Poorly Drafted Subcontract “Work Share” Clauses Can Be Costly

Work share – how much work a prime contractor is guaranteeing a subcontractor -- is perhaps one of the most important clauses in a subcontract. It is a mistake, therefore, to draft this critical clause without considering the language of the other subcontract clauses. Language in a subcontract’s “Definitions” section can severely limit a subcontractor’s work share.

After winning an Army contract for interpreter and translation services, a prime contractor in a recent case signed subcontracts with various linguist providers. One linguist subcontract established a work share of “15% of the services to be provided under the Prime Contract.”  That subcontractor believed that it was entitled to 15% of all prime contract revenue. However, the prime contractor pointed out that the Definitions clause defined “services” in a more severely limited way -- to mean “all linguist services” to be provided under the Prime Contract. The court concluded that the prime’s interpretation had merit.

As this case shows, it is not wise to focus solely on any one subcontract provision-- here the work share provision. Nor is it wise to routinely rely on “model” or template subcontracts. Time spent thinking more clearly about subcontract clauses, especially critical clauses like work share clauses, is time well spent.  

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

Pay Transparency Final Rule Imposes New Obligations on Federal Contractors

The Office of Federal Contract Compliance Programs (OFCCP) recently published a final rule imposing new obligations on federal contractors when it comes to pay transparency. This new rule, which according to the Administration seeks eliminate pay secrecy that can inhibit employees from exercising their rights to seek redress for discriminatory pay practices, is another in a line of several new labor obligations placed on federal contractors.

The final rule issued by the OFCCP prohibits contractors from discharging or discriminating against any employee or job applicant because the employee or applicant inquired about, discussed, or disclosed the compensation of the employee or applicant or another employee or applicant. An exception exists for employees that have access to compensation as part of their essential job functions. The rule does not require contractors and employees to disclose such information upon request, but rather prohibits adverse action against those who choose to do so.

The pay transparency final rule also imposes affirmative obligations on federal contractors and subcontractors. Specifically, the final rule requires that the equal opportunity clause included in covered federal contracts and subcontracts state that contractors and subcontractors are prohibited from discharging or discriminating against employees or applicants who inquire about, discuss, or disclose their compensation or the compensation of other employees or applicants. The final rule also requires that federal contractors incorporate a prescribed nondiscrimination provision into their existing employee manuals or handbooks and disseminate the nondiscrimination provision to employees and job applicants.

Federal contractors will need to take affirmative steps in the coming months to comply with this new rule, which goes into effect on January 11, 2016. They must make sure that their subcontracts include the amended equal opportunity clause that includes the prohibition against retaliation or discrimination for discussing employee compensation. Federal contractors must review and amend their policies and practices to avoid any implication that they prohibit or tend to prohibit employees or applicants from discussing pay, as well as update their employee manuals and handbooks to include the prescribed nondiscrimination provision. Federal contractors must also disseminate through electronic and/or physical postings the prescribed provision to their employees and job applicants, and post the updated “EEO is the Law” poster if they enter into or modify federal contracts or subcontracts after the rule goes into effect. Because employees with access to compensation information as part of their essential job functions are excepted from this rule, federal contractors should review job functions and descriptions to determine whether a given position has access to pay information as an essential job function, and amend job descriptions as necessary to reflect that essential function.

Federal contractors should be aware that this new rule may lead to tension in the workplace now that previously confidential compensation information may be disclosed. Not only must employers take the steps necessary to be in compliance with this rule, but they should begin reflecting from an HR perspective how they will deal with the potential impact on employee morale once this rule goes into effect.

Stephanie Wilson is an attorney Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com.

New SBA Rule Promotes Growth and Development of Women-Owned Small Businesses

Women-owned small businesses are growing three times faster than their counterparts, yet they currently receive less than 5% of federal contracting dollars. The U.S. Small Business Administration (SBA) recently issued a final rule that is “a major step forward in leveling the playing field and supporting our country’s dynamic female entrepreneurs,” said SBA Administrator Maria Contreras-Sweet. This new rule encourages more women entrepreneurs to grow and start new businesses and create more jobs.

The SBA’s new rule, effective October 14, 2015, gives contracting officials the authority to award sole-source contracts to women-owned businesses without first placing the work out for bid. The rule seeks to provide greater opportunities for women-owned small businesses in the federal contracting marketplace, on par with the opportunities afforded to other types of small businesses. Contracting officials are currently able to award sole-source contracts to minority or service-disabled veteran-owned small businesses.

The rule sets out certain requirements that must be met before a sole source contract is awarded. First, a contract can only award up to $4 million (or $6.5 million for manufacturing contracts). Second, the selected woman-owned small business must be deemed a responsible contractor. Third, the selected woman-owned small business must be the only women-owned small business that can perform the work. Fourth, the award must be made at a fair and reasonable price.

The SBA is hopeful that this new rule will help the federal government achieve its goal of awarding 5% of its contract dollars to women-owned businesses. Women-owned businesses should be aware of this rule, which gives them a new competitive advantage in the federal marketplace and provides new opportunities to grow their business and revenues.

Stephanie Wilson is an attorney Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com. Sara Almousa is an intern with Berenzweig Leonard, LLP.

AIG Bailout – Government Was Wrong But Shareholders Get No Damages

The federal government’s 2008 loan of $85 billion bailing out insurance giant AIG during the financial crisis was illegal but literally “harmless,” according to a recent court decision. Although the government had the right to loan AIG money to keep AIG from certain bankruptcy, the government illegally demanded that AIG make the government a part-owner by acquiring 80% of AIG’s stock.  The court, however, awarded the AIG shareholders no damages, because it concluded that the shareholders had lost no money as a result of the government’s unlawful actions. The court found that the government’s loan actually helped the AIG shareholders, because it kept their stock from being completely worthless in bankruptcy.  

Illegal government loan terms. The terms of the government’s AIG loan went beyond what the law allowed. Although the government – as AIG’s banker of last resort – could demand that AIG pay interest on the government loan and demand collateral, the law did not allow the government to become a part-owner of AIG. It would be like a home mortgage loan in which the bank loans the homeowner money, but demands that the bank also become part-owner of the home. Worse yet, in this case, the government would remain a part-owner of AIG even after AIG had completely paid off the government loan.

The government’s loan terms were deemed unfair as well as illegal: “Operating as a monopolistic lender of last resort, the government imposed a 12 percent interest rate on AIG, much higher than the 3.25 to 3.5 percent interest rates offered to other troubled financial institutions such as Citibank and Morgan Stanley.” Also uniquely imposed on AIG was government voting control: “with the exception of AIG, the Government has never demanded equity ownership from a borrower in the 75–year history” of the law the government had based the loan on.

The issue in the lawsuit, however, was not “whether this treatment was inequitable or unfair, but whether the Government's actions created a legal right of recovery for AIG's shareholders.” The court agreed with the AIG shareholders on this issue, concluding that the government had acted illegally under the Federal Reserve Act.

No shareholder damages. But after concluding that AIG’s shareholders had proved that the Government was wrong, the court then reluctantly concluded that, according to legal precedent, the shareholders had not suffered any economic loss and were, therefore, not entitled to damages.
The issue here was whether their damages were to be measured by what the government gained -- $22.7 billion it received from ultimately selling the AIG stock – or by what the AIG shareholders lost – the value of their AIG stock, which would have been zero when, without the government loan, AIG would have gone into bankruptcy.  

According to the court, “common sense suggested” that the damages were the $22.7 billion the government had received “from selling the AIG common stock it illegally exacted from the shareholders for virtually nothing.” Legal precedent, however, focused on the AIG shareholders’ loss on the theory that, if the government has deprived a victim of something, compensation should be based on what the victim was actually deprived of.

The court followed legal precedent, concluding that the AIG shareholders had suffered no loss from the government’s illegal extraction of almost 80% of AIG’s stock. As a practical matter, the shareholders were undoubtedly better off with 20% of a company avoiding bankruptcy than they would be with 100% of a company forced into bankruptcy.

This necessary conclusion based on existing precedent, however, was not one the court welcomed. It sent the message that “Any time the Government saves a private enterprise from bankruptcy through an emergency loan, as here, it can essentially impose whatever terms it wishes without fear of reprisal.”

Whether the court’s concerns are valid will depend on the way appellate courts resolve the appeals that are sure to follow. This decision is not expected to be the final word on the AIG saga.

Terrence M. O'Connor is the Director of Government Contracts at Berenzweig Leonard LLP. He can be reached at TOConnor@BerenzweigLaw.com. 

Have Contingency Plans in Place for Your Proposal Submissions

Although a contractor in one recent case had a contingency plan that covered a variety of unforeseen events that would delay the delivery of its proposal to the Government, its plan did not account for the possibility that local flights could be grounded by severe weather. The result was that the contractor’s proposal was not submitted on time, and the Government rejected the proposal as untimely.

Global Military Marketing, Inc. (“Global”) protested the Defense Commissary Agency’s (“DeCA”) rejection of its offer in response to a solicitation for the supply of fresh pork products. The solicitation made proposals due at the Government facility in Fort Lee, Virginia, by 3:00 p.m. on April 30, 2014. Although Global made two attempts to submit its proposal on time, both attempts failed.

Global first provided its proposal to Federal Express in Pensacola, Florida on April 29, 2014, to be delivered before the 3:00 p.m. deadline the next day. However, on April 29th, there was severe rainfall, and due to the extreme weather, FedEx rerouted Global’s proposal package via ground to Mobile, Alabama, where it was to be put on a courier plane. Mobile also was under a flood emergency, and the FAA restricted aircraft ground operations in Mobile due to the extreme weather. As a result, FedEx did not deliver Global’s proposal until May 1, 2014 – the day after the deadline.

Global’s normal contingency plan was to fly an employee by commercial airlines to deliver the proposal, but the weather prevented this. Due to flooded roads, Global’s employees were not able to reach their offices in Pensacola until two hours before the proposal deadline, at which time Global arranged for a Kinko’s near Fort Lee print, prepare, and deliver the proposal to the Agency. Kinko’s delivered the proposal just forty minutes after the 3:00 p.m. deadline.

The solicitation included FAR 52.212-1, which provides that untimely proposals would not be considered. Global cited FAR 52.212-1(f)(4), which provides a limited exception to this “late is late” rule, where “an emergency or unanticipated event interrupts normal Government processes so that offers cannot be received at the Government office designated for receipt of offers by the exact time specified in the solicitation[.]”
Global argued that the delay in the delivery of its proposals “was caused by the FAA’s restriction of aircraft ground operations at Mobile and Pensacola due to the flood emergency in the extreme weather.” According to Global, the delay was due to an interruption of normal Government processes – i.e., the FAA restricted aircraft ground operations at Mobile and Pensacola – which was naturally not Global’s fault.

The Court of Federal Claims rejected this argument, because the exception applies only to the Government operations at the Government offices designated for receipt of offers, not for any Government operations at the bidder’s location. Quoting the Federal Circuit, the Court of Federal Claims noted that “the FAR provision focuses upon whether unforeseen events prevent the Government from receiving proposals at the site designated, not on whether unforeseen events prevent the offeror from transmitting the proposal.”

Because Fort Lee, Virginia was operating under normal Government processes, FAR 52.212-1(f)(4) did not apply, and the court agreed with the Government that Global had not submitted a timely proposal. This case provides a hard lesson that adequate contingency plans for delivery of a proposal should always be kept in mind.

Global Military Marketing, Inc. v. United States, No. 140622C, Sept. 29, 2014 available at https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2014cv0622-21-0.

Stephanie Wilson is an attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com.

New Executive Order Will Require Contractors to Report Labor Law Violations

On July 31, 2014, President Obama signed the “Fair Pay and Safe Workplaces Executive Order.” The primary purpose of this Executive Order ‒ which is expected to be implemented beginning in 2016 ‒ is to encourage federal contractors receiving taxpayer dollars to maintain lawful working conditions for their employees. It imposes significant new requirements for federal contractors to ensure their compliance with fourteen federal statutes, executive orders, and equivalent state laws, including the FLSA, FMLA, ADA, Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Davis Bacon and Service Contract Acts, and recent Executive Order 13658 – “Establishing a Minimum Wage for Contractors.”

MANDEL NGAN/AFP/Getty Images

The Executive Order requires contractors bidding on procurement contracts valued at $500,000 or more to disclose “whether there has been any administrative merits determination, arbitral award or decision, or civil judgment” issued against the contractor during the preceding three years for violations of the federal and state labor laws covered under the Executive Order. It also requires federal agencies to appoint a “Labor Compliance Advisor” to help contracting officers review contractors’ disclosures during the procurement process and contract performance, and requires contracting officers to consider this information in determining whether an offeror has a satisfactory record of compliance, integrity, and business ethics.

The Executive Order directs the FAR Council to propose to amend the FAR to identify considerations for determining whether serious, repeated, willful, or pervasive labor law violations demonstrate a lack of integrity or business ethics. It also directs the Secretary of Labor to develop guidance to assist agencies in determining whether adverse rulings were issued for serious, repeated, willful, or pervasive violations.

It is too soon to tell how the FAR Council, Department of Labor, and federal agencies will implement this Executive Order, and what the Order’s ultimate effect will be. Compliance with labor laws and maintenance of lawful working conditions should always be an important goal of all employers, including federal government contractors receiving taxpayer dollars. The Executive Order’s goals ‒ to protect employees and crack down on unethical and irresponsible contractors ‒ are admirable. However, the Executive Order introduces additional complexity to an already complicated process that, if not implemented correctly, could result in delays in the contracting process, place additional burdens on contracting officers, and potentially insert a subjective element into the process that opens the door to abuse by federal agency officials.

The White House has stated that contractors will be able to participate in “listening sessions” to provide input on how to ensure the policies and practices associated with the Executive Order will be fair and effective, and that the draft regulations and guidance will be subject to public comment before being finalized. Contractors should take advantage of these opportunities to make their concerns known to the government when the time comes.

Stephanie Wilson is an attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com. 

Do Not Read All FAR Clauses Literally

A literal reading of some FAR clauses can cost you money. One such clause is the Changes clause (FAR 52.243-4) requiring the contractor to give the contracting officer written notice of suspected government changes within 30 days. Although a contracting officer or COTR might want to demand strict compliance with the clause, all government contractors need to know that courts do not require strict compliance. A contractor may be entitled to an equitable adjustment for a contract change even though the contractor notifies a government employee other than the contracting officer of a suspected change long after 30 days have passed and even if the notice is oral. A recent court decision shows how broadly courts construe the Changes clause notice provision.

A construction contractor claimed that it was entitled to an equitable adjustment for design changes that the government imposed in the comments it made to the contractor’s design plans. But the first time the contractor raised the issue was in court pleadings three years after the government had made its design comments and long after the building was built. The contractor should have given the contracting officer notice of its disagreement immediately after receiving the government comments.  

Although the court concluded that this contractor’s notice was too late, its decision discusses precedents that established the defining issue in “notice” disputes. It is not whether 30 days have passed, nor whether the notice was oral, or even whether the contracting officer was the government employee who got notice. The issue is what harm has the government suffered by a contractor’s failure to give 30 days written notice? In this recent case, the harm was that timely notice would have given the parties a chance to resolve the issue years ago, making litigation unnecessary.

But in many situations, the lack of 30 days written notice to the contracting officer may not harm the government. For example, the contractor had complained orally to the COTR immediately after being told to do extra work.

Of course, the best policy is to rigidly follow the rules in the clause. However, a government contractor needs to know that all FAR clauses should not be taken literally. Nor should a government contractor be deterred from filing a request for an equitable adjustment by a contracting officer’s rigid interpretation of a notice provision.

If you believe the government has made costly change to your contract without modifying it to add money, let the Government Contracts Team at Berenzweig Leonard help you make sure you give the government proper notice. A small investment in legal advice can have a large return for you.


Terrence M. O'Connor is the Director of Government Contracts at Berenzweig Leonard LLP. He can be reached at TOConnor@BerenzweigLaw.com.