EXPLAINING THE SOVEREIGN ACT DEFENSE

Senior Judge and former Chief Judge Loren Smith of the Court of Federal Claims (COFC) has just written an opinion explaining the sovereign act defense (which the government can raise in contract disputes) and applying it to a particular fact situation.  He starts by reminding us that when the government acts in its capacity as a contractor, the courts treat the government as a private party.  However, the sovereign acts doctrine shields the government from liability for breach of contract caused by its public and general acts as a sovereign.

The most recent Supreme Court explanation came in the 1996 ruling in United States v. Winstar Corp., 518 U.S. 839 (1996).  There, the Supreme Court held that the sovereign acts defense did not apply because the new minimum capital requirements set by legislation, which abrogated the benefits granted by the government to those financial institutions that had agreed to take over failing thrift institutions, had "the substantial effect of releasing the government from its contractual obligations."

According to the Supreme Court, an act is public and general when its impact upon public contracts is merely incidental to the accomplishment of a broader government objective.  However, the defense does not apply when the government's action is tainted by a governmental object of self-relief.  As Judge Smith points out, the Supreme Court focused on the intent of the government and it found clear evidence in the legislative record that Congress was aware that the legislation would have the effect of releasing the government from its own contractual obligations.

(Judge Smith, by the way,  the applied the defense in a case involving Louisiana's flood control and levy system since the government's conduct was merely incidental to the contract with the private contractor.  The government was shielded by the sovereign act defense.)

So, back to sequestration and whether the government will be successful in asserting the sovereign act defense against claims from contractors.  It's a close call. There is no question but that sequestration has a public and general purpose.  But it also contains a strong element of governmental self-relief from its obligations. The devil is in the legislative history.  If it appears Congress knew and discussed the impact on contracts, the defense probably will fail.  However, we see this issue back at the Supreme Court some years down the road.

bill@spriggslawgroup.com               www.spriggslawgroup.com

CAFC: PAY REA PREP AND NEGOTIATION COSTS

The Court of Appeals for the Federal Circuit (CAFC) has ruled that the government must not only pay the contract administration costs of preparing a request for equitable adjustment (REA) under the changes clause, it also must pay reasonable costs, including attorneys' fees, of negotiating a settlement even if negotiation eventually fails and a Contract Disputes Act (CDA) claim is later submitted.

The government argued that the negotiation costs were not recoverable because the contractor was just trying to "maximize monetary recovery."  As such, the costs were not true costs of contract administration.  The Postal Services Board agreed and so found.  On appeal, the CAFC reversed and remanded, directing the Board to grant the contractor's appeal in its entirety.  The CAFC went on to say "this means" the contractor is entitled to recover its costs, attorney fees, plus interest under the CDA.

The CAFC had been to this dance before.  In a 1995 case called Bill Strong Enterprises, the CAFC had held that REA preparation and negotiation costs were allowable as contract administration costs.  In examining the issue again, the court defined the issue as whether the costs are classified as general contract administration costs or claim preparation costs.  The former are allowable and the latter, not.  (The CAFC, for all practical purposes, is the highest court to hear procurement cases.  The U.S. Supreme Court very rarely gets involved.)

The CAFC said:

Although there is sometimes an air of adversity in the relationship between the CO and the contractor, their efforts to resolve their differences amicably reflect a mutual desire to achieve a result acceptable to both.

The CAFC went on to opine that the courts should examine the objective reason why the contractor incurred the cost.  If a contractor incurred the cost to further negotiation, the cost is allowable.  If, however, the contractor's underlying purpose is "to promote the prosecution of a CDA claim" then the cost is unallowable.  And the court made clear the allowability rule prevails even if negotiation eventually fails and a CDA claim is later submitted.

So, this is as reminder that REA preparation and negotiation costs are recoverable. The bright line distinction is when the contractor converts the REA to a CDA claim. From that date forward, claim costs are not recoverable under FAR 31.205-33.

bill@spriggslawgroup.com            www.spriggslawgroup.com

CONSIDERATION OF PRICE REQUIRED IN TRADEOFF ANALYSIS

The Government Accountability Office (GAO) has just issued a decision reiterating the rule that in a best value tradeoff analysis, meaningful (meaning meaningful) consideration must be given to cost or price.  Even in a competition where price is of lesser importance than technical factors, an agency must meaningfully consider cost or price in making the source selection decision.

In the case, the agency (Veterans Affairs) picked the highest rated technical proposal and compared its prices to its GSA schedule rates.  Not enough, says GAO. The agency focused almost exclusively on the question of price reasonableness as determined by comparison to the awardee's GSA schedule pricing.  GAO determined the lack of any meaningful consideration given to price in the tradeoff decision vitiated the selection.

In a best value procurement, it is the function of the source selection authority (SSA) to perform a price/technical tradeoff analysis meaning the SSA must determine whether a proposal's technical superiority is worth its higher price.  A rule to remember.  So the tradeoff analysis must include an analysis of all the proposals in the competitive range comparing each to the other on both technical and price in order to determine best value.  In this case, neither the evaluated prices of the three proposals in the range, nor the differences between these prices were set forth in the SSA's tradeoff decision.

We've already reported on GAO decisions in which GAO makes it clear that the tradeoff analysis must be made on all proposals within the competitive range.  It is insufficient to pick the highest rated technical proposals and make an award to them.  Price must also be considered and not in the abstract or as part of a price reasonableness analysis.  The heart of best value is finding, by comparison, the very best value considering the tradeoff between technical excellence and price.

Protest sustained.  Reevaluation and new tradeoff analysis with rationale for any tradeoffs, including benefits associated with any price premium, recommended. Costs and attorneys fees awarded.

bill@spriggslawgroup.com           www.spriggslawgroup.com

TEN PROTEST RULES TO REMEMBER

Protests can be filed with the Government Accountability Office (GAO) or in the Court of Federal Claims (COFC).  If filed at GAO and a similar case is filed in the COFC, GAO will dismiss the protest  case at GAO.  If a contractor is unhappy with the result at GAO, it can file a similar protest at the COFC.  Here are some important rules to remember:

1. Protesting is an integral part of the acquisition system.  One of the best ways to illustrate this is by reference to when the U.S. District Courts first decided they had jurisdiction to hear protests (they no longer have this jurisdiction - it was transferred to the COFC).  The courts said disappointed bidders were acting as "private attorneys general" policing the system on behalf of the public.
2. Protests based on any impropriety in the solicitation must be protested prior to the closing time for receipt of proposals.
3. In all other cases, the GAO protest must be filed within 10 calendar days after the basis for the protest is know or should have been known.  Protesters have 10 days to file at GAO after a debriefing.
4. However, for a protester to avail itself of the automatic post award statutory stay of performance of an awarded contract, the protest must be filed at GAO within 10 days after award or 5 days after the debriefing, whichever is longer. Protesting before award stays the award. The agency can override the automatic stay but the override can be challenged in the COFC.  (The agency has a pretty heavy burden to override the stay.)
5. The timeliness rule at the COFC for solicitation protests is the same - the protest must be filed prior to proposal closing time.  However, there are no set timeliness rules at the COFC for other protests except there can be no relief in cases of inordinate delay.
6. Pursuing an agency protest does not extend the time for obtaining an automatic statutory stay.
7. According to GAO statistics, roughly 20 percent of protests are sustained on average over the years.
8. Most protests are won where a protester shows a statute or regulation is violated based on undisputed facts.
9. When an agency engages in "corrective action" after a protest is filed, GAO will dismiss the protest as academic.  However, a disappointed bidder may complain in the COFC or refile at GAO if the corrective action taken is objectionable.
10. At GAO, if the protest is sustained, it is likely GAO will recommend payment of protest costs and attorney fees.  At the COFC, a winning protester may get its bid preparation costs, but it will not get its attorney fees unless it qualifies under the Equal Access to Justice Act (EAJA).

On April 1, 2002, the Administrator of the Office of Procurement Policy (OFPP) admonished all senior procurement executives that the "filing of protests, the filing of claims, or the use of ADR, must not be considered by an agency in either past performance evaluations or source selection decisions."  (Emphasis added.)

In our experience, one should first "protest", probably informally (not through an agency protest) to the contracting officer, before filing at GAO.  Also, don't accuse the contracting officer of bias.  It takes "will nigh irrefragable " proof.  Look it up. It means nearly impossible.  Breach of good faith and fair dealing by failure to cooperate in the context of contract performance only requires proof of the breach. But at GAO, to show bias in the selection process, a protester had better have a smoking gun.

bill@spriggslawgroup.com           www.spriggslawgroup.com

WHAT ARE CONSTRUCTIVE CHANGES?

Changes come in many forms and sizes and often appear in disguise. By far the most popular disguise is in the form of a constructive change.  So we've put together 11 rules of the changes clause, constructive style, that everyone would do well to remember.

1. Errors, conflicts or omissions discovered in the specifications are compensable changes unless they were obvious during proposal preparation, giving rise to the duty to inquire.
2. Commercial impracticability of performance and actual impossibility are compensable changes also subject to the duty to inquire.
3. The government's failure to provide information vital to performance may be a compensable change.
4. The government's failure to cooperate with the contractor and do everything reasonably necessary to enable the contractor to perform is a compensable change.
5. The government's interference in the contractor's performance is a compensable change.
6. The government's failure to communicate with the contractor is a compensable change.
7. The government's failure to recognize excusable causes of delay or nonperformance and its insistence on meeting the original schedule may be a compensable change.
8. The government's insistence on a clearly erroneous interpretation of the contract is a compensable change.  Its insistence on an ambiguous interpretation may be a compensable change.
9. There is no changes clause in commercial item contracts.  Changes may be made by mutual agreement only.  Unilateral changes of any kind are compensable breaches of the contract.
10. The changes clause will be read into government prime contracts as a matter of law.  The clause may be read into subcontracts under government prime contracts as well depending on what law the judge applies.
11.  "Whether or not changed" means you can reprice original work affected by the change.

The changes clause is unique to government contracts.  All unilateral changes in the commercial world are breaches of the contract.  To afford the government the flexibility it needs to achieve mission goals, it is allowed to unilaterally change the contract.  Most of these are formal and the equitable adjustment in price and schedule negotiated.  

The "constructive change" has an interesting history.  Originally, the Boards of Contract Appeals did not have jurisdiction over breach of contract claims.  So they developed the constructive changes doctrine according to which almost all breaches became constructive changes allowing the Boards to take jurisdiction of claims arising under the changes clause.  The distinction is not important today because the Boards have all disputes jurisdiction under the Contract Disputes Act (CDA).  

bill@spriggslawgroup.com            www.spriggslawgroup.com

STAND UP TO THE BULLIES

This will be short and sweet.  It's time to call a spade a spade.  Some contracting officers are bullies.  The noun bully means "one who habitually is cruel to others who are perceived to be weaker."  The verb bully means "to treat others abusively." Our friend Jaime Gracia has commented on these articles calling for an end to bullying.  We agree.  It's time to stand up to the bullies in federal procurement.

We taxpayers are demanding.  We establish rules and regulations for how we expect our taxes are spent on procurement.  We have even set up special tribunals for contractors to air their grievances.  And we have insisted on professional behavior by those who carry the warrants to commit our tax dollars.  Contracting officers are to act judicially, impartially and fairly.

What we don't understand is that every government contract carries with it a legal obligation for our government, through its contracting officers, to practice good faith and fair dealing.  This legal obligation includes the duty to cooperate with and not interfere in the contractor's performance.  Every contract carries with it the obligation of good faith, fair dealing, cooperation and noninterference.  How many times and in how many ways do we need to say it?  It's high time this legal requirement was accepted by all contracting officers.

We have bullies everywhere, even in, and maybe especially in, government procurement.  Stand up to them.  How?  Remind them of their duties and then go to the tribunals that enforce them.  Maybe the President should use his "bully pulpit" to say something to these bullies for whom he is responsible.  Tell them, Mr. President, their bullying will not be permitted on this public playground.

bill@spriggslawgroup.com             www.spriggslawgroup.com

"CONTINUUM" CONFUSION CONTINUES

On March 22, 2012, we reported on an opinion by Judge Bush of the Court of Federal Claims (COFC) in which she said it was illegal to convert a best value tradeoff procurement to a lowest price, technically acceptable (LPTA) buy.  The two are entirely different, she point out.  On August 5, 2012, we reported on a Government Accountability Office (GAO) decision to the same effect.  We then called for removal of "continuum" from FAR 15.101 in our August 13, 2012 opinion piece.  Then, on September 8, 2012, we reported on a major effort by Alan Chovtkin to address the proper use of LPTA.  During the meeting Alan criticized the use of the word "continuum" and he was right.

Apologists have suggested the use of the word should not be confusing since best value can involve tradeoffs or LPTA.  Not in the real world.  Best value has come to mean tradeoffs and LPTA precludes their use.  They are different animals.  As Alan says, even if there is a continuum, where is the middle?

Well, it is confusing and the confusion continues.  Today we learned of another situation in which the contracting officer cast aside the promised best value tradeoff and made an award to those offerors with the best technical scores.  In another case we know about, the tradeoff promised in section M of the solicitation was abandoned and LPTA was used.

Contracting officers apparently think that "continuum" means a sliding scale permitting them to move from one evaluation and source selection scheme to another without amending the solicitation and informing all the offerors.  Even if there are only a few cases, and it might be overkill to remove the word continuum, we think Alan may be on to something with his "where's the middle" comment. Indeed, doesn't a continuum connote more than two choices?  And, apologists notwithstanding, there are two distinct choices.  Read Judge Bush.

Yes, read Judge Bush.  She has written the best book on best value you have ever read.  See our discussion of March 22, 2012.  http://spriggslawgroup.blogspot.com/2012/03/best-book-on-best-value-you-will-ever.html Her opinion (there's a link in our article) should be must reading for all contracting officers.  And ignore the word continuum.  Erase it from your vocabulary.  You have tradeoffs (best value) and no tradeoffs (LPTA).  Pure and simple.

bill@spriggslawgroup.com           www.spriggslawgroup.com

TIPS ON BEING PREPARED FOR 2013 (AND BEYOND)

According to the Congressional Research Service (CRS), in 2013, whether by sequestration or other budget cutting methods, these changes will take place: solicitations will be canceled; options will not be exercised; limitation of funds clauses clauses will be used by agencies; only minimum orders will be placed under Indefinite Delivery/Indefinite Quantity (IDIQ) contracts; the changes clause will be used with greater frequency; the level of work will be reduced; the period of performance will be revised; the stop work order clause will be used; acceleration of performance will be ordered; contracts will be termination for default or convenience; and multi-year contracts will be canceled.

This is quite a list and most commentators believe government agencies will use any or all of these methods to save money.  So what should contractors do?  The preparations guide is simple but difficult.  Here are our tips.

1. Investigation and communication.  Contractors must redouble their efforts to ferret out what the government plans for their programs and contracts.  This requires full time attention by senior executives playing detective and investigative reporter.
2. Get actively involved in industry associations.  We are constantly amazed by the level of activity and information gathering and reporting accomplished by Stan Soloway, Alan Chvotkin and all the folks at the Professional Services Council (PSC).  There are many other industry associations but PSC stands out in service to its members.  Join now whether you are in services, supplies or construction.  Participate in the Government Affairs Committee.
3. Line up your claims experts.  You may not like claims, but you are now being forced into careful consideration of whether and how to submit them.  Line up the benefit of the experienced hands who have spent their careers in the claim trenches.
4. Document, document, document.  Each piece of information must be collected and filed.  No more go home at night and relax.  The night is now time to prepare your memo to file about everything you learned during the day, about every bit of information you picked up along the way.
5. Know your rights (and responsibilities).  Now would be a good time to refresh yourself on the rules.  Government contracting is all about the rules and regulations.

Changes in the way the government does business will occur in 2013, one way or another.  Those changes will most assuredly involve some or all of the actions listed by the CRS.  We probably should add breaches of the contract of every imaginable type.  And, we can expect the government to try to hide behind the sovereign act defense (see our discussions elsewhere in this blog).  Those who are vigilant will survive.  Those who hesitate will be left behind.

bill@spriggslawgroup.com          www.spriggslawgroup.com  

SOVEREIGN ACT DEFENSE TO SEQUESTRATION CLAIMS

The sovereign act defense was developed by the courts to shield the government from liability for breach of contract and, therefore, arguably all contract claims arising under or related to government contracts.  The government indeed has a dual role as a contracting party and as a regulator making laws for the public good. In the latter role, and when the government acts solely as regulator (through the executive or legislative branches, it can successfully assert the sovereign acts defense in the case of inadvertent breach of its contracts.  But that's the extent of the defense.  Pure and Simple.

There's a lot of talk going around inside the beltway that contractor changes and termination claims arising from the Budget Control Act (BCA) sequestration will be defeated by the sovereign act defense.  Shame on the government for asserting it, if it does.  That is not the kind of behavior we expect from our representatives.  The BCA was not enacted for the general public welfare without any intent of affecting government procurement.  Quite the contrary.  One of the specific purposes of the BCA was to curtail government procurement.

If federal actions are taken for the public welfare and the effect on individual contracts is merely incidental, the defense can apply.  For example, closing a national park during fire season may impact a construction contractor's contract incidentally.  The defense, in such a case, has been applied.  The most significant case was decided by the Supreme Court in 1996.  The Supreme Court held that the defense did not apply in the so-called Winstar case where a savings and loan company sued the government for breach of its contract.  The government had passed legislation having the effect of changing agreements entered into between the government and the company.

So, the question is whether the government's action through the BCA had a general welfare purpose and effect or whether its purpose was to curtail procurement spending. And, even if the BCA was general welfare legislation, the defense will not apply if the legislation was "tainted by a government object of self-relief."  The greater the government's self-interest, the more unlikely it is that the defense will work.  You be the judge.  It seems to us, the BCA principally and primarily was self-relief by the government to cut back on procurement (and other) expenditures.

So let's be sure to tell this side of the story.  Contractor claims for changes, stoppages and terminations are alive and well but it may take another run through the courts to put the sovereign act defense in its place.

bill@spriggslawgroup.com           www.govconalert.com

MAJOR EFFORT LAUNCHED TO CONTAIN LPTA

Alan Chovtkin, Executive Vice President and Counsel of the Professional Services Council (PSC) announced today a major effort by that organization to suggest changes to the way the government buys through the use of the lowest price, technically acceptable (LPTA) procurement method.  Following a theme we began in these articles, Alan referred to the ambiguous word "continuum" in the regulation and suggested in passing he didn't know "what was in between."

We have stated over and over again that FAR 15.101 is poorly written and ill-conceived.  Best value is the tradeoff process.  LPTA is not.  Therefore, there is no "continuum".  In fact, the Court of Federal Claims (COFC) agrees, as we have reported.  Best value (the use of tradeoffs) and LPTA (the prohibition on tradeoffs) are completely different animals.  And they do not reside on some "continuum" or sliding scale.  In fact, the regulation is a slippery slope for reasons identified by the COFC and the Government Accountability Office (GAO).  The tendency is for contracting officers to think they can move along the "continuum" during the source selection process.

What has been happening is that the agencies have changed the evaluation scheme during the source selection process.  That's illegal, say COFC and GAO.  Agencies cannot change the rules in the middle of the game.  Moving along the sliding scale may seem acceptable the way the regulation is written but it is not.  So we have advocated changing the regulation to get rid of the word "continuum" and to make it clear that best value and LPTA are completely different.

Alan's and PSC's effort, however, goes far beyond simple language changes.  Alan is writing a white paper for broad publication which points out that LPTA may be good for commodities, but not for technology services.  He explains that LPTA tends to lower the technical levels in favor of obtaining the lowest price.  Among other things, this provides a disincentive to contractor innovation.  Alan is gathering case histories from contractors on their experiences with LPTA.  He has visited with all the high ranking procurement officials on this subject and plans another tour when his white paper comes out.

So, send in your LPTA horror stories (or positive experiences).  We'll pass them on to Alan and we will send you his paper as soon as it comes out.

bill@spriggslawgroup.com          www.govconalert.com

TEN TERMINATION RULES TO REMEMBER

Whether its a termination for default or a termination for convenience, ten rules stand out as the most important to remember.

1. Every compensable change is an excusable cause of delay or non performance. They are acts (or omissions) of the government in its contractual capacity.
2. Even if the termination for default is upheld, the contractor may be entitled to an equitable adjustment under the changes clause.
3. The contractor should submit a pro forma termination for convenience settlement proposal when terminated for default.
4. Even if the contractor fails to appeal the termination for default, it can challenge the default by appealing the assessment of excess reprocurement costs.
5. The government bears the burden of proof in a termination for default.
6. The changes clause can be used to increase the contract price in a termination for convenience settlement or determination.
7. The changes clause can be used to defeat the application of the adjustment for loss formula in a termination for convenience.
8. In a termination for convenience, the cost principles apply unless the contract is for a commercial item.
9. A complete explanation of the essence of a termination for convenience is set forth in FAR 49.201.  
10. In a termination for convenience, recovery of settlement expenses includes fees for accountants and lawyers.

From a contractors point of view, challenging the termination for default involves an extensive examination of the acts or omissions of the government which may have caused or contributed to the alleged default.  This involves possible changes which also are compensable under the changes clause.  The contractor also should immediately file its termination for convenience settlement proposal.  If the termination for default is converted, the conversion reverts to the date of termination thereby allowing the contractor to recoup settlement expenses for time spent negotiating settlement.

From the government's point of view, the changes clause must be considered in any termination situation.  Also, FAR 49.201 is the central guidance to be followed in any termination settlement negotiation.  "The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement."

bill@spriggslawgroup.com      www.govconalert.com

STILL IMPROPER TO "DOWNSIZE" LIST OF VENDORS

On August 22, 2012, we reported on a Government Accountability Office (GAO) decision in which GAO sustained a protest where the agency selected only the most highly technically rated proposals for the best value tradeoff analysis ("downsizing" the vendors).  GAO said that before an agency can select a higher-priced proposal which is technically superior to a lower priced one, the agency must explain its tradeoff analysis.  And it must perform the analysis of all technically acceptable offers.

On that same day, GAO issued another almost identical decision sustaining a protest where the agency conducted a tradeoff analysis in a best value procurement only among the three proposals with the highest point scores but did not consider the lower prices offered by other apparently technically acceptable lower-rated offerors, including the protester.  Twenty-four firms submitted offers.  The contracting officer selected "the top three most highly technical rated offers" for award.  Wrong, says GAO.

Keep in mind GAO's position.  The evaluation of a proposal is a matter within the agency's discretion.  GAO will examine the record to determine whether the agency's judgment was reasonable and consistent with the stated evaluation criteria and applicable procurement statutes and regulations.  While GAO will not substitute its judgment for that of the agency, it will sustain a protest where the agency's conclusions are inconsistent with the solicitation criteria, undocumented, or not reasonably based.

Best value procurements require the agency to perform a tradeoff between price and the non-price factors.  Here, the protester's price was second lowest and the successful awardee's price was higher.  An agency must meaningfully consider cost or price in making its tradeoff decision.  A proper tradeoff decision must explain why technical superiority warrants paying a price premium.  And that must be done in the context of an analysis of all technically acceptable proposals.

Obviously, with 24 proposals, the agency was inclined to focus on a limited group for the tradeoff analysis.  But GAO's recommendation requires the agency to go back and perform a proper tradeoff analysis which includes all technically acceptable proposals.  Attorneys' fees and costs to the protester.

bill@spriggsconsultingservices.com   www.govconalert.com