oversight

Recommended Change in the Pricing of General Services Administration Credit Change Orders

Published by the Government Accountability Office on 1977-04-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            DOCUMENT RESUME

01140 - (A1051954j)

(Recommended Change in the Pricing of General Services Adninistrat:on Credit
Change Orders). LCD-77-326-339; 8-118623, April 7, 1977, 3 pp. Report to
Sen. Charles H. Percy; Sen. Lowell P. Weickerr Jr.; Sen.Harry F. Byrd, Jr.;
Sen. William L. Scott; Rep. Samuel L. Devine; Sen. ?wriard W. Cannon; Sen Paul
Laxalt; Sen. Orrin G. Hatch; Rep. James D. Santini; Rep. Caldwell Butler; Rep.
Gunn McKay; Rep. Dawson Mathis; Sen. Gary Hart; Sen Jake Garn; by Fred J.
Shafer, Director, Logistics and Communications Dlv.

Issue Area: Facilities and Material Management: Design and Construction of
Federal Facilities (707)
Contact: Logistics and Communications Div.
Budget Function: General Government: General Property and Records Managanent
(804)
Organization Concerned: General Services Administration
Congressional Relevance: Rep. Samuel L. Devine; Rp. James D. Santini; Rep.
Caldwell Butler; Rep. Gunn McKay; Rep. Dawson Mathis; Sen. Charles H. Percy; Sen.
Lowell P. Weicker, Jr.; Sen. Harry F. Byrd, J-.; Sen. William L. Scott; Sen.
Howard W. Cannon; Sen. Paul Laxalt; Sen. Orrin G. Hatch; Sen. Gary Hart; Sen.
Jake Garn.

      The ntent of a GAO report to the Gene-al Services Administration (GSA)
on the pricing of cntract change orders was to have such construction contract
adjustments negotiated. It was noted that allowances for overhead, profit, and
commission on subcontract work were routinely included in the negotiated price
for change orders that added work, but no price deductions were made for change
orders that deleted work. It was recommended that construction contract provisions
be amended to provide that overhead, profit, and commission be applied on all
change orders which either add or delete work. Findings/Conclusions: GSA plans
to take steps to recover unexpended %T-unts of overhead, profit, aiid commission
to credit change orders to construction contracts.   n developing language equit-
able to both Government and its contractors, GSA will take into a::ount overhead
costs that may not be reduced as a result of deleted work, such as equipment
rental, salaries, and temporary plant costs. GSA's statements are responsive to
the recommendations in the GAO report. (RRS)
.     (   .g                     UNITED STATES GENERAL ACCOUNTING OFFICE
                                         WASHINCTON, D.C. 2C0

£Swanas        AND COMMuPAWATI




           B-11 8623                                             APR 7     1977



           The Honorable Charles H. Percy
           United States Senate
           Dear Senator Percy:
                By letter of January 11, 1977, you asked us to
           respond to your constituent's letter about our report to
           the General Services Aministration (GSA) on pricing of
           construction contract change orders. Your constituent was
           concerned with our recommendation regarding GSA's future
           treatment of change orders which reduce the required scope
           of work.
                Your constituent's letter and those received from
           numerous others in private industry apparently have inter-
           preted our report as suggesting that GSA make arbitrary
           downward adjustments for overhead, profit, and commissions
           whenever a change order deletes work covered by a contract.
           This was not the intent. Rather our intent was to have
           such adjustments "negotiated."
                As discussed below, GSA officials interpreted our rec-
           ommendation as intended. To assure there is no misunder-
           standing between this Office and GSA in this matter, we
           are sending the Acting Administrator a copy of this letter.
                On November 23, 1976, we reported to GSA on a survey
           of its method for establishing prices for change orders to
           construction contracts. Allowances for overhead, profit,
           and commission on subcontracted work were routinely included
           in the negotiated price for change orders that added work,
           but no price deductions for these allowances were made for
           change orders which deleted work. On the other hand, we
           noted that the practice of the Army Corps of Engineers is
           to obtain a credit for overhead and profit when the scope
           of work is reduced.


                                                                         LCD-77-326
D-11 8623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied o all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders ut were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in nego' sting
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of he contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By lett'ers dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and tne Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                              2
B-118623


     GSA intends to solicit comments from the private sector
at it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurreu or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November 23,
1976, report to GSA is enclosed.
     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response. As you requested, the
correspondence enclosed with your letter is returned.

                                Sincerely yours,




                                F. J. Shafer
                                Director
Enclosures - 2




                           3-
                                UNITED STATES GENERAL ACCOUNTING OFFICE
                                        WASHINGTON, D.C. 2!SU


LO1T1IC    APIC COMMUNICATI11
             DlVIaION
                                                                  APR 7   1977
          B-118623




          The Honorable Lowell P. Weicker, Jr.
          United States Senate
          Dear Senator Weicker:
                 By letter of January 28, 1977, you asked us to
      respond to your constituent's letter about our report to
      the General Services Administration (GSA) on pricing of
      construction contract change orders. Your constituent was
      concerned with our recommendation regarding GSA's futur
      treatment of change orders which reduce the requir   scope
      of work.
           Your constituent's letter and those received from
      numerous others in private industry apparently have inter-
      preted our report as suggesting that GSA make arbitrary
      downward adjustments for overhead, profit,
      whenever a change order deletes work coveredandby commissions
                                                         a contract.
      This was not the intent. Rather our intent was to have
      such adjustments "negotiated."
           As discussed below, GSA officials interpreted our rc-
      ommendation as intended. To assure there is no msunder-
      standing between this Office and GSA in this matter, we
      are sending the Acting Administrator a copy of this letter.
           On November 23, 1976, we reported to GSA on a survey
      of its method for establishing prices for change order to
      construction contracts. Allowances for overhead, profit,
      and commission on subcontracted work were routinely included
      in the negotiated price for change orders that added work,
      but no price deductions for these allowances were made for
      change orders which deleted work. On the other hand, we
      noted that the practice of the Arav Corps of Engineers is
      to obtain a credit for overhead and profit when the scope
      of work is reduced.



                                                                     LCD-77-327
B-118623



     We expressed t the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which cther add or delete wor;.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowan s were being
considered in the case of additive change ord.rs but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changer in indirect as well as direct
costs of the contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     ouch a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental; salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                             2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November 23,
1976, report to GSA is enclosed.
     We have received similar requests from oher Congress-
men based on their constituents' inquiries, and we are
providing them a similar response. As you requested, the
correspondence enclosed with your letter is returned.

                               Sincerely yours,




                               F. J. Shafer
                               Director
Enclosures - 2




                           3
                              )UNIr'w STATES GENERAL ACCOUNTING OFFICE
                                       WASHINGTO*, D.    05


LOIS@M    AND COMMUNICATION
           DVDMOON

                                                           APR7 1977
         B-11 P:23




         The Honorable Harry F.           yrd, Jr.
         United States Senate

         Dear Senator Byrd:

              By letter of January 28, 1977, you aked us to
         respond to your constituent's letter about our report to
         the General Services Administration (GSA) on pricing of
         construction contract change order;,. Your constituent was
         concerned with our recommendation regarding GSA's future
         treatment of change orders which reduce the required scope
         of work.

              Your constituent's letter and those received from
         numerous others in private industry apparently have inter-
         preted our report as suggesting that GSA make arbitrary
         downward adjustments for overhead, profit, and commissions
         whenever a change order deletes work covered by a contract.
         This was not the intent.  Rather our intent was to have
         such adjustments "negotiated."

              As discussed below, GSA officials interpreted our rec-
         ommendation as intended.  To assure there is no misunder-
         standing between this Office and GSA in this matter, we
         are sending the Acting Administrator a copy of this letter.

              On November 23, 1976, we reported to GSA on a survey
         of its method for establishing prices for change orders to
         construction contracts. Allowances for overhead, profit,
         and commission on subcontracted work were routinely included
         in the negotiated price for change orders that added work,
         but no price deductions for these allowances were made for
         change orders which deleted work. On the other hand, we
         noted that the practice of the Army Corps of Engineers is
         to obtain a credit for overhead and profit when the scope
         of work is reduced.



                                                                     LCD-77-328
B-118623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable tat in negotiating
change orders appropriate consideration should be gibbon to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the cntract price by a certain
percentage t allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
menta2 Affairs that he agrees with our recommendation and
that SA will take steps to promulgate suitable contract
language tc recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reducec, as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                              2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract povisions will not be issued before
December 1977.

     We consider GSA's statements responsive to our rec-
ommendation.  As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deletod work.

     For your further reference, a copy of our November
23, 1976, report to GSA is nclosed.

     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response.

                               Sincerely yours,




                               F. J. Shafer
                               Director
Enclosure




                           3
                                UNITED STATES GENERAL ACCOUNTING OFFICE
                                        WASHINGTON, D.C. 2054B


LOGISTICS AND COM MUNICAT1ONS
          DIVISION



       B-118623
                                                                 APR 7   1977


       The Honorable William L. Scott
       United States Senate

       Dear Senator Scott:

            By letter of February 4, 1977, you asked us to
       respond to your constituent's letter about our report
       the General Services Administration (GSA) on pricing   to
                                                             of
       construction contract change orders. Your constituent
                                                               was
       concerned with our recommendation regarding GSA's
                                                         future
       treatment of change orders which reduce the reyuired
                                                             scope
       of work.

           Your constituent's letter and those received from
      numerous others in private industry apparently have
                                                          inter-
      preted our report as suggesting that GSA make arbitrary
      downward adjustments for overhead, profit, and commissions
      whenever a change oruei deletes work covered by a
                                                        contract.
      This was not the intent.  Rather our intent was to have
      such adjustments "negotiated."

           As discussed below, GSA officials interpreted our
                                                               rec-
      ommendation as intended.  To assure there is no misunder-
      standing between this Office and GSA in this matter,
                                                            we
      are sending the Acting Administrator a copy of this
                                                           letter.
           On November 23, 1976, we reported to GSA on a survey
      of its method for establishing prices for change orders
                                                               to
      construction contracts. Allowances for overhead,
                                                        profit,
      and commission on subcontracted work were routinely
                                                           included
      in the negotiated price for change orders that added
      but no price deductions for these allowances were madework,
      change orders which deleted work.                       for
                                         0- the other hand, we
      noted that the practice of the Army Co:ps of Engineers
      to obtain a credit for overhead and profit when the     is
      of work is reduced.                                  scope




                                                                         LCD-77-329
B-118623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor.  Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit chan-e orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                             2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.

     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.

     For your further reference, a copy of our November
23, 1976, report to GSA is enclosed.

     We have received similar requests froL. other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response.

                              Sincerely yours,




                              F. J. Shafer
                              Director
Enclosure
                     UNITED STATES GENERAL ACCOUNTING OFFICE
                             WASHINGTON, D.C. 208


|                >                                  APR7    1977

    B-11 86 23



    The Honorable Jak& Garn
    United States Senate

    Dear Senator Garn:

         By letter of February 8, 1977, you asked us to
    respond to your constituent's letter about our report
                                                           to
    the General Services Administration (GSA) on pricing of
    construction contract change orders.  Your constituent was
    concerned with our recommendation regarding GSA's future
    treatment of change orders which reduce the required
                                                          scope
    of work.

         Your constituent's letter and
    numerous others in private industry those received from
                                         apparently have inter-
    preted our report as suggesting that GSA make arbitrary
    downward adjustments for overhead, profit, and commissions
    whenever a change order deletes work covered by a contract.
    This was not the intent. Rather our intent was to have
    such adjustments "negotiated."

         As discussed below, GSA officials interp:eted our rec-
    ommendal:ion as intended. To assure there is /lo misunder-
    standing between this Office and GSA in this matter, we
    are sending the Acting Administrator a copy of this letter.

         On November 23, 1976, we reported to GSA on
    of its method for establishing prices for change a  survey
                                                      orders to
    construction contracts. Allowances for overhead, profit,
    and commission on subcontracted work were routinely
                                                         included
    in the negotiated price for change orders that added work,
    but no price deductions for these allowances were made
                                                            for
    change orders which deleted work. On the other hand,
                                                           we
    noted that the practice o the Army Corps of Engineers
                                                            is
    to obtain a credit for overhead and profit when the scope
    of work is reduced.



                                                           LCD-77-330
B-118623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor.  Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts' of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical emplo:ees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                              2
B-118623

     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November
23, 1976, report to GSA is enclosed.
     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a imilar response.
                                Sincerely yours,




                                F. J. Shafer
                                Director
Enclosure




                            3
                              UNITED STATES GENERAL ACCOUNTING OFFICE
                                      WASHINGTON, D.C. 20

LOGIolICS AND COMMUNICATIO"
          DIVISION
                                                                APR7    1977

       B-118623




       The Honorable Samuel L. Devine
       House of Representatives

       Dear Mr. Devine:

            By letter of February 8. 1977, you asked
      respond to your constituent's letter about     us to
      the General Services Administration (GSA) our report to
                                                 on pricing of
      construction contract change orders.   Your constituent was
      concerned with cur recommendation regarding
                                                   GSA's future
      treatment of change oders which reduce
                                               the required scope
      of work.

           Your constituent's letter and
      numerous others in private industry those received from
                                           apparently have inter-
      preted our report as suggesting that GSA
      downward adjustments for overhead, profit,make arbitrary
                                                  and commissions
      whenever a change order deletes work covered
      This was not the intent. Rather our intent by a contract.
                                                   was to have
      such adjustments "negotiated."

           As discussed below, GSA officials interpreted
      ommendation as intended. To assure there           our rec-
                                                is no misunder-
      standing between this Office and GSA in
                                              this matter, we
      are sending the Acting Administrator a copy
                                                  of this letter.
          On November 23, 197G, we reported to GSA
     of its method for establishing prices for       on a survey
                                                change orders to
     construction contracts. Allowances for overhead,
     and commission on subcontracted work were           profit,
                                                routinely included
     in the negotiated price for change orders
                                                that added work,
     but no price deductions for these allowances
     change orders which deleted work. On the      were made for
                                                other hand, we
     noted that the practice of the Army Corps
                                                of Engineers is
     to obtain a credit for overhead and profit
     of work is reduced.                         when the scope




                                                                  LCD-77-331
B-118623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as drect
costs of the contractor.  Thus a negotiated change or er
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a p'ocedure is quite different, for example,
from arbitrarily reducing the contract, price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our repoi c apparently conveyed to some readers.
      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                              2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.

      We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work.    owever, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.

     For your further reference, a copy of our November
23, 1976, report to GSA is enclosed.

     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response.

                               Sincerely yours,




                               F. J. Shafer
                               Director
Enclosure




                           3
                          UNNTED STATES GENERAL ACCOUNTING OFCE
                                  WASHINGTON, D.C. 205


LIGTICS AND COMMUNICATO
         DIVISION




      B-11 8623                                      APR 7 1977



      The Honorable oward W. Cannon
      United States Senate
      Dear Senator Cannon:
           By letter of February 15, 1977, you asked us to
      respond to your constituent's letter about our report to
      the General Services Administration (GSA) on pricing of
      construction contract change orders. Your constituent was
      concerned with our recommendation regarding GSA's future
      treatment of change orders which reduce the required scope
      of work.
           Your constituent's letter and those received from
      numerous others in private industry apparently have inter-
      preted our report as suggesting that GSA make arbitrary
      downward adjustments for overhead, profit, and commissions
      whenever a change order deletes work covered by a contract.
      This was not the intent. Rather our intent was to have
      such adjustments "negotiated."
           As discussed below, GSA officials interpreted our rec-
      ommendation as intended. To assure there is no misunder-
      standing between this Office and GSA in this matter, we
      are sending the Acting Administrator a copy of this letter.
           On November 3, 1976, we reported to GSA on a survey
      of its method for establishing prices for change orders to
      construction contracts. Allowances for overhead, profit,
      and commission on subcontracted work were routinely included
      in the negotiated price for change orders that added work,
      but no price deductions for these allowances were made for
      change orders which deleted work. On the other hand, we
      noted that the practice of the Army Corps of Engineers is
      to obtain a credit for overhead and profit when the scope
      of work is reduced.



                                                                  LCD-77-332
 B-118623



      We expressed to the Administrator of General Services
 our opinion that estimated overhead, profit,
                                               and commission
 should be considered in negotiating deductive
                                                changes as
 well as additive changes, ar.d we recommended
                                               that
 construction contract provisions to provide that    he amend
                                                    overhead,
 profit, and commission be applied on all change
                                                  orders
 which either add or delete work.

      Our recommendation was aimed at getting GSA
                                                   to clarify
 its contract provisions which state that allowances
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances         for
considered in the case of additive change orders   were  being
                                                   but were
being excluded in the pricing of deductive change
It seems to us reasonable and equitable that        orders.
                                              in negotiating
change orders appropriate consideration should
                                                be given to
the effect of reductions in scope as well as
                                              to the effect
of increases, and to changes in indirect as well
costs of the contractor. Thus a negotiated         as direct
should reflect the extent that a reduction inchange  order
                                               the  scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure s quite different, for example,
from arbitrarily reducing the contract price
                                              by a certain
percentage to allow for estimated applicable
profit, and commissions, which is the sort of overhead,
                                               impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
 of General Services informed us,  he ouse Committee on
Government Operations, and the Se ate Committee
                                                  on Govern-
mental Affairs that he agrees with our recommendation
                                                         and
that GSA will take steps to promulgate suitable
                                                  contract
language to recover unexpended amounts' of overhead,
fit, and commission for credit change orders             pro-
tion contracts. The Administrator also stated to  construc-
                                                 that in
developing contract language equitable to both
ment and its contractors GSA must take into      the Govern-
                                             account over-
head costs that may not be reduced as a result
                                                 of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant
                                             costs, as
well as contractor costs already incurred for
work.                                          the deleted




                               2
B-118623

     GSA intends to solicit comments from the private sector
as -it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statement responsive to our rec-
cmmendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November
23, 1976, report to GSA is enclosed.
     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response.
                                Sincerely yours,




                                F. J. Shafer
                                Director
Enclosure




                            3
                                UNITED STATES GENERAL ACCOUNTING OFFICE
                                        WASHINGTON, D.C. 205


LOGISTICS ^N0 CctMMUNICATioNs
           DIVISION                                            APR 7    1977
       B-118623




       The Honorable Paul Laxalt
       United States Senate

       Dear Senator Laxalt:

            By letter of February 15, 1977, you asked us to
       respond to your constituent's letter about our report to
       the General Services Administration (GSA) on pricing of
       construction contract change orders. Your constituent was
       concerned with our recommendation regarding GSA's future
       treatment of change orders which reduce the required scope
       of work.

           Your constituent's letter and those received from
      numerous others in private industry apparently have inter-
      preted our report as suggesting that GSA make arbitrary
      downward adjustments for overhead, profit, and commissions
      whenever a change order deletes work covered by a contract.
      This was not the intent. Rather our intent was to have
      such adjustments "negotiated."

           As discussed below, GSA officials interpreted our rec-
      ommendation as intended. To assure there is no misunder-
      standing between this Office and GSA in this matter, we
      are sending the Acting Administrator a copy of this letter.
           On November 23, 1976, we reported to GSA on a survey
      of its method for establishing prices for change orders to
      construction contracts. Allowances for overhead, profit,
      and commission on subcontracted work were routinely included
      in the negotiated price foi  hange orders that added work,
      but no price deductions for these allowances were made for
      change orders which deleted work.  On the other hand, we
      noted that the practice of the Army Corps of Engineers is
      to obtain a credit for overhead and profit when the scope
      of work is reduced.



                                                                       LCD-77-333
B-11 8623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which Aeither add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a pocedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, nd commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January J1, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                             2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate'
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November 23,
1976, report to GSA is enclosed.
     We have received similar requests from other Co;gress-
men based on their constituents' inquiries, and we are
providing them a similar response. As you requested, the
correspondence enclosed with your letter is returned.

                              Sincerely yours,




                              F. J. Shafer
                              Director
Enclosures - 2




                          3
                             UNITED STATES GENERAL ACCOUNTING OFFICE
                                     WASHINGTON, D.C. 20546

LOGITICS AND COMMUNICAIIOI
          DoVnnsIm                                      APR 7   1977
          118623



       The Honorable Orrin G. Batch
       United States Senate
       Dear Senator Batch:
           By letter of February 17, 1977, you asked us to
      respond to your constituent's letter about our report to
      the General Services Administration (GSA) on pricing of
      construction contract change orders. Your constituent was
      concerned with our recommendation regarding GSA's future
      treatment of change orders which reduce the required scope
      of work.
           Your constituent's letter and those received from
      numerous others in private industry apparently have inter-
      preted our report as suggesting that GSA make arbitrary
      downward adjustments for overhead, profit, and commissions
      whenever a change order deletes work covered by a contract.
      This was not the intent. Rather our intent was to have
      such adjustments "negotiated."
           As discussed below, GSA officials interpreted cur rec-
      ommendation as intended. To assure there is no misunder-
      standing between this Office and GSA in this matter, we
      are sending the Acting Administrator a copy of this letter.
           On November 23, 1976, we reported to GSA on a survey
      of its method for establishing prices for change orders to
      construction contracts. Allowances for overhe*d, profit,
      and commission on subcontracted work were routinely included
      in the negotiated price for change orders that added work,
      but no price deductions for these allowances were made for
      change orders which'deleted work. On the other hand, we
      noted that the practice of the Army Corps of Engineers is
      to obtain a credit for overhead and profit when the scope
      of work is reduced.



                                                                       LCD-77-334
B-118623



     We expressed to the Administrator of General Services
our opinion that estimates overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to .:onstruc-
tion contracts. The Administrator also stated tat in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                              2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November 23,
1976, report to GSA is enclosed.
     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response. As you requested, the
correspondence enclosed with your letter is returned.

                             Sincerely yours,




                             F. J. Shafer
                             Director
Enclosures - 2
                            UNITED STATES GENERAL ACCOUNTING OFFICE
                                    WASHINGTON, D.C. 2054


Lo',Is    AND COMMIuCATlO
           DlVlSION                                         APR 7     1977
         B-118623




         The Honorable James D.        Santini
         House of Representatives

         Dear Mr.    Santini:

              By letter of February 17, 1977, you asked us to
         respond to your constituent's letter about our report to
         the General Services Administration (GSA) on pricing of
         construction contract change orders. Your constituent was
         concerned with our recommendation regarding GSA's future
         treatment of chanae orders which reduce the required scope
         of work.

              Your constituent's let-ter and those received from
         numerous others in private industry apparently have inter-
         preted our report as suggesting that GSA make arbitrary
         downward adjustments for overhead, profit, and commissions
         whenever a change order deletes work covered by a contract.
         This was not the intent. Rather our intent was to have
         such adjustments "negotiated."

              As discussed below, GSA officials interpreted our rec-
         ommendation as intended. To assure there is no misunder-
         standing between this Office and GSA in this matter, we
         are sending the Acting Administrator a copy of this letter.

              On November 23, 1976, we reported to GSA on a survey
         of its method for establishing prices for change orders to
         construction contracts. Allowances for overhead, profit,
         and commission on subcontracted work were routinely included
         in the negotiated price for change orders that added work,
         but no price deductions for these allowances were made for
         change orders which deleted work.  On the other hand, we
         noted that the practice of the Army Corps of Erineers is
         to obtain a credit for overhead and profit when the scope
         of work is reduced.



                                                                    LCD-77-335
B-118623


     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.
     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.
     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.
      By letters dated January 31, i977, the Administrator
of General Services informed us, the Bouse Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.



                             2
B-118623


     GSA intends to solicit omments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.

     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.

     For your further reference, a copy of our November
23, 1976, report to GSA is enclosed.

     We have r   ived similar requests from other Congress-
men based on the   constituents' inquiries, and we are
providing them a similar response.

                                Sincerely yours,




                                F. J. Shafer
                                Director
Enclosure




                            3
                       UNITED STATES GENERAL ACCOUNTING OFFICE,
                               WASHINGTON, D.C     5


LOGC AND OblMMUNI&NT
      DIISION
                                                   APR 7
    *B-118623




    The Honorable Caldwell Butler
    House of Representatives
    Dear Mr. Butler:
         Your Office asked us to respond to your constituent's
    inquiry about our report to the General Services Administra-
    tion (GSA) on pricing of construction contract change orders.
    Your constituent was concerned with our recommendation
    regarding GSA's future treatment of change orders which
    reduce the required scope of work.
          Your constituent's letter and those received from
     numerous others in private industry apparently have inter-
     preted our report as suggesting that GSA make arbitrary
     downward adjustments for overhead, profit, and commissions
     whenever a change order deletes work covered by a contract.
     This was not the intent. Rather our intent was to have
     such adjustments "negotiated."
          As discussed below, GSA officials interpreted our rec-
     ommendation as intended. To assure there is no misunder-
     standing between this Office and GSA in this matter, we
     are sending the Acting Administrator a copy of this letter.
          On November 23, 1976, we reported to GSA on a survey
     of its method for establishing prices for change orders to
     construction contracts. Allowances for overhead, profit,
     and commission on subcontracted work were routinely included
     in the negotiated price for change orders that added work,
     but no price deductions for these allowances were made for
     change orders which deleted work. On the other hand, we
     noted that the practice of the Army Corps of Engineers is
     to obtain a credit for overhead and profit when the scope
     of work is reduced.


                                                              LCD-77-336
B-118623


     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.
     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.
     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort     impression
our report apparently conveyed to some  readers.
      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such ab equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.



                              2
B-118623

     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to e incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November
23, 1976, report to GSA is enclosed.
     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response.

                               Sincerely yours,




                               F. J. Shafer
                               Director
Enclosure




                           3
                             UNITED STATES GENERAL ACCOUNTING OFFICE
                                     WASHINGTON, D.C. 2054

LOISTICS AND COMMUNICArTlO
          DIVISION


      B-11 8623                                                        IR?    37



     The Honorable Gunn McKay
     House of Representatives
     Dear Mr. McKay:
         By letter of February 28, 1977, you
                                              asked us to
    respond to your constituent's letter
    the General Services Administration about our report to
                                         (GSA) on pricing of
    construction contract change orders.
                                           Your constituent was
    concerned with our recommendation regarding
    treatment of change orders which reduce      GSA's future
    of work.                                 the required scope

         Your constituent's letter and those received
    numerous others in private  industry apparently havefrom
                                                          inter-
    preted our report as suggesting that
                                          GSA
    downward adjustments for overhead, profit,make  arbitrary
    whenever a change order deletes work         and commissions
    This was not the intent. Rather our   covered  by.a contract.
    such adjustments "negotiated."        intent  was to have

         As discussed below, GSA officials interpreted
    ommendation as intended. To assure there            our rec-
    standing between this Office and GSA      is no misunder-
    are sending the Acting Administrator in this matter, we
                                         a copy of this letter.
         On November 23, 1976, we reported
   of its method for establishing prices to GSA on a survey
   construction contracts. Allowances      for change orders to
   and ommission on subcontracted work  for  overhead, profit,
                                         were routinely included
   in the negotiated price for change orders
   but no price deductions for these allowancesthat added work,
   change orders which deleted work. On           were mae for
                                           the
   noted that the practice of the Army Corps   other hand, we
   to obtain a credit for overhead and profit  of Engineers is
   of work is reduced.                          when the scope



                                                                 LCD-77-337
B-118623



     We expressed ' the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances for
overhead, profit, and commission shall be negotiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but were
being excluded in the pricing of deductive change orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor. Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                              2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.
     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely to be incurred in connection with deleted
work. However, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to deleted work.
     For your further reference, a copy of our November 23,
1976, report to GSA is enclosed.
     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response. As you requested, the
correspondence enclosed with your letter is returned.

                               Sincerely yours,




                               F. J. Shafer
                               Director
Enclosures - 2




                           3
                             UNITED STATES GENERAL ACCOUNTING OFFICE
                                     WASHINGTON, D.C. 20548


LOSIrTICS AND COMMUNICATIO
           DIVIIION


       B-118623                                                         ,G,/




       The Honorable Dawson Mathis
       House of Represer -tives
       Dear Mr. Mathis:
            By letter of February 8, 1977, you asked us to
       respond to your constituent's letter about our report to
       the General Services Administration (GSA) on pricing of
       construction contract change orders. Your constituent
       concerned with our recommendation regarding GSA's futurewas
       treatment of change orders which reduce the required
       of work.                                             scope

           - Your constituent's letter and those
                                                 received from
       numerous others in private industry apparently have inter-
       preted our report as suggesting that GSA make arbitrary
       downward adjustments for overhead, profit, and commissions
       whenever a change order deletes work covered by a contract.
       This was not the intent. Rather our intent was to have
       such adjustments "negotiated."
           As discussed below, GSA officials interpreted our rec-
      ommendation as intended. To assure there is no misunder-
      standing between this Office and GSA in this matte-, we
      are sending the Acting Administrator a copy of this letter.
           On November 23, 1976, we reported to GSA on a survey
      of its method for establishing prices for change orders
      construction contracts. Allowances for overhead, profit,to
      and commission on subcontracted work were routinely included
      in the negotiated price for change orders that added work,
      but no price deductions for these allowances were made
      change orders which deleted work. On the other hand,    for
      noted that the practice of the Army Corps of Engineers we
                                                              is
      to obtain a credit for overheaJ and profit when the scope
      of work is reduced.



                                                                  LCD-77-338
 B-118623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should be considered in negotiating deductive changes
well as additive changes, and we recommended that he   as
                                                      amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that allowances
                                                     for
overhead, profit, and commission shall be negotiated
                                                      for
contract changes. As mentioned, such allowances were
considered in the case of additive change orders but being
                                                      were
being excluded in the pricing of deductive change
                                                  orders.
It seems to us reasonable and equitable that in negotiating
change orders appropriate consideration should be given
the effect of reductions in scope as well as to the       to
                                                     effect
of increases, and to changes in indirect as well as
                                                     direct
costs of the contractor.  Thus a negotiated change order
should reflect the ex ent that a reduction in the
                                                  scope
of the work can be exected to reduce the contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the contract price by a
                                                  certain
percentage to allow for estimated applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed to some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the House Committee
Government Operations, and the Senate Committee on     on
                                                    Govern-
mental Affairs that he agrees with our recommendation
that GSA will take steps to promulgate suitable contractand
language to recover "unexpended amounts" of overhead,
                                                        pro-
fit, and commission for credit change orders to construc-
tion contracts.   The Administrator also stated that in
developing contract language equitable to both the
                                                    Govern-
ment and its contractors GSA must take into account
                                                     over-
head costs that may not be reduced as a result of deleted
work, such as equipment rental, salaries of supervisors
and clerical employees, and temporary plant costs,
                                                    as
well as contractor costs already incurred for the
                                                   deleted
work.




                              2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.

      We consider GSA's statements responsive to our rec-
ommendation. As we hve stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or   ike. to be incurred in connection with deleted
work.    owever, neither would it be equitable to the Govern-
ment for the contractor to receive unearned overhead, pro-
fit, or commission applicable to.deleted work.

     For your further reference, a copy of our November
23, 1976, report to GSA is enclosed.

     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response.

                               Sincerely yours,




                               F. J. Shafer
                               Director
Enclosure




                           3
                               UNITED STATES GENERAL ACCOUNTING OFFICE
                                       WASHINGTON, D.C. 20548


LOGISTICS AND COMMUNICAIIONS
           DIVISION



       B-11 8623




       The Honorable Gary Hart
       United States Senate

       Dear Senator Hart:

            By letter of March 1, 1977, you asked us to
       respond to your constituent's letter about our report to
       the General Services Administration (GSA) on pricing of
       construction contract change orders.  Your constituent was
       concerned with our recommendation regarding GSA's future
       treatment of change orders which reduce the required scope
       of work.

            Your constituent's letter and those received from
       numerous others in private industry apparently have inter-
       preted our report as suggesting that GSA make arbitrary
       downward adjustments for overhead, profit, and commissions
       whenever a change order deletes work covered by a contract.
       This was not the intent. Rather our intent was to have
       such adjustments "negotiated."

            As discussed below, GSA officials interpreted our rec-
       ommendation as intended. To assure there is no misunder-
       standing between this Office and GSA in this matter, we
       are sending the Acting Ad.ministrator a copy of this letter.

            On November 23, 1976, we reported to GSA on a survey
       of its method for establishing prices for change orders to
       construction contracts.  Allowances for overhead, profit,
       and commission on subcontracted work were 'rutinely included
       in the negotiated price for change orders that added work,
       but no price deductions for these allowances were made for
       change orders which deleted work. On the other hand, we
       noted that the practice of the Army Corps of Engineers is
       to obtain a credit for overhead and profit when the scope
       of work is reduced.



                                                                    LCD-77-339
B-11 8623



     We expressed to the Administrator of General Services
our opinion that estimated overhead, profit, and commission
should. be considered in negotiating deductive changes as
well as additive changes, and we recommended that he amend
construction contract provisions to provide that overhead,
profit, and commission be applied on all change orders
which either add or delete work.

     Our recommendation was aimed at getting GSA to clarify
its contract provisions which state that -llowances for
overhead, profit, and commission shall be nei-oiated for
contract changes. As mentioned, such allowances were being
considered in the case of additive change orders but ware
being excluded in the pricing of deductive change orders.
It seems te us reasonable and equitable that in negotiating
change orders appropriate consideration should be given to
the effect of reductions in scope as well as to the effect
of increases, and to changes in indirect as well as direct
costs of the contractor.  Thus a negotiated change order
should reflect the extent that a reduction in the scope
of the work can be expected to reduce the.contractor's
estimated costs, including overhead.

     Such a procedure is quite different, for example,
from arbitrarily reducing the cntract price by a certain
percentage to allow for estimateC applicable overhead,
profit, and commissions, which is the sort of impression
our report apparently conveyed X:.some readers.

      By letters dated January 31, 1977, the Administrator
of General Services informed us, the Bouse Committee on
Government Operations, and the Senate Committee on Govern-
mental Affairs that he agrees with our recommendation and
that GSA will take steps to promulgate suitable contract
language to recover "unexpended amounts" of overhead, pro-
fit, and commission for credit change orders to construc-
tion contracts. The Administrator also stated that in
developing contract language equitable to both the Govern-
ment and its contractors GSA must take into account over-
head costs that may not be reduced as a result of deleted
work, such as equipment rntal, salaries of supervisors
and clerical employees, and temporary plant costs, as
well as contractor costs already incurred for the deleted
work.




                             2
B-118623


     GSA intends to solicit comments from the private sector
as it develops proposed contract provisions, and estimates
that revised contract provisions will not be issued before
December 1977.

     We consider GSA's statements responsive to our rec-
ommendation. As we have stated above, we do not advocate
that contract prices be reduced for overhead costs already
incurred or likely o be incurred in connection with deleted
work. Bowever, neither would it be equitable to the Govern-
ment for the contractor to receive uarned overhead, pro-
fit, or commission applicable to deleted work.

     For your further reference, a copy of our November
23, 1976, report to GSA lb enclosed.

     We have received similar requests from other Congress-
men based on their constituents' inquiries, and we are
providing them a similar response.

                                Sincerely yours,




                                F. J. Shafer
                                Director
Enclosure




                            3