Government Contract Attorneys, SDVOSB Law: Government Contracts Attorneys | Lawyers

Contractor Entitled to “Delay Overhead Costs” Under VA Changes Clause

Posted on September 24th, 2017 by

The Civilian Board of Contract Appeals ruled that a contractor is not only entitled to overhead and profit on change order work under the VA’s Changes Clause, but also to overhead and profit on other work that was impacted or delayed by the change order work. Appeal of Industrial Maintenance Services, Inc., CBCA No. 5618 (September 15, 2017)  This is new precedent and could change the way we calculate impact costs.  Impact costs stem from a change’s impact on unchanged work.  For example, a change in the HVAC duct work might impact or delay electrical work that cannot be completed until the HVAC duct work is done.  In such a case, the Board ruling would allow the contractor to apply overhead and profit on the value of the electrical work as the appropriate measure of impact costs or “delay overhead”:

However, in seeking delay overhead, the contractors did not raise and opinions have not addressed or recognized that in terms of dollars, the actual scope of the underlying change extended beyond the dollar value of work added, altered, or deleted. As is apparent in this case, with the critical path of performance affected, the impact of the change reached beyond the immediate work modified, and the impacted work is just as much a part of the change as the actually added and altered work. The dollar value of the impacted work is an element of the costs of the modified work. It is from that total amount that the overhead and fee percentages must be calculated to properly compensate the contractor for its costs not recoverable as direct costs.

This decision is interesting and could have a wide sweeping impact on how one calculates impact costs, at least with respect to VA contracts. Note that contractors can still seek delay damages under the suspension of work clause, if a particular change suspends performance.  Careful review of the modes of recovery should be looked at to ensure compensation is fair and reasonable.

 

GAO Recommends Cancellaton of a $38.5M Award Due to Organizational Conflict of Interest

Posted on September 13th, 2016 by

The GAO release its decision on September 12, 2016, sustaining a protest filed by AT&T over a $38.5M networking contract that the Air Force awarded to MacAulay-Brown. AT&T was the incumbent for this networking contract.  The GAO found that the Air Force failed to consider a potential Organizational Conflict of Interest by a subcontractor on the MacAulay-Brown Team. This subcontractor – whose name was redacted from the GAO decision – had been working on an Air Force contract for acquisition support. AT&T argued that the subcontractor had access to AT&T’s staffing levels as the incumbent, which was nonpublic information.

The Contracting Officer compared proposals and found that Mc MacAulay-Brown’s proposal “did not mirror incumbent [AT&T] contract staffing levels.” Because of this, the Contracting Officer concluded that MacAulay-Brown did not receive nonpublic staffing information from its subcontractor.  AT&T argued, and the GAO agreed, that “a different staffing level than the incumbent contractor does not reasonably demonstrate that the non-incumbent contractor was not given access to the incumbent contractor’s information.”

The GAO noted that FAR §§ 9.504(a) “requires that contracting officers identify and evaluate potential organizational conflicts of interest, and directs contracting officers to avoid, neutralize, or mitigate potential significant conflicts of interest so as to prevent an unfair competitive advantage or the existence of conflicting roles that might impair a contractor’s objectivity.” The GAO found that “the contracting officer does not appear to have considered the possibility that a non-incumbent contractor could have made use of the incumbent contractor’s proprietary information without necessarily “mirroring” the specific staffing levels.”

This case illustrates the need to vet members of your team for potential conflicts of interest and institute a mitigation plan to avoid disqualification. In this regard, the GAO noted that:

As our Office has held, mitigation efforts that screen or wall-off certain individuals within a company from others, in order to prevent an improper disclosure of information, may be an effective means to address an unequal access to information OCI. Enterprise Info. Sys., Inc., B-405152 et al., Sept. 2, 2011, 2011CPD ¶ 174 at 11; Aetna Gov’t Health Plans, Inc.; Foundation Health Fed Servs., Inc., supra at 13.

However, in this protest, the GAO found that the record did not document the Contracting Officer’s review of the subcontractor’s mitigation plan and conclusion that it was adequate.

Board Denies $8M Claim Under IDIQ Contract

Posted on June 21st, 2016 by

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

Posted on June 1st, 2016 by

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.

Bad Timing – Board Denies Claim Before “Handshake Settlement” is Finalized

Posted on February 3rd, 2016 by

In RELIABLE CONTRACTING GROUP, LLC (January 26, 2016) the Civilian Board of Contract Appeals (“Board”) refused to vacate its decision denying a contractor’s claim for providing back-up emergency generators. The Board denied the contractor’s claim because the generators were not “new” and thus the contractor was responsible for procuring others at a higher cost. The Contractor appealed the Board’s decision to the Federal Circuit. On appeal, the Federal Circuit remanded the case back to the Board to determine if damage to the emergency generators meant they were not “new.”

While the Board was in the process of writing a decision on the contractor’s claim in light of the Federal Circuit’s instructions, the parties engaged in settlement discussions. On September 15, 2015, the parties reached a “handshake agreement” to settle the claim for $550,000. Before the parties could finalize this agreement and sign a written settlement agreement, the Board issued a decision denying the contractor’s claim.

The contractor asked the Board to vacate or reconsider its decision given the parties’ “handshake agreement.” The Board refused to do so and allowed the judgment denying the contractor’s claim to stand. This effectively meant that the VA owed the contractor nothing and the $550,000 “deal” was moot or off the table.

This is a case of bad timing. The Board noted that “it seems to us that to vacate our decision denying recovery, and then enter a
judgment in favor of Reliable for the stipulated amount of $550,000, where we have concluded that no recovery is due, would weaken the judicial process.” The board blamed also blamed both parties “by waiting too long to settle the appeal.”

This case illustrates the inherent risks in trying to settle a case while a decision is still pending before the Board. In retrospect, Appellant could have asked the Board to stay proceedings pending settlement discussions.

RELIABLE CONTRACTING GROUP, LLC (January 26, 2016)

Contractor’s Failure to Keep Accurate Cost Records Leads to Denial of Claims

Posted on February 1st, 2016 by

In the Appeals of Vistas Construction of Illinois, Inc. ASBCA Nos. 58479, et al., (January 12, 2016), the Armed Services Board of Contract Appeals (“Board”) denied a contractor’s claims for additional work and delays involving a project to enlarge a levee in Jefferson Parish, Louisiana. The Board denied most of the claims for lack of adequate proof. The Board gave little weight to the contractor’s attempts to recreate what had occurred during contract performance by piecing together information during litigation.

The Board noted that the contractor’s method of “segregating costs between changed and unchanged work is a matter of considerable controversy.” Unfortunately, the contractor did not contemporaneously maintain records during contract performance, which  separated costs for base contract work and costs for change order work. During litigation, the contractor tried to use its certified payrolls to prove costs for unchanged vs. changed work. The Board found this unconvincing, stating that the certified payrolls “do not describe what work, they do not identify the CLINs or the tasks performed by the worker that day, nor do they identify the equipment used.”

The contractor submitted Quality Control Reports (“QCRs”) during contract performance. The QCRs required the contractor to “to list the equipment used on the project on that day and to specify the operating and standby hours for each piece of equipment.” The contractor’s QCRs showed less equipment time than claimed by the contractor. The contractor explained this discrepancy by claiming the Government changed the manner in which the QCRs were to be provided. The Board did not buy this argument, finding that the contractor has not “identified any contemporaneous document where it protested or documented an alleged demand by the Corps to under report equipment hours.”

The Contractor sought a profit rate of 34.81% on change order work, while the Contracting Officer had only applied a 8.7% profit rate. The Contractor claimed that a 34.81% profit rate is more reasonable since it is in line with the profit rate the Contractor enjoyed on the base contract work. The Board denied the contractor’s claim, holding that the Contractor “has not demonstrated that it earned any profit on the unchanged work, and certainly has not demonstrated that it earned profit of 34.81%.”

The Contractor sought interest on borrowed money. The Board denied payment of interest on borrowed money as unallowable under FAR 31.205-20, “Interest and Other Financial Costs,” which state that “Interest on borrowings (however represented) . . . [is] unallowable.” The Board also noted that interest under the Prompt Payment Act only applies “when a payment is inadvertently late, not when the government refuses to pay or questions its underlying liability.” Since the Government had contested the Contractor’s invoices, Prompt Payment Interest did not apply either.

The Contractor sought consultant costs as allowable contract administration costs. The Board held that if the consultant costs were incurred “for the purpose of materially furthering the negotiation process, the cost normally is allowable under FAR 31.205-33 as a contract administration cost even if the negotiation ultimately fails. On the other hand, if the cost is incurred to promote the prosecution of a claim, then the costs are unallowable.” To determine whether costs are allowable as contract administrative costs or unallowable claim prosecution costs, the Board noted that FAR § 31.205-33(f) requires adequate records of the nature and scope of service furnished evidenced by:

  1. Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed;
  2. Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided;
    and
  3. Consultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.

Based on the above evidentiary requirements, the Board awarded consultant fees spent on responding to a Government audit, but denied other consultant fees. The Board also refused to award the cost of the contractor’s employees as “professional or consultant fees” because FAR 31.205-33(a) states that professional and consultant services do not include officers or employees of the contractor.

This case illustrates the importance of keeping accurate and current records during contract performance.

Appeals of Vistas Construction of Illinois, Inc. ASBCA Nos. 58479, et al., (January 12, 2016)

GAO Investigation Concludes Army Extends Services Contract without Proper Authorization Applicable Procurement Regulations

Posted on January 31st, 2016 by

FAR 52.217-8, “Option to Extend Services,” allows a Contracting Officer to extend a service contract for up to six months. This clause provides:

52.217-8, OPTION TO EXTEND SERVICES (NOV 1999) The Government may require continued performance of any services within the limits and at the rates specified in the contract. These rates may be adjusted only as a result of revisions to prevailing labor rates provided by the Secretary of Labor. The option provision may be exercised more than once, but the total extension of performance hereunder shall not exceed 6 months. The Contracting Officer may exercise the option by written notice to the Contractor within [insert the period of time within which the Contracting Officer may exercise the option]. 

The above clause is typically required when there is a need for continued services until the Government awards a new contract. These extended contracts are commonly known as “bridge contracts.”
On January 28, 2016, the General Accounting Office (”GAO”) found that the Army Contracting Command-Redstone Arsenal had, on several occasions, extended the duration of contracts beyond their legal limits. Recent GAO reports note that about half of the bridge contracts created by such extensions were for professional management or information technology services. Although bridge contracts are typically short-term, GAO found that some contracts spanned multiple years. The GAO investigation fell short of concluding the Army Contracting Command-Redstone Arsenal did this intentionally, but blamed this on inexperienced and overwhelmed project and contracting staff.

Army Contracting: Training and Guidance Needed to Ensure Appropriate Use of the Option to Extend Services Clause (January 28, 2016)

 

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