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.

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