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