Contract Administration

In Joe Tex’s song about unrequited love, the Southern Soul singer belts out, “I gotcha, never shoulda promised to me.” Joe Tex may have thought this approach is the right one for romantic disappointment, but parties to a contract have a different set of obligations.

A lawsuit by Washington State contractor Nova Contracting should serve as an alert to owners dealing with the assessment of a contractor’s performance. Nova’s lawsuit came about because of the owner’s termination of the contract. Nova claimed the owner was using a “gotcha” review process for its submittals that was designed to prevent performance. The trial court agreed with the owner.

Culvert_with_a_dropNova appealed and the court of appeals found sufficient questions of fact to send the dispute back to the trial court. The opinion offers insight into fair dealing and good faith in the performance of construction contracts. Nova Contracting, Inc. v. City of Olympia, No. 48644-0-II (Wash Ct. App. Apr. 18, 2017). Continue Reading Good faith and fair dealing puts an end to the “gotcha” in submittal review

Every government contract contains implied duties, such as the duty to cooperate and the duty of good faith and fair dealing. Such implied duties generally prohibit one party from interfering with the other’s performance or taking actions that undermine the other’s expected benefit of the bargain.

Implied duties offer important protections when an issue is not clearly addressed in the text of the agreement. But courts have been reluctant to apply them in a way that overrides express contract language. A party generally does not breach the duty of good faith and fair dealing, for example, simply by exercising a right that is expressly provided in the contract.

But the government does not have carte blanche. Even if there is express language that gives the government a certain right, the government cannot exercise that right unreasonably or in a way that interferes with the contractor’s performance. In Agility Public Warehousing Company KSCP v. Mattis, No. 2016-1265 (Fed. Cir. Apr. 4, 2017), for example, the Federal Circuit explained that the government can breach the duty of good faith and fair dealing even if its conduct is otherwise consistent with the express terms of a contract.

Airmen serve dinner in the field in a mobile kitchen trailer during Global Medic 13 on Fort McCoy, Wis., July 16, 2013. The food service specialists are assigned to the 940th Force Support Squadron, Beale Air Force Base, Calif.
Source: DOD Image Library

Continue Reading Can the government contract around the duty of good faith and fair dealing?

U.S. Air Force and Honduran doctors work together to remove a diseased gallbladder from a patient at the Doctor Salvador Paredes Hospital in Trujillo, Honduras, July 2, 2015.The 2017 National Defense Authorization Act, Pub. L. No. 114-328 (Dec. 23, 2016), introduces major changes to the Defense Department healthcare program known as TRICARE. By this time next year, we’ll see a new program to contain the cost of prescription drugs at retail pharmacies, contractual incentives for improving the quality of healthcare and reducing “per-capita cost,” and the first major step toward privatizing the delivery of healthcare to military members. Here are the key statutory provisions:

  • Access to private health care providers. Section 701 of the 2017 NDAA establishes TRICARE Select as a new self-managed, preferred provider network option for eligible beneficiaries. TRICARE Select will essentially replace the current TRICARE Extra and TRICARE Standard plans. As of January 1, 2018, all TRICARE Standard and TRICARE Extra beneficiaries will need to be enrolled in either TRICARE Prime or TRICARE Select. The Standard and Extra plans will terminate on that date. Beneficiaries under the new Select plan will have unrestricted freedom of choice in selecting their health care providers.
  • Prior authorization requirements. Section 701 of the 2017 NDAA prohibits managed care support contractors from requiring primary or specialty care providers to obtain prior authorization before referring a patient to a specialty care provider within the contractor’s network.
  • Value-based incentive program for TRICARE contracts. Section 705(a) of the 2017 NDAA requires a “value-based incentive program” to be incorporated into any TRICARE contract for the provision of health care services. These new contractual incentives would encourage health care providers to improve the quality of health care, the health of covered beneficiaries, and the experience of covered beneficiaries. One of the specific elements to be addressed in the contracts and forthcoming contract modifications is lowering the “per-capita cost” of health care. Section 705(c) sets a January 1, 2018 deadline for the program to be implemented. Contracts awarded before the deadline will be modified.
  • Procurement authority. Section 705(b) of the 2017 NDAA requires responsibility for the solicitation and award of “managed care support contracts” to be transferred from the Defense Health Agency to the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics.
  • Privatization of health care services. Section 706 of the 2017 NDAA sets a deadline of January 1, 2018 for DOD to establish “military-civilian integrated health delivery systems” through partnerships with private sector health systems. It calls military treatment facilities and HMOs or other private sector health care providers to enter into contracts or memoranda of understanding that would allow TRICARE members to receive health care services at private sector providers. Section 717 authorizes veterans to receive health care at military treatment facilities.
  • Manufacturer rebates at retail pharmacies. Section 743 gives the Secretary of Defense authority to conduct a pilot program that would allow DOD to capture manufacturer rebates that are payable when TRICARE members have prescriptions filled at retail pharmacies. Under the pilot program, manufacturers would have to pay rebates such that medications are available to TRICARE beneficiaries at the “lowest rate available,” including rates charged to the mail order pharmacy. The pilot program would begin no later than October 1, 2017 and end by September 30, 2018.

More on DOD healthcare contracting—

Incumbency as a factor in the award of TRICARE’s $58 billion managed care support contracts (Nov. 27, 2016)

OFCCP’s five-year moratorium on enforcement actions against TRICARE providers (Apr. 14, 2014)

TRICARE hospitals and pharmacies are not subcontractors (Jan. 9, 2012)

Contractors interested in the application of FOIA Exemption 4 should take note of the Ninth Circuit’s decision in American Small Business League v. Dep’t of Defense, No. 15-15120 (9th Cir. Jan. 6, 2017). The issue in the case was whether a declaration submitted by a Sikorsky Aircraft Corporation employee was sufficient to show the competitive harm necessary to withhold small business subcontracting data obtained from Sikorsky. The Sikorsky declaration was short, but it identified Sikorsky’s competitors and asserted that its small business subcontracting data could be used to gain a competitive advantage.

Soldiers conduct air assault operations on the deck of the 8th Theater Sustainment Command's Logistical Support Vessel-2, the Harold C. Clinger off the coast of Honolulu, Jan. 11, 2016. The soldiers are assigned to the 25th Infantry Division.
Army photo by Sgt. Jon Heinrich

In a November 2014 order, the District Court found the declaration too vague. It lacked “reasonably specific detail” as to the likelihood of competitive injury. It did not show how information found in the subcontracting plan would be “likely to cause substantial competitive injury.” Proof of competitive harm was based only on the fact that a Sikorsky competitor “could” use Sikorsky’s data to cause harm. In the words of District Judge William Alsup, “[t]hat is not enough to grant summary judgment for the agency.” The District Court ordered the government to produce Sikorsky’s master subcontracting plan, subject only to appeal.

Continue Reading The Ninth Circuit sides with DOD on Sikorsky small business subcontract data

[UPDATE: The Supreme Court resolved the Escobar case in a unanimous decision published on June 16, 2015. A link to our discussion of the Court’s opinion is available here.]

In some courts in the United States today, a government contractor or a healthcare provider seeking reimbursement from a federal program can violate the False Claims Act even when its work is satisfactory and its invoices are correct. Under the theory of “implied certification,” a minor instance of non-compliance with one of the thousands of applicable statutes, regulations, and contract provisions can be the basis for a federal investigation, years of litigation, as well as fines, penalties, suspension and debarment, even imprisonment of company personnel.

This week, the Supreme Court heard oral arguments in Universal Health Services, Inc. v. United States ex rel. Escobar, Docket No. 15-7, a case involving the viability of the implied certification theory. Here, we look at the questions posed during oral argument to see if we can infer how the Court might resolve the case.

The Supreme Court agreed to consider two questions posed in Escobar. First, the Court agreed to address the current split in the circuits as to the viability of the implied certification theory. The First Circuit’s decision in United States ex rel. Escobar v. Universal Health Services, Inc., 780 F.3d 504 (1st Cir. 2015), broadly adopts implied certification. The Seventh Circuit’s decision in United States v. Sanford-Brown, Ltd., 788 F.3d 696 (7th Cir. 2015), firmly rejects it.

Continue Reading How the Supreme Court will limit False Claims Act liability for implied certification

Redline of 2015 Amendments to FAR 52.222-50

The 2015 amendments to the anti-trafficking provisions in the Federal Acquisition Regulation will apply to all federal contracts and subcontracts awarded after March 2, 2015. Existing IDIQ contracts for which additional orders are anticipated will be modified “on a bilateral basis” to include the new language in FAR 52.222-50. See 80 Fed. Reg. 4967 (Jan. 29, 2015). The changes implement the requirements outlined in Executive Order 13627 (Sept. 25, 2012) and the anti-trafficking provisions of the 2013 National Defense Authorization Act, Public Law No. 112-239 (Jan. 2, 2013), codified in 22 U.S.C. Chapter 78.

Here we present some of the background on the original FAR clause and a summary of the new requirements. A redline version of the 2015 amendments to FAR 52.222-50 is available here.

The original FAR language on human trafficking

A contract clause prohibiting severe forms of human trafficking, procurement of commercial sex acts, and the use of forced labor has appeared in federal service contracts since April 2006. See 71 Fed. Reg. 20301 (Apr. 19, 2006) [pdf]. The 2006 version of the anti-trafficking clause included a general prohibition applicable to federal service contractors and a requirement to establish policies and procedures to ensure employee compliance. It required contractors to notify employees of the policy and to establish an appropriate employee awareness program. It required contractors to notify the government of an alleged violation and specified penalties for human trafficking violations. The original interim version of FAR 52.222-50 was also a mandatory flowdown in all subcontracts for the acquisition of services.

FAR 52.222-50 was expanded in 2007 to cover all federal contracts and subcontracts, including those for supplies and for commercial items. See 72 Fed. Reg. 46335 (Aug. 7, 2007). The clause was revised again in January 2009. See 74 Fed. Reg. 2741 (Jan. 15, 2009). The main substantive addition at that time was the addition of language making it clear that a contracting officer could consider the adoption of a Trafficking in Persons awareness program as a mitigating factor in determining the appropriate remedy for a trafficking violation.

The 2015 FAR amendments

The 2015 amendments to FAR Subpart 22.17 and FAR 52.222-50 go well beyond the original requirements. They introduce a list of specific types of conduct that had not previously appeared in the clause. They add a requirement for many contractors to implement trafficking compliance plans and to certify the absence of any trafficking activities every year. They also modify the mandatory disclosure obligations and specify the minimum level of cooperation required of contractors responding to a trafficking investigation. Finally, the amendments to the FAR clause expand the list of contracting relationships subject to the anti-trafficking clause. Continue Reading The 2015 amendments to the FAR rule on human trafficking

The contractor’s duty to proceed with performance pending the resolution of disputes is a basic concept in the law of government contracts. It is laid out explicitly in FAR 52.233-1(i), the mandatory disputes clause that appears in nearly all federal contracts: “The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.”

But the duty to proceed has important limits. A contractor is excused from its duty to proceed and may stop work if the government materially breaches its own obligations under the contract.

Breaches occur in many contexts. A cardinal change in the scope of work is a breach that excuses a contractor’s performance. Terminating a contract just to get a lower price is a breach. Refusing to pay for a contractor’s work without an adequate excuse is also a breach.

According to the decision in Kiewit-Turner v. Dep’t of Veteran Affairs, CBCA No. 3450 (Dec. 9, 2014) [pdf], the government breaches the contract by ordering a contractor to continue performance when it is clear that there will be no funds available to pay for the work. The Civilian Board of Contract Appeals recognized Kiewit-Turner‘s right to stop work when the Department of Veteran Affairs failed to provide a design that would have allowed construction to be completed within the budget established by the available appropriations. Despite the general duty to proceed, Kiewit-Turner was not required to continue performance because it was clear that the construction costs would exceed the available funds and the VA refused to seek additional funding or incorporate value engineering changes to reduce the overall construction cost. Continue Reading Kiewit-Turner and the right to stop work

If you are getting ready to submit a claim on a federal contract—especially one that challenges an assessment of liquidated damages—take note of the Federal Circuit’s decision in K-Con Building Systems, Inc. v. United States, No. 2014-5062 (Fed. Cir. Feb. 12, 2015) [pdf]. It has some specific instructions for the contents of your claim letter and demonstrates the harsh results that follow from a misstep in the disputes process.

U.S. Coast Guard photo by Petty Officer 1st Class Bethannie Kittrell.  August 26, 2013.K-Con held a Federal Supply Schedule contract for prefabricated structures. In 2004, it won a $582,000 Coast Guard task order for the design and construction of a Coast Guard cutter support building at Port Huron, Michigan.

K-Con’s July 2005 Claim

When K-Con was unable to complete the work by the deadline set forth in the task order, the Coast Guard assessed liquidated damages of $109,554—186 days at $589 per day. On July 28, 2005, K-Con submitted a one-page claim letter seeking remission of the liquidated damages.

Although it was brief, K-Con’s letter asserted three reasons why the liquidated damages assessment was improper:

  1. K-Con “was not the sole cause of any alleged delays” and any K-Con delays were “concurrent with delays caused by the government;”
  2. the government “failed to issue extension to the completion date as a result of changes to the contract by the government;” and
  3. the liquidated damages “are an impermissible penalty.”

K-Con’s letter requested a contracting officer’s final decision. Though it demanded relief of more than $100,000, K-Con’s letter asserted that a certification was not required “since the assessment of liquidated damages is a claim by the Government.”

Continue Reading Claims for remission of liquidated damages after the Federal Circuit’s decision in K-Con Building Systems

Controlling legal spend is a frequent and important topic of discussion, especially among in-house counsel and their litigation teams. Much of the discussion focuses on the problem of soaring discovery costs driven by the proliferation of electronic data. As an eDiscovery attorney, I employ early case assessment strategies and tools, technology-assisted review, and even low-cost outside staff attorneys to try and curtail the cost of discovery. In the end, the effectiveness of these cost-reduction alternatives hinges on whether clients have done their part to reduce the volume of data upstream.

Beyond implementing a formal records retention plan, there are a number of fairly simple steps that companies can take to help reduce litigation costs. Items 1-5 help reduce the volume of data that needs to be collected and reviewed. Items 6-8 will help ensure that your litigation budget is not exhausted on spoliation or sanctions motions.

1.   When implementing an email archive, be mindful of how it will impact litigation costs.

An email archive is not a cure to your litigation woes. Storing every company email that was sent or received in an email archive may make preservation easy, but it may also be contributing to your soaring discovery costs. Despite claims to the contrary, most archives have poor search and export features. It is also very difficult to pull out only responsive email from an archive.  Instead, you end up overspending on attorney review of irrelevant data or producing mounds of irrelevant data.

One way to control this issue is to tailor the archive for your own business and legal needs from the beginning. Do you really need every employee’s email messages for the last 10 years? Very few industries have regulatory requirements that require such broad retention. Even those that do usually only apply to a small subset of employees. Confirm any applicable regulatory requirements and consider your own business and legal needs. Consider creating email groups with different retention cycles.

Continue Reading Eight ways to cut the cost of ediscovery

Contractors will have more forms to fill out, and possibly some explaining to do, when the recently issued Executive Order on Fair Pay and Safe Workplaces is fully implemented in 2016. The Executive Order requires offerors to disclose whether they have been found to have violated, within the past 3 years, any of 14 different labor laws.

Covered laws include:  Fair Labor Standards Act, Occupation Safety and Health Act, Davis Bacon Act, Service Contract Act, Americans with Disabilities Act, and a host of others. Violations of equivalent state laws must also be reported.

An offeror with violations will be provided an opportunity to disclose steps it has taken to correct the violations or improve compliance. The procuring contractor officer will take this into account in determining the offeror’s responsibility.  The contractor will need to update its disclosure every six months.

Agencies are also required to ensure that contractors (and their subcontractors) provide their employees with “paycheck transparency,” providing a document to each employee that shows the hours worked, overtime hours, pay, and any additions or deductions made. Contractors must also state in writing if an individual is considered an independent contractor and not an employee.

These requirements apply to contracts and subcontracts valued at $500,000 or more. GSA is charged with developing a single website for contractors to use in meeting these new reporting requirements.

For contracts (and subcontracts) valued at $1 million or more, contractors may not require that their employees arbitrate claims relating to Civil Rights violations, sexual assault, or harassment. (Once such a claim has arisen, the parties can mutually agree to arbitrate the claim.)  This restriction, however, does not apply to employees who are covered by a Collective Bargaining Agreement.

The Executive Order is effective now, but the reporting requirement is not expected to begin until 2016, after the development of FAR regulations and clauses. Since the disclosure form has a 3-year look back period, violations that occurred in 2013 would be subject to the reporting requirement.

Contractors need only report adjudicated labor law violations:  a civil judgment, arbitral award, or administrative merits determination that the contractor violated a covered labor law. Settlements of alleged labor law violations are not reported. The Executive Order thus places further pressure on contractors to settle such claims rather than risk a reportable violation.