Federal Government Contract Administration

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Contracting Officer | Request for Equitable Adjustments | Modifications | Claims | Cancellation of Contract | Terminations | Real Options Analysis

 Contracting Officer

Unless specifically prohibited by another provision of law, an agency’s authority to contract is vested in the agency head, for example, the Secretary of the Air Force or the Administrator, National Aeronautics and Space Administration. Agency heads delegate their authority to Contracting Officers, who either hold their authority by virtue of their position or must be appointed in accordance with procedures set forth in the Federal Acquisition Regulation. Only Contracting Officers may sign Government contracts on behalf of the Government. 48 CFR § 1.601. A Contracting Officer has only the authority delegated pursuant to law and agency procedures. This authority is set forth in the Contracting Officer’s certificate of appointment (formerly called a “warrant”). Unlike in commercial contracting, there is no doctrine of apparent authority applicable to the Government. Any action taken by a Contracting Officer that exceeds the Contracting Officer’s actual delegated authority is not binding on the Government, even if both the Contracting Officer and the contractor desire the action and the action benefits the Government. The contractor is presumed to know the scope of the Contracting Officer’s authority and cannot rely on any action of Contracting Officers when it exceeds their authority. Contracting Officers are assisted in their duties by Contracting Officer Representatives (CORs) and Contracting Officer Technical Representatives (COTRs), who usually do not have the authority of a Contracting Officer.

What happens after a Government contract is signed? That subject is referred to as contract administration. Contract administration tasks can include:

• Payments (prompt payment essential) – frequently Wide Area Workflow (WAWF) is used.
• Modifications and Adjustments, typically done using a changes clause
• Includes Requests for Equitable Adjustments (can process under FAR 49.002(c)) (these are essentially modifications under the applicable contract changes clause e.g., FAR 52.212-4 clause)
• Terminations for cause or convenience – for commercial items, you use the terminations clauses in the 52.212-4 clause.
• Bid protests, ratifications and contract claims

Requests for Equitable Adjustments

Requests for Equitable Adjustments (REAs) are modifications of the contract that were not done formally or properly. REAs are frequently based on the changes clause. They typically occur when new work is added or a change in current work is ordered, perhaps by the contracting officer, without the required documentation. Changed circumstances and equity are possible justifications for a contractor to ask for a REA. Contractors can ask for delay damages arising from contract changes in REAs. These can be large.

The burden of showing evidence of increased costs is on the contractor. Special rules exist for entitlement to whether or not contractor is entitled to profit in addition to the actual costs they incurred, especially in the cases of leased equipment that was held over due to delays on the part of the Government or the Government’s failure to properly integrate other contractors who then interfered with our contractor’s work. Cases out there that say the Government can reduce profit if risk was reduced due to the change.

Can use the settlement procedures in FAR Part 49, per FAR 49.002(c) but be advised that this section is really written for terminations – you have to adapt the settlement procedures, probably for terminations for convenience, to the REA.

The Government should make sure there is a release of claims (ROC) clause in the REA’s contract modification – FAR / DFARS do not have a sample ROC clause. In the context of FAR Part 12 commercial items, the changes clause requires BILATERAL AGREEMENT.

A substantial number of Federal cases deal with REAs:

• “It is black letter law that every contract with the Government contains an implied obligation that neither party will do anything to prevent, hinder, or delay performance.” Sterling Millwrights, Inc. v. United States, 26 Cl.Ct. 49, 67 (1992) (citing Lewis-Nicholson, Inc. v. United States, 213 Ct.Cl. 192, 550 F.2d 26, 32 (1977)).
• When Government actions delay contractor performance and increase costs, “the contractor has a claim for damages.” (Lewis-Nicholson, 550 F.2d at 26).
• “A constructive change generally arises where the Government, without more, expressly or impliedly orders the contractor to perform work that is not specified in the contract documents.” Lathan, 20 Cl.Ct. at 128 (citing Chris Berg, Inc. v. United States, 197 Ct.Cl. 503, 525, 455 F.2d 1037, 1050 (1972)).
• Contractors may recover excess costs through an equitable adjustment, however, it “bears the burden of proving liability, causation, and resultant injury.” Ralph L. Jones, 33 Fed.Cl. at 331 (citing Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180, 199, 351 F.2d 956 (1965); Electronic & Missile Facilities, Inc. v. United States, 189 Ct.Cl. 237, 253, 416 F.2d 1345 (1969)).
• The standard of meeting this burden is high. Before an equitable adjustment will be granted, contractors must demonstrate: (1) increased costs arose from conditions materially different from what the contract documents indicated and that such conditions were reasonably unforeseeable based on all information available to the contractor; and (2) the changes in the requirements caused the increased costs in question. Johns-Manville Corp. v. United States, 12 Cl.Ct. 1, 33 (1987).
• A contractor must distinguish for the court those delays for which the Government is responsible as opposed to its own; the contractor’s standard for proving damages does not require “absolute exactness or mathematical precision.” Ralph L. Jones, 33 Fed.Cl. at 336 (quoting Electronic & Missile, 189 Ct.Cl. at 257).
• The court “needs only enough evidence to make a fair and reasonable estimate.” Id. (citing Miller Elevator, 30 Fed.Cl. at 702; Electronic & Missile, 189 Ct.Cl. at 257).

Modifications

Two types of scope determinations in contracts. One is scope of the original contract – meaning, do we have to pay anything for this modification. The second one is whether or not the modification or change is within the scope of the original competition. The first issue comes up when a contractor demands more money (i.e., demand for more money in a CDA claim or REA); the second issue comes up when the Government wishes to modify the contract and the contractor agrees, but another contractor objects to the failure to recompete the contract.

Modifications are governed by the changes clause in the contract. However, the question of competitive scope must be determined first to determine if there will be a Competition in Contracting Act (CICA) violation first. As a collateral issue, the question of whether or not the modification is a good deal must be evaluated because any modification is inherently a sole source award to the incumbent contractor. Thus, there is no price competition for the modification. If the acquisition was done under FAR Part 12, Commercial Items, the Government has no ability to demand cost and pricing information from the Contractor to evaluate whether or not the contractor is ripping off the Government with inflated or padded charges.

With regard to competitive scope determinations, the GAO in American Air Filter Co., 57 Comp. Gen 567 (B-188408), 78-1, para 443, at 573, stated:

“The impact of any modification is in our view to be determined by examining whether the alteration is within the scope of the competition which was initially conducted. Ordinarily, a modification falls within the scope of the procurement provided that it is of a nature which potential offerors would have reasonably anticipated under the changes clause.

To determine what potential offerors would have reasonably expected, consideration should be given to the procurement format used, the history of the present and related past procurements, and the nature of the supplies or services sought. A variety of factors may be pertinent, including: whether the requirement was appropriate initially for an advertised or negotiated procurement; whether a standard off the shelf or similar item is sought; or whether, for example, the contract is one for research and development, suggesting that broad changes might be expected because the Government’s requirement are at best only indefinite.”

GAO issued a decision on 31 Jan 06 in DOR Biodefense Inc. and Emergent BioSolutions, B-296358.3 and B-296358.4 regarding whether a modification is within the scope of the original competition under the Competition In Contracting Act (CICA). Modifications outside the scope of the original competition must be competed or justified as sole source actions. Scope analysis is not mechanical, but requires an integrated assessment of multiple factors, including contract type, specification or statement of work, cost and performance period. Whether the modification requires competition also depends upon whether the original solicitation adequately advised offerors of the potential for that type of change, and thus whether the modification would have changed the field of competition. In Biodefense, the Army issued a single award ten year indefinite quantity contract for development and certification of vaccines for biological defense. The challenged modification was exercise of an optional CLIN for development of a type of vaccine not expressly listed in the solicitation’s option that extended the performance period for the option by 8 years at a significant increase in cost. The GAO determined that this modification was, nevertheless, within the overall scope of the original competition based on the broad developmental purpose of the contract and the solicitation’s express notice to offerors that additional vaccine types could be added after award and that changes in regulation may affect performance period and costs. The discussion of actions taken by the Army in the original solicitation to put competitors on notice of the potential for post-award modifications provides good practice insight. See DOR Biodefense, Inc.; Emergent BioSolutions:

Claims

Release of a Claim

Release of Claims In consideration of the premises contained in contract modification number _______________ of contract number ______________________________, executed on _____________, and sum of $______________to be paid by the United States Government under the above noted contract, the undersigned contractor does release and discharge the Government, its officers, agents, and employees of, from all liabilities, obligations, and claims whatsoever in law and equity arising out of or by virtue of said contract, except as follows:

[fill this in or state – no exceptions]

IN WITNESS WHEREOF, this release has been executed this ___ day of _________.

__________________________
                                Contractor Signature

Contract Disputes Act

Contract claims are handled under the disputes clause in commercial items contracts or another clause in different types of contracts. The clause simply refers to another clause, the contract dispute clause. That clause invokes the Contract Disputes Act (CDA) and specific procedures that must be followed.

The Government seeks to avoid treating requests for additional money or changes to the contract as a claim, for several reasons. For starters, the Government has to pay interest from the date of receipt to the date of payment. Second, if the amount is over a specified amount, then the claim must be certified (see the FAR and CDA). Certification is essentially a company swearing under pain of 18 USC false claims act penalties that they are not falsifying the claim.

Instead of dealing with it as a claim, the Government should deal with it as a REA; the contractor will have to decide what is more advantageous to it – a REA or CDA claim.

Cancellation of Contract

Contractors are understandably quite upset when an awarded contract is cancelled before contract performance can begin. There is some authority for a contractor to recover bid preparation costs in very limited circumstances. Even so, a contracting agency need only establish a reasonable basis to support a decision to cancel an RFQ; in this regard, so long as there is a reasonable basis for doing so, an agency may cancel an RFQ no matter when the information precipitating the cancellation first arises, even if it is not until quotations have been submitted and evaluated. Quality Tech., Inc., B-292883.2, Jan. 21, 2004, 2004 CPD para. 29 at 2-3; Datatrak Consulting, Inc., B-292502 et al., September 26, 2003, 2003 CPD para. 169 at 5. It is well established that an agency’s lack of funding for a procurement provides a reasonable basis for cancellation, as agencies cannot award contracts which exceed available funds. First Enter., B-221502.3, Mar. 24, 1986, 86-1 CPD para. 290 at 3. Procurement authorities are presumed to act in good faith and in order for GAO to conclude otherwise, the record must show that procuring officials intended to injure the protester. Cycad Corp., B‑255870, April 12, 1994, 94-1 CPD para. 253 at 5. A protester’s mere inference of bad faith is insufficient.

Terminations

The Government may terminate a contract for cause (commercial items), for default (T4D) or for convenience (T4C). Terminations for commercial items (FAR Part 12) contracts are governed by FAR 52.212-4(l) and (m), not the T4C or T4D clauses of FAR 52.249-x. FAR Part 49 prescribes T4D and T4C clauses in FAR Part 52 for non-commercial items (FAR Part 12) related contracts. In particular, T4D is covered by FAR Subpart 49.4, Terminations for Default. T4C is covered by several sections of FAR Part 49.

Termination for default reviews can be done a variety of ways, however, one method is to start with what is the ACTUAL deliverable on the contract, not the one that the customer thought they had. Carefully track what the contractor’s actual performance is against the specific language in the contract. If there has been verbal changes by the Government without going through the contracting officer (which should never happen), is there something that indicates the contractor consented to those changes? In writing? For example, the DFARS 252.212-4 clause section that deals with modifications states that mutual consent is required for all modifications. In this review, use the language from the contract and then see if you have adequate evidence from the Government documenting the actual performance. Ask if the Government COR has signed any receiving reports e.g., DD Form 250s accepting performance (so they can get paid). Is there anything in the record that shows the Government placed the contractor on notice of their default or non conforming deliveries?

FAR Part 49 should be read that to get information on terminations including notice to cure and show cause notices. The more the Government tries to give the contractor chances to remedy their default, the more the Government bolsters its case that T4D is appropriate.

The various courts that review T4Ds have a high standard of review for T4Ds, so the Government should consider making sure the T4D is well supported and the Government has had little or no role in the contractors non-conforming performance as well as ensuring there is a clearly defined deliverable, several chances to cure and nothing in the record that indicates the Government failed to do something that was condition precedent to performance or the Government interfered with contract performance or failed to provide required cooperation/support. (For example, failure to provide security escorts or access to a work site thus causing delays on the part of Contractor performance).

The key point for T4Ds is that it is the only way that a Government agency can use prior year single year appropriated funds, such as O&M or many types of procurement funds, for reprocurement of the item in question. Accordingly, it is very important the Agency get the acquisition right up front because bad work statements and poor contract administration destroy the Government’s ability to T4D, thus keep their prior year funds to get a replacement contractor.

Defense Contract Management Agency (DCMA) has a Terminations Handbook which is very useful in dealing with terminations for convenience issues.

Real options analysis

One approach to analysing Government procurements of large systems, such as weapons systems, is to use real options analysis.  Such procurements can be done in single annual lots (“single-year procurements,” or SYPs), or, with Congressional approval, multi-year procurement (MYP) contracts. Multi-year contracts generally lower the risk for the contractor, and thus the unit price paid by the Government. One way to look at this situation is that a multi-year contract contains a real option for the contractor to escape the uncertainty associated with a sequence of single-year contract negotiations (analogous to a put option). Real options analysis can give an estimate of the value to the contractor of transferring revenue risk to the Government as a function of the contract’s size and the volatility of the contract’s value, even though the option is not actively traded. The negotiated price is also influenced by the attitudes towards risk of the negotiating parties.