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Deductive Change

When an item of work is deleted, the issue arises as to whether this deletion should be treated as a partial termination for the convenience of the Government or as a deductive change. If it is treated as a termination, the contract price adjustment is calculated in accordance with the "Termination for Convenience" clause in the contract. If it is treated as a deductive change, the price adjustment is under the "Changes" clause.

As a general proposition, such changes in the specifications or in the scope of work [which cause a decrease in the cost of or time required for performance of any part of the contract work] are usually treated as deductive changes rather than termination actions. Partial terminations are more appropriate for a reduction of the number of units or supplies to be delivered, elimination of identifiable items of work, reduction in the quantity of work required under the contract, or similar reductions in contract tasks. Celesco Industries, Inc., ASBCA No. 22251, 79-1 BCA 13,604 (1978). However, the Boards of Contract Appeals have also held that

[t]he question of whether work should be deleted under the Changes or the Termination clause is best left to the circumstances of each case and where the parties proceeded by means of a deductive change we will not alter that treatment absent a compelling reason. (Goetz Demolition Company, ASBCA No. 39129, 13 August 1990, slip op. at 11.)

In the situation where the deletion is treated as a "change," the contract price is subject to a downward equitable adjustment. In a case before the Armed Services Board of Contract Appeals, the Board concluded that the proper adjustment for a deductive change is measured by the difference between the reasonable cost of performing the contract work before and after the change irrespective of whether or not the contractor included the work in its bid. It reasoned that the integrity of the competitive bidding system required no less: "A bidder who omits, for any reason, costs that would otherwise be included, gets the benefit of a bid lower than it otherwise would be, but runs the risk of a later change in contract price. The tradeoff for the risk involved is the greater likelihood of contract award." Bruce Anderson Company, Inc., ASBCA Nos. 29412, 32247, 89-2 BCA 21,872 (1989).

In another decision, Santa Fe Engineers, ASBCA No. 31762, 91-1 BCA 23,571, the Armed Services Board had the following to say concerning the pricing of deductive change orders:

In measuring deductive change adjustments, we are guided by the principle that the equitable adjustment should not increase a contractor's loss, nor decrease it at the Government's expense. Nager Electric Company v. United States, 442 F.2d 936, (Ct. Cl. 1971); American Electric. Inc., ASBCA No. 15152, 73-1 BCA 9787. We have held that the same principles used in pricing additive changes apply to deductive changes. G.M. Co. Mfg., Inc., ASBCA No. 2883, 57-2 BCA 1505. In appropriate situations, the Government has been allowed a deductive credit for overhead and profit on a change order which deleted contract requirements. See, Keco Industries, Inc., ASBCA No. 15131, 72-1 BCA 9262; Algernon Blair, Inc., ASBCA No. 10738, 65-2 BCA 5127; Andrews & Parrish Co., ASBCA No. 30689, 88-3 BCA 20,976.

It has also been held that in interpreting a contract, the preferred interpretation is one which views the contract as a whole, leaves no portion of the contract meaningless and construes its provisions in a manner in which they do not conflict. Thus the language of a particular contractual provision is to be read in the context of the entire agreement. United States v. Johnson Controls, Inc. 713 F.2d 1541, 1555 (Fed. Cir. 1983); Hensel Phelps Construction Co. ASBCA No. 44259, 96-1 BCA 28,227. Contract language is to be interpreted in accordance with its ordinary and commonly accepted meaning without twisted or strained analysis. Hol-Gar Mfg. Co. v. United States 169 Ct. C1. 384, 390, 351 F.2d 972, 976 (1965). An interpretation by the parties of contract terms prior to a dispute is entitled to great, if not controlling weight. Ver-Val Enterprises, Inc, ASBCA No. 43766, 95-1 BCA 27,334. The Government has the burden of proving its deductive change order, i.e., that the work for which it took a contract price adjustment was required by the contract. Brace Andersen Company, Inc. ASBCA No. 29412, 89-2 BCA 21,872 at 13,337-38; Nager Electric Co. v. United States, 194 Ct. Cl. 835, 442 F.2d 936 (1971).