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B. 7. Contract Modifications and
Amendments Affecting Price
Page 5-33
Page 5-34
(As of 3/12/15)
Page 5-35
Page 5-36
(As of 3/12/15)
Page 5-37 |
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. |
