ANTHOLOGY OF ARTICLES ON SUBCONTRACTS

 

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CHANGE MANAGEMENT

Whether you are a CEO or an entry-level contract administrator, if you have a federal government contract, you must get into the weeds and watch what goes on daily. Suppose any question arises about contract interpretation, interference from government employees, defects in the specifications, or any oral direction from any government employee. In that case, you must immediately notify the contracting officer of a constructive change in your contract. The contracting officer must direct you on what the contracting officer wants you to do.

Who is your contracting officer? Not the COR or the project manager. It's the person with the warrant. Find out who that is and make a nuisance of yourself if you have to by importuning him for clear direction. Only perform extra out-of-scope work if it is directed in writing by the contracting officer. The default is you must perform the job, but there are exceptions. Consult your lawyer.

Do not volunteer to do extra work. Do not even think about it. Take it to the contracting officer. What if you cannot find her? Keep trying and turn the matter over to your lawyer.

That's the way we do government contract business.

For the best course on change management:

Announcing a Free Webinar for All Levels of Experience 

Spriggs Law Group, with over 50 years of experience, invites your organization to reserve up to six people to attend a 60-minute Zoom webinar during which Mr. Spriggs will discuss the topics listed below, and he will answer questions. You and they will receive a copy of the 28-page slide PowerPoint written presentation and a copy of the meeting recording.

• How to excel at contract management.

• Identifying the contract performability risks and language conflicts.

• Monitoring contract performance to spot changes and compensable delays.

• Identifying constructive changes and engagement with the warranted contracting officer.

• Implied by law government obligations.

• Timing and staffing of dispute resolution, including negotiation and ADR.

• REAs, claims, calculating damages, transparency, appeals, and declaratory judgments.

• Terminations and subcontracts considerations. 

Email me with at least two suggested dates and times. I also will need the participants' email addresses so I can send them the Zoom invitation. bill@spriggslawgroup.com

FREE GOVERNMENT CONTRACTS WEBINAR

Announcing a Free Webinar for All Levels of Experience 

Spriggs Law Group, with over 50 years of experience, invites your organization to reserve up to six people to attend a 60-minute Zoom webinar during which Mr. Spriggs will discuss the topics listed below, and he will answer questions. You and they will receive a copy of the 28-page slide PowerPoint written presentation and a copy of the meeting recording.

• How to excel at contract management.

• Identifying the contract performability risks and language conflicts.

• Monitoring contract performance to spot changes and compensable delays.

• Identifying constructive changes and engagement with the warranted contracting officer.

• Implied by law government obligations.

• Timing and staffing of dispute resolution, including negotiation and ADR.

• REAs, claims, calculating damages, transparency, appeals, and declaratory judgments.

• Terminations and subcontracts considerations. 

Email me with at least two suggested dates and times. I also will need the participants' email addresses so I can send them the Zoom invitation. bill@spriggslawgroup.com

PRIME REQUIRED TO AUDIT SUBS?

FAR 43.202(e)(2) provides prime contractors are responsible for managing subcontracts. The law's first rule of interpretation is look to the plain meaning. Manage subcontracts means administer, guide, exercise control over. It does not mean conduct audit of or indemnify the government for unallowable subcontract costs. Guess what? DCAA, always willing to be the outlier and foil for the entire procurement system (and play lawyer the live long day), has decided manage means audit and primes are required to audit subs (because DCAA is too busy).

FAR 42.202 and DFARS 252.244-7001 make no reference to prime contractors having to audit subcontracts. In fact, the only possible support for DCAA's position is found in, FAR 52.216, 7(d)(5)  which provides: “The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request”. Scant support for DCAA mandating prime contractor responsibility for expensive, time consuming audits and indemnification of the government. DCAA has said if primes do not discharge this duty, it will disallow all subcontract costs. What? That's illegal.

DCAA does not have the power to unilaterally impose a new regulatory requirement. Even more importantly DCAA has no right to disallow costs arbitrarily and without the approval of the contracting officer.

We recommend that a contractor facing this issue seek declaratory relief that DCAA does not have this power and any disallowance resulting from a failure to audit is null and void.

bill@spriggslawgroup.com

WHAT A CONTRACT MANAGER DOES

In a 2011 post we asked who is your contract manager?  We explained why you need one 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 should be a lawyer well 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 subcontracts 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. Know, 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.

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.

bill@spriggsconsultingservices.com   bill@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

SUBCONTRACTS: CHOICE OF LAW CLAUSE

We sometimes overlook the singular importance of the choice of law clause in subcontracts under government contract prime contracts.  The choice of the law to be applied in the event of any dispute is important because of the uniqueness of these subcontracts.  As a corollary, the forum for resolution of such disputes also should be spelled out in the subcontract document.  Finally, it is important to separate disputes arising under or related to the prime contract that implicate the subcontract from disputes between the prime contractor and the subcontractor that are unrelated to the prime contract.

We suggest a choice of law clause which makes it clear that all disputes between the prime contractor and the subcontractor be governed and construed in accordance with the federal common law of contracts.  In the absence of federal law on the subject, the parties should select the state law that will be applied irrespective of that state's choice of law rules.  The parties should then agree to submit to the exclusive jurisdiction of that state's courts and the federal courts sitting in that state.

We continue to believe that disputes arising under or related to the prime contract should be the subject of a separate clause binding the parties to follow the disputes procedures applicable to the prime contract.  The subcontract should incorporate a so-called "pass through" clause permitting the parties to cooperate in passing through the dispute to the government under the prime contractor's disputes clause.

Much has been written about the pros and cons of the pass through agreement.  It has been said a subcontractor should never agree to such an arrangement and that prime contractors always should insist on it.  We think it is good business to pass through disputes to the government when they truly arise because of an action or inaction of the government which implicates the subcontract.  These disputes should be governed, construed and adjudicated exclusively by the federal common law of contracts and the federal contract tribunals established to resolve them.

So, we suggest separating the disputes clauses as we suggest.  It is fair, neutral and even handed.  And it should preserve the relationship of the parties.

There is an excellent article on this subcontract choice of law by Joel Pearman in the August 2004 edition of Contract Management magazine.  I take the American Bar Association (ABA) approach to which he refers at the end.

bill@spriggslawgroup.com      www.spriggslawgroup.com

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/

MODEL SUBCONTRACT DISPUTES CLAUSE

The standard FAR disputes, changes and termination clauses are not mandatory subcontract flow down clauses.  In fact, it is improper to flow down the standard FAR disputes clause.  So here is a model subcontract disputes clause:

DISPUTES
1)  If a dispute arises in the performance of this subcontract, the parties will first attempt to negotiate a settlement.  If negotiation is unsuccessful, they agree to submit the dispute to mutually agreed upon mediation.  If mediation does not resolve the dispute, either party may seek redress in any court of competent jurisdiction.  Pending resolution of any dispute, the parties shall proceed diligently with the performance of the work.

2)  However, if any dispute gives the subcontractor recourse against the U.S. Government through the prime contractor's prime contract, the parties may agree to pass the subcontractor's dispute through the prime to the U.S. Government.  The subcontractor must submit the claim within 5 years after it accrues; the prime must cooperate fully with the subcontractor in prosecuting the claim; the parties agree to be bound by the outcome; the subcontractor must certify its claim in a form approved by the prime contractor; each party will bear its own costs in prosecuting the claim; and any other dispute or portion of the dispute not resolved in paragraph 1) above may be decided by a court of competent jurisdiction.  Pending resolution of the dispute, the parties shall proceed with performance of the work.

3)  This subcontract shall be government by the laws of the _____________________.  However, any FAR, DFARS or other federal agency clause or any clause substantially based on a federal agency clause shall be construed and interpreted according to the federal common law of contracts as applied by federal agency judicial tribunals.

This is just one example based on the work of the American Bar Association's Public Contract Law Section, which also publishes guides on which clauses are mandatory flow down clauses.  We have used other more expanded versions, but the concepts are clear.  If the federal prime contract is implicated, it is wise to provide a mechanism, even a requirement, that the subcontractor "pass through" the claim/dispute to the federal government.  This is sometimes called a "sponsorship agreement" which also can be negotiated separately at the time the dispute arises. 

Subcontract terms and conditions under federal government prime contracts can be tricky.  There is nothing in FAR, DFARS or any other federal regulation which provides a single source guide to mandatory flow down clauses.  Moreover, many flow down clauses need to be modified for subcontracts.  The disputes clause is the best example of a clause which has to be totally rewritten for subcontracts.

Subcontracting may be the best way to engage the federal marketplace but the confluence of federal and state law may make it a more complicated undertaking.

Postscript:  We're getting some good comments on ways to modify the clause depending on whether the prime contractor or the subcontractor has the superior bargaining position.  I usually opt for trying to make the clause fair to both sides.  Obviously, depending on who has the superior bargaining position, the prime or the sub can improve its position on the language.

bill@spriggslawgroup.com

SPATE OF SMALL BUSINESS BILLS

Members of the house have introduced a number (we've seen 8 so far) of bills designed to reform small business contracting.  The proposed legislation covers a broad range of changes including raising the small business contracting goals to reformation of the size standard rules. 

The Government Efficiency Through Small Business Contracting Act (H.R. 3850) seeks to boost the annual government small business contracting goal from 23 to 25 percent, enlarge government wide subcontracting goals and withhold bonuses of top level agency officials if the goals are not met.  Since the present goals are not being met, we wonder whether this will go any good.  The Small Business Advocate Act (H.R. 3851) would require that the director of each agency's OSDBU be elevated to s senior executive position.  The Small Business Growth and Federal Accountability Act (H.R. 3779) seeks to cut an agency's procurement budget by 10 percent for missing its small business contracting goal.  We really don't seek how more budget cutting helps small businesses.

The Subcontracting Transparency and Reliability Act (H.R. 3893) would add visibility to insourcing  and ensure that small businesses are receiving federal contracting opportunities even through subcontracting.  We've said over and over again that insourcing is often bad business, bait and switch is just plain illegal, and we need better rules on when it is appropriate to "insource".  The Small Business Opportunity Act (H.R. 3980) really looks great to us.  Small Business advocates in all agencies would have stronger roles in the procurement planning process and always have access to plans before RFP's are released.

The Small Business Protection Act of 2012 (H.R. 3997) seeks to prevent SBA from tying NAICS codes together under common size standards where the data do not support the creation of a common size standards.  The Building Better Business Partnership Act (H.R. 3985 would combine small businesses with civilian agency mentor programs so as to help small businesses win contracts and subcontracts.  Finally, the Contractor Opportunity Protection Act of 2012 (H.R. 4081) would redefine various contract bundling terms in order to broaden the coverage of those procurement actions requiring scrutiny as improper bundling.

Missing again is reformation of the Equal Access to Justice Act.  See our blog "The Almost Equal Access to Justice Act" at http://scs.mymediaroom.com/blog/.  Reformation of the small business procurement process will never be complete until we afford small businesses equal access to the judicial system.

bill@spriggslawgroup.com