When a contractor submits product as Use-as-is with a minor non-conformance we are supposed to receive an equitable adjustment /consideration for accepting this unless the cost of the savings is less than the cost of the modification to the contract. What is the cost to modify a contract in this scenario, how is it determined, and is there somewhere to reference this?
FAR 46.407 (f) ..... However, when supplies or services involving minor non-conformances are accepted, the contract need not be modified unless it appears that the savings to the contractor in fabricating the nonconforming supplies or performing the nonconforming services will exceed the cost to the Government of processing the modification.
This response is based on the information provided. We suggest you discuss with your contracting officer and/or legal department as appropriate.
We have searched and cannot find an authoritative source for the following but are reasonably comfortable in sharing nonetheless. It has been accepted that when creating a value to cover the cost of creating a modification, the dollar value to use was for years $500. We recently heard the value is now considered to be $1000, again we cannot source that information.
"FAR 46.407 -- Nonconforming Supplies or Services .... (c)
(1) In situations not covered by paragraph (b) of this section, the contracting officer ordinarily must reject supplies or services when the nonconformance is critical or major or the supplies or services are otherwise incomplete. However, there may be circumstances (e.g., reasons of economy or urgency) when the contracting officer determines acceptance or conditional acceptance of supplies or services is in the best interest of the Government. The contracting officer must make this determination, based upon--
(i) Advice of the technical activity that the item is safe to use, and will perform its intended purpose;
(ii) Information regarding the nature and extent of the nonconformance or otherwise incomplete supplies or services;
(iii) A request from the contractor for acceptance of the nonconforming or otherwise incomplete supplies or services (if feasible);
(iv) A recommendation for acceptance, conditional acceptance, or rejection, with supporting rationale; and
(v) The contract adjustment considered appropriate, including any adjustment offered by the contractor .... (f) When supplies or services are accepted with critical or major nonconformances as authorized in paragraph (c) of this section, the contracting officer must modify the contract to provide for an equitable price reduction or other consideration. In the case of conditional acceptance, amounts withheld from payments generally should be at least sufficient to cover the estimated cost and related profit to correct deficiencies and complete unfinished work. The contracting officer must document in the contract file the basis for the amounts withheld. For services, the contracting officer can consider identifying the value of the individual work requirements or tasks (subdivisions) that may be subject to price or fee reduction. This value may be used to determine an equitable adjustment for nonconforming services. However, when supplies or services involving minor nonconformances are accepted, the contract need not be modified unless it appears that the savings to the contractor in fabricating the nonconforming supplies or performing the nonconforming services will exceed the cost to the Government of processing the modification."
As you cited and as listed above, non-conforming items can be accepted if requirements in para. c above are met. In para. f, we can accept without an equitable adjustment. But we are not required to accept without an equitable adjustment. Something to consider when making this decision is the contract type. If it is a cost contract, we would be less concerned with collecting costs which we will effectively be paying for. But if the contract is firm fixed-price and the contractor is reducing the price in submitting the non-conforming item we suggest the government consider the remedy cover in para. b.
"(b) The contracting officer ordinarily must give the contractor an opportunity to correct or replace nonconforming supplies or services when this can be accomplished within the required delivery schedule. Unless the contract specifies otherwise (as may be the case in some cost-reimbursement contracts), correction or replacement must be without additional cost to the Government. Subparagraph (e)(2) of the clause at 52.246-2, Inspection of Supplies -- Fixed-Price, reserves to the Government the right to charge the contractor the cost of Government re-inspection and retests because of prior rejection."
If the government is willing to accept the non-conforming items, we should receive an equitable adjustment commensurate with the savings the contractors is experiencing.