EQUAL IGNORANCE CLAIMS AND THE ALLOCATION OF RISK

You are blindsided.  You were unaware a designated and required component had design flaws making compliance with contract terms practically impossible. The government had a long history with your predecessor's performance but also did not know of the subcontractor's issues.  You think you probably do not have a superior knowledge claim.  Or do you?

Courts and boards have long recognized an implied by law duty of the government to disclose information vital to contract performance.  Helene Curtis Industries v. United States, 315 F.2d 774 (Ct. Cl. 1963).  The elements of a claim for breach of this duty are: (1) possession of information the government knows or should have known is material to successful contractor performance; (2) the contractor neither knows nor should have known of the information through normal reasonable investigation; (3) the government knows or should have known of the contractor's ignorance; (4) the government fails to disclose the information; and (5) the contractor suffers injury as a result.

Any information significant to a proper appraisal of the cost and scope of the work falls within the rule.

One aspect of this rule which often is overlooked is what we can call "equal ignorance".  In a way, it is the corollary of the "should have known" rule.  It is also based on an old rule from what is now known as the Court of Appeals for the Federal Circuit (CAFC).  Aerodex, Inc. v. United States, 417 F.2d 1361 (Ct. Cl. 1969).  In Aerodex, a vital component part needed for contract performance was described in the specifications by dimension and performance requirements.  The contractor discovered during production that the government lacked the material specifications necessary to produce the component and therefore the contractor was unable to procure the component from the sole source supplier.  The court held it was reasonable for the contractor to expect the part to be available and the court concluded that the government, being in the better position to know the information, must bear the risk of the costs of failure to perform.

Enter the equitable allocation of risk.

The contractor and the government may be equally ignorant of the information vital to successful performance.  However, the government may be in a better position to know and therefore the risk of performance extra costs is allocated to the government.  So, don't forget the Aerodex rule.  The government may well be allocated the risk of extra performance costs if it is in the better position to know or should have known as originally articulated in Helene Curtis, the seminal case on superior knowledge.

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CONTRACTING OFFICER MUST BE "IMPARTIAL, UNBIASED JUDGE"

It's time we reminded ourselves of the judicial role of the contracting officer in government contracts.  Contracting officers are required by law to act impartially and function in a judicial role when resolving disputes.  The history is clear but very often overlooked.

Abraham Lincoln once said:  "It is as much the duty of the government to render prompt justice against itself, in favor of citizens, as it is to administer the same between private individuals."  In 1912, the United States Supreme Court, in addressing the duties of the contracting officer, said:  "But the very extent of the power and the conclusive character of his decision raised a corresponding duty that the agent's judgment should be exercised not capriciously or fraudulently, but reasonably, and with due regard to the rights of both contracting parties."

The most resounding pronouncement, however, was made by the Court of Claims in a 1950 opinion when, after referring to the 1912 Supreme Court opinion, the Court of Claims said the contracting officer must not represent either side but must "act as an impartial, unbiased judge."  The Court of Claims went on to say the contracting officer's function was "to act impartially, weighing with an even hand the rights of the parties on the one hand and on the other."  The court recognized the obligation of the contracting officer to represent the government's interests in procurement matters, but it went on to state clearly that "in settling disputes this is not his function." 

This is pretty clear.  So why are there so many complaints about contracting officers failing to act judicially when disputes arise?

It's time to get back to basics and take heed of judicial precedent.  And just to bring all this up to date, read FAR 1.602-2(b) again.  "Contracting officers shall ensure that contractors receive impartial, fair and equitable treatment."  It's mandatory.  Impartial, fair and equitable treatment.  Sounds like something Abraham Lincoln might say.

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HOW TO FORCE GOVERNMENT ACTION

There is a way to counter the government's time honored practice of delaying action on contractor complaints.  If action really is required, submit a claim, and promptly appeal to the board seeking declaratory relief.

For example, in a case known as Ryste & Ricas, Inc., the Armed Services Board of Contract Appeals (ASBCA) reiterated the rule that a termination for default could not be based on materially erroneous information as to the contractor's responsibility for delay or materially erroneous information as to the effort and time required to finish the work.  The government owes the contractor an assessment of all of the relevant circumstances when it exercises its discretion to terminate for default.

In Ryste, the contracting officer did not adequately consider whether time extensions were appropriate.  The contractor had requested time extensions as part of REA's.  These requests were not adequately addressed by the contracting officer.  The contracting officer did not analyze the contractor's problems and did not consider whether the contract could have been substantially completed if the time extensions had been granted.  In the end, the ASBCA determined the contracting officer abused his discretion by terminating the contract for default.

The ASBCA concluded the government had not met its burden of proof.

The lesson to be learned is that the contactor's and the government's own behavior including action on REA's must be fully considered.  FAR 49.402-3(f) requires contracting officers to consider, among other things, the terms of the contract and applicable law and regulations in determining whether to terminate for default.  The terms of the contract will always include the changes clause.  The changes clause permits the contractor to submit an REA for equitable adjustment in price and schedule.  FAR 43.204(b) states that contracting officers shall negotiate equitable adjustments resulting from change orders in the shortest practicable time.

If a contractor believes the contract has been changed, constructively or otherwise, and submits its REA, the contracting officer is obliged to consider it in a timely fashion.  It would seem, from a fair reading of Ryste, and the regulations, that the contracting officer also is obliged to adequately respond to the contractors REA before terminating for default.  The contracting officer owes the contractor an assessment of the REA.  Failure to respond altogether is a breach of contract.

The termination example reinforces the government's obligation of cooperation. Prepare a nonmonetary REA, convert to a claim as appropriate, wait for a decision, if you don't get one promptly, appeal and seek declaratory relief citing to the board the urgency of the situation.

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SUBCONTRACTOR FLOW DOWN DISPUTES CLAUSE

Disputes

(a) Any dispute that arises under or is related to this Agreement and which relates to a matter that gives the Prime Contractor recourse against the U.S. Government under the Prime Contract or applicable law shall be resolved in accordance with the Disputes clause of the prime contract as follows:

(1) Subcontractor will give Prime Contractor a fully supported written claim concerning any such dispute within five (5) years after the claim accrues, but in no event later than final payment under this Agreement, or Subcontractor shall be barred from any remedy for such claim.

(2) Subcontractor will cooperate fully with Prime Contractor in prosecuting any such dispute and will be bound by the outcome unless: (i) Prime Contractor does not afford Subcontractor a reasonable opportunity to participate in the resolution of the dispute, (ii) without Subcontractor's written consent, Prime Contractor settles or takes other action to prejudice Subcontractor's rights concerning the dispute, or (iii) Prime Contractor, having determined to discontinue its own prosecution of the dispute, does not afford Subcontractor an opportunity to continue to prosecute the dispute in Prime Contractor's name;

(3) If Prime Contractor and Subcontractor agree to prosecute Subcontractor's claim under this subparagraph (a), for any such claim for more than $100,000, Subcontractor shall submit with the claim a certification to Prime Contractor and to the contracting officer for the prime contract, signed by an authorized representative of the Subcontractor that: (i) the claim is made in good faith; (ii) the supporting data are accurate and complete to the best of the signatory's knowledge and belief; (iii) the amount requested accurately reflects the contract adjustment for which Subcontractor believes the U.S. Government is liable; and (iv) the signatory is duly authorized to certify the claim on behalf of Subcontractor. Furthermore, Subcontractor shall indemnify and hold Prime Contractor harmless from damages, judgments, (including reasonable attorney's fees), and other liabilities arising from any breach of such certification or any violation of Section 5 of the Contracts Disputes Act of 1978 (4I U.S.C. 604) or any violation of costs common law or statutory prohibitions against misrepresentations, fraud or false statements;

(4) Prime Contractor and Subcontractor will each bear their own costs of prosecuting any such dispute;

(5) If the parties do not agree to proceed in accordance with this paragraph (a), the dispute will be decided in accordance with subparagraph (b) hereof;

(6) Nothing in this Agreement Grants Subcontractor a direct right of action against the United States under the Disputes clause of the prime contract, except insofar as certain intellectual property clauses flowed down from the prime contract may so state or be construed to so provide.

(b) Any other dispute that arises under or is related to this Agreement, as well as any dispute that the parties to do agree to resolve according to the procedures set forth in the foregoing subparagraph (a), may be decided by a court of competent agree that jurisdiction and venue lies exclusively in the courts of the Commonwealth of Virginia.

 (c) The Subcontractor shall proceed diligently with performance of this Agreement, pending final resolution of any request for relief, claim, appeal, or action arising under or relating to the Agreement.

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WHAT A CONTRACT MANAGER DOES

We've written on this subject in the past to explain why you need a contract manager and listed most of the things a contract manager does.  You are in the most highly regulated industry in the world.  The procurement regulations are more voluminous and complicated than the U.S. Tax Code.  What does that tell you?

Not all contract managers are lawyers.  But in government contracting and subcontracting, your contract manager might well be a lawyer schooled in public contract law.  You need someone who can navigate the rigorous labyrinth of laws and regulations.  Or, be sure to hire a contract manager who has a contract management lawyer at her fingertips.  Yes, a contract management lawyer, not just any lawyer.  Your team needs contract management with legal expertise and talent steeped in government contracts and subcontract experience.  Whether it's getting a contract, keeping it, or making a profit on it, you need complete contract management coverage.

What does a contract manager do?  Here's a list (not all-inclusive):

1. Knows the statutes, regulations and case law thoroughly and in-depth;
2. Knows, writes and speaks the English language clearly and concisely;
3. Reviews solicitation documents for clarity and legal sufficiency;
4. Assures proposals are well written and meet solicitation and regulation requirements;
5. Handles discussions, clarifications and negotiations of proposals;
6. Handles debriefings and protests;
7. Monitors performance and assures compliance with all contract terms and conditions and regulation requirements;
8. Handles all contract interpretation issues and questions about contract requirements and procurement regulations;
9. Investigates, identifies, analyzes and solves all contractual performance issues;
10. Keeps a daily diary of contract performance issues and communications with the contracting officer;
11. Handles all requests for equitable adjustment, claims, cure notices, terminations and disputes;
12. Handles all communications with the contracting officer;
13. Prepares, reviews and signs all contractual documents;
14. Reads all publications relating to acquisition news and keep current on all statutes, regulations and case law; and
15. Handles contract closeout.

A contract manager stays close to the action and monitors all activity from solicitation to proposal to award and performance.  And he maintains a daily relationship with the contracting officer.  That may be the most important job of anyone on the management team.  That relationship between contract manager and contracting officer will dictate how smoothly the contract progresses.  And behind every dispute is a bad relationship between those two.

One last important point.  Make the contracting officer your best friend and talk to her daily about what's going on.  Stay in constant touch with her and keep her advised in writing of all important contract management issues and events.

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CONTRACTS OF ADHESION?

Sean Stackley called our acquisition system the most "complex, chaotic, over regulated and overseen process in the world."  We may disagree with him.  We are not so sure about the chaotic part.  But it is time to remind ourselves that the federal procurement system is by design a tilted and uneven playing field.  The government writes the rules.  How many of us participate in any way in the rule making process?  The best we can do is join a trade association.  But how many of us actively participate in the efforts to affect the rules?  And with what result?  What influence does industry really have in how the game is played?  We elect our representatives to Congress.  But how many of us sit with the staff members to suggest less micromanagement or changes to the statutes?

It is high time to remind ourselves that federal procurement is based on contracts of adhesion.  What are contracts of adhesion?  In this context, and in the legal sense, they are contracts in which the government dictates the terms and conditions.  Our mentor, Gil Cuneo, was fond of reminding all of the audiences before which he spoke that one must start with the understanding that when you enter the government marketplace, you must be prepared to deal with contracts of adhesion.  The closest commercial counterpart is the insurance contract, to which we all can relate.  The insurance company dictates the terms and conditions.  How many times has each of us negotiated the terms of our insurance policies?

Yes, government contract terms and conditions are dictated by the government.  And if the term or condition is not written in the contract, chances are it will be read into the contract by operation of law.  See our article on the Christian doctrine.  There are no changes or termination for convenience clauses in the commercial marketplace contracts.  Making changes unilaterally and terminating for convenience would be breaches of contract there.  But, like it or not, the government contract will contain these clauses whether they are written in the contract or not.  (Of course, if the contract is for a "commercial item", the unilateral change is eliminated in government contracts.)  Here, we've picked but two of the hundreds of clauses dictated by the government that will be found in government contracts.  In most every case, the contractor has no control over whether the clause is included or not.  And in many instances, it is there even if you can't see it.

So, what do we make of these contracts of adhesion?  Contractors play on a tilted and even uneven playing field.  Tilted in the sense that the government controls the entire system, from clauses to remedies.  Uneven, in the sense that the professional contract administration staff for the government often does not understand the rules and applies them unevenly and even unfairly.  Is it any wonder that in order to invite contractors into its marketplace the government employs ombudsmen?  That's a warning to let the seller beware.

What's the point of all this?  The government owes its contractors a special duty.  It's known as the duty of good faith and fair dealing.  It's known as the obligation to cooperate, communicate, not interfere and disclose information vital to performance.  We've written about these corollary duties over and over again.  Some accuse us of taking sides.  But put all this in the proper perspective.  The contracting party with this unusual control occupies a position of special trust.  And since it is public contracting, that trust is owed to all citizens, all taxpayers, but including all contractors.  That position of trust brings with it certain obligations.  Our trustees should not be driving unreasonably hard bargains and bullying contractors into submission.  They should be assisting contractors to succeed.

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ANGRY? CAN I SUE THE PCO? THE ACO?

Occasionally, we've been asked if it is possible to sue the contracting officer personally.  For a lot of reasons, we discourage such an action, not the least of which is the questionable motivation for doing it.  Not too long ago, a contractor terminated for default decided to sue the contracting officer in U.S. District Court and the Court of Appeals for the Second Circuit decided the appeal of that suit.  Let's take a look at the facts and briefly review what the circuit court decided.

The contractor sued the procuring contracting officer (PCO), the Chief of Contracting, the administrative contracting officer (ACO) and the Program Manager for the New York District Corps of Engineers.  The suit alleged that the contractor's contracts were terminated in retaliation for the contractor's criticism of the Corps' mismanagement of construction projects, that the terminations negatively impacted the contractor's business and that, as a result, the contractor was deprived of its constitutionally protected rights to free speech and substantive due process.  The contractor had appealed the terminations of its contracts to the Armed Services Board of Contract Appeals (ASBCA) but those appeals were dismissed (for reasons not germane here) without prejudice.

In a case called Bivens, the U. S. Supreme Court ruled in 1971 that a cause of action existed for victims of unreasonable searches and seizures against the government agents conducting the complained of searches and seizures.  The Court said it would infer a private right of action for monetary damages where no other federal remedy is available based on the principle that for every wrong, there must be a remedy.  Three Justices dissented, saying such "legislating" should be left to Congress.  Thus, there was born what became know as a "Bivens action" in court.  (The Second Circuit was reversed in Bivens.)

In revisiting the issue, the Second Circuit considered whether the Contract Disputes Act (CDA) of 1978 precluded the contractor's Bivens action.  It noted that other circuit courts had decided just such a preclusion existed.

The court started its discussion noting that precisely because the Bivens action is a judicially created remedy (not based on statute), federal courts have been reluctant to recognize a broad application of such implied judicial relief.  The remedy is an extraordinary thing that should rarely if ever be applied in new contexts.  If there is an alternative remedy available, the implied relief should not be granted.

The court concluded that in the face of the comprehensive CDA scheme of relief, federal courts should decline to infer new substantive legal liability without legislative aid.  Although the CDA does not allow contractors to bring actions against government employees in their individual capacities for alleged violations of constitutional rights, nevertheless, the CDA affords a meaningful and exclusive remedy against the government.  In effect, the CDA remedy is exclusive for all claims arising out of or related to government contracts.  Therefore, contractors cannot sue the government employees in their individual and personal capacities.

So contractors have an exclusive remedy under the CDA and cannot sue the contracting officer personally.  And if contractors still have retribution on their minds, they also should be wary of alleging bad faith.  Government employees are legally presumed to be acting in good faith and successfully overcoming that presumption requires a showing of well-nigh irrefragable proof.

And the obvious question:  can the contractor sue the PCO and others personally for pre-award actions and inactions?  We're looking for a case but it would seem the Competition in Contracting Act CICA) provides what may be described as a meaningful and exclusive remedy through the bid protest procedures.

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REA OR CLAIM? KNOW WHEN AND HOW TO SUBMIT

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.  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).

CONTACT US FOR A 6 PAGE TUTORIAL ON HOW TO PREPARE THE REA

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YES, YOU CAN RECOVER ATTORNEY FEES

 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.

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EFFECT OF CHANGES ON UNCHANGED WORK

Since the Changes clause includes the effect of the change on the unchanged 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 expert to conduct the analysis.  We recommend John Wolf of Peritia Partners, LLC.  John is a quick study, puts together an excellent report and is particularly adept at explaining his findings and conclusions.  He can calculate delay damages, lost productivity, reduced efficiency, extended overhead, and under absorbed overhead.

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.

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DEFAULT? SUBMIT A T FOR C PROPOSAL AND CHANGES CLAIM

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 the preparation and negotiation of the T for C settlement.  As it engages the government in discussions on the 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 their 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 nonperformance 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. If, however, the contractor wishes to include the T for C proposal and the REA in the litigation, they must be converted to a claim, state a sum certain, certify if required and the contractor must request the contracting officer's final decision. 

It is important to note that the contractor must formally submit the changes claim in order to assure that the changes can without question be used in defenses to the default termination.

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MISUNDERSTANDING PRICE REALISM

A protester once argued that the agency's evaluation of its proposal and best value tradeoff determination was unreasonable because the evaluators performed a realism analysis of proposed pricing, finding the protester's price to be so low as to call into question its understanding of the solicitation requirements and its ability to perform successfully.  GAO agreed because price realism was not included in the evaluation factors.

The agency argued it did not conduct a price realism analysis because it did not adjust prices to determine probable cost.  GAO said poppycock. The agency misunderstood price realism as it does not involved adjusting prices.  The agency cannot adjust prices for evaluation of award of a fixed price contract.  Rather, of course, a price realism evaluation involves an assessment of an offeror's low fixed price to see whether the low price reflects a lack of understanding of contract requirements or performance risk.  The agency did that.  So what's the problem?

The problem in the protest was that bidders must be given reasonable notice that a business decision to submit low pricing will be considered as reflecting on their understanding of the requirements or the risk associated with their proposals.  (If there are no evaluation criteria on price realism, a low ball price reflects instead on the contractor's ability and capacity to perform, a matter of responsibility.)

The evaluation factors may only refer to "reasonableness" of the pricing which goes to whether it is too high.  "Because below cost prices are not inherently improper, when offerors are competing for award of a fixed-price contract . . . they must be given reasonable notice that their business decision to submit a low-priced proposal can be considered in assessing their understanding or the risk associated with their proposal."  Thus, consideration of price realism must be announced in the evaluation factors.  

Now to the "when".  We believe that price realism should be included in all lowest price, technically acceptable (LPTA) procurements.  There, perhaps more than anywhere else, the government risks awarding to contractors who may not know what they are doing or don't understand the risks.

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GOOD FAITH AND FAIR DEALING NOT BAD FAITH

The Civilian Board of Contract Appeals (CBCA) has reiterated the rule that proving the lack of good faith does not require the claimant contractor to allege and prove bad faith. The contractor alleged that the government breached its implied duty of good faith and fair dealing by refusing to respond to the contractor's many requests for the government to discharge its contractual duties. The Board denied the motion to dismiss and noted that it was premature for the contractor to claim its attorney fees and costs incurred in responding to the government's motion.

"The covenant of good faith and fair dealing is inherent in every contract," the Board wrote.  Further, "[a] claim that HUD breached the implied covenant of good faith does not require a showing of bad faith."  As we've pointed out before in these articles, a claim that the government breached its duty of good faith and fair dealing is not the same as a claim the government acted in bad faith.  Bad faith involves motivation by malice.

The obligation of good faith and fair dealing is written into every contract by operation of law.  It is implied.  The duty of good faith and fair dealing can be breached by lack of diligence, negligence, or a failure to cooperate. As we have often repeated, the government has a duty to cooperate with the contractor or as the Armed Services Board of Contract Appeals (ASBCA) says, the government has a "duty to do whatever is reasonably necessary to enable the contractor to perform."

The government often takes far too lightly a number of implied obligations it has in every contract.  It has the duty to provide specifications free from errors, conflicts and omissions which are commercially practicable to perform.  It has the duty to cooperate with the contractor and not interfere in the contractor's performance. It has the duty to communicate with the contractor.  Yes, the duty to communicate. And it has the duty to disclose information it has which is vital to the contractor's performance.  This latter obligation exists even if the parties are equally ignorant of the information but the government is in a better position to know it.

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