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aordway

Necessity to Mod Contract Price When There Are Excess Obligated Funds

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The guidance our contracts office repeatedly receive is that if you discover a contract has excess funds obligated to it totaling under $1000, do not do a mod to remove the excess funds from the award.  In that situation, the funds are removed from various systems (GFEBS, etc), but the contract document itself remains unchanged. However, by stating we should not modify the contract to deobligate the excess funds, it also implies that we do not modify the contract to change the contract price at all, and that seems problematic. 

Let's say I have a firm-fixed-price contract to buy 5  t-shirts for $100 total. After delivery of the 5 t-shirts, the contractor invoices for $90, and indicates that they have submitted their final invoice and will not be invoicing for the remaining $10 (it seems illogical that they would not bill for the full price they are owed, but this seems to happen frequently nonetheless). By the contractor stating they only want to be paid $90 instead of $100, it seems like we have a supplemental agreement for the contract.  Not only do we have $10 excess funds obligated to the contract, but the contract price has changed from $100 to $90. If we skip doing a deobligation mod on the contract to remove that $10, that also means we are not adjusting the price in the contract to the new agreed upon $90. Therefore the Government has created a back alley agreement with the contractor on a new contract price, but has not officially recognized that new agreement via an official contract document. The contract stating a firm-fixed-price of $100 is not accurate to what is occurring in the real world.

What is the necessity for modifying the contract price in this situation? Must it be done so that the contract document's stated price matches what the Contractor has agreed to accept as final payment?  Or is there a statutory reason that a mod to change the contract price in this instance is unnecessary?

Follow-up question: If we assume a contract mod IS necessary in this scenario, what is the requirement to get the Contractor's signature on the modification to decrease the price on the contract to $90? Can their written confirmation (via email for example) that the $90 invoice submitted is their final invoice serve as bilateral approval of the new contract price, such that the government can unilateraly mod the contract to state $90? Or in an instance where it has been an extended period of time with no invoice submitted for the final $10 (and the contractor may or may not be hard to get a hold of after a that long period), can the Government reasonably assume the Contractor's actions have forfeited that $10 and inherently agreed to the $90 price, and the Gov't can unilaterally mod the contract to change the price to $90? Or must the Contractor's signature be on the mod in either case?

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12 minutes ago, aordway said:

What is the necessity for modifying the contract price in this situation? Must it be done so that the contract document's stated price matches what the Contractor has agreed to accept as final payment? 

Opinion - The CO should do what the CO feels is appropriate for each situation.  While guidance may come from others, let’s say fiscal, the view expressed may be general without specific knowledge of the nuances of a specific contract.

 

13 minutes ago, aordway said:

Or is there a statutory reason that a mod to change the contract price in this instance is unnecessary?

No research.   But, not to my knowledge.  I suspect it is based on a fiscal policy connected to some "systems" issue.  31 USC 1501 might suggest that recording a change in contract price is absolutely necessary regardless of the amount.

19 minutes ago, aordway said:

If we assume a contract mod IS necessary in this scenario, what is the requirement to get the Contractor's signature on the modification to decrease the price on the contract to $90?

The requirement is as you have described is a change in contract price and if a commercial item contract the change must be by mutual agreement.  If non-commercial item contract the scenario you have painted is not a matter under a 52.243-XX changes clause that would allow a unilateral change.  

22 minutes ago, aordway said:

Can their written confirmation (via email for example) that the $90 invoice submitted is their final invoice serve as bilateral approval of the new contract price, such that the government can unilateraly mod the contract to state $90?

As we are talking matters under $1,000 I would say yes, give it a try especially if a commercial item contract - its their written agreement to the changed price.  I will say your question is skewed as the mod would not be unilateral as you have the contractor agreeing in writing to the change.  Your mod would just have one signature!

24 minutes ago, aordway said:

Or in an instance where it has been an extended period of time with no invoice submitted for the final $10 (and the contractor may or may not be hard to get a hold of after a that long period), can the Government reasonably assume the Contractor's actions have forfeited that $10 and inherently agreed to the $90 price, and the Gov't can unilaterally mod the contract to change the price to $90? Or

I would never assume anything when it comes to contracting.  After all the contract rights and remedies dictate.

Sidebar:  Remember the statutory limitation on a claim is 6 years.  I have in similar situations waited the 6 years before taking the action.  Some might argue you could do it after the appropriation has expired.   I leave to the debate as to what one might want to do.

 

25 minutes ago, aordway said:

Or must the Contractor's signature be on the mod in either case?

I think my responses have answered this.

 

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Thanks for your answers.

 

49 minutes ago, Ibn Battuta said:

Question: If we assume a contract mod IS necessary in this scenario, what is the requirement to get the Contractor's signature on the modification to decrease the price on the contract to $90? Can their written confirmation (via email for example) that the $90 invoice submitted is their final invoice serve as bilateral approval of the new contract price, such that the government can unilaterally mod the contract to state $90? Or in an instance where it has been an extended period of time with no invoice submitted for the final $10 (and the contractor may or may not be hard to get a hold of after a that long period), can the Government reasonably assume the Contractor's actions have forfeited that $10 and inherently agreed to the $90 price, and the Gov't can unilaterally mod the contract to change the price to $90? Or must the Contractor's signature be on the mod in either case?

Answer: In my opinion it is not a good idea for a CO to unilaterally modify a contract without a clause that either expressly or impliedly allows the CO do do so. However, such action may be an administrative necessity if the contractor does not respond to inquiries or no longer exists. In such cases, and with adequate supporting documentation, I think a CO could show that unilateral modification is a justified and prudent course of action.

 

I think this is prudent advice, and I agree.

 

48 minutes ago, C Culham said:
1 hour ago, aordway said:

Can their written confirmation (via email for example) that the $90 invoice submitted is their final invoice serve as bilateral approval of the new contract price, such that the government can unilateraly mod the contract to state $90?

As we are talking matters under $1,000 I would say yes, give it a try especially if a commercial item contract - its their written agreement to the changed price.  I will say your question is skewed as the mod would not be unilateral as you have the contractor agreeing in writing to the change.  Your mod would just have one signature!

Yes, I was not suggesting to mod entirely unilaterally, I was suggesting the mod document itself would be signed only by one party (perhaps "unilateral" was a poor word choice for such a scenario) because the contractor's "bilateral signature" would be through their actions and /or written confirmation outside the contract document. But I agree with Ibn Battuta that doing so should be as a last resort when contact with the contractor is not possible.

 

32 minutes ago, Ibn Battuta said:

Answer:

  1. I know of no FAR requirement to mod the contract. There is apparently no policy requirement in your agency. See my answer 3, below.
  2. Well, that would tie up administrative loose end, but your agency does not think it's necessary. In my opinion it's not essential for any reason of contract law. The contractor's final invoice should resolve any legal issues questions in that regard.
  3. I know of no statutory requirement for a mod to change the contract price.

 

I does seem extremely messy and illogical to not mod the contract to reflect any new agreement, but I appreciate your opinion that there is no regulation requiring it be done. Thanks!

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3 hours ago, aordway said:

What is the necessity for modifying the contract price in this situation?

Agencies are required to record obligations (like contracts) only when supported by documentary evidence of a binding agreement that is in writing (31 USC 1501).  Adjustments to recorded obligations, like the recordings themselves, must be supported by documentary evidence (Red Book, page 7-9).

The SF-30, Amendment of Solicitation/Modification of Contract, shall be used for removal of contract funds.  FAR 43.301(a)(1).

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3 hours ago, jwomack said:

Agencies are required to record obligations (like contracts) only when supported by documentary evidence of a binding agreement that is in writing (31 USC 1501).  Adjustments to recorded obligations, like the recordings themselves, must be supported by documentary evidence (Red Book, page 7-9).

The SF-30, Amendment of Solicitation/Modification of Contract, shall be used for removal of contract funds.  FAR 43.301(a)(1).

Thank you.  The Red Book and FAR 43 references seem to say that IF you are doing a mod, they must be done in accordance with those regulations, but they do not address the need for a mod in the first place. 31 USC 1501 seems to say that you only record an obligation when you have a valid contract (meeting the definition of "contract"); I'm not entirely convinced it answers the question of needing to adjust an obligation downward (but if you did choose to adjust an obligation downward, it would need t be a binding agreemnt in writing before you did so).

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On 1/23/2020 at 10:25 AM, aordway said:

Let's say I have a firm-fixed-price contract to buy 5  t-shirts for $100 total. After delivery of the 5 t-shirts, the contractor invoices for $90, and indicates that they have submitted their final invoice and will not be invoicing for the remaining $10 (it seems illogical that they would not bill for the full price they are owed, but this seems to happen frequently nonetheless). By the contractor stating they only want to be paid $90 instead of $100, it seems like we have a supplemental agreement for the contract.  Not only do we have $10 excess funds obligated to the contract, but the contract price has changed from $100 to $90. If we skip doing a deobligation mod on the contract to remove that $10, that also means we are not adjusting the price in the contract to the new agreed upon $90. Therefore the Government has created a back alley agreement with the contractor on a new contract price, but has not officially recognized that new agreement via an official contract document. The contract stating a firm-fixed-price of $100 is not accurate to what is occurring in the real world.

What is the necessity for modifying the contract price in this situation? Must it be done so that the contract document's stated price matches what the Contractor has agreed to accept as final payment? 

FACT ONE:  The contract price is $100.

FACT TWO:  The contractor invoiced for $90.

Fact Two does not change Fact One.  Or, in other words, Fact One is not changed by Fact Two.

You most assuredly do not have a supplemental agreement to change the price.  There is no new agreement.

You can simply close out the contract file and deobligate the excess funds IAW FAR subpart 4.8 (or let your agency’s <$1,000 automated process do the deobligation).

The contract price was and still is $100.  The contractor invoiced for less than that.  Treat it like a discount.  This has been happening for many years and was easily handled with human finance specialists.  Do you do a supplemental agreement when your paying office takes a prompt payment discount?  No.

That said, your agency’s automated systems might be too dimwitted to recognize this reality.  If your agency’s automated systems require a mod to change the price (so that the obligated amount = price = paid amount), you can do a unilateral administrative close-out modification with a note that the CLIN 001 price is changed from $100 to $90 to reflect the contractor’s invoiced amount, and that the likelihood of the contractor seeking the deobligated amount is essentially zero, so the modification (1) is done solely to make the automated systems happy; and (2) does not change any of the rights or obligations of the parties.  I have done these mods.  Since they are unilateral administrative close-out mods, the contractor never sees them.

Think about this is a cost-reimbursement setting.  If CLIN 001 has an estimated cost of $90 and a fixed fee of $10 (for a price of $100) and the contractor completes the work at $85 cost, do you do a mod to lower the estimated cost by supplemental agreement?  No.  The agreed estimated cost was and still is $90 — you pay the contractor $95 ($85 cost + $10 fixed fee) and you unilaterally and administratively deobligate the excess funds.

 

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Prompt payment discounts are a contract term, so I don't think that's analogous. I view the submission of the final invoice for $90 as a constructive waiver of the contractor's right to be paid the full contract price. As such, an administrative change to the contract would be cromulent, if necessary.

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3 hours ago, Ibn Battuta said:

Just to be clear---by Doh!, I mean Doh!

While the origin of “doh!” Is popularly attributed to Homer Simpson, it predates that show by many decades:

“As it turns out “d'oh” — written in the script simply as “annoyed grunt” — was inspired by Jimmy Finlayson from the Laurel and Hardy movies, but was shortened from “d'ooooooh” because Matt Groening thought it made for better pacing.Aug 22, 2012

The Voice of Homer Simpson Explains the Origin of “D'oh!”

Having grown up as a huge fan of Laurel and Hardy, I can attest to it!

P.S., I have some digital video disc episodes of Laurel and Hardy Shorts. Fun to watch special effects stunts and  pranks frame by frame to see how they edited it! 😁

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Must be some Simpsons fans here. 

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Is it possible that somebody looked at the situation and decided it costs the government more to process the mod, including reviews and entry into MOCAS, than the actual value of the mod?

As a contractor, should I be terminated for convenience I look at my open Purchase Orders to see which ones I should terminate. In some cases, it is cheaper to let the supplier perform and deliver versus terminate for convenience. (My Purchasing Manual describes those circumstances and typically sets a dollar threshold.) It's actually a cost avoidance to refrain from TforC.

I'm wondering whether somebody made a similar call with respect to mods -- less than $1,000, then refrain.

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12 hours ago, Don Mansfield said:

Prompt payment discounts are a contract term, so I don't think that's analogous. I view the submission of the final invoice for $90 as a constructive waiver of the contractor's right to be paid the full contract price. As such, an administrative change to the contract would be cromulent, if necessary.

Thanks @Don Mansfield, I think "constructive waiver of right to be paid" is a great way to look at it, rather than viewing it as a supplemental agreement to the contract as I had been. I can definitely get on board with that.

 

10 hours ago, Ibn Battuta said:

@aordway  What office is the source of that "guidance"?

@Ibn Battuta It comes from the Assistant Secretary of the Army (Acquisition, Logistics and Technology) via PARC Policy Alert #18-46 (written in 2018), which states you should not issue a contract mod in any circumstance, and that guidance rescinds and updates PARC Policy Alert #13-39 (written in 2013) which previously stated you should not do a mod unless the KO feels it is prudent and necessary.

 

 

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49 minutes ago, Ibn Battuta said:

Uh, yes. Even probable.

Also unusual, in my experience.

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1 hour ago, here_2_help said:

Is it possible that somebody looked at the situation and decided it costs the government more to process the mod, including reviews and entry into MOCAS, than the actual value of the mod?

Sort of.....

https://comptroller.defense.gov/Portals/45/documents/fmr/archive/03arch/03_08.pdf

undelivered order (obligation)

081109. Simultaneous Undelivered Order and Accrued Expenditure-Unpaid. If delivery or performance is due within a short period of time, contracts and other orders for $1,000 or less may be entered into the budgetary accounts as Accrued Expenditures--Unpaid rather than Undelivered Orders. This will save one processing step when recording obligation transactions for small amounts.

 

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3 hours ago, Don Mansfield said:

What are Simpsons? Is that a music group or something?

The Cartoon TV series.

“Is Cromulent a real word?

“It's a perfectly cromulent word.” Though 'cromulent' originated as a joke on The Simpsons, it's a perfectly cromulent candidate for future entry in the dictionary. ... Cohen came up with cromulent as one of those words. It means "acceptable" or "fine."

See also:  “Merriam-Webster › words-at-play

A Perfectly Cromulent Word | Merriam-Webster“

image.png

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