Tuesday, July 31, 2012

WHAT WINNING MEANS (AT THE ASBCA)

A few days ago, Armed Services Board of Contract Appeals (ASBCA) Judge Elizabeth Tunks announced in the last paragraph of her opinion:
We conclude that the government breached the contract when it did not permit MCC to compete for the two task orders.  Appellant's motion for summary judgment is granted.  The government's motion for summary judgment is denied.  The appeal is sustained and remanded to the parties for determination of quantum.
The contract in issue referenced a statute which required, in certain circumstances, subsequent contracting opportunities be set aside for exclusive small business participation.  What did the term "subsequent contracting opportunities" mean? Judge Tunks agreed with the contractor's interpretation that the phrase meant subsequent solicitation of a contract (MCC was not a small business), not the government's view that the phrase referred to a request for a task order proposal. Judge Tunks decided the government breached the contract.

The case went off on cross motions for summary judgment.  That is, each side moved the Board for disposition on the merits based on its interpretation of the contract.  The material facts were undisputed as they must be to be successful on a motion for summary judgment.

When a dispositive motion is granted, the appeal is sustained (contractor wins). Since the Board insists on trying entitlement separately (there are limited exceptions), winning means the case is remanded to the parties (contracting officer and contractor) to negotiate damages or "quantum".  Failing settlement, the case returns to the ASBCA for a determination of quantum by the Board.

bill@spriggslawgroup.com     www.spriggslawgroup.com


Wednesday, July 25, 2012

INTERRELATIONSHIP OF CHANGES AND TERMINATIONS

One of the most fascinating aspects of government contracts and also high on the list of things to remember is the interrelationship between the changes clause and both the termination for default and the terminations for convenience clauses. There also exists, of course, an interrelationship among all three clauses. We all know all about changes. They can be formal, informal or constructive. They can arise out of interpretation disputes, specification errors, conflicts or omissions, commercial impracticability, acceleration of delivery, failure to disclose vital information, failure to cooperate, interference in performance and failure to communicate. But just how do changes become involved in terminations?

Every termination for default necessarily implicates possible changes and requires an investigation as to whether changes contributed to the default. The default clause refers to acts of the government in its contractual capacity as part of a list of possible defenses to the default. The changes become possible excuses for non performance or delays. When confronted with a cure notice or show cause notice, every circumspect contractor should investigate and analyze whether constructive changes contributed to the performance issues. The contractor also should be aware that even if it loses its appeal of the determination for default, it still may be able to recover an equitable adjustment for some constructive changes.

In addition, the contractor is well advised to submit its pro forma termination for convenience settlement proposal in response to a termination for default. If the default is converted to convenience, the conversion relates back to the time of termination for default, therefore allowing the contractor the opportunity to fully recover its termination settlement expenses.

And every termination for convenience necessarily implicates possible changes. FAR 49.114 requires examination of whether there are any outstanding changes before the settlement can be completed. In fact, the smart contractor investigates changes carefully since they can be used to offset and defeat any proposed application of the adjustment for loss formula. Moreover, if the settlement proposal exceeds the original contract price (which limits recovery), the price can be increased under the changes clause to allow full recovery of the contractor's proposal. The equitable adjustment in price becomes part of the termination settlement.

The changes clause may be at work in any termination. Every compensable change is an excusable cause of non performance. Every compensable change also defeats adjustment for loss. Every termination implicates the changes clause.

bill@spriggslawgroup.com    http://www.spriggslawgroup.com

MISUSE OF TERMINATIONS FOR DEFAULT

We've been asked to comment on the effects of sequestration on the government contract and subcontract community.  The first thing we thought of was the misuse of terminations for default.  When programs and contracts under them are on the cutting board, the proper mechanism for cancelling them is termination for convenience.  But what we've seen in the past is that some contracting officers decide instead to set the contractor up for termination for default.

Termination for default allows the government to move the funding off the contract.  Conversely, funding must be left on the contract pending resolution of the termination for convenience settlement proposal.  Thus, the contracting officer has a funding motivation for turning the cancellation into a termination for default.

Termination for default also shifts the burden of contract administration and all the contract risks to the contractor.  No termination contracting officer needs to be appointed and there is no administrative burden on the government.  There will be no reprocurement since the requirement is going away.  The contractor must defend the termination for default action.

In defending the termination for default, it may take the contractor up to four (4) years of litigation to obtain a conversion of the termination to one for convenience which finally entitles the contractor to payment under the convenience termination clause.  We have seen many termination for default cases where the government has delayed the litigation for up to and sometimes longer than 4 years.

So our initial comment on sequestration is a warning of the dangers of providing the government the incentive to place all the burden on the contractor to eventually be paid its costs of termination.  There is no question that the proper contract mechanism for implementing sequestration is termination for convenience.  But we are concerned that sequestration may result in the misuse of termination for default to at least postpone the government's liability.

Stay tuned.  We'll discuss what contractors should do about this in another article in the near future.


Related article: http://spriggslawgroup.blogspot.com/2012/06/sequestration-claims-are-coming.html

bill@spriggslawgroup.com        http://www.spriggslawgroup.com


Tuesday, July 24, 2012

DO NOT "READ OUT" PORTIONS OF THE CONTRACT

Judge Owen Wilson of the Armed Services Board of Contract Appeals (ASBCA) has just issued an opinion in which he sustains the contractor's appeal because the government decided to "read out" portions of the contract.  This, he says, is "not legally defensible."

The case involved a Corps of Engineers contract for interior design services issued on a sole source basis to a small disadvantaged business.  The contractor appealed the governments claim for overcharges for employee hours worked but for which the contractor did not pay its employees (these were uncompensated overtime hours).

Judge Wilson said that based on the contract read as a whole, the government's interpretation lacked merit.  The government argued that the payments clause referred to costs which meant the contractor could only be paid for wages actually paid.  There was no question that the labor was performed and that the employees were paid their regular salaries.

Most importantly, the judge said the payments clause did not specifically prohibit the contractor from collecting its hourly rates for work performed by salaried employees even though they performed uncompensated overtime.  The Board said the salary agreements with contractor employees were irrelevant to the dispute over contract language interpretation.

In his opinion, Judge Owen said the rules of contract interpretation are well established.  He began with the plain language of the contract, giving reasonable meaning to all parts of the contract.  Based on a reading of the contract as a whole, the contract is clear, he said.  Firm fixed price rates were established.  They were to be paid.  The labor was performed and payment was due.  Do not read the requirement to pay out of the contract.  Appeal sustained.

bill@spriggslawgroup.com         www.spriggslawgroup.com

Monday, July 23, 2012

UNAMBIGUOUS LANGUAGE; ZONE OF REASONABLENESS

Judge Monroe Freeman, one of the longest serving members of the Armed Services Board of Contract Appeals (ASBCA), recently has interpreted the plain meaning of contract language to find no ambiguity and he concludes the government's interpretation is "not within the zone of reasonableness."  As a result, he also concludes that the government's request for discovery of extrinsic evidence on the meaning of the language is irrelevant and not permitted.

The language in question stated:
[T]he delivered quantity of fuel shall be determined on the basis of temperature compensating meters on the receiving system -- (or if the receiving system meters are inoperative) on the basis of (i) Calibrated meter on the conveyance; or (ii) Gauging the delivery conveyance . . . or (iii) . . . the net quantity determined at the loading point by a calibrated loading rack meter or calibrated scales . . . .
The government argued the phrase "or if the receiving system meters are inoperative: means that all meters on the receiving systems, whether or not they are temperature compensating meters, must be inoperative before the specified alternatives apply.  The government cited a declaration from the contracting officer stating the government's intention to use meters, not weight scales.

Judge Freeman disagrees.  He says "[t]he cited phrase appears in the same sentence and immediately following the specification of 'temperature compensating meters on the receiving system.'"  Thus, the words "receiving system meters" refers to the immediately preceding language.  The government's interpretation, says the ASBCA "is not within the zone of reasonableness and we find no ambiguity in the clause."


No ambiguity.  And when there is no ambiguity, extrinsic evidence of the contracting officer's unilateral intent cannot be used to vary the unambiguous terms of the written contract.


Once again, the first rule of contract interpretation is to determine the plain meaning of the contract language, reading the contract as a whole and giving meaning and harmony to all its parts.  Ambiguity exists only if there is more than one reasonable interpretation.

Related articles: http://spriggslawgroup.blogspot.com/2012/04/rules-of-contract-interpretation.html
http://spriggslawgroup.blogspot.com/2012/05/contract-interpretation-revisited.html
http://spriggslawgroup.blogspot.com/2012/02/interpreting-contractual-language.html

bill@spriggslawgroup.com           http://www.spriggslawgroup.com




Saturday, July 21, 2012

THE IRONY OF A COMMERCIAL ITEM CONTRACT T FOR C

The incongruity between the actual and the expected result is by no means more poignant than in the termination for convenience (T for C) of commercial item contracts.  The T for C of commercial contracts may well result in the contractor receiving no where near the cost recovery it would have received under the standard government contract T for C clause.

The regular T for C clause permits recovery of all allowable costs under FAR Part 31. It is often said the contract, even if fixed priced, is converted to a cost reimbursement contract for the purpose of T for C recovery.  Significantly, those allowable costs include all cost preparing to perform the terminated work.  In the regular clause, they are fully reimbursed.

The commercial item contract T for C clause, on the other hand, limits the T for C recovery to the percentage of the price for the portion of work done plus costs directly related to the termination itself.  In Red River, the Armed Services Board of Contract Appeals (ASBCA), denied the recovery of the costs of preparing to perform the terminated work.

On appeal in Red River, the U.S. District Court (the case went there because Maritime Law was involved) reversed the ASBCA, allowing properly allocable costs of preparing to perform the terminated work.  The court was impressed that the regulation allowed use of the cost principles as a guide and it held in particularly high regard FAR 49.201 which speaks of compensating the contractor "fairly" for the work done "and the preparations made for the terminated portion of the contract."  (The word "fair" is used two more times in the first paragraph.)


Obviously, the thought behind the clause was that in truly commercial item buys, the item would easily be sold in the commercial marketplace, so there was no need for full (and fair) cost recovery for preparing to perform.  However, the question of full recovery of costs is squarely back in litigation before the ASBCA and ultimately the Court of Appeals for the Federal Circuit (CAFC).  The Civilian Board of Contract Appeals CBCA) takes the broader view and permits cost recovery more closely resembling that which a contractor receives in a regular T for C settlement.

The Red River contract (like so many others) should never have been a commercial item contract.  Had the case arose in the CBCA's jurisdiction, the result would have been different. Since the appellate court's opinion in Red River is not binding in other ASBCA cases, the issue remains whether costs incurred preparing to perform will be allowed at the ASBCA (and the CAFC) in terminations for convenience of commercial item contracts.  Stay tuned for further developments.

At the solicitation review stage, contractors should insist on the standard fixed price T for C clause in place of the commercial item clause.


Related article: http://spriggslawgroup.blogspot.com/2012/06/troublesome-t-for-c-clause-in.html

bill@spriggslawgroup.com        http://www.spriggslawgroup.com

Friday, July 20, 2012

CURE NOTICE AND SHOW CAUSE: WHAT'S THE DIFFERENCE?

Paragraph (a)(1)(ii) of the default clause addresses failure to deliver or perform on time.  In these circumstances, no notice of failure or of the possibility of termination for default is required.  (However, if the government has done anything which might be construed by the contractor as a waiver of the delivery schedule, the government must  establish a new due date.)

Paragraphs (a)(1)(ii) and (a)(1)(iii) of the default clause involve failure to make progress endangering performance or failure to perform a provision of the contract other than the schedule deadline.  If default termination is based on these types of failures, the contracting officer must provide the contractor a cure notice.  The format is in FAR 49.607(a).


In preparing the cure notice, care should be taken to specify the failures and to suggest the cures.  The 10 days may be extended if the contracting officer considers it reasonably necessary.  The contractor can use the failure to provide the cure notice as an absolute defense in its termination for default appeal.  Failure to provide the required cure notice is fatal.

As a final warning or if the time remaining for delivery is insufficient to permit a realistic cure period of 10 days or more, the show cause letter, set forth in FAR 49.607(b) may be used.  "It should be sent immediately upon expiration of the delivery period."  The letter warns the contractor default is imminent and invites the contractor to show why the contract should not be so terminated.  It refers to the missed delivery date or the failure to cure the defects cited in the cure notice.  One last chance is given the contractor.

It is important to follow FAR 49.402-3 and 49.607 precisely.  These notices are not interchangeable.  They are complementary.  They are to be used under the precise circumstances described in the regulations.


Contractors should take these notices very seriously and prepare complete responses.  They should fully explain any excusable causes of delay or failure to perform.  And, they should remember that any acts or omissions of the government giving rise to constructive changes are recognized excuses.  The contractor must thoroughly address the issues raised in the notices.

bill@spriggslawgroup.com        www.spriggslawgroup.com

GOVERNMENT AUDIT RIGHTS ON COMMERCIAL ITEM CONTRACTS

Since commercial item contracts do not have a standard changes clause, constructive changes are breaches of the contract which entitle the contractor to breach claims.  Those contracts also have a different termination for convenience clause which specifically addresses the government's audit rights.

So, what is the rule on government audit of breach and termination for convenience claims? (We address the audit question only and reserve for future discussion the nuances of recovery under the termination for convenience clause.)

FAR 15.403-1(b)(3) and (5) specifically prohibit requiring cost or pricing data for commercial item contracts and when modifying such contracts.  Therefore, neither FAR 15.403-4(a)(1) nor 15.403-4(a)(2) (requiring such data) applies.  FAR 12.503(c)(2) says the Truth in Negotiations Act and FAR 15.403 have been modified for commercial item buys.

FAR 12.403(d)(1)(ii) says the government has no right to audit a termination for convenience claim on a commercial item contract.  FAR Part 12 does not address the audit issue on breach claims.  Both breach and termination for convenience claims demand money. Given the FAR Part 15 language and the prohibition on audit of termination claims, it seems logical to conclude the government has no right to audit the breach claims as well.

The issue of how to "price" breach claims under commercial item contracts is not definitively resolved.  (We should hasten to point out that the recovery on termination for convenience claims also is still up in the air thanks to the Red River case problem we will discuss in the future.)  An argument can be made that the cost principles are not  mandatory (that's the rule on commercial item termination claims) and that common law damage calculations are permitted.  If so, the calculations may not be easily audited in any event.

As a practical matter, the judicial tribunals are comfortable with the request for equitable adjustment (REA) approach to damage calculations.  It is possible they will settle the issue in favor of that approach.  And, in litigation of the damage issue, they no doubt will allow government audit as part of normal litigation discovery.

Also as a practical matter, contracting officers may insist on an audit even when the regulations clearly prohibit it.  Contractors may be able to seek declaratory judicial relief from such a position.

bill@spriggslawgroup.com         www.spriggslawgroup.com

ASSERT REA IN 30 DAYS: EXCEPTIONS MAKE THE RULE

Sometimes exceptions make the rule.  The changes clause says the contractor "must assert" its right to a request for equitable adjustment (REA) "within 30 days from the date of receipt of the written order."  The clause goes on to say the contracting officer may act on the request any time before final payment on the contract.  The exceptions, however, have made the rule.  The 30 days is seldom enforced.

First of all, the rule does not apply to constructive changes.  Those changes are never the subject of a formal written change order.  So, contractors need only pay attention to the requirement to be sure their constructive change REA's are submitted prior to final payment.    As long as there is any outstanding action on the contract, there is no final payment.  So, even some notice (perhaps imputed or constructive) of the change extends the time for submission.

The contracting officer's review of the REA waives enforcement of the 30 day notice requirement.

To enforce the 30 day requirement, the government has to show prejudice by the delay.  This is a difficult burden.  The government must show it was deprived of the opportunity to mitigate its costs.  This is almost impossible especially when the contractor argues the government has actual or constructive knowledge of the change.  If the REA is submitted two years after the change occurs and government records have been lost, the government may be able to show prejudice.

Good contract administration dictates that whenever a contractor encounters a formal change, it should send a short letter to the contracting officer, along these lines:
We have received the referenced change order and we will implement it as instructed.  We hereby assert our request for an equitable adjustment to the contract price and schedule.  We will submit details in support of this request within the next 90 days.
The same type of letter can be used for constructive changes and breaches of the contract.  As soon as the contractor discovers the problem it should assert its right to the REA or claim and follow with the details as soon as practicable.

Although the 30 day requirement in the changes clause is not strictly enforced the requirement that the termination for convenience settlement proposal be submitted within one year is strictly enforced.


bill@spriggslawgroup.com          http://www.spriggslawgroup.com/





Wednesday, July 18, 2012

SUBCONTRACTS: MANDATORY FLOW DOWN MYTHS AND REALITY

You will not find a list of mandatory subcontract flow down clauses conveniently located in any regulation (with the single exception of FAR 52.244-6 which lists subcontract clauses for commercial item contracts).  We have to create our own lists (depending, of course, on the type of prime contract and other regulatory criteria).  The American Bar Association (ABA) Public Contract Law Section has two now outdated publications addressing mandatory and suggested flow down clauses.

Recently, McKenna Long & Aldridge has conducted a webinar on the subject worthy of our attention.  The McKenna firm lists 9 mandatory flow down clauses for commercial item contracts (FAR 52.244-6) and an additional 4 such clauses for noncommercial item contracts.  It also lists 9 mandatory clauses for construction subcontracts and two additional clauses for service contracts other than construction.  We recommend this course.

It's hard to separate myth from reality.  Most prime contractors insist that all of their prime contract clauses (or most of them) must flow down to all subcontractors. Their superior bargaining position often allows them to get away with this approach.  They will take the position that since they are in the prime contract they must be flowed down (they are "mandatory").  Subcontractors, if they are in a superior bargaining position, can narrow that list down considerably. Myth and reality is dictated by bargaining position.

The general truth is that there are not that many mandatory flow down clauses and whether or not they are mandatory depends on the type of contract and the size of the order (and sometimes some other limitations on the need to flow down).  The biggest myth of all is that the disputes, changes and termination for convenience and default clauses are mandatory flow down clauses.  They are not mandatory.  And if they are flowed down in concept, they must be rewritten for the subcontract context. (See http://spriggslawgroup.blogspot.com/2012/05/model-subcontract-disputes-clause.html )

Does the Christian Doctrine apply to subcontracts? That is, if a mandatory clause is not in the subcontract, will it be read in as a matter of law.  The key phrase is "a matter of law."  Perhaps the most fascinating aspect of subcontracts under government prime contracts is what law applies.  Since subcontracts are commercial contracts (the government is not a party), state law would apply.

Most state laws do not have the equivalent Christian Doctrine.  Or do they?  The Uniform Commercial Code is based on the premise that many clauses will be read into commercial contracts.  If the Choice of Law clause in the subcontract refers to the federal common law of contracts, and if the judge decides to apply the federal law concepts (perhaps because of the many FAR clauses flowed down), he or she may decide to apply the Christian Doctrine.

The point here is that the flow down exercise is more art than science and is subject to negotiation.  The lesson for subcontractors is that the list of mandatory flow down clauses is not that long and if your bargaining position permits, you should test what the prime is saying about the clause being mandatory.

bill@spriggslawgroup.com          http://www.spriggslawgroup.com/


Tuesday, July 17, 2012

ADVERSE PAST PERFORMANCE REPORTS: PROTEST SUSTAINED

GAO has sustained a protest where the agency failed to conduct discussions with the protester regarding adverse past performance reports that the protester had not previously had an opportunity to address.

As a general matter, GAO said, the evaluation of an offeror's past performance is a matter within the discretion of the contracting agency, and GAO will not substitute its judgment for "reasonably based" past performance ratings. However, GAO will question an agency's evaulation conclusions where they are unreasonable or not properly documented. The critical question is whether the evaluation was conducted fairly, reasonably and in accordance with the solicitation's evaluation scheme. Moreover, the evaluation must be based on relevant information sufficient to make a reasonable determination of the offeror's past performance.

In the case, the agency argued it did not consider positive past performance information reliable. GAO dismissed this argument since the agency had considered similar information other offerors had submitted with their proposals.

It is a fundamental precept of negotiated procurements that discussions, when conducted, must be meaningful, equitable and not misleading, GAO reiterates. Discussions must not mislead offerors and must identify deficiencies and significant proposal weaknesses that could reasonably be addressed in a manner to materially enhance the offeror's potential for receiving contract award. Agencies are also required to provide an offeror with a chance to address adverse past performance information to which the offeror has not previously had an opportunity to respond.

While discussions must be meaningful, leading an offeror into the areas of its proposal requiring amplification or revision, the agency is not required to spoon feed an offeror as to each and every item that could be raised to improve its proposal.

Finally, GAO said an agency cannot escape its obligations to conduct discussions in a reasonable manner by characterizing an evaluated weakness in past performance as something less than adverse. Although agencies must advise offerors during discussions of adverse past performance regarding which the offeror has not yet had an opportunity to respond, GAO says an offeror is not entitled to discussions if it has perviously had an opportunity to address the issue with the agency.

bill@spriggslawgroup.com       http://www.spriggslawgroup.com/

Saturday, July 14, 2012

A WORD TO THE WISE ABOUT SMALL BUSINESS SIZE

The Small Business Administration (SBA) Office of Hearings and Appeals (OHA) has issued a decision denying a small business size appeal because the business did not carefully consider size issues before it self-certified its size.  In the appeal, the business (Technical Services Group, LLC) appealed a size determination arguing that it had corrected the affiliation issue after the protest and initial SBA size determination.  It is well-settled, said the OHA judge, that "SBA determines size status as of the date of self-certification."

In the case, a 40% owner and co-chairman of the would be small business, also controlled several large businesses.  The question was whether he also controlled the alleged small business.  In determining whether he had such power, SBA applied 13 CFR 121.103(c)(2) which provides that if two or more persons own less than 50% of the voting stock but their holdings are "large" compared to other stock holdings, there is a presumption of control.  Another person owned 35%, making the two owners control 75% together.

The OHA judge said that was enough to raise the presumption of control.  The mere fact that a minority shareholder cannot individually control a concern is not sufficient to overcome the presumption of control.  The OHA decided that although the possibility to control was remote, the potential was real.  That possibility meant the would be small business was affiliated with a large business and therefore was not small. This is called the minority shareholder rule.


The lesson is clear: a minority shareholder can potentially control the would be small business and the resulting affiliation issue must be resolved prior to self-certification.


bill@spriggslawgroup.com        http://www.spriggslawgroup.com/


Friday, July 13, 2012

WHEN, WHY AND HOW TO CONVERT THE REA TO A CLAIM

One of our most popular discussions deals with how to prepare a request for equitable adjustment (REA).  In response, we've had a number of questions about when, why and how to convert the REA to a claim.  Again, there is no guidance in the regulations in answer to these questions so we suggest answers based on our experience.

The REA is not defined in FAR Part 2.  A claim is defined there as follows:
"Claim" means a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract.
The regulation goes on to say a routine invoice is not a claim.  It then states:
The [routine request] may be converted to a claim, by written notice to the contracting officer as provided in 33.206(a), if it is disputed either as to liability or amount or is not acted upon in a reasonable time.
We believe it is reasonable to treat the REA as if it were a routine request for payment.  It is a request, not a claim.  The intent is to negotiate a settlement of the matters raised in the submission.  The costs of preparing, presenting, negotiating and settling the request are allowable costs.  The intent behind the request is to reach agreement to modify the contract to provide some or all of the relief requested.

A claim arises when the "submission" (the word used in the above referenced quote for which we substituted "routine request" in brackets) is disputed or is not acted upon in a reasonable time.  FAR Subpart 33.2 covers the initiation and certification of a claim, interest on claims and all the rules relating to the contracting officer's decision on a claim.  The distinguishing characteristics between the REA and a claim are a claim must be certified (if over $100K), interest runs on it from date of receipt and the contracting officer is obliged to render a decision on it from which the contractor can appeal to the tribunal of its choice.


In practice, unless it knows its request will be disputed, the contractor usually submits the REA first.  Then, if the contractor meets resistance, either in the form of delay or denial, the contractor should "convert" the REA to a claim, certify it (probably in any event) and request the contracting officer's final decision.  Most often this is accomplished by simply resubmitting the REA with a cover letter providing the requisite certification and request for decision.

A claim, in any event, must be submitted within 6 years of its accrual.  The REA can be submitted any time before final payment.  The judicial tribunals do not have jurisdiction to hear the claim unless it has been certified (if over $100K) and the contracting officer has either rendered a decision or failed to do so within a reasonable time (60 days for small claims).

bill@spriggslawgroup.com    http://www.spriggslawgroup.com/

Tuesday, July 10, 2012

TIPS ON CLAIM RESOLUTION

Contractors hate to litigate claims.  They have better things to do.  It takes too long and diverts important resources into a speculative, risky enterprise with no hope of a new product or service line.  But some contractors are either forced or choose to treat losses written off as possible profit enhancers in tough times.  There are other reasons to pursue claims particularly when they involve contract interpretation issues which may apply to ongoing contract performance, or defending a termination for default by arguing affirmative relief claims.

So we thought we would provide a list of tips for contractors preparing for the possibility of claim litigation.
  1. Prepare a professional request for equitable adjustment (REA) and convert it to a claim only after negotiations with the contracting officer fail.  See www.spriggsconsultingservices.com for a list of 14 tips on how to negotiate a settlement of the REA.  Submit the claim with the proper certification (do not change a word) and ask for a prompt final decision as required by the regulation.  Remind the contracting officer interest is running on the claim.
  2. Appeal the failure to issue a decision if it is not rendered either within 60 days or a reasonable time (usually 90 days), whichever is appropriate under the regulation.
  3. Make your choice of forum based on sound professional advice.  This usually means going to the Board of Contract Appeals (Board).
  4. Always file your complaint with your notice of appeal.  Always.  There is no need to wait the 30 days.
  5. Always ask opposing counsel to agree to mediation right away.  Always.  The first step in the litigation should be an attempt to set up a mediation meeting presided over by a Board judge.  In fact, it is possible to engage the services of a Board judge even before commencing the litigation.
  6. Consider forgoing discovery and arguing that opposing counsel's discovery should be limited.  If you have prepared your case properly, you may be able to proceed to trial without discovery or after limited discovery.  Control of the other side is difficult and depends on the judge.  
  7. Consider carefully dispositive motions.  Legal issues can be disposed of on motion.  If you have prepared your case properly, the only issues that remain should be legal issues susceptible to disposition on motion.
  8. If mediation has not worked early on, forget alternative dispute resolution (ADR).  Go ahead and go to trial as fast as you can or file your dispositive motions.
  9. There is a reason for the hackneyed "settlement on the court steps."  It happens.  But it most likely happens before the parties have invested too much time in witness preparation and before they come close to the courthouse steps.
  10. The Boards like to adjudicate entitlement and leave quantum (damages) to the negotiation of the parties.  Even the slightest headway on entitlement can lead to settlement.
These are just a few suggestions on resolution of claims.  We are a big fan of ADR. However, it should be used early in the process.  It's an excellent technique for discovering the other side's position and it is the best opportunity you have to hear a judge (as mediator) point out the strengths and weaknesses of the parties' positions.

bill@spriggslawgroup.com        http://www.spriggslawgroup.com/
                                                   http://spriggsconsultingservices.com/ 

Monday, July 9, 2012

GAO LPTA DECISION GONE AWRY

The Government Accountability Office (GAO) recently has issued an awful lowest price technically acceptable (LPTA) procurement decision.  Essentially, GAO has said it takes a hands off view since a fixed price contract places all the risk on the contractor and it is acceptable for an agency to base its "price realism" analysis on its own independent government estimate (IGE) even if the agency changes the IGE during proposal evaluation to meet the contractor's low ball price.

In Resource Ltd., B-406492; B-406492.2 (June 6, 2012), the solicitation provided for the award of an indefinite delivery/indefinite quantity (IDIQ) contract on a LPTA basis for custodial services.  Offerors were informed that proposals would be evaluated as acceptable or unacceptable under the technical capability factor.  The solicitation also provided that the agency would assess the reasonableness, realism and affordability of offerors' prices.

The so called assessment of price reasonableness and realism was based solely on the government's IGE.  Moreover, during proposal evaluation, the government lowered the IGE in an apparent justification of the successful contractor's price.

The protester argued that the agency failed to perform a proper realism evaluation and that the winning contractor's low ball price demonstrated the firm's lack of understanding of the work required and therefore represented an unacceptable performance risk to the government.

GAO denied the protesting, saying:
Where, as here, the award of a fixed-price contract is contemplated, a proposal's price realism is not ordinarily considered, since a fixed-price contract places the risk and responsibility for contract costs and resulting profit or loss on the contractor.  However, any agency may provide in the solicitation for a price realism analysis for such purposes as measuring an offeror's understanding of the solicitation requirements, or to avoid the risk of poor performance from a contractor who is forced to provide goods or services at little or no profit.
GAO's first order of business should be the preservation and protection of the integrity of the federal procurement system.  To that end, GAO should be as interested as most of us are in the FAR guidance on buying in.  It also should be wary of the potential for mischief LPTA creates and the damage that improper selection of LPTA contractors inflicts on the taxpayers.


Postscript: We do not criticize judicial tribunals.  GAO is not a judicial tribunal. We criticize GAO, however, because we respect and admire the institution as a quasi-judicial body.  The Court of Federal Claims often disagrees with GAO and sometimes we do too.   

bill@spriggslawgroup.com     http://www.spriggslawgroup.com/

REA PREPARATION COSTS: RECENT BOARD OPINION

Judge Park-Conroy of the Armed Services Board of Contract Appeals (ASBCA) recently has opined on the issue of whether a contractor can recover its costs of putting together, presenting and attempting to negotiate a settlement of a request for equitable adjustment (REA).  "The Costs of professional and consultant services are unallowable if they are incurred in connection with the prosecution of a claim against the government," she says.

"Contract administration costs, on the other hand, are 'presumptively allowable if they are also reasonable and allocable'," she quickly points out.  (Citations omitted.) In evaluating a contractor's claim for REA costs, the Board must examine the reasons the costs were incurred.  If they were incurred as contract administration costs, they are allowable.  But if they were incurred incidental to the prosecution of a claim, they are not.

Costs incurred for the real purpose of fostering and furthering the negotiation process should be viewed as contract administration costs even where negotiations fail and the REA is turned into a claim.  Thus says the Court of Appeals for the Federal Circuit (COFC) upon which precedent Judge Park-Conroy relies.  In the Appeal of TMS Environcon, Inc., however, Judge Park-Conroy denied recovery of the costs because they were not incurred in furtherance of settlement negotiations.

Converting the REA to a claim begins the running of interest at the Treasury rate which at last check was slightly under 2 percent.  Seeking recovery of the costs of contract administration seems the wiser choice as long as the prospects of settlement remain alive.

The costs of contract administration that are properly associated with the REA include:

  1. Identification of changes and research of documents relating to changes;
  2. Interviews with key personnel about the changes and examination of their files;
  3. Review of all relevant files including any government files obtained under the Freedom of Information Act (FOIA);
  4. Preparation of REA presentation narratives, appendixes and exhibits;
  5. Presentations to the contracting officer in support of the REA;
  6. Review of and response to reviews and audits conducted by the government;
  7. Attendance at settlement negotiation meetings, negotiation telephone calls and preparation of negotiation strategy; and
  8. Negotiation of and obtaining approval for final settlement including preparation of the contract modification.
And these costs are recoverable even if the negotiations are not successful and the REA becomes a claim and is litigated.

Thursday, July 5, 2012

BUYING IN REVISITED

Many of us remember when advertised procurements (now called sealed bidding) ruled the government contracting universe.  In fact, one of the versions called two step was quite popular.  Now, FAR Part 14, containing these types of acquisitions, seldom are used.  Those were the days of lowest priced, technically acceptable. Sound familiar?

In the old days of advertised (sealed bid, FAR Part 14) contracting, contracting officers often rejected a contractor's "unrealistically low bid."  In fact, many of us were involved in GAO protests in which one side or the other was arguing for or against the determination of an unrealistically low bid.  How often do you hear this today?  The debate was all based on FAR 14.404-2(f) which states:
Any bid may be rejected if the contracting officer determines in writing that it is unreasonable as to price.  Unreasonableness of price includes not only the total price of the bid, but the prices for individual line items as well.
In the old days, low ball bids might well be rejected if the contracting officer suspected the contracting was buying in.

"Buying-in may decrease competition or result in poor contract performance."  FAR 3.501-2(a).  Contracting officers are required by that regulation to make sure any buying in losses are not recovered through changes and follow on contracts.

FAR Part 14, and its progeny, advertised procurements, bear a striking resemblance to LPTA in FAR 15.101-2.  Under LPTA, "tradeoffs are not permitted," and the award goes to the lowest priced technically acceptable contractor.  Sounds like advertised (sealed) bidding to us.  So let's take the pretense one more step and reject buy ins as unreasonably priced proposals.

Since LPTA and sealed bidding are siblings and FAR 3.501 applies to both anyway, shouldn't contracting officers be wary of low ball pricing, shouldn't they exercise some due diligence to investigate the reasonableness of the lowest price and shouldn't they have the fortitude to reject unreasonable prices?


The solution starts with evaluation criteria alerting contractors to the prospect that unrealistically low or unreasonably priced proposals will be rejected.



bill@spriggslawgroup.com    http://www.spriggslawgroup.com/

Sunday, July 1, 2012

NEW AGE LPTA: IS BUYING IN ILLEGAL?

Yes, it's the new age of lowest price, technically acceptable (LPTA) government contracting.  Specifications may be written to the lowest common denominator so that marginally qualified contractors can join in the bidding war.  This is like the advertised, sealed bidding of old (except then the qualification barriers were higher).  It's also akin to reverse auctions except there is only one shot at being low and contractors are not looking at each other's prices.

So, the complaints of underbidding costs are already coming in.  Is buying in illegal?  That question was answered 40 years ago, but we may need to be reminded of the answer.

FAR 3.501 defines "buying in" as submitting an offer below anticipated costs, expecting to increase the price after award through changes or to receive follow on contracts designed to recover losses incurred on the buy-in contract.  Sound familiar?

Buying in, although it may decrease competition or result in poor contract performance, is not illegal.  But the onus is on the contracting officer to make sure buying-in losses are not recovered through the pricing of change orders or follow on contracts.

The regulation says the contracting officer "must" take appropriate action and "should minimize the opportunity" for buying in.  The only   way this effectively can be done is through proper contract administration practices designed to review carefully all alleged changes.

Note that the buying in regulation is located in the FAR subpart dealing with improper business practices.  In our opinion, buying in raises substantial questions about the integrity of the contractor, and hence its responsibility.  So, although the practice of buying in is not itself illegal, the contracting officer is not without effective ways to discourage the practice.

bill@spriggslawgroup.com        http://www.spriggslawgroup.com/
                                                  http://spriggsconsultingservices.com/

WRITING THE REA: THEORIES OF RECOVERY

What needs to be included in the request for equitable adjustment (REA) is one thing (see our previous blog posting).  Understanding the theories of recovery is quite another.  We are talking here about "constructive" changes, that is acts or omissions of the government which are breaches of the contract, but which are called constructive changes where a unilateral changes clause is included in the contract (that's in all government contracts except commercial item contracts -- and it will be read into the contract by operation of law if its not included).

Constructive changes are not formal changes.  If you receive a formal change or are entitled to an equitable adjustment under another clause such as the stop work order clause, you do not need to concern yourself with these theories of recovery.

The four main categories of constructive changes are:  1) contract interpretation; 2) breach of warranty of the specifications; 3) breach of the duties of noninterference, cooperation, communication and disclosure of vital information (known as superior knowledge); and acceleration.

Most disputes arise over differing contract language interpretations.  We've written in other blog postings about the rules of contract interpretation (our most popular blogs so far).  The contractor may submit its REA if it believes its interpretation is the only reasonable one or even if the language is not obviously ambiguous (if it was obvious, the contractor has assumed the risk).

The government warrants that its specifications will be free from errors, conflicts, omissions and that they will not be commercially or practicably impossible to perform.  If the contractor encounters a problem with the specifications which was not obvious at time of bidding, it may seek relief.  Impossibility is almost impossible to prove.  More on that later.

The REA also can be based on the government's interference with and failure to cooperate and communicate with the contractor and its failure to disclose information vital to performance (also known popularly as "superior knowledge"). There is an implied obligation in every contract, read into the contract by operation of law, that the government will do "whatever is reasonably necessary on its part to enable the contract to perform."

An acceleration occurs if the contractor 1) encounters an excusable cause of delay or nonperformance, 2) provides timely and complete notice to the government of the excusable cause of delay and 3) the government either actually or constructively orders the contractor to meet the original schedule notwithstanding the excusable cause of delay.  An excusable cause of delay is anything covered by the default termination clause including acts or omissions of the government in its contractual capacity (other constructive changes).

Although the facts about what the contract required and how those requirements were changed come first, placing those facts in the proper context of a theory of recovery comes second.

Postscript:  In the new age of LPTA, we expect to see contractors trying to use the changes clause to increase the low prices they have to bid to get the job.

bill@spriggslawgroup.com      http://www.spriggslawgroup.com/
                                               http://spriggsconsultingservices.com/