Contractors Should Beware of Broad Assignments

Government contractors often assign government contract payments to banks in exchange for loans to finance the contract. This is sometimes also known as “factoring.” Recently, a broadly worded assignment was interpreted to include not only payments under the original contract, but also payments under a sole-source bridge contract during a protest of the follow-on contract.

Tiger Enterprises, Inc. agreed to assign payments under a 2007 Air Force contract to Chain Bridge Bank of McLean, Virginia. The assignment covered the original Air Force contract as well as “all modifications, supplements and replacements.” After that contract ended in 2010, the Air Force gave Tiger a “Bridge Contract” for several more months, so that laundry services could continue until a protest of the follow-on contract ended. When the Air Force continued to send payments for Tiger’s bridge contract to the bank, Tiger filed a claim, arguing that the bridge contracts payments were not covered by the assignment and as a result, the government should have sent the bridge payments to Tiger.

The Armed Services Board of Contract Appeals disagreed, because the assignment’s terms applied not only to Tiger’s initial contract but also “all modifications, supplements and replacements” of that contract.  According to the Board, the sole-source bridge contract was a “supplement” or “replacement” to Tiger’s original contract “using the same performance work statement and Equipment as Contract 0001 due to exigent circumstances arising from the filing of bid protests regarding the follow-on procurement for Contract 0001.” To the Board, its interpretation of the assignment was “in accordance with the modern trend away from tying a particular loan to a particular security [because] the use of a revolving credit financing device has been regarded as acceptable” under federal law.

Carefully reviewing the scope of an assignment is essential, as this decision points out. Otherwise, factoring agreements can have unforeseen consequences. Berenzweig Leonard’s Government Contracts attorneys can help contractors protect themselves from overly-broad agreements like the one that burned Tiger. 

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm. Terry can be reached at toconnor@BerenzweigLaw.com.

Which Contracting Officer Resolves Disputes Involving Agency Purchases from the GSA Federal Supply Schedule?

A recurring issue faced by vendors on the Federal Supply Schedule (FSS) is which the vendor must deal with when it gets into a disagreement with an ordering agency during the performance of a delivery order – the ordering contracting officer or the GSA contracting officer. The Federal Circuit recently addressed this issue in Sharp Electronics Corp. v. McHugh, 707 F.3d 1367 (Fed. Cir. 2013).

The Federal Circuit interpreted FAR 8.406-6 as creating a bright line rule that “all disputes requiring interpretation of the schedule contract go to the schedule CO, even if those disputes also require interpretation of the order, or involve issues of performance under the order. … Requiring that all schedule contracts must be construed by the GSA CO maintains a clear, predictable allocation of jurisdiction between agency contracting office and GSA.” The Court also stated that “the ordering CO is certainly authorized to construe the language of the order (or its modifications). … We also see no reason why an ordering CO resolving a dispute cannot apply the relevant provisions of the schedule contract, as long as their meaning is undisputed. … The dispute only need go to the GSA CO if it requires interpretation of the schedule contract’s terms and provisions.”

From the Federal Circuit’s decision, we have three important guidelines regarding these “mixed-authority” disputes:

1. The GSA contracting officer resolves all disputes requiring interpretation of the schedule contract according to FAR 8.406-6.

2. The ordering contracting officer could “decide routine disputes about order performance not involving interpretation of the schedule contract, such as whether the contractor’s default was excusable.”

3. The ordering contracting officer can also get involved in issues other than performance claims, such as issues construing the language of the order or its modifications.

The ASBCA recently decided two cases dealing with this issue. In Impact Associates, Inc., ASBCA No. 57617 (Apr. 19, 2013), the ASBCA concluded that because both Impact and the Army “plainly dispute the meaning” of three clauses in the GSA FSS contract, the issue was one for the GSA contracting officer and the CBCA. In Hewlett-Packard Company, ASBCA No. 57940 (July 9, 2013), the Navy had issued a blanket purchase agreement allowing it to buy HP software and the Army issued two delivery orders for HP software under the BPA. A dispute arose regarding the terms of the delivery orders. The ASBCA concluded that because HP’s dispute did not involve any interpretation of the FSS contract, HP properly brought its claim to the ordering agency contracting officer and, subsequently, the ASBCA.

The Federal Circuit acknowledged that the guidelines it set forth in Sharp Electronics are “less than perfect” and openly invited the FAR Council to set different rules by changing the FAR provisions on which the court based its decision. However, until the FAR Council takes such action, these rules can help guide contractors as they navigate disputes arising during the performance of a delivery order under a GSA FSS contract.

Stephanie Wilson is an attorney at Berenzweig Leonard, LLP, a business law firm in the Washington metro area. She can be reached at swilson@berenzweiglaw.com.

Government Contractor Can Be Penalized for Kickbacks Employees Receive Even If the Company Has No Knowledge of the Kickbacks

Mandatory Anti-Kickback Act procedures will not protect a government contractor from paying civil penalties for kickbacks given by subcontractors to company employees, under the Anti-Kickback Act (AKA), 41 U.S.C. 8701-07. A company is liable for kickbacks its employees receive regardless of whether the company was aware of or profited from the kickbacks. The decision shows the need for government contractors to closely monitor their employees’ compliance with company AKA procedures required by FAR 3.502-3.

A kickback can take many forms including money, football tickets, or anything of value that a subcontractor gives back to a prime contractor in exchange for something of value, like undeserved good past performance ratings.

The rationale for prohibiting kickbacks is not only that they poison the procurement system - they also needlessly raise the price the government pays the prime who in turn pays the subcontractor: since the kickback is ultimately government money, kickbacks cost the government needless expense.

The decision involved Kellogg Brown and Root (KBR)’s ID/IQ contracts with the U.S. Army for transporting military equipment and supplies to Iraq, Afghanistan and Kuwait between 2002 and 2006. The work could be done by KBR or by subcontractors that KBR selected. Two of the subcontractors gave a KBR supervisor and his colleagues meals, drinks, golf outings, tickets to rodeo events and other gifts and entertainment. In exchange, the KBR employees overlooked performance failures of the subcontractors, and continued to give them new subcontracts despite the failures.

After the government joined in a qui tam (whistleblower) lawsuit against KBR and the employees, KBR asked the court to throw the case out, arguing that the AKA did not allow corporate officials to be responsible for acts of the employees, that is, the company had no “vicarious liability” for what its employees did behind the scenes. The District Court agreed with KBR and threw the lawsuit out but the government appealed and won, keeping the case alive.

The appeals court focused first on the AKA’s definition of “person” who could be liable under the Act. The Act defined “person” broadly to include corporations and other business entities.  Thus, since the AKA “makes corporations liable for kickback activity, it requires attributing liability to corporate entities for that activity under a rule of vicarious liability.”

This decision shows why all government contractors must monitor their employees’ compliance with company Anti-Kickback procedures required by FAR 3.502-3 and FAR 52.203-7. Berenzweig Leonard LLP can provide your company with contract compliance guidance as well as white-collar defense strategies to help you comply with legal provisions such as the AKA.

John Polk is a former Assistant U.S. Attorney and handles contract compliance and white-collar issues for the firm. Terry O’Connor has over 40 years of government contract experience in all aspects of contract compliance.  Berenzweig Leonard can help government contractors avoid not only AKA penalties but also avoid being found non-responsible due to kickbacks.  John can be reached at jpolk@berenzweiglaw.com.

The Government Shutdown’s Impact on Payment to Contractors

All companies contracting with the Federal Government should ensure that they are doing everything they can to protect themselves and maximize their chances of payment once the government shutdown ends. Congress has approved back pay for federal workers once the shutdown is over, and President Obama recently signed a bill requiring the DoD to continue paying civilian Federal Government employees and contractors that provide support to the armed services.  Government contractors, however, have been put in limbo, and need to make careful decisions while navigating the shutdown.

Contractors who do not serve the armed services must typically operate on a case-by-case basis, and should stay in contact with their Contracting Officers (COs) and Contracting Officer Representatives (CORs), if they are working, to understand what the procuring agency is doing and how it is operating during the shutdown. The worst thing to do is to drop off the CO’s communication radar and give the CO proof by way of an email track record that your company did not contact him or her during the shutdown to confirm understandings on contract performance. Assumptions cannot be made during this uncertain time, so it will be beneficial to contractors to send regular written communications to agency representatives to ensure everyone is on the same page.

Each contract will have varying factors affecting its appropriation, but generally speaking, a contractor should not expect to get paid for work it does not perform – the Federal Government cannot accept payment for voluntary services under the Anti-Deficiency Act. However, contractors covering work that is fully funded, or incrementally funded and not yet reaching the funding limit, should still be funded by the Government, although each case can differ. Time and materials contracts are more problematic, and contractors should proceed with caution. FAR § 52.242-15 gives the Government discretion to terminate or suspend work independent of whether a contract is funded, and so if contractors have not already initiated creative cost-cutting mechanisms, now is the time to think outside the box and be protective.

Hopefully Congress can lead the way to a solution so that the current standoff can end, and hard working contractors can go back to work and slowly resume a normal and uninterrupted routine to help federal customers achieve their missions.

Katie Lipp is an attorney the Washington, DC regional business law firm Berenzweig Leonard, LLP. She can be reached at KLipp@BerenzweigLaw.com.  

Is a Code of Business Ethics and Conduct Required?

Must a federal government contractor have a Code of Business Ethics and Conduct?   Yes!   All federal government contractors must have a Code of Business Ethics and Conduct.  In addition, unless the contractor is a small business or the contract is for the acquisition of commercial items (as defined by FAR 2.101), the contractor must also have a “business ethics awareness and compliance program” and an “internal control system” aimed at preventing fraud in government contracting.

Although small businesses are exempt from these latter two requirements, small businesses are well-advised to implement an ethics awareness program and internal controls. Debarment from government contracting is a huge risk for small businesses, and an ethics training program and internal controls will help prevent the type of misconduct that could result in debarment.

A company’s ethics and compliance program should focus especially on the company’s operations that pose the greatest risk of potential fraud.  This will not be the same for all contractors.  Assessment of the risk of fraud is essential to an effective compliance program.  A company must study its own operations and look for vulnerability to fraud.  How might an errant employee commit fraud?  How might a careless employee negligently do something that triggers a government audit or I.G. investigation, resulting in a costly debarment proceeding?  The type and scope of ethics awareness training and internal controls will vary from company-to-company, depending on the type of products, services and business operations.  One size does not fit all, which is why contractors must study their own operations and develop effective ethics and compliance programs that work best for them.  Finally, an ethics and compliance program will not be effective unless it is fully supported by top management and embedded in the contractor’s business culture.

John Polk is Special Counsel to Berenzweig Leonard, LLP, a DC region business law firm. John can be reached at jpolk@berenzweiglaw.com.

Teaming Agreement’s Promise of Future Subcontract Was Not Enforceable

Enforcing vague provisions in a Virginia teaming agreement is difficult. Courts continue to consider some teaming agreement provisions to be an unenforceable “agreement to agree” as seen in a recent decision of the Federal District Court in Alexandria. Although finding the teaming agreement’s promise of a subcontract was unenforceable, the court did honor the teaming agreement’s choice of law provision. Thus, not all teaming agreement provisions are automatically unenforceable. To the extent that the parties can make teaming agreements precise, they may be enforceable.

The recent case involved Information Experts (IE) trying to get a contract with the Office of Personnel Management with the help of team member Cyberlock Consulting. Their teaming agreement contained standard provisions committing the parties, if successful in winning the contract, to a specific work-share (51 percent of the work to IE, 49 percent to Cyberlock), tasks each would perform, promises of good faith negotiations to enter into a subcontract if the proposal effort was successful, and a clause identifying Virginia law to be applicable to the teaming agreement.

After the IE-Cyberlock team won the OPM contract, their efforts to negotiate a subcontract acceptable to both parties failed. Cyberlock then sued IE for breaching the teaming agreement by alleging that IE failed to negotiate a subcontract in good faith. The court concluded that the promise of a subcontract was too vague to be enforceable.

Because an enforceable contract needed “terms reasonably certain under the circumstances … mere agreements to agree in the future are too vague and too indefinite to be enforced.” And in Virginia, “agreements to negotiate at some point in the future are unenforceable … Accordingly, an agreement to negotiate open issues in good faith to reach a contractual objective within [an] agreed framework will be construed as an agreement to agree rather than a valid contract.”

Looking at the title of the document itself—a teaming agreement—the court said: “calling an agreement something other than a contract or subcontract, such as a teaming agreement or letter of intent, implies that the parties intended it to be a nonbinding expression in contemplation of a future contract. Moreover, even if the parties are fully agreed on the terms of their contract, the circumstance that the parties do intend a formal contract to be drawn up is strong evidence to show that they did not intend the previous negotiations to amount to an agreement which is binding.”

Although admittedly the teaming agreement contained some very specific language such as the 51/49 work share, the court considered the teaming agreement as a whole, which “indicates that this particular language was not meant to provide a binding obligation but rather to set forth a contractual objective and agreed framework” for negotiating a subcontract “in the future along certain established terms.” For example, any seemingly mandatory teaming agreement language to award Cyberlock a portion of the prime contract “was modified by provisions indicating that: (1) the award of such work would require the negotiation and execution of a future subcontract; (2) the award of such work was dependent on the success of such future negotiations; (3) any future executed subcontract was subject to the approval or disapproval of OPM; and (4) that the framework set out for the work allocation in a future subcontract potentially could change as it merely was based on the work anticipated to be performed by Cyberlock as then-presently understood by the parties.”

To the court, the teaming agreement “was an agreement to negotiate in good faith to enter into a future subcontract” and “such an agreement is precisely the type of agreement to agree that has consistently and uniformly been held unenforceable in Virginia.”

The court’s decision does not mean that all teaming agreement provisions are unenforceable, only those that are too vague to enforce. Because the teaming agreement provision identifying Virginia law as applicable to the teaming agreement was specific and not vague, that provision was enforced.

If you want to put teeth into a teaming agreement, let Berenzweig Leonard help you tailor teaming agreement language that will be enforced.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm. Terry can be reached at toconnor@BerenzweigLaw.com.

Can Contractors Ask the Government for More Price Information?

With budget cuts making price more important in winning government contracts, contractors should know that the government is allowed to provide more helpful information during price discussions than the standard “sharpen your pencil” refrain.  FAR 15.306 (e)(3) lets the government “inform an offeror that its price is considered by the Government to be too high, or too low, and reveal the results of the analysis supporting that conclusion. It is also permissible, at the Government's discretion, to indicate to all offerors the cost or price that the Government's price analysis, market research, and other reviews have identified as reasonable.”

Unfortunately, the government rarely uses this broad authority. Contracting officers can be reluctant to get more specific on price, and prefer to err on the side of caution when it comes to price discussions. In the end, they disclose only the bare minimum that they have to disclose.  This safe approach, however, is not always the right one. In one GAO decision, an agency told an offeror simply that its price was “overstated” when its price was 8 times the government estimate. GAO said that the agency had to tell the offeror much more than “overstated.”  Creative Information Technology, Inc.  B- 293073.10, Mar. 16, 2005.

If the government is stingy with price information, it might help to remind the agency that the FAR lets the government be more helpful in discussing price with government contractors.  In one case, the GAO had no problem with an agency telling offerors during the first round of discussions about those line item prices which varied from the government estimates by more than 20%, nor with telling offerors during the second round all of the agency's estimates. Kaneohe General Services, Inc., B- 293097.2, Feb. 2, 2004.

More recently, the GAO concluded that there was nothing wrong with the VA telling each offeror in the competitive range where its price stood in comparison to the average of all current offers in the competitive range. Walsh Investors, LLC, B-407717, B-407717.2, January 28, 2013.  These decisions show that an agency can often give government contractors information more helpful pricing than to just “sharpen your pencil.”  Because there is no harm in asking the government for more information, contractors should ask.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP, a DC region business law firm. Terry can be reached at toconnor@BerenzweigLaw.com.

What Are Common Bid Errors to Avoid?

The procurement process is fraught with many procedures and regulations, and therefore submitting a flawless solicitation is a difficult task.  But there are some errors committed with enough frequency that contractors can readily learn from the mistakes of others. Recent protest decisions of the Government Accountability Office (GAO) show good examples of common errors that government contractors make in submitting proposals for a contract or task order.  Here are five common proposal errors for all contractors to avoid in the proposal process.  

1. When in doubt, treat the words ‘may’ or ‘should’ as ‘shall.’  

Last year, we reported a decision in which GAO treated the word “should” as “shall”, concluding that a solicitation telling offerors they “should” submit resumes of some personnel really meant that offerors “shall” submit their resumes. According to GAO, “terms like ‘may’ and ‘should’ are capable of expressing a mandate." KPMG LLP, B-406409; B-406409.2; B-406409.3; B-406409.4, May 12, 2012.  In another case, “may” turned out to be “expressing a mandate” in a recent GAO opinion. The RFP warned offerors that the agency “may evaluate the past performance of subcontractors that would perform major or critical aspects of the requirement.” An offeror failed to provide past performance information for all subcontractors that would be performing the work. GAO concluded that the agency properly downgraded the offeror for failing to do so, even though the information was not required.  According to GAO, offerors were on notice that it would be wise for them to submit past performance information on major subcontractors. Paragon Technology Group Inc., B-407331, December 18, 2012.

2. Confirm that the government has actually received your offer. 

It may sound elementary, but make sure the proposal you send to the agency is actually received.  A vendor carries the burden of proving that the government received its quote and any requested vendor verification of that quote.  In one noteworthy case, the vendor claimed it had sent its quote and follow-up verification to the agency by email prior to the deadline.  After the agency awarded the work to another contractor, the vendor checked with the agency to see why its quote had not been selected.  After doing an email trace, the agency informed the contractor that it had not received the vendor’s verification.  The company’s protest to GAO included an email chain with a message, allegedly sent before the agency deadline to the relevant contract specialist, containing the vendor’s necessary verification. In denying the company’s protest, GAO stated that “although the protester has presented evidence that it timely sent an email verifying information about its quote, there’s no question that the agency did not receive B&S’s email verification prior to the contract specialist’s deadline.”  In addition, “the record does not show that the offeror took steps to confirm that its email message was received.” GAO cited a number of prior decisions agreeing with an agency and rejecting a quote where vendors could not prove that the agency timely received it.  B&S Transport Inc., B-407589, December 27, 2012.

3. Put the right information in the right section of the proposal. 

It is a bad idea to make the agency evaluators hunt for required information. They can hunt for it if they want to, but they need not do so.  For example, an agency properly did not assign a “strength” to a company’s home office management and support portion of its proposal when that information did not appear in the relevant section of its proposal, “but instead was presented in an executive summary of its past performance and in its discussion of its approach to design requirements.” Clark Construction Group, LLC, B-407334.2; B-407334.3, December 18, 2012.   One caveat here is that, although an agency may ignore information in an unrelated section, the agency “does not have license to ignore information in a proposal that is readily apparent.”  For instance, an agency’s evaluation of corporate experience required offerors to provide a range of information, including “contracting method.”  One vendor described its project experience in both his proposal narrative and in proposal exhibits. Although the proposal did not address the contracting method as required, the information was included on the general contractor reference form in its proposal exhibits. GAO concluded that the agency should have considered that information.  J.R.Conkey and Assoc., B-406024.4, Aug. 22, 2012.

4. Don’t be ambiguous that you intend to comply with the solicitation requirements.

Some contractors’ proposals will be less than clear regarding their intent to adhere to the solicitation requirements, thus jeopardizing any chance of getting the award.  The FAR mandates that a proposal that “contains an ambiguity as to whether the offeror will comply with a material requirement of the solicitation renders the proposal or quotation unacceptable."  In one recent case, an agency required an offeror to provide an item that would comply with "ISO 17357." One offeror promised to comply with "ISO 17357:2000 (E) /eqvt. ASTM standard," which on its face signaled that the contractor may choose to comply with an equivalent standard as opposed to the stated requirement.  GAO concluded that this "qualified designation created ambiguity regarding the offeror's intentions and introduced uncertainty regarding whether the offeror intended to perform in accordance with the terms of the RFP." In other words, was the offeror promising to comply with ISO 17357:2002 (E) or in accordance "with what it viewed to be an equivalent ASTM standard?"  GAO agreed with the agency that the proposal was ambiguous and, therefore, unacceptable.  Kirti International, B-407612, January 16, 2013.

5. Promptly correct any bid deficiencies that the agency points out.

Contractors should consider it a gift when an agency points out a proposal error. In one case, an agency told an offeror that its technical approach did not include a necessary component. Rather than revise the proposal, the offeror responded along the lines that it could do the work.  After being told that its proposal remained deficient on this technical issue and provided an opportunity to correct it, the offeror again failed to address it in its final revision.  GAO agreed with the agency that the proposal was deficient: “although the offeror insists that it will adequately perform the required work, it failed to adequately explain this approach in its proposal as required by the RFP.” Tidewater, Inc., B-407483: B-407483.2, Jan. 8, 2013.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP a DC region business law firm. Terry can be reached at Toconnor@BerenzweigLaw.com.

Bidders Must Not Delay Protesting Solicitation Amendments

Filing a protest before the agency even awards a contract can be a very difficult business decision because it seems like you are suing your potential customer to get the order. But sometimes that difficult decision must be made and, as we will see, might not be a bad business decision at all.

Recently, the U.S. Court of Appeals for the Federal Circuit (CAFC) set a firm timeliness rule for pre-award protests: If the agency amends the solicitation and in the process hurts a bidder’s chances of winning the contract, a bidder cannot wait until after losing the contract to protest that amendment. Any protest must be filed right away, before award. Failing to do so waives a bidder’s right to protest the amendment after award.

DoD issued a solicitation that initially made contract award dependent on the evaluation of the bidder’s proposals for a “basic contract” and 2 specific task orders. Only those offerors providing the best value for the basic contract would be considered for award of the task orders. Later, the agency issued Amendment 5 stating that only the basic contract would be awarded, that the task orders would be converted to sample task orders, that the proposals for task orders would be used for evaluating the pricing factor for the basic contract, and that no proposal revisions would be accepted.

After award, an unsuccessful bidder protested, arguing that the amendment was improper because it prohibited changes to proposals.

The appeals court concluded that the bidder should have protested Amendment 5 before award. By not doing so, the bidder had waived its right to protest after award. The court’s explanation was based on keeping the solicitation process fair: “a contractor with knowledge of the solicitation defect could choose to stay silent… If his proposal loses to another bidder, the contractor could then come forward with the defect to restart the bidding process, perhaps with increased knowledge of its competitors.”

As mentioned above, not all pre-award protests are bad business decisions. For example, a protest alerting the Contracting Officer to ambiguities in the solicitation might be welcomed and not counter-productive. Berenzweig Leonard for years has helped its government contract clients decide whether to protest pre-award and, if so, whether to protest to the agency, the Government Accountability Office, or the U.S. Court of Federal Claims. Although a pre-award protest can be a difficult business decision, it can also be the right one.

Terry O’Connor is the Director of  Government Contracts with Berenzweig Leonard, LLP a DC region business law firm. Terry can be reached at Toconnor@BerenzweigLaw.com.