subcontracting

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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—

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.

Contributed by Husch Blackwell Associate Thomas J. Rath

It makes sense to require contractors seeking reimbursement of costs they incur in the performance of a government contract to show that the costs were reasonable. According to the latest decision addressing KBR’s effort to recoup costs incurred to support the United States military in Iraq, the rule is no different for work performed in a warzone. Without additional proof of reasonableness, the Court of Federal Claims concluded that $37 million may be too much for a dining facility needed to feed and protect 6,000 American soldiers. See Kellogg Brown & Root Services, Inc. v. United States, Nos. 09-428C & 09-578C (Fed. Cl. Sept. 27, 2012).

The decision arises from KBR’s claims for costs incurred to construct and operate a reinforced concrete dining facility needed to feed and protect 6,000 soldiers in Mosul, Iraq. Though KBR’s contract was awarded on a cost-reimbursement basis, KBR awarded a fixed-price subcontract for the work to ABC International Group. Army representatives urged KBR to begin work on the new facility quickly, citing the need for “force protection.” Responding to this pressure, KBR accepted a proposal from ABC that doubled the expected monthly cost of labor without seeking competing bids. KBR concluded the increase was reasonable because the work would be conducted amid “violence and the beheading of hostages by terrorists [which] caused a drastic increase in the cost of labor and a severe shortage of available staff.” By the end of the contract, the government asserted that KBR had paid over $12 million more to ABC for labor than it should have.