Debarment: A Potentially Deadly Problem for Small Government Contractors

A few years ago, a government official made a startling statement about debarment from government contracting.  The statement was startling not because of its content, but because it was made at all, considering the natural tendency of people, including government officials to spin the facts to put themselves and their agencies in the best light.  The government official said: “If you are a small contractor and you do something wrong, we will debar you.  If you are a big contractor and you do something wrong, we will work it out.”  Amazing: candor and truth all in one breath, and from a government official no less.  Big government contractors, fear not!  You are not only too big to fail, but also too big to be debarred.  Big contractors rarely, if ever, are debarred.  I cannot recall that it has ever happened to a big contractor.  The Air Force brags that more than nine years ago it temporarily suspended three business units of Boeing.  That was a long time ago, and even then the Air Force granted temporary waivers of the suspension to permit Boeing to bid on new work.

However, small contractors, watch out!  Debarments are on the rise.  Congress has been pushing departments and agencies to debar more contractors.  The game is on – that is, the numbers game.  Government agencies want to bolster their debarment statistics.  So, who will they debar?  You got it, small contractors!

Small government contractors should educate themselves on the potentially lethal remedy of debarment.  There is too much to cover in a short blog, but here is a fundamental point.  The government starts a debarment proceeding by proposing a contractor for debarment.  The contractor has an opportunity to respond in an effort to convince the government that the contractor should not be debarred.  But, here is the problem for a small contractor.  A proposal to debar has the same practical effect as a permanent debarment.  When the government proposes to debar a contractor, the contractor’s name goes on the Excluded Parties List maintained by the General Services Administration.  That means that the contractor cannot receive any new business from the government – no new contracts, no new purchase orders, no new task orders, and no options on existing contracts.  Bluntly put, the small contractor’s oxygen supply is cut off, and then the question is how long can the contractor hold its breath.

The author is John W. Polk, Special Counsel to Berenzweig Leonard LLP, a business law firm located in the Washington D.C. Metropolitan Area.  John can be reached at  jpolk@berenzweiglaw.com.

Whistleblowing Sounds Again

The Department of Justice recently joined a whistleblower’s lawsuit alleging that The Gallup Organization (Gallup) violated the Truth in Negotiations Act (“TINA”), 10 U.S.C. §2306a, in United States ex rel. Lindley v. Gallup, DCDC No. 1:09cv01985.

TINA provides that (in most cases), before the government awards a sole source contract, the contractor must submit and certify “cost and pricing data” on which the contractor bases its estimated cost of providing the goods of services, including labor hours required to perform the work.  If a contractor submits false cost or pricing data the contractor commits misconduct commonly referred to as “defective pricing.”  If a contractor knowingly engages in defective pricing, then the contractor violates the False Claims Act.

According to the allegations, Gallup compensated its employees based, in part, on the gross margin generated by projects for which the employees were responsible.  Under Gallup’s pay-for-performance system, employees received incentive compensation based on the projects gross margin – i.e., the difference between total costs and revenue.  Gallup had many years of historical data showing the cost of performing contracts.  The complaint alleges that Gallup employees submitted false cost and pricing data to the government, inflating the supposed cost of performing contracts in order to artificially increase the price of the contracts.  The employees kept a separate internal set of books showing the actual lower costs which the Gallup used to calculate its gross margin and the amount of the employees’ incentive pay.

The complaint also alleges other misdeeds by Gallup, including shifting costs from fixed-price to cost-plus contracts, improperly upgrading labor categories, and conflicts of interest.  But the flagship allegation is the alleged violation of TINA.  The fact that Department of Justice has joined the lawsuit shows that DoJ believes that the whistleblower’s claims have substantial merit.

Gallup’s compensation system is an example of how a compensation system that was intended to incentivize employees to increase the company’s gross margin by reducing costs can have the opposite effect of encouraging employees to increase profit margins by submitting false cost and pricing data, thereby fraudulently inflating the price of sole source contracts.  As this case illustrates, it is important for contractors to carefully assess their compensation systems to assure they do not encourage fraud.

The author, John W. Polk, is an attorney with Berenzweig Leonard LLP located in the Washington, D.C. region.  He can be reached at jpolk@berenzweiglaw.com.

Make It Easier To Do Business With The Government

Although vendors can give the government a “proposal acceptance period” after which the vendor’s prices are no longer valid, the government can ask vendors to extend that period so the government can have more time to evaluate offers. When asked to extend, it’s risky to refuse because reviving an expired bid, although possible, is by no means a sure thing.

In a recent case, Global Automotive, Inc. agreed to several extensions of its bid acceptance period but refused to extend the period to February 29, 2012 saying that “Our prices are valid until 1 February only and we reserve the right to adjust prices thereafter.” After the government awarded the work to another vendor on April 10th, Global protested to the Government Accountability Office (GAO) arguing that the government should have allowed Global to “revive” its expired bid.

According to GAO, it is possible for a vendor to revive an expired bid and extend its prices after-the-fact, but not under these circumstances. Global’s refusal to extend the acceptance period had tried to give Global “the right to adjust prices thereafter.”  This unfairly put Global in the position of unilaterally setting the revived price which, if market trends had allowed lower prices, would have been unfair to other vendors.

As this case shows, it’s easier to simply extend acceptance periods than to have to rely on the government allowing you to revive your expired prices.

Author Terrence O’Connor is the Director of Government Contracts for the Washington, DC regional business law firm of Berenzweig Leonard, LLP.  He can be reached at toconnor@BerenzweigLaw.com.

Are Small Business Set Asides Now Illegal?

In a recent legal decision that could have a big impact on contractors, the D.C. federal court has ruled that awarding contracts to minority owned companies under the government’s  Section 8(a) Program may be unconstitutional.  The 8(a) Program was designed to remedy past effects of discrimination against minority businesses by providing preferential award of certain contracts.

DynaLantic Corporation sued the Defense Department alleging that a DoD contract award to a minority owned company for flight training equipment was illegal, since the 8(a) set-aside Program was allegedly unconstitutional under the equal protection clause of the Fifth Amendment to the Constitution.  DynaLantic is a small business but is not minority owned.

The DC court ruled that the 8(a) Program is constitutional on its face.  However, the court also ruled that the way DoD applied the program with respect to the award involving DynaLantic was unconstitutional.  In its decision, the court upheld the overall Program due to the Congressional record reflecting statistical evidence of racial discrimination, but concluded that the Program “as applied” was unconstitutional because the government failed to present evidence of actual discrimination in the applicable industry.

The implications of this ruling are significant, since the government may not want to go through the steps of compiling a record of discrimination in each specific industry it wants to issue a contract under the 8(a) Program.  Certain industries may also have different statistics that may leave the question of discrimination subject to dispute.  Government contractors need to be aware of this decision and be prepared for new battles that may now involve a constitutional controversy impacting small businesses in DC and throughout the United States.

Author Seth Berenzweig is the Managing Partner of D.C. regional business law firm, Berenzweig Leonard, LLP.  He can be reached at sberenzweig@berenzweiglaw.com.

Does a Previous Equitable Adjustment Guarantee Another Under Similar Circumstances?

Although the government can be flexible and agree to pay an equitable adjustment for extra work on a fixed-price government contract instead of fighting a claim, doing so just once does not create a “course of dealing” that guarantees the government must always do so in the future.

In a recent decision, although the IRS had paid a snow removal contractor an extra $109,000 for removing 3 times the expected snowfall at its Ogden, Utah office during the 2007-2008 winter, a different Contracting Officer refused to pay extra for an equally-heavy snow removal effort by the same contractor the next winter. The Civilian Board of Contract Appeals (CBCA) agreed with the new Contracting Officer’s refusal to pay. Although precedent held that, for example, the government could not refuse to make an exception on the 8th time after agreeing to do so for 7 previous times, a single transaction cannot create a course of dealing.

As the decision shows, contractors cannot assume that the government will continue to pay for extras unless it has done so numerous times before. This is especially true because, over the course of a multi-year contract, the Contracting Officers will very likely change.  Therefore, it is critical that contractors get written confirmation before performing additional work and keep good records to demonstrate that costs for a future equitable adjustment are similar to expenses  previously covered by the government.

Author Terrence O’Connor is the Director of Government Contracts for the Washington, DC regional business law firm of Berenzweig Leonard,LLP.  He can be reached at  toconnor@BerenzweigLaw.com.