B-130534, APR. 30, 1957

B-130534: Apr 30, 1957

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TO THE SECRETARY OF THE NAVY: REFERENCE IS MADE TO A LETTER DATED JANUARY 29. INASMUCH AS THE OFFER WAS MADE SUBSEQUENT TO FINAL PRICING ACTION UNDER THE CONTRACT AND IN VIEW OF THE QUESTION WHICH AROSE AS TO THE REASONABLENESS OF THE OFFER. THE CORRESPONDENCE ASSOCIATED WITH THE CASE WAS FORWARDED HERE FOR SUCH ACTION AS MAY BE DEEMED APPROPRIATE. THE ORIGINAL CONTRACT PRICES FOR ITEMS 1 THROUGH 13 WERE. THE TARGET COSTS AND PROFITS WERE SUBJECT TO REVISION UPON NEGOTIATION FOLLOWING THE ACCEPTANCE OF THE 201ST ARTICLE UNDER ITEMS 1 AND 2. AFTER DELIVERY OF THE LAST ARTICLE CALLED FOR UNDER ITEMS 1 AND 2 OF THE REDETERMINED PRICES WERE TO BE ESTABLISHED UPON THE BASIS OF THE CONTRACTOR'S ADJUSTED COST PLUS THE TARGET PROFIT AND PLUS OR MINUS 20 PERCENT OF THE DIFFERENCE BETWEEN THE ADJUSTED COST AND THE TARGET COST.

B-130534, APR. 30, 1957

TO THE SECRETARY OF THE NAVY:

REFERENCE IS MADE TO A LETTER DATED JANUARY 29, 1957, FROM THE CHIEF, BUREAU OF ORDNANCE, COLA-2-RGP:BBA NORD-11297, RELATIVE TO AN OFFER MADE BY CONVAIR, DIVISION OF GENERAL DYNAMICS CORPORATION (POMONA) TO REFUND THE SUM OF $217,697.24 AS A PRICE ADJUSTMENT RELATING TO ITEMS 1 THROUGH 13 OF BUREAU OF ORDNANCE CONTRACT NORD 11297. THE BUREAU HAS AGREED TO RECEIVE PAYMENT OF THE PROPOSED REFUND BUT, INASMUCH AS THE OFFER WAS MADE SUBSEQUENT TO FINAL PRICING ACTION UNDER THE CONTRACT AND IN VIEW OF THE QUESTION WHICH AROSE AS TO THE REASONABLENESS OF THE OFFER, THE CORRESPONDENCE ASSOCIATED WITH THE CASE WAS FORWARDED HERE FOR SUCH ACTION AS MAY BE DEEMED APPROPRIATE.

THE ORIGINAL CONTRACT PRICES FOR ITEMS 1 THROUGH 13 WERE, FOR ALL PRACTICAL PURPOSES, STATED IN TERMS OF TARGET COSTS AND TARGET PROFITS. THE TARGET COSTS AND PROFITS WERE SUBJECT TO REVISION UPON NEGOTIATION FOLLOWING THE ACCEPTANCE OF THE 201ST ARTICLE UNDER ITEMS 1 AND 2. AFTER DELIVERY OF THE LAST ARTICLE CALLED FOR UNDER ITEMS 1 AND 2 OF THE REDETERMINED PRICES WERE TO BE ESTABLISHED UPON THE BASIS OF THE CONTRACTOR'S ADJUSTED COST PLUS THE TARGET PROFIT AND PLUS OR MINUS 20 PERCENT OF THE DIFFERENCE BETWEEN THE ADJUSTED COST AND THE TARGET COST.

SUBSEQUENT TO THE EXECUTION OF THE FINAL PRICING AGREEMENT, IT WAS DETERMINED THAT THE COST DATA SUBMITTED BY THE CONTRACTOR FOR USE IN THE NEGOTIATION OF THAT AGREEMENT HAD BEEN OVERSTATED BY AN AMOUNT OF $272,121.55. THE CONTRACTOR OFFERED TO MAKE REFUND OF 80 PERCENT OF SUCH AMOUNT, OR $217,697.24, STATING THAT "THE PROFIT EFFECT IS THE SAME AS IF THE ADJUSTMENT HAD BEEN PROCESSED PRIOR TO THE FINAL PRICE NEGOTIATION.'

THE BUREAU OF ORDNANCE CONSIDERED THAT THE CONTRACTOR'S OFFER OF SETTLEMENT SHOULD BE INCREASED FROM $217,697.24 TO $274,886.47 FOR THE REASON THAT, IF THE CONTRACTOR'S ACCOUNTING CONTROLS HAD INSURED A PROPER RECORDING OF CERTAIN ITEMS AFFECTING COSTS AS OF THE TIME OF NEGOTIATING THE REVISED TARGET PRICES FOR ITEMS 1 THROUGH 13, THE TARGET COSTS AND PROFITS WOULD NORMALLY HAVE BEEN REDUCED BY THE RESPECTIVE AMOUNTS OF $197,204.25 AND $17,748.38. IN THE BUREAU'S COMPUTATION OF ITS RECOMMENDED SETTLEMENT AMOUNT OF $274,886.47, THE SUM OF $17,748.38 IS ADDED TO THE NET COST REDUCTION OF $272,121.55, MAKING A TOTAL OF $289,869.93, AND FROM THAT AMOUNT THERE IS DEDUCTED $14,983.46 AS AN INCENTIVE PROFIT OF 20 PERCENT ALLOWABLE ON THE DIFFERENCE BETWEEN $272,121.55 AND $197,204.25.

THE CONTRACTOR REFUSED TO INCREASE ITS OFFER, CONTENDING THAT THERE IS A DEFINITE DISTINCTION BETWEEN TARGET SETTING AND FINAL PRICE REDETERMINATION AND THAT IN MAKING ITS OFFER IT HAD DEVIATED FROM USUAL CONTRACTUAL PRACTICE WHEREBY, AFTER THE FINAL COST IS NEGOTIATED, BOTH PARTIES ASSUME THEIR OWN RISKS REGARDING SUBSEQUENT EVENTS AFFECTING COSTS.

THE BUREAU OF ORDNANCE AT FIRST TOOK EXCEPTION TO THESE CONTENTIONS ON THE BASIS THAT THE ERRORS IN THE COST DATA DID NOT CONCERN SUBSEQUENT EVENTS AND THAT, AS OPPOSED TO THE SITUATION WHERE FACTS CANNOT BE ASCERTAINED UNTIL A LATER DATE, AN ERRONEOUS STATEMENT BY ONE PARTY TO A CONTRACT AS TO EXISTING FACTS WILL PERMIT THE OTHER PARTY TO OBTAIN RELIEF BY RESCISSION OR REFORMATION OF THE CONTRACT. HOWEVER, IN A LETTER OF JANUARY 25, 1957, TO THE CONTRACTOR, IT IS STATED THAT,"THE BUREAU HAS FURTHER REVIEWED THE MATTER AND, AS A CONSEQUENCE, WISHING TO INFORM THE CONTRACTOR THAT PAYMENT OF THE PROFFERED REFUND WILL BE ACCEPTED, BUT THAT ANY SUCH ACCEPTANCE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS THE GOVERNMENT MAY HAVE UNDER THIS CONTRACT OR OTHERWISE.'

ORDINARILY, IN THE NEGOTIATION OF INTERIM TARGET PRICES AND FINAL PRICES UNDER A CONTRACT OF THE TYPE HERE INVOLVED BOTH PARTIES ASSUME CERTAIN RISKS, AND IT WOULD BE VERY QUESTIONABLE WHETHER MISTAKES MADE IN THE COST DATA SUBMITTED WITH THE GOVERNMENT CONTRACTOR'S PRICING PROPOSALS WOULD SERVE AS A SUFFICIENT BASIS FOR RESCISSION OR REFORMATION OF THE PRICING AGREEMENTS. THE GOVERNMENT CONTRACTOR DOES NOT GUARANTEE THE ACCURACY OF THE DATA SUBMITTED IN SUPPORT OF ITS PRICING PROPOSALS AND THE NEGOTIATORS MUST BE PRESUMED TO HAVE CONSIDERED THE POSSIBILITY THAT THE COSTS FOR A STATED BASE PERIOD MAY HAVE BEEN EITHER OVERSTATED OR UNDERSTATED.

IN SUCH CIRCUMSTANCES, UNLESS THE COSTS HAVE BEEN DELIBERATELY MISREPRESENTED WITH A FRAUDULENT MOTIVE, THE CASE WOULD BE GOVERNED BY THE GENERAL RULE THAT A MISTAKE AS TO AN EXISTING SITUATION, WHICH LEADS EITHER ONE OR BOTH PARTIES TO ENTER INTO A CONTRACT WHICH THEY WOULD NOT HAVE ENTERED INTO HAD THEY BEEN ADVISED OF THE ACTUAL FACTS, WILL NOT JUSTIFY REFORMATION, THE CONTROLLING QUESTION BEING, NOT WHAT THE PARTIES WOULD HAVE INTENDED IF THEY HAD KNOWN BETTER, BUT RATHER WHETHER THE INSTRUMENT EXPRESSES THEIR INTENTION AT THE TIME, INFORMED AS THEY WERE. SEE 26 COMP. GEN. 744, AND CASES THERE CITED.

ACCORDINGLY, AND SINCE THERE IS NOTHING OF RECORD TO INDICATE THAT THE CONTRACTOR SOUGHT TO TAKE ADVANTAGE OF THE GOVERNMENT BY OVERSTATING ITS COSTS IN THE DATA SUBMITTED WITH THE PRICING PROPOSALS NOR CAN IT BE STATED WITH ANY CERTAINTY WHAT THE TARGET PRICE WOULD HAVE BEEN HAD THE CORRECT COSTS BEEN KNOWN, WE FIND NO GROUND FOR OBJECTING TO THE ACTION TAKEN BY THE BUREAU IN AGREEING TO ACCEPT THE PROPOSED REFUND OF $217,697.24, OR FOR REQUIRING ANY FURTHER ACTION IN CONNECTION WITH THE MATTER.

THE FILE OF CORRESPONDENCE FORWARDED WITH THE LETTER OF JANUARY 29, 1957, IS RETURNED HEREWITH.