B-1408, APRIL 15, 1939, 18 COMP. GEN. 784

B-1408: Apr 15, 1939

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IRRESPECTIVE OF DISCOUNT WHICH LIKEWISE IS TO BE COMPUTED ON THE GROSS CONTRACT PRICE. THAT IS. CONTAINS ALSO GUARANTEES BY THE CONTRACTOR THAT THE EQUIPMENT WILL BE IN ACCORDANCE WITH THE SPECIFICATIONS. LIQUIDATED DAMAGE ASSESSMENTS FOR DELAYED PERFORMANCE SHOULD BE COMPUTED ON THE NEW CONTRACT PRICE WHERE PRICE REDUCTION IS MADE BECAUSE OF THE OVERWEIGHT. WHERE A PENALTY IS ASSESSED FOR THE OVERWEIGHT. NO NEW CONTRACT PRICE IS EFFECTED THEREBY. 1939: THERE WAS RECEIVED YOUR LETTER OF FEBRUARY 8. UNDER NOS CONTRACTS CONTAINING A LIQUIDATED DAMAGE CLAUSE THE ASSESSMENT OF LIQUIDATED DAMAGES IS BASED ON THE VALUE OF THE ARTICLES OR MATERIAL NOT DELIVERED WITHIN THE TIME SPECIFIED BY CONTRACT.

B-1408, APRIL 15, 1939, 18 COMP. GEN. 784

CONTRACTS - LIQUIDATED DAMAGES AND DISCOUNT - CONTRACT PRICE CHANGES, ETC., COMPUTATION PROCEDURE WHERE A CONTRACT CONTAINS A LIQUIDATED DAMAGE CLAUSE BASED ON THE CONTRACT PRICE, BUT NOT TO EXCEED A STATED PERCENTAGE OF THE STIPULATED VALUE OF THE ARTICLES OR MATERIALS NOT DELIVERED, AND ALSO AN OFFER OF DISCOUNT FOR PROMPT PAYMENT, LIQUIDATED DAMAGES FOR DELAYED PERFORMANCE SHOULD BE DEDUCTED ON THE BASIS OF THE GROSS CONTRACT PRICE, IRRESPECTIVE OF DISCOUNT WHICH LIKEWISE IS TO BE COMPUTED ON THE GROSS CONTRACT PRICE, IRRESPECTIVE OF LIQUIDATED DAMAGES. WHERE A CONTRACT ORIGINALLY SPECIFYING A DELIVERED PRICE, SUBSEQUENTLY MODIFIED FOR ACCEPTANCE F.O.B. CONTRACTOR'S WORKS AT A REDUCED PRICE BECAUSE OF DELIVERY BY GOVERNMENT BILL OF LADING, CONTAINS A LIQUIDATED DAMAGE CLAUSE BASED ON THE CONTRACT PRICE, BUT NOT TO EXCEED A STATED PERCENTAGE OF THE STIPULATED VALUE OF THE ARTICLES OR MATERIALS NOT DELIVERED, AND ALSO AN OFFER OF DISCOUNT FOR PROMPT PAYMENT, LIQUIDATED DAMAGES AND DISCOUNT SHOULD BE COMPUTED ON THE BASIS OF THE REDUCED CONTRACT PRICE, AND WITHOUT REGARD TO EACH OTHER; THAT IS, EACH ON THE BASIS OF THE GROSS NEW CONTRACT PRICE. 6 COMP. GEN. 692; 17 ID. 580, COMPARED, AND 17 ID. 1030, DISTINGUISHED. WHERE A CONTRACT CONTAINING A LIQUIDATED DAMAGE CLAUSE BASED ON THE CONTRACT PRICE, BUT NOT TO EXCEED A STATED PERCENTAGE OF THE STIPULATED VALUE OF THE ARTICLES OR MATERIALS NOT DELIVERED, CONTAINS ALSO GUARANTEES BY THE CONTRACTOR THAT THE EQUIPMENT WILL BE IN ACCORDANCE WITH THE SPECIFICATIONS, AND PROVISIONS FOR EITHER REJECTION, ACCEPTANCE AT A PRICE REDUCTION, OR DEDUCTION OF A SPECIFIED AMOUNT, AS A PENALTY, FOR OVERWEIGHT, LIQUIDATED DAMAGE ASSESSMENTS FOR DELAYED PERFORMANCE SHOULD BE COMPUTED ON THE NEW CONTRACT PRICE WHERE PRICE REDUCTION IS MADE BECAUSE OF THE OVERWEIGHT, BUT, WHERE A PENALTY IS ASSESSED FOR THE OVERWEIGHT, AND NO NEW CONTRACT PRICE IS EFFECTED THEREBY, LIQUIDATED DAMAGES AND DISCOUNT SHOULD BE COMPUTED ON THE BASIS OF ORIGINAL CONTRACT PRICE.

COMPTROLLER GENERAL BROWN TO THE SECRETARY OF THE NAVY, APRIL 15, 1939:

THERE WAS RECEIVED YOUR LETTER OF FEBRUARY 8, 1939, REQUESTING DECISION ON THE VARIOUS POINTS CONTAINED IN LETTER OF JANUARY 24, 1939, FROM THE CHIEF, BUREAU OF SUPPLIES AND ACCOUNTS, NAVY DEPARTMENT AS FOLLOWS:

1. UNDER NOS CONTRACTS CONTAINING A LIQUIDATED DAMAGE CLAUSE THE ASSESSMENT OF LIQUIDATED DAMAGES IS BASED ON THE VALUE OF THE ARTICLES OR MATERIAL NOT DELIVERED WITHIN THE TIME SPECIFIED BY CONTRACT. THE APPLICABLE PORTION OF THE LIQUIDATED DAMAGE CLAUSE READS AS FOLLOWS:

"LIQUIDATED DAMAGES WILL BE ASSESSED AT THE RATE OF ---------- OF THE CONTRACT PRICE, BUT NOT TO EXCEED AN AGGREGATE OF ------- PERCENT OF THE STIPULATED VALUE OF THE ARTICLES OR MATERIALS NOT DELIVERED, - --------

DUE TO MANY OTHER PROVISIONS IN NUMEROUS CONTRACTS THE PHRASE STIPULATED VALUE OF THE MATERIAL IS SUBJECT TO VARIOUS INTERPRETATIONS, BEING AFFECTED BY THE APPLICATION OF DISCOUNT PROVISIONS, FREIGHT ADJUSTMENTS DUE TO DIVERSION OF SHIPMENTS, REDUCTIONS IN PRICE DUE TO EXCESSIVE WEIGHT OR FAILURE TO MEET CONTRACT GUARANTEES, INCREASES DUE TO BONUSES OFFERED FOR BETTERING THE REQUIREMENTS OF THE SPECIFICATIONS, ETC. IN AN EFFORT TO OBTAIN UNIFORMITY OF INTERPRETATION BETWEEN THE GENERAL ACCOUNTING OFFICE AND THE DISBURSING OFFICERS MAKING PAYMENTS UNDER SUCH CONTRACTS, IT IS REQUESTED THAT DECISIONS BE OBTAINED FROM THE COMPTROLLER GENERAL ON THE FOLLOWING POINTS:

(A) UNDER A CONTRACT CONTAINING THE USUAL LIQUIDATED DAMAGE CLAUSE, WITH AN OFFER OF DISCOUNT FOR PROMPT PAYMENT, SHOULD LIQUIDATED DAMAGES BE DEDUCTED FROM THE CONTRACT PRICE OR THE CONTRACT PRICE AFTER THE DEDUCTION OF DISCOUNT, WHEN DISCOUNT IS APPLICABLE, ASSUMING THAT THE "VALUE OF THE ARTICLES" IS THE SUM PAID THE CONTRACTOR THEREFOR?

2. IT HAS ALWAYS BEEN CONSIDERED THAT UNDER A CONTRACT CONTAINING AN OFFER OF DISCOUNT, TWO VALUES FOR THE MATERIAL ARE ACTUALLY ESTABLISHED BY THE CONTRACTOR'S BID, THE QUOTED PRICE FOR PAYMENT WITHIN THE ORDINARY TIME AND A LOWER PRICE (LOWER BY DEDUCTION OF A STIPULATED DISCOUNT RATE) FOR PAYMENT WITHIN A SPECIFIED SHORTER TIME. WHEN PAYMENT IS MADE AT THE LOWER PRICE (THE CONTRACT QUOTED PRICE, LESS THE DISCOUNT), THIS REPRESENTS THE VALUE OF THE MATERIAL AND APPEARS TO BE THE BASIS ON WHICH THE LIQUIDATED DAMAGES SHOULD BE ASSESSED. NO RULING OF THE COMPTROLLER GENERAL ON THIS POINT CAN BE FOUND OTHER THAN 6 COMP. GEN. 692 AND THIS DECISION IS NOT FOR APPLICATION UNDER A CONTRACT WHERE THE LIQUIDATED DAMAGE ASSESSMENT IS BASED ON THE VALUE OF THE MATERIAL, AS IS TRUE IN THE CASE OF THE NOS CONTRACTS UNDER DISCUSSION.

(B)UNDER A CONTRACT ORIGINALLY SPECIFYING A DELIVERED PRICE, SUBSEQUENTLY MODIFIED FOR ACCEPTANCE F.O.B. CONTRACTOR'S WORKS AT A REDUCED PRICE, DELIVERY BY GOVERNMENT BILL OF LADING, SHOULD LIQUIDATED DAMAGES BE ASSESSED ON THE ORIGINAL CONTRACT PRICE OF THE MATERIAL, OR THE PRICE PAID THE CONTRACT AFTER BEING MODIFIED TO MEET THE CHANGED DELIVERY TERMS, AT A LOWER RICE.?

3. A CONCRETE EXAMPLE OF SUCH A CONTRACT IS NOS-54981. THE UNIT PRICE ESTABLISHED BY CONTRACT FOR ITEMS 1G, 3G, AND 4G, WAS A TOTAL OF $108,841.00. THE CONTRACT TERMS WERE MODIFIED BY SUPPLIES AND ACCOUNTS' LETTER OF 10 FEBRUARY 1938 TO ACCEPT THE MATERIAL F.O.B. WORKS, SHIPMENT TO BE MADE ON GOVERNMENT BILL OF LADING. THIS MODIFICATION RESULTED IN A REDUCTION IN PRICE OF $1,778.44. SUCH MODIFICATION IN EFFECT MADE A NEW CONTRACT, ESTABLISHING A VALUE FOR GOODS SOLD AT POINT OF ORIGIN RATHER THAN AT DESTINATION AND LIQUIDATED DAMAGES APPARENTLY SHOULD BE ASSESSED ON THE NEW CONTRACT PRICE. IN THE CASE OF A CONTRACT ORIGINALLY CALLING FOR DELIVERY F.O.B. CONTRACTOR'S WORKS, SHIPMENT ON GOVERNMENT BILL OF LADING, LIQUIDATED DAMAGES WOULD BE ASSESSED ONLY ON THE F.O.B. WORKS PRICE.

4. USING CONTRACT NOS-54981 AGAIN AS AN EXAMPLE, ATTENTION IS INVITED TO PAGE 8 UNDER GUARANTEES, AND PAGE 9, PARAGRAPHS HEADED PENALTY FOR OVERWEIGHT AND REJECTION. THESE OR SIMILAR TERMS ARE EMBODIED IN MANY NOS CONTRACTS AND HAVE THE EFFECT OF PLACING A NEW CONTRACT PRICE OR ,VALUE OF THE ARTICLES.'

(C) SHOULD LIQUIDATED DAMAGES BE ASSERTED AGAINST THE ORIGINAL CONTRACT PRICE OR THE PRICE REDUCED BY DEDUCTION FOR OVERWEIGHT AND FAILURE TO MEET CONTRACT GUARANTEES?

5. THE WORDING OF THE CONTRACT DOES NOT ESTABLISH DEFINITELY WHETHER THE ADJUSTMENTS MADE UNDER AUTHORITY OF THE CITED PARAGRAPHS ARE TO BE CONSIDERED AS ESTABLISHING A MODIFIED PRICE OR TO BE CONSIDERED IN THE LIGHT OF PENALTIES ONLY. HOWEVER, IT IS BELIEVED THAT THE TRUE INTENT OF THE CONTRACT IS TO ESTABLISH A NEW UNIT PRICE FOR ANY EQUIPMENT MODIFIED AS PROVIDED FOR IN THE APPLICABLE SPECIFICATIONS, AND AUTHORIZED UNDER PARAGRAPH 2 OF GENERAL TERMS OF STANDARD FORM NO. 32.

6. ASSESSMENTS OF LIQUIDATED DAMAGES HAVE BEEN MADE BY THE GENERAL ACCOUNTING OFFICE ON THE BASIS OF THE ADJUSTED PRICES AS WELL AS ON THE BASIS OF THE CONTRACT PRICES. UNDER CONTRACT NOS-26769, SUSPENSIONS WERE RAISED IN THE ACCOUNTS OF THE NAVY DISBURSING OFFICER FOR FAILURE TO ASSESS LIQUIDATED DAMAGES ON THE PRICE ADJUSTED BY PAYMENT OF BONUS. UNDER CONTRACTS NOS-40549 AND NOS-40889, SUSPENSIONS WERE RAISED FOR FAILURE TO ASSESS LIQUIDATED DAMAGES ON THE CONTRACT PRICE WHEN PAYMENT WAS MADE AT A UNIT PRICE REDUCED IN ACCORDANCE WITH CONTRACT PROVISIONS. UNDER CONTRACT NOS-69084, IN THE SETTLEMENT OF CLAIMS BY THE GENERAL ACCOUNTING OFFICE, RECOGNITION WAS GIVEN TO THE ASSESSMENT OF LIQUIDATED DAMAGES ON THE ADJUSTED PRICE. THESE EXAMPLES ARE CITED AS SHOWING THE VARIETY OF THE INTERPRETATIONS PLACED ON THE SAME OR SIMILAR PROVISIONS.

(D) UNDER THE SAME CONDITIONS AS OUTLINED IN QUESTION (B) SHOULD DISCOUNT BE DEDUCTED FROM THE ORIGINAL CONTRACT PRICE, OR THE PRICE PAID THE CONTRACTOR AFTER BEING MODIFIED TO MEET THE CHANGED DELIVERY TERMS?

7. QUESTIONS HAVE ARISEN AS TO THE APPLICATION OF THE DISCOUNT PROVISION BROUGHT ABOUT PRIMARILY BY REASON OF 17 COMP. GEN. 1030. WHILE THIS DECISION APPLIES SOLELY TO TREASURY PROCUREMENT DIVISION CONTRACTS, IT APPEARS TO COVER A CONDITION PARALLEL TO THE ONE CITED UNDER CONTRACT NOS- 54981 WHERE MATERIAL WAS DIVERTED FROM PUGET SOUND TO F.O.B. CONTRACTOR'S WORKS, SHIPMENT TO BE MADE ON GOVERNMENT BILL OF LADING. ARTICLE 2, CHANGES, FOUND IN STANDARD FORM NO. 32 CONTEMPLATES CHANGES IN DELIVERY POINT JUST AS PARAGRAPH 6 OF THE SPECIAL CONDITIONS UNDER TREASURY PROCUREMENT DIVISION CONTRACTS DOES. THE PRICES UNDER THE LATTER CONTRACTS ARE ESTABLISHED FOR WASHINGTON DELIVERY AND PARAGRAPH 6 WAS INTENDED AS A GENERAL METHOD OF ESTABLISHING A PRICE AT ALL POINTS TO WHICH THE GOVERNMENT MIGHT REQUIRE DELIVERIES AND WHICH COULD NOT BE FORESEEN AT THE TIME THE AWARD WAS PLACED. IT WOULD ALSO APPEAR TO BE IMPOSSIBLE TO QUOTE PRICES FOR DELIVERY AT ALL GOVERNMENT POINTS AT WHICH THESE SUPPLIES MIGHT BE NEEDED.

8. APPLICATION OF DISCOUNT TO THE DELIVERED PRICE QUOTED WHEN THE DELIVERY TERMS ARE MODIFIED, REDUCES THE PRICE BY MORE THAN THE FREIGHT REDUCTION AUTHORIZED, AS THE PRICE PAID IS REDUCED BY THE FREIGHT DEDUCTION, AND ALSO BY THE AMOUNT OF DISCOUNT FIGURED ON THE FREIGHT, WHICH UNDER THE MODIFICATION IS NO LONGER AN ELEMENT OF COST ENTERING INTO THE PRICE AGREED UPON. UNDER THE NOS CONTRACTS WHERE DELIVERY IS MODIFIED, AS UNDER NOS-54981, DISCOUNT DEDUCTIONS HAVE ALWAYS BEEN MADE ON THE MODIFIED PRICE, IT BEING CONSIDERED THAT THE MODIFICATION CREATES A NEW CONTRACT, AUTHORIZING PURCHASE BY THE GOVERNMENT F.O.B. POINT OF ORIGIN, RATHER THAN F.O.B. DESTINATION AND DISCOUNT SHOULD BE APPLIED TO THE F.O.B. POINT-OF-ORIGIN PRICE, OR TO THE "VALUE OF THE ARTICLES" AS REPRESENTED BY THE PRICE PAID.

9. UNDER CONTRACT NOS-47888 CLAIM FOR REFUND OF DISCOUNT WAS ALLOWED BY THE GENERAL ACCOUNTING OFFICE ON CERTIFICATE OF SETTLEMENT 0467282 ON THE BASIS OF THE AMOUNT PAID CONTRACTOR, THAT IS, DISCOUNT WAS APPLIED ONLY TO THE AMOUNT PAID AFTER DEDUCTION FOR LIQUIDATED DAMAGES. IT HAS ALWAYS BEEN HELD THAT THE DISCOUNT PROVISION REPRESENTS A PRICE REDUCTION AND WHEN LIQUIDATED DAMAGES ARE INVOLVED SHOULD BE DEDUCTED FIRST WHEN PROMPT PAYMENT IS MADE, IN ORDER TO DETERMINE THE AMOUNT DUE THE CONTRACTOR. THE AMOUNT OF THE DISCOUNT DOES NOT VARY, BEING BASED ENTIRELY ON THE CONTRACT PRICE.

10. THE CONFUSION IN THE APPLICATION OF THE LIQUIDATED DAMAGES AND THE DISCOUNT PROVISIONS IS DUE APPARENTLY TO THE UNCERTAINTY AS TO WHAT DETERMINES THE VALUE OF THE MATERIAL OR THE UNIT PRICE, THEREFORE A DECISION BY THE COMPTROLLER GENERAL ON THE QUESTIONS RAISED IS DESIRED IN ORDER TO PERMIT A UNIFORM AUDIT AND PAYMENT OF VOUCHERS.

AS TO THE FIRST SPECIFIC QUESTION PRESENTED FOR DECISION IN PARAGRAPH A, YOU ARE ADVISED THAT IN A-92065, DATED MARCH 1, 1938, IT WAS HELD THAT THE STIPULATIONS WITH RESPECT TO DISCOUNT AND LIQUIDATED DAMAGES ARE INDEPENDENT, THE FIRST BEING TO SECURE PROMPT PAYMENT OF ANY SUMS DUE THE CONTRACTOR AND THE SECOND BEING TO COMPENSATE THE UNITED STATES FOR DELAYS IN DELIVERY OF MATERIAL. THE EFFECT IS THAT THE UNITED STATES IS LIABLE FOR PAYMENT OF THE CONTRACT PRICE, LESS DISCOUNT THEREON, BUT IT IS ENTITLED TO DEDUCT THE AMOUNT OF THE ACCRUED LIQUIDATED DAMAGES IN MAKING PAYMENT OF THE CONTRACT PRICE. THUS, SINCE EACH PROVISION IS A SEPARATE OR INDEPENDENT COVENANT, IT WOULD APPEAR EVIDENT THAT LIQUIDATED DAMAGES FOR DELAYED PERFORMANCE SHOULD BE DEDUCTED ON THE BASIS OF THE GROSS CONTRACT PRICE, IRRESPECTIVE OF DISCOUNT WHICH LIKEWISE IS TO BE COMPUTED ON THE BASIS OF THE GROSS CONTRACT PRICE, IRRESPECTIVE OF LIQUIDATED DAMAGES. SEE ALSO A-98718, DATED OCTOBER 28, 1938.

THE QUESTIONS STATED IN PARAGRAPHS B AND D IN THE ABOVE LETTER OF JANUARY 24, 1939, MAY BE ANSWERED TOGETHER. THE ADMINISTRATIVE SUGGESTION IS CORRECT THAT THE MODIFICATION OF A CONTRACT FOR DELIVERY F.O.B. GOVERNMENT DESTINATION TO PROVIDE FOR DELIVERY F.O.B. THE CONTRACTOR'S SHIPPING POINT WITH DEDUCTION FROM THE CONTRACT PRICE OF THE COST OF COMMERCIAL FREIGHT RESULTS IN ESTABLISHING A "VALUE" FOR GOODS SOLD AT POINT OF ORIGIN RATHER THAN AT DESTINATION. BOTH LIQUIDATED DAMAGES AND DISCOUNT SHOULD BE COMPUTED ON THE BASIS OF A NEW CONTRACT PRICE--- THE DISCOUNT AND LIQUIDATED DAMAGES BEING COMPUTED ON THE SUBSEQUENTLY ESTABLISHED F.O.B. SHIPPING POINT PRICE WITHOUT REGARD TO EACH OTHER; THAT IS, FOLLOWING THE RULE IN THAT RESPECT STATED IN ANSWER TO THE QUESTION IN PARAGRAPH A OF THE ABOVE QUOTED LETTER. COMPARE 6 COMP. GEN. 692; 17 ID. 580. THE RULE APPLIED IN 17 COMP. GEN. 1030 IS NOT FOR APPLICATION TO MODIFICATIONS IN CONTRACTS AS STATED IN THE ABOVE-QUOTED LETTER.

WITH RESPECT TO PARAGRAPH C OF THE ABOVE-QUOTED LETTER IT IS TO BE NOTED THAT BY THE TERMS OF THE CONTRACT THE CONTRACTOR GUARANTEES THE EQUIPMENT TO BE IN ACCORDANCE WITH SPECIFICATIONS. THERE IS AN ADDITIONAL GUARANTEE THAT ANY PART OR PARTS GIVING EVIDENCE OF DEFECTS IN MATERIAL OR WORKMANSHIP WITHIN 1 YEAR AFTER FINAL TRIAL ABOARD SHIP WILL BE REPLACED BY THE CONTRACTOR WITHOUT COST TO THE GOVERNMENT. IN THE USUAL CONTRACT STIPULATION ENTITLED "PENALTY FOR OVERWEIGHT" IT IS PROVIDED THAT A SPECIFIED AMOUNT FOR EVERY POUND OVER THE GUARANTEED WEIGHT WILL BE DEDUCTED FROM THE CONTRACT PRICE WHEN FINAL PAYMENT IS MADE, WHILE IN THE PARAGRAPH ENTITLED "REJECTION" THE GOVERNMENT RESERVES THE RIGHT TO EITHER REJECT THE OVERWEIGHT UNITS OR TO ACCEPT THEM AT A PROPER REDUCTION IN PRICE.

THERE IS THUS A DISTINCTION BETWEEN A SITUATION INVOLVING ACCEPTANCE OF THE OVERWEIGHT MATERIAL AT A REDUCTION IN CONTRACT PRICE AND A SITUATION WHERE THE NAVY DEPARTMENT ELECTS TO ASSESS THE PENALTY FOR OVERWEIGHT AND LEAVE THE CONTRACT PRICE OTHERWISE UNCHANGED. WHERE THE OVERWEIGHT MATERIALS ARE ACCEPTED AT A REDUCTION IN CONTRACT PRICE, THERE IS SUBSTITUTED A NEW CONTRACT PRICE ON WHICH PERCENTAGE LIQUIDATED-DAMAGE DEDUCTION SHOULD BE COMPUTED, WHILE IN THE SITUATION WHERE A PENALTY IS ASSESSED FOR OVERWEIGHT THE PENALTY ASSESSMENT DOES NOT AFFECT THE ORIGINAL CONTRACT PRICE FOR LIQUIDATED DAMAGE OR DISCOUNT PURPOSES. 60550, JUNE 19, 1936.