Many politically charged issues are likely to steal the headlines during the confirmation hearings for President Trump’s nominee for the U.S. Supreme Court, D.C. Circuit Court of Appeals Judge Brett Kavanaugh.  However, one issue unlikely to make headlines is the impact that Judge Kavanaugh’s confirmation may have on the doctrine that gives “controlling weight” to the way government agencies interpret their own regulations — known as the Auer Deference doctrine.

Given the composition of the Supreme Court, recent Judicial attempts to re-examine the doctrine, and Judge Kavanaugh’s previous statements, Judge Kavanaugh’s confirmation signals the probability of the Supreme Court’s eventual overturning of the Auer Doctrine  — which would be good news for government contractors.

What is Auer Deference?

Auer deference (also referred to as Seminole Rock deference) is a principle of administrative law that requires courts to give “controlling weight” to the way government agencies interpret their own regulations, even where the agency’s interpretation is not “the best” reading of the text in question. Developed from the U.S. Supreme Court’s holdings in Auer v. Robbins, 519 U. S. 452 (1997) and Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945), the doctrine mandates that courts credit the agency’s interpretation as controlling as long as it is not “plainly erroneous or inconsistent with the regulation.”

This obviously puts a thumb on the scale for agencies in the context of contract disputes or bid protests tied to certain regulatory interpretations. It can be particularly harmful to contractors when the agency has altered its interpretation during the performance or procurement of a contract, or worse, during the course of litigation. Unlike agencies whose procurements rely on interpretation of the FAR, agencies that draft and enforce their own regulations (such as the Small Business Administration) are sometimes empowered under Aeur to alter their interpretation to suit the agencies’ needs on a case-to-case basis. Continue Reading Why Judge Kavanaugh’s Confirmation Could be Good News for Government Contractors

The federal regulations and procurement framework for design-build project delivery concerning direct government procurements, and indirect federal projects where the government provides funding but does not procure the construction, has been in place for the past twenty-two years (The Clinger-Cohen Act passed in 1996, part of Federal Acquisition Regulation at subpart 36.300 et seq.)  Design-build delivery can provide a streamlined project to federal agencies at many times better value than a design-bid-build delivery

In the next three years, design-build projects are expected to to be just about 20% of all of the total U.S. Construction Put in Place ($1.2 trillion of the $5.4 trillion estimated total; See Fails Management Institute June 2018 Market Study ) Highway and road projects are expected to make-up fourteen percent of the design-build delivered projects over the same time period (Ibid.)  As the twenty-fifth anniversary of design-build procurement at the federal level approaches, we can take a few minutes to look at a couple of the benefits and pitfalls for contractors of design-build projects.

Benefit

Generally speaking, design-build projects take less time to complete than traditional design-bid-build projects.  This benefit is realized by eliminating a second procurement process, reducing the errors and omissions in the drawings, and allowing for concurrent design and construction.

Pitfall

Despite Federal Acquisition Regulation subparts 36.303-1, Phase One, and 36.303-2, Phase Two setting for the criteria for evaluating proposals in phases, the evaluation of the criteria is necessarily subjective when the government is awarding a negotiated contract on best value.  The constraints on the wide discretion of the awarding body are that the decision cannot be arbitrary or capricious, contrary to established procedures, or unsupported by substantial evidence (5 U.S.C. § 706(2)) Meeting this burden during the protest process is a more challenging burden of proof.

Benefit

Because the design team and the contractor are under the same umbrella, often times working together during the programming phase of a project, design-build projects generally have less litigation.  A significant reason is that one of the main points of tension, design vs. contractor, is removed in a design-build project.

 Pitfall

Making sure that the design-build team, and the project, is protected by the appropriate insurance coverage can be a challenge for the design-builder.  In our experience, most of the design-builders are traditionally general contractors that contract with a design or engineering firm to be part of the design-build team.  For example, this creates a potentially problematic situation if a project specific insurance policy will have to cover general and professional liability, which is a non-standard type of coverage requiring savvy brokers, builders, designers, and underwriters.  Care must also be taken when negotiating the design-build contract with the awarding agency to include language and insurance requirements appropriate for both the professional liability side (“design”) and the general liability side (“build”).

Despite presenting unique challenges, design-build delivery can provide a streamlined project to federal agencies at many times better value than a design-bid-build delivery.

Contractors frequently claim that owners have breached the implied duty of good faith and fair dealing, largely as an alternative to more specific claims for constructive change or breach. These good faith and fair dealing claims are difficult to recover on, largely because courts and the boards have required a breach of the implied duty to be tied to an express contract term. However, recently in Relyant, LLC, the Armed Services Board of Contract Appeals (the “Board”) awarded a contractor damages based upon its finding that the government breached the duty of good faith and fair dealing by failing to respond to the contractor’s request to amend its scope of work in a timely manner—notwithstanding the fact that the contract did not contain an express term prescribing a time frame for such responses. The Board found that the government had breached the duty of good faith and fair dealing by “allowing Relyant to, figuratively, ‘twist in the wind’ from late April to early August 2009 as the government considered the change to the [scope of work].”

Implied Duty of Good Faith and Fair Dealing

As explained by the Federal Circuit, the implied duty of good faith and fair dealing exists because “it is rarely possible to anticipate in contract language every possible action or omission by a party that undermines the bargain.” The general rule is that the implied duty of good faith and fair dealing “prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprive the other party of the contemplated value.” The “good faith” standard is often judged from the perspective of a contractor’s reasonable expectations. The Restatement (Second) of Contracts § 205 provides that “good faith” excludes conduct that “violate[s] community standards of decency, fairness, or reasonableness,” and cites judicial decisions which have held that “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance” may all violate the implied duty. A party that violates the implied duty may be liable for all damages incurred as a result of the breach.

Unreasonable Government Delay in Responding to Contractor Can Implicate Implied Duty of Good Faith and Fair Dealing

Relyant involved a contract to supply pre-fabricated relocatable buildings (“RLBs”) to two sites in Afghanistan. The dispute focused on the RLBs interior finishes: the Scope of Work (“SOW”) accompanying the solicitation required a gypsum drywall interior over three-inch thick fiberglass insulation. Relyant proposed a sandwich panel using a polystyrene insulation. The government awarded the contract to Relyant but the contract did not incorporate a revision to the SOW for Relyant’s proposed sandwich panel.

The first order issued under the contract required Relyant to deliver six RLBs to Forward Operating Base Sharana, Afghanistan, the first being required for First Article Testing (“FAT”) within 180 days. Subsequent delivery orders required Relyant to deliver additional RLBs to Bagram Airfield, Afghanistan. Due to tight scheduling concerns, Relyant could not wait for its first delivery to Sharana to pass FAT testing before it began manufacturing the remainder of the RLBs for the Bagram deliveries. The government accepted the RLB’s delivered to Sharana (with knowledge of the noncompliant sandwich panels), but then rejected the sandwich panels during FAT for the deliveries to Bagram.

As Relyant had already delivered a number of the RLBs to Bagram, it requested a modification to the SOW first in November 2008 and then again in April 2009, both times requesting that the government permit its “as-bid” sandwich panel construction. The government, despite knowing that Relyant was incurring costs while waiting for its response, did not finally reject the proposed modification until August 2009. While the contract did not specify how long the government could review a request for a modification to the scope of work, the government was actually able to review the request and obtain the contracting officer’s concurrence in less than a week—which the Board found would have been a reasonable time for a response.

The Board ultimately held that the implied duty imposes “certain obligations with regard to timeliness of government responses to Relyant’s request to amend the SOW, for which Relyant is entitled to certain relief.” The Board held that the Government had breached the duty of good faith and fair dealing by failing to respond to Relyant’s request in a timely manner.  The Board clarified that “the proper inquiry regarding the duty often boils down to questions of “reasonableness” of the government’s actions. In Relyant, the government’s delay was unreasonable when the request could be evaluated and responded to within a week, but the government took over three months to respond despite being aware that the contractor was incurring extra costs as a result of the delay.

Take Away

The decision serves as a reminder to contractors that the duty of good faith and fair dealing is a valuable claim when a contractor is damaged as a direct result of the government’s failure to respond in a reasonable amount of time to a contractor’s request during contract performance. As the government’s knowledge that the contractor was incurring additional costs was a key factor in allowing Relyant to recover its damages, contractors should remember to notify the government in writing of the type and estimate of any damages that it is incurring as a result of the government’s delayed decision-making.

 

Image courtesy of Flickr (licensed) by Dave Bleasdale.  

The continued initiative from Alaska Senators has recently brought about a reinterpretation of the requirements imposed by the Small Business Administration’s “8(a)” program – aimed at helping companies owned by minorities and disadvantaged groups compete in federal contracting.  In 1986, Congress expanded the “8(a)” program to include Alaska Native Corporations (ANCs) and Indian tribes.  After the 1986 8(a) expansion, ANCs received many sole source federal defense contracts.  ANCs thrived under this procurement model, but their success in federal contracting was scrutinized by some in Washington D.C.

The 2010 National Defense Authorization Act (NDAA) changed the law relating to 8(a) procurement and specifically to sole source procurements then valued at over $20 million.  For defense contracts, the 2010 law required, among other things, the contracting officer obtain approval from the respective secretaries of the military branches.  DoD entities interpreted the language to mean that, rather than securing approval from a designee, they had to obtain approval from the actual branch secretary.  The burden associated with this perceived requirement proved so prohibitive that contracting officers largely abandoned their sole source authority for ANCs for any procurements affected by the new law.  The change to sole source contracting (which became effective through the Federal Acquisition Regulation in March 2011) had a significant adverse impact on ANCs, drastically reducing the use of this once abundant procurement model.  Indeed, by some accounts, the change has decreased awards of federal defense contracts to ANCs by over 80%, thus significantly impacting what was once a powerful economic growth engine for ANCs and village corporations.

Recently, however, the Army, Navy and Air Force through a series of internal memoranda have adopted a more sensible reading of the statue, agreeing to reinterpret the approval requirements imposed by the 2010 NDAA law.  Instead of requiring the actual signature of the secretary of these branches, the Army, Navy and Air Force now agree that contracting officers can once again award sole source contracts to ANCs by obtaining approval from a proper designee of the secretary of the agency, without getting the actual signature of the secretary themselves, a prohibitively burdensome requirement.  This more sensible interpretation may reopen the door to federal contracting for ANCs and again provide an important economic boon to the Alaska economy.  While the door has now been reopened, it is left to be seen whether the sole source procurements for ANCs will return to its pre-2011 activity.  Stay tuned.

Six months into Trump’s presidency, we wrote about how Trump’s $1 trillion infrastructure plan was likely to include more federal deregulation, including possible repeal or suspension of the Davis Bacon Act (DBA).  Two months after that article, comments from the House Transportation and Infrastructure Committee suggested Trump had changed his tune and would retain the DBA protections perhaps in part to gain support from typically pro-DBA democrats for the administration’s infrastructure plan.

While media sources have reported that the administration’s infrastructure plan all but “died” several months ago, Trump’s Supreme Court nominee somewhat refocuses on the DBA and other government contract industry related legislation.  And while nominee Brett Kavanaugh’s confirmation won’t mean repeal of the DBA, his confirmation could mean the reach and application of the Act (and other related legislation) to federally funded projects could be even further limited.

Such potential limitations are foreshadowed in a decision Kavanaugh issued during his time on the D.C. Circuit in the case of District of Columbia v. Dep’t of Labor, 819 F.3d 444 (D.C. Cir. 2016).  There, the contract at issue was one for the lease of certain property that would be used to construct a privately-funded mixed-use development, known as CityCenterDC.  The Department of Labor made the determination that CityCenterDC was a “public work” within the meaning of the DBA, and thus the contract – between the property lessor and the private developer – was subject to the prevailing wage requirements of the Act.  Finding that the lease agreement was not one “for construction,” and was separate and apart from the construction agreements that would follow between the developers and general contractors, Kavanaugh found the DBA was not intended to have such far-reaching application:

The text of the Act is straightforward.  As relevant here, the Act covers contracts “for construction” to which the District Columbia is a party. . . Contrary to the U.S. Department of Labor’s suggestion, moreover, neither the lease agreements nor the development agreements between D.C. and the developers are themselves contracts for construction to which D.C. is a party. . .

The Department’s interpretation of the statutory term “contract…for construction” would significantly enlarge the scope of the Davis-Bacon Act.  The Department’s interpretation would embrace any lease, land-sale, or development contract between the Federal Government or D.C. and another party, so long as to the agreements required the counterparty in turn to undertake more than an incidental amount of construction.  The terms of the Davis-Bacon Act are not so malleable.  A contract for construction is a contract for construction.  And a lease, land-sale, or development agreement that contemplates one of the parties entering into a future contract for construction with a third party construction contractor is not itself a contract for construction.

In applying his hallmark strict constructionist views, Kavanaugh’s decision in District of Columbia could be a sign of what’s to come – i.e., more limitations on what some in the industry consider bureaucratic overreach.  While it is rare that a decision directly impacting the government contracting industry reaches the United States’ highest court, Kavanaugh’s judicial “style” could mean legislation such as the DBA and other, ancillary legislation becomes more limited in its reach.

With every new administration, there is both great uncertainty and opportunity in federal government contracting. To help you navigate the rough seas of doing business with the federal government in the Trump administration, Oles Morrison is partnering with the AGC of Alaska and Alaska PTAC to host a half-day seminar/webinar on August 15, 2018, with nationally recognized practitioners who will cover topics relevant to government contractors large and small.

Session topics include:

  • A Primer on Subcontract Disputes and Pass-Through Claims on Federal Projects
    Howard Roth, Of Counsel, Oles Morrison Rinker & Baker LLP
  • Keys to Succeeding in SBA’s Mentor-Protégé Joint Venture Programs
    Adam Lasky, Partner, Oles Morrison Rinker & Baker LLP
  • Pricing Change Orders, REAs and Claims
    Aaron Raddock, CPA, CFE, CFCM, Managing Director, Industry Specialty Services – Government Contracts, BDO USA LLP
  • Complying with the Mandatory and Voluntary Disclosure Rules in Federal Contracting
    David Yang, Partner, Oles Morrison Rinker & Baker LLP

Three Ways to Attend:

  • In-person, AGC Anchorage (8005 Schoon Street, Anchorage, AK 99518)
  • In-person live stream, AGC Fairbanks (3750 Bonita Street, Fairbanks, AK 99701)
  • On-line live stream

When:

  • August 15, 2018
  • 8:00 a.m. – 12:00 p.m. Alaska Daylight Time (9:00 a.m. – 1:00 p.m. PDT / 12:00 p.m. – 4:00 p.m. EDT)

Click HERE for the program flyer and complete details.

Click HERE to Register.

Questions? Contact Kimberley Gray at 907.561.5354 or kimberley@agcak.org.

It is no secret that the False Claims Act (“FCA”) is the government’s primary anti-fraud tool and that recoveries under the statute have hit record highs in recent years.  For example, since 1987, FCA recoveries have totaled $56 billion with no single year since 2010 falling below $3 billion.  Moreover, most of these cases have been brought by qui tam relators and where the Department of Justice (“DOJ”) did not intervene.  Accordingly, DOJ’s remarks during the American Bar Association’s June 14, 2018, 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement, were certainly welcome for industry.

During this session, top DOJ leadership addressed a number of “reform” projects of significant interest.  First, DOJ emphasized that the greater the degree of cooperation that DOJ receives from a defendant or potential defendant the more leniency the company may receive when it comes time for settlement.  In this regard, the FCA allows for penalties ranging between $11,181 and $22,363 per false claim and treble damages, which allows damages to rack up quickly.  DOJ confirmed that companies which fully cooperate with the Department can expect to receive “tremendous enforcement discretion with respect to structuring settlements while also providing a discount.”  DOJ stated that cooperation can come in many forms, but that the government is usually looking for voluntary disclosures (which DOJ considers to be most valuable), sharing information during an internal investigation, making individuals available for interviews, and identifying culpable individuals (in accordance with the Department’s focus in the Yates Memorandum on individual, and not just on corporate, responsibility).

DOJ also acknowledged that even the best compliance systems fail from time-to-time and assured that “when fraud occurs, the DOJ will give the greatest consideration” to companies that live by a robust compliance culture that is deeply engrained in the organization.  These comments reinforce the fact that having a compliance program is only the first step because it is even more critical that companies continuously update, monitor and stress those principles to its stakeholders, while still making compliance both practical and effective to apply from a business standpoint.

DOJ did not specify the types of leniency that companies can expect, but if lessons can be taken from parallel criminal fraud cases, the incentives for cooperation may result in a below double damages multiplier (or perhaps even no multiplier), a reduction of penalties from even the low end of the range, and no requirement for a corporate integrity agreement and monitor.

Finally, DOJ spoke about two other pressing issues—DOJ’s authority to dismiss frivolous qui tam cases and cases which rely on informal agency guidance, as opposed to an actual regulation or statute, to allege a legal violation in support of a false claim.  As for its dismissal authority, DOJ acknowledged that its policy of dismissing frivolous cases, as set forth in the Granston Memorandum, remains an important objective for DOJ but acknowledged that such dismissals by DOJ, to date, have been rare.  That said, DOJ is “now instruct[ing] [its] attorneys” to give a hard look at cases where DOJ has declined to intervene to determine whether dismissal is warranted.  While results remain to be seen, this and similar recent statements by senior DOJ leadership signal that the Department is trending down this appropriate path.

And, with regard to reliance (often by qui tam relators) on internal and informal agency policies or practices to fashion the basis for a legal violation, DOJ’s remarks, which are consistent with statements in the Brand Memorandum, are especially welcomed because those informal policies lack the force and effect of law and should not serve as the basis for alleging an actual legal violation that could cost a company millions of dollars, especially when such policies and practices are both subjective and inconsistent in their application.

In sum, DOJ continues to send a positive message that companies which act as good corporate citizens by conducting their businesses ethically and in good faith, pursuant to established compliance systems, and which promptly disclose any potential issues to the government will enjoy the benefits of those practices, and that meritless cases should not be used to extract millions of dollars from responsible contractors.

The National Defense Authorization Act for Fiscal Year 2018 amended the Truth in Negotiations Act’s cost or pricing data report threshold, effective July 1, 2018, for all Department of Defense (DoD) procurement contracts, if no exceptions apply.  The TINA amendment raises the threshold for submitting certified cost or pricing data (i.e., that the data are current, accurate and complete) from negotiated contracts valued at $750,000 or more to negotiated contracts valued at $2 million or more. The amendment applies to both prime contractors and subcontractors for a prime contract or subcontract entered into or modified after June 30, 2018. The threshold for submitting certified cost or pricing data threshold on preexisting contracts remains at the $750,000 level.

Congress’ purpose in raising the TINA threshold is to incentivize more and smaller companies to participate in DoD programs by alleviating some of the burden of complying with the often complex and difficult job of preparing and submitting certified cost or pricing data.  Some observers have viewed these considerations as a potential chilling factor in a contractor’s decision to enter negotiated procurements where certified cost or pricing data may be required. The DoD budget for this year is already immense and its budget proposal for 2019 is also significantly more robust than in prior years.  With DoD now doing more than ever, a pattern which we can expect to continue for the foreseeable future, the government will need more contractors to support its missions around the world.

However, with opportunity comes risk and it is no different here.  Compliance with certified cost or pricing data requirements can be difficult for contractors, given the burden of not only preparing them initially but also monitoring the data to ensure that they remain current, accurate and complete over time if there are modifications or other changes during contract performance that are valued at or more than $2 million that may also require the submission of certified cost or pricing data.  This burden also translates into risk for contractors because an erroneous certification of cost or pricing data can result in government deductions/payment withholding and breach of contract claims or even raise the specter of administrative sanctions and False Claims Act liability.  These issues can present a potential minefield for contractors that have not traditionally worked on negotiated procurements, which require the submission of certified cost or pricing data and may, therefore, warrant some diligence to scope out any potential issues before deciding to submit such bids.  It is also noteworthy that although the TINA threshold has been raised to $2 million, many applicable contracts will exceed that amount and even a contract that initially was below $2 million may, over time, be increased (through modifications or other means) to or above $2 million, thus potentially triggering certified cost or pricing data requirements that did not originally exist.  Given these issues, contractors new to certified cost or pricing data requirements should carefully weigh these considerations before engaging in such procurements.

Liquidated damages are useful tools for parties to allocate risk at the beginning of a contract.  A liquidated damages clause allocates the risk of a contract being completed late.  For a liquidated damages clause to apply, the damages must be approximately the damages likely to be incurred by the assessing party and the damages must be reasonably uncertain at the time of contracting.  While a liquidated damages clause could be used on any type of contract with a deliverable, it is most commonly seen in construction contracts.  In that case, for every day the contractor is late in finishing the project, the owner can assess liquidated damages rather than calculating the actual damages on a day-by-day basis.

While the concept seems straightforward (1 day late = $X in damages), assessing liquidated damages can escalate in complexity.  In the recent case of American International Contractors, assessing liquidated damages required not one but three project aspects that would impact the project’s completion date.  ASBCA Nos. 60948, 61166.  In this case, the Army Corps of Engineers contracted with American International Contractors, Inc. (“AICI”) to contract for the “United Kingdom Maritime Component Command (UKMCC) Development, Mina Salman Port, NSA II, Kingdom of Bahrain.”  The project provided for the construction of two facilities among other items.  The two facilities had to be completed by Mar 7, 2015 and April 6, 2015.  Both facilities were completed late with eight days and 28 days of liquidated damages assessed, respectively.  After AICI had demobilized from the site, the Army Corps requested a proposal from AICI to perform various work in one of the new facilities.  Rather than issuing a new contract, the contracting officer issued a unilateral modification to the construction contract line item for the new facility whereby AICI would perform the new scope in the new facility.  In the modification, the contract stated “[t]he Period of Performance has increased … for a period of two-hundred-thirty-two (232) days from the effective date of this modification of March 11, 2016. … This Period of Performance covers work under this modification only, not for the overall contract.”  Continue Reading Assessment of Liquidated Damages: Careful What You Bargain For

While FAR 52.242-14 (the “Suspension of Work Clause”) and FAR 52.242-15 (the “Stop-Work Order Clause”) both allow a contracting officer to require a contractor to stop all, or any part, of the work at the Government’s convenience, they contain some key differences that prudent contractors should know to protect their interests when contracting with the Government.  The two clauses contain differences in relation to allowable damages, when claims must be presented, the time of suspension or work interruption, and what must be proved to recover damages.

A contractor not aware of which of these clauses is in play could unknowingly submit an untimely or invalid claim.

The Suspension of Work Clause:

The FAR requires that the Suspension of Work Clause be inserted in fixed-price construction and architect-engineer contracts.  The Suspension of Work Clause allows the Contracting Officer to order the Contractor “to suspend, delay, or interrupt all of any part of the work…for the period of time that the Contracting Officer determines appropriate for the convenience of the Government.”  Even if a Suspension Order is not given, if the conduct of the government forces the Contractor to interrupt or cease its work, that conduct may be treated as a “constructive suspension,” affording the Contractor the same rights under the Clause.  The four-part test for recovery under the Suspension of Work Clause is as follows: (1) the resulting delay was for an unreasonable period of time, (2) the delay was proximately caused by the Government’s actions, (3) the delay resulted in some injury to the Contractor, and (4) there is no delay concurrent with the suspension that is the fault of the Contractor.

For directed suspensions, a claim, in an amount stated, must be asserted in writing as soon as practicable after the suspension, delay, or interruption, but not later than the date of final payment under the Contract.  In the case of a constructive suspension under the Suspension of Work Clause, the Contractor may submit a written claim for added costs, exclusive of profit, incurred within 20 days of notice that the work is suspended, delayed, or interrupted for an unreasonable period of time by (1) an act of the Contracting Officer, or (2) by the Contracting Officer’s failure to act within the time specified in the contract.  However, courts have indicated that this notice requirements may be liberally construed.  See Hoel-Steffen Const. Co. v. U.S., 197 Ct.Cl. 561, 570-571 (1972); K-Con Bldg. Sys., Inc. v. U.S., 115 Fed. Cl. 558, 573 (2014). In addition, no allowance for delay is permitted to the extent performance would have been delayed by any other cause.  Continue Reading FAR Suspension of Work v. Stop-Work Order: What Contractors Need to Know