B-138340, NOVEMBER 6, 1959, 39 COMP. GEN. 355

B-138340, NOVEMBER 6, 1959, 39 COMP. GEN. 355

CONTRACTS - PRICE ADJUSTMENT DETERMINATIONS - CONFORMANCE TO CONTRACT TERMS - AMENDMENTS - EFFECTS ALTHOUGH, UNDER A CAPEHART HOUSING CONSTRUCTION CONTRACT WHICH REQUIRES THE FEDERAL HOUSING COMMISSIONER TO DETERMINE AN AMOUNT FOR PRICE ADJUSTMENT PURPOSES BASED ON THE DIFFERENCE BETWEEN THE REPLACEMENT COST COMPUTED ACCORDING TO THE BIDDER'S WAGE SCHEDULE AND THE WAGE SCHEDULE ACTUALLY USED, THE COMPUTATION OF SUCH AMOUNT BY THE COMMISSIONER WOULD BE BINDING ON THE PARTIES EXCEPT FOR BAD FAITH OR GROSS MISTAKE, THE CONCURRENCE OF THE COMMISSIONER IN AN AMOUNT NEGOTIATED BETWEEN THE BUILDER AND THE CORPS OF ENGINEERS, NOTWITHSTANDING THAT IT DID NOT CONFORM TO THE COMPUTATIONS MADE IN ACCORDANCE WITH THE PRESCRIBED FORMULA IS WITHOUT LEGAL EFFECT AND, EVEN THOUGH THE TIME FOR A PRICE REVISION HAS EXPIRED, THE PROPER AMOUNT IS THAT DETERMINED PURSUANT TO THE TERMS OF THE CONTRACT. ALTHOUGH A PRICE ADJUSTMENT FIGURE AGREED TO BY PRIVATE PARTIES TO A CONTRACT MAY BE REGARDED AS A BINDING AMENDMENT, NOTWITHSTANDING THE FAILURE TO FOLLOW THE PRESCRIBED PROCEDURE, A PRICE ADJUSTMENT FIGURE AGREED TO BY A GOVERNMENT CONTRACTING OFFICER AND A BUILDER, NOTWITHSTANDING THAT THE FIGURE WAS NOT COMPUTED IN ACCORDANCE WITH THE PRESCRIBED FORMULA, MAY NOT BE REGARDED AS BINDING ON THE GOVERNMENT SINCE A CONTRACTING OFFICER IS WITHOUT AUTHORITY TO AGREE TO A CONTRACT AMENDMENT UNDER WHICH THE GOVERNMENT WOULD BE REQUIRE TO PAY A GREATER AMOUNT WITHOUT SOME COMPENSATING BENEFIT FLOWING TO THE GOVERNMENT. UNDER A CAPEHART HOUSING CONSTRUCTION CONTRACT WHICH ENTITLES THE BUILDER TO ONLY THE CONTRACT PRICE AND REQUIRES THE MORTGAGOR BUILDER TO TURN OVER TO THE GOVERNMENT UPON COMPLETION THE CAPITAL STOCK HELD IN ESCROW, THE DIFFERENCE BETWEEN THE MORTGAGE AMOUNT AND THE CORRECT CONTRACT PRICE DETERMINED PURSUANT TO FORMULA PRESCRIBED IN THE CONTRACT REPRESENTS AN ASSET OF THE MORTGAGOR BUILDER TO WHICH THE GOVERNMENT IS ENTITLED UPON ASSUMPTION OF CONTROL OF THE CAPITAL STOCK.

TO THE GERSTEN CONSTRUCTION COMPANY, NOVEMBER 6, 1959:

WE REFER TO CONTRACTS NOS. DA-49-080-ENG-3937, 3951, 3952, AND 3953, DATED JUNE 18, 1958, FOR THE CONSTRUCTION OF A 618 UNIT CAPEHART HOUSING PROJECT AT FT. BELVOIR, VIRGINIA.

PURSUANT TO INVITATION FOR BIDS NO. ENG-49-080-58-8-/7) DATED MARCH 20, 1958, THE GERSTEN CONSTRUCTION COMPANY SUBMITTED A BID FOR THE PROJECT. LETTER OF ACCEPTABILITY WAS ISSUED TO THAT FIRM ON MAY 14, 1958, WHICH CONSTITUTED AN ACCEPTANCE OF ITS BID OBLIGATING THE BIDDER TO UNDERTAKE CONSTRUCTION OF THE PROJECT AND TO MAKE CERTAIN ARRANGEMENTS PRELIMINARY THERETO INCLUDING MAKING:

* * * APPLICATION TO THE SECRETARY OF LABOR FOR AN APPROPRIATE WAGE DETERMINATION (ON A FORM WHICH WILL BE SUPPLIED UPON REQUEST BY THE FEDERAL HOUSING ADMINISTRATION) FOR USE IN THE CONSTRUCTION OF THE PROJECT AND FURNISH A COPY OF SUCH WAGE DETERMINATION TO THE CONTRACTING OFFICER AND THE COMMISSIONER. SUCH WAGE DETERMINATION WILL BE USED BY THE COMMISSIONER TO INCREASE OR DECREASE THE BID PRICE IN THE MANNER SPECIFIED IN YOUR BID. ( ITALICS SUPPLIED)

UNDER THE TERMS OF THE INVITATION THE BID PRICE ADJUSTMENT ON ACCOUNT OF DIFFERENCES BETWEEN THE PREVAILING WAGE RATE DETERMINATION USED IN PREPARING THE BID AND THAT APPLICABLE TO ACTUAL CONSTRUCTION WAS TO BE COMPUTED AS FOLLOWS:

5. UNDER THE PROVISIONS OF TITLE IV OF THE HOUSING AMENDMENTS OF 1955 THE PRINCIPAL AMOUNT OF THE MORTGAGE IS LIMITED, AMONG OTHER THINGS, TO THE AMOUNT OF THE BID OF THE ELIGIBLE BUILDER. HOWEVER, THE DAVIS-BACON ACT AND SECTION 212 (A) OF THE NATIONAL HOUSING ACT, AS AMENDED, REQUIRE THAT WAGES PAID TO LABORERS AND MECHANICS BE THE PREVAILING WAGE AS DETERMINED BY THE SECRETARY OF LABOR NOT MORE THAN NINETY (90) DAYS PRIOR TO THE COMMENCEMENT OF CONSTRUCTION. SINCE MORE THAN NINETY (90) DAYS MAY ELAPSE FROM THE DATE OF THIS INVITATION FOR BIDS TO THE COMMENCEMENT OF CONSTRUCTION, THE BIDS CALLED FOR BY THIS INVITATION FOR BIDS WILL INCLUDE A PROVISION FOR ADJUSTMENT OF THE DOLLAR AMOUNT THEREIN SPECIFIED TO REFLECT ANY DIFFERENCE BETWEEN THE TENTATIVE MINIMUM WAGE SCHEDULE ATTACHED HERETO AND THE APPLICABLE MINIMUM WAGE SCHEDULE AS FINALLY DETERMINED BY THE SECRETARY OF LABOR. ANY SUCH ADJUSTMENT WILL BE IN AN AMOUNT DETERMINED BY THE COMMISSIONER TO REFLECT SUCH DIFFERENCES, AND THE AMOUNT OF THE LOWEST ACCEPTABLE BID AND THE FHA ESTIMATED REPLACEMENT COST OF THE TOTAL PROJECT WILL BE AMENDED IN THE AMOUNT SO DETERMINED BY THE COMMISSIONER; EXCEPT THAT, IF SUCH AN ADJUSTMENT WOULD INCREASE THE AMOUNT OF THE BID ABOVE THE AMOUNT OF ANY OTHER STATUTORY MAXIMUM APPLICABLE TO THE INSURABLE MORTGAGES, THE ELIGIBLE BUILDER WILL HAVE THE OPTION OF REDUCING HIS BID TO SUCH STATUTORY MAXIMUM OR OF WITHDRAWING HIS BID. ITALICS SUPPLIED).

THE BID FORM ON WHICH THE BID WAS SUBMITTED PROVIDES WITH RESPECT TO THE SAME MATTER:

4. THE BIDDER REPRESENTS THAT HE IS AWARE OF THE STATUTORY REQUIREMENTS OF SECTION 212 (A) OF THE NATIONAL HOUSING ACT, AS AMENDED, AND OF THE DAVIS-BACON ACT THAT WAGES TO BE PAID TO LABORERS AND MECHANICS EMPLOYED IN THE CONSTRUCTION OF THE PROJECT ARE REQUIRED TO BE NOT LESS THAN THOSE CONTAINED IN THE PREVAILING WAGE DETERMINATION OF THE SECRETARY OF LABOR, AND THAT, IN ORDER TO COMPLY WITH THESE STATUTORY PROVISIONS, THE BID PRICE IS SUBJECT TO INCREASE OR DECREASE BY AN AMOUNT DETERMINED BY THE FEDERAL HOUSING COMMISSIONER (HEREINAFTER CALLED THE COMMISSIONER) TO REPRESENT THE DIFFERENCE IN THE " TOTAL ESTIMATE OF REPLACEMENT COST OF THE TOTAL PROJECT," COMPUTED ACCORDING TO THE WAGE SCHEDULE ATTACHED TO THE INVITATION FOR BIDS AND COMPUTED ACCORDING TO THE WAGE SCHEDULE AS AMENDED BY THE "PREVAILING WAGE DETERMINATION" AS THAT TERM IS DEFINED IN PARAGRAPH 19 OF THE SPECIMEN FORM OF HOUSING CONTRACT ATTACHED TO THE INVITATIONS FOR BIDS. MOREOVER, THE BIDDER REALIZES THAT, IF THE AMOUNT OF HIS BID AS SPECIFIED IN THE LETTER OF ACCEPTABILITY, IS THEREBY INCREASED SO AS TO EXCEED THE MAXIMUM AMOUNT OF THE INSURABLE MORTGAGE AS DETERMINED BY THE COMMISSIONER, THE BIDDER SHALL HAVE THE OPTION OF REDUCING HIS BID TO THE AMOUNT OF THE MAXIMUM INSURABLE MORTGAGE AS DETERMINED BY THE COMMISSIONER, OR OF WITHDRAWING HIS BID. ( ITALICS SUPPLIED)

WE TAKE THE FOREGOING TO MEAN THAT UPON ISSUANCE OF THE LETTER OF ACCEPTABILITY THE BIDDER WAS REQUIRED TO PERFORM AT THE BID PRICE AS ADJUSTED BY AN AMOUNT DETERMINED BY THE FHA COMMISSIONER TO REPRESENT THE DIFFERENCE BETWEEN THE REPLACEMENT COST COMPUTED ACCORDING TO THE WAGE SCHEDULE SUPPLIED WITH THE INVITATION AND THAT APPLICABLE TO THE ACTUAL CONSTRUCTION. IN THIS INSTANCE THE LATER DETERMINATION CONTAINED CERTAIN WAGE RATE INCREASES.

PURSUANT TO AN APPARENT ORAL UNDERSTANDING BETWEEN REPRESENTATIVES OF THE D.C. INSURING OFFICE OF FHA AND THE CORPS OF ENGINEERS, THE CORPS AND THE BUILDER ENTERED INTO NEGOTIATIONS TO ESTABLISH A PRICE ADJUSTMENT BY REASON OF THE WAGE RATE INCREASES. ON JUNE 16, 1958, THE BIDDER AND THE CORPS AGREED TO INCREASE THE CONTRACT PRICE BY $242,609.81 SUBJECT TO CONCURRENCE BY FHA. ON JUNE 17, 1958, THE CORPS WROTE TO THE D.C. INSURING OFFICE, FHA, AND REQUESTED CONCURRENCE ON THE ADJUSTMENT. FHA DID NOT REPLY TO THE LETTER, BUT THE D.C. INSURING OFFICE ISSUED REVISED COMMITMENTS ON JUNE 18, 1958, FOR MORTGAGE INSURANCE ON THE PROJECT IN AN AMOUNT AGGREGATING $9,808,535.81 REPRESENTING THE BID PRICE PLUS THE ADJUSTMENT NEGOTIATED BY THE BUILDER AND THE CORPS OF ENGINEERS. THIS ACTION AND THE FAILURE TO INTERPOSE ANY OBJECTION PRIOR TO OR AT THE INITIAL CLOSING ON JUNE 24, 1958, LED THE CORPS AND THE BUILDER TO ASSUME THAT FHA HAD AGREED TO THE AMOUNT OF THE NEGOTIATED INCREASE.

WE HAVE SINCE BEEN ADVISED BY A LETTER OF FEBRUARY 9, 1959, FROM THE DIRECTOR OF THE D.C. INSURING OFFICE THAT, WHILE THAT OFFICE HAD COMPUTED A DIFFERENCE IN REPLACEMENT COST BASED ON CHANGES IN THE PREVAILING WAGE RATE DETERMINATIONS OF APPROXIMATELY $119,000, NO OBJECTION WAS RAISED TO THE INCREASE NEGOTIATED BY THE CORPS AND THE BUILDER BECAUSE THE TOTAL AMOUNT OF THE CONTRACT WAS STILL LESS THAN THE REVISED ESTIMATED REPLACEMENT COST AND, ALSO, WAS WITHIN THE STATUTORY AVERAGE UNIT COST LIMITATION.

SUBSEQUENTLY, AS A RESULT OF QUESTION HAVING BEEN RAISED BY OUR OFFICE, FHA DETERMINED THAT THE APPROPRIATE INCREASE IN THE CONTRACT PRICE IN ACCORDANCE WITH THE METHOD PRESCRIBED BY THE BIDDING DOCUMENTS WAS $150,392 AND THE CORPS OF ENGINEERS WAS SO ADVISED BY LETTER OF MAY 18, 1959, FROM THE D.C. INSURING OFFICE. IN REPLY, BY LETTER OF JUNE 4, 1959, THE CORPS OF ENGINEERS CONTENDED THAT THE AMOUNT OF INCREASE WAS NO LONGER SUBJECT TO REVISION. THE EXCHANGE OF CORRESPONDENCE WAS BROUGHT TO OUR ATTENTION BY A LETTER OF JULY 10, 1959, FROM THE COMMISSIONER. IT APPEARS THAT NO CHANGE HAS BEEN EFFECTED IN THE CONTRACT PRICE TO REFLECT THE COMMISSIONER'S DETERMINATION.

WITH RESPECT TO THE PRICE ADJUSTMENT, THE COMMISSIONER, FHA, IS IN THE SAME POSITION AS A PERSON OR GROUP WHICH, BY THE TERMS OF A CONTRACT, MAKE CERTAIN FINDINGS OF FACT TO BE BINDING UPON THE CONTRACTING PARTIES. SUCH DETERMINATIONS ARE ORDINARILY NOT SUBJECT TO QUESTION BY THE CONTRACTING PARTIES EXCEPT FOR SUCH REASONS AS BAD FAITH OR GROSS MISTAKE. HOWEVER, WHERE, AS HERE, THE PRESCRIBED METHOD FOR MAKING THE DETERMINATION IS NOT FOLLOWED, THE FINDINGS OF THE PERSON OR GROUP ARE WITHOUT EFFECT. THUS, IN THE CASE OF ST. PAUL FIRE AND MARINE INS. V. ELDRACHER, 33 F.2D 675, THE PARTIES ENTERED INTO A CONTRACT OF FIRE INSURANCE UNDER WHICH THE INSURED WAS CO-INSURER TO THE EXTENT THAT THE AMOUNT OF COVERAGE DID NOT REPRESENT 100 PERCENT OF SOUND VALUE. THE AGREEMENT FURTHER PROVIDED THAT IF THE PARTIES COULD NOT AGREE AS TO THE EXTENT THAT THE AMOUNT OF COVERAGE DID NOT REPRESENT 100 PERCENT OF SOUND VALUE. THE AGREEMENT FURTHER PROVIDED THAT IF THE PARTIES COULD NOT AGREE AS TO THE SOUND VALUE AND AMOUNT OF LOSS ON THE OCCASION OF A CLAIM UNDER THE POLICY, THOSE AMOUNTS (SOUND VALUE AND AMOUNT OF LOSS) WOULD BE SET BY A TEAM OF APPRAISERS. A FIRE SEVERELY DAMAGED THE BUILDING AND THE PARTIES WERE UNABLE TO AGREE EITHER AS TO THE SOUND VALUE OR THE AMOUNT OF LOSS. PURSUANT TO THE AGREEMENT, THEREFORE, APPRAISERS WERE APPOINTED WHO SUBMITTED THEIR UNANIMOUS FINDINGS AS TO BOTH OF THE ITEMS. THE INSURED CONTESTED THE CONCLUSION ON THE BASIS THAT THE APPRAISERS HAD NOT RENDERED A BONA FIDE DECISION AS TO THE SOUND VALUE AND LOSS BUT HAD ESTABLISHED ARBITRARY FIGURES WHICH RESULTED IN A SETTLEMENT THEY BELIEVED WOULD BE SATISFACTORY TO ALL PARTIES. THE COURT HELD THAT THE FINDINGS OF THE APPRAISERS WERE INVALID BECAUSE THEY HAD EXCEEDED THEIR AUTHORITY IN ESTABLISHING THE FIGURE ON A BASIS OTHER THAN THAT PRESCRIBED IN THE AGREEMENT.

SIMILARLY, WITH RESPECT TO THE CONTRACTS HERE INVOLVED, THE FHA COMMISSIONER OR HIS DESIGNEE WAS TO COMPUTE THE DIFFERENCE IN THE REPLACEMENT COSTS IN ACCORDANCE WITH THE PROCEDURES IN THE BIDDING DOCUMENTS AND SUCH FIGURE WAS TO BE USED TO ADJUST IN THE CONTRACT PRICES. HAD THE COMMISSIONER OR HIS DESIGNEE MADE SUCH A COMPUTATION, THE RESULTING FIGURE WOULD HAVE BEEN BINDING ON THE PARTIES EXCEPT FOR BAD FAITH, GROSS MISTAKE, ETC. HOWEVER, IT IS CLEAR FROM THE FOREGOING THAT THE FIGURE NEGOTIATED BETWEEN THE BUILDER AND THE CORPS OF ENGINEERS WAS ADOPTED BY FHA NOTWITHSTANDING THAT IT DID NOT CONFORM TO THE COMPUTATIONS MADE IN ACCORDANCE WITH THE PRESCRIBED FORMULA FOR REASONS WHICH HAVE BEEN NOTED ABOVE. THEREFORE, THE CONCURRENCE OF FHA WITH THE NEGOTIATED FIGURE IS OF NO EFFECT AND THE PROPER FIGURE BY WHICH THE BID PRICE SHOULD HAVE BEEN INCREASED IS THAT ARRIVED AT PURSUANT TO THE TERMS OF THE BID DOCUMENTS.

A PRICE ADJUSTMENT FIGURE AGREED TO BY PRIVATE PARTIES TO A CONTRACT MAY BE REGARDED AS A BINDING AMENDMENT TO THE CONTRACT NOTWITHSTANDING THE FAILURE TO FOLLOW THE PROCEDURE PROVIDED THEREIN. HOWEVER, IT MUST BE RECOGNIZED THAT NO AGENT OF THE GOVERNMENT HAS AUTHORITY TO AMEND AN EXISTING GOVERNMENT CONTRACT EXCEPT IN THE INTEREST OF THE UNITED STATES. 26 COMP. GEN. 280. THEREFORE, IN THIS CASE THERE WAS NO AUTHORITY IN THE CONTRACTING OFFICER TO AGREE TO A CONTRACT AMENDMENT UNDER WHICH THE GOVERNMENT WOULD BE REQUIRED TO PAY A GREATER AMOUNT WITHOUT SOME COMPENSATING BENEFIT FLOWING TO THE GOVERNMENT.

IN ACCORDANCE WITH THE FOREGOING WE CONCLUDE THAT THE PROPER CONTRACT PRICE UNDER THE TERMS OF THE CONTRACT SHOULD HAVE BEEN AND IS $9,565,926 PLUS $150,392.

UNDER ARTICLE II OF THE HOUSING CONTRACT THE MORTGAGOR BUILDER IS REQUIRED TO PAY THE CONTRACT PRICE TO THE ELIGIBLE BUILDER FOR SUCCESSFUL PERFORMANCE. UNDER ARTICLE XV OF THE CONTRACT THE ELIGIBLE BUILDER UPON INITIAL CLOSING IS REQUIRED TO DEPOSIT IN ESCROW RESIGNATIONS OF OFFICIALS AND DIRECTORS OF THE MORTGAGOR BUILDER, TOGETHER WITH CERTIFICATES ENDORSED IN BLANK, REPRESENTING ALL OF THE CAPITAL STOCK OF EACH MORTGAGOR BUILDER. UPON COMPLETION OF THE PROJECT ALL OF THE CAPITAL STOCK IS FOR DELIVERY TO THE DEPARTMENT OF THE ARMY.

WE WILL CONSIDER, WITHOUT CONCEDING, THAT THE PROVISION OF 12 U.S.C. 1748B (J), MAKING THE VALIDITY OF THE CONTRACT OF MORTGAGE INSURANCE INCONTESTABLE EXCEPT FOR CERTAIN CAUSES NOT HERE APPLICABLE, PRECLUDES ANY CHANGE IN THE MORTGAGE AMOUNT OR IN THE AMOUNT OF THE MORTGAGE GUARANTEE TO COINCIDE WITH THE CORRECT CONTRACT PRICE. HOWEVER, SINCE UNDER THE TERMS OF THE CONTRACT THE ELIGIBLE BIDDER IS ENTITLED ONLY TO THE CONTRACT PRICE AND SINCE THE CAPITAL STOCK OF EACH MORTGAGOR BUILDER IS HELD IN ESCROW TO BE TURNED OVER TO THE DEPARTMENT OF THE ARMY UPON COMPLETION, WE ARE OF THE OPINION THAT THE DIFFERENCE BETWEEN THE MORTGAGE AMOUNT AND THE CONTRACT PRICE SHOULD REPRESENT AN ASSET OF THE MORTGAGOR BUILDER TO WHICH THE DEPARTMENT OF THE ARMY IS ENTITLED AT THE TIME IT TAKES OVER CONTROL OF THE MORTGAGOR BUILDER CORPORATION AND ASSUMES POSSESSION OF ALL OUTSTANDING CAPITAL STOCK. CONSEQUENTLY, YOU ARE HEREBY DIRECTED TO CONSERVE THIS ASSET BY REFUSING TO PAY MORE THAN THE CORRECT CONTRACT PRICE TO THE ELIGIBLE BUILDER.

COPIES OF THIS LETTER ARE BEING FURNISHED TO THE SECRETARY OF THE ARMY, THE MORTGAGEE, THE COMMISSIONER, FHA, AND THE ELIGIBLE BUILDER. THE PURPOSE OF THE LETTER IS TO PUT ALL INTERESTED PARTIES ON NOTICE THAT WE HAVE REQUESTED THE SECRETARY OF THE ARMY TO TAKE APPROPRIATE STEPS TO INSURE THAT UPON FINAL CLOSING THERE IS RECOVERED BY THE GOVERNMENT THE DIFFERENCE BETWEEN THE PRICE INCREASE NEGOTIATED BETWEEN THE BUILDER AND THE CORPS OF ENGINEERS TO REFLECT AN INCREASE IN THE PREVAILING WAGE RATE DETERMINATIONS AND THE INCREASE AS COMPUTED BY THE FHA IN ACCORDANCE WITH THE PROCEDURE SET OUT IN THE BID DOCUMENT.