The Do’s and Don’ts of Government Construction Contracts

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The Dos and Donts of Government Construction
Contracts
Or David Lettermans Top Ten Traps for the Unwary
Joseph C. Kovars, Esq. OberKaler 100 Light
Street Baltimore, MD 21202 jckovars_at_ober.com
410.347.7343
Barbara G. Werther, Esq. OberKaler 1401 H
Street, N.W. Washington, DC 2005 bwerther_at_ober.com
202.326.5015
www.ober.com
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Top Ten Traps

• Authority to bind the Government
• Funding of contractAnti-Deficiency Act
• Recognizing constructive changes
• Notice requirements
• Bilateral modification releases
• Documentation letter in/letter out
• Updating schedules
• Cure notices/show cause
• Claim certification
• False claims

3
Federal Acquisition Regulation (FAR)

• Provides uniform policies and procedures for
  acquisitions by Federal Govt agencies
• Parts 1-51 are policies and instructions
• Part 52 is standard form clauses
• Part 53 is forms
• FAR clauses apply to the extent they are
  incorporated into the contract, either full text
  or by reference.
• The Christian Doctrine

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Procurement Methods for Construction

• Sealed bidding FAR Part 14
• Only used where price is sole basis for award
• Contracting by Negotiation FAR Part 15
• Used when factors other than price are considered
• Used for Best Value procurements
• Negotiation is a term of art its not a real
  negotiation!

5
Sealed Bidding

• Invitation for Bid (IFB) is used
• Bids are publicly opened
• Award goes to lowest price, responsive bid by a
  responsible bidder
• Responsive bid means complies in every respect
  with the requirements of the IFB (FAR 14.404-2)
• Responsible bidder refers to financial
  resources, integrity, organization and skills,
  ability to meet schedule, and past performance
  (FAR Part 9.1)
• Firm, fixed-price contract results.

6
Contracting By Negotiation

• Request for Proposals is used (RFP)
• Tradeoff between price and other factors (Best
  Value)
• Evaluation factors and significant sub-factors
  must be clearly stated (Section M of RFP)
• Must state whether all other factors are more
  important, less important or equally important as
  price
• Separate technical and price proposals submitted
  (separate volumes)

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Contracting By Negotiation - 2

• Technical evaluation by technical team
• Price evaluation by price team
• Technical price kept separate until final
  selection decision
• Oral presentations can be used
• Can typically award on basis of initial proposals
  without discussions
• Or can hold discussions, followed by BAFO

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Contracting By Negotiation - 3

• If discussions are held with one offeror, must
  hold discussions with all within competitive
  range
• Discussions must indicate deficiencies,
  significant weaknesses and adverse past
  performance information
• Exceptions may be taken, but are risky
• Additional features and enhancements may be
  offered

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Contracting By Negotiation - 3

• Debriefing of unsuccessful offerors available on
  request
• When to protest?
• Whats the likelihood of winning a protest?

10
Funding Anti-Deficiency Act

• Procurements are funded through appropriations.
• The appropriation is listed on the contract form
  should be checked.
• Anti-Deficiency Act prohibits Making or
  authorizing an expenditure or creating or
  authorizing an obligation in excess of the amount
  available in the appropriation or fund unless
  authorized by law. (31 U.S.C. s. 1341(a)(1)(B))

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Funding Anti-Deficiency Act

• Anti-Deficiency Act -- Governments
  representatives cannot make any payment or a
  commitment to make payment for work unless there
  are sufficient funds in the bank (in the
  appropriation) to cover the cost in full.
• What does this mean in terms of the multiyear
  construction project?

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Funding Anti-Deficiency Act

• Limitation of Funds clause (FAR 52.232-22) -
  Monitor costs and notify at 75. Right to stop
  work.
• Availability of Funds clause (FAR 52.232-19)
  Funds are not presently available for
  performance beyond ______. . . Implied right to
  stop work.
• What happens when the Government runs out of
  money and there is no new appropriation?

13
Changes

• FAR 52.243-4 CHANGES (JUNE 2007)
• (a) The Contracting Officer may, at any time,
  without notice to the sureties, if any, by
  written order designated or indicated to be a
  change order, make changes in the work within the
  general scope of the contract, including changes
  --
• (1) In the specifications (including drawings and
  designs)
• (2) In the method or manner of performance of the
  work
• (3) In the Government-furnished property or
  services or
• (4) Directing acceleration in the performance of
  the work.

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Changes

• (b) Any other written or oral order (which, as
  used in this paragraph (b), includes direction,
  instruction, interpretation, or determination)
  from the Contracting Officer that causes a change
  shall be treated as a change order under this
  clause provided, that the Contractor gives the
  Contracting Officer written notice stating (1)
  the date, circumstances, and source of the order
  and (2) that the Contractor regards the order as
  a change order.
• (c) Except as provided in this clause, no order,
  statement, or conduct of the Contracting Officer
  shall be treated as a change under this clause or
  entitle the Contractor to an equitable
  adjustment.

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Changes

• (d) If any change under this clause causes an
  increase or decrease in the Contractor's cost of,
  or the time required for, the performance of any
  part of the work under this contract, whether or
  not changed by any such order, the Contracting
  Officer shall make an equitable adjustment and
  modify the contract in writing. However, except
  for an adjustment based on defective
  specifications, no adjustment for any change
  under paragraph (b) of this clause shall be made
  for any costs incurred more than 20 days before
  the Contractor gives written notice as required.
  In the case of defective specifications for which
  the Government is responsible, the equitable
  adjustment shall include any increased cost
  reasonably incurred by the Contractor in
  attempting to comply with the defective
  specifications.

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Changes

• (e) The Contractor must assert its right to an
  adjustment under this clause within 30 days after
  (1) receipt of a written change order under
  paragraph (a) of this clause or (2) the
  furnishing of a written notice under paragraph
  (b) of this clause, by submitting to the
  Contracting Officer a written statement
  describing the general nature and amount of
  proposal, unless this period is extended by the
  Government. The statement of proposal for
  adjustment may be included in the notice under
  paragraph (b) above.
• (f) No proposal by the Contractor for an
  equitable adjustment shall be allowed if asserted
  after final payment under this contract.

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Changes

• The contractor is required to perform the changed
  work as directed and make claim under the
  Disputes Clause if not paid. (Constructive change
  or dispute over unilateral amount granted). FAR
  52.233-1(i)
• Permissible scope of changes
• Drawings and specifications
• Method or manner of performance
• GFM/GFP
• Directed acceleration
• Time of performance (nights, weekends)
• Place of performance

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Changes

• Types of Changes
• Formal
• Constructive
• Formal/Express Changes
• Directed change or CCD unilateral from
  Government
• Bilateral supplemental modification to contract
• Accord and satisfaction
• Reservation of rights
• Who may initiate? Either party

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Changes

• Constructive Changes
• Conduct by C.O. or authorized representative
  which has the effect of causing the Contractor to
  perform work different from that set forth in the
  contract,
• Even when not described or acknowledged as a
  change.

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Changes

• Elements of a Change
• Direction to do something different from existing
  contract
• Within the general scope of the contract
• Issued by C.O. (or duly authorized representative)

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Changes

• What does within the general scope of the
  contract mean?
• No exact formula
• 99.99 of every change you will ever see.
• Prohibition on issuing changes outside the
  general scope because significantly different
  work should be put out for bid.
• Changes beyond general scope are cardinal
  changes.

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Changes

• Cardinal change
• 1965, Wunderlich Constructing Co. v. U.S., Court
  of Claims says changes beyond the general scope
  of the contract are cardinal changes
• The number of changes, in and of itself, is not
  necessarily a cardinal change
• More of the same kind of work (i.e., more
  asbestos abatement) not a cardinal change
• Direction to build an airstrip when the contract
  was for the terminal probably is a cardinal
  change

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Changes - Authority

• Who has authority to issue changes to the
  Contract? (FAR 1.603-3(a))
• Only the C.O. (or authorized representative) has
  authority to bind the Government and modify the
  contract
• Who is the C.O. ?
• What is authority of COTR?, ROICC?, etc.

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Changes - Authority

• The Government is not legally bound by
  unauthorized acts or acts of unauthorized agents
• Apparent Authority is NOT AVAILABLE AGAINST THE
  GOVERNMENT.
• Contractors duty to assure authority behind
  direction.
• Dont be a Volunteer.

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Changes - Authority

• When is the Government bound by unauthorized
  actions?
• Implied Authority/Course of Conduct
• Ratification
• Equitable Estoppel

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Changes - Authority

• Who does not have authority?
• Inspectors
• Contract administrators
• Getting confirmation
• If you are directed by a Government
  representative, send a letter to the C.O. and ask
  the C.O. if you are to comply with the directive,
  i.e., have the C.O. ratify the directive.

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Constructive Changes

• What is a constructive change?
• (Subsection (b) of the changes clause)
• A directive to the Contractor
• Requiring the Contractor to perform additional or
  changed work
• Contractor relied on the Government direction and
  incurred increased cost, added time
• Notice given

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Changes - Types of Constructive Changes

• 1. Interpretation of specifications and drawings
• Ambiguity in the specifications/drawings
• Patent vs. latent
• The ambiguity is latent
• The contractors interpretation is reasonable
• The Government has a different interpretation and
  tells the contractor to perform in accordance
  with the Governments interpretation
• The contractor incurs additional costs by
  complying with Governments interpretation

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Changes - Types of Constructive Changes

• Inconsistencies between drawings and
  specifications
• FAR 52.236-21
• If only in specifications, or only in drawings,
  treat as if mentioned in both places
• In case of difference, specifications govern over
  drawings
• If the discrepancy is patent, duty to inquire
  pre-bid
• If the discrepancy is latent, give notice,
  segregate costs

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Changes - Types of Constructive Changes

• 3. Defective Specification
• The Government warrants the adequacy of its
  specifications
• Must be a design specification (implied warranty
  on Government under Spearin)
• Specifications contain errors, omissions,
  inconsistencies
• Contractor entitled to costs of attempting to
  comply and for performing corrective work

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Changes - Types of Constructive Changes

• 3. Defective Specification
• The Government warrants the adequacy of its
  specifications
• Must be a design specification (implied warranty
  on Government under Spearin)
• Specifications contain errors, omissions,
  inconsistencies
• Contractor entitled to costs of attempting to
  comply and for performing corrective work

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Changes - Types of Constructive Changes

• Risk of Specification Problems
• Design Specifications Government owns risk
• Performance Specifications Contractor owns risk
• Mixed Specifications It depends (analyze in
  detail)

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Changes Types of Constructive Changes

• Risk of Specification Problems (contd)
• Design-Build Contracting
• Building Information Modeling (BIM)

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BIM
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Changes - Types of Constructive Changes

• 4. Inspection and Testing
• Government over-inspection
• Improper or incompetent rejection
• Government directs a change in testing method or
  frequency
• More stringent testing procedure than that set
  forth in contract
• Interference by Government in unreasonable
  inspecting during performance

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Changes - Types of Constructive Changes

• 5. Changes In The Method And Manner Of
  Performance
• Where C.O. insists on a change in the
  contractors method and manner of performance of
  the work
• Contractor can recover the difference in cost
  between its method and Governments method
• Example change in planned sequence

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Changes - Types of Constructive Changes

• 6. Constructive Acceleration
• When Government effectively requires the
  contractor to finish earlier than planned

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Changes - Types of Constructive Changes

• 7. Duties of Cooperation, Not to Hinder
• NTP issued, but contractor not permitted to
  construct road to worksite
• Work on railroad tracks can only be performed
  with Owners flagmen and at night, but no flagmen
  work at night
• C.O. withheld design fix from contractor and
  charged contractor LDs for not finishing on
  time

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Changes - Types of Constructive Changes

• 8. Cumulative Impact
• Combined impact of a large number of changes
• Ripple effect
• Note Low rate of success in cases. Measurement
  of damages is amorphous.
• Be careful when signing modifications
• Bell BCI v. United States (Fed. Cir. 2009)

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Changes

• Notice Requirements
• Notice must be timely
• Notice must be in writing
• Notice must be sent to the C.O.
• Notice must set forth the nature of the claim
• Constructive changes notice relates back 20
  days, as to costs incurred
• No time limit for defective specifications

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Changes

• Exceptions to Strict Notice Requirements
• (1) Where the Government knew about the basis of
  the claim
• Actual knowledge can be shown from Government
  records
• Presence of Government personnel on jobsite
• Acts of Government in working with contractor
  to address issue
• Meetings
• (2) Where the Government considers the claim on
  the merits without complaining about lack of
  notice
• (3) Where the Government is not prejudiced by the
  lack of notice
• Government has burden of proving it was
  prejudiced
• Prejudice occurs if Government cannot mitigate
  expense or elect any one of available options

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Changes

• Contractor Duty to Proceed
• The Contractor must perform the changed work
• C.O. can terminate contract for default if
  contractor does not proceed
• Disputes Clause Contractor can submit its claim
• Equitable Adjustment
• Price
• Bruce Construction v. U.S., 324 F.2d 516 (Ct. Cl.
  1963) keep a contractor whole when the
  Government modifies the contract.
• Actual, reasonable cost ordinarily incurred
  because of the change
• Actual cost plus reasonable OH P
• May include costs incurred for affected work
  areas not changed
• Time
• If the change order implicates work on the
  critical path, additional time may be required
• The Request for Equitable adjustment (REA)

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Delays Suspension

• Types of delays
• Excusable, Compensable, Unexcused
• Special Cases
• Sovereign vs. contractual acts
• Subcontractors suppliers
• Bankruptcy financial inability (unless
  Government caused)
• Compensable Special Case
• Differing Site Conditions

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Delays Acceleration

• Concurrent delays burden on claiming party to
  untangle
• Net effect excusable delay no damages
  recoverable by either party
• Requires two delays on critical path
• Highly fact intensive
• The Hurry Up and Wait problem

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Delays Acceleration

• Notice requirements
• 10 days. Prejudice rule.
• Boards believe in contemporaneous records.
• Right to early completion conceptually
  accepted, but difficult to prove.
• Schedule must be realistic and relied upon

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Delays Acceleration

• Proving Delay Claims
• Sophistication of Boards and Court of Claims for
  delay claims
• CPM schedule is normal basis of proof
• Some cases even say hard to imagine proving claim
  without CPM analysis
• Sophisticated in review/analysis of CPM
  presentations
• TIA/Windows
• Impacted as planned,
• Collapsed as built,

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Delays Acceleration

• Important to use contemporaneous schedules and
  updates.
• Have solid schedule as early as possible
• Update it accurately and honestly.
• Will have to live with project schedule for
  claims purposes
• If Government restricts updates, create shadow
  schedule

50
Delays Acceleration

• Acceleration
• Well recognized doctrine
• Actual and constructive
• Constructive effect of requiring acceleration

51
Terminations

• Terminations for Default FAR 52.249-10
• Draconian a forfeiture - disfavored
• High standard of proof
• Default termination is discretionary with C.O.
• Improper default termination is converted to a T
  for C
• High stakes a dispute is winner take all

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Terminations

• Terminations for Default (cont.)
• If default sticks, the government recovers its
  re-procurement costs from the defaulted
  contractor
• And, any other rights available to the
  Government, such as LDs
• Burden of proof is on the Government to show, by
  a preponderance of the evidence, that the default
  termination was proper.

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Terminations

• Grounds for Default Termination
• Failure to complete the work within the time for
  the contract or any extension.
• Failure to make progress
• Repudiation by the contractor
• Contractors failure to perform its obligations
  under the contract
• Failure to provide adequate assurances that
  performance will proceed
• Failure to continue performance during a dispute

54
Terminations

• Cure Notice (or Show Cause) FAR 49.402-3(e)
• Required in supply contracts
• Not required in construction contracts
• But, Government often issues cure notice
• Take this very seriously
• Provide adequate assurances

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Claims and Disputes

• Contract Disputes Act
• Basic statute governing claims
• Established claims process and forums for
  disputes
• Initiation of claim submitted to CO, request
  Final Decision
• Definition of claim
• written assertion,
• matter of right,
• payment of sum certain

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Claims and Disputes

• Must be Certified if over 100,000
• Final Decision is prerequisite to
  appeal/litigation
• Final Decision must be provided in 60 days
• Unless it isnt can specify a longer period
  (usually 60 more)
• May consider claim as deemed denied if not
  timely issued
• Interest from date of certification

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Claims and Disputes

• Certification Requirement
• Classic trap for unwary
• Made by authorized person who can bind the
  company
• Claim made in good faith
• Supporting data are accurate and complete to the
  best of my knowledge and belief
• Amount requested accurately reflects the
  adjustment for which the contractor believes the
  Government to be liable

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Claims and Disputes

• Under penalty of perjury
• False Claims Act liability criminal and civil,
  company and personal
• Subcontractor issues want subcontractor to
  certify to you
• Even if the sub does so, need to do due diligence
  independently,
• Cant rely blindly on sub certification.
• Pass thru agreements-- need to remain liable to
  sub for what sub is claiming.

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Claims and Disputes

• Appealing Contractor Performance Evaluation Todd
  Construction v. U. S., 656 F.3d 1306 (Fed. Cir.
  2011)
• Pre-Todd Rule Unsatisfactory performance
  evaluations not appealable.
• Post-Todd contractor may appeal UNSAT because it
  is a claim relating to the performance under the
  contract.
• To obtain judicial review, must comply with CDA
  claim certification requirements.

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Recovering Costs from the Government

• Field overhead
• Can recover as percentage adder to direct costs,
  or as extended, time-related cost.
• Not both, and only consistent with general
  treatment.
• This generally means go with percentage markup.

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Recovering Costs from the Government

• Unabsorbed home office overhead Eichleay
  Formula
• So many restrictions that generally not worth the
  trouble any longer
• Among other things, requires essentially complete
  standby situation, and showing impracticable to
  take on replacement work

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False Claims

• False Statements Act, 18 U.S.C. 1001
• False Claims Act, 3729 (a)(1) and (a)(2)
• (a)(1) imposes contractor liability for knowingly
  presenting, or causing to be presented, false
  claims
• (a)(2) imposes contractor liability knowingly
  using false records or statements to obtain
  payment for false claims.
• Numerous Other Fraud/Falsification Statutes
  Penalties

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False Claims

• MAIN ELEMENTS
• A claim for payment submitted to the Government
• Falsity (claim itself or records supporting)
• Knowing conduct

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False Claims

• CLAIMS
• Requests for progress payments
• Request for final payment
• Requests for Equitable Adjustments and Claims
• Statements Regarding the Quality of the Work

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False Claims

• FALSITY
• Does the Contractors Conduct Comport With Its
  Contractual, Regulatory, and Statutory
  Obligations
• Invoice misrepresenting quantity installed
• Invoice seeking payment for non-conforming work
• False certification of payment of Davis Bacon Act
  wages
• Payment and/or proper classification of workers
• REAs with factual misrepresentations.

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False Claims

• Knowing Conduct
• Did Contractor have
• actual knowledge of the falsity,
• deliberately ignore the truth or falsity of the
  information, or
• act in reckless disregard of the truth or falsity
  of the information
• Did the Government have prior knowledge of the
  facts allegedly constituting a false claim?

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False Claims

• OTHER EXAMPLES
• False certifications of compliance with the
  contract requirements
• Representations of timely payment to
  subcontractors
• Billing amounts not intending to pay subs
• Seeking or obtaining payment for work the
  Contractor knows does not conform to the contract
  requirements
• Inflated quantities in an invoice

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False Claims

• Daewoo v. United States
• Forfeiture of affirmative claim due to fraud
• 65 M claim became 50 M adverse judgment
• Affirmed on appeal
• Numerous mistakes -- Unclear consequences

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Ethics/Compliance

• BASIC ELEMENTS
• Written code of business ethics and code of
  conduct
• Internal audit of company policies, procedures
  and controls
• Mechanism for anonymous reporting of violations
• Compliance/ethics education program for employees
• Enforce disciplinary actions for violations
• Cooperation with government investigations

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Ethics/Compliance

• Mandatory Disclosure Rule (FAR 52.203-13)
• Contractor shall timely disclose in writing to
  OIG and CO, when credible evidence that the
  Contractor has
• Committed a violation of Federal criminal law
  (fraud, bribery, gratuities, conflict of
  interest)
• Committed a violation of the civil False Claims
  Act or
• Obtained a significant overpayment from the
  Government.
• Duty continues for 3 years following final
  payment.
• Failure to make required disclosure is grounds
  for debarment. FAR 3.1003

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Ethics and Conduct Requirements

• FAR 52.203-13 requires Contractors (except
  commercial item contracts and small businesses
• Have a written code of ethics and conduct
• Exercise due diligence to prevent and detect
  criminal conduct
• Encourage ethical conduct and promote a culture
  of ethical compliance
• Implement ongoing business ethics awareness and
  compliance program

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Ethics/Compliance

• Procurement Integrity Act and FAR 52.203-14
  require Contractors to exercise due diligence
  to ensure that no employee gains an unfair
  competitive advantage by possessing
• Proprietary information obtained from a
  government official without permission, or
• Source selection information that is not
  available to all competitors.
• In the event of an OCI or PCI, Contractor must
  disclose to the Government.

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Ethics/Compliance

• Strategy to Mitigate OCI/PCI Risks
• Develop a comprehensive plan that includes
  detection, mitigation and removal of conflicts of
  interest.
• Screen employees and acquisition targets for OCI
  and PCI risks and avoid acquiring/hiring them, if
  possible.
• Assign a senior ranking individual as compliance
  officer for the firm
• Assess OCI and PCI risks periodically
• Prepare OCI and PCI disclosures when necessary.

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Questions?