B-159066, FEB. 12, 1969

B-159066, FEB. 12, 1969

TO MR. SECRETARY:

REFERENCE IS MADE TO A LETTER DATED OCTOBER 10, 1968, FROM THE GENERAL COUNSEL, OFFICE OF THE CHIEF OF ENGINEERS, FILE ENGGC-C, FURNISHING OUR OFFICE WITH A REPORT ON THE REQUEST OF MCNAMARA CONSTRUCTION OF MANITOBA LIMITED FOR ADDITIONAL COMPENSATION UNDER A MODIFICATION TO CONTRACT NO. DA-20-064-CIVENG-64-140, PROVIDING FOR THE PAYMENT OF APPLICABLE MICHIGAN STATE USE TAXES.

THE ABOVE-MENTIONED MODIFICATION WAS ENTERED INTO PURSUANT TO OUR DECISION B-159066, MAY 6, 1966, WHICH AUTHORIZED REFORMATION OF THE CONTRACT ON THE GROUND THAT THE GOVERNMENT INNOCENTLY MISLED THE CONTRACTOR INTO BELIEVING THAT THE SUBJECT STATE TAXES WOULD NOT BE APPLICABLE TO THE CONTRACT WHEN, IN FACT, SUCH TAXES WERE APPLICABLE TO THE CONTRACT WORK. THE CONTRACTOR NOW SEEKS REIMBURSEMENT OF A MARKUP OR HANDLING CHARGES INCURRED INCIDENT TO THE PAYMENT OF THE USE TAXES ON THE BASIS THAT SUCH CHARGES WOULD HAVE BEEN INCLUDED IN ITS BID PRICE INITIALLY HAD IT NOT BEEN MISLED BY THE GOVERNMENT. IT IS THE CONTRACTOR'S CONTENTION THAT HAD IT BEEN AWARE OF THE TAX APPLICABILITY, IT WOULD HAVE TREATED IT AS ANY OTHER PROJECTED CONTRACT COST AND IT WOULD HAVE ADDED STANDARD PERCENTAGES FOR OVERHEAD AND PROFIT TO THE AMOUNT OF THE ACTUAL ESTIMATED TAX LIABILITY IN COMPUTING ITS BID PRICE. THESE PERCENTAGES, ACCORDING TO THE CONTRACTOR, AMOUNT TO 25.7 PERCENT OF THE TAX LIABILITY, OR $59,110, IN ADDITION TO THE ESTIMATED TAX LIABILITY OF $230,000. THE CONTRACTOR REASONS THAT THE OVERHEAD AND PROFIT PERCENTAGES PROPERLY SHOULD BE CONSIDERED AS PART OF THE BENEFIT DERIVED BY THE GOVERNMENT THROUGH ITS MISREPRESENTATION AND, THEREFORE, SHOULD BE CONSIDERED IN DETERMINING THE AMOUNT TO WHICH IT IS ENTITLED UNDER OUR DECISION.

THE SUPPLEMENTAL REPORT OF THE CONTRACTING OFFICER ON THE PRESENT CLAIM STATES THAT,"IT IS UNDISPUTED THAT THE CONTRACTOR WAS REQUIRED TO SUBMIT EXTENSIVE MONTHLY REPORTS TO THE MICHIGAN DEPARTMENT OF REVENUE, USE TAX SECTION, AS WELL AS AN EQUALLY EXTENSIVE REPORT TO THE DETROIT DISTRICT," AND THAT IT IS REASONABLE TO ASSUME THAT "OVERHEADS AND MARKUPS" IN ADDITION TO THE AMOUNT OF THE TAX WOULD BE INCLUDED IN THE BID PRICE OF A BIDDER AWARE OF THE APPLICABILITY OF THE TAX TO A GIVEN PROCUREMENT. WHILE CONCEDING THAT SOME ADDITIONAL INDIRECT EXPENSE MAY HAVE BEEN INCURRED BECAUSE OF THE TAX, THE REPORT STATES THE OPINION THAT ANY "OVERHEADS AND MARKUPS" TO BE APPLIED AS A RESULT OF PAYMENT OF THE TAX WOULD BE SOMEWHAT LESS THAN THE 25.7 PERCENT CLAIMED BY THE CONTRACTOR BECAUSE PRIOR CONTRACT MODIFICATIONS HAD ALLOWED ONLY 4.9 PERCENT FOR HOME OFFICE OVERHEAD WITH PROFIT ALLOWANCE BEING COMPUTED IN ACCORDANCE WITH THE "WEIGHTED GUIDELINES" METHOD.

THE OCTOBER 10 LETTER FROM THE GENERAL COUNSEL, OFFICE OF THE CHIEF OF ENGINEERS, CONCLUDES THAT, REGARDLESS OF ANY ADDITIONAL EXPENSES ACTUALLY INCURRED, COMPENSATION SHOULD BE LIMITED TO THE TAXES ACTUALLY INCURRED BECAUSE PRIOR DECISIONS OF OUR OFFICE HAVE SO LIMITED SIMILAR CONTRACT REFORMATIONS. ADDITIONALLY, IT IS POINTED OUT THAT ARMED SERVICES PROCUREMENT REGULATION 11-401.1 (C), WHICH CONTAINS THE STANDARD "FEDERAL, STATE, AND LOCAL TAXES" CLAUSE, MERELY PROVIDES FOR CONTRACT PRICE ADJUSTMENT FOR CHANGES IN APPLICABLE FEDERAL TAXES TO THE AMOUNT OF THE TAX ALONE WITH NO AUTHORIZATION FOR HANDLING CHARGES OR MARKUP ALLOWANCES.

AS WAS STATED IN OUR EARLIER DECISION, THE THEORY UNDERLYING THE EQUITABLE CONCEPT OF REFORMATION IS THAT IT WOULD BE UNJUST TO ALLOW ONE WHO MAKES A MISREPRESENTATION "TO RETAIN THE FRUITS OF A BARGAIN WHICH INDUCED, IN WHOLE OR IN PART, BY SUCH MISREPRESENTATION.' THEREFORE, THE END SOUGHT BY REFORMATION IS TO REGARD THE CONTRACT AS EXPRESSING THE AGREEMENT WHICH WOULD HAVE BEEN REACHED BY THE PARTIES ABSENT THE MISREPRESENTATION. 41 COMP. GEN. 34. IN THIS REGARD, THERE SEEMS TO BE NO QUESTION BUT THAT A BIDDER AWARE OF THE APPLICABILITY OF A STATE TAX WOULD HAVE INCLUDED PROFIT AND OVERHEAD IN ADDITION TO THE ANTICIPATED AMOUNT OF THE TAX IN CALCULATING HIS BID PRICE.

WERE IT NOT FOR THE GOVERNMENT'S INNOCENT MISREPRESENTATION, THE CONTRACTOR'S PRICE WOULD HAVE INCLUDED THE USE TAX, AND WERE IT NOT FOR THAT MISREPRESENTATION THE CONTRACTOR WOULD HAVE INCLUDED ALSO THE COSTS AND PROFIT ATTRIBUTABLE TO THE MANAGEMENT OF ITS USE TAX LIABILITY. THINK IT UNREASONABLE TO CONSIDER AN AFTER-THE-FACT CONTRACT COST LIABILITY, REIMBURSEMENT FOR WHICH IS AUTHORIZED BY REFORMATION, SUCH AS FOR TAXES, AS RESTRICTED TO THE DIRECT OR BARE COST LIABILITY WITHOUT REFERENCE TO OTHER COSTS DIRECTLY ATTRIBUTABLE TO ADMINISTERING SUCH COST LIABILITY.

WE THEREFORE ARE OF THE VIEW THAT ALLOCABLE AND ALLOWABLE OVERHEAD COSTS AND PROFIT INCIDENT TO THE EFFORT INVOLVED IN COMPLYING WITH THE REQUIREMENTS FOR REPORTING AND PAYING MICHIGAN USE TAXES APPLICABLE TO THE CONTRACT WORK MAY BE REIMBURSED THE CONTRACTOR AS PART OF THE CONTRACT REFORMATION AUTHORIZED BY OUR DECISION OF MAY 6, 1966.

WHILE IT IS TRUE THAT THE CASES CITED IN THE OCTOBER 10, 1968, LETTER FROM THE OFFICE OF THE CHIEF OF ENGINEERS (I.E., 42 COMP. GEN. 517; 39 ID. 432; 27 ID. 767; B-153472, DECEMBER 2, 1965) DID NOT PROVIDE FOR THE PAYMENT OF ANY AMOUNTS IN ADDITION TO THE ACTUAL TAXES INCURRED, NO SUCH ADDITIONAL AMOUNTS WERE CLAIMED IN CONNECTION WITH THE REFORMATION AUTHORIZED IN THOSE CASES, NOR WAS THE LIABILITY THEREFORE CONSIDERED. MIGHT MENTION IN THIS RESPECT THAT OUR OFFICE, AS A MATTER OF PRACTICE, PERMITS THE ALLOWANCE OF ADDITIONAL CONTRACT COMPENSATION, INCLUDING OVERHEAD AND PROFIT, WHEN REFORMATION IS AUTHORIZED IN MISTAKE INBID CASES ALLEGED AFTER AWARD. SEE, FOR EXAMPLE, 45 COMP. GEN. 305; 44 ID. 383.

ALSO, SINCE THE "FEDERAL, STATE, AND LOCAL TAXES" CLAUSE DEALS WITH CHANGES IN APPLICABLE FEDERAL TAXES TAKING EFFECT AFTER THE CONTRACT DATE RATHER THAN WITH THE AMOUNT OF A CONTRACT PRICE ADJUSTMENT ALLOWABLE AS A RESULT OF REFORMATION, THE INSTANT CASE IS NOT GOVERNED BY THAT CLAUSE.

IN ACCORDANCE WITH THE ABOVE CONSIDERATIONS, ALLOWANCE SHOULD BE MADE IN THE CONTRACT MODIFICATION AUTHORIZED BY OUR PRIOR DECISION FOR COSTS AND PROFIT RESULTING FROM COMPLIANCE WITH THE MICHIGAN USE TAX. HOWEVER, THE AMOUNT OF SUCH ALLOWANCE SHOULD NOT BE COMPUTED ON THE BASIS OF THE 25.7- PERCENT FIGURE PROPOSED BY THE CONTRACTOR BUT SHOULD BE COMPUTED ON THE BASIS UTILIZED IN OTHER CONTRACT MODIFICATIONS TO DATE WHEREIN A 4.9- PERCENT HOME OFFICE OVERHEAD HAS BEEN ALLOWED AND PROFIT ALLOWED ON A WEIGHTED GUIDELINES METHOD. IF SUCH METHOD IS UNACCEPTABLE, PAYMENT MAY BE ALLOWED ON THE BASIS OF A MUTUALLY SATISFACTORY NEGOTIATED AMOUNT SUPPORTED, IF POSSIBLE, BY AN AUDIT OF THE CONTRACTOR'S RECORDS.

ACCORDINGLY, MODIFICATION OF THE CONTRACT AS ABOVE INDICATED IS AUTHORIZED.