SUBCONTRACTORS BEWARE THESE FLOW DOWNS

 

Doing business as subcontractor on government prime contracts can be profitable and a source of prompt payment. Many subcontract opportunities are out there and if you have the right assistance in how these deals are structured, they're a pretty risk free and profitable stream of revenue.

The problem is the prime contractors will want to pass down to the subcontractor every one of the government contract clauses in its prime contract. Some of these clauses are not all that onerous but others can create some high risks for the subcontractor. There are four clauses about which the subcontractor should be wary and insist that they be modified or eliminated altogether. Those clauses are Disputes, Changes, Termination for Convenience and Sponsorship.

Disputes.

The prime contract contains a disputes clause which requires the prime contractor to follow certain administrative procedures when a dispute arises and requires continued performance pending the outcome of the dispute process.  The prime contractor most likely will insert in your subcontract a clause which binds you as a subcontractor to follow the federal procedure rather than avail yourself of your remedies at law. Keep in mind your subcontract is a private commercial contract subject to the common law of contracts and the Uniform Commercial Code in the state in which you reside and do business. You have certain rights and remedies under your state laws. Therefore, you will want to protect your position as much as you can.

So, regarding the remedy for disputes, you want to avoid the administrative process of the prime. Instead, you want to protect your right to sue for breach of contract and the right to abandon performance considering the breach.  You want to have a clause in your subcontract that clearly addresses this protection. And you do not want the prime contractor’s disputes clause. If, because of your bargaining position, you end up having to accept the result of the disputes clause requiring you to be bound by proceeding according to the federal scheme then you should insist on compensation for acceding to that provision and accepting that risk.

Changes.

The prime contractor has a changes clause whereby the government can make changes and require the prime to continue performance. You do not want this clause. You do not want the prime contractor to be able to unilaterally change the work. If you must accept such a clause because the prime says it's essential to pass down the flexibility required by the government, you should insist on some kind of concession or compensation to account for this additional risk. There is no such counterpart in your local law contracts.

Termination for Convenience.

The prime contract contains a clause allowing the government to terminate the contract at will. At the very least, you should insist that the prime can only terminate your contract if in fact it is terminated by the government and that termination includes your portion of the work. There probably is nothing beyond that that you can do to protect yourself although it would be smart to try to get rid of that clause altogether. Try to negotiate a clause which contains a premium the prime must pay if it terminates for its convenience. Under your local law, a termination absent a clause permitting it is a breach of contract entitling you to direct and consequential damages.

Sponsorship Agreement.

You may in fact wish to pursue your claim against the government rather than sue your prime contractor in your local courts. If so, you should insist that the prime contractor agree to pay you compensation pending the outcome of that action. You are giving up your right to litigate in your jurisdiction and venue. The prime contractor should pay you for agreeing to process your claim through the prime to the government. The sponsorship agreement is written from the prime contractor’s point of view, and you need to level the playing field. The best way to do that is to avoid that process altogether but there might be good business reasons for not suing your prime contractor and to join hands with it and process the claim against the government.

SUBCONTRACT DISPUTES CLAUSE

SUBCONTRACT DISPUTES CLAUSE

(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 agree to resolve according to the procedures set forth in the foregoing subparagraph (a), may be decided by a court of competent 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.  

THE REA'S PROCEDURAL PATH

 

THE REA’S PROCEDURAL PATH

1.      Be on top of things. Know what’s going on with contract performance. Keep a diary.

2.   Be in daily contact with the contracting officer even if it is just by text or email. Have a running dialogue. Problems with performance should not be a surprise to you or him/her.

3.      If a problem happens, get in touch with the contracting officer immediately and brief him/her.

4.      Keep up the diary. Provide written notice of the issue and state an REA will follow so you are asserting it now in general terms.

5.      Hire an expert witness if appropriate to assist in dealing with the problem and to help with the REA.

6.      Hire Spriggs.

7.      Meet face to face with the contracting officer and plan the agenda for submission and discussion of the REA.

8.      Prepare and submit the REA. Keep in constant touch with the contracting officer.

9.      If the contracting officer is negative, suggest you prepare a joint request to the Chairman of the ASBCA or CBCA asking for a judge to mediate.

10.   Meet with the judge.

11.   If mediation fails, convert the REA to a claim.

IT ALL DEPENDS ON THE RELATIONSHIP YOU CAN ESTABLISH WITH THE CONTRACTING OFFICER. IF YOU DON’T WORK THINGS OUT, SPRIGGS TAKES OVER AND THAT’S ANOTHER CHAPTER.

bill@spriggslawgroup.com

EAT CAKE

 EAT CAKE

The wonder of life.
Don’t ask about the meaning of life. There is none. Just celebrate you are alive. Eat cake.

More life after death? No evidence. Besides I want to spend eternity as I spent the first 14 billion years.
Celebrate your birth. Birthdays are days to celebrate the wonder of life. Eat lots of cake.

Every day I tell myself it will never be any better than today. But I also tell myself this is the best day of my life. I can relax and do pretty much as I please. I am not in perfect health, but my brain still functions. I am still capable of love and empathy. 

I can see the small, good things and the small bad things don’t bother me. I would say I am the happiest, the truly happiest, I have ever been. I do wish I had a few things I could do over, but I can avoid looking back without much effort. I don’t have a lot to look forward to, but that does not bother me. For once, I can live in the moment knowing I don’t know how many more I have left.

I have no secret to longevity mainly because I don't qualify to express it yet. But here is my preview: WORK. I mean something for which you have some emotional energy. Any work you love. If it’s right for you it is not hard but all the rest of us marvel that you are still doing it and it means something to someone other than you.

bill@spriggslawgroup.cpm

TERMINATION FOR CONVENIENCE ABUSED

Perhaps we should call this Changes clause abused.

Lately, we have seen an alarming increase in agencies attempting to "descope" work.  What's disturbing is the abuse of the rules because descoping means price reduction. Much of the time, this action by the government is illegal.

Descoping much of the time legally is a partial termination for convenience, entitling the contractor to recover its termination costs and to reprice the remaining work. 

Many court and board cases have discussed deductive changes (descoping) versus terminations for convenience. The seminal claim arose in 1962 when the appellate court said: “The long and short of it is that the proper yardstick in judging between a change and a termination in projects of this magnitude would best be found by thinking in terms of major and minor variations in the plans.” A legion of cases has followed this reasoning by concluding that the Changes clause is appropriate for minor deletions of work. For significant omissions, the termination for convenience clause must be used.

Here is what we know so far. Descoping is not defined and described in FAR. Check 2.101 definitions. Arguably, since descoping is MIA, the contractor's first line of defense is to say descoping does not exist, is not countenanced, is illegal, and cannot be done. Warning. The case law is clear that if you go along with descoping, you cannot come along later after you have read this and argue it was a partial termination for convenience. Be forearmed.

So what is descoping? Yep. It's a code word for deductive change.  Remember those things nobody ever uses? You studied them in class and never saw them again or seldom see them at most. Well, there must be a memo from some bright young lawyer for the government wanting to make a name for herself promoting descoping as a way for the government to deduct work without suffering the pecuniary disadvantage and budget hit of a termination for convenience. Deductive changes have been around forever, and we all know when to use them, as limited as those occasions may be.

The problem is abuse. Poison for the unwary. And the courts and boards have yet to help, something the young lawyer undoubtedly stumbled upon. The case law is all over the lot. And the result? If a minor change, deductive change.  If significant, T for C. What a fine recipe for litigation. What is little, and what is central. How many angels can dance on the head of a pin?

There is a solution. Tackle the issue in FAR.  We need a "legislative" fix.

bill@spriggslawgroup.com

TERMINATION FOR CONVENIENCE UNABUSED

The government has an almost unfettered right to terminate a contract for its convenience.  Only in very rare cases has a termination been treated by a judicial tribunal as a breach of contract.  These cases involve bad faith attempts to just get the contract switched to another contractor.  In some cases we’ve also seen the termination rules abused by contracting officials who terminate for default when they should terminate for convenience.  The remedy in such a case is conversion to a termination for convenience. 

 The distinction between breach of contract and termination for convenience is important since one of the hallmarks of a T for C is the inability to recover lost anticipated profits or any form of incidental or consequential damages.  These remedies are available, however, in the case of breach of contract.

 A T for C places many responsibilities on the contractor.  These are all covered not only in the T for C clause but also in FAR Part 49, one of the best written regulations the government has ever written.  Among the responsibilities is the requirement to submit a T for C settlement proposal.   There even are special forms.  See FAR 53.301-1436, 37, 38 and 39. 

It is extremely important to remember the rules for termination settlement proposals are very different if your contract is a commercial type contract under FAR Part 12.   Those rules also are currently undergoing some controversial judicial interpretations.  However, if your contract is not a FAR Part 12 contract, there are four important things to keep in mind when submitting a T for C settlement proposal:

 

1.      The cost principles in FAR Part 31 apply.  Only the costs allowable under that regulation can be recovered.

2.      Your proposal very likely will be audited.

3.      Your recovery is limited by the original contract price unless that price is increased through the changes clause.

4.      The adjustment for loss formula may be applied when the government projects you would have lost money if you completed the contract  but  the changes clause can be used to avert that result.

In any event, the government should be guided by the following language in FAR 49.201:

“A settlement should compensate the contractor fairly for the work done and the preparations made for 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.”

bill@spriggslawgroup.com

"WHETHER OR NOT CHANGED" 2.0

You may dismiss this post as a repetition.  I hope so. That will mean you have received the message.  If not, we repeat the rule for emphasis. The quoted language is at the heart of what constitutes an equitable adjustment and projects the outer limits of cost recovery. If you read our posts, we explore the outer limits, which may well include rewriting and repricing the original work, considering the effects of inflation. Yes, those posts.

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:

Suppose any such change causes an increase or decrease in the cost or time required to perform any part of the work under this contract, whether or not changed by the order. In that case, 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 development to reprice the entire piece to the extent the change affects that work.

While we're on the subject, the contractor is always 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 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 postponement, although this is more likely in times of inflation.  The modification or partial termination may also change how the remaining work must be performed, making it more expensive.  The point is these clauses contemplate recovery 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        

SHARING THE RISK EQUALLY

If the loss was foreseeable the fixed price contractor pays. That party assumed the risk.  If the contract is cost reimbursable, the government (owner) assumes the risk and must pay. If the loss causing event is beyond the contractor’s control and without its fault or negligence, the contractor may be afforded some relief for the delay, but he will not be made whole.

If the government knew of the likely interference in the contractor’s performance and failed to tell the contractor, the government bears the risk and must make the contractor whole. Even if the contractor and the government are unaware of the impediment to the contractor’s performance but the government was in a better position to know and to inform the contractor, the risk will be allocated to the government and the government must make the contractor whole.

But what if both parties are unaware of the potential interference and neither was in a superior position to know or otherwise be required to assume the risk.  To whom is it allocated?  If it is a fixed price contract the contractor may have no relief.  Even if the event is force majeure, the parties do not share the pecuniary risk equally.

But they should.  Such a rule would promote party partnership, increase project efficiency, and reduce if not eliminate the contingency. Cost contractors must price into their bids to account for the unforeseen and unforeseeable. The federal law of contracts is close to the right result in some cases and far away in others. We hope the federal contract tribunals will adopt a rule of shared cost and schedule relief for all situations where the pecuniary loss is beyond the contractor’s control and without its fault or negligence.

We suggest adopting the concept of shared responsibility. Risk allocation always is a matter of equity and the inherent powers of equity permit the tribunals to adopt such a rule. Adoption of this principle is only one step beyond allocating the risk to the party in a better position to anticipate it.

bill@spriggslawgroup.com

HOW TO HANDLE CLAIMS WITH THE CONTRACTING OFFICER

Working with the contracting officer is the best way to collect money on claims without disputes. Here's how:

1. DON'T try to work around her or run to her boss.  She has the warrant and must independently approve everything.
2. DON'T start with a document called a claim.  Just meet the definition in FAR 2.101 but call it a Baseline Reconfiguration Proposal.  There is no requirement either as to the name or the format or contents for that matter. But if you don't settle, be sure to comply with the rules on submitting a claim.
3. DO hire an expert witness now, not later.  They can be impressive and help provoke an early settlement.
4. DO get a rent free ASBCA or CBCA judge into the case even before  you submit the claim.  Yes, write the Chairpersons.  They are more than happy to help avoid disputes. 
5. DO spend a lot of time with and become a friend of the contracting officer. Make it a marriage.  Most disputes are caused by bad blood between the parties.
6. DO find out what the contracting officer wants/needs and get it for her. Even if it does not relate to the claim. Example, please get rid of the project manager. He's just lazy.  Ask her and listen.  If you help her she may be more inclined to help you.
7. DO study psychology and diplomacy. You may pick up something we need to add to this list.

Continuing our discussion of avoiding disputes while collecting money on claims . . .

bill@spriggslawgroup.com

MORE PRODUCTIVE AT THE OFFICE? POPPYCOCK

The Bureau of Labor Statistics reports that in 2022, those who worked from home spent 2.5 fewer hours per day than those in the office. Barron concludes that if people go back to the office and work 8.2 hours per day instead of at-home 5.7 hours per day, productivity would increase, thereby stimulating economic growth. 

Poppycock.

Two reasons. First, it's based on something other than peer-reviewed science. The study would be a significant undertaking, but you can bet BLS needs help and should not be putting anything out there that the likes of Barron's can run with and misconstrue.

Second, what is productivity (part of the aforementioned scientific analysis)? I'm no economist, but productivity should not be measured by time spent (doing what, by the way). I am very productive working at home. I'm motivated because I really like not commuting. Also, I have a great boss (me) who motivates me, making me very productive. I measure productivity as what is the result? Did it achieve the goal? Was he so efficient he got two done when the plan was one and a half? Productivity is a management issue. Good managers motivate high productivity. It has nothing to do with hours on the job here or there.

The CEOs are on the warpath.  The middle line is killing their almighty bottom line. New businesses not committing to heavy real estate investments are winning the competition. Duh. "Get those people back to the office. BLS says more productive," they say. Really?  

Not from where I sit.

bill@spriggslawgroup.com