I think Vern hit the nail on the head when he asked for the source of the spec. The governmetn will have to change its spec in order for it to be compliant with the EPA regs, accordingly a change order would have to be subsequently issued to the contractor and that opens toe equitable adjustment door, both in terms of time and money.


By Anonymous on Wednesday, April 17, 2002 - 02:30 pm:

The govt vs. commercial spec discussion is interesting, but my hunch is that it doesn't matter here. The original question indicated that EPA had changed its emission standards (e.g., requiring cleaner air from the smokestack) and this would have nothing to do with spec compliance.

My further hunch is that the Govt probably has a decent sovereign acts defense, but that legally it could (and arguably should) approve an equitable adjustment to account for the increased cost of production. If the contractor's position is legitimate and supportable, it's only fair...


By joel hoffman on Wednesday, April 17, 2002 - 03:44 pm:

Anon 2:30: "Fairness" is not the issue on a firm fixed price contract. Risks have been apportioned between the parties, based on the terms of the contract and upon the law, not on what is "only fair."

If the Government's performance or design specs require changing due to the EPA revision, I believe that it does make all the difference in the world. The Government must then change the contract.

If a Government performance specification doesn't change, but the the regulation affects how the Contractor can produce the widget to be legal, the questions discussed above, concerning prior notice and immunity from sovereign acts, are relevant. happy sails! joel


By Vern Edwards on Wednesday, April 17, 2002 - 04:29 pm:

Anonymous of 2:30pm may have a point. I assumed that the EPA emission standards apply to product emissions, but if they apply to plant emissions then I don't think the government owes the contractor anything due to the change in EPA requirements. The sovereign acts rule would apply.


By joel hoffman on Wednesday, April 17, 2002 - 05:00 pm:

Vern, I think that your response is consistent with my premise that "If a Government performance specification doesn't change, but the the [EPA change to a]regulation affects how the Contractor can produce the widget to be legal, the questions discussed above, concerning prior notice and immunity from sovereign acts, are relevant.

I would agree with you that an EPA change in plant emissions standards on a fixed price contract for widgets, produced by the plant, does not entitle the contractor to a price adjustment.

That is a risk allocated to the contractor, in a FFP supply contract, isn't it? Do you see any difference between that and a new rule which would require stricter emissions controls on construction equipment, thus increasing a contractor's costs? I'm certain that there would be no entitlement in that case, either. happy sails! joel


By Vern Edwards on Wednesday, April 17, 2002 - 05:23 pm:

Joel:

I agree--there is no entitlement if there is no change to the government's specification. The risk of a new EPA rule that requires a change to the method of production is a risk of doing business. It was not caused by the other contracting party.


By Chuck Solloway on Thursday, April 18, 2002 - 07:22 am:

Thanks for the insights. I intended to convey that the emissions were smokestack emissions and not part of the TDP.

While it appears that, under such circumstances, the government as a contracting party is not responsible for the acts of the government as a sovereign, the question remains "Can the contracting officer elect to make an adjustment in the contract price?"

For example, if the contracting parties could not have reasonably forseen the change in the EPA regulation, may the contract now be amended to increase the price using "mutual mistake" (or some other reformation mechanism) as the basis?

Or is it clearly a case of - since the government is not obligated to pay it cannot pay.


By joel hoffman on Thursday, April 18, 2002 - 07:54 am:

Chuck, I feel that this is a risk which was allocated to the manufacturer on the FFP contract. What basis would you have to pay? If they were manufacturing widgets to fill firm commercial contract orders would they be able to raise their prices, absent a provision in their contract?

Is the Government the only customer, here or will the manufacturer be able to amortize the cost increase on future sales?

Another way to look at the risk allocation principle might be to ask, "Would I expect a credit if the cost of manufacturing unexpectedly dropped, due to some event or price de-escalation?"

The Corps Of Engineers had a rash of claims in the late 1970's on FFP civil works contracts (earthmoving and dredging),when the Arab oil embargo caused a doubling of diesel fuel prices. There were no provisions in the contracts for fuel escalation adjustments. Unfortunately, fuel price escalation was the industry's risk on FFP contracts. happy sails! joel


By Anonymous on Thursday, April 18, 2002 - 08:21 am:

Anon 2:30 here.

First off, I got a nice chuckle from Joel's comment: " 'Fairness' is not the issue on a firm fixed price contract." Classic....

I've been on both sides of the procurement street - govt and private - and I'm always disappointed to hear these types of sentiments. In my humble opinion, this is one reason why some companies would prefer not to do business with the govt. And I assure you that it is quite common in the commercial world for the parties to renegotiate price due to unforseen conditions. But that isn't the issue. Even if it weren't common in the commercial world there are some who believe that our govt has an obligation to those it serves to ALWAYS take fairness into account.

I agree that, based on my understanding of the facts, the govt would appear to have a valid sovereign acts defense and would not have to grant an equitable adjustment. I believe I stated so fairly clearly. But the tougher question that Chuck (quite properly, IMHO) raised is whether, assuming that the sovereign acts doctrine probably applies, the govt nonetheless has the legal authority to grant an EA.

I believe the answer is "yes." As others have noted, the issue of whether the sov acts doctrine applies is often a very difficult one to resolve. Look at the cases cited in the N&C treatise, or even the Winstar cases -- those were tough cases, and reasonable judges disagreed on the answers.

Although I don't know all the facts, it's likely that a contracting officer could rationally conclude that it is POSSIBLE that the EPA regs do NOT consitute a sovereign act. This would overcome any "lack of consideration" argument and justify granting the contractor an equitable adjustment.

I leave it to brighter minds to determine if such a result is appropriate in this particular case, but I do think that Chuck is asking a very good question -- one that deserves more than a response of "fairness is not an issue in a FFP contract."


By joel hoffman on Thursday, April 18, 2002 - 08:57 am:

Anonymous, if it were the other way around, of course there would be no credit to the owner or Government. Is it only one way on a FFP contract? Is the risk of unforseen cost fluctuations only the owner's responsibility? Does the owner or Government guarantee the contractor a profit on a FFP contract and guarantee against unforseen losses?

"fairness" goes both ways or isn't an issue. Agreed risk allocation is the issue. happy sails! joel


By Anonymous8 on Thursday, April 18, 2002 - 09:49 am:

So, is the general answer that FFP contract type provides no authority to compensate contractor for changes in law?

What about changes in insurance premia related to Sep 11? Would they also be contractor's problem if we had a FFP contract?

Just curious about opinions.


By Anonymous on Thursday, April 18, 2002 - 10:19 am:

Of course the govt doesn't "guarantee" a profit on FFP contracts, and of course the risk of cost fluctuations isn't only the owner's "responsibility." I've already agreed with that. My point is that a solution that's undoubtedly "legal" is not always the best and fairest solution -- especially when other solutions are also "legal."

Assume that an agency has a FFP widget contract with Acme. The agency reasonably believes, from competition or price/cost analysis, that Acme is making a fair profit on the contract. Acme always delivers on time, the widgets always pass inspection, their employees are responsible and courteous, and there's a great relationship between the agency and Acme. Now suppose Acme comes to see you halfway through the contract period and explains that, because of a new EPA reg, they're going to have to spend a couple million dollars on a new particulate scrubber system. They show you some financials demonstrating that, properly allocated, the new system will change their 6% profit on the widget contract to a 5% loss.

Do you REALLY believe that the BEST resolution in this situation is to say to Acme: "tough luck; this is a FFP contract and therefore you agreed to bear the risk of this sort of thing"? I agree that you COULD tell them that -- but SHOULD you? Mightn't it be fairer, and ultimately better for everyone -- the agency, Acme, and ultimately the public -- to consider an appropriate equitable adjustment (which also would be legal)?


By Vern Edwards on Thursday, April 18, 2002 - 10:22 am:

All:

Let's sort some things out. First, there was no mutual mistake. Here is the definition of mutual mistake from The Government Contracts Reference Book, 2d ed., by Nash et al., p. 357:

"A mistake common to both parties to a contract. Mutual mistakes can occur when the parties include terms in the contract that do not conform to or express their actual intent or agreement (called mistakes in integration) or when the parties labor under the same misconception about a fundamental fact on which the contract is based (called mistakes in basic assumption)... Both types of mistakes have led to contract reformation by the boards of contract appeals or the courts or through extraordinary contractual actions. FAR 33.205 states that such mistakes should now be dealt with under the disputes procedures."

The same reference defines mistake as follows at pp. 350-351:

"A belief that is not in accord with the existing facts (but not an error in business judgment)."

For an extended discussion of mistakes and mutual mistakes, see: Administration of Government Contracts, 3d ed., by Cibinic and Nash, pp. 321-347.

Chuck's case does not involve any mistake, either unilateral or mutual. The U.S. Court of Appeals for the Federal Circuit has held that that mistake law does not cover predictions or judgments to occur in the future. See Dairyland Power Cooperative v. United States, 16 F.3d 1197 (Fed. Cir. 1994):

"Dairyland contends that the continued availability of commercial reprocessing was a basic premise to the 1973 sale contract and the parties never considered the possibility, nor allocated the risk, of the commercial reprocessing industry's demise. To establish a mutual mistake of fact, however, the party seeking reformation must show that the parties to the contract held an erroneous belief as to an existing fact. The availability of commercial reprocessing in the future cannot constitute an existing fact at the time of the 1973 sale contract. "A party's prediction or judgment as to events to occur in the future, even if erroneous, is not a 'mistake' as that word is defined [under the doctrine of mutual mistake of fact]." Restatement (Second) of Contracts 151 cmt. a (1981)... Indeed, there is uniformity among the circuit courts of appeals and the commentators that mutual mistake of fact cannot lie against a future event."

So forget about mutual mistake.

Next, an equitable adjustment is a particular kind of adjustment; it is "a fair price adjustment under a contract clause for changed work, including an adjustment for profit, a change in the delivery schedule, if appropriate, and a change in any other affected terms of the contract." The Government Contracts Reference Book, p. 215. As far as we know, based on what Chuck has told us, although there has been a change in the circumstances of performance, there has been no change in the terms of the contract. Also, as far as we know, there is no clause in the contract that entitles the contractor to an equitable adjustment on the basis of the kind of change in circumstances that has occurred. Therefore, there is no contractual basis for any equitable adjustment.

The EPA rule change cannot be handled pursuant to the disputes clause, either, because it is not a basis for a claim, either "arising under" nor "relating to" the contract. (See the discussion of "relating to the contract" on page 438 of The Government Contracts Reference Book.) It appears clear to me that the EPA's action was a sovereign act.

I think that Chuck's only recourse, assuming that the contract has some legitimate connection to the national defense, would be to grant extraordinary contractual relief by making an amendment without consideration pursuant to FAR Subpart 50.3. FAR 50.302-1(a) says:

"When an actual or threatened loss under a defense contract, however caused, will impair the productive ability of a contractor whose continued performance on any defense contract or whose continued operation as a source of supply is found to be essential to the national defense, the contract may be amendede without consideration, but only to the extent necessary to avoid such impairment to the contractor's productive ability."

Authority to grant such relief is granted to agency heads, who may delegate it "to a level high enough to ensure uniformity of action." Delegations are stated in agency FAR supplements, but authority is generally not delegated to contracting officers.


By Chuck Solloway on Thursday, April 18, 2002 - 10:59 am:

Vern,

My view of the situation was substantially the same as yours. The only apparent remedy is amendment without consideration. However, some of my colleagues disagreed - rather strongly - mostly on the basis of fairness.

Government contracting precedent is replete with instances where individual injustices/injury are tolerated (For example, the Christian Doctrine, the Severin Doctrine, the Winter Wheat case, etc.) There seems to be some feeling on that part of my colleagues that contracting officers should be able to make case by case decisions based on equity.

We posted this on wifcon to see how others felt.


By Anonymous on Thursday, April 18, 2002 - 11:06 am:

Anon 2:03 (and 10:19) here again.

Vern, I think your list of examples for which an equitable adjustment is allowed is too narrow. The GK Reference Book is a helpful tool, but it's not the final word. Equitable adjustments are used to compensate contractors for constructive changes, and there are constructive changes that don't fall within your list. For example, a "failure to cooperate" type of constructive change is compensable with an equitable adjustment even though it doesn't appear to meet the criteria you cite from the GK Reference Book.

As you point out, we don't know all the facts, but I can envision a constructive change and/or impracticability claim under the Disputes clause under the facts we do know. Again, I'm not saying that a court or board would agree with the contractor if the matter went into litigation -- most likely a board would conclude that this is a noncompensable sovereign act. I think we all agree on that. The better question is whether the contracting officer HAS THE AUTHORITY legally to grant the equitable adjustment, and I continue to believe the answer is most likely "yes" (although we'd need more facts).


By formerfed on Thursday, April 18, 2002 - 11:09 am:

Vern,

That's a nice job of summarizing the options available. So it seems that unless the company is determined essential to the national defense and continued performance of the contract will jeoprodize their ability, there is no recourse. In the two instances I've seen where this authority was used, they tried to get support and justification from other defense components. This is a "hot potato" that no one wants to put their name on the bottom line to help.

Anon 4/18,

I hear what you say. Being the "good guy" to help a contractor recover a loss puts yourself in a situation where I personnally would not want to be. These kind of situations just constitute risks that any contractor must consider when entering into a fixed price contract. Making a contractor "well" could be an opportunity for a lot of visibility and meeting new people - certainly the IG, GAO, and maybe the US Attorney.


By joel hoffman on Thursday, April 18, 2002 - 11:10 am:

Thankyou, Vern. Well presented, including the background explanation and references. I should have mentioned extraordinary contractual relief - but still wouldn't have had access to or time to find the references, as I'm in and out of teaching a class, this week. That is an important point, although the relevant criteria for application are limited along with the authority to approve the action. happy sails! joel


By joel hoffman on Thursday, April 18, 2002 - 11:16 am:

Anon 4/18, etc.

What provision under the contract would you think would provide authority to adjust the price? Please explain. Do you believe that the KO can reform the contract? happy sails! joel


By Anonymous on Thursday, April 18, 2002 - 11:40 am:

Joel -

I haven't given this a lot of thought, but 2 possibilities come to mind. First, the Changes clause -- the contract language might enable the contractor to make a constructive change argument. I'd have to see the contract to know whether this would work, but there might be some locally drafted language that could be construed as obligating the contractor to comply only with regs that are in effect on the date of award, or construed as an implied promise to compensate for increased costs of any type. If such language was found, the govt's desire that the contractor perform without a price increase would constitute a constructive change that is compensable under the Changes clause with an equitable adjustment.

Second, the Disputes clause -- the contractor could allege that impracticability of performance excuses its ability to perform (this is the usual remedy in impracticability situations). The govt disagrees, and the dispute is resolved with a supplemental agreement (bilateral mod) granting an equitable adjustment.

At the risk of beating a dead horse, I agree that if this matter ripened into litigation the contractor would probably lose. But that's not the question. If the contractor can make a good-faith and legally reasonable argument -- which depends on facts we don't have at this point -- the contracting officer can grant the EA (and the IG shouldn't be concerned).

In any event, it's pretty clear that I'm in the minority on this issue so I'll get off my soap box. Thanks to all for your thoughts, which I respect and will definitely think about.


By Kennedy How on Thursday, April 18, 2002 - 12:18 pm:

It's not always a given that the contractor would lose a litigation case. Yes, I've heard the "Govt isn't always fair" or the "Fairness' is not the issue on a firm fixed price contract." I've also been on the wrong end of some ASBCA cases where the Board has ruled on "Equity". In that case, the Board said the right thing to do is to grant the relief to the contractor, even though the Government doesn't have to. Those cases were send back to us to negotiate a settlement of the issue.

I've only been involved in two instances where a contractor has seriously contemplated requesting "extraordinary contract relief", under PL 85-804, I believe. The first was when the Hunt Brother tried to corner the silver market, and silver prices went through the roof. The total price of the contract we had barely covered a fraction of the cost for the silver to begin with. The Government stood fast and refuse to increase the price of the contract, and it worked itself out. The second instance was due to alleged defective specs, but discussions with the contractor over the stigma of being associated with 85-804 led that one down the dead end path as well.

Yes, neither of these falls into the category of a "sovereign act", but at least in the former, I tried to illustrate that things outside of the control of both the contracting agency and the contractor can have detrimental effects on the performance or well-being of a contractor.

Kennedy


By joel hoffman on Thursday, April 18, 2002 - 12:31 pm:

Kennedy, as I recall the Hunt incident, the price of silver dropped through the floor after the Hunts started trying to corner the market. They "lost the family jewels" over that fiasco. They bought high, then their holdings were mostly de-valued, after the price dropped. I didn't understand why silver went up in your example. Did silver initially go up as they bought it, during your contract performance? Just curious. Anyhow, can you please clarify why ASBCA said you should "grant relief to the contractor even though the Government doesn't have to"? Is the case published? Do you have a copy of the decision? I would be interested in reading it. Thanks. happy sails! joel


By Vern Edwards on Thursday, April 18, 2002 - 12:31 pm:

Anonymous:

The constructive changes approach won't work, because in order to be a constructive change the change must have been ordered by the government acting in its capacity as a party to the contract. The EPA acted in a sovereign capacity.

The impracticability of performance approach won't work, because the use of the impracticability doctrine in government contracting has been limited to impracticability arising out of facts in existence when the contract was formed, rather than supervening events. The change to the EPA rules may entitle the contractor to an excusable delay [see the clause at FAR 52.249-8, Default (Fixed-Price Supply and Service) (APR 1984), paragraph (c)], but not a price increase. See Administration of Government Contracts, 3d ed., p. 312-314.

By the way--I'm not trying to be negative, but to think about the problem from the standpoint of laws and regulations, rather than personal notions about fairness. Contracting officers do not have the authority to do anything that strikes them as "fair." FAR 1.602-1(b) requires contracting officers to do business in accordance with "all requirements of law, executive orders, regulations, and all other applicable procedures[.]" The CO certificate of appointment, SF1402, says that CO authority is "subject to the limitations contained in the Federal Acquisition Regulation."

A CO cannot act merely on the basis of personal notions of what is good and right without reference to the laws (including case law) and the regulations.

If the contractor is going to take a bath or perhaps perform poorly due to the EPA regulations, then I might be inclined to agree to a no-cost termination for convenience followed by a new competition. But I doubt that I would agree to a noncompetitive price increase. If you run a production plant that is subject to EPA emission standards and you plan to stay in business, then you have to comply with changes to those standards whether you and I have a contract or not. That's part of the risk of doing the kind of business that you do. If you think my contract will make you go belly-up, then I might let you out of it (why insist on doing business with a potentially poor performer), but that's about it.


By bob antonio on Thursday, April 18, 2002 - 12:38 pm:

Joel:

Maybe they applied the "deep pockets" theory of jurisprudence.


By Ron Vogt on Thursday, April 18, 2002 - 01:02 pm:

Just a thought: everyone seems to be wrapped up in whether an equitable adjustment or claim would be proper. Why not just T for C the remaining deliveries, and recompete them. If the contractor truly is operating at a loss now, then a T for C would help it. As the incumbent, it should have a good chance at the recompetition. At worst, a loss of the recompetition is better than continuing to lose money.


By AL on Friday, April 19, 2002 - 11:02 am:

I think the discussion here has been excellent, and I think Vern has laid out the issues and authority very well. However, there is one other option that I haven't seen addressed. The government could get some other concession (i.e., consideration, and change to the contract) from the contractor, for example an extended warranty, faster delivery, or something else that the contractor can give, and in return provide an EA on the price to cover that concession by the contractor. The amount of that EA is negotiated between the parties, and if the government is somewhat generous in its EA for the consideration it is getting by way of the change to the contract, that may help make the contractor whole (or at least better). The changes clause permits this, though it would be something of a fig-leaf resolution. I'm not necessarily recommending this, and it wouldn't really be appropriate or even possible in all circumstances, but it is something to be considered.


By Vern Edwards on Friday, April 19, 2002 - 12:03 pm:

AL, et al.:

At the risk of coming across to all of you proactive problem-solvers as some kind of naysayer, here are a couple of thoughts:

First, if Chuck negotiates for some additional value from the contractor as a way to cover the cost impact of the EPA changes, he must still determine that any increase in price is fair and reasonable. Thus, if he wants to be "generous," he must be prepared to stretch the truth somewhat in that regard, because what he will really doing is disguising his attempt to cover the cost of the contractor's misfortune.

Second, since Chuck's contract is a fixed-price supply contract, the changes clause (FAR 52.243-1) permits him to make only three specific kinds of changes: (1) a change to the "drawings, designs, or specifications," (2) a change to the method of shipping and packaging, and (3) a change in the place of delivery. Therefor, changes clause might not cover changes to warranties or time of delivery, since such terms usually are not addressed in the drawings, designs or specifications.

Third, in any event, an equitable adjustment to price for a change order is supposed to be made on the basis of the amount of the increase or decrease in the contractor's costs that were caused by the change. Therefore, if Chuck wants to be "generous," he must be prepared to fib when writing the price negotiation memorandum that supports the equitable adjustment, because he is really trying to cover the cost of the EPA change, not the cost of the change order.

Finally, as I pointed out in my long post of April 18 at 10:22a.m., we should not be talking about making an "equitable adjustment" in this case. Equitable adjustment is a term of art that signifies a particular kind of adjustment, and unless a clause in Chuck's contract provides for an equitable adjustment in the case of a sovereign act, and I don't know of any FAR clause that does, then we are talking about some other kind of adjustment. I feel that as contracting professionals we must be nit-picky about the use of terminology; otherwise, someone might accuse us of not knowing what we're talking about.


By Vern Edwards on Friday, April 19, 2002 - 12:33 pm:

Anon of April 18, 2002 - 11:06 am:

I apologize. Somehow I missed your post of the above date and time. I was not ignoring you. I'll respond now to the following comment that you made:

"Vern, I think your list of examples for which an equitable adjustment is allowed is too narrow. The GK Reference Book is a helpful tool, but it's not the final word. Equitable adjustments are used to compensate contractors for constructive changes, and there are constructive changes that don't fall within your list. For example, a "failure to cooperate" type of constructive change is compensable with an equitable adjustment even though it doesn't appear to meet the criteria you cite from the GK Reference Book."

Here is what I said that you were responding to:

"[A]n equitable adjustment is a particular kind of adjustment; it is "a fair price adjustment under a contract clause for changed work, including an adjustment for profit, a change in the delivery schedule, if appropriate, and a change in any other affected terms of the contract." The Government Contracts Reference Book, p. 215. As far as we know, based on what Chuck has told us, although there has been a change in the circumstances of performance, there has been no change in the terms of the contract. Also, as far as we know, there is no clause in the contract that entitles the contractor to an equitable adjustment on the basis of the kind of change in circumstances that has occurred. Therefore, there is no contractual basis for any equitable adjustment."

Anon: You are quite correct that equitable adjustments are made for "constructive changes." That's because the doctrine of constructive changes was invented by the boards of contract appeals to allow them to settle breach of contract claims under the changes clauses, which provide for equitable adjustments. Prior to the enactment of the Contract Disputes Act of 1978, the boards did not have authority to settle breach of contract claims, such as "failure to cooperate" (i.e., claims "relating to" a contract). So they treated some breach of contract claims as "constructive" changes in order to settle them under the changes clause, which was within their power. So when the The Government Contracts Reference Book says, "under a contract clause," it is including constructive changes, which are handled under a changes clause. See: Administration of Government Contracts, 3d ed., by Cibinic and Nash, pp. 429-432. Also, see: Government Contract Changes, 2d ed., by Ralph C. Nash, Jr., published by Federal Publications, Inc. (1989), pp. 10-2 through 10-5.

In sum, I don't think that Chuck can make an "equitable adjustment" to compensate the contractor for the impact of the EPA emission standards, because: (1) the EPA was acting in its sovereign capacity, not in the capacity as a party to the contract, and (2) no contract clause provides for an equitable adjustment for a sovereign act. I don't know of any case in which a board used the contructive changes doctrine to compensate a contractor for a sovereign act, do you? If you do, I would appreciate learning about it.


By Anon on Friday, April 19, 2002 - 12:55 pm:

In the past when a constructive change occurred, I issued my settlement mod citing the Disputes clause rather than the Changes clause. I discussed the doctrine of constructive changes in my decision memo to the file, but I never felt the Changes clause was the appropriate authority for the mod, I felt the request for relief from a constructive change was a claim relating to, or arising under, the contract.


By Eric Ottinger on Friday, April 19, 2002 - 12:58 pm:

I agree with Vern on this one.

Sometimes being fair means treating everybody equally.

Eric


By Anonymous on Friday, April 19, 2002 - 04:29 pm:

Anon from yesterday here -

Although I said my piece yesterday, Vern asked me a question today and I guess I ought to respond to it. His question was: "I don't know of any case in which a board used the contructive changes doctrine to compensate a contractor for a sovereign act, do you? If you do, I would appreciate learning about it."

No, I don't know of any such case, and I'd bet there are none. But that wasn't my point. What I said (see the 2d half of my post at 8:21 a.m. yesterday) was that it's not always easy to determine if something is or is not a sovereign act. If the CO believes in good faith that the EPA's action was not a sovereign act, or believes that a court or board could hold that it was not a sovereign act, then depending on the contract language (not the FAR clauses, the locally drafted language) the CO might be able to enter into a supp agreement and grant an EA under a constructive change theory. I continue to believe that this would be permissible.

Like Kennedy, I've walked into a courtroom more than once being 90% sure that something was true only to have the judge rule the other way.

BTW, I kind of liked your (and someone else's) comment about offering a T4C. If the contractor turned down this offer, you'd have to question whether the new EPA regs were such a financial burden after all.


By Vern Edwards on Friday, April 19, 2002 - 06:44 pm:

I think I have detected an underlying current in this discussion. It goes like this: Since The Government caused the increase in the contractor's costs, The Government should find a way to increase the contract price to compensate the contractor, even if the contract doesn't provide a way.

I first picked up on this theme when Chuck mentioned on April 18 that some of his colleagues felt strongly on the basis of fairness that the contractor should be compensated for the increase caused by the change in the EPA emission standards. I think I have detected it, too, in the desire on the part of some participants to be creative in finding a way to give the contractor some relief.

This feeling that fairness demands that Chuck find a way to help the contractor seems to rest on the belief that the government is, after all, The Government, and that if any part of it caused the contractor some grief then it ought to provide the contractor some relief.

To the extent that this sense of fairness rests on the belief that the government as contracting party and The Government as lawmaker are really one in the same, it is based on a faulty understanding of our law. Here is the Court of Claims addressing itself to that issue in 1865(!), as quoted by Cibinic and Nash:

"A contract between the government and a private party cannot be specially affected by the enactment of a general law. The statute bears upon it as it bears upon all similar contracts between citizens, and affects it in no other way. In form, the claimant brings this action against the United States for imposing new conditions upon his contract; in fact he brings it for exercising their sovereign right of enacting laws. But the government entering into a contract stands not in the attitude of the government exercising its sovereign power of providing laws for the welfare of the State. The United States as contractor are not responsible for the United States as a lawgiver."

Deming v. United States, 1 Ct.Cl. 190 (1865).

In another case in that same year, the same Court said:

"The two characters which the government possesses as a contractor and as a sovereign cannot be thus fused; nor can the United States while sued in the one character be made liable in damages for their acts done in the other. Whatever acts the government may do, be they legislative or executive, so long as they be public and general, cannot be deemed specially to alter, modify, obstruct or violate the particular contracts into which it enters with private persons."

Jones v. United States, 1 Ct.Cl. 383 (1865).

This legal principle is now almost 140 years old. I, for one, don't want some contracting officer, acting out of some private sense of fairness, taking it upon himself to violate that principle by making some businessman well when the cost of doing business goes up because of something that Congress or some agency has done in the exercise of the sovereign rights of the United States of America. And I am a businessman, not a government employee. As a businessman I have learned that The Government can do many things after the award of a government contract that increase contract costs, but that were not caused by the contracting agency acting in its capacity as a party to the contract. That, as I have learned, is life in the Big City.

I think that contracting officers have to understand this legal principle and respect it. After all, they are appointed to safeguard the interests of the United States in its contractual relationships. FAR 1.602-2. They are impartial, fair and equitable to contractors when they treat them in accordance with the law.

I would agree to a no cost T4C if I thought that the contractor would perform poorly due to the increase in costs caused by the EPA emission standards. After all, my job is to get the widgets, not to beat up contractors in court. So I'd conduct a new competition. But I wouldn't give the contractor one red cent based on what Chuck has told us.

I'm leaving for the coast now, so I have to get off of my soapbox.

Vern


By joel hoffman on Friday, April 19, 2002 - 09:23 pm:

And this is FFP Contracting 101! I don't know how some KO's were trained, but obviously using different material/sources than me. In fact, some of what I read here is hard to believe, unless the individuals have a cost plus background/outlook.

As a suggestion, PLEASE ask your office to purchase "Administration of Government Contracts" by Nash and Cibinic and then read it. It's been around for years - I first read it 20 years ago. happy sails! joel


By bob antonio on Saturday, April 20, 2002 - 07:02 am:

Without going back to any texts and cases, here are my thoughts. They appear consistent with Vern's. However, I have not read this thread carefully so I may be mistaken.

I would not give the contractor additional funds since I consider EPA's actions to be an ordinary risk of doing business.

If the widgets were a pure commercial item, I would offer a default termination to the contractor if it fails to produce. However, if the contractor is willing to offer proof of its commercial customers changing their agreements with it, I might reconsider.

If it is a government item, I would offer a no-cost settlement and pay for the completed widgets. If the contractor wishes to dispute my actions, he is welcome to take it to the boards and the courts. They may offer the "deep pockets" remedy. As a contracting officer, I would not.


By Kennedy How on Monday, April 22, 2002 - 12:14 pm:

Joel,

As far as the Silver incident, I think at the time they were cornering the market, the silver prices were going up. It was only after the scheme collapsed that the prices collapsed with it. During the price run-up, that was when the contractor was getting antsy.

I can't remember if silver was a long-lead item at the time, but I remember our office was discussing the situation. I can't remember the exact circumstances, but I think there was some time to go before the contractor actually had to commit to a contract for silver. My feeling is that by that time, the prices went down to the point where the Government didn't have to do anything. It would have been interesting to see what would have happened if the price stayed high.... I would expect a dispute of sorts.

As far as specific ASBCA cases, I've not been able to come up with specific case cites. All I know is that they would have been during the mid to late 80s.

Vern mentioned the "Government is the Government" attitude. I'd guess that Contractors tend to take that position, sometimes we wonder why one branch takes a position that's counter to another branch. As far as making a contractor whole, we had a case like that. I can't remember the specifics, but we had a contract for trucks with BMY, Marysville OH for 5ton trucks. Had to do with FET on the tires that went on the trucks. We lost that case, and we were absolutely flabbergasted when the Board ruled against us.

From what I remember, we were dinged because another Government entity did something which affected our contract. I need to search the ASBCA decisions to find it, but I remember hearing that we lost the case clearly, as I had another pending case with a different division, and that didn't bode well.

Kennedy


By Vern Edwards on Monday, April 22, 2002 - 12:32 pm:

Kennedy:

Are you talking about the Army contract with BMY Combat Systems for 5-ton earthmovers?


By Vern Edwards on Monday, April 22, 2002 - 12:46 pm:

Kennedy:

I think I found it: BMY, Division of Harsco Corp., ASBCA No. 36,805, 93-2 BCA 25,684. The issue concerned federal excise taxes and FAR clause 52.229-3 (APR 84). It was a $47 million claim for an "after-imposed Federal tax." The board held for the appellant and remanded for negotiation.

If that's the case, the contract included a clause that expressly provided for a price adjustment in the event of an "after-imposed" tax. Thus, the sovereign acts doctrine did not apply. The dispute arose out of a disagreement about what the contractor was supposed to have included in its price.


By Vern Edwards on Monday, April 22, 2002 - 01:18 pm:

Kennedy:

Wowie, Zowie! What a great case! A $1 billion contract awarded through two-step sealed bidding, a complicated bid schedule; a confusing combination of contract clause, bid preparation instructions, and tax law; and, people on both sides who didn't want to say too much out of fear of upsetting the apple cart.

It doesn't have anything to do with what we've been discussion in this thread, but you could make a movie out of it. A great procurement story.

Vern


By Anonymous on Monday, April 22, 2002 - 02:42 pm:

Vern, you said the BMY decision "doesn't have anything to do with what we've been discuss[ing] in this thread."

Isn't the BMY case an example of a situation in which locally drafted contract language can be interpreted to entitle the contractor to a price adjustment for something that otherwise might seem to be a sovereign act?


By Vern Edwards on Monday, April 22, 2002 - 03:54 pm:

Anonymous of April 22 at 2:42pm:

Yes, I suppose so. However, the clause in the BMY case wasn't locally-drafted; it was a standard FAR clause. The 1984 edition of the clause was revised in 1991. See FAR 52.228-3.

The clause is an advance agreement between the parties that is designed to avoid speculative contingency contract pricing. It provides for an increase or decrease in contract prices in the event of "after-imposed" or "after-relieved" Federal taxes of a certain kind (but not state or local taxes). You have to read the clause carefully in order to understand how it works. It doesn't cover the parties for all tax changes. For example, it doesn't cover the parties for changes in Federal income tax rates or for changes in social security or other employment taxes.


By joel hoffman on Monday, April 22, 2002 - 05:00 pm:

I've used or seen the clause ( 52.229-3 Federal, State and Local Taxes)several times over the years. When the Feds impose or relieve what is considered to be an excise tax or duty, after the fact, and the Contractor can certify that it didn't already include a contingency in the contract price for this, the Government will make an adjustment (NOT an "equitable adjustment") in the amount of the increase or decrease of the tax or duty. Fuel tax is an example, import duties are another - but off-road construction equipment and generators are exempt from fuel taxes, so only the on-road equipment is affected by fuel tax increases. Contractors invariably "forgot" to mention that when asking for the adjustment. I imagine the case cited by Kennedy involved after imposed excise taxes on rubber tires or something related. There are no provisions for relief from after-imposed state or local taxes. happy sails! joel


By joel hoffman on Monday, April 22, 2002 - 06:14 pm:

I meant "...or seen the clause...used several times..." happy sails!


By Kennedy How on Tuesday, April 23, 2002 - 12:10 pm:

Vern,

Yeah, that's the one, but it's 5-ton trucks. The earthmover case was mine (I won that one; it was one of three concurrent claims: Late exercise of option, defective TDP, and inappropriate Economic Price Adjustment).

The truck contract was written by the guys on the floor above mine. I never really saw what the contract provisions were, but between the 5-ton truck contract, and my Armored Combat Earthmover contract, we kept the JAG's office (as well as BMY's Legal crew) pretty busy.

This was one of my favorite cases, at least the way it was explained to me. I tend to refer to it as a pertinent example in various discussions, but it's been so long, I can't really remember the details. It mattered to me since we thought we had a good case, and my contract was going through the claim process. So, losing what we thought was a winner wasn't real encouraging. I know internally, the issue of equity came up again. Do you remember seeing the part where the Board said if Congress intended to have a perpetual tax, they wouldn't have wrote the law to require annual renewal?

Where did you find the ASBCA Decision? The WIFCON link doesn't go back that far, and I can't remember where there's any other ASBCA Archive. At least on-line, you may be looking in a book somewhere....

Kennedy


By Vern Edwards on Tuesday, April 23, 2002 - 09:37 pm:

Kennedy:

I have sent you a copy of the decision via email.

Enjoy.

Vern


By Kennedy How on Wednesday, April 24, 2002 - 11:56 am:

Thanks Vern.

I can't remember who the KO was on this, or even many of the people involved. As I said, they were upstairs from us.

I suspect that in any kind of 2-step formal ad, bringing up certain topics could get your bid thrown out, and nobody wants to say something that might get you disqualified from a $1billion dollar contract. It's not like we're negotiating stuff, like today.

FET doesn't get much attention in our Contracts office (no FET in Combat stuff), but the Tactical Wheeled Division did a lot. I learned more about it dealing with the office that buys Tires; it's weird that we have to pay FET on tires to a sister agency, but that agency didn't want to waive that. The rate changes annually, somebody sends this complex formula to the manufacturers (each formula is specific to the manufacturer, and the kind of tire produced), and the manufacturer calculates the FET owed. Then, we have to mod all of our contracts to reflect the new rate. That rate could be only a few cents difference.....

I'd be interested in your thoughts on the case itself; you seemed intrigued by it all....

Kennedy


By Vern Edwards on Thursday, April 25, 2002 - 06:25 am:

Kennedy:

The problem started when bidder called the CO to ask for clarification of the bidding instructions pertaining to the tax. The CO didn't sort things out before bid opening. Then he/she didn't sort things out prior to contract award, even though it was clear that the government and the bidder didn't agree on what had happened or on the interpretation of the contract. The way the Board describes what happened, the bidder was open about what it had done and how it interpreted the contract. The CO looked the other way, hoping that the problem would just go away. It didn't.

I think that the Board decided in favor of the contractor because the Army had badly mishandled its own procurement. I don't really blame the CO. On a procurement of this size he/she was almost certainly overwhelmed by Army management and lawyers, who made one wrong determination and decision after another. The CO was just along for the ride. A more knowledgeable and influential CO might have prevented the train wreck, but I doubt it.

It's a heck of a story, really, and shows what can happen when people don't know their business.

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