Submitted by Russell Orban

The Consolidated Appropriations Act, 2014, Public Law No. 113-76 (Jan. 17, 2014) funds the federal government until September 30, 2014. This legislation followed the groundbreaking Bipartisan Budget Act of 2013, Public Law No. 113-67 (Dec. 26, 2013). Together, these laws reflect a significant departure from the recent past. Normally, the budget agreement sets the boundaries for federal government spending in the upcoming fiscal year and the details are then supplied by the Appropriations Committees. The Bipartisan Budget Act set levels for both FY2014 and FY2015—the period from October 1, 2013 to September 30, 2015. This gives Congress a head start on its spending process for FY2015 and will postpone budget-deficit skirmishes until after the next election. Many important things remain undecided, but it is encouraging that Congress has found some common ground.

During the budget process, the House and Senate decide how much the federal government will spend in an upcoming year. Targets are based on Presidential requests and Congressional committees’ advice about agency needs. Allocations are made to each appropriation subcommittee, and Congress has four or five months to agree on how to spend the allotted money. The President’s role in the process comes from his power to veto appropriations bills.

Without a budget, no appropriations guidelines were set and gridlock ensued. Disagreements over spending cuts, raising revenues and allocating money resulted in stalemate, automatic sequestration cuts, and a government shutdown.

Since that time, both sides have worked out a compromise that spends less than the President requested but more than what originally passed. Here are some thoughts on what the two laws do and what they don’t do:

What the Budget Act and the Consolidated Appropriations Act do—

  • Prevent another government shutdown. By passing a bill that prescribes spending amounts for the rest of the fiscal year, Congress avoided another shutdown in January.
  • Meet budget targets. The Bipartisan Budget Act set a discretionary spending ceiling of $1. 012 trillion for 2014, and the Consolidated Appropriations Act met that goal. This is $191 billion less that the President requested, but it marks the fourth straight year of reduced government spending. That has not happened for over 60 years.
  • Set spending levels for two years. The Budget Agreement makes it possible for the Appropriations Committees to get an early start on 2015 spending priorities and (hopefully) work out differences ahead of time. Setting budget targets moves the endless budget deficit debate off center stage.
  • Reduce the impact of “sequestration.” Republicans and Democrats agree that sequestration is arbitrary and wasteful. The Budget Agreement reduces sequestration in 2014 and 2015 by $63 billion, postpones portions of those cuts, and finds ways to “pay for” any increased spending. The legislation reflects agencies’ latest priorities with flexibility to make intelligent reductions instead of blind, across-the-board cuts.

As part of the Obama Administration’s push to raise the minimum wage, the President announced during his State of the Union speech that he intends to issue an Executive Order raising the minimum wage for workers on federal contracts to $10.10 per hour. We’ll wait for the Executive Order itself before offering specific guidance on its requirements, but it’s not too early for contractors to begin thinking about how this might impact their business. Here are a few things to consider—

1.  The new minimum wage could apply to some current contracts.

The Obama Administration has asserted that the wage increase will apply only to new federal contracts—i.e., those awarded after the effective date of the Order. But the regulations implementing the prevailing wage requirements could mean that the $10.10 minimum will also apply to some current contracts.

The McNamara-O’Hara Service Contract Act requires contractors and subcontractors performing service contracts to pay their workers not less than the locally prevailing wage or the amount paid by the predecessor contractor under a collective bargaining agreement. The Department of Labor prepares wage determinations establishing the minimum wages and fringe benefits based on surveys of local prevailing wages or existing collectively bargaining agreements.

FAR provisions implementing the Service Contract Act contemplate that the prevailing wages may change during the course of a service contract. Under FAR 22.1007, the contracting officer is required to obtain and incorporate a new wage determination for modifications that extend the term of an existing contract or make a change in the scope of work “whereby labor requirements are affected significantly.” FAR 22.1007(b). A new wage determination is also required on the annual or biennial anniversary date of multi-year service contracts. FAR 22.1007(c). Depending on how the Executive Order implementing the new minimum wage is worded, the wage determination applicable to contract modifications or to multi-year service contracts could require current contractors to pay the new $10.10 minimum wage.

The FAR permits the government to suspend or debar a contractor based solely on its affiliation with another contractor that has been suspended. See FAR 9.406-1(c) & FAR  9.407-1(c). The Eleventh Circuit’s decision in Agility Defense & Government Services v. U.S. Dept. of Defense, 739 F.3d 586 (11th Cir. 2013), significantly expands the impact of a suspension due to affiliation. The court held that the initiation of legal proceedings (such as an indictment) permits the indefinite suspension of the contractor’s affiliates, even if the affiliates have not been accused of any wrongdoing. The decision overturned a 2012 Alabama district court decision that was a limitation on suspension due solely to corporate affiliation. We discuss the district court case in an earlier blog post.

Public Warehousing Company was indicted for fraud related to a government contract in November 2009 and was suspended as a result of the indictment. The Defense Logistics Agency then suspended Agility Defense & Government Services and Agility International, Inc., subsidiaries of Public Warehousing. The affiliates submitted written requests for reinstatement because they were not implicated in the indictment. After the agency’s refusal to reinstate them, the affiliates undertook several actions attempting to end their suspension, including a proposed management buyout that would have resulted in Public Warehousing retaining only an indirect 40-percent ownership in one of the affiliates.

As their suspension approached three years, the affiliates filed suit in the United States District Court for the Northern District of Alabama. The court found in their favor, ending the suspension. The district court reasoned that the applicable regulation limited the automatic suspension to 18 months. In the district court’s view, suspension beyond 18 months required the agency to initiate legal proceedings directed to the affiliates’ involvement. The Eleventh Circuit Court of Appeals reversed.

New OFCCP rules amending the nondiscrimination and affirmative action provisions of the Vietnam Era Veterans Readjustment and Assistance Act and Section 503 of the Rehabilitation Act are expected to be effective March 24, 2014. OFCCP has published a set of forms that are to be used in implementing the new rules, which are available in this client alert from Husch Blackwell’s OFCCP compliance team.

As we have discussed in several earlier posts, the new rules represent an aggressive move by OFCCP. They impose significant new recordkeeping obligations on federal contractors and subcontractors. They set high placement goals and hiring benchmarks for veterans and individuals with disabilities. They authorize OFCCP to obtain more contractor information during compliance reviews.

One of the key issues with the new rules is that they require federal contractors and subcontractors to ask job applicants and current employees whether they are individuals with disabilities. Such questioning is normally prohibited by the Americans with Disabilities Act.  Needless to say, there has been a lot of opposition to the new OFCCP rules.

Subcontracting is often the best way to complete a complex project. A subcontractor may have technical expertise, equipment, or human resources that are unavailable to the prime contractor. But assigning work to one or more lower-tier parties carries with it a certain amount of risk. One of the challenges is allocating liability for changes in the scope of work, delays, and other inefficiencies that increase a subcontractor’s cost or time for performance. Today we look at how the allocation of this risk is affected by the Severin doctrine.

The Severin doctrine takes its name from the decision in Severin v. United States, 99 Ct. Cl. 435 (1943). Severin employed a subcontractor on a contract to build a post office in Rochester, New York. As a result of construction delays, Severin sought to recover $702 on behalf of its subcontractor.

The Court of Claims (now the Court of Federal Claims) gave two reasons for rejecting the claim. First, the court held that the subcontractor could not sue on its own because it had no contract directly with the government. The government had waived its sovereign immunity only for its direct contractual agreements.

Second, the court held that Severin could not pursue a claim on the subcontractor’s behalf because Severin itself could not be held liable for the same damages under its subcontract agreement.

A strict application of the Severin doctrine would increase risks for both prime contractors and subcontractors and would hamper the efficient resolution of claims. It would restrict the use of no-damage-for-delay clauses and other risk-shifting clauses that have widely been seen as effective. But in practice, the Severin doctrine has not been strictly enforced.

You’ve heard by now that the Supreme Court’s decision in Atlantic Marine Constr. Co. v. United States District Court, No. 12-929 (U.S. Dec. 3, 2013) is a strong endorsement of a contractor’s right to choose the forum that will resolve disputes with subcontractors. We discuss the Court’s decision in an earlier post.

So you know that you can have a forum selection clause. But Atlantic Marine doesn’t answer the hard question, which is this—

How do you write a forum selection clause that will be reliably and economically enforced—without an expensive trip through the court system, perhaps even all the way to the Supreme Court?

Here are some basic points on drafting a forum selection clause, drawn from some of the dozens of reported court cases addressing them—

It should come as no surprise that the contracting policy changes in the National Defense Authorization Act for 2014 [pdf] reflect a continued focus on reducing spending. But they also encourage collaboration between the government and the private sector and emphasize the need for innovative contracting strategies and greater flexibility in the procurement process, which may benefit contractors in the long run. Here is a breakdown of a few of the highlights:

  • Extension of restrictions on contractor services spending. Section 802 of the 2014 NDAA amends Section 808 of the 2012 NDAA to extend the temporary limit on the amounts obligated for DOD spending on contract services in FY 2014 to the amount requested for contract services in the President’s budget for FY 2010. It also requires that the heads of each Defense Agency continue the 10-percent-per-fiscal-year reductions in spending for staff augmentation contracts and contracts for inherently governmental function for FY 2014, and requires that any unimplemented amounts of the 10 percent reductions for FY 2012 and FY 2013 be implemented in FY 2014.

The United States Defense Department has published a final cybersecurity regulation concerning unclassified “controlled technical information.” See 78 Fed. Reg. 69,273 (Nov. 18, 2013) [pdf]. The objective of the regulation is to require contractors to maintain “adequate security” on unclassified information systems on which CTI may reside or transit and to implement detailed reporting requirements for “cyber incidents.” The final rule is narrower than the proposed regulation, which sought to safeguard unclassified DoD information generally.  See 76 Fed. Reg. 38,089 (June 29, 2011) [pdf].

Definition of CTI

The final rule includes a new DFARS provision (DFARS 204.7300) and a DFARS contract clause (DFARS 252.204.7012), which impose new security measures and reporting requirements on contractors and subcontractors whose work involves unclassified “controlled technical information resident on or transiting through contractor information systems.”

The rule broadly defines CTI as “technical information with military or space application that is subject to controls on the access, use, reproduction, modification, performance, display, release, disclosure, or dissemination.”  DFARS 204.7301.

The term “technical information” is further defined to mean “recorded information, regardless of the form or method of the recording, of a scientific or technical nature . . . .” See DFARS 252.227-7013. Examples of technical information include research and engineering data, engineering drawings and associated lists, specifications, standards, process sheets, manuals, technical reports, technical orders, catalog-item identifications, data sets, studies and analyses and related information, and computer software executable code and source code.

While this is a broad definition, comments on the new rule limit its application to information requiring controls pursuant to DoD Instruction 5230.24 [pdf] and DoD Directive 5230.25 [pdf]. Contractors should not have to devote resources simply to the task of determining whether information is CTI or not.

The Contract Disputes Act gives prime contractors a straightforward procedure for resolving claims against the federal government. But there is no mandatory approach to resolving disputes between contractors and subcontractors. Private parties may agree to arbitrate their disputes or designate a specific court to hear them. They may identify the applicable law, provide for the recovery of attorney’s fees, and prescribe any number of other details.

The Supreme Court’s decision in Atlantic Marine Constr. Co. v. United States District Court for Western District of Texas, No. 12-929 (U.S. Dec. 3, 2013), holds that forum selection clauses in subcontracts on federal projects are enforceable. In this first blog post of a two-part series, we discuss the decision in Atlantic Marine and the limits of the Supreme Court’s analysis. In the subsequent one, we will discuss the use of subcontract dispute resolution clauses more broadly.

Contractors have the constitutional right to rebut past performance evaluations before they are stigmatized by the government’s assessments in the future. See Old Dominion Dairy Products, Inc. v. Secretary of Defense, 631 F.2d 953 (D.C. Cir. 1980). But full exercise of this right has the potential to conflict with the practical interest in efficient government procurement. The final revisions to the rules governing the process for reporting and appealing past performance evaluations demonstrate that the two ideals are not easily balanced. The Federal Register notice announcing the final revision to FAR 42.1503 can be found at 78 Fed. Reg. 46783 (Aug. 1, 2013) [pdf].

Helpful rules revisions

First the good news. The August 2013 final revisions to the rules requiring the government to evaluate past performance retain the existing requirement to allow contactor rebuttal and appeal. Commenters to the government’s proposal were unanimously against scrapping or substantially modifying the process. As summarized in the discussion of the final rule, commenters insisted that the appeals process “ensures that individual Government rater bias or lack of understanding of the complete program, not just contracting issues, can be brought out and addressed.” According to one commenter, at least 30 percent of past performance evaluation appeals result in substantive changes. The final rule maintains verbatim the language of former FAR 42.1503(b), now located at FAR 42.1503(d).