B-139280, JUNE 8, 1959, 38 COMP. GEN. 826

B-139280, JUNE 8, 1959, 38 COMP. GEN. 826

CONTRACTS - MODIFICATION - ESCALATION - IMPORT DUTIES - ENGINEERING SERVICES IN THE ABSENCE OF A MODIFICATION OF A CONTRACT, A LETTER FROM A CONTRACTING OFFICER CONCERNING A REVISED DELIVERY SCHEDULE FROM WHICH IT MAY REASONABLY BE IMPLIED THAT THE CONTRACTOR REQUESTED THE REVISION AND A TELEGRAM FROM THE CONTRACTOR ACCEPTING THE LATER DELIVERY SCHEDULE MAY BE REGARDED AS AN AUTHORIZED EXTENSION OF THE DELIVERY DATE; HOWEVER, SUCH PROCEDURE MAY NOT BE GENERALLY SANCTIONED AND SIMILAR CONTRACT MODIFICATIONS SHOULD BE EFFECTED ONLY BY A FORMALIZED SUPPLEMENTAL AGREEMENT. UNDER A CONTRACT WHICH CONTAINS AN ESCALATION CLAUSE, AN EXTENSION OF THE FINAL DELIVERY DATE FROM SEPTEMBER TO DECEMBER DURING WHICH PERIOD THERE WERE NO INCREASES IN THE PRICE INDICES AFTER NOVEMBER, THE HOLDING IN 34 COMP. GEN. 565, THAT ACCEPTANCE OF LATE DELIVERY UNDER A CONTRACT CONTAINING AN ESCALATION CLAUSE DOES NOT REQUIRE THE GOVERNMENT TO ASSUME ADDITIONAL COSTS AS A RESULT OF PRICE INCREASES AFTER THE DATE DELIVERY SHOULD HAVE BEEN MADE, DOES NOT PRECLUDE ALLOWANCE OF ADDITIONAL COSTS RESULTING FROM PRICE INCREASES PRIOR TO THE DECEMBER COMPLETION DATE. THE INCLUSION OF AN IMPORT DUTY IN A CONTRACT PRICE UNDER A CONTRACT CONTAINING AN ESCALATION CLAUSE, WHICH PROVIDES THAT PRICE ADJUSTMENT IS ALLOWABLE ON STIPULATED PERCENTAGES OF THE MONTHLY ESTIMATES OF EARNINGS SUBMITTED BY THE CONTRACTOR AND APPROVED BY THE CONTRACTING OFFICER, DOES NOT PRECLUDE ESCALATION ON THE IMPORT DUTY WHEN THE EARNINGS ARE BASED ON THE CONTRACT PRICE WHICH INCLUDES THE IMPORT DUTY. SERVICES OF ERECTING ENGINEERS UNDER A TURBINE CONTRACT WHICH CONTAINS AN ESCALATION CLAUSE ARE SEPARATE AND DISTINCT FROM THE DESIGN, MANUFACTURE AND DELIVERY OF THE TURBINES, ARE OPTIONAL WITH THE GOVERNMENT, AND ARE NOT LIMITED TO TIME BUT ARE TO BE RENDERED AFTER THE CONTRACT DELIVERY ATE; THEREFORE, THE AMOUNT OF SUCH SERVICES MAY NOT BE REGARDED AS AFFECTED BY FLUCTUATIONS IN PRODUCTION, LABOR, OR MATERIAL COSTS AND MAY NOT BE INCLUDED IN THE AMOUNT ON WHICH ESCALATION IS ALLOWABLE.

TO W. E. PILCHER, DEPARTMENT OF THE ARMY, JUNE 8, 1959:

BY THIRD ENDORSEMENT DATED APRIL 3, 1959 ( ENGOR 260/26), THE OFFICE OF THE CHIEF OF ENGINEERS, DEPARTMENT OF THE ARMY, TRANSMITTED HERE YOUR LETTER OF FEBRUARY 18, 1959, REQUESTING AN ADVANCE DECISION AS TO WHETHER YOU ARE AUTHORIZED TO MAKE PAYMENT ON A VOUCHER TRANSMITTED THEREWITH IN FAVOR OF THE ENGLISH ELECTRIC EXPORT AND TRADING COMPANY, LTD., OF LONDON, ENGLAND, IN THE AMOUNT OF $47,715.12, REPRESENTING AN ADDITIONAL AMOUNT CLAIMED TO BE DUE UNDER CONTRACT NO. DA-03-050-ENG 2690, DATED NOVEMBER 9, 1954, UNDER THE CIRCUMSTANCES HEREINAFTER SET FORTH.

UNDER THE TERMS OF THE CONTRACT INVOLVED, THE CLAIMANT AGREED TO DESIGN, COMPLETE THE MANUFACTURE OF, PREPARE AND LOAD FOR SHIPMENT, AND DELIVER F.O.B. RAILROAD CARS AT BRANSON, MISSOURI, TWO 68,000 HORSEPOWER HYDRAULIC TURBINES AND APPURTENANCES FOR THE TABLE ROCK RESERVOIR PROJECT NEAR BRANSON, MISSOURI, THE FIRST UNIT TO BE DELIVERED BY JANUARY 1, 1957, AND THE ENTIRE WORK TO BE COMPLETED BY SEPTEMBER 1, 1957.

WITH YOUR LETTER THERE WAS ENCLOSED A COPY OF A LETTER DATED SEPTEMBER 1, 1956, FROM LIEUTENANT COLONEL GEORGE E. HESSELBACHER, JR., EXECUTIVE OFFICER, CORPS OF ENGINEERS, TO THE CONTRACTOR, IN REPLY TO A LETTER DATED AUGUST 29, 1956, FROM THE CONTRACTOR, GIVING THE PROPOSED SCHEDULE OF SHIP ASSEMBLIES FOR TURBINE NO. 1 BEING FURNISHED UNDER THE SUBJECT CONTRACT. THE CONTRACTOR WAS ADVISED, AMONG OTHER THINGS, THAT A REVIEW OF THE CONSTRUCTION SCHEDULE FOR THE SUBJECT POWERHOUSE INDICATED THAT THE DELIVERY DATES COULD BE REVISED TO PERMIT DELIVERY "NOT EARLIER THAN 1 SEPTEMBER 1957" AND "NOT LATER THAN 1 DECEMBER 1957.' BY TELEGRAM DATED NOVEMBER 7, 1956, THE CONTRACT ADVISED OF ITS AGREEMENT TO THE REVISED DELIVERY SCHEDULE, A COPY OF THE TELEGRAM BEING ENCLOSED WITH YOUR LETTER. YOU POINTED OUT, HOWEVER, THAT IF IT SHOULD BE CONCLUDED THAT THE LETTER AND TELEGRAM HAD THE EFFECT OF EXTENDING THE DELIVERY DATE, THAT SUCH MODIFICATION WAS NEVER FORMALIZED AND MADE A PART OF THE CONTRACT.

YOU STATED THAT THE PROVISIONS OF OUR DECISION DATED MAY 4, 1955, B 105964 (B-105694/--- PUBLISHED AT 34 COMP. GEN. 565, 568--- WERE CALLED TO THE CONTRACTOR'S ATTENTION AND THAT THE CONTRACTOR INTERPRETS THAT DECISION AS PERMITTING PAYMENT OF ESCALATION ON EARNINGS AFTER THE CONTRACT COMPLETION DATE, BASED ON INDICES IN FORCE ON THE CONTRACT COMPLETION DATE, WHICH, IN THE INSTANT CASE, THE CONTRACTOR CLAIMS IS DECEMBER 1, 1957. RESPECTING THIS CLAIM, YOU STATED IN YOUR LETTER THAT--

I ASSUME THAT THE CLAIMANT IS ENTITLED TO PAYMENT OF ESCALATION ON EARNINGS AFTER THE DATE SET FOR COMPLETION OF THE CONTRACT ON THE BASIS OF INDICES EXISTING AS OF THE CONTRACT COMPLETION ATE; THAT IS, AT 275.7 FOR LABOR AND AT 346.4 FOR MATERIALS, WHICH FIGURES ARE THE INDICES FOR AUGUST 1957. * * *

ON PAGE THREE OF YOUR LETTER YOU RAISE QUESTIONS AS TO WHETHER ESCALATION IS APPLICABLE TO CERTAIN IMPORT DUTY PAYABLE BY THE CONTRACTOR, AND ALSO AS TO THE SERVICES OF ERECTING ENGINEERS, IT BEING STATED THAT PAYMENT UNDER ITEM 11 OF THE CONTRACT--- COVERING THE SERVICES OF ONE OR MORE ERECTING ENGINEERS FOR A TOTAL OF ABOUT 300 MAN DAYS--- HAD BEEN MADE IN THE AMOUNT OF $6,939 LESS RETAINAGE ON ESTIMATE NO. 29, AND THAT ESCALATION HAS ALREADY BEEN INCLUDED (ERRONEOUSLY OR OTHERWISE) IN THE AMOUNT PAID THE CONTRACTOR UNDER THIS ITEM. UPON THE BASIS OF THE FOREGOING FACTS, YOU SUMMARIZE YOUR DOUBT AS FOLLOWS:

(1) WHETHER THE FINAL DELIVERY DATE UNDER THE CONTRACT WAS IN FACT EXTENDED TO 1 DECEMBER 1957.

(2) WHETHER ESCALATION IS ALLOWABLE AFTER THE FINAL CONTRACT DELIVERY DATE ON BASIS OF INDICES EXISTING IN AUGUST 1957 (OR NOVEMBER 1957, IF TIME WAS EXTENDED).

(3) WHETHER ESCALATION IS ALLOWABLE ON THE AMOUNT INCLUDED FOR IMPORT DUTY.

(4) WHETHER ESCALATION IS ALLOWABLE ON AMOUNT PAID FOR SERVICES OF ERECTING ENGINEERS.

WE HAVE NOT BEEN FURNISHED WITH A COPY OF THE CONTRACTOR'S LETTER OF AUGUST 29, 1956, GIVING THE PROPOSED SCHEDULE OF SHOP ASSEMBLIES FOR TURBINE NO. 1 BEING FURNISHED UNDER THE CONTRACT, AND CONSEQUENTLY WE DO NOT KNOW WHETHER A SPECIFIC REQUEST WAS MADE THEREIN FOR A REVISED (EXTENDED) DELIVERY DATE. HOWEVER, IT MAY REASONABLY BE IMPLIED FROM THE LETTER OF SEPTEMBER 14, 1956, THAT SUCH A REQUEST WAS MADE AND THAT LIEUTENANT COLONEL HESSELBACHER GAVE CONSIDERATION THERETO SINCE HE ADVISED THE CONTRACTOR THAT THE DELIVERY DATES COULD BE REVISED AS INDICATED, AND REQUESTED THE LATTER'S COMMENTS ON THE REVISED DELIVERY SCHEDULE. THE CONTRACTOR REPLIED TO THIS REQUEST BY TELEGRAM DATED NOVEMBER 7, 1956, TO THE EFFECT THAT HE AGREED WITH THE REVISED DELIVERY DATE AND ADVISED THAT CERTAIN WORK WAS ACCORDINGLY BEING DELAYED. UNDER THE FACTS REPORTED, IT IS OUR VIEW THAT THE ACTION TAKEN MAY PROPERLY BE CONSIDERED AS AN AUTHORIZED EXTENSION OF THE DELIVERY DATE, IT BEING CLEAR THAT THE LETTER OF SEPTEMBER 14, 1956, WAS SO UNDERSTOOD BY THE CONTRACTOR. THIS HOLDING IS NOT TO BE UNDERSTOOD AS APPROVING GENERALLY THE PROCEDURE FOLLOWED IN THIS CASE-- THAT IS TO SAY, UNDER THE FACTS REPORTED THE CONTRACT APPARENTLY SHOULD HAVE BEEN MODIFIED BY SUPPLEMENTAL AGREEMENT--- BUT UNDER SUCH CIRCUMSTANCES WE BELIEVE THERE WAS AN EFFECTIVE WAIVER OF THE GOVERNMENT'S RIGHT TO REQUIRE DELIVERY BY SEPTEMBER 1.

IN THE CITED DECISION OF MAY 4, 1955, WE HELD THAT ACCEPTANCE OF LATE DELIVERY UNDER A CONTRACT CONTAINING AN ESCALATION CLAUSE DOES NOT REQUIRE THE GOVERNMENT TO ASSUME ADDITIONAL COSTS AS A RESULT OF INCREASES IN PRICES ACCRUING AFTER THE DATE DELIVERY SHOULD HAVE BEEN MADE--- IN THIS CASE, DECEMBER 1, 1957. ON THE BASIS OF THE HOLDING HEREIN THAT THE CONTRACT DATE WAS PROPERLY EXTENDED TO DECEMBER 1, 1957, AND SINCE THE " PRICE ADJUSTMENT SHEET" ATTACHED TO THE VOUCHER SHOWS THAT THERE WERE NO INCREASES IN THE PRICE INDICES SUBSEQUENT TO NOVEMBER 30, 1957, IT APPEARS THAT THE HOLDING IN THE DECISION OF MAY 4, 1955, IS NOT A BAR TO THE ALLOWANCE OF THE PRESENT CLAIM.

YOUR THIRD INQUIRY RELATES TO WHETHER ESCALATION IS ALLOWABLE ON THE AMOUNT INCLUDED FOR IMPORT DUTY. UNDER THE TERMS OF THE CONTRACT THE CONTRACTOR WAS TO BE PAID THE SUM OF $984,900 FOR THE TWO TURBINES. THE CHIEF OF ENGINEERS REPORTS THAT ESTIMATED DUTY AMOUNTING TO $122,531 WAS INCLUDED IN THE CONTRACT PRICE. PARAGRAPH SC-9 OF THE SPECIAL CONDITIONS, PRESCRIBING THE CONDITIONS UNDER WHICH ESCALATION WOULD BE PAID, INCLUDES THE FOLLOWING LANGUAGE:

C. THE ESTIMATES OF EARNINGS SUBMITTED BY THE CONTRACTOR AND APPROVED, AND UPON WHICH PAYMENT IS MADE BY THE CONTRACTING OFFICER, SHALL BE USED AS THE BASIS FOR ADJUSTMENTS IN PAYMENTS. THE TOTAL AMOUNT EARNED BY THE CONTRACTOR FOR WORK PERFORMED IN ANY ONE MONTH SHALL BE THE BASIC UNIT UPON WHICH ADJUSTMENTS IN PAYMENTS ARE TO BE MADE. THE PROPORTIONATE AMOUNTS OF SUCH TOTAL MONTHLY EARNINGS AS DETERMINED BY USE OF PERCENTAGES IN B (1) AND (2) ABOVE SHALL BE USED FOR LABOR AND MATERIAL ADJUSTMENTS AND ARE HEREINAFTER REFERRED TO AS "MONTHLY ADJUSTMENT AMOUNTS.' ADJUSTMENTS WILL BE BASED UPON APPROVED EARNINGS AND NOT UPON ACTUAL PAYMENTS.

UNDER THE QUOTED LANGUAGE IT SEEMS CLEAR THAT ESCALATION IS ALLOWABLE ON THE STIPULATED PERCENTAGES (40 PERCENT FOR LABOR AND 45 PERCENT FOR MATERIALS) OF THE MONTHLY "ESTIMATES OF EARNINGS SUBMITTED BY THE CONTRACTOR AND APPROVED.' EARNINGS ARE BASED ON THE "CONTRACT PRICE" AND THERE APPEARS TO BE NO VALID BASIS FOR REFUSAL OF PRICE ADJUSTMENTS UNDER THE DEFINITE PROVISIONS OF SC-9 MERELY BECAUSE IMPORT DUTY IS INCLUDED IN SUCH CONTRACT PRICE. AS A PRACTICAL MATTER, WE ASSUME THAT THE INCREASED PRICE RESULTING FROM ESCALATION MAY WELL AFFECT THE VALUATION ON WHICH THE DUTY IS ASSESSED AND THEREFORE THE AMOUNT OF DUTY TO BE PAID.

WITH RESPECT TO YOUR FOURTH INQUIRY, IT IS OUR VIEW THAT, SINCE THE SERVICES, AS SPECIFIED BY SECTION 3 OF THE SPECIFICATIONS, ARE ESSENTIALLY SEPARATE AND DISTINCT FROM THE DESIGN, MANUFACTURE, AND DELIVERY OF THE TURBINES; ARE ENTIRELY OPTIONAL WITH THE GOVERNMENT; ARE NOT LIMITED AS TO TIME BUT PROBABLY ARE TO BE RENDERED IN LARGE PART AFTER THE DELIVERY DATE OF THE TURBINES; ARE NOT OF A KIND WHICH WOULD BE DIRECTLY AFFECTED BY FLUCTUATIONS IN PRODUCTION LABOR COSTS OR MATERIAL PRICES; AND SINCE SECTION 3 IS SILENT AS TO ADJUSTMENT OF THE DAILY RATES OF COMPENSATION QUOTED, SUCH RATES ARE TO BE CONSTRUED AS FIRM AND NOT SUBJECT TO ESCALATION.

THE VOUCHER TRANSMITTED BY YOU, AND WHICH, WITH THE PERTINENT CONTRACT, IS RETURNED HEREWITH MAY BE CERTIFIED FOR PAYMENT, IF OTHERWISE CORRECT.