SUBMITTING T FOR C PROPOSAL WHILE T FOR D IS PENDING

Contractors are permitted to file a termination for convenience (T for C) proposal while a termination for default (T for D) is pending, even when the T for D is in litigation.  All Federal Acquisition Regulation (FAR) default clauses provide that improper T for D's will be converted to T for C's.  The government contract judicial tribunals have recognized that prior to the time the default is overturned, the contractor can submit its T for C settlement proposal and that proposal can be treated as a claim under the Contract Disputes Act (CDA) since the demand for T for C costs creates the dispute necessary to convert the proposal into a claim.  An appeal of the T for C claim, however, probably will be dismissed as premature without prejudice to reinstatement when the T for D is converted.

The reason contractors submit T for C proposals when they are terminated for default is that the conversion, when it happens, is deemed by law to have occurred at the time of termination for default.  That is, the T for C relates back to the time of T for D.  This means that legally, the contract was the subject of a T for C all along. This in turn means that settlement expenses incurred in connection with the T for C can be recovered from the time the contract was terminated for default.

Settlement expenses include contractor in house costs and outside consultant and attorney fees.  If the costs relate to and are properly allocable to the T for C settlement proposal, they can be recovered.  Thus, during the pending negotiation and litigation of the T for D, if the contractor engages in attempts to settle the case based on its T for C settlement proposal, the costs properly can be included in the T for C settlement proposal.  The contractor, consultants and attorneys keep separate accounts for litigation of the T for D and attempts to settle the case based on the T for C proposal.

As a practical matter, the smart contractor immediately prepares its T for C proposal when it appeals its T for D.  It allocates litigation costs to the T for D litigation account.  It also sets up a separate account for preparation and negotiation of the T for C settlement.  As it engages the government in discussions on conversion of the T for D to a T for C and payment of its T for C proposal, it charges its costs for that effort to the T for C settlement account.

As we've pointed out before, contractors may also include an equitable adjustment in contract price as part of its T for C settlement proposal.  The costs of this contract administration effort also are recoverable.  Each compensable change is an excusable cause of delay or non performance and equitable adjustments through the changes clause can avoid the application of the adjustment for loss formula and any limitation on recovery imposed by the original contract price ceiling.

Don't forget this blog site is word searchable.  To complete your research using these articles, you may wish to do a word search on related subjects.

bill@spriggslawgroup.com          www.spriggslawgroup.com

WHAT IS THE "RIPPLE EFFECT"?

Following up on our discussion of the effect of the change on the changed work ("whether or not changed" in the changes clause), it is appropriate to examine what is commonly called the "ripple effect". In many cases, the cumulative effect of a number of changes when viewed collectively can produce an unforeseeable impact on the unchanged work.  The changes create a synergistic disruptive result. The contractor no longer can proceed with the original work as planned.

The ripple effect, however, can result from a single major change or government caused delay.  It is not limited to cases involving numerous changes.  A single change can produce the same causal chain leading to loss of productivity, diminished efficiency and even further delay.

Here is where proof of causation and effective price and schedule impact come into play.  Proof of causation is essential.  The contractor must draw a straight line connection between the government acts or omissions and the price and schedule impact.  In our experience, it is essential to engage a forensic experts to conduct the analysis.  We most often rely on McGovern & Greene (see a link on www.spriggsconsultingservices.com) for assistance.  Jim McGovern has been able to assist contractors in the calculation of lost productivity, reduced efficiency and under absorbed overhead calculations.

One Board case summarizes impact costs as follows:

Impact costs are additional costs occurring as a result of the loss of productivity; loss of productivity is also termed inefficiency.  Thus, impact costs are simply increased labor costs that stem from the disruption to labor productivity resulting from a change in working conditions cause by a contract change.  Productivity is inversely proportional to the man-hours necessary to produce a given unit of product. As is self-evident, if productivity declines, the number of man-hours of labor to produce a given task will increase.

Identifying the increased costs is not the difficult task.  Explaining why and how they are caused by the change is the challenge.

bill@spriggslawgroup.com               www.spriggslawgroup.com

PROTESTERS MUST SHOW PREJUDICE

In two recent decisions, the Government Accountability Office (GAO) clearly has restated the rule that for GAO to sustain a protest, the protester must show it was prejudiced by the agency error, even if that error is admitted by the agency.

"Our Office will not sustain a protest unless the protester demonstrates a reasonable possibility that it was prejudiced by the agency's actions, that is, unless the protester demonstrates that but for the agency's actions, it would have had a substantial chance of receiving the award."  (Emphasis added.)

In one case, the protester argued that the agency improperly based its final evaluation on the protesters initial proposal which were changed in its final proposal revision.  The agency acknowledged that it erred but argued the protester was not prejudiced because the heart of the significant weakness the agency found in the protester's proposal was its failure to meet certain small business goals, overall small business participation and women-owned business participation.  This weakness persisted in the final proposal revision. Thus, GAO found no prejudice and denied the protest.

In another case, the agency admitted that it waived a requirement for the firm that was awarded the contract.  GAO said that in cases where an agency waives a requirement, it will sustain a protest only if the protester is prejudiced.  "In such circumstances, prejudice does not mean that, had the agency failed to waive the requirement, the awardee would have been unsuccessful."  GAO went on to explain:

Rather, the pertinent question is whether the protester would have submitted a different offer that would have had a reasonable possibility of being selected for award had it known that the requirement would be waived.

The protester failed to argue that the waiver affected the submission of its offer, so GAO found no basis to sustain that aspect of the protest (although it was sustained on other grounds).

The lesson is clear for both sides.  Protesters must show they were prejudiced by the improper agency action.  Agencies need to be aware that they need to examine the prejudice issue in a protest proceeding to make sure they argue lack of prejudice even if the alleged error is found by GAO to exist.

bill@spriggslawgroup.com                www.spriggslawgroup.com

"WHETHER OR NOT CHANGED"

Too many of us are unfamiliar with the words "whether or not changed," where they are found and what they mean.  The standard fixed price changes clause contains the following language:

If any such change causes an increase or decrease in the cost or, or the time required for, performance of any part of the work under this contract, whether or not changed by the order, the Contracting  Officer shall make an equitable adjustment in the contract price, the delivery schedule or both . . . .  (Emphasis added.)

The words, in essence, mean the contractor is entitled to an equitable adjustment which includes the effect of the change on the unchanged work.  This allows the contractor, in effect, to reprice the unchanged work to the extent the change affects that work.

While we're on the subject, the contractor always is entitled to also show entitlement to a schedule adjustment based on changes, if justified.  Too many of us forget this aspect of the changes clause as well.

These rules apply to all changes including constructive changes based on breaches of implied duties under each contract.

This concept has been around forever and is akin to the provision in FAR 49.208 which permits the contractor to reprice unchanged work after a partial termination. That regulation says that after partial termination, "a contractor may request an equitable adjustment in the price or prices of the continued portion of a fixed-price contract."

Changed or partially terminated work may well cause an increase in prices of the unchanged work especially where the change results in delay.  Material and labor costs may increase because of the delay although this is more likely in times of inflation.  The change or partial termination may also change the way in which the remaining work must be performed, making it more expensive.  The point is, these clauses contemplate recovery of a type of consequential damage resulting from the change.

The schedule adjustment aspect of the changes clause comes into play in most termination for default cases.  Every compensable change can become an excusable cause of delay, entitling the contractor to a schedule extension.

bill@spriggslawgroup.com          www.spriggslawgroup.com

A PRIMER ON ORGANIZATIONAL CONFLICTS

The Government Accountability Office (GAO) recently has issued a decision which can be used as a primer on the current state of the law on organizational conflicts. The protester had alleged that the leader of the source selection evaluation team had been the program manager for another contract being performed by the firm selected for award.

The government interviewed agency employees involved in solicitation drafting to determine if the person in question had any influence in its drafting, and concluded he had not.  The agency further determined that the lead had left his position prior to involvement in evaluating proposals.  The agency also investigated the possibility of unequal access to information.  Agency employees took extraordinary precautions to prevent the disclosure of source selection sensitive information.

GAO pointed out that FAR requires that contracting officials avoid, neutralize or mitigate potential significant conflicts of interest.  The responsibility for determining a conflict of interest rests with the agency.  "The situations in which OCI's arise, as described in FAR subpart 9.5 and the decisions of our Office, can be broadly categorized into three groups: biased ground rules, unequal access to information, and impaired objectivity."

GAO reviews the reasonableness of the agency's investigation, however.  But GAO will not substitute its judgment for the agency's, absent clear evidence the agency's conclusion is unreasonable.  (Sound familiar?)  A protester must identify "hard facts" indicating the existence or potential existence of a conflict; mere inference or suspicion of an actual or potential conflict is not enough.  "The identification of conflicts of interest are fact-specific inquiries that require the exercise of considerable discretion."

In its recent decision, GAO said the protester had not identified the necessary hard facts so the protest was denied.

GAO has consistently applied these conflict of interest rules and is in perfect synchronization now with the Court of Federal Claims (COFC).  The guidance is clear, but as GAO says, the cases are fact-specific and there is room for discretion.

Postscript:  We should add that we continue to oppose any changes to the regulations on organization conflicts.  The law is now well settled at GAO and the COFC, the discretion of the contracting officer is well protected and the directions to contractors and grounds for protest are clear.

bill@spriggslawgroup.com               www.spriggslawgroup.com

LOWERING EXPECTATIONS BY EXPANDING LPTA

In the old days, the government drew up detailed specifications and put procurement out to bid.  Advertised procurement, it was called (today's almost never used "sealed bidding" in FAR Part 14).  It was akin to today's lowest price, technically acceptable (LPTA) favorite flavor.  Advertised procurement went out when best value came in.  It was the real value we wanted, not just someone who could agree to perform to the government's specifications for the lowest price.  We raised our expectations.  Government, especially military, readiness and superior performance demanded high quality.

But then came budget austerity.  Then came a dwindling federal acquisition workforce, overworked and under educated.  Then came competition born from the austerity making it too much trouble for the procurement workforce to deal with best value.  (Yes, LPTA is supposedly a form of best value but it is not.)  In its true, purest form, best value is involves analyzing price and technical ingenuity and perhaps paying more to achieve superior performance.  LPTA, like advertised procurement (sealed bidding), fits commodity buying perfectly.  Complex requirements, however, are entirely different.  Best value trade offs are a perfect fit there.

LPTA should not be used for complex solutions.  Greater benefits and long-term results are achieved by decisions based on value.  LPTA has no discriminators for technical superiority.  LPTA is all about adequate and cheap.  Why invest in research and development in the LPTA world?  The technical bar is the lowest competitive common denominator and the award goes to the contractor most willing to buy in.  Yes, that's another problem.  Buying in is back in vogue.

Our friends at the Professional Services Council (PSC) have just published their Services Sector Review which on page 36 contains many of these same thoughts and points and concludes:

Denying bidders credit for the innovations and performance enhancements that drive long-term efficiencies, or other discriminators, offers industry no incentive to be anything beyond mediocre.  As a result of bidders being driven to mediocrity, government contracts could actually cost more in the long run and perform worse than if the government had evaluated bids based on best-value.

Budget austerity does not mean we must lower expectations.  The government acquisition workforce will have to work a little harder, to be sure.  But the reward will be in maintaining our incentives to excellence.  We just don't need to lower our expectations.  We really should do all we can to prevent our expectations being pulled lower by short sighted, easy way out procurement solutions.

bill@spriggslawgroup.com                  www.spriggslawgroup.com

WHAT DOES FAR 49.201 REALLY MEAN?

Too many people overlook one of the most important parts of the procurement regulations:  FAR 49.201.  But an understanding of its importance begins with knowledge of an even more important and even less understood section of FAR Part 49, FAR 49.113, which reads:

The cost principles and procedures in the applicable subpart of Part 31 shall, subject to the general principles in FAR 49.201--(a) Be used in asserting, negotiating, or determining costs relevant to termination settlements under contracts with other than educational institutions, and (b) Be a guide for negotiation of settlements under contracts for experimental, developmental, or research work with educational institutions (but see 31.104).  (Emphasis added.)

Thus, it is mandatory that application of the cost principles is subject to FAR 49.201.

FAR 49.201 is well worth repeating:

(a) A settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit.  Fair compensation is a matter of judgment and cannot be measured exactly. In a given case, various methods may be equally appropriate for arriving at fair compensation.  The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.

Some contracting officers treat this as an invitation to deny recovery of allowable costs.  They have things backwards.  FAR 49.201 is a fairness doctrine.  The contractor is to be treated fairly.  The cost principles are not rigid rules necessarily to be followed if unfairness results.  Various methods may be used to arrive at fair compensation. The regulation is designed to provide flexibility from rigid accounting rules.

In the end, FAR 49.201 is designed to promote settlement.  A settlement, as we all know, is based on judgment and fair dealing.  The government has used a contract clause not found in the commercial world.  It has unilaterally decided to walk away from the contract.  But not with impunity.  It must pay for the privilege.  And with that privilege comes the responsibility to act fairly and give the contractor its due. This does not mean a further penalty.  It means fair compensation even in the face of cost principles which may, in other circumstances, dictate otherwise.

And that's what FAR 49.201 really means.

bill@spriggslawgroup.com                www.spriggslawgroup.com