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B-155936, DEC. 10, 1965

B-155936 Dec 10, 1965
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GENERAL SERVICES ADMINISTRATION: WE HAVE HAD OCCASION RECENTLY TO EXAMINE SEVERAL SETTLEMENT AGREEMENTS NEGOTIATED BY ONE OF THE CIVIL AGENCIES AFTER TERMINATION OF FIXED-PRICE SUPPLY CONTRACTS FOR THE CONVENIENCE OF THE GOVERNMENT. NOR WERE AMENDED TO INCORPORATE A TERMINATION FOR CONVENIENCE OF THE GOVERNMENT CLAUSE SUCH AS THAT SHOWN IN FPR 1-8.701 (FPR 1-8.703 FOR CONSTRUCTION CONTRACTS). UNDER FPR 1-8.700-2 (A) THE CLAUSE IS PRESCRIBED FOR USE . WE HAVE NOT BEEN APPRISED OF ANY OVERRIDING DISADVANTAGES EXPERIENCED BY THAT DEPARTMENT IN GETTING OR ADMINISTERING CONTRACTS DUE TO THE MANDATORY REQUIREMENT FOR THE INCLUSION THEREIN OF SUCH A CLAUSE. IN NEGOTIATING THE SETTLEMENT AGREEMENTS REFERRED TO THE SUBJECT AGENCY ALLOWED AN AMOUNT FOR PROFIT APPROXIMATING THE FULL PROFIT ANTICIPATED FOR THE ENTIRE CONTRACT ALTHOUGH ONLY A MINOR PORTION OF THE WORK PROVIDED FOR BY THE CONTRACT WAS ACTUALLY PERFORMED.

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B-155936, DEC. 10, 1965

TO THE HONORABLE LAWSON B. KNOTT, JR., ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

WE HAVE HAD OCCASION RECENTLY TO EXAMINE SEVERAL SETTLEMENT AGREEMENTS NEGOTIATED BY ONE OF THE CIVIL AGENCIES AFTER TERMINATION OF FIXED-PRICE SUPPLY CONTRACTS FOR THE CONVENIENCE OF THE GOVERNMENT. THE CONTRACTS NEITHER ORIGINALLY CONTAINED, NOR WERE AMENDED TO INCORPORATE A TERMINATION FOR CONVENIENCE OF THE GOVERNMENT CLAUSE SUCH AS THAT SHOWN IN FPR 1-8.701 (FPR 1-8.703 FOR CONSTRUCTION CONTRACTS). UNDER FPR 1-8.700-2 (A) THE CLAUSE IS PRESCRIBED FOR USE ,WHENEVER AN AGENCY CONSIDERS IT NECESSARY OR DESIRABLE" TO PROVIDE IN ITS CONTRACTS FOR TERMINATION FOR THE CONVENIENCE OF THE GOVERNMENT. BY COMPARISON, HOWEVER, ASPR 7-103.21 (ALSO SEE ASPR 8-701) MAKES THE USE OF A TERMINATION FOR CONVENIENCE CLAUSE MANDATORY IN FIXED-PRICE SUPPLY CONTRACTS OF AGENCIES OF THE DEPARTMENT OF DEFENSE (SEE ASPR 7 602.29 FOR CONSTRUCTION CONTRACTS), AND WE HAVE NOT BEEN APPRISED OF ANY OVERRIDING DISADVANTAGES EXPERIENCED BY THAT DEPARTMENT IN GETTING OR ADMINISTERING CONTRACTS DUE TO THE MANDATORY REQUIREMENT FOR THE INCLUSION THEREIN OF SUCH A CLAUSE.

IN NEGOTIATING THE SETTLEMENT AGREEMENTS REFERRED TO THE SUBJECT AGENCY ALLOWED AN AMOUNT FOR PROFIT APPROXIMATING THE FULL PROFIT ANTICIPATED FOR THE ENTIRE CONTRACT ALTHOUGH ONLY A MINOR PORTION OF THE WORK PROVIDED FOR BY THE CONTRACT WAS ACTUALLY PERFORMED. SUCH ALLOWANCE WAS PREDICATED UPON THE POSITION THAT UNDER COMMON LAW THE CONTRACTOR IS ENTITLED TO THE PROFIT ANTICIPATED UNDER A BREACHED CONTRACT. SINCE THE SUBJECT CONTRACTS INVOLVED SEVERAL MILLION DOLLARS THE AMOUNTS INCLUDED IN THE SETTLEMENT AGREEMENTS FOR ANTICIPATORY PROFITS COMPRISED VERY SUBSTANTIAL SUMS AND WERE OUT OF PROPORTION TO THE ACTUAL WORK PERFORMED AND TO THE BENEFITS DERIVED BY THE GOVERNMENT.

PARAGRAPH 1-8.301 (A) AND 1-8.303 (A) OF THE FEDERAL PROCUREMENT REGULATIONS (AND SIMILAR PROVISIONS IN ASPR) DO NOT PERMIT ALLOWANCE OF ANTICIPATED PROFIT ON UNPERFORMED WORK WHERE A TERMINATION FOR CONVENIENCE CLAUSE IS CONTAINED IN THE CONTRACT, AND SET FORTH THE PRINCIPLE THAT A SETTLEMENT SHOULD COMPENSATE THE CONTRACTOR FAIRLY FOR THE WORK DONE AND THE PREPARATIONS MADE FOR THE TERMINATED PORTIONS OF THE CONTRACT, INCLUDING AN ALLOWANCE FOR PROFIT THEREON WHICH IS REASONABLE UNDER THE CIRCUMSTANCES. WE FEEL THAT SUCH PRINCIPLE CONSTITUTES A FAIR AND ADEQUATE BASIS FOR SETTLEMENT OF THE PROFIT ELEMENT IN CONTRACTS TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT AND WE PERCEIVE NO COGENT OR COMPELLING REASONS IN SUCH SITUATIONS FOR AFFORDING SOME CONTRACTORS THE OPPORTUNITY TO GAIN ACCESS TO FULL ANTICIPATORY PROFITS ON UNPERFORMED WORK THROUGH A DISCRETIONARY EXCLUSION FROM THE CONTRACTS OF THE TERMINATION FOR CONVENIENCE CLAUSE.

WE UNDERSTAND YOUR AGENCY HAS PREVIOUSLY GIVEN CONSIDERATION TO MAKING THE TERMINATION FOR CONVENIENCE CLAUSE MANDATORY BUT THAT BECAUSE OF OBJECTIONS BY CERTAIN AGENCIES THE USE OF THE CLAUSE HAS BEEN PERMITTED TO REMAIN OPTIONAL. SOME TIME HAS ELAPSED, HOWEVER, SINCE THE ADOPTION OF THE OPTIONAL PROVISION AND WE THINK IT WOULD BE APPROPRIATE FOR G.S.A. AND THE AFFECTED AGENCIES TO RECONSIDER THE DESIRABILITY OF EFFECTING AN AMENDMENT TO THE FEDERAL PROCUREMENT REGULATIONS TO MAKE MANDATORY UPON THE FEDERAL AGENCIES THE USE OF A TERMINATION FOR CONVENIENCE CLAUSE IN THOSE FIXED-PRICE CONTRACTS WHERE ITS USE IS CURRENTLY REQUIRED BY THE PROVISIONS OF ASPR.

SINCERELY YOURS,

FRANK H. WEITZEL

ACTING COMPTROLLER GENERAL

THE HONORABLE LAWSON B. KNOTT, JR ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION

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