Decision 3. Deal with the Contracting Officer and Get the Decision in Writing

Berenzweig Leonard is beginning the New Year with a summary of four important government contract legal decisions handed down in 2013. We began by describing in two blog articles the problems a government contractor can get into as a result of “apparent authority”, a one-sided legal concept that does not apply to the government but that does apply to a government contractor and can be costly if not closely monitored.   Today we deal with the two most fundamental, and most-ignored, rules in government contracting: an enforceable government contract decision can only come from the contracting officer and only if that decision is in writing. 

Decision 3. Deal with the Contracting Officer and Get the Decision in Writing

Every year, decisions show that government contractors break the two most critical rules in government contracting: if an agreement is to be binding on the government, it must be in writing and signed by the contracting officer.

No written document. 

A contractor thought it had reached a settlement agreement with the government on a termination for convenience because the government had agreed to a $485,000 settlement in a telephone conference with the contracting officer who advised the contractor that written confirmation of the amount would be forthcoming. When that written confirmation came, however, it said that the last signature on the currently unsigned agreement would have to be the government’s. When the government failed to go through with the settlement, the contractor tried to force the government to honor the oral settlement but lost. FAR Part 49 explicitly requires termination for convenience settlement proposals to be a written contract modification and the parties had not reached that point in their settlement process. Sigma Construction Co. v. United States, CFC No. 12-865, September 30, 2013.

No contracting officer approval. 

Getting to the contracting officer can be a serious problem. Because a contractor typically works closely with an agency’s technical personnel, the agency’s contract administration personnel, in particular the contracting officer, often is only in the distant background. This can be especially true for Department of Defense agencies that have multiple layers of authority: a contracting officer whose identity may change over the course of a multi-year contract,  a contracting officer’s representative (COR) or technical representative (COTR), plus perhaps some other contractors providing support to a project. However, regardless of how distant the contracting officer may seem to a contractor, it’s essential that the contracting officer be kept in the loop, especially when a contract clause demands it and warns a contractor that lack of contracting officer approval may be fatal.

A contractor recently ended up working for the government for free because the contractor had failed to get the contracting officer’s approval to continue working as required by a contract clause.   Because the contractor’s task order would be funded in two to three month increments, the government wanted to carefully monitor how much money had been spent and how much remained in any increment.  Monitoring would be done via a DFARS clause, 252.232-7007, Limitation on Government Obligation (LOGO) that required the contractor to notify the contracting officer in writing at least 90 days before the date the contract work would reach 85 percent of the total amount then allotted. In addition, the clause prohibited the contractor from spending more than the allotted amount, stating expressly that the government “will not be obligated in any event to reimburse the contractor in excess of the amount allotted to the contract.”

Despite these clear requirements, the contractor did not comply with them. In fact, the contractor kept on working after 100 percent of the increment had been spent, believing what other government personnel were telling it: that the money was in the pipeline. The additional money, however, never came through and eventually the government issued a stop work order due to lack of funding. Although the government paid the contractor 100 percent of the funds allotted to the work, it refused to pay the contractor the additional $288,000 the contractor claimed it had spent based on assurances received from the government personnel other than the contracting officer. A board of contract appeals agreed with the government that the contractor was not entitled to payment so the contractor ended up working for free. Dynamics Research Corp., ASBCA No. 57830, March 26, 2013.

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

Decision 2. Corporate Liability for Employee Kickbacks

Berenzweig Leonard is beginning the New Year with a summary of four important government contract legal decisions handed down in 2013. A previous blog article discussed the one-sided legal concept of “apparent authority” that applies to a government contractor but not to the government. Today we discuss another problem presented by “apparent authority”: how the management of a government contractor could be liable for kickbacks company employees receive.

Decision 2. Corporate Liability for Employee Kickbacks

Apparent authority can cost a contractor significant penalties under the Anti-Kickback Act (AKA). Regardless of whether a government contractor knew that its employees were violating the AKA), the company may be civilly liable – for each occurrence, double damages plus $11,000 – for kickbacks its employees received. Alternatively, regardless of what a government contractor knew, the contractor may be liable for the actual amount of the kickback. An appeals court held that the company could be liable for “double damages plus $11,000” for its employees’ violations of the AKA based on “apparent authority” if, later in the litigation, the government proved that the kickback-accepting employees had the apparent authority to implicate their employer. United States ex rel., David Vavra  v. Kellogg Brown and Root, U.S. Court of Appeals for the Fifth Circuit No. 12-40447, July 19, 2013.

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

Decision 1. Do Not Create "Apparent Authority"

With so many government contract legal decisions handed down during any year, it’s helpful at the start of the New Year to summarize those handed down the previous year that impact a government contractor’s bottom line. Over the next four days, we will provide a summary of an important decision from last year, typically one that serves as a reminder of the costly consequences of ignoring the often-obscure rules of government contracting.  

Today, we describe “apparent authority”, a one-sided legal concept that does not apply to the government but does apply to a government contractor and can cost a government contractor dearly.   

Decision 1. Do Not Create "Apparent Authority"

If a contractor is not vigilant, it can be harmed by “apparent authority.”  This dangerous concept is best explained by the Seven Seas Shiphandlers, LLC.  Seven Seas had a contract for work with the U.S. government in Afghanistan.  For convenience, Seven Seas let one of its subcontractor’s employees deliver Seven Seas’ invoices to the government. Also, on several occasions, the government gave him Seven Seas’ payments in cash which he gave to Seven Seas. But in early June 2009, the government gave him over $240,000 as full payment for five Seven Seas contracts and he has not been seen since then. A board concluded that the government could avoid paying Seven Seas for those five contracts if the government could prove that Seven Seas had given the subcontractor’s employee “apparent authority” to receive Seven Seas’ payments. Seven Seas Shiphandlers LLC, ASBCA 57875-79, 26 November 2012.

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

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.