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.

The Christian Doctrine in Government Contracting

May 8, 2009 on 10:36 pm | In Contract Interpretation | 4 Comments

The following article appeared in this month’s issue of FAR View – a newsletter put out by the Government Contracting students of Cal Poly Pomona’s Society of Law, Contracts and Procurement. If you are not already subscribed to this wonderful publication, simply send an email to farviewcpp@gmail.com and just ask! And if you want to check out the current issue, just ask them or ask me – I’ll send it to you. Just go to www.ask-tom-reid.com and post the request.

There is a principle of government contract law referred to as the Christian Doctrine. When I teach this in a class I typically joke that it is the principle that states that defaulting contractors will be fed to the lions. But in reality it has nothing to do with lions, or Christians, or eating. It is the principle that tells us when a clause, having been omitted from the contract, might be “read into” the contract by operation of law – often to the great surprise of the contractor.

The doctrine gets its name from the seminal case in the area captioned G.L. Christian & Associates v. US, 312 F.2d 418 (Ct. Cl. 1963); rehearing denied, 320 F. 2d 345 (Ct. Cl. 1963); cert denied, 375 U.S. 954 (1964). The contract in question was awarded by the New Orleans Corps of Engineers for construction work in the area. There is a hint that the Termination for Convenience clause was actively negotiated out of the contract by the contractor. When a new contracting officer arrived, however, and it was determined that the services were no longer needed, a termination for convenience issued. Mr. Christian argued that without the clause, a termination was such an extraordinary act that the government had no right to terminate and as a result he would be entitled to recover full commercial damages for breach of the contract. These damages would include all consequential and incidental damages, including his lost profits measured by what he would have made if the contract had been allowed to run its course. These are called “anticipatory profits” and every government contracting student knows that these are damages the government never pays.

The Court of Claims (now the US Court of Federal Claims) reasoned that there were some clauses that were required to be in contracts that reflected such an ingrained principle of federal contracting law that their omission could not be tolerated. As a matter of public policy, therefore, if the clause was omitted, it could only have been by accident and it must be read into the contract. As a result Mr. Christian’s contract was deemed terminated for convenience and his damages were limited to the termination for convenience clause limitations, once they were “read into” his contract.

On the one hand this may seem very unfair to Mr. Christian. Looking at it from the view of the “public” however, the termination clause itself is so unique to government contracting simply because it does reflect a very important policy. If the government no longer needs whatever the contract is for, the taxpayer should not be required to continue paying for something it does not need. In commerce generally this is considered a breach, but for the government different policies apply. So the Christian Doctrine has been developed to provide the following guidance: IF (and only if) there exists a required clause that reflects an important public policy, its omission will be corrected by reading the clause into the contract. So there are two essential elements for invoking this doctrine. First the clause in question must be required by the regulation or statute. Second, it must reflect an important public policy. If it meets those standards, then the Christian Doctrine will apply and the clause will be considered part of the contract, whether or not it appears by reference or full text in the contract.

Clearly not all clauses fit into those requirements. One clause that does not is the “Availability of Funds” clause. Can you figure out why? We’ll talk about that clause next time.

Custom and Usage in Trade Compels Payment of Excess Reprocurement Costs

June 28, 2007 on 12:30 pm | In Contract Interpretation | Comments Off

In one of the first cases to come out of the newly constituted Contract Appeals Board the key issue was how to interpret a contract that used a particular acronym to describe the required paper quality. In brief, the Government Printing Office ordered some tags to be printed using the designation “CSU” for the paper stock. When the awarded contractor (FWG) delivered the tags, they were deemed to be of poor quality and not printed on “White CSU Tag, 13 pt.” as required by the purchase order. As the facts developed it appears that the printer actually had no idea what the “CSU” designation meant, but at one point contended that is stood for “Card Stock Uncoated.” The term was not defined in the purchase order and the contractor never requested clarification.

Before the Board, the contractor presented evidence from paper manufacturers that they had never heard of the term, but nothing to support its contention that it stood for “Card Stock Uncoated.” For the Government, the GPO provided evidence from The Printing Service Specialist’s Handbook and Reference Guide (1994, Rev.1997) published by the Society for Service Professionals in Printing which, the Board noted, indicated “that ‘CSU’ is a standard term used throughout the tag printing industry to define ‘clay-coated sulphite tag stock.’” This was further supported by vendor website print-outs, vendor catalogs, and other materials from six separate vendors.

The Board first noted that the “language of a contract must be given the meaning that would be derived from the contract by a reasonably intelligent person acquainted with the contemporaneous circumstances” citing Hol-Gar Mfg. Corp. v. United States, 351 F.2d 972, 975 (Ct. Cl. 1965). The Board then ruled that FWG failed to demonstrate that its interpretation was either correct or reasonable, and FWG was therefore not entitled to any payment. The Board also held that the reprocurement costs had been properly assessed. Its reasoning was that a contract must be interpreted in accordance with the language common to the trade. Citing US Claims Court decisions, the Board noted that it is often said that “a court in construing the language of the parties must put itself into the shoes of the parties. [But] That alone will not suffice; it must adopt their vernacular.” (cites omitted). Despite FWG’s argument that the government should have used clearer specifications, the Board held that “the record establishes that the term ‘CSU Tag’ was commonly used and understood in the printing industry, and in particular the tag printing industry – the industry to which this contract related. Trade usage evidence can be used in interpreting a contract where ‘there was a well-defined usage generally adopted by those engaged in the business to which the contract relates, at the place where the contract was made or was to be performed.’” Citing William Clairmont, Inc., ASBCA No. 15447, Feb. 9, 1973, 73-1 BCA para. 9927 at 46, 459 which quoted 5 Williston on Contracts section 650 (3rd ed.).

While the Board acknowledged that a more detailed description in the purchase order could have avoided the issue in this case, the Board held that the terminology was a proper use of a trade term that is well understood in the industry and its clear meaning can be easily ascertained through the Internet or reference to industry literature.

So what are the take-away lessons here? First, be certain to read and understand every word and term in your contract, even if it is only a purchase order. Any acronyms that are not clear place a burden on the contractor to find out what is intended. If you hold yourself out as a vendor in a particular product or service, you will be expected to understand the commonly accepted usage of terms used in the trade. For example, many people will make reference to lumber that is 2 by 4. Such lumber is not, however, two inches by four inches – it is closer to 1 ½ by 3 ½ inches, depending on the drying and finish planning applied! Failure to understand such jargon of the trade can cause very significant performance problems. Imagine the problems that would result if an inspector required the removal of all boards that were not exactly 2 inches by 4 inches in a project!

Second, there is another common rule of interpretation that says that an ambiguous contract will be construed against the drafter, which would be the Government in this case. In the present situation the Board did not have to reach this rule because there was no finding that the contract was ambiguous. The questioned term was abundantly clear to those in the trade, thus, absent an ambiguity, the use of trade terms will trump the argument that contracts are construed against the drafter.

Appeal of Far Western Graphics, Inc. CAB No. 2006-5, June 8, 2007.

 

 

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