After beginning the contract the contractor finds out the foreign country where the prime is performing requires the contractor to pay 18% VAT. Neither party anticipated this at time of award. Can the government agency modify the contract to raise the contract value above the $4M ceiling for a direct award?
The following response is based solely on the question and background information provided. As we do not have all of the facts particular to your contract, program, and situation, we highly recommend, as applicable, you consult your leadership, contracting officer and/or Legal Office for guidance.
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It appears you conducted a FAR Part 15 competition and the "prime" discovered a "mistake" when learning that a VAT would be payable in the country where performance takes place. Your attention is directed to FAR 14.407-4 (cross referenced from FAR 15.508) -- Mistakes After Award and FAR Subpart 33.2 Disputes and Appeals for regulatory direction. The referenced FAR Parts govern both FAR 14 & 15 competitive actions and establishes procedures for addressing "mistakes" discovered after award. Assessing your situation in relation to the FAR criteria and direction will determine whether an adjustment can be made to your current contract value of $3.96M.