Two of my students, who work for a very large government contractor, told me that the contracting officers (COs) who administer their contracts unilaterally update contract clauses from time to time when they add funds to the contract or when they exercise options. They wondered if that was okay.
It's not okay.
More than a few people believe that the government must update contract clauses when the government changes the Federal Acquisition Regulation (FAR). Some of them think that the government may do so unilaterally. Others believe that contracts are “automatically” updated when the government changes the FAR. Those beliefs are false.
Once the government and a contractor enter into a contract a deal is a deal, and the government and the contractor are bound by the clauses in the awarded contracts until the contracts are completed. Nothing in FAR and no standard FAR clause authorizes a CO to unilaterally update, add, or delete clauses in a contract after award. None of the five Changes clauses, FAR 52.243-1 through -5, empower a CO to do that.
Thus, with a few exceptions, which are discussed below, changes to FAR clauses — revisions, additions, and deletions — must be accomplished through supplemental agreement [(bilateral modification). See FAR 43.103(a)(3). Any such supplemental agreement must be supported by consideration in order to be contractually enforceable.
In this blog entry I will address two questions:
1. What FAR clauses must COs insert in their contracts and purchase orders?
2. What happens after contract award when a Federal Acquisition Circular (FAC) revises, adds, or deletes a clause that is applicable to a contract of the type awarded, or changes a portion of FAR that has been incorporated into the contract by a clause?
FAR contract clauses
The FAR and agency FAR supplements prescribe the use of standard contract clauses to implement the statutes, regulations, and policies that apply to government contracts. FAR clauses implement the statutes, regulations, and policies that are in effect on (1) the date the solicitation for the contract was issued, (2) the date of contract award, or (3) some other date, depending on the terms of the clause. See, e.g., FAR 52.202-1, “Definitions (JAN 2012),” which incorporates into contracts the FAR definitions in effect “at the time the solicitation was issued.” See also FAR 52.216-7, “Allowable Cost and Payment (JUN 2011),” subparagraph (a)(1), which incorporates the text of FAR Subpart 31.2 that is in effect “on the date of this contract.” And see FAR 52.227-11, “Patent Rights—Ownership by the Contractor (DEC 2007), which incorporates the procedures in 37 C.F.R. § 401.6 and agency supplements in effect “on the date of contract award.” The language in those clauses fixes the version of the statute, regulation, or policy for the duration of the contract, unless the contract expressly provides otherwise.
What FAR clauses must COs insert in purchase orders and solicitations?
A purchase order or solicitation states the government’s terms, and quoters or offerors are expected to base their quotes and proposals on those terms. A purchase order or a solicitation for a contract must include the clauses prescribed by the various parts of the FAR. See, generally:
For commercial items, FAR 12.301(a):
For purchase orders issued pursuant to simplified acquisition procedures, FAR 13.302-5:
For acquisitions conducted using sealed bidding, FAR 14.201-3:
For acquisitions conducted by negotiation, FAR 15.204-3:
What does all of that mean? It means that a CO must include in a purchase order or solicitation all clauses that FAR prescribes for a prospective contract and that are in effect on the date the solicitation is issued. When an offeror bases its offer on the solicitation, and the government accepts that offer, the contract includes the clauses that were in the solicitation and the parties are bound by those clauses. A CO cannot change (revise, add, or delete) any clauses in a contract document after the offeror has signed it without the agreement of the offeror. Any such agreement would constitute a new offer.
What happens when a Federal Acquisition Circular (FAC) containing a clause change is issued before or after a solicitation is released, but the change does not take effect until after the solicitation has been released?
Suppose that a CO is preparing a solicitation for a firm-fixed-price supply contract that is expected to exceed $10 million and that the CO plans to issue the solicitation on June 1 and award the contract on December 1. Now suppose that on May 15, a Federal Acquisition Circular (FAC) comes out that adds a new clause to FAR that must be inserted in all FFP contracts that will exceed $5 million. The FAC states that the new clause will become applicable on August 15. Now suppose further that the agency office reviewing the solicitation before its release insists that since the prospective contract will be awarded after the clause becomes applicable the CO should include the new clause in the solicitation. According to FAR 1.108(d)(1), the new clause does not apply to the solicitation and need not be included, but according to FAR 1.108(d)(2) the CO may include it in the solicitation as long as the contract will be awarded after the new clause becomes applicable.
Thus, purchase orders and solicitations must include the contract clauses that are applicable on the date the solicitation is issued, and they may include any clauses that become applicable after that date as long as they are expected to be applicable on or after the date of contract award.
What happens when a clause change takes effect after contract award?
Assuming that the CO included all applicable clauses when soliciting offers, after contract award the government and the contractor are bound by the clauses in their contract throughout the period of performance. In the absence of a contract clause that expressly authorizes the CO to revise, add, or delete a clause without the contractor’s consent, any attempt to bind a contractor to a unilateral clause change would be a breach of contract. See General Dynamics Corp. v. U.S., 47 Fed. Cl. 514, 544 - 547 (2000) and United States v. Winstar Corp., 518 U.S. 839 (1996).
However, FAR 1.108(d)(3) permits COs to include FAR changes in existing contracts “with appropriate consideration.” Thus, changes to the contract clauses must be on the basis of supplemental agreement (bilateral modification), not unilateral action by the CO. The consideration would flow from the party seeking inclusion of the clause to the party agreeing to the inclusion. The amount of the consideration is negotiable.*
Automatic Updating Of Clauses?
There are some contract clauses that provide for automatic updating of contract terms following a change in law or regulation. For example, FAR 52.222-43, “Fair Labor Standards Act and Service Contract Act — Price Adjustment (Multiple Year and Option Contracts) (SEP 2009)” and 52.222-44, “Fair Labor Standards Act and Service Contract Act — Price Adjustment (SEP 2009) provide for automatic updating in response to a change in the minimum wage pursuant to the Fair Labor Standards Act of 1938. FAR 52.230-2, “Cost Accounting Standards (May 2012),” 52.230-5, “Cost Accounting Standards—Educational Institution (May 2012),” and 52.230-6, “Administration of Cost Accounting Standards (JUN 2010)” provide for automatic updating following a change to the Cost Accounting Standards. All such changes apply prospectively, not retroactively. See FAR 52.230-2:
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May COs unilaterally update contract clauses when exercising options?
No. The clauses that apply to option periods are locked in at the time of contract award. FAR does not require that COs update clauses when exercising options. Moreover, the law of contracts does not permit COs to unilaterally change the terms of an option once they have been set. Absent express agreement to the contrary, the government must exercise options in strict accord with their terms. See Chemical Technology, Inc., ASBCA No. 21863, 80-2 BCA ¶ 14728:
Any attempt by the government to impose new terms on a contractor when exercising an option would be breach of contract and would invalidate the option. See New England Tank Industries of New Hampshire, Inc. v. U.S., 861 F. 2d 685 (Fed. Cir. 1988):
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The rule that exercise of an option must be in accordance with the terms of the option as awarded is reflected in FAR 17.207(e), which requires that before exercising an option the CO must make a written determination that the exercise “is in accordance with the terms of the option….” Thus, unless a contract contains an express term to the contrary, COs have no authority to unilaterally update contract clauses when exercising options.**
What is the effect of changes to parts of the FAR that were incorporated into a contract by reference?
Several FAR contract clauses incorporate parts of the FAR into contracts by reference. See e.g., FAR 52.202-1, which incorporates FAR definitions “in effect at the time the solicitation was issued,” and 52.216-7(a)(1), which incorporates the version of FAR Subpart 31.2 “in effect on the date of this contract.” In those examples, the terms of the FAR are fixed in time and cannot be altered without mutual agreement of the parties and consideration.
But what if the clause does not fix the terms of the FAR? See e.g., FAR 52.211-15, “Defense Priority and Allocation Requirements (APR 2008).” It requires the contractor to comply with “15 C.F.R. 700,” without further qualification. See also the various small business clauses that require the contractor to comply with Title 19 of the C.F.R., and the labor law clauses that require the contractor to comply with Title 29. If those regulations change after contract award the contractor is always bound by the current regulation. In such cases the updating is automatic and does not require a contract modification unless the clause provides for an adjustment of some kind, equitable or otherwise.
As I mentioned above, some clauses, such as the Cost Accounting Standards clause, provide for automatic updating with price adjustment.
Can Congress enact a law that changes existing contracts?
Yes, but they might breach the contract if they do. That was the holding of the Supreme Court in United States v. Winstar Corp., cited above, in which Congress changed a law, and the agency changed its regulations accordingly, after entering into contracts with financial institutions:
In Winstar, the court quoted its decision in Sinking Fund Cases, 99 U.S. 700 (1879):
Getting back to my two students, absent express language in the contract to the contrary, a CO may not unilaterally change the clauses in a contract when funding the contract or exercising an option. He or she may change clauses only with the assent of the contractor and with consideration for the change.
I asked my two students how they responded when their COs unilaterally updated the clauses in their contracts. They said that they went along with it, because so far none of the changes had much if any effect. That is too bad, because they are teaching the COs in question that what they are doing is okay. It is not okay. And it is not wise for one party to a contract to let the other party violate its rights by unilaterally imposing new terms.
*Note that “consideration” is not the same as an “equitable adjustment.” An equitable adjustment is a fair increase or decrease in the contract price or estimated cost and fee and the time required for contract performance, as required by a contract clause, such as a Changes clause or Differing Site Conditions clause. The amount of the equitable adjustment is based on the estimated or actual effect of the change on the cost or time required for performance. When the parties to a contract agree to modify it on the basis of mutual agreement, and not in accordance with a contract clause that provides for equitable adjustment, the parties are making a new bargain and the bargain must be supported by consideration in order to be enforceable in court. Consideration is necessary whether or not there is any effect on cost or time. The amount of the consideration is not determined or limited on the basis of the effect on cost or time, but is determined through bargaining. The consideration would flow from the party that will benefit from inclusion of the clause to the party that agrees to its inclusion.
**However, the parties may change the terms of a future option period pursuant to the terms of contract clauses, such as the Changes clause, or pursuant to a justification for other than full and open competition.