B-16316, APRIL 26, 1941, 20 COMP. GEN. 695

B-16316, APRIL 26, 1941, 20 COMP. GEN. 695

CONTRACTS - PRICE ADJUSTMENTS - FLUCTUATIONS IN LABOR AND MATERIALS COSTS WHERE IT IS ADMINISTRATIVELY DETERMINED TO BE NECESSARY OR DESIRABLE IN THE INTERESTS OF THE UNITED STATES, NO OBJECTION WILL BE MADE TO INCORPORATING INTO THE SPECIFICATIONS OF LONG-TERM CONTRACTS, COVERING THE PROCUREMENT OF SUCH EQUIPMENT AS POWER PLANT MACHINERY, A PRICE ADJUSTMENT PROVISION FOR FLUCTUATIONS IN LABOR AND MATERIALS COSTS SUCH AS ONE WHEREBY A CERTAIN PERCENT OF THE CONTRACT PRICE WILL BE ADJUSTED AT THE COMPLETION OF THE CONTRACT ON THE BASIS OF THE AVERAGE OF THE MONTHLY AVERAGE HOURLY EARNINGS FOR THE DURABLE GOODS INDUSTRY, AS PUBLISHED BY THE BUREAU OF LABOR STATISTICS, DURING THE PERFORMANCE PERIOD OF THE CONTRACT.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF THE INTERIOR, APRIL 26, 1941:

I HAVE YOUR LETTER OF APRIL 19, 1941, AS FOLLOWS:

SPECIFICATIONS NO. 959 HAVE BEEN ISSUED BY THE BUREAU OF RECLAMATION FOR A HYDRAULIC TURBINE AND GOVERNOR FOR THE PARKER POWER PLANT, ARIZONA- CALIFORNIA, AND BIDS WILL BE OPENED APRIL 28, 1941. THE BUREAU ALSO HAS UNDER CONSIDERATION, THE ISSUANCE OF SPECIFICATIONS IN THE NEAR FUTURE FOR LARGE ELECTRICAL EQUIPMENT AND POWER PLANT MACHINERY FOR A NUMBER OF OTHER POWER PLANTS.

I AM ADVISED BY THE COMMISSIONER OF RECLAMATION THAT A NUMBER OF PROMINENT CONTRACTORS HAVE VISITED HIS OFFICE, AND THAT THEY ARE MUCH CONCERNED OVER THE PROSPECT OF HIGHER COSTS OF LABOR AND MATERIALS ON FUTURE CONTRACTS, ESPECIALLY THOSE WHICH EXTEND OVER A LONG PERIOD. THE DELIVERY PERIOD IN SPECIFICATIONS NO. 959 IS 600 DAYS. THE CONTRACTORS REFERRED TO AND ALSO THE WESTINGHOUSE ELECTRIC AND MANUFACTURING COMPANY BY LETTER DATED APRIL 9, 1941, HAVE REQUESTED THE INCLUSION IN THE SPECIFICATIONS OF AN ARTICLE PROVIDING FOR ADJUSTMENT OF PRICES FOR FLUCTUATIONS IN LABOR AND MATERIAL COSTS USING AS A BASIS UNITED STATES DEPARTMENT OF LABOR STATISTICS. COPY OF THE WESTINGHOUSE LETTER OF APRIL 9 WITH A DRAFT OF PROPOSED PRICE ADJUSTMENT PROVISION IS ENCLOSED AND ALSO ENCLOSED IS A DRAFT OF PROPOSED ADJUSTMENT ARTICLE PRESENTED BY THE OTHER CONTRACTORS WHEN THEY VISITED THE BUREAU. UNDER THE PROPOSED ADJUSTMENT PROVISION, IT WILL BE POSSIBLE TO EVALUATE THE DIFFERENT BIDS UNDER CONDITIONS EXISTING AS OF THE DATE OF THE OPENING OF BIDS AND NO CHANGES THEREAFTER IN ECONOMIC CONDITIONS WOULD CHANGE THE IDENTITY OF THE LOW BIDDER.

IT IS BELIEVED THAT BIDS MORE FAVORABLE TO THE GOVERNMENT WILL BE SUBMITTED IF SOME PROVISION IS MADE IN SPECIFICATIONS WHICH WILL PERMIT OF ADJUSTMENTS FOR MAJOR CHANGES IN ECONOMIC CONDITIONS AND YOUR OPINION IS RESPECTFULLY REQUESTED AS TO WHETHER THERE IS ANY LEGAL OBSTACLE TO THE INCLUSION OF AN ADJUSTMENT PROVISION ALONG THE GENERAL LINES OF THOSE ENCLOSED, IN CONTRACTS FOR MATERIALS AND SUPPLIES EXTENDING OVER A PERIOD OF ONE YEAR OR LONGER. ANY SUGGESTIONS AS TO CHANGES IN PHRASEOLOGY WHICH IN YOUR VIEW WOULD MORE CERTAINLY ATTAIN THE DESIRED OBJECTIVES WOULD ALSO BE APPRECIATED. AS STATED ABOVE, THE BIDS UNDER SPECIFICATIONS NO. 959 WILL BE OPENED APRIL 28, 1941, AND IT IS HOPED THAT IT WILL BE POSSIBLE FOR YOU TO RENDER DECISION AT AN EARLY DATE.

THE LETTER OF APRIL 9, 1941, REFERRED TO IN YOUR LETTER, IS AS FOLLOWS:

WE RESPECTFULLY REQUEST YOUR CONSIDERATION AND FAVORABLE ACTION IN INCLUDING A PRICE ADJUSTMENT PROVISION IN LARGE CONTRACTS WHICH YOU MAY ENTER INTO WITH OUR COMPANY FOR THE MANUFACTURE OF ELECTRICAL EQUIPMENT REQUIRING MORE THAN TWELVE MONTHS FOR MANUFACTURE OR ASSEMBLY.

FIRM PRICE CONTRACTS REQUIRING A LONG PERIOD TO COMPLETE ARE A DEFINITE RISK TO OUR COMPANY AND OUR CUSTOMERS, AS FLUCTUATIONS IN MATERIAL AND LABOR COSTS MAY BE A POTENTIAL SOURCE OF LOSS OR GAIN TO EITHER PARTY. THIS RISK HAS BEEN RECOGNIZED BY THE UNITED STATES NAVY WHEN THEY INCLUDED PROVISION FOR ADJUSTMENT OF LABOR AND MATERIAL COST CHANGES IN THEIR CONTRACTS FOR SHIPS, AND A RECENT STATEMENT BY THE NATIONAL ASSOCIATION OF MANUFACTURERS INDICATES A LARGE PERCENTAGE OF MANUFACTURERS ARE ALREADY ASKING THEIR CUSTOMERS FOR SOME FORM OF PRICE ADJUSTMENT ON LONG TERM CONTRACTS.

IT IS ALSO BECOMING MORE AND MORE DIFFICULT TO OBTAIN FIRM PRICES ON MATERIALS AND SUPPLIES. IN MANY CASES IT IS NECESSARY TO PAY A MARKET PRICE AT THE DATE OF DELIVERY.

THERE ARE TWO PRACTICAL WAYS TO HANDLE SUCH SITUATIONS: ONE, INCREASE PRICES SUFFICIENTLY ON LONG TERM CONTRACTS TO TAKE CARE OF PROBABLE INCREASES IN LABOR AND MATERIAL COSTS; TWO, PROVIDE FOR ADJUSTMENT OF PRICE ON LONG TERM CONTRACTS FOR CHANGES IN LABOR AND MATERIAL COSTS USING AS A BASIS U.S. DEPARTMENT OF LABOR STATISTICS.

WE BELIEVE THE SECOND METHOD IS EQUITABLE TO BOTH BUYER AND SELLER, AS IT PROVIDES FOR ADJUSTMENTS BOTH UP AND DOWN.

WE ATTACH A FORM WHICH MIGHT SERVE AS A BASIS FOR INCLUDING ADJUSTMENT OF LABOR AND MATERIAL PRICES IN YOUR CONTRACTS HAVING DELIVERIES OF TWELVE MONTHS OR LONGER. YOU WILL NOTE THAT FOR THE PURPOSE OF ADJUSTMENTS THE PROPORTION OF THE CONTRACT PRICE REPRESENTING LABOR IS ACCEPTED AS 40 PERCENT WHILE THAT PROPORTION OF THE CONTRACT PRICE REPRESENTING MATERIAL IS ACCEPTED AS 30 PERCENT. THIS HAS BEEN BASED ON AN ANALYSIS OF THE LABOR AND MATERIAL CONTENT OF USUAL LONG TERM CONTRACTS FOR LARGE MACHINERY, WHICH INDICATES THAT THEY ARE FAIR AVERAGES RESPECTIVELY. THE FORM CLEARLY INDICATES THE MANNER IN WHICH CHANGES UP OR DOWN ARE APPLIED TO THE CONTRACT PRICE.

USE OF A PRICE ADJUSTMENT PROVISION IN THE CONTRACT SHOULD NOT BE CONSTRUED TO IN ANY WAY ELIMINATE PROGRESS PAYMENTS, WHICH ARE OF COURSE ANOTHER CONSIDERATION.

IF WE CAN AID IN ANY WAY IN YOUR CONSIDERATIONS OF THESE SUGGESTIONS, WE WOULD BE VERY GLAD TO DO SO UPON YOUR REQUEST.

ALTHOUGH YOUR SUBMISSION DOES NOT SO STATE, INFORMAL ADVICE FROM REPRESENTATIVES OF YOUR DEPARTMENT INDICATES THAT THE PROVISION WHICH THE BUREAU OF RECLAMATION WISHES TO INCORPORATE INTO SUCH CONTRACTS IS THAT WHICH WAS STATED IN YOUR SUBMISSION TO HAVE BEEN PREPARED BY CONTRACTORS OTHER THAN THE WESTINGHOUSE CONCERN, AND WHICH IS AS FOLLOWS:

THE CONTRACT PRICE SHALL BE ADJUSTED AT THE COMPLETION OF THE CONTRACT TO COMPENSATE FOR THE CHANGE IN THE LABOR RATES DURING THE EXECUTION OF THE CONTRACT, BUT SUCH ADJUSTMENT SHALL APPLY TO ONLY SEVENTY PERCENT OF THE CONTRACT PRICE. A BASE OF AVERAGE OF THE HOURLY AVERAGE EARNINGS IN THE DURABLE GOODS INDUSTRY OF THE MONTH IN WHICH THE CONTRACT IS SIGNED AND OF THE MONTH PREVIOUS AND THE MONTH FOLLOWING.

THE CONTRACT AVERAGE HOURLY EARNINGS RATE FOR ADJUSTMENT SHALL BE TAKEN AS THE AVERAGE OF THE AVERAGE HOURLY EARNINGS IN THE DURABLE GOODS INDUSTRY OF ALL OF THE MONTHS FROM AND INCLUDING THE MONTH IN WHICH THE CONTRACT IS SIGNED, TO AND INCLUDING THE MONTH OF THE LAST CONTRACT SHIPPING DATE. THEN SEVENTY PERCENT OF THE CONTRACT PRICE SHALL BE INCREASED OR DECREASED IN PROPORTION AS THE CONTRACT AVERAGE HOURLY EARNINGS RATE BEARS TO THE BASE AVERAGE HOURLY EARNINGS RATE AS ABOVE SET FORTH.

IN CASE THE CONTRACT DATE OF COMPLETION IS EXTENDED BY THE PURCHASER OR BY THE TERMS AND CONDITIONS OF THE CONTRACT, THEN THE CONTRACT AVERAGE HOURLY EARNINGS RATE SHALL RUN TO THE DATE OF SUCH EXTENSION.

ON THE DUE DATE OF THE LAST PAYMENT UNDER THE CONTRACT, THE UNADJUSTED AMOUNT OF FINAL PAYMENT SHALL BE PAID, AND FINAL ADJUSTED PAYMENT SHALL BE MADE AS PROMPTLY THEREAFTER AS IT IS POSSIBLE TO DETERMINE UPON THE ADJUSTED CONTRACT PRICE, IN CASE OF DEDUCTION COMPANY SHALL REFUND AND THE COMPANY BOND SHALL RUN UNTIL FINAL ADJUSTED PAYMENT IS MADE.

THE BASE AVERAGE HOURLY EARNINGS RATE AND THE CONTRACT HOURLY EARNINGS RATE SHALL BE DETERMINED FROM THE COMPILATIONS THIRD READING OF THE BUREAU OF LABOR STATISTICS AS NOW PUBLISHED UNDER THE HEADING " AVERAGE HOURLY EARNINGS IN THE DURABLE GOODS INDUSTRY" (WHICH AVERAGE INCLUDES ALL THE INDUSTRIES LISTED UNDER DURABLE GOODS INDUSTRY) AND NOW PUBLISHED MONTHLY IN PAMPHLET FORM BY THE BUREAU OF LABOR STATISTICS, AND FOR THE PURPOSES OF THIS CONTRACT, THE SAME MATTER, METHODS, COMPILATIONS, AND INCLUSIONS USED IN DETERMINING THE BASE AVERAGE HOURLY EARNINGS RATE SHALL BE USED FOR DETERMINING THE CONTRACT AVERAGE HOURLY EARNINGS RATE THROUGHOUT THE DURATION OF THE CONTRACT.

THE PRINCIPAL APPARENT DIFFERENCE BETWEEN THE PROVISION ADVOCATED BY THE WESTINGHOUSE ELECTRIC AND MANUFACTURING CO. AND THE ONE QUOTED ABOVE IS THAT THE FORMER WOULD ADJUST 40 PERCENT OF THE CONTRACT PRICE ON THE BASIS OF THE INDEX OF HOURLY EARNINGS OF THE " ELECTRICAL MACHINERY, APPARATUS, AND SUPPLIES" INDUSTRY AND 30 PERCENT OF THE CONTRACT PRICE ON THE BASIS OF THE INDEX OF WHOLESALE PRICES FOR " GROUP VI METALS AND METAL PRODUCTS," WHEREAS THE QUOTED PROVISION CONTEMPLATES AN ADJUSTMENT OF 70 PERCENT OF THE CONTRACT PRICE ON THE BASIS OF " AVERAGE HOURLY EARNINGS IN THE DURABLE GOODS INDUSTRY," ALL AS REPORTED IN PUBLICATIONS OF THE DEPARTMENT OF LABOR.

I AM ADVISED THAT THE PROVISION QUOTED ABOVE IS PREFERRED BY THE BUREAU OF RECLAMATION FOR ITS SIMPLICITY OF OPERATION, AND THAT SINCE ITS INVESTIGATIONS SHOW THAT FLUCTUATIONS IN MATERIAL COSTS ADHERE CLOSELY TO THOSE OF LABOR COSTS, APPROXIMATELY EQUIVALENT RESULTS MAY BE EXPECTED UNDER EITHER PROVISION.

IT IS EVIDENT THAT THE PROPOSED ADJUSTMENT PROVISION WILL SERVE TO PROTECT THE GOVERNMENT IN CASE OF A DECREASE IN PREVAILING PRICES AND THE CONTRACTOR IN CASE OF AN INCREASE, AND IT IS NOTED THAT YOU BELIEVE ITS USE IN SUCH LONG-TERM CONTRACTS WILL BE TO THE ADVANTAGE OF THE GOVERNMENT, PRESUMABLY BECAUSE WITHOUT SUCH A PROVISION SOME CONCERNS WILL REFRAIN FROM BIDDING, OR WILL INCLUDE IN THEIR BIDS AMOUNTS SUFFICIENT TO COVER ANY POSSIBLE INCREASES IN LABOR COSTS.

WHILE THE EXACT AMOUNT OF THE RESULTING CONTRACT CANNOT BE DETERMINED UNTIL THE WORK IS COMPLETED, THE SUGGESTED PROVISION IS NOT NECESSARILY OBJECTIONABLE FOR THAT REASON, SINCE IT PROVIDES A DEFINITE MEANS OF DETERMINING THE EXACT AMOUNT OF THE CONTRACT AND THE MAXIMUM AMOUNT OF THE INCREASE CAN BE APPROXIMATED WITH REASONABLE CERTAINTY. ACCORDINGLY, ON THE BASIS OF THE REPRESENTATIONS MADE IN YOUR LETTER I HAVE TO ADVISE THAT THIS OFFICE IS NOT REQUIRED TO OBJECT TO THE INCORPORATION INTO CONTRACT SPECIFICATIONS COVERING THE PROCUREMENT OF EQUIPMENT OF THE GENERAL TYPE HERE INVOLVED OF A PRICE ADJUSTMENT PROVISION OF THE GENERAL PURPORT OF THAT QUOTED ABOVE, SHOULD YOU DETERMINE IT TO BE NECESSARY OR DESIRABLE IN THE INTERESTS OF THE UNITED STATES.

IT IS SUGGESTED FOR YOUR CONSIDERATION THAT THERE BE SUBSTITUTED FOR THE LANGUAGE FOLLOWING ,ADJUSTED CONTRACT PRICE" IN THE FOURTH PARAGRAPH OF THE DRAFT OF PROVISIONS AS SUBMITTED, THE FOLLOWING SENTENCE:

IN CASE THE FINAL ADJUSTMENT OF THE CONTRACT PRICE, PURSUANT TO THIS PROVISION, SHALL RESULT IN A NET DEDUCTION FROM SAID CONTRACT PRICE, THE CONTRACTOR AND HIS SURETIES SHALL BE LIABLE FOR THE AMOUNT THEREOF UNTIL IT IS REFUNDED TO THE GOVERNMENT.