B-124560, MAR. 12, 1956

B-124560, MAR. 12, 1956

TO MR. E. D. FAEH, MANAGER, SPECIAL ACCOUNTS DEPARTMENT, GOUGH INDUSTRIES, INC.:

YOUR LETTER OF JANUARY 20, 1956, REQUESTS RECONSIDERATION OF DECISION DATED DECEMBER 22, 1955, IN WHICH WE HELD THAT YOU WERE NOT ENTITLED TO RECEIVE A PRICE INCREASE FOR ELECTRICAL EQUIPMENT FURNISHED UNDER CONTRACT NO. AT/40-1/-1599.

THE REQUEST APPEARS TO BE PREDICATED UPON CONTENTIONS THAT THE ESCALATION PROVISIONS OF SECTION 4 OF THE CONTRACT OPERATED TO INCREASE OR DECREASE THE PRICE OF EQUIPMENT TO THE GOVERNMENT IN ACCORDANCE WITH FLUCTUATIONS IN PREVAILING DOMESTIC MARKET PRICES FOR LIKE EQUIPMENT AND THAT, CONTRARY TO THE ADMINISTRATIVE VIEW, DELIVERIES WERE MADE PRIOR TO THE TIME ACTION WAS TAKEN BY THE CONTRACTING OFFICER TO ACCEPT OR REJECT YOUR NOTICE OF PRICE INCREASE.

REGARDLESS, HOWEVER, OF WHETHER DELIVERIES WERE MADE PRIOR TO ACCEPTANCE OR REJECTION OF THE NOTICE, A GENERAL INCREASE IN THE PRICE OF LIKE DOMESTIC ITEMS DID NOT ESTABLISH YOUR ENTITLEMENT TO A PROPORTIONATE INCREASE IN THE PRICES CHARGED THE GOVERNMENT UNDER THE CONTRACT TERMS.

THE FIRST SENTENCE OF SECTION 4 EXPLAINED THAT ESCALATION WAS REQUIRED BECAUSE OF "ECONOMIC FACTORS WHICH MAY AFFECT THE COST OF PRODUCING THE ITEMS TO BE FURNISHED.' YOU WERE REQUIRED TO SET PRICES WHICH WOULD REFLECT SUCH PRODUCTION COSTS AND SERVE AS A BASE FOR ESCALATION. SUBSECTION 4/A) YOU WARRANTED THAT "ANY DIFFERENCES BETWEEN THE PRICES PROVIDED HEREIN * * * AND * * * ESTABLISHED OR PUBLISHED PRICES FOR LIKE QUANTITIES OF THE MATERIALS WHICH ARE THE NEAREST COMMERCIAL EQUIVALENTS OF THE MATERIALS COVERED BY THIS CONTRACT (HEREINAFTER REFERRED TO AS "THE ESTABLISHED PRICES") ARE DUE TO DIFFERENCES IN COSTS RESULTING FROM COMPLIANCE WITH SUCH SPECIFICATIONS.' IN SUBSECTION C YOU STIPULATED THAT SUCH BASE OR "ESTABLISHED" PRICES WERE A SUM EQUAL TO THE TOTAL OF INDIVIDUAL ITEM QUOTATIONS, AND IN EXPLANATION OF THE BID IT WAS NOTED ON THE FIRST PAGE OF THE INVITATION THAT "85 PERCENT OF EQUIPMENT IS MANUFACTURED ABROAD * * * 15 PERCENT OF EQUIPMENT IS DOMESTIC MANUFACTURE

YOU THUS AGREED THAT ANTICIPATED FLUCTUATING PRODUCTION COSTS FOR THE ITEMS FURNISHED WOULD BE ADJUSTED ON THE BASIS OF THE UNIT PRICES QUOTED, IN THE RATIO OF 85 PERCENT FOR THOSE MANUFACTURED ABROAD AND 15 PERCENT FOR THOSE MANUFACTURED IN THE UNITED STATES. THIS ENABLED YOU TO AVOID RISKS INCIDENT TO INCREASING OR DECREASING PRODUCTION COSTS WHICH, OF COURSE, WERE ASSUMED BY THE GOVERNMENT.,AND CONTEMPLATED THAT, TO THE EXTENT THAT YOU WERE A MANUFACTURER, A CHANGE IN YOUR PUBLISHED PRICES FOR LIKE EQUIPMENT PRIOR TO DELIVERY WOULD NECESSITATE ADJUSTMENT OF THE CONTRACT PRICE. TO THE EXTENT THAT THE EQUIPMENT WAS MANUFACTURED BY OTHERS, A CHANGE IN THE PUBLISHED PRICES OF YOUR SUPPLIERS WOULD NECESSITATE A SIMILAR ADJUSTMENT. HOWEVER, WHILE THE TERMS OF ARRANGEMENTS WITH SUPPLIERS WERE NOT TAKEN INTO CONSIDERATION, IT IS DIFFICULT TO UNDERSTAND HOW, IF SUCH ARRANGEMENT RESULTED IN FIXING PRODUCTION COSTS, IT CAN NOW BE CLAIMED THAT FLUCTUATIONS IN "ESTABLISHED" PRICES BASED UPON SUCH PRODUCTION COSTS OCCURRED TO ACTIVATE THE ESCALATION PROVISIONS AND TO EITHER INCREASE OR DECREASE THE FINAL COSTS OF THE EQUIPMENT TO THE GOVERNMENT OBVIOUSLY, IF "ESTABLISHED" COSTS COULD BE CHANGED AT THE OPTION OF A DEALER, REGARDLESS OF WHETHER OR NOT ITS COSTS VARIED, THE ESCALATION PROVISIONS WOULD BE DENIED MEANING AND EFFECT.

SINCE YOU HAVE NOT SHOWN THAT EITHER THE DOMESTIC OR FOREIGN PORTION OF THE "ESTABLISHED" COSTS APPLICABLE TO THE EQUIPMENT FLUCTUATED IN ACCORDANCE WITH THE TERMS OF SECTION 4 OF THE CONTRACT, THE DISALLOWANCE OF YOUR CLAIM FOR ESCALATION IS SUSTAINED.