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B. 6. Replacement Contracts
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In an early decision, the Comptroller
of the Treasury was asked whether fiscal year 1902 funds, originally
obligated under a contract but unexpended because of contractor
default, could be used in the following year to continue the
original object of the contract. The Comptroller stated:
“A contract was properly made within
the fiscal year 1902, and it would seem that any part of the
consideration of that contract which failed of use owing to the
default of the contractor could still be used in carrying out the
object of the original contract within the meaning of [31 U.S.C.
§ 1502(a)]. Appropriations are made to be used and not to
be defeated in their use, and it would be a narrow
construction to hold that a default on a properly made
contract would prevent the use of the appropriation for the object
for which it was made and for carrying out which the
contract was executed.”
9 Comp. Dec. 10, 11 (1902). This marked the beginning of the
replacement
contract theory.
In its traditional form, the rule is well settled that, where it
becomes
necessary to terminate a contract because of the contractor’s
default, the
funds obligated under the original contract are available, beyond
their
original period of obligational availability, for the purpose of
engaging
another contractor to complete the unfinished work.
60 Comp. Gen.
591
(1981); 55 Comp. Gen. 1351 (1976);
44 Comp. Gen. 623 (1965);
40
Comp.
Gen. 590 (1961);
32 Comp. Gen. 565 (1953);
2 Comp. Gen. 130 (1922);
21 Comp. Dec. 107 (1914);
B-160834, Apr. 7, 1967;
B-105555, Sept.
26, 1951;
A-22134, Apr. 12, 1928.
Implicit in the rule is the premise that the original contract
validly
obligated then current funds. See
34 Comp. Gen. 239 (1954). In
addition, the
rule is based on the notion that the default termination does not
eliminate
the bona fide need of the fiscal year in which the original contract
was
executed. 44 Comp. Gen. 399, 401 (1965). In accordance with 31 U.S.C.
§ 1502, amounts from the appropriation available at the time the
original
contract was entered would remain available to fund costs properly
chargeable to that appropriation. See B-242274, Aug. 27, 1991.
Accordingly,
the replacement contract seeks only to meet the agency’s preexisting
and
continuing need relying on the budget authority obligated by the
original
contract.
In order for funds to remain available beyond expiration for a
replacement
contract, three conditions must be met:
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A bona fide need for the work, supplies, or services must have
existed
when the original contract was executed, and it must continue to
exist
up to the award of the replacement contract. E.g.,
55 Comp. Gen.
1351,
1353 (1976); 34 Comp. Gen. 239, 240 (1954). If a terminated contract
is
found to have been improperly made to fulfill a need of a fiscal
year
other than the year against which the obligation was recorded, it
would
also be improper to charge that same appropriation for obligations
incident to a replacement contract.
35 Comp. Gen. 692 (1956). In
addition, if contracts made in a subsequent fiscal year do not
satisfy a
continuing need for the goods and/or services provided under the
original contract from a prior fiscal year, then the subsequent
fiscal year contracts are not replacements and those contracts are
not
chargeable to the prior fiscal year appropriation. See
B-242274,
Aug. 27,
1991.
-
The replacement contract must not exceed the scope of the original
contract. If it does, it is a new obligation and must be charged to
funds
currently available for obligation at the time the replacement
contract
is entered into. E.g.,
44 Comp. Gen. 399 (1965); B-181176-O.M., June
26,
1974.
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The replacement contract must be awarded within a reasonable time
after termination of the original contract. E.g., 60 Comp. Gen. at
593.
Excessive delay raises the presumption that the original contract
was
not intended to meet a then existing bona fide need. The same result
may follow if there is unwarranted delay in terminating the original
contract. 32 Comp. Gen. 565 (1953).
At one time, the replacement contract rule was mostly (but not
exclusively)
limited to the default situation. E.g.,
24 Comp. Gen. 555 (1945),
overruled
by 55 Comp. Gen. 1351. It has, however, been expanded. In
34 Comp.
Gen. 239 (1954), a default termination was found to be erroneous and
was
converted to a termination for convenience by agreement of the
parties to
permit settlement of the contractor’s claim for damages. The
decision held
that, in view of the original termination, the funds originally
obligated were
available for the timely execution of a new contract for the
performance of
the unfinished work.19
A further question in that case was whether
the
replacement contract rule was affected by the newly enacted 31 U.S.C.
§ 1501(a), which requires that contractual obligations be supported
by a
binding agreement in writing executed prior to expiration of the
appropriations availability. The decision held that the original
contract met
these requirements. 34 Comp. Gen. at 241.
In a later case, a
contract for flooring repairs was awarded in fiscal year
1975, obligating fiscal year 1975 funds, conditioned upon a
determination
from the Small Business Administration (SBA) that the contractor
qualified
as a small business. SBA found the contractor not to be a small
business.
Concluding that the original award was sufficient to support an
obligation
under 31 U.S.C. § 1501(a), the Comptroller General applied the
replacement contract rule and held that the funds obligated for the
contract
in fiscal year 1975 could be used to resolicit in fiscal year 1976.
55 Comp.
Gen. 1351 (1976).
In 66 Comp. Gen. 625 (1987), however, the Comptroller General
declined to
extend the rule in a situation involving a voluntary modification
that
reduced the scope of a contract. The Navy had contracted for the
construction of 12 ships. The contractor encountered financial
difficulties
and filed for reorganization under Chapter 11 of the Bankruptcy Act
under
which the contractor could, with court approval, reject the
contract. See
11 U.S.C. §§ 365(a) and (d)(2). To avert this possibility, the Navy
agreed to
a contract modification that, among other things, reduced the number
of
ships to be provided from 12 to 10. The question was whether the
funds
originally obligated for the 2 ships deleted by the modification
were
available after expiration to fund a reprocurement. GAO concluded
that
they were not because there had been no default, nor was there an
actual
rejection under the Bankruptcy Code. “[T]he modification was an
essentially voluntary act on the part of the Navy, and as such is
beyond the
scope of the replacement contract rule.” Id. at 627. Therefore, any
replacement contract for the 2 deleted ships would have to be
charged to
appropriations current at the time it was made.
Cases involving the termination of erroneously or improperly awarded
contracts have been less than consistent, although a clear direction
now
appears evident. The earliest decisions applied the replacement
contract
rule. Thus, 17 Comp. Gen. 1098 (1938) held, without much discussion,
that
funds obligated by an award to a bidder subsequently determined not
to
have been the low bidder could be used for an award to the otherwise
low
bidder in the following fiscal year. In a 1953 case, a contract had
to be
partially canceled because the contractor’s bid had not conformed to
the
advertised specifications. GAO noted that “the obligating instrument
was
legally defective in such a way as to render the contract voidable
at the
election of the Government,” but nevertheless applied the
replacement
contract rule. B-116131, Oct. 19, 1953. See also B-89019, May 31,
1950.
GAO’s position seemed to change with the enactment of 31 U.S.C.
§ 1501(a)
in 1954, on the theory that a contract award found to be invalid did
not
constitute a binding agreement so as to support a recordable
obligation.
38 Comp. Gen. 190 (1958); B-118428, Sept. 21, 1954,
overruling
B-116131
and B-89019. However, B-116131 was at least arguably “reinstated” by
B-152033, May 27, 1964, which followed both the “voidable at the
election
of the government” rationale and the result of B-116131, without
citing
either it or the case that presumably overruled it. See also
B-173244(2),
Aug. 10, 1972; B-158261, Mar. 9, 1966. This latter group of cases
was in turn
cited with approval in
55 Comp. Gen. 1351, 1353 (1976).
The apparent direction indicated by
55 Comp. Gen. 1351 (1976) and
the
cases it cited was called into question by statements in
60 Comp.
Gen. 591
(1981) to the effect that the replacement contract rule does not
apply to
terminations for the convenience of the government, whether
initiated by
the contracting agency or on recommendation of some other body such
as
GAO. Of course, the typical situation in which a replacement
contract is
needed following a termination for convenience is where the original
contract is found to have been improperly awarded. An important
clarification occurred in
68 Comp. Gen. 158 (1988), which modified
60 Comp. Gen. 591 and held the replacement contract rule applicable
where a contract must be terminated for convenience, without a prior
default termination, pursuant to a determination by competent
administrative or judicial authority (court, board of contract
appeals, GAO)
that the contract award was improper. As noted previously, the bona
fide
need of the original contract must continue, and the replacement
contract
must be made without undue delay after the original contract is
terminated
and must be awarded on the same basis as, and be substantially
similar in
scope and size to, the original contract.
Logically and inevitably, the next
question would be why the rule should not be the same regardless of
whether the defect leading to termination is determined by an
external reviewing body or by the contracting agency itself. It
should make no difference, GAO concluded in
70 Comp. Gen 230
(1991). The essence of the problem—a legal impropriety in the
procurement process requiring corrective action—is no different.
Thus, the replacement contract rule, with its attendant conditions,
applies where the contracting agency determines that a contract
award was improper and terminates the contract for the convenience
of the government, provided there is clear evidence that the award
was erroneous and the agency documents its determination with
appropriate findings of fact and law. Id. See also
B-322628, Aug. 3,
2012 (finding that an agency may award a replacement grant where
a grant officer discovers a defect in the competitive selection
process).
It is worth noting that with regard to agencies that
terminate their
contracts based on improper awards, the 1991 GAO decision added a
fourth
condition to the three articulated earlier in this section that
determine
whether funds remain available in a subsequent fiscal year for
replacement
contracts. In addition to the existence of a continuing bona fide
need, a
replacement contract of the same size and scope as the original, and
the
execution of the replacement without undue delay, the decision added
that
the original contract had to be made in “good faith” before an
agency could
use prior year appropriations to fund a replacement contract after
terminating the original for convenience due to an improper award;
70 Comp. Gen. 287, 289 (1991).
The issue of whether an agency is required to avail itself of the
replacement
contract rule arose in a protest submitted to GAO alleging the
improper
award of a contract. GAO found that the agency properly awarded the
contract and that, even when available, the replacement contract
rule is not
mandatory on an agency. B-270723, Apr. 15, 1996. The 1996 decision
stated
that since the replacement contract rule “provides a mechanism to
allow
agencies to administer their contract effectively when there is a
reason to
terminate a contract, its use is solely at the government’s
discretion.” Id. At
least one federal district court has adopted the position that the
availability
of funds for a replacement contract does not require the agency to
procure
a replacement contract. LeBoeuf, Lamb, Greene & MacRae, L.L.P. v.
Abraham, 215 F. Supp. 2d 73, 81 (D.D.C. 2002). See, e.g.,
B-276334.2,
Oct. 27, 1997. |
