Contract Administration

[UPDATE: On May 26, 2015, the Supreme Court reversed the Fourth Circuit’s decision in Carter and held that the Wartime Suspension of Limitations Act is limited to criminal offenses. Kellogg Brown & Root Services, Inc. v. Carter, No 12-1497 (U.S. May 26, 2015) [pdf]. Our discussion of the Carter decision is available here.]

What is the statute of limitations for qui tam actions brought against a contractor during a time of war? The answer to this question depends not only on whether the Wartime Suspension of Limitations Act applies to actions brought by an individual relator under the qui tam provisions of the False Claims Act, but also on when the United States is “at war.” The Fourth Circuit Court of Appeals addressed both of these questions in U.S. ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013).

“At war” does not mean “declared war.”

The Wartime Suspension of Limtations Act was enacted in 1942. It suspends the applicable limitations period for any offense involving fraud against the United States when the country is “at war” or when Congress has enacted a specific authorization for the use of the Armed Forces. The suspension lasts for the duration of the war and until five years after hostilities end. 18 U.S.C. § 3287. Hostilities must be terminated “by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.”

The meaning of “at war” is not specifically outlined in the WSLA, but it is a focal point of the decision in Carter. The relator, a water purification operator at two U.S. military camps in Iraq, asserted that his employer charged the government for work that was not performed. Due to a number of procedural obstacles, the action was filed outside of the six-year limitations period that normally applies to FCA qui tam actions. As a result, the district court dismissed the action as untimely. The relator appealed, asserting that the WSLA tolled the limitations period because the hostilities in Iraq meant that the United States was “at war.” The Fourth Circuit agreed, reasoning that a “formalistic” definition of when the country was “at war” did not reflect the “realities of today.”

Flight delays resulting from the furloughs of air traffic controllers are certainly not the only impact of sequestration. All federal contractors and grant recipients will have to adapt to reduced federal spending. According to the OMB report to Congress on sequestration reductions for FY 2014, $109 billion will be cut from the federal budget next year with equal reductions of approximately $54.7 billion in the defense and non-defense categories. Discretionary defense spending will see a $53.9 billion reduction, while direct defense spending will be reduced by $749 million. Non-defense discretionary spending will decrease by $37.2 billion, and non-defense direct spending will shrink by $17.5 billion, $11.2 billion of which will come from reductions in Medicare spending.

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:

By Hal Perloff

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,…

Contractors are entitled to recover consultant and attorney costs reasonably incurred in preparing, pricing, and negotiating a change order under federal government contracts, including U.S. Postal Service contracts. That’s the holding in Tip Top Constr., Inc. v. Donahoe, 695 F.3d 1276 (Fed. Cir. 2012). The court overturned a Postal Service Board of Contract Appeals decision that had erroneously limited the contractor’s recovery of these costs. End result: if an agency changes your contract (whether by unilateral direction or constructive change), your request for an equitable price adjustment may include reasonable consultant and attorney costs.

The Prompt Payment Act requires agencies to pay interest on late payments. If the interest isn’t paid when due, the contractor is entitled to collect an additional interest penalty. A June 26, 2012 report by the Government Accountability Office looks at how much the Prompt Payment Act costs the Department of Defense.

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.

With budget cuts in the headlines and an election just around the corner, contractors once again face the threat of reduced funding for their contracts. The sequestration process established in the Budget Control Act of 2011 will impose automatic across-the-board spending cuts of more than $100 billion per year for each of the next ten years, significantly impacting contract expenditures by the Department of Defense and other agencies. As agencies look for ways to pare down their spending, contractors may find themselves hearing that there is not enough money to go around. Fortunately, contractors can take comfort in the fact that a lack of funding does not normally excuse the government’s payment obligations.

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.

The draft RFP issued by the Army Energy Initiatives Task Force is a significant step in the Army’s plan to develop large-scale renewable energy projects. It presents as much as $7 billion in new opportunities to the alternative energy market and reflects a growing synergy between the defense and energy industries. Here we highlight some of the key provisions in the draft RFP, including some that are unique to contracts with the federal government.

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.

Courts often look at a party’s conduct for help in interpreting ambiguous contract terms. But this concept has broader application. Actions and positions that one side takes before a dispute arises may actually override a clear contract requirement. The Civilian Board of Contract Appeals’ recent decision in TKC Aerospace, Inc. v. Department of Homeland Security, CBCA No. 2119 (Jan. 31, 2012) [pdf] illustrates the point. The Board’s opinion identifies the contractor’s response to a problem during performance as the key factor in resolving the case.

Contributed by Ike Skelton and Russell Orban of Husch Blackwell’s Government Affairs Practice Group

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.

The National Defense Authorization Act for Fiscal Year 2012 [pdf] puts an end to OFCCP’s effort to impose subcontractor status on retail pharmacies and health care providers serving TRICARE beneficiaries. The controversy had been brewing for some time. As we discussed in an earlier client alert, the October 2010 decision in OFCCP v. Florida Hospital, …