Board Denies $8M Claim Under IDIQ Contract
In the appeal of CAE USA, INC. v. DEPARTMENT OF HOMELAND SECURITY (May 26, 2016), the Board of Contract Appeals denied CAE’s claim in excess of $8M to build a flight simulator for the U.S. Coast Guard. CAE entered into an IDIQ contract with the Government to provide training services to pilots of the HC-130H aircraft. The Coast Guard uses this aircraft for long range surveillance. CAE invested over $8M building a Full Flight Simulator for this training. The Government provided the “avionics package” to be incorporated into the simulator. CAE would then be paid for training courses provided to Coast Guard pilots. During the proposal stage, the Government also indicated that CAE could use the simulator to provide training to third parties on a “not to interfere basis.” This provided CAE a business opportunity to make money by providing training to private air cargo services and foreign militaries. CAE argued that this induced it to invest in the development of the Full Flight Simulator, which was very costly.
The Government decided to cancel the flight training program and did not order any further services off of the IDIQ contract with CAE. To make matters worse, the Government asked CAE to provide the avionics package back. This meant that CAE could no longer provide training to private air cargo companies and foreign military entities. CAE would lose significant revenue as a result of this lost business opportunity.
CAE filed a claim against the Government based on breach of the duty of good faith and fair dealing. CAE argued that the Government should have allowed it to continue to use the avionics package so it could recoup on its significant investment into the Full Flight Simulator. The Board of Contract Appeals denied CAE’s claim. The Board ruled that because the contract was on IDIQ type, the Government was only obligated to purchase the minimum quantities stated in the contract.
Given that the contract was and IDIQ type, the Board held that CAE could not complain when the Government decided it no longer need flight training services. The duty of good faith and fair dealing did not change this fact. The Board noted that this duty does not “expand party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.”
The Board also held that the duty of good faith and fair dealing did not require the Government to allow CAE to keep the avionics package so it could train other pilots and recoup its investment into the flight simulator:
Would it have been nice of the Coast Guard to let CAE hold the A1U avionics for a longer period of time? Certainly. 2 But the good faith and fair dealing duty “is not limitless.” West Run Student Housing Associates, LLC v. Huntington National Bank, 712 F.3d 165, 170 (3d Cir. 2013). It does not entitle contractors to extra-contractual benefits, or require the Government to take extra-contractual steps, simply because such generosity would be nice, even if gratuitous. See Excel Services, Inc., ASBCA 30565, 85-3 BCA ¶ 18,369, at 92,159 (duty to cooperate “does not obligate the Government to assist a contractor” outside the requirements of the contract “by taking positive actions” that the contract does not require). If the Government is not contractually obligated to do certain things, it is not financially liable – under a breach of contract theory – for failing to do them.
When entering into the IDIQ contract, CAE could have inserted language that permitted it to keep the avionics package if the Government cancelled the flight training program. This way, it could have recouped its investment even after the Government cancelled its flight training program.
This opinion includes a detailed discussion on the Government's duty of good faith and fair dealing. Although it did not help CAE here, this doctrine is still alive and well.
SBA Limitation on Subcontracting Rules Undergoes Major Change
Effective June 30, 2016, the SBA’s limitation on subcontracting rules will undergo a major change. Now, a small business prime contractor can count subcontractor work towards its self-performance requirement if the subcontractor is “similarly situated.” The new regulation defines a similarly situated entity as follows:
Similarly situated entity is a subcontractor that has the same small business program status as the prime contractor. This means that: For a HUBZone requirement, a subcontractor that is a qualified HUBZone small business concern; for a small business set-aside, partial set-aside, or reserve a subcontractor that is a small business concern; for a SDVO small business requirement, a subcontractor that is a self-certified SDVO SBC; for an 8(a) requirement, a subcontractor that is an 8(a) certified Program Participant; for a WOSB or EDWOSB contract, a subcontractor that has complied with the requirements of part 127. In addition to sharing the same small business program status as the prime contractor, a similarly situated entity must also be small for the NAICS code that the prime contractor assigned to the subcontract the subcontractor will perform.
In plain terms, if a subcontractor meets the small business eligibility requirements under a particular procurement, then work performed by that subcontractor will be treated as if performed by the prime contractor. For example, in an SDVOSB set aside procurement, if the subcontractor qualifies as an SDVOSB, the prime contractor can credit that subcontractor’s work towards the prime contractor’s self-performance requirement. The revised regulation will permit more subcontracting on small business set asides.
However, the SBA’s limitation on subcontracting regulation limits the “similarly situated” subcontractor rule to first tier subcontractors only:
SBA will apply the limitations on subcontracting collectively to the prime and any similarly situated first tier subcontractor, and any work performed by a similarly situated first tier subcontractor will count toward compliance with the applicable limitation on subcontracting. Any work that a similarly situated first tier subcontractor subcontracts, to any entity, will count as subcontracted to a non-similarly situated entity for purposes of determining whether the prime/sub team performed the required amount of work. In other words, work that is not performed by the employees of the prime contractor or employees of first tier similarly situated subcontractors will count as subcontracts performed by non-similarly situated concerns.
The SBA’s limitation on subcontracting rules also change the way percentage of work is calculated for services and supply contracts. Instead of focusing on cost of labor, the SBA will base percentage of work on how much the Government pays for a particular service or supply:
General. In order to be awarded a full or partial small business set-asidecontract with a value greater than $150,000, an 8(a) contract, an SDVO SBC contract, a HUBZone contract, a WOSB or EDWOSB contract pursuant to part 127 of this chapter, with a value greater than $150,000, a small business concern must agree that:
In the case of a contract for services (except construction), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded.
(2)(i) In the case of a contract for supplies or products (other than from a nonmanufacturer of such supplies), it will not pay more than 50% of the amount paid by the government to it to firms that are not similarly situated. Any work that a similarly situated subcontractor further subcontracts will count towards the 50% subcontract amount that cannot be exceeded. Cost of materials are excluded and not considered to be subcontracted.
Affiliation
The new SBA regulations create a presumption of affiliation based on two additional grounds:
- Firms that conduct business with each other and are owned and controlled by persons who are married couples, parties to a civil union, parents and children, and siblings.
- If a firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other and, therefore, that the two firms are affiliated.
The above presumptions of affiliation have long be recognized in case law decisions. The regulations now codify them.
Joint Ventures
SBA regulations create an exclusion from affiliation for small business size status to allow two or more small businesses to joint venture for any procurement without being affiliated with regard to the performance of that procurement requirement. This will encourage more joint venturing of small businesses.
