Prime – Sub Relationships in Government Contracting

June 1, 2018 on 4:05 pm | In Contract Interpretation, Contract Types | Comments Off

In the commercial world, under the Uniform Commercial Code (UCC), contracting can be very flexible and given the policies of the UCC, parties can find themselves in a contractual relationship with much less formality. Occasionally one of the parties is surprised that they are in a contractual relationship, but when the processes are much less formal, that can happen.

There is also a legal principle involved known as privity of contract. This principle reflects that two parties are in a direct relationship; there is no third party between them that holds a contractual relationship with them both. Thus the government has privity with the prime, and the prime has privity with the sub, but the government and the sub do NOT have privity as between them. The two of them are not in a direct contractual relationship with each other. Among other things, this prevents the buyer from going to the seller’s subcontractor and making changes of which the seller is unaware. It maintains a legally enforceable relationship between the parties actually in a contract with each other.

It is rare when an adjudicative body appeals to the privity of contract rules, but the GAO found it necessary in a May 18, 2018 decision. The current procurement, an IDIQ solicitation, led to the award of 80 contracts with a variety of contractors. One of the requirements was that if the offeror proposed subcontractors, the prime offeror had to demonstrate that they had successfully performed with that subcontractor in an identical relationship previously.

The protestor here submitted documentation to show that they had worked with the proposed sub under a different solicitation. That requirement was different and the government, which has extremely broad discretion on how to define its needs, dictated that all subs would be given PRIME contracts and deal directly with the government. In that case, this offeror’s “team” (there was a formal teaming agreement, which is NOT a subcontract) won the contract and each of them got separate prime contracts. Thus, in addition to other differences, the government provided specific contract direction to these separate entities and each billed its own costs and the government paid them directly. The protestor tried to argue that as the “team lead,” it served an identical role as a prime with subcontractors. The GAO disagreed.

Contracting in a loose manner in never advisable. You should never treat basic contracting principles in a cavalier manner. What you name an agreement may, on some occasions and some circumstances, reflect what the parties believed the nature of the relationship to be, but from a legal perspective a contract is different than a teaming agreement, which is different than a joint venture, which is different than a partnership, which is different than a corporation, which is different than a limited liability company, which is different from any number of other relationships that people or entities might have between or among themselves. A court will look to the terms of the agreement and how it functioned to determine the true nature of the arrangement.  In this case, the parties on the prior contract called what they did a team. And most commonly, upon winning a contract, the prime is awarded a contract and each other teammate then assumes a role as a subcontractor at some tier. In that case, however, due to government demands in meeting its reasonable requirements, each of the teammates became a prime contractor. Thus the protestor here had NEVER been in a prime/sub relationship with the currently proposed subcontractor.

The GAO determined that the agency had been correct in removing points from the protestor’s evaluation, thus dropping them below the level at which contracts were awarded. It pays to understand the variety of contractual relationships, and never try to call an apple a kumquat.

Amyx, Inc., B-415789.4, May 18, 2018.

Assumption of Risk in a FFP Contract

April 21, 2016 on 6:42 pm | In Contract Drafting, Contract Interpretation, Contract Types | Comments Off

February 5, 2016 by Tom Reid

Everyone in the government contracting profession understands that a FFP contract means that it is a FIRM commitment by the contractor to perform the contract work at a PRICE that does not change, i.e. it is FIXED. An interesting case in August 2015 highlighted this in an interesting way.
Agility was under a FFP contract to dispose of all the property in Afghanistan, Iraq, and Kuwait related to specific sites in those countries. The government provided accurate historical data for property disposal, but history was about to change. There was significantly more property to dispose of and Agility filed a claim for $6.9 M for the excess. The contracting officer allowed $236,363.93 via final decision that was appealed to the US Court of Federal Claims.
The court acknowledged that this was “an unusually high-risk contract.” Even so, the legal issue was quite simple – who had assumed the risk of the bad estimate? Interestingly, Agility was allowed to keep the proceeds from sale of scrap material. Thus a reasonable assumption would suggest that with an increase in the quantity of property of which to dispose, there would be an increase in the revenue from the sale of scrap. The parties even drafted a clause in an effort to deal with actual property counts that varied significantly varied from the original estimate. The court described this clause as being “so complex and uncertain that it offered essentially no protection at all to the contractor.”
The court provided a good survey on determining what ‘type” of contract the parties intended.
Regarding the quantity term, there are three possible types of supply contracts: those for a definite quantity, those for an indefinite quantity, and those for requirements. … The question here is whether the contract is one for a definite quantity, as the contract itself states, or for requirements, as Agility claims. The Court is not bound by the name or label included in the contract itself. ….
Rather, it must “look beyond the first page of the contract to determine what were the legal rights for which the parties bargained, and only then characterize the contract.” … “[I]f a contract is susceptible of interpretation as . . . one for requirements . . . the court should uphold it as of the requirements type.” ….
A definite quantity contract contemplates a “fixed, definite quantity of goods or services be purchased and provided.” …. A contract that provides only estimates and not definite quantities is not a definite quantity contract. ….
On the other hand, a requirements contract is formed when the seller has the exclusive right and obligation to fill all of the buyer’s needs for the goods or services described in the contract…. An essential element of a requirements contract is the promise by the buyer to purchase the contract subject matter exclusively from the seller.… (citations omitted).

The court concluded that this was a “high risk” FFP requirements contract. Agility argued constructive change, negligent estimating, breach of warranty of reasonable accuracy, and general equitable adjustment for a portion of the work. The court found none of those arguments persuasive.
The primary message in this case is one every contractor learns quickly or goes out of business just as quickly. FFP means FIRM, FIXED, PRICE. There are almost never any exceptions. If you can’t do the work at that price, do not propose that price. A second lesson has to do with the drafting of a special contract provision. That clause was useless to Agility even though it was drafted by the government and should have been construed against the government. The Court did not address that little detail (and Agility was no novice government contractor; they should have known better.)
What strikes me about this case, however, is “none of the above.” Yes, FFP means FFP and any contractor who forgets that gets what they deserve. Survival of the fittest, Darwin Principle, and stupid is as stupid does. What strikes me is that FAR 16.202-2 is extremely clear. It says, “A firm-fixed-price contract is suitable for acquiring … supplies or services on the basis of reasonably definite functional or detailed specifications … when the contracting officer can establish fair and reasonable prices at the outset….” More and more I see agencies issuing terrible requirements documents and forcing them under a FFP arrangement. Sadly there are enough hungry contractors, and from my experience even sadder, usually small businesses including 8(a)’s, who will bet their company on the hope that it can succeed. The government takes advantage of this arguing that the fact that there was competition validates the reasonableness of the requirement. This is false logic. The hungry or naive small business bites the dust (or minimally hurts itself very badly) from what is, in reality and effect, a bad requirements document promulgated by the government. In my view, this contract was void ab initio (Meaning it never existed.) The contractor should have been compensated for the fair value of benefit received by the government. The CO had no authority to even enter into the contract since he/she failed to comply with ALL of the rules and regulations as required by FAR 1.602-1 (b) “No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met.” FAR 16.202-2 is just one example. I do not think justice was done here, and it all started with a bad requirements document, coupled with a hungry contractor. That is ALWAYS a recipe for disaster and this situation played out exactly as any reasonable person would have predicted.

Time and Materials Contracts – Does Anybody Really Understand Them?

January 21, 2009 on 3:52 pm | In Contract Types | Comments Off

Under a time and materials contract a supplier is paid simply for delivering hours. Whether anything productive gets done, or a project is completed, or even if it is done correctly are risks that fall totally on the buyer. So long as the vendor shows up and puts in time, they get paid. The “materials” portion is for what is commonly known as “Other Direct Costs” or ODCs. This might include the cost of travel, costs for duplicating something, or most any other cost incurred on behalf of the buyer, by the seller, for which the seller expects to be paid. If there are no materials, and the contract is purely for hours, then the more common term applied to it is Labor Hour Contract.

According to the Federal Acquisition Regulation (FAR), these are highly undesirable contracts for the government. Yet from 1996 to 2005 their use by DOD alone grew from just under $5 billion to about $10 billion. In one study by GAO they reported that the numbers were grossly understated due to coding errors on the reports. The use of such contracts flies in the face of direction from Congress that contractors are to be held more accountable for results, not just putting in time. Thus there are strong mandates from Congress, the Office of Federal Procurement Policy, and many executive branch agencies (including DOD), that contracts for services should be under a performance work statement where the contractor gets paid only for results, not just time.

So why are they so widely used? From the seller’s perspective, they are great contracts. You get paid for showing up. If you actually accomplish something, well that’s just a bonus! They have no responsibility for the results and can’t be blamed if things go badly. They offer no warranty, and have no residual obligation. Unlike a fixed price contract that usually requires that the work be completed and delivered before any payment is made, under a T&M contract they can typically bill weekly or every other week. As we’ve noted in these pages before, cash is king to any business, and especially so for a small business.

From the buyer’s perspective, they are easy to place, require very little pre-planning, can be adjusted quickly if needs change, and gives the manager a body (or two or three or ten or one hundred) that they can use to accomplish their mission without the time and trouble of a detailed work statement and performance plan. So long as they have the budget, they can augment their workforce as much as they please. And it is for these same reasons that FAR suggests that this is one of the least preferred types of contracts. Additionally, as GAO pointed out, there is no monitoring of the monitors on T&M contracts to ensure that they are being administered correctly, with proper discipline, and with an eye toward achieving actual, measurable results. Even after a T&M has been used, perhaps properly, no one ever seems to go back and look for a less risky contract vehicle that will hold the contractor more responsible for results.

Even lawyers, who have traditionally been T&M providers of services, are beginning to do more fixed price work, or setting performance standards for their results. While that may not be appropriate for some types of litigation, most buyers would prefer to have the seller sharing in the risk for results, even where professional services are involved.

T&M contracts are a legitimate way to purchase hours of effort. While it may be the best process in some circumstances, long term efforts, or those that actually contribute to a measurable result probably have a better vehicle to use. Of course this will require more planning and effort on the buyers part, such as in the drafting of a performance work statement or statement of objectives, and more work on the part of the seller to put quality bodies on the project, assume some of the risk, and pay more attention to administering the contract. Contract professionals know this and know as well that it is the right way to contract for services in most cases. Less experienced, less knowledgeable, and just plain lazy ones live their whole lives off of T&M. The choice is yours.

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