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The Bona Fide Needs Rule

B. 7.  Contract Modifications and Amendments Affecting Price

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Contract performance may extend over several years. During this time, the contract may be modified or amended for a variety of reasons at the instigation of either party. An amendment within the general scope of the contract that does not increase the contract price remains an obligation of the year in which the contract was executed. B-68707, Aug. 19, 1947. If the modification results in an increase in contract price, the question from the bona fide needs perspective is which fiscal year to charge with the modification.

If the modification exceeds the general scope of the original contract, for example, by increasing the quantity of items to be delivered, the modification amounts to a new obligation and is chargeable to funds current at the time the modification is made. 37 Comp. Gen. 861 (1958); B-207433, Sept. 16, 1983. When the Internal Revenue Service (IRS) benefited from a contractual provision that allowed its contractor to pass along cost savings to the agency in a fiscal year subsequent to when it entered the contract, IRS could not use those cost savings to increase the quantity of items that the contract required the contractor to deliver. B-257617, Apr. 18, 1995. Although there was a bona fide need for an increased quantity of items that had continued from the fiscal year that IRS entered the contract, it was not within the scope of the contract to increase the quantity of items delivered. If the contractual provision had stated that a cost savings would be passed on to IRS in the form of an increased quantity of items delivered, then increasing the quantity would not have constituted a contract modification creating a new obligation. Id.

In the case of a contract for severable services, a modification providing for increased services must be charged to the fiscal year or years in which the services are rendered, applying the principles discussed in this chapter in section B.5.20 61 Comp. Gen. 184 (1981), aff’d upon reconsideration, B-202222, Aug. 2, 1983; B-224702, Aug. 5, 1987. See also B-322455, Aug. 16, 2013; B-235086, Apr. 24, 1991. In 61 Comp. Gen. 184, for example, a contract to provide facilities and staff to operate a project camp was modified in the last month of fiscal year 1980. The modification called for work to be performed in fiscal year 1981. Regardless of whether the contract was viewed as a service contract or a contract to provide facilities, the modification did not meet a bona fide need of fiscal year 1980. The modification amounted to a separate contract and could be charged only to fiscal year 1981 funds, notwithstanding that it purported to modify a contract properly chargeable to fiscal year 1980 funds.

For modifications within the general scope of the original contract, the situation is a bit more complicated. Most government contracts contain provisions which, under certain conditions, render the government liable to make equitable adjustments in the contract price. Such liability may arise due to changes in specifications, government-caused delay, changed conditions, increased overhead rates, etc. These conditions are set out in standard contract clauses such as the “Changes” clause, “Government Property” clause, or “Negotiated Overhead Rates” clause.

Because there is no way to know whether the government will actually incur liability under these provisions, and if so, the amount of such liability, until the occurrence of the specified conditions (cf. 50 Comp. Gen. 589, 591 (1971)), the appropriations charged with the cost of the contract are not firmly obligated to cover future price increases, which arise due to the operation of these clauses. Nevertheless, as noted, government contracts frequently contemplate that performance will extend into subsequent fiscal years. When an upward price adjustment is necessitated in a subsequent year, the general approach is to ask whether the adjustment is attributable to an “antecedent liability”—that is, whether the government’s liability arises and is enforceable under a provision in the original contract. If the answer to this question is yes, then a within-scope price adjustment, which is requested and approved in a subsequent fiscal year, for example, under the “Changes” clause, will—with one important qualification to be noted later—be charged against the appropriation current at the time the contract was originally executed. Cases supporting this proposition in various contexts are 59 Comp. Gen. 518 (1980); 23 Comp. Gen. 943 (1944); 21 Comp. Gen. 574 (1941); 18 Comp. Gen. 363 (1938); A-15225, Sept. 24, 1926; B-146285-O.M., Sept. 28, 1976.21 See also B-197344, Aug. 21, 1980, where supplemental work was done without issuance of a formal contract modification. This principle is occasionally referred to as the doctrine of “relation back.” E.g., 37 Comp. Gen. 861, 863 (1958).

The reasoning is that a change order does not give rise to a new liability, but instead only renders fixed and certain the amount of the government’s preexisting liability to adjust the contract price. Since that liability arises at the time the original contract is executed, the subsequent price adjustment is viewed as reflecting a bona fide need of the same year in which funds were obligated for payment of the original contract price. The concept was stated as follows in 23 Comp. Gen. 943, 945 (1944) (explanatory information provided):

“It is true that at the time the contract was executed it was not known that there would, in fact, be any changes ordered…for which the contractor would be entitled to be paid an amount in addition to amounts otherwise payable under the contract. Also, it is true that [the Changes clause] contemplates the execution of amendments to the contract from time to time covering such changes. However, the fact remains that the obligations and liabilities of the parties respecting such changes are fixed by the terms of the original contract, and the various amendments merely render definite and liquidated the extent of the Government’s liability in connection with such changes.”

In order to avoid overobligating the original appropriation, the contracting officer must estimate the expected net additional obligations to insure that available appropriations are not committed to other purposes. E.g., 61 Comp. Gen. 609, 612 (1982); B-192036, Sept. 11, 1978. It is also true, however, that estimated liabilities of this type require constant review to ensure that appropriations do not remain encumbered in excess of the amounts that will actually be needed to meet the total liability under the contract.

For contracts spanning lengthy periods of time, funding of within scope modifications involves the use of expired appropriations. As discussed later in this chapter, the balances in expired accounts prior to closing are available without further congressional action.

Not all price adjustments arising from contract modifications or amendments represent a bona fide need of the year in which the agreement was made. If, as noted above, the change or amendment exceeds the general scope of the contract, or is not made pursuant to a provision in the original contract, then it is not based on any antecedent liability, in which event it may obligate only appropriations current at the time it is issued. 56 Comp. Gen. 414 (1977). See also 25 Comp. Gen. 332 (1945) (purported change order issued after completion of contract, covering work the contractor was not legally bound to do under the original contract, amounted to a new contract).

As noted above, there is an important exception or qualification to the antecedent liability rule. In cost reimbursement contracts, discretionary cost increases (i.e., increases that are not enforceable by the contractor), which exceed funding ceilings established by the contract, may be charged to funds currently available when the discretionary increase is granted by the contracting officer. 61 Comp. Gen. 609 (1982). It would be unreasonable, the decision pointed out, to require the contracting officer to reserve funds in anticipation of increases beyond the contract’s ceiling. Id. at 612. Changes that do not exceed the stipulated ceiling continue to be chargeable to funds available when the contract was originally made (id. at 611), as do amounts for final overhead in excess of the ceiling where the contractor has an enforceable right to those amounts (id. at 612). Since prior decisions such as 59 Comp. Gen. 518 had not drawn the below-ceiling/ above-ceiling distinction, 61 Comp. Gen. 609 modified them to that extent. Other cases applying this approach are B-317139, June 1, 2009 and 65 Comp. Gen. 741 (1986).

Once an appropriation account has closed (generally five fiscal years after the expiration of obligational availability), questions of antecedent liability or relation back are no longer relevant for purposes of determining the availability of amounts in the closed accounts since, at that time, appropriation balances cease to be available for expenditure. However, questions of antecedent liability or relation back are used to determine the extent to which current funds are available since, once an appropriation closes, only current funds may be used, up to specified limits, for such obligations. 31 U.S.C. §§ 1552 and 1553.

Footnotes 20 Presumably, if an agency, acting under authority to charge a 12-month severable services contract that crosses fiscal years to the appropriation current in the first fiscal year, had charged the original obligation to the first fiscal year, the agency should charge the costs of the modification to that same appropriation. We discuss this authority for civilian agencies and 10 U.S.C. § 2410a for military departments) in section B.9.a of this chapter. We found no case law addressing this point, however. See generally B-259274, May 22, 1996 (discussing 10 U.S.C. § 2410a).  (BACK)

21 Similarly, costs incurred under a termination for convenience are chargeable to the appropriation originally obligated for the contract. B-203074, Aug. 6, 1981.  (BACK)

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