Pricing Out Deleted Work

In cases of contract change orders, modifications, and claims, contractors are often required to price out the cost of work not yet performed. The work was part of the original contract but for some reason, is no longer required. The question that often arises is: At what price do you value the deleted effort - the price originally negotiated or the price based on current estimates. This is not an insignificant question as it could directly affect a contractor's bottom line.

Say for example, in 2012, a contractor negotiated a contract with indirect rates based on the current FPRA (Forward Pricing Rate Agreement). The G&A rate was 25 percent. In 2013, because workload diminished, the G&A rate jumped to 35 percent. Do you burden the deleted work with a 25 percent rate or a 35 percent rate? Similarly, if the price of raw materials (e.g. steel) jumped significantly from 2012 to 2013 do you price out the deleted work at the negotiated prices or the prices in effect today.

FAR 15.408, Table 15-2, Instructions for Submitting Cost/Price Proposals When Certified Cost or Pricing Data Are Required, answers this question pretty plainly. Table 15-2, Section B.(2) states:

Include the current estimates of what the cost would have been to complete the deleted work not yet performed (not the original proposal estimates), and the cost of deleted work already performed.

So there you have it; you must use current estimates. This represents a potential significant risk to contractors (it could also allow contractors to reap a windfall if prices and rates go down from what was originally bid/negotiated). Even where the initial contract price was based on competition or data other than certified cost or pricing data, modifications to those contracts often require the submission of certified cost or pricing data. Contractors that aggressively priced a contract for competitive reasons, could easily find that they have to delete more costs than they negotiated.

The contracting officer does have some discretion in determining what is fair and reasonable (to both parties). If you ever find yourself in this situation, be sure to let your contracting officer know. Maybe fairness and equity will prevail.

Types of Contract "Modifications"

Generally, Government contracts contain a changes clause that permits the contracting officer to make changes to a contract. Changes can be categorized into unilateral changes and bilateral changes. Some changes are purely administrative. Administrative changes are unilateral written changes that do not affect the substantive rights of the Government or the contractor. For example, a change in the point of contract, telephone number, or paying office address are administrative changes that would not likely affect costs or other rights of the contracting parties.

Change orders are also unilateral changes that direct contractors to make a change authorized under the "changes" clause of a contract. Most contracts have a changes clause, either FAR 52.232-1 for fixed price contracts or FAR 52.232-2 for cost type contracts or FAR 52.232-3 for time and material contracts. Change orders usually result in an equitable adjustment.

Other examples of unilateral changes include

• make changes authorized by clauses other than a changes clause (e.g. property clause, options clause, or suspension of work clause)
• termination notices

Bilateral modifications (aka supplemental agreements) is a contract modification that is signed by both the Government and contractor. Bilateral modifications are used to

• make negotiated equitable adjustments resulting from the issuance of a change order
• definitize letter contracts and
• reflect other agreements of the parties modifying the terms of the contract

See FAR Part 43, Contract Modifications, for regulatory coverage of contract modifications.

Order of Precedence - Contract Modifications - Final

This isn't exactly a re-post of a previous update on this subject but it does come close. Back in January, we wrote that DoD had proposed to amend its FAR supplement (DFARS) to establish an order for application of contract modifications to resolve any potential conflicts that may arise from multiple modifications with the same effective date. The January proposal has now become regulation in DFARS 204.7007.

This is important for contractors to know because circumstances exist in which the numeric order of the modifications to a contract is not the order in which the changes to the contract actually take effect. In order to avoid conflict, confusion and potential litigation, DoD has now clearly established within its procurement regulations, an order of precedence.

• Modifications will be applied in the order of the effective date on the modification
• In the event of two or more modifications with the same effective date, modifications will be applied in signature date order.
• If the modification has the same effective date and the same signature date, PCO mods (those are modifications beginning with the letter 'P') will be applied in numeric order followed by ACO mods (those are the modifications beginning with the letter 'A') will be applied in numeric order.

In short, dates take precedence over numeric order unless there is a tie. Numeric order is the tie-breaker.

Order of Precedence - Contract Modifications

The Department of Defense is proposing to amend its FAR supplement (the DFARS) to establish an order for application of contract modifications to resolve any potential conflicts that may arise from multiple modifications with the same effective date. Although it does not happen frequently, there are enough cases involving contract modifications with conflicting contract provisions that have the same effective date, to make such a regulation desirable.

Currently there are no rules to describe in what order to apply modifications to determine the actual content of a resulting modified contract. In order to determine the sequence of modifications to a contract or order, a method for determining the order or application for modifications will resolve any conflict arising from multiple modifications with the same effective date.

Under the new regulations, modifications will be applied in the following order:

1. Modifications will be applied in order of the effective date on the modification.
2. In the event of two or more modifications with the same effective date, modifications will be applied in signature date order.
3. In the event or two or more modifications with the same effective date and the same signature date, procuring contracting office modifications (contract modifications beginning with the letter "P") will be applied in numeric order, followed by contract administration office modifications (contract modifications beginning the the letter "A") in numeric order.