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.

Contracts and Bridges

May 22, 2009 on 1:26 pm | In Contract Drafting, Leadership | Comments Off

There are many things we attempt that literally have no value until they are completed. At the same time, there are some things that just getting them done “well enough” can be acceptable.

For example, if you are writing a position paper and you have thought out your arguments, gathered your facts, and written all of this is a logical manner, there is a good probability that what you have done is good enough for the purpose and you can submit it. If you are like me, however, you constantly believe that you can make it just a little bit better so you sleep on it “just one more night” and maybe you get back to it and maybe you don’t. In these cases, you need to discipline yourself to accept “good enough” and move on. The same can be said of a contract. Anyone who has attended my classes has heard me say that there is not such thing as the “perfect contract” (no matter what your boss or even Legal might try to tell you). No matter how many sets of eyes get to see it, there is always something that can be done to improve it in some way. It’s the nature of business transactions and the foibles of our human language. Good enough needs to be good enough, and you need to get on with other matters.

But there are some things where good enough isn’t. Suppose you were building a bridge. You might have the anchor supports, the girders, the suspension cables, and the mid-span supports (I’m no engineer, so there are probably correct names for all of this, but I think you get what I am saying), but unless you have laid the very last section of decking, you do not have a bridge. It is not functional. It cannot be used as a “bridge.” It might be a nice piece of art, and it might even be considered a “good start,” but if someone is trying to take a truck loaded with widgets across it, they won’t make it. And the results can be disastrous if not catastrophic.

In everything you do in the course of a day, which of them can be completed “good enough” and which ones must be fully carried across the finish line? Are you writing a contract or building a bridge? Each task you tackle in the course of your day fits within one, and only one, of these two categories. Do you ever confuse them?

I recently accepted the task of writing an agreement for a client. It’s a pretty standard agreement with mostly boilerplate language. It was relatively easy to locate a model, review it for applicability, accuracy, and currency and have it prepared. It was, as far as this type of agreement goes, “good enough.” The problem arose in that this client as not completed the formation of their business. They do not have an approved company name registered with the state. So while the agreement is “good enough” we cannot carry it across the finish line. There is an absolutely essential part that is missing – the name of the party.

So the next time you create your “to do” list, give some thought about into which of these two categories each task fits. Can you get it completed “good enough” and not waste any more time trying to make something perfect that never will be? Or is this a task that has a critical component that must be completed? What is that critical component? Have you set the wheels in motion to make that happen? Do you even know what that component looks like, who has to do it, and what resources will be necessary to get it done? We worked with a client who was frustrated over not having a website. They had drafted all the content, but could not figure out how websites are set up (let’s just say that IT and web searches were beyond their experience). We showed them how to register a domain name, how to set up a hosting agreement, and how to load webpages into the site. Any ONE of those things being missing would have prevented the site from being viewed by potential customers. We needed all three. And it made no sense to embark on building a website until all three were identified and someone was made responsible for making it happen. The content could be considered a good-enough task. The whole website was a bridge task.

How many projects do you have that have lain incomplete for what seems forever? Are they contracts or bridges? Can you make use of it in its current good-enough state? Or must you find that missing link to connect both ends of the bridge?

When you think about getting things done, considering this approach might be a useful tool in increasing your productivity.

Does it Matter if your Contracts are Grammatically Correct?

April 28, 2009 on 3:15 pm | In Contract Drafting | Comments Off

We put together contracts of many pages – often hundreds of pages. With that many words on paper, what are the odds that it is free of grammatical mistakes?

According to Inside Training Newsletter, sixty percent of all business correspondence contains one or more grammar or spelling errors. This is based on a study done by a developer of English writing software solutions, WhiteSmoke. The most common error in written correspondence is missing words. Nearly one third of the documents reviewed revealed that the writers failed to use all the words needed for a grammatically correct sentence. The words most likely to be missed are verb auxiliaries (be, have, do), prepositions (in, on, at), determiners (a, an, the, this), and nouns.

Take a look at the contracts you have written. Are they grammatically correct? Does each sentence make sense? Do they each have a subject and verb? With the current explosion of “text-speak” it is possible that some contract drafters wouldn’t know a misspelling without the help of spell check. What about using the wrong word? Does it make a difference if one of the parties is assigned the responsibility to ensure, assure, or insure that a particular task gets done?

I suspect that, given the length of most government contracts, it is the extremely rare example that does NOT contain some measure of errors. The issue becomes one of determining if the errors are significant or what might be considered “harmless” error. Are the responsibilities of the parties clear? Are there any ambiguities caused by bad grammar?

Just because some mistakes may be inevitable is no excuse to accept sloppy drafting practices. You owe it to the parties (as well as your standing as a professional) to contain the risk of a contract by making it as clear and error free as possible. Sure, use spell check, but don’t forget that spell check can still give you the WRONG word. Both “from” and “form” are legitimate words. Just not the same word!

Here are two tips to help you improve the drafting of your contracts:
1. Don’t assume that you know what the document says. We all become too familiar with our own work and we “know” what it says even when it doesn’t say what we think. Get a fresh set of eyes on your document. Do a peer review with a co-worker. Reading portions out loud can also help. When you are articulating the words, when there is a disconnect between what your eyes are seeing and your mouth is saying errors become more obvious. We joke about the saying – When all else fails – read the contract, but in this case it actually helps!
2. Take the time to review your boilerplate forms and clauses as well. We are often called upon to review such forms and we have yet to find ANY such standard forms that do not contain some grammatical error – and sure enough misspellings and missing words are the most common culprits. Use the same techniques – peer review, fresh eyes, and reading out loud.

Do not accept sloppy drafting. Use the tools at your disposal to improve your writing. Fix the errors in your contract. Seek clarity and accuracy. Your contracts are a reflection on your own professionalism. The odds are that you will not see your contract cradle to grave. Give your successor a break and write in complete sentences – with proper spelling and grammar.

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