As agencies struggle with these mandatory budget cuts imposed by sequestration, incrementally funded contracts are particularly vulnerable. Despite the apparent need for their goods or services and the high caliber of their work, contractors holding incrementally funded contracts may find that funds are simply not available. Here are three strategies contractors can take to limit the risk of performing without compensation:

Relying on assurances of future funding from anyone other than the contracting officer can be risky, because they may not bind the government. In Appeal of Dynamics Research Corp., ASBCA No. 57830 (Mar. 26, 2013) [pdf], for example, the contractor continued performing after existing appropriations were exhausted. It did so in part because of assurances from its Technical Point of Contact (TPOC) that future funding was in the approval process and would be made available. The Board held that the contractor could not rely on such assurances because the TPOC did not have authority to assure the contractor that the government would provide future funding. The contract made clear that only the CO could change or modify the contract terms or take action that obligated the government.

2.     Monitor funding and give notice

Contractors should also monitor contract funding levels, be aware of when they will exhaust available funds, and give notice to the CO. This is particularly true where, as in Dynamics Research Corp., the contract contains the Limitation of Government’s Obligation clause (DFARS 252.232-7007) or the Limitation of Funds clause (FAR 52.232-22). The DFARS clause requires the contractor to give 90 days’ advance notice of when the contract work will reach 85 percent of the available funds allotted to the contract. The notice must be in writing, addressed to the CO, and must estimate when 85 percent of the allotted funds will be expended. As the Board in Dynamics Research Corp. explained, simply identifying the amount of available funds remaining is not sufficient. The FAR Limitation of Funds clause has a similar 60-day notice requirement when contract work will exceed 75 percent of funds allotted to the contract. 

3.     When the funds stop, the work stops

Several of our previous posts have discussed the Antideficiency Act (ADA) in the context of potential government shutdowns. The ADA generally prohibits contractors from continuing work once available funds have been exhausted. There are, however, some exceptions, which we discuss here and here.  Both the Limitation of Funds clause and the Limitation of Government’s Obligation clause incorporate this prohibition. The FAR clause provides that the contractor is not obligated to continue work once funding is exhausted, while the DFARS clause provides that the contractor is not authorized to continue. These textual differences notwithstanding, the effect of the clauses is the same—once funding levels are exhausted, the contractor should not continue working unless additional funding has been appropriated and allocated to the contract. Like the contractor in Dynamics Research Corp., contractors who continue work after funds are exhausted do so voluntarily and at their own risk.

Energy is a national security issue. The U.S. defense industry represents one of the world's largest markets for energy, and the cost and availability of energy directly affects military capabilities and readiness. Department of Defense leaders are revamping how DOD uses energy and determining which fuels offer the best overall investment, prices, and logistical advantages with the fewest environmental problems. Moreover, the military provides an attractive test-bed for commercialization of emerging technologies on a 'demand-pull' basis as well as an important market for fossil fuels, renewable energy and biofuels, energy services, energy efficiency, and demand response. A secure and sustainable energy system must be viewed from a national defense standpoint. What are the risks and rewards for moving the military toward an environmentally as well as economically sustainable energy system?

This year's J.B. and Maurice C. Shapiro Conference is entitled "Laying the Foundation for Sustainable Energy Future: Legal and Policy Challenges" and will present a panel on Sustainable Energy and the National Defense. The panel will be chaired by former Chief of the U.S. Army Corps of Engineers, retired Lieutenant General Robert Flowers, and includes as panelists:

• Honorable Katherine Hammack, Assistant Secretary of the Army (Installations, Energy & Environment)
• General Paul Kern, Chairman, CAN Military Advisory Board, U.S. Army (Ret.)
• Christopher Yukins, Co-Director of George Washington University Law School's Government Procurement Law Program
• Matthew Carr, Managing Director, Industrial & Environmental Section, Biotechnology Industry Organization
• Hal Perloff, Partner, Husch Blackwell, LLP

This timely and insightful conference is co-sponsored by the George Washington University Law School, Husch Blackwell LLP, the Environmental Law Institute, and the Constellation Energy Foundation and will be held on April 10 & 11, 2013 at the Jacob Burns Moot Court Room on GW's campus. Please follow this link for additional information and to register to attend.

Tip Top received a work order to install an air conditioning unit at the Main Post Office in Christiansted, U.S. Virgin Islands. After the contract was signed, but before the unit was installed, the Postal Service required that a particular refrigerant be used. Unfortunately, that refrigerant could not be used with the equipment specified in the contract. So the contractor was required to change the equipment and incur other costs to use the new refrigerant. The contracting officer recognized that this was a change and asked Tip Top to submit a proposal to furnish compatible equipment.

Tip Top employed a consultant to oversee its projects, including this one, and had the consultant to prepare the proposal. Tip Top’s proposal included the costs incurred by its consultant in preparing the proposal. The contracting officer eventually directed Tip Top to provide the new equipment at a price to be determined later. The contracting officer also told Tip Top that it could not recover consultant costs incurred in preparing the change proposal. This caused Tip Top to hire a lawyer to advise on the recoverability of such costs.

Ultimately, the contractor submitted a claim to recover various costs, including the consultant costs incurred in preparing and negotiating the proposal, and the attorney costs incurred on advising on cost recoverability. The contracting officer only granted the portion of the claim related to equipment costs and denied recovery of any consultant and attorney costs. The contractor appealed the partial denial of its claim to the PSBCA.

PSBCA decision

At the PSBCA, the Postal Service offered several arguments as to why consultant and attorney fees should not be recoverable. The PSBCA rejected all of them. But the PSBCA imposed a limitation: consultant and attorney costs could be recovered only up to the date when the contracting officer approved the substitute equipment.

The PSBCA held that consultant and attorney costs incurred after the contracting officer approved the new equipment had nothing to do with the changed work. The PSBCA considered such costs as being solely directed at trying to convince the contracting officer to accept Tip Top’s price for that work. In the PSBCA’s view, consultant and attorney fees could be recovered only when they related to aspects of contract performance, not to price negotiations.

Adding insult to injury, the PSBCA also held that the contractor had not met its burden of proof in establishing that the consultant’s and attorney’s time charges related to these negotiations. Unsatisfied with this result, Tip Top appealed the PSBCA’s decision to the Court of Appeals for the Federal Circuit.

Court of Appeals decision

The Court of Appeals for the Federal Circuit sustained Tip Top’s appeal and overturned the PSBCA’s limitation on the recovery of consultant and attorney costs. The Court noted that in a prior case, Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995), it held that a contractor was entitled to recover consulting costs incurred in connection with negotiations relating to an agency-caused delay. The Bill Strong case involved the recovery of costs incurred under a contract governed by the Federal Acquisition Regulation (FAR) and the Postal Service is not subject to the FAR. But the Court saw no reason why a different rule should be imposed on Postal Service contracts.

The Court stated that the recoverability of consultant and attorney costs depends on whether they were incurred as part of contract administration or prosecution of a contract claim. If the former, they are recoverable as part of the contractor’s request for an equitable price adjustment submitted in response to a contract change. In looking through the record, the Court determined that the consultant and attorney costs were incurred for the genuine purpose of furthering the negotiating process. The costs were thus recoverable as part of Tip Top’s changes claim.

The Court next addressed the PSBCA’s finding of fact that the contractor had not sufficiently established that the billings of its consultant and attorney were attributable to these price negotiations. Findings of fact by lower level tribunals are offered great deference by appellate courts and rarely overturned. But here, the Court had no trouble overturning the PSBCA’s finding of fact. The billing records prepared by Tip Top’s consultant and attorney fully supported Tip Top’s claim. The Court thus held that Tip Top was entitled to recover the full amount of the consultant and attorney costs it had sought.

What costs are recoverable? 

If you are directed to perform additional work, and you reasonably require a consultant to assist you in preparing and pricing a change proposal, then those costs are added to the total costs of performing the changed work. The same would be true if you are responding to a constructive change to your contract. Similarly, costs incurred by a consultant in negotiating with the agency on your proposal or request for equitable adjustment are also recoverable. If you reasonably require the assistance of an attorney to advise you on the recoverability of various costs applicable to the change, or other related assistance, those costs are also recoverable. You are also entitled to recover profit on top of these costs. See Unarco Material Handling, PSBCA No. 4100, 00-1 BCA ¶ 30,682.

To be recoverable, these costs must be incurred as part of the good faith contract administration process that normally would occur in response to a directed or constructive change. But that encompasses a lot. It does not require that the Postal Service agree with your consultant. Indeed, the Tip Top court noted that “there is sometimes an air of adversity in the relationship between the CO and the contractor” that occurs during this process.

Costs that are incurred solely for the purpose of preparing a claim to be submitted pursuant to the Disputes clause of the contract are not recoverable under this doctrine. But costs incurred in the preparation of a request for equitable adjustment would be recoverable. It is thus often preferable for the contractor to submit a request for equitable adjustment before submitting a claim pursuant to the Disputes clause.

HCR seminar

Want to learn more about legal issues that may arise under your Postal Service HCR contracts? Then you may want to consider attending a special seminar I will be presenting on Wednesday, January 16, 2013 at the Star Route Association’s Western/Central regional meeting at the Golden Nugget hotel. The seminar is entitled “Postal Service Contracting:  What Every HCR Contractor Should Know” and will be presented from 1:30 – 4:30 p.m. Star Route members receive a discounted registration fee, as do additional employees from the same company.

To learn more about this seminar, or to register for it, go to www.regonline.com/PostalSeminarJan2103. Or contact our firm’s seminar coordinator, Stephanie Dorssom, at (314) 345-6646 or stephanie.dorssom@huschblackwell.com

According to GAO’s estimate, DOD paid late payment penalties totaling about $21 million in 2011. This number is comprised of $19 million in late-payment penalties reported on transactions processed by the Defense Finance and Accounting Service. GAO estimates that DOD paid about $2 million in late payment penalties on transactions processed outside of DFAS, which includes transactions handled by the U.S. Army Corps of Engineers and TRICARE. GAO estimates that DOD lost another $9 million by foregoing prompt payment discounts.

• According to DOD, incomplete documentation causes about 57% of late payments. Many DOD components continue to mail documentation to DFAS.
• According to DOD, processing delays and backlog within DFAS cause about 23% of late payments.
• In some cases, late payments are the result of ambiguous language in the contract, either in the descriptions of items being purchased or confusing units of measure.

Obviously, reducing the amount that the government spends on late-payment penalties and foregone prompt payment discounts should be a priority. 

Current Prompt Payment Act interest rates and a handy interest calculator are available from the Treasury Department.

The Supreme Court’s decision in Salazar v. Ramah Navajo Chapter, No. 11-551 (U.S. June 18, 2012) addresses this subject. The government sought to avoid its contractual promise to pay the full amount of “contract support costs” to Indian tribes that contracted with the Department of the Interior to provide federally-funded services such as education, health services, and law enforcement. The contracts with the tribes were authorized by the Indian Self-Determination and Education Assistance Act, which requires the Secretary of the Interior to pay the full amount of a tribe’s contract support costs (e.g. auditing costs, workers’ compensation insurance, and start-up costs) subject to the availability of appropriations. But if the contract support costs are not paid, the tribal contractors can pursue money damages under the Contract Disputes Act and obtain payment through the Judgment Fund, which does not have any fiscal year limitations and is not subject to Congressional appropriations.

In a 5-4 decision by Justice Sotomayor, the Supreme Court rejected the agency’s view. The Court held that contractors should not have to bear the burden of a funding shortfall in a lump sum appropriation. The “not to exceed” amount provided in the appropriation was more than sufficient to cover the contract support costs for any individual tribal contractor and “it is not reasonable to expect each contractor to know how much of that appropriation remained available for it at any given time.” Contractors need only know that the appropriation is large enough to cover their contract. If it is, the government must honor its obligation to pay:

Contractors are responsible for knowing the size of the pie, not how the agency elects to slice it. Thus, so long as Congress appropriates adequate funds to cover a prospective contract, contractors need not keep track of agencies’ shifting priorities and competing obligations; rather, they may trust that the Government will honor its contractual promises.

The Court’s opinion highlights the long-term financial benefits of holding the government to its promises. If the government can refuse to pay a contractor because it thinks the money is better spent elsewhere, contractors will be less likely to enter into contracts or will do so only at prices that are high enough to compensate for the risk of the government running out on the bill.

Related posts-

The contractor’s guide to surviving a government shutdown (Feb. 24, 2011).

Exceptions to the Anti-Deficiency Act (April 6, 2011).

The Draft RFP

The draft RFP was issued by the Army Energy Initiatives Task Force. It contemplates a multiple-award indefinite delivery-indefinite quantity contract under which the Army could purchase up to $7 billion worth of renewable and alternative energy over 10 years—a base period of 3 years with 7 option years. Through competition with the IDIQ contract holders, the Army would issue individual firm-fixed-price task orders to purchase electricity through Power Purchase Agreements based on a fixed rate per unit of energy (e.g. $/kWh). The PPAs would be allocated across four renewable technologies:  solar (1.5 billion kWh); wind (9 billion kWh); biomass (19 billion kWh); and geothermal (8 billion kWh).

Depending on the requirements of a particular task order, bidders could be responsible for constructing the energy generating systems and guaranteeing a certain level of renewable energy output by a specific date. Failing to meet the specified date could subject the contractor to liquidated damages for the output shortfall on a price-per-MWh basis.

Maintenance of the energy generation systems would be the contractor’s responsibility, as would achieving certain output performance levels over the course of the PPA. For variable energy production technologies (i.e. solar and wind), contractors would have to maintain performance levels that are in the top 25 percent of the industry in the United States. For continuous energy production technologies (i.e. geothermal and biomass), contractors would be required to provide replacement energy at no cost when their systems fail to meet the minimum production requirements.

To offset the construction and maintenance costs, bidders would be required to take advantage of all available utility incentive programs.  The government would retain ownership of any renewable energy credits associated with the energy generated under the task order.

Allocation of renewable energy credits and production guarantees are common provisions in commercial-sector power purchase agreements. But having the federal government as a customer imposes a number of unique obligations and risks.

     1.  Buy American Act / Trade Agreements Act

The draft RFP would impose restrictions on the source of supplies and products that could be used in constructing, developing, and operating the projects. The RFP includes FAR 52.225-23, for example, which establishes a preference for domestic construction material, U.S.-manufactured construction materials, and U.S.-produced iron or steel. DFARS 252.225-7012, also included in the RFP, contains similar requirements and expresses a preference for certain domestic commodities. If these provisions are included in the final RFP, bidders will need to examine their product supply lines to ensure that they are able to comply with the requirements.

     2.  Prevailing wage rules and affirmative action compliance requirements

There are a number of labor law and affirmative action requirements included in the draft RFP.  Where a task order requires construction, awardees would have to comply with the prevailing wage requirements established under the Davis-Bacon Act (FAR 52.222-6). Service elements of a task order (e.g. operation and maintenance of the energy generation systems) would require compliance with the Service Contract Act of 1965 (FAR 52.222-41), which contains similar requirements to pay prevailing wage rates. Overtime compensation would have to be paid to comply with the Contract Work Hours and Safety Standards Act (FAR 52.222-4). 

The draft RFP also includes federal contractor requirements addressing non-discrimination and affirmative action. FAR 52.222-26 prohibits discrimination on the basis of race, color, religion, sex, or national origin in the performance of a task order or contract.  It also requires that contractors take affirmative action to ensure that both actual and potential employees are treated equally and without regard to those same characteristics. FAR 52.222-27 applies to construction and contains similar affirmative action requirements. It specifies a series of affirmative action procedures that contractors must implement, including ensuring a work environment free of harassment, intimidation, and coercion, establishing and maintaining a source list of minority and female job applicants, and developing on-the-job training opportunities that expressly include minorities and women.

     3.  Small business opportunities and restrictions

The AEITF’s draft RFP contemplates restricting competition to small businesses on certain task orders based on the size of the project. Competition on task orders seeking energy production of 4MW or less would be restricted to small businesses only, and the contracting officer would have authority to restrict competition on task orders seeking between 4MW and 12MW, depending on the level of small business interest. Competition for task orders involving 12MW or more would be unrestricted among IDIQ contract holders. Task order awardees would also have to make efforts to utilize small businesses in the performance of a task order (FAR 52.219-8), including submitting and adhering to a small-business subcontracting plan (FAR 52.219-9).

     4.  Contractor transparency requirements

Contracting with the federal government includes a number of requirements that make contractor information available to the public. The Federal Awardee Performance and Integrity Information System (FAPIIS), which contains reports on contractor default terminations and other information deemed relevant to a contractor’s “responsibility,” is now open to the public. Under FAR 52.204-10, contractors and first-tier subcontractors that meet certain gross revenue thresholds are required to report the names and total compensation of their five most highly paid executives. Contractors can expect AEITF contracts and task orders to include these requirements. We discuss FAPIIS and the executive compensation reporting requirements in an earlier post.

     5.  Audit rights

For task order PPAs exceeding $700,000, bidders may be required to certify that the cost or pricing data included in their proposals are accurate, complete, and current to the best of the contractor’s knowledge and belief. Under FAR 52.215-2, the government would have the right to examine an awardee’s records to evaluate the accuracy and completeness of the cost or pricing data that the contractor submitted. 

     6.  Termination for convenience

The draft RFP includes the FAR termination-for-convenience clause at FAR 52.249-2. This clause outlines the government’s broad right to terminate the contract, in whole or in part, when doing so is in the government’s interest. Although there are some important restrictions on the government’s ability to terminate a contract for convenience, a proper termination under this clause is not a breach of contract and does not entitle the contractor to recover expectancy damages. Termination for convenience essentially converts a fixed-price contract into a cost-reimbursement contract under which the contractor may recover the costs of performing the completed work, a reasonable profit on that work, and the costs of winding down. A termination settlement proposal must be submitted within one year of the effective date of the termination.

Contributed by Husch Blackwell attorneys Michael Gatje and Steve Neeley.

During a periodic maintenance inspection five years into the contract, the manufacturer discovered corrosion in the aircraft structure. The contractor immediately directed the manufacturer to repair the corrosion. The contractor then returned the aircraft to service but did not make a claim for the costs of repairing the corrosion.

The Coast Guard concluded that operational availability was less than 95 percent while the aircraft was out for repairs and deducted $631,414 from the contractor's invoices. TKC Aerospace objected to the government's position and submitted a claim demanding payment of the invoices and $135,547 for the costs of the corrosion repair. The contractor appealed to the CBCA after the contracting officer denied the claim.

Although the Board's decision addressed the lack of evidence supporting the contractor’s argument that the Coast Guard caused the corrosion, the key factor in the case was the contractor's initial response. In the Board's view, the contractor “immediately assumed that repairing the corrosion was its responsibility.” The contractor did not send a corrosion repair bill to the Coast Guard or give prompt notice of its position as to the availability of the aircraft while the corrosion was being repaired. Given this conduct, the Board concluded that the contractor was not entitled to recover the corrosion repair costs or to recover the government withholdings.

Although the result in this particular decision may be justified on the facts, the Board's findings on this point are troubling from a business and policy perspective. Government contracts law should promote good results for contractors who put the work first, rather than pushing them aside in favor of contractors who excel at the red tape.

The United States Department of Defense is the world's biggest purchaser of goods and services, spending some $381 billion on contracts in FY 2011. But serious changes are on the way. The Iraq war is over and the Obama Administration is planning to withdraw from Afghanistan in the near future. Last summer's hard-fought budget agreement requires $487 billion in cuts to the defense budget over the next 10 years. The President will soon recommend a defense budget that shaves $51 billion from its previous 2013 projections.

Should all of the expected budget cuts be put into effect, the military will have to reduce spending by $80 to $120 billion per year over the next decade. A good portion of the cuts will come from reductions in government-awarded contracts. Every contract, every major weapons program, and every installation commitment will have to be reviewed and perhaps pared down to meet the reduced spending goals. There will be fewer new ships, planes, and other major weapons systems. Existing weapons systems will have to be scrapped. Research-and-development efforts will be rolled back. Overseas bases will have to be closed, and there will have to be another round of base closings and realignments here at home.

Needless to say, cutting all expenditures equally without reviewing the merits of the underlying programs is not the best way to draw back the military or to reign in spending. It could even hamper the military’s ability to respond to threats that we do not yet know about. Congress could avoid the automatic cuts by putting an alternative plan in place this year. Unfortunately, recent history and the fact that 2012 is an election year means that such a plan is unlikely.

For the purpose of determining whether network providers under such provider network agreements are subcontractors for purposes of the Federal Acquisition Regulation or any other law, a TRICARE managed care support contract that includes the requirement to establish, manage, or maintain a network of providers may not be considered to be a contract for the performance of health care services or supplies on the basis of such requirement.

Husch Blackwell's client alert on the new legislation is available here.

The government contracting community is concerned about the repercussions of the failure of the Joint Select Committee on Deficit Reduction (aka "the Super Committee") to reach an agreement before the November 23rd deadline. In light of this failure, the question of the day is what happens now on deficit reduction and what impact this will have on government contractors.

For contractors seeking to quantify and reduce the uncertainty resulting from the impending cuts, two factors are worthy of consideration. First, the automatic cuts imposed by the Budget Control Act are a relatively small percentage of overall federal spending. According to the Office of Management and Budget's historical expenditures table [pdf], 2011 federal expenditures were approximately $3.8 trillion. According to USASpending.gov, federal spending on contracts was $457.6 billion, while federal grant spending was $541.7 billion.

Second, the automatic cuts specified in the Budget Control Act will not go into effect until January 1, 2013. With more than a year before that deadline and a Presidential election in the interim, there is a significant possibility that Congress will seek to modify, delay, or eliminate the cuts before they go into effect. Although the Obama Administration may seek to avoid any such changes, some members of Congress will likely seek to reduce cuts in defense spending.

For now, it looks like contractors can turn their attention to other issues.

Under NLRB guidelines, the terms of employment offered by the successor are significant factors in determining a successor's status under the perfectly clear doctrine. It is often not “perfectly clear” that a majority of the predecessor's employees will become employees of the successor, for example, if they are offered new terms of employment. The DOL's final rule seems to conflict with the NLRB's perfectly clear doctrine, suggesting DOL's belief that successor employers should not have the flexibility to specify new terms of employment.  Hopefully, the FAR Councils will include additional guidance on this subject when they issue regulations implementing the DOL final rule.

UPDATE:  We discuss the new FAR rule implementing the Executive Order 13495 and the DOL Rule on nondisplacement of qualified workers here.

• Expand the powers of inspectors general
• Facilitate the increased use of suspension and debarment
• Apply risk factors in deciding whether to contract in contingencies
• Develop deployable cadres for acquisition management and contractor oversight
• Phase out use of private security contractors for certain functions
• Set and meet annual increases in competition goals for contingency contracts to eliminate acquisition strategies that favor incumbent contractors with performance deficiencies
• Improve contractor performance-data recording and use
• Expand investigative authority and jurisdiction

Implementation of these recommendations will certainly increase the risk of contracting with the U.S. Government, especially for contractors operating in contingency contracting situations. The obvious message is to increase the corporate focus on compliance and to further develop a corporate culture of compliance.

KBR challenged the denial of payment for these costs by submitting a certified claim under the Contract Disputes Act. When the Army contracting officer failed to issue a final decision, KBR appealed the claim to the Armed Services Board of Contract Appeals. While the matter was pending at the Board, the government filed a Civil False Claims Act action against KBR. The government alleged that KBR violated the False Claims Act by seeking payment for private security costs that it knew were prohibited by the contract.

KBR moved to dismiss, arguing that there was nothing "false" about its payment requests. The court denied the motion. Relying on the D.C. Circuit's recent decision in United States v. Science Applications International Corp., 626 F.3d 1257 (D.C. Cir. 2010), the court rejected KBR's argument that FCA violations under the implied certification theory are limited to contractual requirements that are an express prerequisite to payment. Rather, the court held that the government need only show that KBR withheld information about its noncompliance with a material contractual requirement. According to the court, "materiality" can be shown either through express contractual language (i.e., an express prerequisite to payment) or through testimony demonstrating that the parties understood that payment was conditional on compliance with the requirement at issue.

The court found that the government's FCA complaint demonstrated the materiality of the alleged prohibition on private security contractor costs through: (1) internal KBR email dialogue and discussion where someone stated that costs of private security contractors “could be considered unallowable;” and (2) KBR's efforts to obtain a change order to the LOGCAP III contract to allow for reimbursement of private security contractor costs. In rejecting KBR's motion to dismiss, the court noted that KBR could continue to press its positions that: (1) the LOGCAP III contract does not prohibit reimbursement of private security contractor expenses─a legal question; and (2) even if those costs are prohibited, none of the contractual provisions violated were material to payment of KBR's claims.

Background on the False Claims Act

An appreciation of the court's decision requires some basic background on the False Claims Act. In order to succeed in an FCA matter, the government must show three elements:  (1) the defendant submitted a claim to the government; (2) which was false; and (3) which the defendant knew was false.

FCA cases generally fall into one of two categories—factually false or legally false. A "factually false" claim is one in which a claimant submits information that is false on its face. For example, a factually false claim occurs when a contractor knowingly bills the government for work that it did not perform, such as charging for phantom workers. Another example of a factually false claim occurs when a contractor knowingly furnishes an incorrect description of goods or services in a payment request, such as billing for an MRI when only an X-ray was performed.

The second category of false claim is a legally false claim, which commonly referred to as a "false certification." False certifications involve false representation of compliance with an applicable statute, regulation, or contract term. False certifications can be express or implied. An express certification occurs when a claimant explicitly represents that it has complied with a contractual condition but has in fact not complied. 

Although it is not recognized in all judicial circuits, the "implied false certification" theory is based on an indirect certification of compliance with contractual or legal requirements. A typical instance is a fraud-in-the-inducement situation where a contractor makes a false representation in order to receive a government contract and then submits a payment request after it performs. Not every contractual requirement or law or regulation can form the basis of an implied false certification. Rather, the plaintiff must show that compliance with the requirement at issue was a material condition to payment.

The government pursued all of these theories in its response to KBR's motion to dismiss. The government argued that KBR's claims were factually false because they sought payment for private contractor security costs that were disallowed under the LOGCAP III contract. The court rejected the government’s position because there was nothing factually false about KBR's payment request. The government did not allege that KBR disguised the private contractor security costs or misstated the amounts. According to the court, the issue of whether private security costs were disallowed under the contract was a question of contract interpretation, which is a legal, not a factual question. Despite its ultimate conclusion, the court went to great lengths to demonstrate that not every instance of contractual non-compliance is an FCA violation.

The government also argued the implied false certification theory. The government asserted that KBR's claims for reimbursement impliedly certified that they complied with the terms of the LOGCAP III contract and that the implied certification was false because the contract prohibited payment for private contractor security expenses. KBR argued that nothing in the LOGCAP III contract expressly conditioned government payment to KBR upon compliance with the contractual provisions that allegedly prohibited payment of private contractor security costs.

Where do we go from here?

The relaxed view of the implied certification standard reflected in the decision on KBR's motion to dismiss represents a significant expansion of potential FCA exposure for government contractors. On the one hand, the court's rejection of the government's factual false claim theory reinforces the conclusion that run-of-the-mill contract disputes are not false claims. On the other hand, turning the question of materiality into a factual question has real negative consequences for contractors. It ignores the fact that not every contract provision is clear and unambiguous, as well as the fact that there is room for disagreement and internal debate as to the interpretation of ambiguous contract provisions. The risk now, especially if the KBR decision becomes precedential, is that internal differences of opinion (even if ill-informed) will be cited as evidence of a False Claims Act violation. The negative consequences of adopting a contract interpretation later deemed incorrect have never been higher.

(d) Agency evaluations of contractor performance, including both negative and positive evaluations, prepared under this subpart shall be provided to the contractor as soon as practicable after completion of the evaluation.  See 76 Fed. Reg. 37704 (June 28, 2011) [pdf].

The corrected language published on August 9, 2011 incorporates the contractor protections from the existing FAR 42.1503, simply moving them from existing paragraph (b) to a new paragraph (d). In addition to providing for the confidentiality of past performance information, the corrected language confirms the contractor's right to respond to and appeal a past performance evaluation above the level of the contracting officer:

(d) Agency evaluations of contractor performance, including both negative and positive evaluations, prepared under this subpart shall be provided to the contractor as soon as practicable after completion of the evaluation. Contractors shall be given a minimum of 30 days to submit comments, rebutting statements, or additional information. Agencies shall provide for review at a level above the contracting officer to consider disagreements between the parties regarding the evaluation. The ultimate conclusion on the performance evaluation is a decision of the contracting agency. Copies of the evaluation, contractor response, and review comments, if any, shall be retained as part of the evaluation. These evaluations may be used to support future award decisions, and should therefore be marked ‘‘Source Selection Information’’. . . . .  The completed evaluation shall not be released to other than Government personnel and the contractor whose performance is being evaluated during the period the information may be used to provide source selection information. Disclosure of such information could cause harm both to the commercial interest of the Government and to the competitive position of the contractor being evaluated as well as impede the efficiency of Government operations. Evaluations used in determining award or incentive fee payments may also be used to satisfy the requirements of this subpart. A copy of the annual or final past performance evaluation shall be provided to the contractor as soon as it is finalized. See 76 Fed. Reg. 48776 (Aug. 9, 2011) [pdf].

The deadline for comments on the proposed rule has been extended to September 8, 2011. Our discussion of the June 28, 2011 proposal is available here.

The deletion of FAR 42.1503(b) could eliminate the contractor's role in the assessment of contractor past performance. Nothing in the proposed rule formally permits a contractor to respond to a past performance evaluation or to rebut the conclusions of agency officials. There is no language affirmatively requiring agencies to consider contractor rebuttals or to establish an appeal process for disputes concerning past performance. There is no requirement that contractor responses be included with the past performance evaluation record. The proposed language does not address the confidentiality of contractor past performance evaluations. The only part of FAR 42.1503(b) that would remain is the general requirement that contractors receive a copy of their past performance evaluation when it is complete.

While permitting an agency to ignore a contractor's response to a past performance evaluation might simplify the process in the short run, it would certainly have adverse consequences in the long run. In addition to pushing contractors into litigation challenging erroneous evaluations, it would decrease the value of past performance assessments as tools in predicting future performance. It would also increase the risk of de facto debarment, against which contractors have constitutional protections. See Old Dominion Dairy Products, Inc. v. Secretary of Defense, 631 F.2d 953 (D.C. Cir. 1980). If nothing else, the loss of uniformity resulting from the elimination of FAR 42.1503(b) seems to be inconsistent with the goal of improving uniformity in past performance evaluations.

We'll be watching for commentary and the final version of this rule. Submit comments on the proposed rule by August 29, 2011. Comments can be submitted here. Include a reference to "FAR Case 2009-042."

[UPDATE.  A corrected version of the proposed rule reinstating the contractor protections in FAR 42.1503 was published on August 9, 2011.  We discuss the correction here.]

Under new FAR Subpart 23.1, agencies are required to promote sustainable acquisition by ensuring that 95% of new contract actions require products that are energy-efficient, water-efficient, biobased, environmentally preferable, non-ozone depleting, or contain recycled content. "New contract actions" includes both new contracts (and task or delivery orders placed on those contracts), as well as new task or delivery orders placed on existing contracts.  

Contractors will also face new requirements. Under FAR 23.002, contractors operating government-owned or government-leased facilities, as well as those providing support services at such facilities, will have to comply with the same sustainable acquisition requirements.  FAR subpart 23.9 and FAR 52.223-19 require that all contractors comply with an agency's environmental management system. FAR Part 4 requires (rather than encourages) contractors to submit all paper documents on double-sided 30 percent post-consumer fiber paper, if practicable. 

The interim rule provides limited exceptions for acquisitions by intelligence activities, law enforcement activities, vehicle fleets for law enforcement, protective, emergency response, or military tactical purposes, and any agency activities or facilities in the interest of national security. It also does not apply to contracts for the acquisition of weapons systems and contracts performed outside the United States. Barring these exceptions, the interim rule overrides any other inconsistent contracting policies.    

Green Construction

Contractors also face new green construction obligations.  Under the interim rule, agencies must promote sustainable acquisition by implementing high-performing and sustainable building design, construction, renovation, repair, operation, and management. Agencies must pursue cost-effective, innovative strategies to minimize energy and water consumption and seek out renovation alternatives that will reduce maintenance costs. By the end of 2015, agencies will be required to recycle or recover at least 50% of construction and demolition materials and debris that might be placed in the waste stream. Contractors performing new construction or major renovations will be required to comply with the Guiding Principles for Federal Leadership in High-Performance and Sustainable Buildings [pdf].  

The FAR Councils note that they do not expect the new rules to impose significant economic impacts on contractors because they are "only emphasizing existing requirements" already put in place by agency sustainability programs and previous executive orders. The accuracy of this prediction remains to be seen.

Motivated by a desire to curb any "pay-to-play" perceptions in federal contracting, the order reasons that additional measures are needed to maintain "the integrity of the federal contracting system" and to ensure that contracting decisions are based on merit alone. The order would require that offerors disclose all contributions to or on behalf of federal candidates which are made by the offeror, its directors or officers, as well as those of any affiliates or subsidiaries within its control. The order would also require disclosure of any contributions to third parties with the intent or reasonable expectation that the contributions will be used in election advertisements to support or oppose political candidates. Contractor political contributions would also be available on the internet "in a centralized, searchable, sortable, downloadable and machine readable format." 

The order drew criticism on a number of fronts. Many felt that the order infringed the First Amendment right recognized in the Supreme Court's landmark decision in Citizens United v. FEC, 130 S. Ct. 876, 913 (2010), which permits corporations to make unlimited expenditures to third party groups in order fund advertisements supporting or opposing political candidates. Critics also argued that the order unnecessarily politicized an apolitical process. Pointing out that the draft order does not specify how, if at all, the information regarding political contributions is to be used by contracting officers, critics argued that the order created the risk that information on contractors' political contributions would inappropriately influence source selection decisions.   

Keeping Politics Out of Federal Contracting Act of 2011

Congress responded to the draft executive order with proposed legislation. Both the House and Senate versions of the bill (S. 1100 and HR 2008) would essentially foreclose any disclosure of contractor political contributions. Agencies would be prohibited from requiring contractors to provide "political information" regarding the contractor or subcontractor at any tier in connection with a solicitation or during performance of a government contract. Regardless of how political information is acquired, the legislation would prohibit its use as a factor in a decision regarding source selection, contract modification, or the exercise of an option.

If passed, the bill would also prohibit the inclusion of any political information in the past performance database or any other database "designed to provide information to a contracting officer for purposes of supporting the responsibility determination by such officer." This may be necessary to address the fact that FAPIIS—the Federal Awardee Performance and Integrity Information System—is now available to the public. More on that issue here.

The bill is currently in committee with the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Oversight and Government Reform. We will continue to monitor activity on both the bill and the draft order, as this issue poses significant implications for politically active contractors and the upcoming 2012 election.

The interim rule creates and modifies six clauses outlining the requirements for contractors' business systems dealing with accounting, cost estimating, earned value management, material management, contractor purchasing, and contractor property management. The "Contractor Business Systems" clause authorizes the CO to withhold five percent from progress and performance-based payments for a significant deficiency in a single contractor business system.  It authorizes withholding of up to ten percent for a significant deficiency in multiple contractor business systems. The new rule defines a "significant deficiency" as one that "materially affects DoD's ability to rely upon information produced by the contractor's system that is needed for management purposes."

Withholding is not automatic.  If the CO makes an initial determination that there is a significant deficiency in the contractor's business system(s), the contractor is notified and has 30 days to respond. The CO will review the response before making a final determination as to whether a significant deficiency exists.  If the final determination concludes that a deficiency does exist, the CO will issue a withholding notice and a directive to the contractor to reduce its billings to implement the withholding. The contractor then has 45 days to correct the deficiency or to submit a corrective action plan outlining the remedial steps and milestone dates. Once an acceptable corrective action plan is in place, the CO is required to reduce the withholding to two percent until the deficiencies are corrected.

Once the contractor has remedied the deficiencies, the CO must issue a final determination eliminating the withholding and directing the contractor to bill for the outstanding amount. If the CO fails to issue the final determination within 90 days, he must reduce the withholding "by at least 50 percent" until the determination is issued.

The Uncertainty

The current interim rule is a revision of two previous proposed rules that received substantial public comment. While the rule purports to address many of the concerns raised during the comment period, there is still substantial uncertainty surrounding its implementation. The rule offers little practical guidance as to what constitutes a "significant deficiency" or when COs will seek to withhold payments.  Because this determination is nominally in the CO's "sole discretion," there is likely to be substantial variation among COs as to which deficiencies are "significant." 

The rule also fails to offer any guidance to the CO for describing a "significant deficiency" when finding that one exists. Insufficient detail in describing the deficiency will place the contractor in the difficult position of trying to remedy a problem that is not entirely clear. In addition to the increased cost of remedying a problem that is not clearly specified, a lack of clarity in describing a deficiency will delay the contractor's receipt of payment.  Even in the best of circumstances, a contractor may have to wait up to 135 days to recover payments withheld under this rule (45 days to correct + 90 days for a determination to end withholding).

Hopefully these uncertainties will be addressed during the current public comment period, which closes on July 18, 2011. Even if the final rule makes changes to resolve these issues, the short term response is clear. Contractors should respond promptly to any CO determination and act quickly to address any identified deficiencies. If the deficiency cannot immediately be remedied, contractors should submit a corrective action plan within the 45-day window to reduce any withholding while implementing the corrective action.