Amended Version of the SUSPEND Act Clears House Oversight Committee and Aims to Change Suspension and Debarment Procedures for Federal Contractors

By: Michael H. Payne & Maria L. Panichelli

This past July, we told you about an important bill known as the Stop Unworthy Spending Act (“SUSPEND Act”). That bill, which was introduced by House of Representatives oversight committee chairman Darrell Issa, aimed to dramatically overhaul the suspension and debarment (“S&D”) procedures applicable to federal contractors. Currently, the suspension and debarment of contractors is handled by each individual contracting agency, by its respective S&D office. But under Issa’s SUSPEND Act, these forty-one individual offices would be consolidated into one, centralized “Board of Civilian Suspension and Debarment.” That board would be overseen by the General Services Administration. In addition to consolidating the forty-one civilian agency S&D offices, the Act aimed to standardize agencies’ S&D policies, and increase transparency.     

On October 29, 2013, the House of Representatives’ Oversight Committee passed an amended version of the SUSPEND Act. According to an October 28, 2013 press release, the amended version of the bill “reflects extensive stakeholder and academic community feedback,” and differs from the draft version of the bill circulated in February in several key respects. Among the additions to the new version of the bill is a timeliness rule, which requires the new, consolidated “Board of Civilian Suspension and Debarment” to consider cases within thirty days of referral. The board would also be required to render a final decision on those cases within six months of referral. S&D procedures relating to wartime operations and other time-sensitive matters would be further expedited. The new bill would also require agencies to coordinate their S&D efforts; it encourages the agencies to utilize a range of fraud remedies, including civil and criminal enforcement, with an emphasis on the timely recovery of funds.

Pursuant to the new bill, over forty smaller executive agency S&D offices would be centralized under the control of the Board of Civilian Suspension and Debarment. In contrast, larger agencies and military departments would be permitted to operate their own independent S&D offices, as long as they can demonstrate that they are able to run an effective S&D program. Overall, proponents say, the SUSPEND Act will improve the consistency and transparency of governmental S&D programs by:

  • Combining the separate S&D regulations governing contracts and grants into a single, comprehensive regulation;
  • Mandating a single government-wide case management system to track cases and make publicly available all final resolutions of S&D cases;
  • Enhancing oversight to ensure the accuracy and completeness of a government-wide database of firms that should not receive awards;
  • Speeding up referrals for S&D, including the identification of contractors and grantees that repeatedly fail to perform; and
  • Ensuring accused parties have the opportunity to be heard prior to any adverse action being taken against them by requiring “show cause” letters.

In our view, the new S&D framework proposed in the SUSPEND Act is a considerable improvement over the current S&D system, if only because of the shortened governmental response deadlines. Under the current system, government contractors who were unfairly suspended or proposed for debarment are often forced to wait months before the matter is resolved. Hopefully, this bill could remedy that problem. We will keep you posted on the progress of the bill.

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Final Rule Imposes New Small Business Subcontracting Obligations on Large Business Prime Contractors

By: Michael H. Payne & Maria L. Panichelli

On August 15, 2013, the SBA put into effect a long-awaited Final Rule (Federal Register Volume 78, Number 136 (Tuesday, July 16, 2013)) designed to help small business subcontractors. The Final Rule, which implements policies set forth in the Small Business Jobs Act of 2010, provides for several very important changes to small business contracting.

First, the rule will impact the ways large business contractor-offerors must utilize small business subcontractors who help during the proposal stage. Small businesses frequently complain that they spend considerable time, effort, and resources assisting large businesses in preparing bids, quotes and proposals, only to be left without any subcontract when the large business actually secures an award of the contract. To combat this problem, the Final Rule requires that large business contractor-offerors (those in line for an award over $650,000, or, in the context of a contract for the construction of a public facility, an award over $1,500,000) “represent to the contracting officer that it will make a good faith effort to acquire articles, equipment, supplies, services, or materials, or obtain the performance of construction work from small business concerns that it used in preparing its bid or proposal, in the same scope, amount, and quality used in preparing and submitting the bid or proposal.” Pursuant to the rule, an offeror “uses” a particular small business in its bid or proposal if:

  • The large business referenced the small business as a subcontractor in its bid or proposal;
  • The large business referenced the small business as a subcontractor in its small business subcontracting plan;
  • The large business has a subcontract or “agreement in principle” to subcontract with the small business to perform a portion of the contract work;
  • The small business drafted any portion of the bid or proposal; or
  • The large business used the small business’s cost/pricing information or technical expertise in preparing the bid or proposal.

If the large business ultimately fails to use the small business as a subcontractor it must provide the Contracting Officer with a written explanation as to why. Under the rule, the CO must consider these issues when rating the large business prime’s overall performance. Moreover, in the most extreme cases, the CO is required to report a large business’ non-compliance to the Federal Awardees Performance and Integrity Information System (FAPISS). In short, large business offerors will no longer be able to rely on the efforts of small business subcontractors during the proposal stage without conferring some of the benefits of award on those subcontractors.

Second, the rule provides that large business prime contractors are responsible for ensuring that small business concerns are given the “maximum practicable opportunity” to participate in the performance of the work. The prime contractors must conduct market research and use “all reasonable means” to identify small business subcontractors and suppliers. Contractors on larger awards also have additional administrative and substantive responsibilities. For example, they must give pre-award written notice to unsuccessful small business subcontractors. Lastly, the primes cannot prohibit subcontractors from discussing any material matter, including payment from the prime, directly with the contracting officer.

Third, the rule requires that prime contractors must notify the Contracting Officer, in writing, when it is more than 90 days behind paying its small business subcontractors. Primes must also notify the CO if they pay the small business contractor a reduced price, lower than that agreed to in the subcontract. A contractor will be deemed to have a history of slow or reduced payments if it self-reports 3 times within a one-year period. The contracting officer is required to evaluate these payment factors when ultimately rating the contractor’s overall performance.

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Continuing Government Focus on Fraud Might Lead to Significant Changes in Suspension and Debarment Procedures

By: Michael H. Payne & Maria L. Panichelli

Suspension and debarment procedures have been a hot topic in recent years, and it appears that the issue will remain a focus of congressional debate for the rest of this year as well. On June 12, 2013, Congress heard testimony on the state of the federal government’s suspension and debarment (S&D) system. The testimony was meant to serve as a congressional follow up to two troublesome GAO reports, which emphasized the many problems with the current S&D system.

John Neumann, the GAO’s Director of Acquisition and Sourcing Management, offered testimony at this June 12th hearing. He spoke about the GAO’s recent efforts to alleviate the systematic issues identified in the GAO reports. Neumann’s testimony indicated that he believed the suspension and debarment system was, in fact, improving, and that no major changes to the system were necessary. However, his opinion is far from universal. Most people agree that the S&D system is inescapably flawed, and in need of a dramatic overhaul.

For example, Scott Amey, General Counsel for the Project On Government Oversight (a group that works “to achieve a more accountable federal government”), testified that many agencies “still are not utilizing the suspension or debarment tool” effectively. Amey went on to testify that “history proves” that the current system does not force agencies to employ “top-notch contractors that are not involved in illegal or questionable activities.” In other words, most agencies continue to look the other way, giving business to contractors the agencies know are involved in misconduct, rather than initiating suspension and debarment procedures. Amey cited the Nuclear Regulatory Commission and Social Security Administration as agencies that have “zero suspensions, proposed debarments, debarments, and administrative agreements.” He further identified the Departments of Commerce, Health and Human Services, and Labor as having only a handful of suspensions and debarments. In short, Amey indicated that he does not believe that the current system encourages agencies to diligently prosecute and punish “bad” contractors.

Amey did, however, suggest a possible solution to this systematic underuse, or misuse, of suspension and debarment procedures: the Stop Unworthy Spending (or “SUSPEND”) Act. The SUSPEND Act, which was introduced by House of Representatives oversight committee chairman Darrell Issa several months ago could dramatically overhaul the S&D procedures applicable to federal contractors. Currently, suspension and debarment of contractors is handled by each individual contracting agency, by its respective suspension and debarments office. But under Issa’s SUSPEND Act, these forty-one individual offices would be consolidated into the “Board of Civilian Suspension and Debarment,” which would be overseen by the General Services Administration. In addition to consolidating the forty-one civilian agency S&D offices into one centralized board, the Act would standardize agencies’ S&D policies, and increase transparency.

Proponents of the SUSPEND Act point out that it will result in consistent, uniform application of S&D procedures across various agencies, and thereby put a stop to the underutilization of the S&D process by individual agencies. It will also prevent these agencies from making mistakes with respect to reporting requirements. In Issa’s view, the SUSPEND Act is necessary to combat the award of government contracts to those he described as “fraudsters, criminals, or tax cheats.” However, opponents say that the proposed changes could be detrimental to both contractors and agencies.

Critics point out that a centralized Board of Civilian Suspension and Debarment could result in a bureaucratic behemoth, which would ultimately prove slower for contractors, and result in a more formal process that requires participation of legal counsel. Moreover, the restructuring could deprive agencies of their leverage in negotiating concessions from contractors during debarment negotiations. It might also lead to duplication and inefficiency as the agencies try to coordinate their suspension and debarment activities with a new government entity.

Pro or con, the SUSPEND Act has the potential to become very important in upcoming months, and we will keep you updated on the progress of the bill. Whether or not the bill ultimately passes, it is important to also keep in mind what it signifies. This bill, and the congressional attention paid to the S&D program in general, demonstrate the government’s increased vigilance with respect to contractor fraud. The government’s focus remains on increasing the prosecution of dishonest or fraudulent contractors, and on perfecting S&D procedures used to punish those contractors. As this process continues, it is important for contractors to be aware of the dangers, and consult with legal counsel to avoid any inadvertent infractions.

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Feds Weigh in on Texting

By: Edward T. DeLisle & Maria L. Panichelli

Our last blog article focused on the ability of an SDVOSB to control his company remotely thanks to the advancements of technology. Well, technology can be both a blessing and a curse. It can allow you to work from pretty much anywhere, but, as we all know, there are certain places where you should simply avoid using the technology available to you, such as when you are behind the wheel. The hazards of texting while driving has become a major problem and, as a result, it's been rendered illegal in many states. Based upon recent changes to the FAR, now the federal government is getting into the act.

Pursuant to FAR Subpart 23.11 (incorporated into every government contract through clause 52.223-18) a government contractor should adopt and enforce a policy banning employees from texting whenever an employee is: (1) driving a vehicle owned or rented by the company; (2) driving a vehicle owned by the government; or (3) driving a privately owned vehicle when performing any work on behalf of the government. Moreover, contractors are required to “flow down” this anti-texting clause to all of its subcontractors, if the value of the subcontract exceeds the “micro-purchase threshold” (currently $3,000).

More importantly, 52.223-18 requires federal contractors to “conduct initiatives” to educate employees about the dangers of texting while driving; these initiatives should be “commensurate with the size of the business.” If you are a large government contractor, this likely means that the government will expect some sort of training in addition to a written policy or employee handout covering this topic. If you are conducting periodic ethics training (and you should be), you can likely incorporate any necessary training on anti-texting as part of those sessions. If you do not conduct periodic ethics, and other government contracting, training to refresh yourself regarding what the government requires of its contractors, you should certainly consider doing so. If you have any questions, please feel free to contact us.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Ties that Bind: Be Careful the Person Directing Your Work Has Authority to Bind the Government

By: Edward T. DeLisle & Maria L. Panichelli

We’ve warned you before against relying on informal, or oral, directives from a Contracting Officer; get it in writing!   A recent case before the Armed Services Board of Contract Appeals reminds us that contractors also need to be wary about who from the government is giving those directives.

In EEC International, ASBCA No. 55781 (Dec. 28, 2012), the contractor asserted claims against the government, alleging that constructive changes to the contract resulted in higher performance costs.  Specifically, the contractor alleged that the government’s construction representative, as well as the contracting officer's representative, interfered with its means and methods and directed the contractor to make many changes to its scope of work.  According to the contractor, the construction representative and contracting officer representative also constructively accelerated its performance. 

The Board did not address the merits or credibility of the contractor’s claims.  It instead concluded that even if events occurred as the contractor claimed, it was barred from entitlement because neither the construction representative nor the contracting officer’s representative was authorized to modify the contact.  The Board concluded that only the contracting officer had such authority, and the contractor had not alleged that the contracting officer directed it to take the actions at issue.  Although the contractor argued that the acts of the construction representative and contracting officers representative were implicitly ratified by a higher authority who had knowledge of the facts, as well as the authority to bind the government, the Board rejected this argument. 

The hard lesson: taking direction from someone other than the contracting officer is done at a contractor’s peril.  We certainly feel that the Board's decision was harsh here.  Contracting officers are most often not those with whom the contractor has regular communications and there are situations where directives from others may be binding.  However, as budgets shrink and possible sequestration looms, anticipate that agencies will rely more and more heavily on defenses such as this.  We're already seeing it happen.  So contractors should avoid taking direction from anyone but the individual explicitly vested with authority to bind the government.  If you find yourself in a difficult position, where you feel compelled to proceed without proper written authorization, contact an experienced legal professional for assistance. 

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Can a Contractor ever ask the Government for Attorney's Fees?

By: Edward T. DeLisle

We are frequently asked whether attorneys fees are recoverable as part of the federal claims procedure. The answer is sometimes. A case just decided by the Court of Appeals for the Federal Circuit assists in explaining when such a recovery is possible.

In Tip Top Construction v. Donahue, the United States Postal Service required a contractor to perform additional work to complete an air conditioning repair project in the Virgin Islands. While it approved a change order to perform the additional work, the contractor incurred other additional costs, including attorneys fees, to convince the USPS to accept its request for additional money. Those monies were submitted in the form of a claim and denied.

The U.S. Postal Service Board of Contract Appeals upheld the denial stating that the costs included in the claim "had nothing to do with the performance of the changed work or genuine contract administration." The Federal Circuit disagreed.

The Federal Circuit took the position that the monies included in the claim reasonably flowed from negotiations associated with the change order process. This conclusion was important, for the Federal Circuit framed the issue as follows: "If a contractor incurred the cost for the genuine purpose of materially furthering the negotiating process, such cost should normally be a contract administration cost allowable under FAR 31.205-33, even if negotiation eventually fails and a CDA claim is later submitted." Here, the facts revealed that the parties were, in fact, making attempts to negotiate an amicable resolution regarding price for a number of months prior to submission of the claim. Consultants and attorneys were used by the contractor to assist it in its presentation to the Postal Service. Because the evidence suggested that the contractor's underlying purpose was to resolve the dispute, the Federal Circuit held that these costs were recoverable.

Tip Top illustrates the fine line one must walk when it comes to the collection of attorneys fees. Certainly, once an actual claim is submitted by a contractor, there can be no expectation to collect fees from that point forward. The dispute has traveled too far down the road of dispute resolution. Prior to that point, however, if a contractor can prove that the costs incurred for counsel stemmed from a desire to negotiate an amicable resolution to a change order dispute, recovery of fees is possible.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Comment Period on Revised Small Business Size Standard for Dredging Ends Monday, September 17, 2012

By: Joseph A. Hackenbracht 

On July 18, 2012, the Small Business Administration published a proposed increase in the small business size standard for “Dredging and Surface Cleanup Activities” from $20 million to $30 million in average annual receipts. 77 FR 42197. The average annual receipts are calculated by averaging a concern’s receipts for the last three fiscal years. 13 CFR 121.104(c). Receipts means “total income.” 13 CFR 121.104(a).

In order to qualify as small on a Federal procurement, a concern must also perform at least 40 percent of the volume dredged with its own equipment or equipment owned by another small dredging concern. 13 CFR 121.201; note 2. This requirement, sometimes referred to as the “40 percent rule,” has been in SBA’s size standards for small business since 1974. Before 1974, the Department of Defense’s Armed Services Procurement Regulations (ASPR’s) had contained such a requirement for many years. (ASPR 1-701.1(A)(2)). In 1974, it was determined that DoD was exceeding its authority because the obligation to set size standards for small business was within the jurisdiction of the SBA.

When the SBA proposed to increase the size standard for Dredging in July, 2012, it also sought comments regarding the requirement that in order to qualify as small that a concern must perform at least 40 percent of the dredging with its own equipment or equipment owned by another small dredging concern. SBA has heard from small dredging firms that believe they should be able to lease equipment from any size firm as long as employees from the small firm perform the work on the contract.

At this time, however, SBA has proposed to continue requiring small dredging concerns to comply with the “40 percent rule,” in order to ensure that these firms perform a significant and meaningful portion of a dredging project set aside for small business. SBA has asked for comments from the industry and the public concerning (1) whether there continues to be a need for the current 40 percent equipment requirement; (2) whether there is a rationale for a different percentage; and (3) whether a different and more verifiable requirement based on an alternative measure (such as value of contract or personnel involved) may achieve the same objective of ensuring that small businesses perform significant and meaningful work.

The following methods can be used for the submission of comments: (1) the Federal eRulemaking Portal: www.regulations.gov, by following the instructions for submitting comments; or (2) Mail/Hand Delivery/Courier to Khem R. Sharma, Ph.D., Chief, Size Standards Division, 409 Third Street SW., Mail Code 6530, Washington, DC 20416. Please note that SBA will not accept comments to this proposed rule submitted by email. Also, be sure to refer to “RIN 3245-AG37” when submitting comments, so that SBA correctly attributes your comments to the proposed rule in question.

Joseph A. Hackenbracht is a Partner in the firm and a member of the Federal Contracting Practice Group.

FAR Council Implements Final Rule; Contractors Now Required to Report Subcontractor Awards and Executive Compensation

By: Edward T. DeLisle & Maria L. Panichelli

On August 27, 2012, FAR council issued a final rule entitled Reporting Executive Compensation and First-Tier Subcontract Awards (“the Rule”). Although this Final Rule was implemented just last month, it has been a topic of discussion on Capitol Hill for over six years.

In 2006, the Federal Funding Accountability & Transparency Act of 2006 (Pub. L. 109-282, 31 U.S.C. § 6101 note) (“FFATA”) was enacted, with a two fold purpose: (1) to reduce “wasteful and unnecessary spending;” and (2) to ensure that the public can access financial information on entities and organizations receiving federal funds, which included federal government contractors and their subcontractors. FFATA required all federal contractors to divulge, through the use of a website set up by the Office of Management and Budget (“OMB”), contract and subcontract award information for all contracts over $25,000. Contractors’ reporting responsibilities were further expanded by the Government Funding Transparency Act of 2008 (“GFTA”). GFTA amended the FFATA to provide that contractors report, in addition to contract and subcontract award information, the names and total compensation of the five most highly compensated officers of those entitities. On July 8, 2010 an interim rule was put in place, requiring Federal contractors to comply with the new reporting requirements.

It was this interim rule (with a few minor modifications) that was ultimately implemented on August 27, 2012. Under the Final Rule, prime contractors must report contract and first-tier subcontract awards, and the names and executive compensation of the five most highly compensated officers of both the prime contractor, and its first-tier subcontractors. The information must be reported by the end of the month following the month of a contract award, and annually thereafter, in the Central Contactor Registration system (“CCR”)(now the “System of Award Management” or “SAM”). All of the information is to be made accessible to the public through www.usaspending.gov.

Compliance with the rule requires that contractors fully understand the reporting requirements, which can be rather complicated. Accordingly, some guidance concerning the reporting requirements is set forth below.

Subcontract Award Reporting

This requirement is applicable to all Contracts with value of $25,000 or more, but there is no requirement to disclose classified information. This represents a change from the interim rule, which included language stating that it did not apply to classified contracts; the Final Rule expands this provision to state that nothing in the statute requires disclosure of “classified information.” The Final Rule deleted an additional exception that had been contained in the interim rule, namely that the rule did not apply to contracts with individuals. There is no such exemption in the Final Rule. There is also no exemption for COTS or commercial items.

A “First-Tier Subcontract” is defined as a subcontract “entered into by the [Prime] Contractor to furnish supplies or services for performance... It includes, but is not limited to, purchase orders and changes and modifications to purchase orders, but does not include contracts that provide supplies or services benefiting two or more contracts.” FAR 52.204-10(a). This too represents a change from the interim rule. The interim rule’s definition of “first-tier subcontracts” has been modified slightly, to clarify that the definition does not include long-term contracts for supplies and materials that are not solely related to a single, applicable contract. According to the preamble of the Final Rule, this change is meant to give contractors “greater flexibility” in determining what type of company qualifies as a “first-tier subcontractor.”

An extensive list of the information contractors must report regarding first-tier subcontract awards can be found at FAR 52.204-10(a)

Executive Compensation Reporting

Contractors and applicable Subcontractors must comply with this requirement only if that contractor or subcontractor, in the preceding fiscal year, received eighty percent (80%) or more of its annual gross revenues and twenty-five million or more in annual gross revenues from federal contract awards, AND if the public did not otherwise have access to this executive compensation information from other publically available sources (for example, through SEC or IRS filings).

The category of subcontractors required to report executive compensation is limited to “First-Tier Subcontractors,” which is defined in the same manner as set forth above. The Subcontractor is required to report to the prime contractor names and total compensation of each of the five most highly compensated executives for that subcontractor’s preceding completed fiscal year. The Prime Contractor, in turn, is required to report this information, along with its own executive compensation information to the extent that it falls within the parameters of the Rule.

For purposes of disclosure under the final Rule, both “executive” and “compensation” are defined broadly. Compensation includes not only salary, but also:

– (1) bonus;
– (2) awards of stock, stock options, and stock appreciation rights;
– (3) earnings for services under non-equity incentive plans;
– (4) change in pension value;
– (5) above-market earnings on deferred compensation which is not tax-qualified; and
– (6) other compensation, if the aggregate value of all such other compensation (e.g., severance, termination payments, value of life insurance paid on behalf of the employee, perquisites or property) for the executive exceeds $10,000.

“Executive” is defined as any officer, managing partner, or any employee in a management position.

The prime contractor must report executive compensation information in two different locations. For subcontractors, the information is entered into the FFATA Sub-award Reporting System (“FSRS”). For contractor information, primes must use the Federal Procurement Data System (“FPDS”), where certain required information will be pre-populated by the government. Prime Contractors must note two things here: First, as to first-tier subcontractors, the prime is responsible for notifying its subcontractors that the required information will be made public. Second, regarding its own information, under the Final Rule it is the prime’s responsibility to check and correct any inaccurate information pre-populated in FPDS.

This Rule places prime contractors in the precarious position of collecting and reporting not simply their own information, but information from others. How can a prime assure itself that it is collecting and reporting the full extent of the subcontractor information required? How can it ensure that the information it receives from its subcontractors is accurate? These are troubling issues and prime contractors will have to develop risk management systems to assist with compliance. Specifically, prime contractors should establish a mechanism, through their subcontracts, for example, to notify subcontractors of the reporting requirements and what information must be provided. However, since the reporting obligation applies to the prime contractor and not subcontractors, it will not be sufficient to merely “flow down” the actual reporting responsibilities. Having subcontractors certify the information provided may also assist prime contractors in protecting themselves from the risks associated with the Rule. And primes must not forget about reporting their own information. Systems for collecting, reporting and updating this information must be established to remain compliant. Oh, the joy of dealing with the federal government…

Edward T. DeLisle
Maria L. Panichelli has been closely following the development of this Rule since its inception, and has advised many contractors with regards to compliance. For further information, or for a short slide presentation concerning the Rule, please contact Mr. DeLisle at edelisle@cohenseglias.com.

BEWARE OF UNDERBIDDING - FALSE CLAIMS ACT APPLIES TO 'BUYING IN'

By: Edward T. DeLisle & Maria L. Panichelli

We’ve warned you before: the False Claims Act should be taken seriously. In recent years, the government has been increasingly willing to wield the provisions of the FCA as weapons, zealously punishing offending federal contractors.

A recent opinion United States ex rel. Hooper v. Lockheed Martin Corp., No. 11-55278 (9th. Cir. 2012) reminds us once again that the government almost seems to be searching for ways expand the FCA’s application, finding new categories of conduct that are covered by, and punishable pursuant to, the Act.

In Hooper, the Court found that the practice known as “buying in” – i.e. deliberate underbidding of a job – was covered under the FCA. Hooper, a former employee of Lockheed Martin, brought a “qui tam” action against Lockheed, alleging that the company deliberately underbid at least one Air Force contract. The contract was cost-reimbursable with an award fee. As one might imagine, intentionally underbidding this type of contract could be quite lucrative. In apparent recognition of this fact, Hooper alleged that Lockheed knowingly underestimated its costs when submitting its bid.

In response, Lockheed moved to dismiss. The company argued that a false estimate could not create liability under the False Claims Act. The Court disagreed. After noting that both the First and Fourth Circuits had previously found the FCA applicable to similar “underbidding” situations, the Ninth Circuit stated as follows: “we conclude that false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of an FCA claim are met.”

In the wake of this decision, all contractors would be wise to take every possible precaution to avoid underbidding – intentional or otherwise.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Subcontractors in Afghanistan Frequently Suffer Without the Protection of a Payment Bond

By: Michael H. Payne

Subcontractors who are performing work on Corps of Engineers construction projects in Afghanistan frequently experience financial difficulties because they are not paid promptly and, in some cases, they are not paid at all. Unlike construction projects performed in the United States, payment bonds have frequently not been required by the Corps in Afghanistan. FAR 28.102-1 provides that “The Miller Act (40 U.S.C. § 3131 et seq.) requires performance and payment bonds for any construction contract exceeding $150,000, except that this requirement may be waived (1) by the contracting officer for as much of the work as is to be performed in a foreign country upon finding that it is impracticable for the contractor to furnish such bond. . .” It is this exception that has been invoked to waive the usual payment bond requirement.

When a payment bond is in place, a subcontractor who has not been paid has the right to file a Miller Act suit in Federal Court demanding payment by the prime contractor’s surety. When there is no payment bond, subcontractors are at the mercy of prime contractors who, in some cases, have proven to be dishonest. With no surety to act as a guarantor of payment, subcontractors are forced to file suit directly against American prime contractors, in U.S. courts, or to take advantage of the laws of the local jurisdiction when dealing non-American prime contractors. Under this system, unscrupulous prime contractors can “play the system” by denying payment and effectively betting that the subcontractors will not have the capability, or the resolve, to do anything about it.

In our view, when the Corps of Engineers is aware that a prime contractor is breaching its subcontractor obligations, the Corps should quickly intercede before potentially catastrophic losses are incurred by the subcontractors. In fact, funding should be withheld from the prime and used to make direct payments to subcontractors. This makes eminently good sense because the United States cannot be promoting business opportunities for Afghani subcontractors, in an effort to cultivate the growth of viable construction companies within Afghanistan, and then stand idly by while those subcontractors are victimized by unscrupulous prime contractors. In many cases, the denial of payment by a prime contractor can result in the collapse and financial ruination of the subcontractor’s business. Although we understand that the Corps does not have privity of contract with subcontractors on a federal project, when the protection of a payment bond is not available we believe that the Corps should not stand idly by and hide behind a “lack of privity.”

We are aware that payment bonds are now being required on many Corps of Engineers’ projects, but that is of little help to those who did not have the protection of a bond on a prior contract. In addition, it is not easy for contractors to secure bonding to do work in Afghanistan, since many U.S. Treasury listed sureties are unwilling to issue the bonds. Although FAR 28.202(b) provides that “for contracts performed in a foreign country, sureties not appearing on Treasury Department Circular 570 are acceptable if the contracting officer determines that it is impracticable for the contractor to use Treasury listed sureties,” the approval of non-listed, or foreign, sureties has been inconsistent. Undoubtedly, many of the payment difficulties being experienced by subcontractors doing work in Afghanistan, and Iraq, could have been avoided if bonding had been required and facilitated by the Corps of Engineers.

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters regarding projects performed in the United States and other countries around the world.

Beware the False Claims Act

By: Edward T. DeLisle

Pursuant to the Contract Disputes Act of 1978 (CDA), every claim on a federal construction project that is in excess of $100,000 must be certified. The reasoning behind this policy is simple: the government wants to discourage the submission of questionable and/or inflated claims. As such, for each claim in excess of the threshold amount, a contractor must append the following language to its claim:

I certify that the claim is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes the Government is liable; and that I am duly authorized to certify the claim on behalf of the Contractor.

If a contractor submits a claim that it has reason to believe runs afoul of this affirmation, it is subject to a variety of penalties. Those set forth in the False Claims Act (FCA) are the most daunting and represent those that the government will most likely pursue if it becomes aware of a potential violation.

In order to be liable under the civil version of the FCA, the government (or an individual in a qui tam action) must prove that the contractor submitted false information and had actual knowledge that the information was false; acted in deliberate ignorance of the truth or falsity of that information; or acted in reckless disregard of the truth of falsity of the information. If, after an evidentiary hearing, a fact finder determines that a violation took place, a contractor can be assessed fines, damages, or both. Fines can range from $5,000 to $10,000 per violation. This can amount to quite a penalty indeed. For example, in Ab-Tech Const., Inc. v. U.S., 31 Fed.Cl. 429 (1994), a contractor was successful in obtaining the award of a contract issued as an 8(a) set-aside. It subsequently pursued a claim for an equitable adjustment of its contract. The government filed a counterclaim under the FCA, alleging that the contractor was not eligible to receive the award, thereby forfeiting its claim. The government also demanded penalties in the amount of $10,000 for each instance that the contractor submitted an invoice for payment, arguing that in each case the contractor was effectively asserting that it was an eligible participant under the 8(a) program. The court ultimately agreed that the government was entitled to a penalty of $221,000, $10,000 for each payment application submitted by the contractor.

The government can also seek treble damages under the FCA. While many of the reported cases that involve the assessment of treble damages pertain to egregious violations, that does not preclude the government from pursuing such a remedy in more benign situations. See Morse Diesel Intern v. U.S., 79 Fed.Cl. 116 (2007)(assessing treble damages where contractor billed the government more than $1.6 million for reimbursement of bond premiums that were not paid and in excess of $650,000 for false indemnity payments to a parent company).

The above must be taken very seriously based upon the current trends in federal government contracting. The GAO has issued a number of reports over the last several years identifying instances of fraud in the government procurement process. Those reports have generated intense interest on Capitol Hill, resulting in legislation such as the Small Business Contracting Fraud Prevention Act of 2011. The Act would allow for stricter enforcement of the regulations governing small business procurement and increase prosecutions, suspensions and debarments for violations. Similarly, there is a push to amend the FCA to increase the statute of limitations for offenses from six (6) to ten (10) years, expand the ability of the government to obtain awards in excess of any actual losses incurred and apply these principals in a retroactive fashion. All of this suggests increased vigilance in the prosecution of potential instances of fraud. Inevitably, as the government attempts to vigorously root out the evils in the system, there will be honest, hard-working contractors who find Justice knocking on their door. Contractors must be aware of the FCA and the world we now live in and have sufficient controls in place to avoid any unwanted visitors.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

This article was originally published on Law360.

MATOC - Some Winners and Mostly Losers

By: Michael H. Payne

There is an old saying that "you win some, and you lose some." Well, if you are a construction contractor who competes in the world of Multiple Award Task Order Contracting ("MATOC"), you usually lose. Under sealed bidding, which dominated the procurement of federal construction for many years, a contractor who was not the low bidder could always compete for the next project. In the MATOC arena, a contractor who is not selected to be one of the chosen few to compete for task orders over what is often a three to five year period may not be able to compete for the "next project" for a long time. What this means is that there are a few winners, but there are many more losers.

Even if a contractor is fortunate enough to be selected as one of the MATOC master contract holders, there is no guarantee of being selected for future task orders. Every construction MATOC features a "seed" project that serves as the basis of the price competition for the evaluation of the offers on the master contracts. If a contractor does not win the seed project, there may not be another task order for a long time, and the award of the ensuing task orders may go to someone other than the low bidder. The reason for this is that most construction MATOCs are negotiated, best value, procurements ("RFPs"), and past performance, experience, technical merit, quality of personnel, small business subcontracting, and other evaluation factors may come into play. Although it can be argued that the award of a master MATOC should pre-qualify all of the MATOC holders, we have heard complaints from a number of contractors who lose out in the competition for task orders because they do not score well on past performance, or one of the other evaluation factors. This has never made sense to me because if a contractor has won the fierce competition for one of the master MATOCs, price should be the discriminator for the task order awards. If the contractor is not technically qualified to receive a task award on a lowest price proposal, why was the contractor selected as one of the MATOC holders in the first place?

Those who are really left out in the cold, however, are the construction contractors who fail to win one of the master MATOC awards. Simply because a contractor may not have scored particularly well technically, or simply because the contractor's price on a seed project may have been too high, does not mean that it will always be that way. A contractor can do a much better job of putting together a competitive proposal the next week, but if all of the upcoming projects are tied up in MATOCs, the door is closed. Simply because a contractor submits the lowest price on a seed project does not mean that the contractor will be similarly competitive on future projects. It is for this reason that I have been a frequent critic of indefinite delivery/indefinite quantity ("IDIQ/MATOC") contracting for construction. I do not believe that FAR 16.5, dealing with various indefinite delivery contracts, was ever meant to be applied to construction, and I believe that the system unfairly penalizes a lot of very qualified contractors who simply are not adept at proposal writing. Construction was successfully procured using sealed bidding for many years, and that system was more open and fair. The new system simply results in too many losers and not enough winners. (See the earlier article "Has the Corps of Engineers Gone MATOC Crazy?").

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters. He also serves as the Executive Director of FedCon Consulting, an ancillary business of the firm that involves former contracting officers, procurement and technical personnel, as well as lawyers, in providing assistance to federal construction contractors in the preparation of proposals.

Has the Corps of Engineers Gone MATOC Crazy?

By: Michael H. Payne

The recent increase in the use of Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracting for construction has become even more evident by looking at the “FY 2011 – Forecasted Acquisition Strategy” issued by the Jacksonville District of the Corps of Engineers. A review of the list reveals that the majority of the construction work in the coming year will be awarded in the form of task orders under existing Multiple Award Task Order Contracts (“MATOC”), or under task orders on new MATOCs to be issued. The Jacksonville District is not alone in this trend and there is an unmistakable decline in the number of contracts available for full and open competition.

I have been a frequent critic of the use of IDIQ contracts for construction because I do not believe that the drafters of the FAR ever envisioned that the system described in FAR 16.504 for the purchase of supplies and services on an IDIQ basis would ever be used for construction. Nevertheless, that is exactly what has happened as contracting agencies continue to insist that IDIQ/MATOC contracting is more “expedient.” Even more disturbingly, most of these solicitations are being issued as RFPs (negotiated procurements) in total disregard for the FAR 36.103 preference for sealed bidding in the procurement of construction.

This consolidation of procurements could not come at a worse time for the construction industry. As state, local, and commercial contracting opportunities have declined during the recession, many contractors have looked to the federal market for work. What they have found is a large federal construction budget that is often used to fund various forms of small business set-asides, including MATOC set-asides, and various large-dollar multi-state IDIQ/MATOC procurements. There is, therefore, an ever-growing pool of qualified construction contractors who have fewer contracting opportunities. The result of all this is that both small and large business contractors are being denied the opportunity to effectively, and fairly, compete for billion of dollars worth of federal construction. The federal government, the construction industry, and the taxpayers all end up being the losers under this system.

Michael H. Payne is the Chairman of the firm's Federal Practice Group and, together with other experienced members of the group, frequently advises contractors on federal construction matters.

Veterans Win Significant Procurement Battle

By: Edward T. DeLisle & Craig Schroeder

Last year, the United States Association of Veterans in Business ("USAVETBIZ") urged Congress for a government-wide preference in contracting and set-aside programs that extended the existing preference for service-disabled veteran owned small businesses ("SDVOSB") to all veteran-owned small businesses.  While that has not happened yet, the set aside program for SDVOSBs has been recently strengthened.

On October 7, 2010, the Government Accountability Office ("GAO") issued a decision interpreting the Veterans Benefits, Health Care, and Information Technology Act of 2006, 38 U.S.C. sections 8127-8128 (Supp. III 2006) ("the Act") to require that, in certain circumstances, architect/engineer service contracts must be set aside by the Department of Veterans Affairs ("VA") for SDVOSBs.  In the Matter of Powerhouse Design Architects & Engineers, Ltd., Powerhouse, a Pittsburgh SDVOSB, protested the terms of eight Sources Sought Notices (SSN) issued by the VA for A/E services. Powerhouse asserted that the agency improperly failed to set aside these procurements for SDVOSB firms as required by the Act and its implementing regulations. The procurements were conducted pursuant to the Brooks Act, 40 U.S.C. § 1101 et seq. (Supp. III 2006), and Federal Acquisition Regulation (FAR) subpart 36.6. Consistent with the Brooks Act, the agency publicized its need for A/E services on FedBizOpps. Powerhouse challenged the terms of the SSNs, which were issued on an unrestricted basis.

In sustaining the protest, the GAO analyzed the Act and its implementing regulations. It noted that the Act provides that ". . . a contracting officer of [the VA] shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States." 38 U.S.C. § 8127(d). The GAO then went on to look at the regulations, which state that "the contracting officer shall set aside an acquisition for competition restricted to SDVOSB concerns upon a reasonable expectation that: (1) Offers will be received from two or more eligible SDVOSB concerns[4] and; (2) Award will be made at a reasonable price.”

The GAO found "nothing in the VA Act or the VA regulations that exempts A/E procurements from the set-aside requirement." It also found that the agency's defenses to application of the set aside requirement meritless. Accordingly, the GAO held that "the agency [should] determine whether there is a reasonable expectation that it would receive offers from two or more eligible SDVOSB concerns and award would be made at a reasonable price. For each requirement where there is such an expectation, we recommend that the VA solicit the requirement on the basis of a competition restricted to SDVOSB concerns." Powerhouse was awarded its costs for pursuing the protest, including reasonable attorneys' fees.

While USAVETBIZ is still seeking a veteran-wide preference, the Powerhouse decision should be considered a victory for all veterans, service-disabled or otherwise.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.  Craig A. Schroeder is an Associate in the firm’s Federal Practice Group. 

Congress Acts, Ends HUBZone Priority

By: Edward T. DeLisle

On September 23, 2010, we wrote an article regarding the current status of the HUBZone priority fight between the GAO, the Court of Federal Claims and a number of federal agencies. That article followed another that we wrote on this issue on August 27, 2010. In a series of cases, the GAO and the Court of Federal Claims took the position that contracting officers were required to consider set-aside contracts for HUBZone entities, prior to considering set-asides for any other small or small, disadvantaged companies. In reaching this conclusion, the GAO and the Court of Federal Claims focused on the enabling legislation for the HUBZone program, which stated:

Notwithstanding any other provision of law…a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns if the contracting officer has a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price.

Based upon this language, the GAO and the Court of Federal Claims took the position that contracting officers did not have any discretion in deciding whether to set-aside a contract for HUBZone entities. They had to do so, unless they could show that there were not at least two qualified HUBZone companies that would submit offers at a reasonable price. That has all changed.

On September 27, 2010, President Obama signed the 2010 Small Business Jobs Act. As part of the Act, the language of the HUBZone statute was changed. The legislation now states that “a contract opportunity may be awarded pursuant to this section”, eliminating the mandatory nature of the original version. Based upon this simple change, the HUBZone program has been placed on equal footing with all other small and small, disadvantaged business programs, including, but not limited to, those relating to Service-Disabled, Veteran Owned Small Businesses and 8(a) companies.

As we stated in our last article, it was not likely that Congress intended to establish a priority for HUBZone companies. The problem was borne out of sloppy drafting. That drafting problem has now been corrected. It will be interesting to see how this change impacts the HUBZone program in the months to come.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Government Agencies Defy GAO, Court Positions on HUBZone Priority

By: Edward T. DeLisle

On August 27th, we posted an article regarding the recent Court of Federal Claims case, DGR Associates, Inc. v. United States. In that case, the protesting contractor took the position that the government agency, the Air Force, failed to follow the direction of Congress in determining how to set aside contracts for small and small, disadvantaged businesses. It proffered that the legislation which created the HUBZone program clearly gave HUBZone companies priority over other small and small, disadvantaged businesses. The statute reads in relevant part:

Notwithstanding any other provision of law...a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns if the contracting officer has a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price.

In agreeing with the GAO's position regarding this issue, the Court reached the following conclusion:

On the issue of statutory interpretation, the language of the Small Business Act granting priority to the HUBZone program could not be more clear. By using the phrases "notwithstanding any other provision of law...a contract opportunity shall be awarded on the basis of competition to qualified HUBZone small business concerns, "Congress established a priority for the HUBZone program over other competing small business programs.

The Court then proceeded to set forth the remedy associated with its finding:

By this decision, the Court enters a permanent injunction requiring the Air Force and the Small Business Administration to terminate the unlawful contract awarded to General Trades & Services, and to determine whether the criteria of 15 U.S.C. § 657a(b)(2)(B) are met, such that the contracting opportunity at issue must be set aside and awarded on the basis of restricted competition to a qualified HUBZone small business concern. Defendant is enjoined from awarding the contract in a manner that is inconsistent with this decision.

The Court could not have been clearer. The Air Force was required to assess whether the contract could have been set aside for HUBZone concerns. If the Air Force reached the conclusion that at least two HUBZone companies could perform the work at a fair price, then the contract had to be set aside for HUBZones. While at this point it is not clear what happened following the Court's decision, based upon two recent GAO decisions, it is obvious that the Air Force and at least one other government agency don't intend to follow the Court's directive in other cases.

Matter of: Rice Services, Inc. B-403746, issued by the GAO on September 16, 2010, involved a decision by the Air Force to set aside a contract for 8(a) small business concerns. The protester took the position that the contract should have been set aside for HUBZone companies. In response to the protest, the GAO asked the Air Force "whether it had acted in reliance on the DOJ Memorandum Opinion." In DGR Associates, Inc., the Air Force based its position on a memorandum issued by the Department of Justice, which concluded that the Small Business Act did not require HUBZone prioritization. The GAO, and then the Court of Federal Claims, disagreed with the DOJ's position. Nonetheless, in response to the GAO's question in the Rice Services matter, it is clear that the Air Force refused to budge:

[Consistent] with our prior position, the Air Force intends to follow the Memorandum Opinion issued by the Office of Deputy Assistant Attorney General, Office of Legal Counsel, Department of Justice, concluding that there is no statutory requirement to prioritize the HUBZone small business program.

Undeterred, the GAO sustained the protest. Following the reasoning set forth in DGR Associates, Inc., the GAO stated that the language of the HUBZone statute clearly mandated that HUBZone's were to be given priority over other small and small, disadvantaged businesses. As a result, it issued a recommendation to the Air Force that it "undertake reasonable efforts to ascertain whether it will receive offers from at least two HUBZone concerns...at a fair market price."

In Matter of: Rice Services, Inc. B-402966.2, also issued by the GAO on September 16, 2010, the same protester made an identical challenge, this one involving the Defense Commissary Agency. The DCA attempted to set aside a contract for service-disabled, veteran-owned small businesses and, in doing so, took the same position as the Air Force, that is, that it could do so without first considering whether the contract should be set aside for HUBZone contractors. The DCA suffered the fate as the Air Force. The GAO sustained the protest.

The above illustrates the current tug-of-war between certain executive agencies, as well as the judicial branch, of our government. While one can guess as to what Congress may have intended when it established the HUBZone program, the language of the statute is clear. The Court of Federal Claims and the GAO had no choice but to rule as they did in the cases cited above. If Congress was simply sloppy in drafting the HUBZone program's enabling legislation, which was probably the case, then only Congress can fix the problem. It will be interesting to see how this battle plays out in the weeks and months to come.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.
 

HUBZone Priority Upheld by the Courts

By: Edward T. DeLisle

On August 13th, the Court of Federal Claims temporarily ended a controversy regarding how agencies go about setting aside contracts for certain qualified small businesses. DGR Associates, Inc. v. United States involved a decision by the Air Force to issue a set aside contract for qualified 8(a) companies. The project involved housing maintenance, inspection services and repairs at Eielson Air Force Base in Alaska. The solicitation was challenged by a HUBZone contractor who claimed that the Air Force violated the Small Business Act by failing to give priority to HUBZone contractors. Specifically, the protesting contractor claimed that when the HUBZone program was established in 1997, the legislation required agencies to consider setting aside contracts for HUBZone contractors prior to considering any other small and/or disadvantaged companies for such contracts.

The enabling statute for the HUBZone program states the following:

Notwithstanding any other provision of law ... a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns if the contracting officer has a reasonable expectation that not less than 2 qualified HUBZone small business concerns will submit offers and that the award can be made at a fair market price.

Given this language, the protesting contractor took the position that Congress intended to give priority to HUBZones over other small and small, disadvantaged businesses, where government agencies make the decision to issue set aside contracts. The GAO agreed. In May of 2010, the GAO issued a recommendation to the Air Force that it follow clear Congressional authority and set aside the solicitation for HUBZone contractors, if further research suggested that two or more HUBZone contractors could perform the work at a reasonable price.  The Air Force refused to follow this recommendation, taking the position that Congress did not intend such a result. The protesting contractor then took action in the Court of Federal Claims.

Considering the same arguments made before the GAO, the Court of Federal Claims agreed with the conclusion reached in that forum. In rendering its decision, the Court stated as follows:

On the issue of statutory interpretation, the language of the Small Business Act granting priority to the HUBZone program could not be more clear. By using the phrases "notwithstanding any other provision of law ... a contract opportunity shall be awarded on the basis of competition to qualified HUBZone small business concerns," Congress established a priority for the HUBZone program over other competing small business programs.

The Court went on to state that "Congress must alone enact an appropriate amendment" if its intent was something other than to provide priority to HUBZones.

Based upon this decision, until such time as Congress acts, if a contracting officer is prepared to set aside a contract, he or she must determine whether two or more HUBZone contractors can perform the work for a fair price. If the answer to that query is "yes", then the contract must be set aside for HUBZone contractors to the detriment of other small and small, disadvantaged businesses. While one can reasonably expect Congress to take action at some point in the near future, in the short term this could mean more opportunities for HUBZone contractors.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. 

GAO Issues Report on President's 2011 Budget Proposal for Corps of Engineers Civil Works Program and Recommends Transparency of Presentation be Improved

By: Joseph A. Hackenbracht

On April 2, 2010, the Government Accountability Office responded to a request from the House Subcommittee on Energy and Water Development to evaluate “whether the President’s recent budget requests for the Corps are presented so that agency priorities are clear and proposed use of funds transparent.” In its analysis, the GAO reviewed the Corps’ internal review guidance for fiscal year 2011 and interviewed Corps’ officials at the Headquarters office and all Division offices. The GAO concluded that the Corps’ budget presentation continues to lack transparency and should provide key information that would be useful for Congress’ review of the budget. GAO believes that the Corps should provide two types of project-level information: first, information on projects previously funded that may still have resource needs; and second, information on the amount of unobligated appropriations remaining on previously funded projects. GAO suggests that this detailed information would help Congress make better informed appropriations and oversight decisions. Both Senate and House members have indicated that this type of information would be useful, and the Corps has agreed to provide this type of project-level information in future budget requests. While some of the information has been provided for the 2011 budget, the Corps has indicated that it can supplement the budget request during Congressional consideration of the appropriations.

The GAO noted that the fiscal year 2011 budget request included 95 construction projects and 65 investigation projects. The budget request that President Obama presented to Congress on February 1, 2010, totaled 3.834 trillion dollars. The budget proposal includes 4.881 billion dollars to support the U.S. Army Corps of Engineers’ Civil Works Program. Highlights of the Corps’ proposed budget are:

• $164 million to construct commercial navigation improvements on America’s inland waterways. 
• $789 million for efforts to reduce the risk of flood and storm damage. 
• $506 million to restore aquatic ecosystems. 
• The budget gives construction priority to dam safety work, projects that reduce significant risks  to human safety, and projects that will complete construction during 2011.
• $58 million for the Corps share of the CALFED Bay-Delta Program designed to improve California’s water supply and the ecological health of the San Francisco Bay/Sacramento-San Joaquin River Delta.
• $180 million to advance Corps studies and key construction projects to restore the South Florida ecosystem, including the Everglades, an extraordinary but threatened ecosystem.
• $36 million for efforts to restore and protect the ecosystem along the Louisiana Coast, still recovering from Hurricanes Katrina and Rita.

The Corps’ 2011 proposed amount, however, represents a substantial decrease from the 2010 budget amount of 5.446 billion dollars. The budget proposal for the Corps also reflects a dramatic drop in fiscal outlays from the American Recovery and Reinvestment Act funding for the Civil Works Program.

The Water Resources Coalition, an organization established to promote the development, implementation and funding of a comprehensive national water resources policy, has expressed its concern that the budget cuts will have wide negative impacts “including reducing necessary flood control protection along coastlines, stifling inland waterway shipments, and the lost opportunity for job creation.” Among its members, the Water Resources Coalition includes the Associated General Contractors of America and the American Society of Civil Engineers.

Brian T. Pallasch, Co-Chairman of the Water Resources Coalition, stated that “the Administration’s budget ignores the public safety and environmental benefits these programs offer our nation. The residual risk to life and property behind such structures cannot be ignored.” The Water Resources Coalition has encouraged Congress to reverse these budget cuts and increase the funding for the Corps’ Civil Works Program. The project-level information that the Corps has indicated it would provide for the 2011 budget process may assist Congress in justifying increases in the funding for the Corps. 
 

Provisions Added to the FAR Concerning Use of Project Labor Agreements

By: Joseph A. Hackenbracht

On April 13, 2010, the FAR Council published in the Federal Register a Final Rule that adds a new section to the Federal Acquisition Regulation – Subpart 22.5 – Use of Project Labor Agreements for Federal Construction Projects. The Final Rule implements Executive Order 13502, which President Obama signed on February 6, 2009, encouraging Federal agencies to consider the use of a project labor agreement (“PLA”), on large construction projects. Use of project labor agreements by Federal agencies had been curtailed by an Executive Order issued by President Bush in 2001. (See earlier blog article dated February 10, 2009 for more information).

As of May 13, 2010, Contracting Officers can include in solicitations for construction projects clauses FAR 52.222-33 and FAR 52.222-34 that will require an offeror to negotiate a PLA and that will “bind the offeror and all subcontractors engaged in construction on the project to comply with the PLA.” Use of the FAR provisions concerning PLAs, however, is limited to projects where the total cost to the Federal Government is $25 million or more. The Alternate clauses are to be used if the Contracting Officer determines to only require the “apparent successful offeror” or the awardee of the contract to negotiate the PLA.

In deciding whether or not to require a PLA, agencies must conclude that use of a PLA will “advance the Federal Government’s interest in achieving economy and efficiency in Federal procurement, producing labor-management stability, and ensuring compliance with laws and regulations governing safety and health, equal employment opportunity, labor and employment standards, and other matters.” Agencies can also consider other factors in determining whether a PLA is appropriate, such as: (1) the project involves multiple contractor or subcontractors employing multiple crafts; (2) a shortage of skilled labor exists in the project area; (3) the project has a relatively long performance time; (4) PLAs have been used on comparable projects, public and private, in the project area; and (5) a PLA promotes the agency’s long term program interests.

Jared Bernstein, Chief Economic Advisor to Vice President Biden, reports that “Project Labor Agreements have also been used by the private sector for a variety of construction projects that are similar in nature to those undertaken in the public sector, including for manufacturing plants, power plants, parking structures, and stadiums. The executive order and the final rule now enable Agencies to consider whether their projects might gain some of the benefits found in the private, state and local construction sectors as well.” Mr. Bernstein quoted the Secretary of Labor, Hilda Solis, as saying, “Project labor agreements are a win-win; they benefit businesses, workers and taxpayers.” Simon Brody, with the National Association of Government Contractors, however raises the question whether the Federal government’s PLA initiative is pro-labor and anti-small business. Mr. Brody suggests that the use of PLAs will “put more Federal contracts out of reach for the mid-sized and small contractors who are best able to infuse the crippled job market with immediate opportunities.” He reported that Representative John Kline, member of the House Education and Labor Committee, observed that “PLAs are an antiquated approach to federal contracting designed to favor large, unionized contractors at the expense of smaller employers,” and that “PLAs reduce competition, increase costs for taxpayers, and add layers of bureaucracy and red tape to federal construction projects. Creating a formal federal process for imposing these Depression-era mandates on construction projects may be a win for special interests, but it’s a loss for workers, taxpayers, and small businesses hoping to compete for federal jobs.”

The use of PLAs has always been controversial, and has been the subject of contentious litigation. It can be expected that challenges to their implementation will continue, particularly in light of Mr. Bernstein’s comment that “[m]any agency contracting offices have little knowledge of or experience with PLAs.” However, he did note that an Inter-Agency PLA Working Group had been convened to provide technical assistance to agencies. With the soon-to-go into effect FAR provisions, we will need to wait and see what types of, and how many, solicitations Contracting Officers decide are appropriate for a Project Labor Agreement.
 

Obama's Message to Federal Contractors: "Pay Your Taxes"

By: Edward T. DeLisle

On Wednesday, January 20, 2010, President Obama signed a presidential memorandum directing the Internal Revenue Service to conduct an audit of all federal contractors.  As reported by Nextgov.com, the audit is designed to identify those federal contractors that have failed to pay taxes and prevent them from obtaining additional federal work.  The IRS is required to issue a report on its findings within ninety (90) days.

Calling out “deadbeat companies” that are being awarded government contracts while delinquent in their taxes, President Obama’s memorandum is intended to stop these companies from collecting government contracts while they are “gaming the system.”  Studies by the Government Accountability Office have identified tens of thousands of such companies that, collectively, owe more than $5 billion in back taxes, the president said.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Court of Appeals Keeps MATOC Alive

The Court of Appeals for the Federal Circuit has decided two cases that assure the continued use of the Multiple Award Task Order Contract (“MATOC”) in federal construction contracting. In the first case, Weeks Marine, Inc. v. United States, the United States Court of Federal Claims decided a bid protest in favor of Weeks Marine.  The protest challenged the right of the South Atlantic Division of the Corps of Engineers to use MATOC procurement to solicit all maintenance dredging and shore protection projects for the next five years by establishing a MATOC pool of contractors who would compete for projects solicited on a task order basis.  The Protester contended, and the Court agreed, that since sealed bidding had been used successfully in the procurement of dredging for many years, there was no basis to use contracting by negotiation, much less MATOC. The Court found that the Corps’ Acquisition Plan did not provide a rational basis for a departure from sealed bidding.

The Court of Appeals reversed the lower court and concluded that the Corps was required to “supply a reasoned chronicle of the risk assessment,” and did so “by stating the reasons for its procurement decision and the thinking behind those reasons.”  Therefore, the Court concluded that as long as the Corps stated its reasons, and the thinking behind those reasons, the Court would not “second-guess” the Corps. In other words, even if the Corps’ rationale for using MATOC procurement made no sense and was not well supported, the Court would not disturb the Corps’ right to use a MATOC as long as some reasons were given.  In this regard, the Court stated “If the court finds a reasonable basis for the agency’s action, the court should stay its hand even though it might, as an original proposition, have reached a different conclusion as to the proper administration and application of the procurement regulations.”

The second MATOC decision, Tyler Construction Group v. United States, involved a protest by a small business concern against the use of MATOC procurements to procure barracks construction in an eight state region. The protester contended that Indefinite Delivery Indefinite Quantity (“IDIQ”) contracts may only be used to procure supplies and services, and not construction, pursuant to FAR 16.5.  MATOC procurements are solicited through the IDIQ contracting procedures specified in FAR 16.5, but that section of the FAR does not mention “construction” even once.  Tyler argued that the Corps, under the guise of “innovation,” had adapted a contracting method used to procure supplies and services, like rounds of ammunition or electrical repair services, to the acquisition of large multi-million dollar buildings.

The Tyler protest also addressed the issue of improper bundling in violation of the Small Business Act. By taking individual projects, many of which were less than the $31.5 million (now $33.5 million) small business size standard for general construction, and bundling them into a $300 million MATOC procurement, the Corps effectively prevented small business concerns from competing as prime contractors.  In other words, even though many small businesses could compete for projects in the $30 million range, they are excluded by the size of the bundled MATOC solicitation. In fact, both small businesses and small to medium-sized large businesses are effectively excluded from competition by MATOC procurements.

The Court of Federal Claims ruled that since the use of IDIQ/MATOC was not specifically prohibited in the procurement of construction by the FAR, it was therefore permitted.  The Court also found that the Corps had conducted market research and had concluded that there was an industry consensus that bundling was “necessary and justified.”  The Court of Appeals agreed with the lower court and decided that “The Corps, like other federal procurement entities, has broad discretion to determine what particular method of procurement will be in the best interests of the United States in a particular situation.”

In this writer’s opinion the widespread use of MATOC procurements to procure large dollar value construction projects is not consistent with the FAR. It is interesting that the use of the IDIQ procedure for construction was not subjected to review by the Defense Acquisition Regulations Council (DAR Council), as is commonly done when a new regulation is needed, or when there is a request for a deviation from an existing regulation.  Although the Corps has taken the position that IDIQ/MATOC is an innovative method that is within its procurement discretion, we find it to be strange that a method affecting billions of dollars of construction procurement is not specifically addressed by the FAR, or the supplemental agency regulations (DFARS, AFARS, EFARS). In fact, when the Corps was challenged because it was not following its own regulations (EFARS) that addressed IDIQ contracting,  it promptly rescinded those regulations. What the construction contracting community is left with is a multi-billion dollar procurement methodology that is unregulated, is ripe for abuse, and that only serves the interests of a reduced federal procurement workforce.  It certainly remains to be seen whether MATOC is truly more efficient or cost-effective than traditional single project solicitations.

Most disturbing of all, is the hands-off policy adopted by the Court of Appeals for the Federal Circuit on matters of federal procurement.  If the agencies can do whatever they want, as long as it is not expressly prohibited by law or regulation, and as long as they provide some reason for their decisions, the competitive opportunities that have been the hallmark of federal construction contracting will continue to be eroded.  Many capable contractors have been, and will be, denied a fair opportunity to compete and, in the long run, that cannot possibly be in the best interests of the construction contracting community, or the federal government.

Michael Payne is a Partner and is the Chairman of the firm's Federal Practice Group.

The American Recovery and Reinvestment Act of 2009: What it Means for Federal Construction Contractors

Co-authored by Michael H. Payne and Craig A. Schroeder

On February 17, 2009, the President signed Public Law 111-5, the American Recovery and Reinvestment Act of 2009 (also known as “ARRA,” the “Recovery Act,” and the “Stimulus Act”), including a number of provisions to be implemented in Federal Government contracts.  The Recovery Act’s purposes are to stimulate the economy and to create and retain jobs. The Act gives preference to activities that can be started and completed expeditiously, including a goal of using at least 50 percent of the funds made available by it for activities that can be initiated not later than June 17, 2009. 

An Interim Rule issued on March 31, 2009, implements section 1512, which is also known as the ``Jobs Accountability Act.''  Subsection (c) of section 1512 requires contractors that receive awards (or modifications to existing awards) funded, in whole or in part, by the Recovery Act to report quarterly on the use of the funds. The comment period on the interim rule expires on June 1, 2009. In addition, a new section was added to the FAR, subpart 4.15, “American Recovery and Reinvestment Act – Reporting Requirements,” and a new clause was added to implement the reporting requirements, FAR 52.204-11.   Contracting Officers are now required to include the new clause in solicitations and contracts funded in whole or in part with Recovery Act funds, except classified solicitations and contracts.  Commercial item contracts and Commercially Available Off-The-Shelf (COTS) item contracts are covered, as well as actions under the simplified acquisition threshold.

Effective March 31, 2009, five (5) interim Federal Acquisition Regulation (FAR) rules went into effect that implement several requirements of the Recovery Act. See Federal Acquisition Circular (FAC) 2005-32, published at 74 Fed. Reg. 14,639 (Mar. 31, 2009). These new rules only apply to federal procurement contracts funded with stimulus money. Their goal is increased transparency and accountability in the spending of Stimulus Act funds. The new rules include:

            1. Reporting Requirements for Recipients of Recovery Funds (See 74 Federal Register 14639);

            2. Publicizing Contract Actions (See 74 Federal Register 14636);

            3. GAO and IG Access to Company Employees (See 74 Federal Register 14646);

            4. Whistleblower Protections (See 74 Federal Register 14633); and

            5. Buy American Requirements for Construction Materials (See 74 Federal Register 14623).

Each rule is discussed, in turn, below. 

1. Reporting Requirements for Recipients of Recovery Funds 

This is the most onerous of the new requirements and contractors must now file quarterly reports documenting their use of stimulus funds. See FAR Case 2009-009, Interim Rule, American Recovery and Reinvestment Act of 2009 (the Recovery Act)— Reporting Requirements, 74 Fed. Reg. 14,639 (Mar. 31, 2009).  Information on the Recovery Act may be found on the Recovery Act Web site (www.recovery.gov). A new website is under construction, www.federalreporting.gov, that will facilitate online reporting. The site is expected to be operational before July 10, 2009. 

The new mandated contract clause, FAR 52.204-11, which must be included in all contracts receiving stimulus funds, requires the prime contractor, and first tier subcontractors, to report the following information:

            (i) Contract and order number;

            (ii) Amount of stimulus funds invoiced by the contractor for the reporting period;

            (iii) List of significant supplies delivered or services performed;

            (iv) Assessment of the contractor’s progress on the contract;

            (v) Employment impact of the contract (e.g., an estimate of the number of jobs      created and retained);

            (vi) The names and compensation of the five most highly compensated officers of the contractor for the calendar year in which the contract is awarded if the contractor receives 80 percent and $25 million or more of its annual gross revenues from federal awards and the public does not have access to the information through periodic reports filed with the Securities and Exchange Commission or the Internal Revenue Service; and

            (vii) Detailed information on first-tier subcontracts.

Reporting on invoices submitted prior to June 30, 2009 are due no later than July 10, 2009.   After those dates, contractor reports must be submitted no later than the 10th day after the end of each calendar quarter. The new reporting requirements apply to all solicitations and contracts funded in whole or in part with Recovery Act funds, except classified solicitations and contracts. This includes Government-wide Acquisition Contracts (GWACs), multi-agency contracts (MACs), Federal Supply Schedule (FSS) contracts, or agency indefinite-delivery indefinite-quantity (ID/IQ) contracts that will be funded with Recovery Act funds.  

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Department of Defense Expenditure Plan Provides Tremendous Opportunities for Federal Construction Contractors

Although many aspects of our economy are suffering, the federal construction market will most certainly be booming.  On Friday March 20, 2009, the Department of Defense issued a 191 page Report to Congress detailing how it plans to spend the money it has received as part of the American Recovery and Reinvestment Act of 2009, also known as the “Stimulus Package.”  The DoD has “identified specific investments in construction, facility improvements, and energy efficiency projects that will help improve the quality of life for our troops and their families.” Included in the Report is a very detailed breakdown of how the money will be spent. For each project anticipated, the included spreadsheet provides cost, a brief description of the work, and the project location

The Recovery Act includes approximately $7.4 billion in Defense-related appropriations, which accounts for less than 1 percent of the total $787 billion stimulus package.  The Department intends to spend this funding with “unprecedented full transparency and accountability.”  A website, www.Recovery.gov, is the main vehicle to provide every citizen with the ability to monitor the progress of the recovery.  The DoD also has a website which links to Recovery.gov. and it may be found at http://www.defenselink.mil/recovery.

The DoD plans to spend $2.3 billion of the Stimulus funds on military construction and family housing construction projects.  The Department also indicates that it will be “pursuing architectural and engineering services greater than $1 million for 5 projects, conducting repair projects greater than $7.5 million for 56 projects, and carrying out 45 Energy Conservation Investment Program projects, respectively.”  In addition, the DOD provided a list of 3,300 Facilities Sustainment, Restoration, and Modernization (“FSRM”) projects costing an estimated $3.4 billion, representing 80% of the total FSRM funds appropriated to the DOD.  The FSRM projects account for over $3.83 billion of their entire Stimulus spending. The following are the areas where DoD plans to spend money as quickly as possible:

• $4.2 billion in Operation and Maintenance accounts to improve, repair, and modernize DOD facilities, including energy-related improvements
• $1.3 billion in military construction for hospitals
• $240 million in military construction for child development centers
• $100 million in military construction for warrior transition complexes
• $535 million for other military construction projects, such as housing for the troops and their families, energy conservation, and National Guard facilities
• $300 million to develop energy-efficient technologies
• $120 million for the Energy Conservation Investment Program (“ECIP”)
• $555 million for a temporary expansion of the Homeowner’s Assistance Program (“HAP”) benefits for private home sale losses of both DOD military and civilian personnel
• $15 million for DOD Inspector General oversight and audit of Recovery Act execution

The federal agency that is the most heavily involved in construction, the U.S. Army Corps of Engineers (“USACE”), has provided Congress with “informed estimates” of existing capability to perform additional work. The Corps has set forth project selection criteria as projects that will:

(1) Be obligated/executed quickly

(2) Result in high, immediate employment

(3) Have little schedule risk

(4) Be executed by contract or direct hire of temporary labor

(5) Complete either a project phase, a project, or will provide a useful service that does not require additional funding

For the USACE Civil Works Program, the Recovery Act includes $4.6 billion in funding.  Of that, $2.1 billion is appropriated for construction and $2.3 billion for Operation and Maintenance (O&M). Appropriations are also included for the Mississippi River and Tributaries account.  The Corps estimates that it will award contracts on approximately 400 maintenance projects with O&M funding by the end of April with contract values ranging from $250,000 to $10 million and construction durations of 6 months to 2 years.  The Corps also estimates the award of approximately 300 construction contracts ranging in value from $1 million to $30 million by the end of April with construction durations ranging from 6 months to 3-1/2 years.

These projects will provide tremendous opportunities for federal construction contractors.  It remains to be seen whether the government has enough procurement people to issue so many solicitations in such a short time and whether the specific agencies have the capability to properly administer all of this work.  On the bright side, however, the surge of work created from all of these new projects should give our economy the boost that it needs.
 

Obama Issues Memorandum Ordering Reduced Wastefulness in the Federal Procurement Process

On February 18, the Office of Management and Budget (“OMB”) director Peter Orszag issued guidance to agencies regarding the administration of federal Stimulus funds. Just this past week, on March 4, President Obama signed a memorandum designed to reform federal government contracting. These directives mark the beginning of reform in the world of government contracting, and reflect the greater accountability and transparency the new administration promises to American taxpayers.

The OMB memo requires agencies to submit spending and performance data to the new website http://www.recovery.gov on a regular basis. The website is a web portal that demonstrates exactly how the Stimulus funds are being spent, and it calls itself the “centerpiece” of efforts to implement the American Recovery and Reinvestment Act with “accountability and transparency.” In a video message to Americans on the website, President Obama pledges greater accountability and transparency in government spending. In his address, he notes that the “size and scale of this effort demand unprecedented efforts to root out waste, inefficiency and unnecessary spending,” and he refers to the Stimulus as a “significant investment in our country’s future.”

The OMB memo also increases the requirements for those doing business with the federal government. Starting on March 3, agencies must submit weekly reports breaking down how they have spent Stimulus funding. They must also summarize any major actions taken as well as any future activities. Beginning May 1, they must provide recovery plans outlining their individual agency goals and any coordinating efforts. By May 8, they must being submitting monthly financial reports detailing their obligations, expenditures, and other pertinent financial information.

Under the new requirements, agencies are now required to post pre-solicitation and award notices for any task and delivery order acquisition contracts on FedBizOpps, a clearinghouse for federal government contracting opportunities. Any Stimulus-related prospects must be specially formatted to differentiate them from regular projects. For any contracts or orders over $500,000, the agencies must summarize the contract or order, provide a description of the particular goods or services required, and then post that information to the recovery.gov website, making it available to the public.

Agencies are also urged to use fixed-price contracts wherever possible and appropriate. Several types of fixed-price contracts exist. They are designed to facilitate proper pricing under varying conditions. Generally, they place more cost responsibility on the contractor than on the Government, and encourage greater efficiency in contract management. According to Orszag, these kinds of contracts “expose the government to the least risk.” Fixed-price contracts are outlined in more detail in Subpart 16.2 of the Federal Acquisition Regulation (“FAR”).  More detailed instructions will be provided to agencies in the coming months.

Obama’s presidential memo comes out of the recent government responsibility summit and calls for massive overhaul in government procurement. In his announcement regarding this memo, President Obama noted that, “last year, the Government Accountability Office, looked into 95 major defense projects and found cost overruns that totaled $295 billion…That's $295 billion in wasteful spending.”
 

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Use of Project Labor Agreements Encouraged in Executive Order Issued by President Obama

On February 6, 2009, President Obama issued an Executive Order encouraging agencies to use Project Labor Agreements ("PLAs") in federal construction projects with a total cost to the Government of $25 million or more.  The purpose of the Order is to avoid some of the problems which typically arise during the completion of such large projects causing various delays in their timely completion. 

"Project Labor Agreements" are defined as, "pre-hire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific construction project and is an agreement described in 29 U.S.C. 158(f)."  Title 29 governs the relationship between management and labor as well as national labor relations and section 158 governs unfair labor practices.  While the Order is effective immediately, the FAR Council has been given 120 days-until June 6, 2009-to take "whatever action is required" to implement this order.  President Obama also instructs the Director of the Office of Management and Budget, in consultation with the Secretary of Labor and other appropriate officials, to evaluate whether broader use of such PLAs would help promote the economical, efficient and timely completion of such projects. 

This Order repeals George W. Bush's Executive Order 13202 which forbade federal agencies and other recipients of federal funding to require contractors to sign union-only PLAs as a condition of performing work on federal projects.  Interestingly enough, the history behind the most recent Order clearly demonstrates the divide between the Democratic and Republican Parties' divergent view of the role of unions.  Bush's Order repealed an Order issued by former President Clinton, the purpose of which was to overrule an Order issued by his predecessor George H.W. Bush. 

Many in the construction industry are concerned about this order and feel that the implementation will negatively impact the 84% of U.S. construction workers who are not union members.  However, the Order only encourages PLAs for large-scale construction projects, it does not mandate them. "Executive agencies may, on a project-by-project basis, require the use of a project labor agreement by a contractor where use of such an agreement will...advance the Federal Government's interest in achieving economy and efficiency in Federal procurement..."  Under the terms of the Order, the government cannot compel a contractor to enter into these agreements, and cannot exclude from competition those contractors that choose not to use them.  Additionally, contractors are not required to obtain their labor from any particular labor organization.  We will just have to wait and see how the FAR is updated before we can determine the ramifications for federal construction contractors.

Early Contractor Involvement - Another Experiment by the Corps of Engineers in "Creative Contracting"

In recent years, the U.S. Army Corps of Engineers has attempted to employ "innovative" contracting methods but, in doing so, has often limited the number of contractors who have had the opportunity to perform major construction projects.  One of the justifications for these “innovative” methods has been that there will be a reduction in the administrative workload resulting in a "savings" for the government.  As a result, it seemed as though fewer solicitations were being issued using the sealed bidding procedures in FAR Part 14, with a corresponding increase in the procurement of construction under FAR Part 15, Contracting by Negotiation.  Construction contractors began to find that competition was no longer based on price alone, but on subjective factors as well, such as past performance, technical ability, or client satisfaction.  Of course, even though these procurements were purportedly “negotiated,” the instances where discussions or negotiations actually occurred were relatively few in number.  It was for that reason that we continued to wonder whether the Corps ever actually intended to “negotiate” a negotiated contract.  Could the reason possibly be that the Corps wants to be able to use subjective evaluation factors, under the guise of “best value,” as an excuse not to award construction contracts to responsible, bonded, contractors who offer the lowest price?

In a further extension of the use of "Contracting by Negotiation," the Corps has also adopted the Multiple Award Task Order Contracting (“MATOC”) procedures provided under FAR Part 16.5, "Indefinite-Delivery Contracts," to the procurement of major construction projects.  We have been involved in on-going legal challenges to the use of MATOC for construction  because we believe that the preference for sealed bidding in construction, as expressed in FAR Part 36, is being ignored by the Corps.  Through the use of MATOC, the Corps has found a way to limit the competition for the design and construction of facilities in entire regions of the country to only a few of the very largest construction companies.
 
Just as the shift to large, regional MATOCs has decreased the number of contractors, both large and small, who are able to perform these projects as prime contractors, the adoption of design-build as the favored mechanism for major construction projects has also tended to limit competition.  Design-build contracting has permitted the government to shift more and more risk and responsibility to the contracting community, but it seems to be a community that is shrinking in size.  Does this make any sense at a time when the country is suffering from rapidly increasing unemployment and the government is planning to spend billions of dollars on improving the infrastructure?  There are many small and medium-sized business concerns who have capably performed thousands of federal construction projects over the years under sealed bidding.  We continue to wonder why that successful system is being systematically abandoned.

Now the Corps is beginning to issue solicitations for major construction projects under the provisions of FAR Part 16.403, Fixed Price Incentive Contracts, using a project delivery method referred to as "Early Contractor Involvement," or “ECI” for short.  Under ECI, the Corps engages the services of a general contractor to provide "preconstruction services" concurrent with the design of a project that is being performed by a design firm.  The construction contractor reviews the partially completed design for constructability and biddability.  As the design work nears completion, construction is then procured through the exercise of an option under the ECI contract.  An ECI procurement requires the construction contractor to compete on both technical and price factors long before the project's design is developed to the point that facilitates meaningful and well-informed cost proposals, however.  With so little detailed information on the construction that is being procured, the competition among construction firms has the real possibility of being nothing more than a popularity contest in which the government procurement officials make choices based on who they think they want to work with, rather than the contractor they should be working with based on the technical aspects of a particular project.  The competitors also must provide a ceiling price for the project as part of their proposals, long before the design has reached the point where a price estimate is anything more than an educated guess.  Although a Corps spokesman, in an article published in Engineering News-Record, indicated that the Corps is turning to ECI for classic reasons, that it is "better, faster, cheaper,"  we wonder what the basis is for such a bold conclusion.

In a recent press release, the New Orleans District of the Corps reported that it will use Early Contractor Involvement (ECI) to construct the $500 Million Gulf Intracoastal Waterway West Closure Complex project.  Colonel Alvin Lee, New Orleans District Commander, indicated that although "the New Orleans District has never used ECI as an acquisition strategy before," the District was "excited about the benefits it brings to this momentous project.”  In addition to the West Closure Complex project, the New Orleans District is proposing to employ ECI on a series of levee improvement projects on the Chalmette Loop Levee in St. Bernard Parish, Louisiana.  These additional ECI contracts will total between $850 Million and $1.75 Billion.

Other Corps districts have had some experience using a similar method of procurement under a strategy known as "IDBB," or "Integrated-Design-Bid-Build."  Two of these IDBB projects are the new Community Hospital and the National Geospatial Intelligence Agency Complex at Fort Belvoir, Virginia.  Very recently, other Corps districts have advertised the intention to issue ECI solicitations, notably for the construction of a Replacement Hospital at Fort Riley, Kansas ($250 to $500 Million).  Other Federal agencies can be expected to increasingly employ the ECI procurement method; the U.S. Navy already intends to construct a $68 Million Helicopter Maintenance Hanger in San Diego using ECI.  In private construction, ECI is called Construction Management (or Manager) at-risk, "CM@R."   A joint committee of the AIA and AGC have described CM@R as follows:

Construction management at risk (CM@R) approaches involve a construction manager who takes on the risk of building a project. The architect is hired under a separate contract. The construction manager oversees project management and building technology issues, in which a construction manager typically has particular background and expertise. Such management services may include advice on the time and cost consequences of design and construction decisions, scheduling, cost control, coordination of construction contract negotiations and awards, timely purchasing of critical materials and long-lead-time items, and coordination of construction activities.  In CM@R the construction entity, after providing preconstruction services during the design phase, takes on the financial obligation for construction under a specified cost agreement. The construction manager frequently provides a guaranteed maximum price (GMP). CM@R is sometimes referred to as CM/GC because the construction entity becomes a general contractor (GC) through the at-risk agreement. Primer on Project Delivery, AIA/AGC (2004).

A question remains as to whether the government can exercise the flexibility that a private entity can employ to insure that the ECI, or CM@R, process can be successful.  Whether or not such flexibility is possible, use of ECI will certainly further diminish the competitive nature of the government procurement of construction projects in the future.

Department of Homeland Security Sued Over E-Verify Requirement

In November, 2008, the Department of Homeland Security (DHS) implemented a new rule through the Federal Acquisition Regulation (FAR) that would force companies doing business with the federal government to clear their workers through a verification database. This database is called E-Verify and it electronically confirms whether a new hire is in the United States legally and therefore eligible to work on a federal project.  It works by comparing the name of the queried worker against submitted I-9 forms - the Social Security Administration’s paper based means of verifying worker status - and the DHS’s 60 million records of immigrants. Currently participation in E-Verify is voluntary. According to the October 23, 2008 DHS press release, over 92,000 employers have used E-Verify, with nearly 7 million queries made in Fiscal Year 2008, and 450,000 queries so far in Fiscal Year 2009.  In 96% of the queries made, the worker is deemed eligible to work on a federal project.

The new rule was placed into effect on June 6, 2008 by President Bush as part of an Executive Order, and pending the outcome of the case discussed below, it will be implemented on January 15, 2009. If implemented, it will require contractors and subcontractors who win federal contracts to verify their employees’ status and makes it very difficult for any company to knowingly employ illegal immigrants. In the past, illegal immigrants have been discovered working on U.S. military bases and in other federal offices on multiple occasions. The rule is not without limitation - it would only apply to contracts valued at over $100,000.00 and subcontracts valued over $3,000.00, and to the workers assigned to that particular project.    

The legality of this new requirement is being challenged in federal court where many groups, including the U.S. Chamber of Commerce and Associated Builders and Contractors among other co-plaintiffs, have filed suit to prevent its implementation. The Complaint names Michael Chertoff, Secretary of Homeland Security, et. al., as Defendants and was filed on December 23, 2008 in the United States District Court for the District of Maryland.  The lawsuit contends that it is illegal to require participation in a program such as E-Verify. The law in question, an amended version of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, designated E-Verify as one of several pilot programs that contractors can enroll in, but it also asserts that their participation cannot be made mandatory, as it would be if this new rule were implemented.    

The rule has the potential to impact a very large number of contractors. The rule could make participation in federal government contracting more costly for contractors: the Complaint notes an estimated increased cost of $188 million to private employers if the rule is implemented, a very negative outcome given the current state of the economy.  In a statement issued by the U.S. Chamber of Commerce, Randy Johnson, Vice President of Labor, Immigration and Employee Benefits stated that, “The DHS intends to expand E-Verify on an unprecedented scale in a very short timeframe, and to impose liability on government contractors who are unable to comply.” He adds that, “Given the current economy, now is not the time to add more bureaucracy and billions of dollars in compliance costs to America’s businesses.”  Additionally, the press release includes comments regarding the legality of the rule from Robin Conrad, executive vice president of the National Chamber Litigation Center (NCLC), the Chamber’s public policy law firm, who stated that, “This massive expansion of E-Verify is not only bad policy, it’s unlawful,” adding that, “The Administration can’t use an Executive Order to circumvent federal immigration and procurement laws. Federal law explicitly prohibits the Secretary of Homeland Security from making E-Verify mandatory or from using it to re-authorize the existing workforce.” Considering all of the changes we are expecting to see with the inauguration of Barack Obama in January, it will be interesting to see how this all plays out in the coming months. 

House Votes to Close Code of Ethics Loophole on Contracts Performed Outside the United States

The requirement found at FAR 52.203-13 was implemented on December 24, 2007 and requires any contractor who is awarded a contract in excess of $5 million to have a written Code of Business Ethics and Conduct within thirty days after award.  Large business firms must also implement a training and compliance program within ninety days (see our earlier blog article for additional information). The requirements, however, did not apply to contracts that were to be performed outside of the United States. This “exemption” for foreign projects has now received the attention of the U.S. House of representatives.

As reported today by the Associated Press, the House has voted to close a multibillion-dollar loophole in a crackdown on contract fraud, approving plans to force the Bush administration to act within six months. At issue is a Bush administration rule requiring government contractors to report misuse of taxpayer dollars to the Justice Department. The rule, as originally published last November, included a loophole to exempt contracts performed overseas. Administration officials told lawmakers at a House Oversight and Government Reform hearing earlier this month that the loophole was a "drafting error" and likely would be removed. The administration since has stripped the loophole from the proposed rule, which likely will be finalized later this year. At the House hearing, a top official for the White House Office of Management and Budget predicted the exemption would not be included in the final rule. The Justice Department said has charged at least 46 people in investigations over the past several years into kickbacks, bribes and other abuses of government-funded contracts in Iraq, Afghanistan and Kuwait. It opposed the loophole.  (Excerpted from "House moves to close contract fraud loophole" as published by the Associated Press).

We agree that there is no reason to treat projects performed overseas any differently than projects performed in the United States. After all, it was the Justice Department’s concern about the millions of dollars of fraud, waste, and abuse in Iraq, Afghanistan, and Kuwait that give rise to the rule in the first place.

© 2008 Associated Press. All rights reserved

Air Force General Suggests That "Unwarranted" Protesters Should Be Penalized

The Commander of the Air Force Material Command, General Bruce Carlson, recently told reporters at a forum sponsored by Aviation Week that there should be some sort of penalty for protests that are found to be unwarranted.   It was reported that the General said “that some losing bidders file protests with 20 or 30 elements when perhaps only one part has any foundation.  In recent years, nearly every significant defense contract has been protested by the losers to the Government Accountability Office.”  The comments, which were reported by GovernmentExecutive.com and the Congress Daily, demonstrate a total lack of understanding about the vital need for accountability on the part of federal agencies, contracting officers, and source selection authorities. 

I disagree with the General’s observations.  Government contractors, and the taxpayers, are entitled to a procurement process that is fair and reasonably transparent, and they are entitled to take advantage of the Constitutional right to petition Congress for redress of grievances.  They are also entitled to take advantage of statutory and regulatory procedures authorizing protests against unfair or illegal procurement actions without intimidation or fear of having to pay some sort of “penalty” to the government.   It is interesting that one of the protests that apparently triggered the General’s comments was a challenge by the Sikorsky Aircraft Company and Lockheed Martin Systems to what they contended was an unfair source selection process in the award of a large dollar value contract to The Boeing Company for the Combat Search and Rescue Replacement Vehicle (CSAR-X).  The GAO sustained the protest and found that the Air Force had ignored differences among the proposed aircraft that could have had a material impact on likely O & S costs, and that the Air Force had departed from its stated evaluation approach. (See the attached GAO decision)

This is not the first time that the Air Force has not followed the procurement regulations and has lost a protest. The General, rather than focusing on the improvement of source selection procedures by his agency, would seek to reduce the number of challenges to Air Force procurements by penalizing unsuccessful protesters.  This, of course, would have the unavoidable effect of reducing the number of successful protests, as well, and would give the Air Force even greater latitude to run roughshod over the procurement regulations.

It is not easy to win a protest before the GAO or the United States Court of Federal Claims. The protester must demonstrate a clear violation of procurement laws or regulations, an abuse of discretion, or a decision by the Contracting Officer that lacked a rational basis. In fact, given the rapidly expanding use of multiple award task order contracting (“MATOC”), where the law prohibits protests against task orders (except in very limited circumstances), government contractors are already precluded from protesting task order solicitations and source selections that they believe are unfair. In addition, great deference is afforded to contracting officers by the GAO and the Court and when protests are sustained there generally is something very wrong in the procurement process. In other words, there are plenty of things built into the system to discourage frivolous protests, including the cost of legal representation, without seeking to impose additional “penalties.”

It must be recognized that there is a statutory and a regulatory right to file a protest, and these rights cannot be denied by agency action alone. The statutory basis for bid protests is found in 28 USC 1491(b)(1), granting the Court of Federal Claims Protest Jurisdiction.  For the GAO the statutory basis is found in 31 USC 3526, the authority to settle accounts.  As provided in Pichel Air Service, 84-1 CPD  108, the basis for the GAO to decide protests is based upon the authority to adjust and settle accounts and to certify balances in the accounts of accountable officers under Pub. L. No. 97-258, § 3526, 96 Stat. 964 (1982) (codified at 31 U.S.C. § 3526).  With account settlement authority, the Comptroller General can take exception to an improper transaction and hold the certifying officer or relevant official personally liable for the amount of money improperly expended. Moreover, his decisions on the expenditures of appropriated funds are binding on the executive branch.” The regulatory basis is found in FAR 33.1, Protests (Agency and GAO protests)  and 4 CFR Part 21 (GAO Bid Protest Regulations) which states that protests may be filed with the GAO.

Contractors Now Required to Prepare a Code of Business Ethics and Conduct and to Implement Internal Controls and Ethics Training

We published an article on March 5, 2007, reporting a proposed amendment to the FAR that would require government contractors to prepare a Code of Business Ethics and Conduct.  On November 23, 2007, a final rule was published in the Federal Register and two new FAR clauses became effective on December 24, 2007. These new clauses are very important to all federal government contractors and they mandate the preparation of a Contractor Code of Business Ethics and Conduct (FAR 52.203-13) and the Display of Hotline Poster(s) (FAR 52.203-14) if a contractor receives an award in excess of $5 million with a period of performance of at least 120 days.  This is yet another example of the unending criminalization of the federal procurement process that makes it very risky for any contractor to do business with the federal government unless the contractor keeps up-to-date on the rules.  It is anticipated that suspension and debarment will be among the potential consequences of a failure to comply with these new rules, and a contractor’s record of integrity and business ethics may now become part of the contractor’s performance record that is evaluated as part of the contract award process.

FAR 9.104-1(d) provides that contractors must have “a satisfactory record of integrity and business ethics.” In furtherance of that requirement, the new policy explained in FAR 3.10, provides that “Government contractors must conduct themselves with the highest degree of integrity and honesty” and that “Contractors should have a written code of business ethics and conduct.”  To promote compliance with the code of business ethics and conduct, contractors should have an employee business ethics and compliance training program and an internal control system that—

(1) Are suitable to the size of the company and extent of its involvement in Government contracting;

(2) Facilitate timely discovery and disclosure of improper conduct in connection with Government contracts; and

(3) Ensure corrective measures are promptly instituted and carried out. (See FAR 3.1002).

Specifically, the bew FAR requirements for the code of business ethics and conduct require that it be:

1. in writing;

2. issued within 30 days of the contract award (unless the contracting officer allows a longer time period);

3. furnished to each employee engaged in performance of the contract; and

4. that the contractor "promote" compliance with its code of business ethics and conduct.

Although the policy expressed in FAR 3.1002 applies as guidance to all government contractors, the mandatory requirements are explained in the new clauses found at FAR 52.203-13 and FAR 52.203-14.  All contractors receiving awards in excess of $5 million where the period of performance is 120 days or more must have a code of business ethics and conduct, but the requirements for a training program, awareness and compliance program, and internal controls, do not apply to small business concerns.  All contractors who expect to receive awards, or subcontracts, in excess of $5 million, with periods of performance of 120 days, would be well advised to consult with legal counsel to obtain advice as to what must be done to comply.  There is nothing to be gained by waiting for a contract to be awarded, given the thirty day time period to prepare the code of business ethics and conduct (unless extended by the contracting officer), and the document should be prepared and distributed as soon as possible.

It is important to understand that these new rules are being implemented because the Federal Government has found that voluntary disclosure has not worked and has concluded that mandatory requirements are needed.  We will be advising our clients to provide ethics training, even if they are small business concerns, to make it clear that they take these new requirements seriously.  If a company principal or an employee commits a criminal act in the performance of a government contract, the company will be viewed in a more favorable light if it demonstrates that it has already implemented the requirements of the new regulation.  Just as it does little good to repair a cracked sidewalk after someone has tripped and broken a leg, it does little good to implement ethics requirements and training after a violation has occurred.

A summary of the mandatory requirements are as follows:

A contractor must have a written code of business ethics and conduct in place within thirty days of the award of any contract in excess of $5 million.  The time may be extended by the contacting officer and the requirement does not apply to existing contracts that were awarded before December 24, 2007, or to task orders awarded under those contracts.

A copy of the code of business ethics and conduct must be furnished to each employee involved in the performance of the contract. In addition, the contractor is required to promote compliance with its code.

Unless the company is a small business concern, and has so certified in the bid or offer submitted in response to the solicitation, the contractor must establish an ongoing business ethics and business conduct awareness program, and an internal control system, within ninety days after award of the contract.  This time period may also be extended by the contracting officer.

The internal control system is intended to facilitate timely discovery of improper conduct in connection with Government contracts, and to ensure that corrective measures are promptly instituted and carried out.  Although the regulation is not very explicit about the structure of the required internal control system, examples of what is required include (1) Periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the Contractor’s code of business ethics and conduct and the special requirements of Government contracting; (2) An internal reporting mechanism, such as a hotline, by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports; (3) Internal and/or external audits, as appropriate; and (4) Disciplinary action for improper conduct.

The contractor is required to include the substance of the clause found at FAR 52-203-13 in subcontracts that have a value in excess of $5 million and a performance period of more than 120 days, unless the subcontract is for a commercial item or is for work entirely performed outside of the United States. (Author’s Note: Contractors should be aware that a “purchase order” qualifies as a “subcontract” for purposes of this clause, subject the exceptions noted in the preceding sentence).

The second clause, found at FAR 52.203-14, requires the Contractor to prominently display hotline posters in common work areas within business segments performing work under this contract and at contract work sites, (i) any agency fraud hotline poster or Department of Homeland Security (DHS) fraud hotline poster identified in paragraph (b)(3) of this clause; and (ii) any DHS fraud hotline poster subsequently identified by the Contracting Officer. In addition, if the Contractor maintains a company website as a method of providing information to employees, the Contractor is required display an electronic version of the poster(s) at the website. As in the case of FAR 52.203-13 discussed above, the substance of this clause must be included in subcontracts that have a value in excess of $5 million and a performance period of more than 120 days, unless the subcontract is for a commercial item or is for work entirely performed outside of the United States. (Author’s Note: If the Contractor has implemented a business ethics and conduct awareness program, including a reporting mechanism, such as a hotline, then the Contractor need not display any agency fraud hotline posters as required in paragraph (b) of this clause, other than any required DHS posters).

A supplement to the new requirement for a Code of Business Ethics and Conduct is also under consideration at the request of the Department of Justice. The proposed additional rule was published on November 14, 2007 and comments must be submitted by January 14, 2008. This Proposed Rule imposes additional requirements regarding codes of business ethics and conduct, including notification requirements for contractors upon becoming aware of violations of federal law.  The following additional requirements will be imposed on those contractors subject to the requirements of FAR 3.10, as implemented by FAR 52.203-13 and FAR 52-203-14, if the proposed rule becomes effective:

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Federal Court Rules that Negotiated IDIQ/MATOC Contracting Cannot be Used Instead of Sealed Bidding Without a Lawful and Rational Basis

In a recent prebid protest presented by our firm, Payne Hackenbracht & Sullivan, the United States Court of Federal Claims considered the protest of Weeks Marine, Inc. v. The United States (“Weeks”) challenging the decision of the United States Army Corps of Engineers, South Atlantic Division (“SAD”), to solicit proposals for maintenance dredging and shore protection projects using negotiated indefinite delivery indefinite quantity (“IDIQ”) multiple-award task order contracts (“MATOC”).  The Court noted that the contemplated change to negotiated IDIQ task order contracting represented a significant departure from SAD’s prior practice of using sealed bidding, and further noted that the policy change had caused widespread industry criticism. 

As grounds for its protest, Weeks asserted that SAD’s proposed change to negotiated IDIQ/MATOC task order contracting was contrary to law, and was without any rational basis.  Weeks relied upon 10 U.S.C. § 2304(a) and Federal Acquisition Regulation (“FAR”) ¶ 6.401(a), mandating that an agency shall use sealed bidding procedures when (1) time permits, (2) awards will be made solely based on price, (3) discussions are not necessary, and (4) the agency reasonably expects to receive more than one bid. Weeks contended that each of these four conditions was met for SAD’s dredging contracts, and that no legal basis existed to use negotiation procedures.

The Corps of Engineers argued in opposition that SAD’s proposed IDIQ task order contracting was lawful, that the agency had wide discretion in selecting an appropriate procurement method, and that SAD’s justification for the change was reasonable under current circumstances.  The Court disagreed and ruled that an agency’s discretion “does not empower an agency to employ a procurement method in violation of applicable law.”  The Court ruled that SAD had not pointed to any significant changes in its procurement environment that would warrant a change to IDIQ task order contracting.  The Acquisition Plan confirmed that SAD had “excelled in program execution” during the last two years and “the Court does not see any reasons or developments for moving away from the sealed bid process.  Without any analysis of the applicable statutes and regulations, and without citing any significant reasons or developments, the Court held that SAD would violate 10 U.S.C. § 2304(a), FAR ¶ 6.401(a), FAR ¶ 14.103-1(a), and FAR ¶ 36.103(a) by employing IDIQ task order contracting methods.“

This is an important judicial opinion that will hopefully cause government agencies to revisit decisions to utilize contracting by negotiation in either single procurements or IDIQ contracting.  When the sole justification for negotiated contracting boils down to nothing more than a desire to introduce unnecessary subjectivity into the source selection process, RFPs should not be used and sealed bidding should continue to be the preferred method.  In dredging, as in many other areas of construction contracting, sealed bidding has been a successful procurement method for many years.  It is a system that provides the greatest risk coupled with the greatest opportunity for reward and it is an integral part of the free enterprise system.

Of great concern to the Court was the fact that under SAD’s “new” procurement method approximately $2 billion in task order awards during the next five years would become virtually immune from any judicial or administrative bid protest review.  The Federal Acquisition Streamlining Act of 1994 (“FASA”) provides that “[a] protest is not authorized in connection with the issuance of a task order or delivery order except for a protest on the ground that the order increases the scope, period, or maximum value of the contract under which the order is issued.”  While SAD’s current sealed bid awards routinely are subject to bid protest review by the Government Accountability Office (“GAO”) or the Court, SAD’s task order awards would be insulated from review except in very limited circumstances.  Thus, while purporting to use highly discretionary “best value” evaluation procedures in awarding task orders, SAD effectively would remove itself from any bid protest oversight.   Although the Corps argued that the Court must apply the FASA provision that Congress created, the Court ruled that this provision did not authorize SAD to convert all of its procurements into task orders.

In asserting a need for a change from sealed bidding to contracting by negotiation, the Corps contradicted its own position by stating that its sealed bid approach had “excelled in program execution” during the last two years.  As a result, the Court concluded that “The agency has provided no evidence that the current system is failing or in need of revision.  In fact, the Court would be hard-pressed to identify any contracts better suited to sealed bid procurement than dredging.  If not appropriate for dredging work, it is difficult to imagine when sealed bidding ought to be used.” (Emphasis added).

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New Rule Allows Subcontracts to Companies Owned by American Indian Tribes to Count Toward Small Business Subcontracting Goals

A new federal rule allows federal contractors to count subcontracts given to companies owned by American Indian tribes and Alaskan communities toward small business contracting goals. The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council have agreed on a final rule amending the Federal Acquisition Regulation (FAR) to implement section 702 of the Emergency Supplemental Act, 2002, as amended by section 3003 of the 2002 Supplemental Appropriations Act for Further Recovery From and Response to Terrorist Attacks on the United States.

The law permits subcontracts awarded to Alaska Native Corporations (ANCs) and Indian tribes to be counted towards a contractor's goal for subcontracting with small business (SB) and small disadvantaged business (SDB) concerns. In addition, the law provides that subcontracts awarded to Indian tribes that are recognized by the Bureau of Indian Affairs in accordance with 25 U.S.C. 1452(c), and Indian-owned economic enterprises that meet the requirements of 25 U.S.C. 1452(e), may be counted towards the satisfaction of a contractor’s goal for subcontracting with SB and SDB concerns. Such credit is taken even where the ANC or Indian tribe may be ‘‘other than small’’ under the Small Business Administration (SBA) regulations.

Small-business advocates are concerned about the new rule and feel that it may be unfair.  Skeptics believe the agencies will funnel more contracts to native companies in an effort to take advantage of the benefits and convenience of working with larger contractors while getting credit toward their small-business contracting goals.

The Need for More Competition in the IDIQ Process

“Competition is the cornerstone of our acquisition system.” This opening statement, from the Administrator of the Office of Management and Budget (OMB) in his May 31, 2007 policy directive, Enhancing Competition in Federal Acquisition, formed the basis for requesting that all government agencies take advantage of full and open competition, particularly on task orders issued under IDIQ contracts. OMB noted that “the lack of meaningful competition” for task orders has increased as government agencies have awarded more IDIQ contracts with a corresponding rise in task and delivery orders.

OMB’s directive also expressed concern over the increase in the number of contract modifications, which obviously are accomplished on a sole source basis. In order to increase competition, OMB is encouraging each agency’s competition advocate to “promote competition and challenge the barriers” to increased competition. 

In addition to energizing the competition advocates, OMB also proposes that the Federal Acquisition Regulatory Council seek ways to maximize competition. Among the proposals that OMB would like the FAR Council to consider are the following:

 1) Limits on the duration of contracts awarded on a sole source, urgent basis to one year;

 2) Providing notice in FedBizOpps of sole source awards;

 3) Assuring the receipt of at least three proposals for  multiple award contracts; and

4) Identifying evaluation factors for large delivery and task orders that have statements of work that will enable meaningful comparison between competing proposals.      

The policy directive underscored the adage that competition saves the taxpayer money. The Administrator is concerned that the government is not taking full advantage of competitive acquisition tools “especially in the placement of task and delivery orders under indefinite-delivery vehicles.”

Code of Ethics and Internal Training Program May Soon be Required for Contractors Receiving Awards in Excess of $5 Million

A proposed amendment to the FAR was published in the Federal Register on February 16, 2007 to address Contractor Code of Ethics and Business Conduct.   FAR 3.101, Standards of Conduct, provides that “Government business shall be conducted in a manner above reproach and, except as authorized by statute or regulation, with complete impartiality and with preferential treatment for none. Transactions relating to the expenditure of public funds require the highest degree of public trust and an impeccable standard of conduct.  The general rule is to avoid strictly any conflict of interest or even the appearance of a conflict of interest in Government-contractor relationships.” 

The Federal Register notice points out that FAR Part 3 provides guidance on improper business practices and personal conflicts of interest, but it does not discuss the contractor’s responsibilities with regard to code of ethics and business conduct and the avoidance of improper business practices.  The proposed new regulation will provide that contractors receiving awards in excess of $5,000,000 that have performance periods of 120 days or more, shall have a written code of ethics and business conduct within 30 days after contract award.  Furthermore, the contractor will be required to promote compliance by establishing, within 90 days after contract award, an employee ethics and compliance training program and an internal control system proportionate to the size of the company and extent of its business with the Federal Government.

Contractors who currently compete for contracts in excess of $5 million, with performance periods in excess of 120 days, and do not currently have a Code of Ethics or an internal training program, would be well-advised to start planning to take steps in anticipation of the new regulation. In fact, implementation of these requirements is a good idea even if the proposed regulation is not ultimately approved. Comments on the proposal are due no later than April 17, 2007.

New DFARS Provision Has a "Chilling Effect" on Claims

One of the byproducts of the recent use of negotiated procurements under FAR, Part 15, has been the concern, on the part of contractors, that the submission of claims will be a negative factor during the evaluation process on a Request for Proposals.  While we can certainly understand that a contractor who has a history of filing frivolous claims might deserve to be downgraded, we see no valid reason for the government to assign a lower rating to a contractor who has filed meritorious, or good faith, claims in the past.

On February 12, 2006, a provision was added to the Defense Federal Acquisition Regulation Supplement (DFARS) dealing with the review of claims that we find very disturbing.  Under DFARS Subpart 233.2, Disputes and Appeals, Paragraph 233.10, “Contracting Officer’s Authority,” there is a reference to a new “PGI” (Procedures. Guidance and Information). The new guidance states that “When it would be helpful in reviewing the current claim, the contracting officer should get information on claims previously filed by the contractor.  Such information may provide a historical perspective of the nature and accuracy of the claims submitted by the contractor and how they were settled.  Potential sources for the information include the contracting activity’s office of legal counsel, other contracting activities, and the Defense Contract Audit Agency.”

We believe that each claim should stand on its own merits.  Each claim is different and is the result of a different contract, a different set of facts, and is ultimately decided by a different set of legal principles.  In addition, the Contract Disputes Act of 1978 gives contractors the right to file claims.  It seems to us that “guidance” that could potentially penalize contractors for filing claims is most inappropriate.

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Task Order Contractors Must be Given a Fair Opportunity to Compete for Individual Task Orders

As we have mentioned previously, the growing use of multiple award task order contracts in federal construction contracting, as can be seen in much of the disaster recovery work in New Orleans, is limiting the competitive opportunities for small and mid-sized construction contractors.  Unless a contractor is the recipient of one of the major task order contract awards, there is no opportunity for a contractor to compete for upcoming individual task orders and the contractor is effectively precluded from competing for potentially millions of dollars of work to be awarded over a period of years. In the past, when there were more single award contracts, if a contractor lost out to a competitor, there was always another solicitation on the horizon.  If a contractor fails to become one of those selected to compete under a multiple award task order contract, there may be no, or very little, work “waiting in the wings.”

It follows that it is important to monitor the decisions of the GAO and the courts to see what is being done to protect the rights of contractors, and we will continue to do so.  In a newly issued GAO decision, Palmetto GBA, LLC, B-299154, December 19, 2006, the Comptroller General stated that according to the legislative history of the Federal Acquisition Streamlining Act (FASA), task and delivery-order contracts were intended to encourage the use of multiple-award, rather than single-award contracts, in order to promote an ongoing competitive environment in which each awardee would be fairly considered for each order issued.  H.R. Conf. Rep. No. 103-712, at 178 (1994), reprinted in 1994 U.S.C.C.A.N. 2607, 2608; S. Rep. No.103258, at 15-16 (1994), reprinted in 1994 U.S.C.C.A.N. 2561, 2575-76. In this regard, the Federal Acquisition Regulation (FAR) requires agencies to provide all awardees “fair opportunity to be considered for each order exceeding $3,000 issued under multiple delivery-order contracts or multiple task-order contracts.”  FAR sect. 16.505(b)(1)(i).

An interesting aspect of the Palmetto case is that the GAO reiterated that a task or delivery order that precludes competition for future task or delivery orders for the duration of the contract performance period may constitute a “downselection.”  The GAO has recognized downselections in circumstances not only where all work under a contract will be foreclosed from future competition, but also where specific categories of work will be similarly foreclosed for the duration of the contract.  While the GAO did not find that “downselection” occurred in the Palmetto case, it is important for contractors to recognize that a task order award that eliminates competition for future work can be successfully protested. Continue Reading...

Declining Opportunities for Small and Mid-Sized Federal Construction Contractors

The cover story, “New Marching Orders,” in the most recent edition of Constructor, published by McGraw-Hill Construction, highlights a trend in military construction that should concern small to mid-size general contractors.  In the past, many projects for construction of military housing and other facilities were procured as individual contracts through sealed bid solicitations issued by the U.S. Army Corps of Engineers.  Small and mid-size contractors, familiar with the local market conditions, were well positioned to compete for, win, and perform these contracts.  E. Michael Powers reports that today, however, the Corps is focusing its procurement efforts on multiple-award construction contracts and indefinite delivery/indefinite quantity contracts with task orders.  These contracts tend to be for greater volumes of work, resulting in contracts that exceed the bonding capacity of many small to mid-size firms.

Powers also notes that a contract to build fifty buildings at a cost of $10 million per building, spread across a large geographic area, might not even appeal to firms that have the bonding capacity to bid on such a large contract.  In addition, where so much work is included in one contract, there is only one prime contractor, whereas before there could have been as many as fifty contractors performing fifty separate projects.

These large procurements are often the subject of negotiated procedures under FAR, Part 15, where price is no longer the controlling factor in determining who receives the contract.  In these "best value" procurements, the experience and past performance of a larger contractor may be decisive in the Corps' award decision.

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Upcoming Consolidation of the Civilian Boards of Contract Appeals

Effective January 6, 2007, the Boards of Contract Appeals for the General Services Administration, the Departments of Agriculture, Energy, Housing and Urban Development, Interior, Labor, Transportation, and Veterans Affairs will cease to exist and will become part of the new Civilian Board of Contract Appeals.  All of the judges of these boards and their pending cases will be transferred to the new Civilian Board of Contract Appeals.   This consolidation was authorized in the National Defense Authorization Act for Fiscal Year 2006 and notice was published in the Federal Register on November 9, 2006 of the consolidation. 

The agencies of the Department of Defense, (Army, Navy, Air Force), NASA and the United States Postal Service will continue to maintain their own boards of contract appeals. 

Since the rules of procedure for the various civilian boards of contract appeals are nearly identical, we do not anticipate any disruption of the disputes process as a result of this consolidation.  The transfer of existing appeals should be a seamless transition from a procedural standpoint. When the Engineer Board of Contract Appeals merged with the Armed Services Board of Contract Appeals, the transition was smoothly accomplished and the process was not disrupted.

Technical Assistance Guide for Federal Construction Contractors

The Office of Federal Contract Compliance Programs (OFCCP) has published a Technical Assistance Guide designed to help federal government construction contractors and subcontractors comply with the federal laws and regulations that prohibit government contractors from discriminating in employment, and require that they undertake affirmative action to ensure equal employment opportunity in their workforces.  It is intended for government contractors who have construction contracts and/or subcontracts.  The obligations of government contractors and subcontractors who hold non-construction contracts differ in significant ways and are covered in a separate guide.

This Guide does not create new legal requirements or change current legal requirements. Instead, it reflects the views of OFCCP and is intended to serve as a basic resource document on OFCCP-administered laws. The legal requirements related to equal employment opportunity that apply to Federal supply and service contractors are contained in the statutes, executive orders, and regulations cited in the Guide. Every effort has been made to insure that the information contained in the Guide is accurate and up to date.

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New SBA Regulations Require Small Businesses to Recertify After Five Years

A new regulation announced by the Small Business Administration on November 15, 2006, to be effective on June 30, 2007, requires small businesses to recertify their size when they are purchased by or merged with a larger business, or at the end of the five-year point of a contract.  The rules are intended to help small businesses obtain more federal contracts and to assure that contracts set aside for small businesses are not going to larger companies.  As reported in the Thompson West publication, the Government Contractor Online Update, “According to SBA Administrator Steven Preston, the changes “will go a long way toward ensuring that contract awards get in the hands of small business owners, federal agencies get the proper credit toward their small business contracting goals and small business contracts are fairly and accurately reported..’”

There are critics of the new policy, however, who contend that the SBA has not gone far enough to prevent larges businesses from intruding into the small business marketplace.  The American Small Business League has commented that “A new policy proposed by the Small Business Administration (SBA) and the Office of Federal Procurement Policy (OFPP) will allow the government to continue reporting awards to large companies as federal small business contracts.” (See the full article).

Pertinent parts of the new regulation are as follows:

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