B-141307, JUN. 3, 1960

B-141307: Jun 3, 1960

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TO THE SECRETARY OF THE ARMY: REFERENCE IS MADE TO A LETTER DATED NOVEMBER 19. THE ESCALATION CLAUSE PROVIDED THAT THE UNIT PRICE OF SHELLS MAY BE ADJUSTED WHEN THE CONTRACTOR IS REQUIRED TO PAY RATES OF PAY FOR LABOR OR TO PAY PRICES FOR MATERIALS IN EXCESS OF. THE FOLLOWING RATES OR PRICES UPON WHICH THE CONTRACT UNIT PRICE OF $15.57 WAS BASED: TABLE TYPE OF LABOR OR MATERIAL UNIT OF MEASURE RATE OF PAY OR PRICE PER UNIT C. IT WAS PROVIDED IN SUCH CLAUSE THAT ANY ADJUSTMENT IN THE UNIT PRICE WOULD APPLY TO UNITS COMPLETED SUBSEQUENT TO THE EFFECTIVE DATE OF THE INCREASE OR DECREASE IN LABOR RATES OR MATERIALS. REFORMATION IS REQUESTED BY TEMCO SO AS TO APPLY THE ESCALATION PROVISION IN MODIFICATION 17 TO THE COST OF METALS PURCHASED BY SUBCONTRACTORS AS WELL AS TO THE COST OF METALS PURCHASED DIRECTLY BY TEMCO.

B-141307, JUN. 3, 1960

TO THE SECRETARY OF THE ARMY:

REFERENCE IS MADE TO A LETTER DATED NOVEMBER 19, 1959, WITH ENCLOSURES, FROM THE CHIEF, CONTRACTS BRANCH, PROCUREMENT DIVISION, OFFICE OF THE DEPUTY CHIEF OF STAFF FOR LOGISTICS, FORWARDING FOR OUR DECISION THEREQUEST OF TEMCO, INCORPORATED, FOR REFORMATION OF CONTRACT NO. DA-33- 008-ORD-1055 DATED OCTOBER 20, 1954.

THE CONTRACT, AS AMENDED, PROVIDED FOR THE MANUFACTURE OF 100,000 106MM SHELLS AT A UNIT PRICE OF $14.83, OR A TOTAL CONTRACT PRICE OF $1,483,000. MODIFICATION NO. 17 DATED FEBRUARY 3, 1956, PROVIDED FOR THE FURNISHING OF AN ADDITIONAL 63,000 SHELLS AT A UNIT PRICE OF $15.57, OR FOR AN ADDITIONAL CONTRACT COST OF $980,910. THIS MODIFICATION ALSO PROVIDED THAT GENERAL PROVISION 45, ENTITLED "PRICE ESCALATION (LABOR AND MATERIALS)" WOULD BE APPLICABLE TO THE ADDITIONAL PROCUREMENT OF SHELLS. THE ESCALATION CLAUSE PROVIDED THAT THE UNIT PRICE OF SHELLS MAY BE ADJUSTED WHEN THE CONTRACTOR IS REQUIRED TO PAY RATES OF PAY FOR LABOR OR TO PAY PRICES FOR MATERIALS IN EXCESS OF, OR LESS THAN, THE FOLLOWING RATES OR PRICES UPON WHICH THE CONTRACT UNIT PRICE OF $15.57 WAS BASED:

TABLE TYPE OF LABOR OR MATERIAL UNIT OF MEASURE RATE OF PAY OR PRICE PER UNIT C. R. ANNEALED COPPER PRICE/LB. $ .5662 (AS OF 7-22-55) STEEL BARS COLD FINISHED BASE PRICE/CWT. 5.90 (AS OF 9-30-55) STEEL TUBING TOTAL PRICE/100 FT. 189.08 (AS OF 9-30-55) AL. ROD FORGING STOCK PRICE/LB. .373 (AS OF 9-30-55) AL. BAR FORGING STOCK PRICE/LB. .468 (AS OF 9-30-55) LABOR RATES PRICE/HR. APPROPRIATE UNION AGREEMENT

ALSO, IT WAS PROVIDED IN SUCH CLAUSE THAT ANY ADJUSTMENT IN THE UNIT PRICE WOULD APPLY TO UNITS COMPLETED SUBSEQUENT TO THE EFFECTIVE DATE OF THE INCREASE OR DECREASE IN LABOR RATES OR MATERIALS, BUT THAT NO ADJUSTMENT WOULD BE MADE WHICH DOES NOT RESULT IN AN INCREASE OR DECREASE OF AT LEAST THREE PERCENT OF THE THEN AGGREGATE CONTRACT PRICE OF THE UNCOMPLETED UNITS OF THE CONTRACT.

REFORMATION IS REQUESTED BY TEMCO SO AS TO APPLY THE ESCALATION PROVISION IN MODIFICATION 17 TO THE COST OF METALS PURCHASED BY SUBCONTRACTORS AS WELL AS TO THE COST OF METALS PURCHASED DIRECTLY BY TEMCO. ON SUCH BASIS, TEMCO SEEKS TO RECOVER $35,000, ADJUSTED FROM ITS ACTUAL CLAIM OF $36,570.74, IN SETTLEMENT OF ITS CLAIM FOR THE INCREASED COSTS OF MATERIAL AND LABOR INCURRED IN FURNISHING THE ADDITIONAL UNITS UNDER MODIFICATION NO. 17. TEMCO'S CLAIM FOR $36,570.74 MAY BE DIVIDED INTO TWO CATEGORIES; (1) AN AMOUNT OF $17,705.84 FOR THE COSTS OF MATERIAL AND LABOR INCURRED BY TEMCO IN EXCESS OF THE AMOUNTS STATED IN THE ESCALATION CLAUSE; AND (2) AN AMOUNT OF $18,864.90 FOR COSTS OF MATERIAL INCURRED BY SUBCONTRACTORS IN EXCESS OF THE AMOUNTS STATED IN THE ESCALATION CLAUSE. TEMCO'S REQUEST WILL BE CONSIDERED ONLY WITH RESPECT TO THE SUBCONTRACTORS' MATERIAL COSTS SINCE THE BALANCE OF THE ADJUSTMENT CLAIMED CONSISTS OF PRIME CONTRACTOR COSTS AS TO WHICH THE ESCALATION CLAUSE IS ALREADY APPLICABLE.

THE CONTRACT FILE RELATING TO THE PROCUREMENT ACTION UNDER MODIFICATION 17 INDICATES THAT AT THE TIME OF THE SUBMISSION OF TEMCO'S PROPOSAL, TEMCO CONTEMPLATED THE PURCHASE OF CONES, FINS, CHAMBERS, AND HOUSING FROM CERTAIN SUBCONTRACTORS. DURING THE COURSE OF PRODUCTION ALL COMPONENTS UTILIZING COPPER, ALUMINUM ROD FORGING STOCK, AND ALUMINUM BAR FORGING STOCK WERE PROCURED FROM SUBCONTRACTORS. BUT TEMCO DID NOT PURCHASE SUCH COPPER AND FORGING STOCKS AS RAW MATERIALS. INSTEAD THESE MATERIALS WERE PURCHASED BY SUBCONTRACTORS AND MANUFACTURED BY THEM INTO COMPONENTS PURCHASED BY TEMCO. ALSO, IT APPEARS THAT TEMCO INTENDED PRIOR TO EXECUTION OF MODIFICATION 17 TO APPLY THE ESCALATION CLAUSE TO MATERIAL PURCHASED BY SUBCONTRACTORS, AND SUCH INTENTION APPARENTLY WAS SHARED BY THE CONTRACTING OFFICER. IN VIEW OF THE RECORD, IT SEEMS APPARENT THAT MODIFICATION 17, WHEN REDUCED TO WRITING, DID NOT REFLECT THE ACTUAL CONTRACT ON WHICH THE PARTIES HAD PREVIOUSLY AGREED AND ATTEMPTED TO NEGOTIATE, BY REASON OF A MUTUAL MISTAKE IN OMITTING THEREON A PROVISION MAKING THE ESCALATION PROVISIONS OF THE CONTRACT APPLICABLE TO MATERIAL PURCHASED BY SUBCONTRACTORS. SUCH MISTAKE FORMS THE USUAL BASIS FOR REFORMING A WRITTEN INSTRUMENT IF IT CAN BE ESTABLISHED, AS HERE, WHAT THE INSTRUMENT ACTUALLY WAS OR WOULD HAVE BEEN BUT FOR THE MISUNDERSTANDING. HENCE, WE ARE OF THE VIEW THAT MODIFICATION 17 MAY BE REFORMED TO REFLECT THE UNDERSTANDING OF THE PARTIES AS TO APPLICATION OF THE ESCALATION CLAUSE TO MATERIALS PURCHASED BY SUBCONTRACTORS FOR INCORPORATION INTO COMPONENTS PURCHASED BY TEMCO. SEE THE CASES CITED IN 20 COMP. GEN. 533, 538.

TEMCO HAS COMPUTED ITS SUBCONTRACTORS' COST OF METALS AND DETERMINED THAT IT WAS IN EXCESS OF THE COST OF THE METALS INCLUDED IN THE ESCALATION CLAUSE AS SUMMARIZED BELOW:

* * * * * * * * * * * * * * (TABLE OMITTED) * * * * * * * * * * * * * *

WE UNDERSTAND THAT WHEN TEMCO ORDERED THE COMPONENTS FROM SUBCONTRACTORS THE QUOTED PRICE OF THE COMPONENT WAS BASED ON A STATED COST OF METAL AND THE PRICE OF THE COMPONENT WAS SUBJECT TO CHANGE IF THE COST OF METAL CHANGED. FOR EXAMPLE, AFTER THE EXECUTION OF MODIFICATION 17, THOMAS INDUSTRIES, A SUBCONTRACTOR, POINTED OUT TO TEMCO THAT ITS SELLING PRICE OF $1.01 A UNIT FOR COPPER CONES WAS BASED ON A COST OF COPPER OF $0.6516 PER POUND, AND THAT THE EVENTUAL PRICE OF THE COMPONENT TO TEMCO WAS CONTINGENT ON ANY FUTURE CHANGE IN THE COST OF COPPER. THE ACTUAL COST OF COPPER USED BY THOMAS INDUSTRIES TO MANUFACTURE THE CONES VARIED FROM $0.5866 TO $0.6416 PER POUND, AND AVERAGED $0.5896 PER POUND. THE PRICE THOMAS CHANGED TEMCO FOR THE COMPONENT VARIED FROM $0.9618 TO $1.0319 PER UNIT, AND AVERAGED $0.9648 PER UNIT.

OUR DISCUSSION OF THE MERITS OF TEMCO'S CLAIM IS RELATED PRIMARILY TO COPPER CONE COMPONENTS PROCURED FROM THOMAS INDUSTRIES SINCE THE CLAIM CONTAINS MORE DETAILED INFORMATION ON THIS ITEM THAN ON OTHER SUBCONTRACTED ITEMS.

IN NEGOTIATING CONTRACT MODIFICATION 17, TEMCO PROPOSED A UNIT COST OF $1.0150 FOR COPPER CONES. THE COST OF COPPER THAT WAS USED TO DEVELOP THE UNIT COST OF THIS COMPONENT IS NOT SHOWN IN TEMCO'S CLAIM. HOWEVER, ON FEBRUARY 27, 1956, OR SUBSEQUENT TO THE EXECUTION OF THE MODIFICATION, TEMCO ORDERED 25,000 CONES FROM THOMAS AT A UNIT PRICE OF $1.0375 EACH, BASED ON A COPPER COST OF $0.6516 PER POUND. SINCE 1.276 POUNDS OF COPPER ARE REQUIRED FOR THE MANUFACTURE OF EACH CONE, ABOUT 80 PERCENT OF THE QUOTED PRICE OF THE COMPONENT CONSISTED OF METAL COSTS. THIS INDICATES THAT IN DEVELOPING ITS PROPOSED UNIT COST OF $1.0150 FOR CONES DURING NEGOTIATIONS OF MODIFICATION 17, TEMCO MAY HAVE USED A COST OF COPPER OF ABOUT 80 PERCENT OF THIS AMOUNT, OR $0.6374 PER POUND. MODIFICATION 17 PERMITTED REIMBURSEMENT TO TEMCO TO THE EXTENT THAT TEMCO PAID MORE THAN $0.5662 PER POUND FOR COPPER. THIS COST, ACCORDING TO MODIFICATION 17, WAS PRESUMABLY USED ALSO IN DEVELOPING THE UNIT PRICE OF SHELLS. CONSEQUENTLY, THE SAME COST OF METAL WAS TO BE USED BOTH IN DETERMINING THE AMOUNT OF ESCALATION AND IN DEVELOPING THE UNIT PRICE OF SHELLS.

HOWEVER, IN SUBMITTING ITS CLAIM FOR ESCALATION, TEMCO HAS NOT SHOWN WHETHER THE COPPER COST OF $0.5662 PER POUND SET FORTH IN THE ESCALATION CLAUSE OF THE PRIME CONTRACT WAS ACTUALLY USED IN DEVELOPING THE SUBCONTRACT COST OF $1.0150 A UNIT WHICH IT INCLUDED IN THE UNIT PRICE OF SHELLS. THE RECORD INDICATES THAT THE UNIT COST OF CONES OF $1.0150 MAY HAVE BEEN BASED ON COPPER COSTS OF ABOUT $0.6374 PER POUND WHICH IS SUBSTANTIALLY GREATER THAN THE AMOUNT ACTUALLY INCURRED BY THE SUBCONTRACTOR OF $0.5896 PER POUND. IF AN AMOUNT APPROXIMATING $0.6374 PER POUND FOR COPPER WAS USED IN NEGOTIATING THE UNIT COST OF SUBCONTRACTED CONES, AND ESCALATION WAS PERMITTED ON THE INCREASE FROM THE METAL COSTS OF $0.5662 PER POUND NOTED IN THE PRIME CONTRACT TO ACTUAL COSTS OF $0.5896 PER POUND, THE CONTRACTOR WOULD RECEIVE PAYMENT FOR AN INCREASE IN COSTS WHICH IT DID NOT ACTUALLY INCUR. WITH RESPECT TO OTHER SUBCONTRACTED COMPONENTS, TEMCO ALSO FAILED TO SHOW WHETHER THE METAL COSTS USED IN PRICING THESE COMPONENTS WERE THE SAME AS THE METAL COSTS INCLUDED IN THE ESCALATION CLAUSE. IT WOULD SEEM REASONABLE FOR TEMCO TO HAVE FURNISHED THIS INFORMATION IN ORDER TO CLEARLY SHOW THAT THE INTENT OF THE PARTIES WAS TO APPLY ESCALATION TO SUBCONTRACTED COMPONENTS.

WE SEE NO BASIS FOR ALLOWING ESCALATION ON SUBCONTRACTED COMPONENTS ON THE PRESENT RECORD UNLESS TEMCO CAN ESTABLISH THAT IT ACTUALLY INCURRED SUBCONTRACT COSTS IN EXCESS OF THE MARKET PRICE OF METALS USED IN DEVELOPING THE UNIT COSTS OF COMPONENTS AT THE TIME METAL PRICES WERE ESTABLISHED BY MODIFICATION 17. AS POINTED OUT ABOVE, COPPER COSTS APPROXIMATING $0.64 A POUND WERE USED IN NEGOTIATING THE UNIT COST OF CONES, WHEREAS THE SUBCONTRACTOR ACTUALLY INCURRED COSTS OF ONLY $0.59 A POUND.

ACCORDINGLY, WHILE REFORMATION IS AUTHORIZED, THERE IS ALSO FOR CONSIDERATION THE THREE PERCENT PRICE ADJUSTMENT LIMITATION OF MODIFICATION 17. HENCE, UNLESS IT CAN BE ESTABLISHED TO THE SATISFACTION OF YOUR DEPARTMENT THAT TEMCO ACTUALLY INCURRED SUCH INCREASED SUBCONTRACT COSTS, AND THAT SUCH ESTABLISHED COSTS, TOGETHER WITH THE COSTS OF $17,705.84 INCURRED DIRECTLY BY TEMCO, EXCEED THREE PERCENT OF THE THEN AGGREGATE CONTRACT PRICE OF THE UNCOMPLETED UNITS OF THE CONTRACT, OR ABOUT $29,400, NO ADDITIONAL PAYMENT MAY BE MADE TO TEMCO UNDER MODIFICATION 17.