B-158180, FEB. 9, 1966, 45 COMP. GEN. 484

B-158180: Feb 9, 1966

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- A RIGHT THAT IS NOT DIMINISHED BY THE CONTRACTOR'S RIGHT TO PROGRESS PAYMENTS. - AND FAILURE TO DELIVER THE CUTTER ON TIME IS A DEFAULT. THE SURETY UNDER THE PERFORMANCE BOND WILL BE LIABLE IF THE CONTRACTOR IS UNABLE OR UNWILLING TO MAKE PAYMENTS. 1966: REFERENCE IS MADE TO THE LETTER OF DECEMBER 10. WAS AWARDED TO CHRISTY ON NOVEMBER 13. THE CONTRACTING OFFICER AGREED TO GRANT AN EXTENSION OF 87 DAYS WHICH WAS REJECTED. WHICH WAS SUBSEQUENTLY MODIFIED TO AUGUST 10. WHERE IT IS PRESENTLY PENDING. THE CONTRACT HAS NOT BEEN TERMINATED AND THE CONTRACTOR IS CONTINUING CONSTRUCTION. THE COAST GUARD ESTIMATES THAT CONSTRUCTION WILL BE COMPLETED ON OR ABOUT APRIL 1. INVOICES HAVE BEEN SUBMITTED AND PAID MONTHLY.

B-158180, FEB. 9, 1966, 45 COMP. GEN. 484

CONTRACTS - PAYMENTS - PROGRESS - WITHHOLDINGS ALTHOUGH THE GOVERNMENT MAY RETAIN MORE THAN THE 10 PERCENT PROVIDED BY THE PROGRESS PAYMENT CLAUSE OF A CONTRACT FOR THE CONSTRUCTION OF A COAST GUARD CUTTER TO SECURE PAYMENT OF BOTH ACCRUED AND ANTICIPATED LIQUIDATED DAMAGES PURSUANT TO ITS RIGHT OF SET-OFF--- A RIGHT THAT IS NOT DIMINISHED BY THE CONTRACTOR'S RIGHT TO PROGRESS PAYMENTS--- TO AVOID JEOPARDIZING CONTINUED PERFORMANCE UNDER THE CONTRACT, MONIES IN ADDITION TO THE 10 PERCENT RETAINED UNDER THE PROGRESS PAYMENT CLAUSE SHOULD NOT BE WITHHELD, AND THE PERCENTAGES RETAINED TO INSURE THE GOVERNMENT IN CASE OF DEFAULT-- - AND FAILURE TO DELIVER THE CUTTER ON TIME IS A DEFAULT--- MAY BE APPLIED IN SATISFACTION OF THE LIQUIDATED DAMAGES ASSESSED, AND IN EVENT RETAINED PERCENTAGES PROVE INADEQUATE TO COVER FUTURE LIQUIDATED DAMAGES ASSESSMENTS, THE SURETY UNDER THE PERFORMANCE BOND WILL BE LIABLE IF THE CONTRACTOR IS UNABLE OR UNWILLING TO MAKE PAYMENTS, AND THE ASSIGNMENT OF MONIES DUE THE CONTRACTOR UNDER THE CONTRACT REQUIRING PROGRESS PAYMENTS TO BE MADE TO THE ASSIGNEE BANK, DOES NOT OPERATE TO AFFECT THE RIGHTS OF THE GOVERNMENT.

TO THE COMMANDANT, UNITED STATES COAST GUARD, FEBRUARY 9, 1966:

REFERENCE IS MADE TO THE LETTER OF DECEMBER 10, 1965, WITH ENCLOSURES, FROM YOUR COMPTROLLER REQUESTING AN ADVANCE DECISION ON THE PROPRIETY OF WITHHOLDING ADDITIONAL MONIES FROM PROGRESS PAYMENTS BEING MADE TO THE CHRISTY CORPORATION UNDER CONTRACT NO. TCG-59,930-A, FOR THE PURPOSE OF SECURING PAYMENT OF BOTH ACCRUED AND ANTICIPATED FUTURE LIQUIDATED DAMAGES ASSESSED UNDER THE CONTRACT.

THE SUBJECT CONTRACT, FOR THE CONSTRUCTION OF A MEDIUM ENDURANCE 210 FOOT COAST GUARD CUTTER, WAS AWARDED TO CHRISTY ON NOVEMBER 13, 1963, WITH DELIVERY SCHEDULED FOR MAY 14, 1965. IN MARCH 1964, THE CONTRACTOR REQUESTED THAT THE DELIVERY DATE BE EXTENDED 101 DAYS. THE CONTRACTING OFFICER AGREED TO GRANT AN EXTENSION OF 87 DAYS WHICH WAS REJECTED. THEREAFTER, THE CONTRACTING OFFICER RENDERED A FINAL DECISION PURSUANT TO THE DISPUTES CLAUSE OF THE CONTRACT EXTENDING THE DELIVERY DATE TO AUGUST 9, 1965, WHICH WAS SUBSEQUENTLY MODIFIED TO AUGUST 10, 1965, BY SUPPLEMENTAL AGREEMENT NO. 31 TO THE CONTRACT. THIS DECISION HAS BEEN APPEALED BY THE CONTRACTOR TO THE CONTRACT APPEALS BOARD, WHERE IT IS PRESENTLY PENDING.

ALTHOUGH THE CUTTER HAS NOT BEEN COMPLETED AND DELIVERED TO DATE, THE CONTRACT HAS NOT BEEN TERMINATED AND THE CONTRACTOR IS CONTINUING CONSTRUCTION. THE COAST GUARD ESTIMATES THAT CONSTRUCTION WILL BE COMPLETED ON OR ABOUT APRIL 1, 1966, WHEREAS THE CONTRACTOR CONTEMPLATES COMPLETION IN MID-FEBRUARY 1966.

THE CONTRACT CONTAINS A LIQUIDATED DAMAGES CLAUSE WHICH PROVIDES THAT THE CONTRACTOR SHALL PAY THE GOVERNMENT $1,000 PER DAY FOR EACH CALENDAR DAY OF DELAY IN COMPLETION AND DELIVERY OF THE CUTTER. THE CONTRACT ALSO INCLUDES A PROGRESS PAYMENTS CLAUSE WHICH PROVIDES THAT THE CONTRACTOR SHALL BE PAID, UPON SUBMISSION AND APPROVAL OF INVOICES, 90 PERCENT "OF AN AMOUNT DETERMINED BY APPLYING TO THE CONTRACT PRICE * * * THE STAGE OF COMPLETION * * *.' INVOICES HAVE BEEN SUBMITTED AND PAID MONTHLY.

THE ORIGINAL CONTRACT PRICE WAS $1,998,103, BUT HAS BEEN INCREASED BY MODIFICATIONS TO $2,011,882.45. PROGRESS PAYMENTS ON GROSS BILLINGS OF $1,314,421.65 THROUGH OCTOBER 31, 1965, TOTAL $1,182,979.48, LEAVING A BALANCE OF $131,442.17 EARNED BY THE CONTRACTOR BUT UNPAID. WE HAVE BEEN INFORMALLY ADVISED THAT INVOICES FOR NOVEMBER AND DECEMBER HAVE BEEN SUBMITTED AND ARE UNDER CONSIDERATION. AT THE TIME OF THE LAST PROGRESS PAYMENT, OCTOBER 31, 1965, $82,000 IN LIQUIDATED DAMAGES HAD ACCRUED SINCE AUGUST 10, 1965, THE EXTENDED DELIVERY DATE. ALTHOUGH THE CONTRACTING OFFICER PUT THE CONTRACTOR ON NOTICE ON AUGUST 11, 1965, OF THE PASSING OF THE DELIVERY DATE, AND ADVISED THAT CONSIDERATION WOULD BE GIVEN TO WITHHOLDING ADDITIONAL MONIES FOR LIQUIDATED DAMAGES, PROGRESS PAYMENTS WITHOUT ADDITIONAL DEDUCTIONS WERE CONTINUED BECAUSE IT WAS FELT THAT THE CONTRACTOR'S CONTINUED PERFORMANCE, WHICH WOULD BE THREATENED BY ADDITIONAL WITHHOLDINGS, WOULD BE TO THE GOVERNMENT'S INTEREST. DECEMBER 2, 1965, THE GOVERNMENT RECEIVED NOTICE FROM THE MARSHALL AND ILSLEY BANK OF MILWAUKEE THAT ALL THE MONIES DUE OR TO BECOME DUE TO THE CONTRACTOR FROM THE GOVERNMENT UNDER THE CONTRACT HAVE BEEN ASSIGNED TO IT PURSUANT TO THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, 31 U.S.C. 203, 41 U.S.C. 15.

SINCE THERE IS A STRONG POSSIBILITY THAT AN AMOUNT EQUAL TO 10 PERCENT OF THE CONTRACT PRICE BEING WITHHELD PURSUANT TO THE PROGRESS PAYMENTS CLAUSE WILL NOT BE SUFFICIENT TO COVER LIQUIDATED DAMAGES AT THE TIME THE CONTRACT IS COMPLETED, YOU REQUEST OUR DECISION ON THE PROPRIETY OF WITHHOLDING ADDITIONAL SUMS. AS POINTED OUT IN THE COMPTROLLER'S REPORT, IF CONSTRUCTION IS NOT COMPLETED UNTIL APRIL 1, 1966, AS THE COAST GUARD ESTIMATES, $233,000 IN LIQUIDATED DAMAGES WILL HAVE ACCRUED. BASED ON THE CURRENT CONTRACT PRICE OF $2,011,882.45 THE MAXIMUM AMOUNT OF WITHHOLDINGS UNDER THE PROGRESS PAYMENTS PROVISIONS WILL BE $201,188.25, APPROXIMATELY $32,000 SHORT OF THE ACCRUED LIQUIDATED DAMAGES. HOWEVER, IF CONSTRUCTION IS COMPLETED WITHIN THE TIME CONTEMPLATED BY THE CONTRACTOR, THE LIQUIDATED DAMAGES WILL APPROXIMATE $190,000, IN WHICH CASE THE PROGRESS PAYMENTS WITHHOLDINGS WILL BE SUFFICIENT TO COVER THE LIQUIDATED DAMAGES.

SPECIFICALLY, OUR DECISION IS REQUESTED REGARDING THE FOLLOWING QUESTIONS:

A. ASSUMING THERE IS NOT A LEGAL REQUIREMENT TO DO SO, SHOULD THE CONTRACTING OFFICER NEVERTHELESS WITHHOLD SUFFICIENT FUNDS TO COVER THE ACCRUED LIQUIDATED DAMAGES IN THE INSTANT ASE?

B. IF MONIES ARE TO BE WITHHELD IS IT NECESSARY THAT THE CONTRACTING OFFICER COMMENCE THE WITHHOLDING THE MOMENT THE DELIVERY DATE PASSES, WHEN THERE IS SUFFICIENT BALANCE REMAINING IN THE CONTRACT TO COVER THE ANTICIPATED ACCRUAL?

C. WHEN A CONTRACT CONTAINS BOTH A PAYMENT CLAUSE, WHICH REQUIRES A PERCENTAGE WITHHOLDING FROM EACH BILLING, AND A LIQUIDATED DAMAGES CLAUSE, CAN THE MONIES WITHHELD UNDER THE PAYMENT CLAUSE BE CONSIDERED FOR THE PURPOSE OF WITHHOLDING MONIES TO COVER ACCRUED LIQUIDATED DAMAGES? (ALL BUT 3 PERCENT OF THE CONTRACT PRICE IS PAYABLE UPON PARTIAL ACCEPTANCE OF THE VESSEL BY THE GOVERNMENT AND THIS 3 PERCENT IS PAYABLE UPON FINAL ACCEPTANCE.)

D. IF MONIES SHOULD BE WITHHELD, WHAT PROCEDURE IS MOST APPROPRIATE -- THE METHODS NOTED IN QUESTIONS (B) AND (C) OR SOME OTHER PROCEDURE?

ALTHOUGH THERE IS NO LEGAL REQUIREMENT TO WITHHOLD FUNDS IN ADDITION TO THOSE RETAINED UNDER THE PROGRESS PAYMENTS CLAUSE TO COVER ACCRUED LIQUIDATED DAMAGES, AS ASSUMED IN YOUR FIRST QUESTION, WE BELIEVE THE GOVERNMENT HAS THE RIGHT TO DO SO IF IT IS CONSIDERED NECESSARY AND EXPEDIENT. BY THE TERMS OF THE CONTRACT, THE FAILURE OF THE CONTRACTOR TO DELIVER THE CUTTER WITHIN THE TIME SPECIFIED, AS EXTENDED, WAS A DEFAULT (ARTICLE 11 (A) (I) ENTITLING THE GOVERNMENT TO BE PAID A $1,000 PER DAY AS LIQUIDATED DAMAGES IN LIEU OF ACTUAL DAMAGES FOR EACH CALENDAR DAY OF DELAY. THE RIGHT OF THE GOVERNMENT TO "APPLY THE UNAPPROPRIATED MONEY OF (ITS) DEBTOR, IN (ITS) HANDS, IN EXTINGUISHMENT OF THE DEBTS DUE TO (IT)" HAS LONG BEEN RECOGNIZED. UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234. THIS RIGHT OF SET OFF IS NOT DIMINISHED BY THE CONTRACTOR'S RIGHT TO PROGRESS PAYMENTS. THE PROGRESS PAYMENTS PROVISION OF THE CONTRACT DOES NOT UNCONDITIONALLY REQUIRE MONTHLY PAYMENTS FOR THE VALUE OF THE WORK PERFORMED DURING THE PRECEDING MONTH, BUT IS SUBJECT TO THE RIGHTS OF THE GOVERNMENT UNDER THE CONTRACT AND CONDITIONED UPON PERFORMANCE BY THE CONTRACTOR OF ITS CONTRACTUAL OBLIGATIONS. MODERN INDUSTRIAL BANKS. UNITED STATES, 101 CT.CL. 808.

NOTWITHSTANDING THE FOREGOING, FOR THE FOLLOWING REASONS WE DO NOT BELIEVE IT IS EITHER NECESSARY OR EXPEDIENT FOR THE GOVERNMENT TO EXERCISE ITS RIGHT OF SET-OFF AT THIS POINT OR TO WITHHOLD MORE THAN THE 10 PERCENT PRESENTLY RETAINED UNDER THE PROGRESS PAYMENTS CLAUSE. FIRST, THE RETAINED PERCENTAGES ARE WITHHELD FOR THE PURPOSE OF INSURING PERFORMANCE BY THE CONTRACTOR AND, IN THE CASE OF DEFAULT, TO PROTECT THE INTERESTS OF THE GOVERNMENT. SINCE THE FAILURE OF THE CONTRACTOR TO DELIVER THE CUTTER ON TIME IS AS MUCH A DEFAULT AS WOULD BE ITS FAILURE TO DELIVER A WORKMANLIKE PRODUCT, THE RETAINED SUMS MAY BE APPLIED IN SATISFACTION OF LIQUIDATED DAMAGES. SEE 40 COMP. GEN. 85,87 AND CASES CITED. SECOND, ALTHOUGH THE RETAINED PERCENTAGES MAY PROVE INADEQUATE TO COVER THE LIQUIDATED DAMAGES WHICH MAY EVENTUALLY BE ASSESSED, THE GOVERNMENT MAY LOOK TO THE SURETY ON THE CONTRACTOR'S PERFORMANCE BOND FOR SATISFACTION OF ANY CLAIMS IT HAS AGAINST THE CONTRACTOR ARISING OUT OF ITS PERFORMANCE OF THE CONTRACT. UNDER SUCH PERFORMANCE BOND, THE SURETY HAS AGREED TO PAY THE PENAL SUM SPECIFIED IF THE CONTRACTOR DOES NOT "TRULY PERFORM AND FULFILL ALL THE UNDERTAKINGS, COVENANTS, TERMS, CONDITIONS, AND AGREEMENTS OF SAID CONTRACT DURING THE ORIGINAL TERM OF SAID CONTRACT AND ANY EXTENSIONS THEREOF * * *" THEREFORE, IF THE CONTRACTOR'S DELAY IN DELIVERING THE CUTTER IS INEXCUSABLE, AND THEREFORE A DEFAULT ENTITLING THE GOVERNMENT TO LIQUIDATED DAMAGES, THE SURETY WILL BE LIABLE FOR THEIR PAYMENT IF THE CONTRACTOR IS UNABLE OR UNWILLING TO MAKE PAYMENT. COMP. GEN. 428, 430; AMERICAN EMPLOYER'S INSURANCE COMPANY V. UNITED STATES, 91 CT.CL. 231. MOREOVER, SINCE THE WITHHOLDING OF ADDITIONAL SUMS MAY JEOPARDIZE THE CONTRACTOR'S CONTINUED PERFORMANCE AND RESULT IN FURTHER DELAY, IT WOULD APPEAR TO BE EXPEDIENT TO CONTINUE THE FULL PROGRESS PAYMENTS.

THE FACT THAT THE MONIES DUE THE CONTRACTOR HAVE BEEN ASSIGNED TO A BANK WILL, OF COURSE, MEAN THAT THE PROGRESS PAYMENTS SHOULD BE MADE TO THE ASSIGNEE BANK. HOWEVER, THE ASSIGNMENT DOES NOT OPERATE SO AS TO AFFECT THE RIGHTS OF THE GOVERNMENT AS HERETOFORE STATED. MODERN INDUSTRIAL BANK, SUPRA. ..END :