Posted on 7/21/2011 11:02 AM

CLIENT (AND FRIENDS) INFORMATION BULLETIN (CIB)

              

 1.       Recent OCI Opinion
In a case called NetStar-1 Government Consulting, Inc., Judge Allegra of the Court of Federal Claims recently has enjoined an award of a DHS/ICE contract for support services because DHS failed to properly mitigate an organizational conflict of interest. The successful awardee, ALON, Inc., had access as an incumbent contractor to databases of proprietary information which included labor rates for its competitor NetStar-1 Government Consulting, Inc. ALON also had access to the government’s budget plan and other non-public information.
The contracting officer failed to obtain a nondisclosure agreement from ALON, belatedly reacted to the obvious conflict of interest and did nothing more to mitigate the situation than obtain declarations from ALON employees that they had not obtained NetStar-1’s information or shared it with ALON officials. ALON did put up a firewall but it was merely a pledge that the ALON employees would not participate in ALON’s proposal. Said the Court: “This is a far cry from the sorts of detailed and verifiable firewall provisions that have been found adequate to mitigate other organizational conflicts of interest.”
The Court concluded that it was unprepared to accept the DHS remedy of obtaining declarations from the winning bidder that it did not take advantage of the unequal access to information that its employees possessed. Judge Allegra went on to conclude that a preliminary injunction should issue to stop performance of the awarded contract to ALON.
As you know, the final FAR rule on OCI, which expands the flexibility of contracting officers in deciding proper mitigation techniques, is still in the comment stage. Meanwhile, we continue to watch GAO and COFC decisions and opinions in this area.
2.       Commercial Contracts Under FAR Part 12; Terminations; Accelerated Payments
You may have a commercial type FAR Part 12 contract (and not realize it). If you do, you will have a special termination for convenience clause which limits your recovery to the percentage of the contract price representing the performance of work performed plus “charges” directly related to the termination itself. The Armed Services Board of Contract Appeals (ASBCA) has held in a case called Red River that this language precludes normal termination for convenience cost recovery (in particular, eliminating costs incurred in preparing to perform). Fortunately that opinion has been reversed by the appellate court. You can now recover all your costs subject to the test of reasonableness. The new opinion also recognizes the policy reasons why the FAR Part 31 Cost Principles do not apply in this context and the government has no right to audit.
Also, as you probably know, there is an interim DOD rule to accelerate payments to all small businesses. It will be final soon. However, it does not apply to subcontracts, so you should insist that your prime contractor or higher tier subcontractor insert this new requirement in your subcontract. While we are on the subject of subcontracts, remember such clauses as changes, termination for convenience and default and disputes are not mandatory flow down clauses. In fact, mandatory flow down clauses are limited to socio-economic and certain pricing clauses. Let us know if you need assistance in reviewing what should and should not be in your subcontract terms and conditions.
3.       GAO Will Hear Protests on IDIQ Task Orders; Advice on Protests
Recently, the GAO has decided it now does have jurisdiction to decide protests in IDIQ Task Orders. Technatomy Corporation, B-405130 June 14, 2011.
With regard to protests, our practical advice is simple. If there are errors, conflict, omissions or lack of clarity in the solicitation documents and the contracting officer either refuses or fails to correct them, protest or don’t bid (you will assume the risk of the problems if you bid). If you lose a contract award, ask for a debriefing and consider protesting only if it appears a regulation has been violated. The most common successful protests involve cases where the agency failed to follow the announced evaluation factors or treated the offerors unequally. Forget protesting bias and whether the source selection decision was correct (we can explain). However, the source selection decision is always vulnerable to attack if it is not thoroughly rationalized and supported in the record.
4.       Funding; The Anti-Deficiency Act; Investigation
During our recent seminar in Fredericksburg, I told the audience about a recent phone call I had received from a government criminal investigator looking into possible Anti-Deficiency Act violations by government employees. He asked me, off the record, to give him my opinion about situations he had found where the government employees were using current funds to liquidate prior year’s debts. (The funding had expired or was exhausted.) I told him unequivocally that it is illegal for the government to use current funds to liquidate prior debts. The Anti-Deficiency Act clearly prohibits the government from obligating itself in advance of funding. I passed out an article I had written on the subject.
As I told the investigator, as I told the audience, that I likewise was concerned that if a contractor is award of the funding manipulation, the contractor could be criminally complicit (the Anti-Deficiency Act includes criminal penalties). If you are aware of such scheme, you should immediately report it to the proper authorities. In these days of funding delays, austerity and scrutiny, one must be careful not to run afoul of the Anti-Deficiency Act. The spotlight was on the Act during the threatened government shutdown and it is still shining brightly on all contracts.
5.       Interrelationship of Changes and Termination Clauses
At our recent seminar, I explained the interrelationship of the changes and termination clauses in government contracts and subcontracts. (I pointed out these clauses are not mandatory flow down clauses in subcontracts.) Every compensable change is an excusable cause of delay or failure to perform in termination for default cases.
These sometime called constructive changes include the breach of the government’s implied obligation in every contract to: 1) provide clear language in its solicitations and contracts; 2) provide solicitation and contract documents free of errors, conflicts and omissions; 3) provide commercially practicable requirements; 4) cooperate and communicate with the contractor and not interfere in its performance; and 5) disclose information vital to the contractor’s performance. Yes, these obligations are implied in every contract and subcontract.
In the case of termination for default, use the changes clause both as a shield and a sword. Changes are defenses and affirmative avenues for recovery of costs and profit. (Even if the termination for default is upheld, you can still recover costs and profit under the changes clause.) In the case of termination for convenience, changes can eliminate the application of the adjustment for loss formula and provide a means for recovery of costs and profit beyond the original contract price. A changes claim (we explained in detail at our seminar how these claims are written) should always be considered when you are facing termination for default or convenience, especially at the cure notice or show cause stage.
The interrelationship of these clauses is so critical that I sometimes refer to them as one clause, the “termanges” clause. Let us know if you’d like to hear more.
          
6.        Proposed FAR on Past Performance; How to Review Solicitations
Yesterday, (June 28, 2011), DOD, GSA and NASA announced a proposed FAR amendment to provide standardization of past performance evaluation factors and to require all past performance information to be placed in CPARS. There are five evaluation factors and a five scale rating system. Both negative and positive evaluations must be provided the contractor as soon as practicable after completion of the evaluation. Performance issues are to be documented during performance to ensure details are covered. Agencies are required to provide timely assessments and quality data. The entire proposed regulation is attached for your convenience. Comments are due by August 29, 2011.
What should you do when you get your government solicitation? Five things. (There are 10. Stay tuned for the other five.) Parse the statement of work for clarity, practicability, possible restrictions on competition and errors, conflicts or omissions. If you find lack of clarity, impracticability, restrictions on competition or errors conflicts or omissions, immediately notify the contracting officer. Communication is critical. Next, check the evaluation factors (Section M) for compliance with FAR 15.304. In fact, check the solicitation for compliance with FAR 15, Part 2 as well. Third, go to FAR 53 Part 2 and check to make sure the proposed contract terms and conditions (Section I) match the Matrix requirements. The Matrix tells you which clauses are required and which are optional. If optional, you may wish to suggest removal. (Reminder: Neither this Matrix nor any other FAR provision contains a list of mandatory subcontractor flow down clauses.) Next, check the special terms and conditions in Section H. Finally, read very carefully the instructions on how to prepare your proposal. The devil is in the details. Be sure the contracting officer is allowing enough time to respond.
Many disputes can be avoided if you review the solicitation documents carefully. Often an outside set of eyes can catch things you may overlook. If a problem exists which is not hidden and you fail to raise it before submitting your bid, you have assumed the risk. Almost all disputes involve issues of interpretation of the solicitation and contract documents.
7.       OCI Comment Extension; New Interest Rate; More on RFP Review
As predicted, the time for comment on the proposed Organizational Conflicts of Interest FAR regulation has been extended to July 27, 2011. We support this proposal totally. It will help reduce litigation and provide contracting officers needed flexibility.
The new interest rate for prompt payment and claim purposes is 2 ½ percent for the period July 1 through December 31, 2011.
In CIB No. 6, we listed 5 things to do when you get your solicitation. Here’s the rest of the list:
List of Ten Things To Do When You Get Your Solicitation 
1)       Parse the statement of work for clarity, practicability, possible restrictions on competition and errors, conflicts and omissions.
2)      Check the evaluation factors for compliance with FAR 15.304. Check for restrictions on competition.
3)      Check the FAR 53 Part 2 Matrix to be sure the right terms and conditions are included.
4)      Check the special terms and conditions.
5)      Read the instructions on how to prepare your proposal.
6)      Be sure the right type of contract for the work is contemplated.
7)      Hire a proposal writer to help you prepare your proposal.
8)      Plan to be on time and deliver your proposal the way delivery is specified.
9)      Raise any questions you have about the solicitation promptly. If you don’t get a satisfactory answer, consider protesting to GAO.
10)   Most disputes involve solicitation and contract language interpretation issues. Hire a legal expert to help with your solicitation review.
 
 
8.       Protesting IDIQ Task Orders
In our CIB No. 3, we reported that in Technatomy Corporation, GAO decided it had jurisdiction to hear protests of GSA IDIA task order awards. We need to explain further.
Clearly, GAO may now decide civilian agency task order protests without limitation. However, on July 5th, DOD, NASA and GSA published an interim rule amending FAR to extend the limitation on such protests for DOD, NASA and the Coast Guard. So, although one may protest IDIQ task order awards in all other cases, if the task order is under a DOD, NASA or Coast Guard contract, the limitation on protests continues until September 30, 2016. That limitation is as follows: you cannot protest unless the ground for protesting is that the order increases the scope, period or maximum value of the contract under which the order is issued; or the protest is on an order in excess of $10M.
There is likely to be some confusion about this because the interim rule incorrectly recites the current status of civilian agency protests under the Technatomy decision.
9.       Cutting Back on Contracts for Services
Whether it’s Congress (see Section 823 of the FY12 National Defense Authorization Act), or the White House (see the attached Federal News Radio story), it’s beginning to look as if there will be serious cutbacks on contracts for services. Didn’t we learn anything from DOD’s undisciplined approach to insourcing? We applaud buying smarter and even the use of fixed price contracts. But here we go again with the prospect of undisciplined dollar reduction targets and goals. That approach is just flat wrong. We have hope Dan Gordon (OFPP) comes out with some clearer guidance and we intend to talk with him about it.
In the meantime, be wary. These cutbacks may take odd forms. Often reductions in work are constructive terminations for convenience or even breaches of contract. We may even see terminations for default because myopic buyers may opt for trying to avoid responsibility altogether.
In any event, look for a speedier death of time and materials. Get ready for fixed pricing nearly all services.
10.   Safeguarding Unclassified DOD Information
As you may know, DOD is proposing a new DFARS subpart addressing requirements for safeguarding unclassified DOD information.  The proposed rule is in 76 Fed. Reg. 38089, June 29, 2011.  Comments are due August 29, 2011.  No date has been set for implementation.  The new rule would apply across the board to all DOD contractors and subcontractors at any tier.
 
In a nutshell, this rule purports to treat unclassified data (the description is vague) as if it were classified, whether it's sent by the government or developed by a contractor of subcontractor.  The rule also forces contractors and subcontractors to divulge details to DOD of cyber attacks waged against them within 72 hours after they become aware the attacks occurred.
 
This could well be unwieldy and difficult and expensive to implement.  We'll be preparing comments and  summarizing comments from industry associations as they are developed.  We'll be happy to discuss this further with you if you desire.
 
11.   Recent OCI Court of Appeals Decision
 
The Court of Appeals for the Federal Circuit recently has affirmed a Court of Federal Claims opinion which overturned a GAO decision that an organizational conflict of interest required an awarded contract to be terminated.  The COFC had reinstated the contract holding there was no prejudicial OCI. 
 
The Court of Appeals and the COFC criticized GAO for assuming the successful contractor's employees had access to nonpublic information without any evidence of "hard facts".  GAO was not rational because it concluded there was only a possibility of access but with no supporting evidence.  The Court pointed out that the existing regulation in FAR 9.505 says the identification of OCI's, their evaluation and the consideration of mitigation proposals are all fact-specific, requiring considerable discretion.  In this case, the contracting officer engaged in an extensive fact finding mission to determine there was no conflict.
 
So, the Court concluded that although the hard facts need only show a potential, not actual conflict, the mere suspicion of a conflict clearly is not enough.  There must be "hard fact" evidence that the contractor's employees obtained nonpublic information and that there was at least a potential for unfair use in the procurement process.
 
With this carefully written exposition of the law by the Court, I wonder just how important it is to be making all these regulatory changes.  Meanwhile, the regulation stays the same as it was when the Court reached its conclusion.
 
12.   Cuts in Service Contracts
 
The White House wants to cut spending on management support service contracts by 15% ($6B) by the end of FY 2012.  Government spending on all contracts declined by $80B last year and time and materials contracts were cut by $1B.  Meanwhile, the federal workforce already is handicapped by hiring freezes and pay restrictions.  But the requirements for the work do not go away.  Although Dan Gordon denies this is an insourcing move, it is an insourcing move.
 
If your contract ends and the work does not go in house, you obviously have no remedy.  But if 1)  your solicitation is canceled and the work goes in house, 2) your option is not exercised and your work goes in house, 3) your task/delivery order work dries up and the work goes in house or 4) you lose an A-76 competiton, you do have a remedy.  GAO and the Court of Federal Claims will hear cases involving solicitations.  If you have a contract, both the COFC and the ASBCA have jurisdiction to hear your constructive termination or breach of contract complaint.
 
But the really important point is that any remedy must be based on hard facts.  Did your work actually go in house?  You must have the hard facts to pursue the remedy.
 
13.   Debt Ceiling Crisis
 
Well, I was not going to do this because I am so certain the debt ceiling crisis will be averted, but just in case, here is my take on the situation (PSC and others will weigh in next week).
 
The possible government shutdown over failure to pass the FY 2011 appropriation legislation was a little different.  You saw my piece on that.  This time, if checks don't go out and offices are shuttered, we just don't know yet the order in which the administration will take action.  But the government will not have money to spend.  So, guess what?  Here comes the Anti-Deficiency Act again.  The government cannot make or authorize an expenditure or obligation in excess of the amount available.  Moreover, it cannot accept voluntary services unless authorized by law.  Violations could result in administrative or criminal sanctions.  (We can send you our article on the Anti-Deficiency Act.) 
 
My take is that if there is no money to spend, procurement must be shut down and your remedies are the same as I outlined during the shutdown crisis.  (I also can send you that press release.)  President Obama probably will outline the order in which payments will not be made, allowing some functions and payments to go forward initially.  Again, I don't see going into any more analysis because I see the meltdown will be avoided. 
 
But this is another warning to beware of the Anti-Deficiency Act and your obligation not to engage in any conspiracy with the contracting officer to violate it by trying to work around it.  It's also another reminder that this kind of crisis is a defense to a termination for default and gives rise to claims for breach of contract.
 
14.   Debt Ceiling Crisis Revisited
 
My friend Alan Chvotkin believes the Anti-Deficiency Act is not implicated this time (as contrasted to being in the forefront during the possible shutdown over FY 2011 appropriations).  He notes Congress has appropriated money.  However, he does not address the "or funds" available language in the Act and the fact that Congress must have known when it passed appropriations that the debt ceiling limitation loomed.  But I feel obliged to report that Stan Soloway and Alan Chvotkin of PSC believe the government and its contractors are facing a cash flow only problem this time.  This means existing contracts continue, new contracts may be awarded if appropriations cover them but payments may be delayed.  (I'll revisit the ADA.)
The Prompt Payment Act requires the government to pay interest on the late payments.  Most contracting officers don't keep track of contractor payments, so notify the contracting officer if payments are late.  Try to negotiate accelerated payments in the days left in July.
 
To add insult to injury, we also are approaching the end of fiscal year 2011 and it is highly unlikely appropriations will be in place for FY 2012 by October 1st.  So, once we get through this crisis, we run smack up on the edge of the shutdown cliff again.
 
No one knows how President Obama will prioritize payments in August if a deal isn't reached.  (There will be $203B in revenue in August, with obligations to pay out $362B).  Your contracting officer will have no idea when you will be paid.
 
We all are betting these crises will be averted.  The only practical advice we can give now is to try to accelerate payments in July and be ready for possible delay in payments in August.
 
One last word on the Anti-Deficiency Act.  GAO describes the Act as prohibiting making payments or commitments to pay if there is not enough money in the bank to cover them.  What is the bank?  Is it the appropriation?  The Act says "or fund".  Fund connotes cash.  As things sit right now, there will not be enough cash in the bank for the government to pay its bills in August.  The implication?  It would be illegal to make payments or create new obligations.  I continue to advise that a shutdown is a breach of contract with all the attendant remedies for damages. 
 
                15.   Insourcing
 
Two of our group and I met with Dan Gordon today and among other things, we discussed the 15% reduction in services contracting.  I told Dan that if the requirements don't change, this really is an insourcing move.  Dan explained that the plan is for all agencies to examine their requirements to see where there may be unnecessarily redundant and otherwise unnecessary requirements, perhaps due to unintended duplication.  Then, if the carefully reviewed requirements remain, the direction is to negotiate lower prices either through fixed prices, fixed price discounts or labor rate discounts.  Clearly, he is trying to avoid arbitrary cuts and insourcing as he has claimed..  It was a great meeting.  Dan is a stand up guy who, as I have said before, is the best ever Administrator of OFPP and I've lived with all of them since Hugh Witt. 
 
That said, we will visit this subject often with Dan often.  Perhaps the best thing about the meeting was his promise to keep listening to us.  So, I invite, no I urgently request, your comments on this subject.  Give me hard facts.  What is going on in the field?  How are contract managers dealing with the 15% reduction goal in your experience.  I will collect your comments and pass them on to Dan.  And, send me your questions and concerns.  We have an opportunity for a dialogue with a real acquisition leader and we ought to take advantage of it.
 
On a related subject, one of our members reminds us that Dan recently has said that he has told the Federal Acquisition Regulatory Council (which issues new rules) not to issue any more interim rules before any public comments only when the urgent and compelling need is fully justified.  He also has told the Council to extend the periods for comment and post comments on line.  Amen.  Kudos to Dan.
 
 

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