Deductive change governed by Estimated value or fair market value?

[bobbyduece]

Subcontractor has a fixed-price lump sum contract. Government has requested one of the systems, to be installed, is to be a different kind of system. The credit offered by the subcontractor is less than what the government desires, claiming that the original specified system cannot be provided for the offered deduct. Can the government require the subcontractor to provide a higher deductive amount than is in their estimate? Value of the change isin the range of $25k on the low end to $80k on the high end.

Thanks in advance for opinions and references.

[dwgerard]

Estimated costs are used when you are dealing with unknowns due to possible discounts, future values or other variables that make a sum certain cost impossible. In this case, you're dealing with the present, and the systems in questions have a known value that can be documented.

The subcontractor should simply show how much the new system will actually cost right now. Then the subcontractor should show how much it paid or would have paid for the deducted system right now, adjust according to the proposal values, discounts offered or other factors, plug in any other pertinent costs and voila; the subcontractor will have the actual delta between the 2 systems.

It is easy to argue over estimated costs, but not so much when there are actual costs. Give the Government the actual costs along with your price worksheets and welcome their efforts to find better prices should they disagree with those figures.

[joel hoffman]

Subcontractor has a fixed-price lump sum contract. Government has requested one of the systems, to be installed, is to be a different kind of system. The credit offered by the subcontractor is less than what the government desires, claiming that the original specified system cannot be provided for the offered deduct. Can the government require the subcontractor to provide a higher deductive amount than is in their estimate? Value of the change isin the range of $25k on the low end to $80k on the high end.

Thanks in advance for opinions and references.

Q 1: Are you the prime contractor or are you the government in this instance?

At first glance, this looks like a loaded question. The answer to your question is that the government can't directly "require" a subcontractor to provide any credit. The contract is with the prime contractor.

I had originally included a long summation of the principles involved in an equitable adjustment for a deductive change to a federal construction contract under the changes clause (52.243-4). See Chapter 8, "Pricing of Adjustments" in Nash and Cibinic's "Administration of Government Contracts" for reference. There are several other similar references, such as N&C's "Government Contract Changes". The concept has been defined and refined through case law.

In short, the equitable adjustment is GENERALLY based upon the difference in cost to the prime contractor to perform the work as changed versus the cost to perform the original work (see paragraph (d) of the Changes clause). The concept of an equitable adjustment generally includes appropriate allowances for overhead and profit on deductive changes - similar to an increase change.

And the prime is expected to include appropriate clauses in its subcontracts to protect itself and is expected to negotiate reasonable settlements with its subs.

Here the prime or sub "[claims] that the original specified system cannot be provided for the offered deduct.

Q 2: Does this mean that the sub would not have performed the original work at a loss for the price in its subcontract?

Q 3: If you are the prime, did you pass down the prime contract's changes clause to the sub or include some similar provision?

[bobbyduece]

Q1: We are the subcontractor.

Q2: Yes, it is probable the sub would have performed the original work at a loss.

Q3: see Q1

Q 1: Are you the prime contractor or are you the government in this instance?

Q 2: Does this mean that the sub would not have performed the original work at a loss for the price in its subcontract?

Q 3: If you are the prime, did you pass down the prime contract's changes clause to the sub or include some similar provision?

[joel hoffman]

Q1: We are the subcontractor.

Q2: Yes, it is probable the sub would have performed the original work at a loss.

Q3: see Q1

bobbyduece, with respect to your situation, the government can't directly "require" you, as the subcontractor, to provide a higher deductive amount than is in your estimate because the contract is with the prime. That doesn't necessarily mean that the government cant obtain a credit from the prime, however.