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May 2012

100 Worst Mistakes in Government Contracting Post-Award Sections 40, 44, 45-50, 56, 61, 65, 75-78, 80-83. May 2012. Objective. Provide a broad overview of the following “post-award” requirements for Federal contractors. Service Contract Act Limitation of Cost & Limitation of Funds Options

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May 2012

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  1. 100 Worst Mistakes in Government ContractingPost-Award Sections 40, 44, 45-50, 56, 61, 65, 75-78, 80-83 May 2012

  2. Objective • Provide a broad overview of the following “post-award” requirements for Federal contractors. • Service Contract Act • Limitation of Cost & Limitation of Funds • Options • No Cost Time Extensions • Terminations • Examine various sections within the book that cover topics around these “post-award” concepts

  3. Service Contract Act

  4. Service Contract Act (SCA) Book Chapters: • 44 & 50 FAR Clause: • Prescribed in FAR 22.1006 • 52.222.41, Service Contract Act of 1965

  5. Overview of “Service Contract Act” Clause • Applies to service contracts over $2,500 • Mandates • minimum wages and benefits • safe and sanitary working conditions • notification to employees of the minimum allowable compensation • equivalent Federal employee classifications and wage rates. • Mandatory flowdown clause to all subcontracts.

  6. Wage Determination • Department of Labor (DOL)-issued Wage Determination (WD) • Represents “prevailing” wages for a given geographic locale • Applies based on place of performance • Provides sample description • SCA Directory of Occupations is basis for labor categories included

  7. “Mistakes”: Service Contract Act • Failure to claim a price adjustment due to increased labor costs as the result of a new wage determination or collective bargaining agreement could mean that the government will not be obligated to pay the contractor above the amount specified in the wage determination in place at the time of award. • Contractors are also entitled to a price adjustment where there is an increased cost in continued compliance with pre-existing wage determinations or Collective Bargaining Agreements (CBA).

  8. “Mistakes”: Service Contract Act • Failure to pay the minimum wages and benefits required by a wage determination in a contract subject to the SCA may result in severe sanctions including financial penalties, debarment, and criminal prosecution. • Failure to request a price adjustment when the wage determination is revised may result in inability to recover the difference.

  9. Example: Service Contract Act • Fixed Price (FP) contract with SCA clause • Original WD rate = $14.00/hr • Employee’s actual rate = $14.30/hr • WD rate is revised and new WD rate is $15.00/hr • Contractor either • A) fails to increase the employee’s actual rate to at least $15.00/hr • B) increases the Employee’s actual rate but fails to request an adjustment (allowable at $0.70/hr)

  10. Limitation of Cost/Limitation of Funds

  11. Limitation of Cost & Limitation of Funds Book Chapter: • 56 FAR Clauses: • Prescribed in FAR 32.705-2: • 52.232-20, Limitation of Cost, found in fully funded cost-reimbursement (CR) contracts • 52.232-22, Limitation of Funds, found in incrementally funded contracts • Cost Reimbursement contract must contain one or the other.

  12. Purpose of LOF/LOC Clauses • Provides the government with an option for the action to be taken when notified by the contractor that additional funds will be required to complete the work.

  13. Overview of LOF/LOC Clauses • It is expected that performance of the contract will not cost the Government more than the estimated cost specified in the Schedule. • The government is not required to reimburse contractor for any costs incurred above the estimated costs. • Prior approval must be obtained per the following process: • Contractor must notify the Contracting Officer (CO) in writing when it anticipates thatwithin the next 60 days it will exceed seventy-five percent of the estimated cost and provide a revised estimate; • Contractor must notify the CO that the total cost of the contract will be significantly greater than estimated; • The CO must notify Contractor in writing that the estimated cost has been increased by a specific amount or that the scope has been reduced; AND • Until the CO gives such notice, Contractor is not required to continue performance or incur costs that exceed those estimated in the contract. 13

  14. Overview of LOF/LOC Clauses • If Contractor does not receive advance approval, Contractor has the right to refuse work that will cause us to exceed the estimated costs. • If Contractor fails to provide notice and overruns the contract, the government is not obligated to reimburse Contractor for the overrun. • After receiving notice of the anticipated overrun, the CO has the discretion to approve additional funding, modify the work scope to prevent the overrun, or terminate the contract. • Contractor must comply with the CO’s written decision in order to obtain reimbursement.

  15. “Mistakes”: LOF/LOC Clauses • Failure to monitor a cost-reimbursement contract, or to report costs incurred to the CO as required, could mean that the government will not be obligated to pay the contractor above the estimated amount set forth in the contract. Contractors have amassed an extremely low batting average of winning appeals when they fail to give proper advance notice of overruns under the LOF/LOC clauses.

  16. Example: LOF/LOC Clauses • Cost Plus Fixed Fee (CPFF) contract with LOC clause. • During period of performance, contractor incurs an increase in overhead and administrative costs, triggering the reporting requirements under the LOC clause. • Contractor’s accounting records reflected the increase. • Court held that contractor knew, or should have known, that indirect costs incurred exceeded the rates specified in the contract. • Contractor claimed that “pressures of work” kept them from providing proper notification to the Government. • Court rejected claim noting that the Contractor has a duty to monitor costs and is obligated to report under LOC clause. • The requirement for determination of final indirect rates per audit does not excuse failure to provide earlier notice during contract performance.

  17. Additional Reference NCMA Article: “Cost Limitations in Government Contracts” by Christopher Wolfe (May 2010) http://www.ncmahq.org/files/AContractorcles/CM0510%20-%2032-43.pdf

  18. Options

  19. Options Book Chapters: • 45-49 FAR Clauses: • Prescribed in FAR 17.2 • FAR 52.217-6,Option for Increased Quantity • FAR 52.217-7, Option for Increased Quantity, Separately Priced Line Item • FAR 52.217-8, Option to Extend Services • FAR 52.217-9, Option to Extend the Term of the Contract

  20. Overview of “Option” Clauses • Unilateral • Only the government can exercise them if: • funds are available, • there is a government need, • offers the most advantages route, and • was synopsized, if required. • If an option is exercised, contractor must perform.

  21. Types of Options • Option Years • Under Multiyear contracts, the Government typically awards a base year + up to nine (9) option years. The option years are priced as part of the initial proposal and contract award. • Option Quantities • The Government may include pricing in the contract for additional items or quantities. Typically, these options can be exercised more than once during the specified period. • Option to Extend • Under Service Contracts, the Government can “request” continued service for up to 6 months (in single or multiple contract actions) beyond contracted Period Of Performance within the limits and at rates specified in contract.

  22. Process for Exercising Options • Options should be exercised in strict accordance with the terms of the contract. • Inclusion of an option in a contract does not obligate the government to exercise it, but creates an expectation that the contractor will perform the option under the terms of the contract if requested. • Contracts may include language requiring notice of intent 60 days in advance. • If the Government fails to comply with this requirement, the exercising of the option becomes unilateral.

  23. “Mistakes”: Options • Performance or incurring costs prior to receiving a signed modification exercising the option is at your own risk. • May require internal approval. • May cause issues if effective date of modification is not back-dated. • A letter of intent to award or modify is not a contract. • An unfunded contract is not a contract.

  24. No Cost Time Extensions

  25. No Cost Time Extensions Book Chapters: • 40, 51, 65

  26. No Cost Time Extensions Example: • It is virtually certain that the FP project will not produce the final deliverable within the contract period of performance and we have asked for a no cost time extension. The Government is not a factor in our inability to deliver on time. • Discussion: • Failure to deliver on time under this example is a major risk to the Contractor since the Government has the right to terminate for default immediately without providing a Cure Notice or Show Cause letter. Also, not offering consideration under this scenario, where a termination for default is a real possibility, is like adding insult to injury. • Solution: • Recognize the potential consequences of such a delay and apply sufficient resources to the project to ensure timely delivery.

  27. No Cost Time Extensions • Example: • It is virtually certain that the FP project will not produce the final deliverable within the contract period of performance and we have asked for a no cost time extension. The Government is a significant factor in our inability to deliver on time. • Discussion • Has the impact of the Government delay been communicated? • Does their delay cause cost exposure and is a no cost time extension appropriate? • Is the action or inaction of the Government the primary contributor to the delay? • Solution: • Provide notification(s) to the Contracting Officer and the Contracting Officer’s Technical Representative that the Government delays have the potential of causing schedule and cost impacts.

  28. No Cost Time Extensions Regardless of the contractual rules and possible outcomes, missing due dates have consequences – some can be worked around but none are convenient for the customer.

  29. Terminations

  30. Terminations Book Chapters: • 75-78, and 80-83 FAR Clauses: • Prescribed in FAR 49.5 • FAR 52.249, Various Termination Clauses for Convenience/Default and Fixed Price/Cost-Reimbursement

  31. Overview of “Termination for Default” • Government is only liable to pay for accepted work • Contractor is liable for reprocurement costs • Example: Contract was valued at $1M. The reprocured contract value is $1.5M. Contractor may owe the Government an additional $500K beyond the costs that were not paid by the Government for unaccepted work. • Must be disclosed in future Past Performance sections of federal procurements for 3 years. • Multiple (as few as two) terminations for default over a short time period could cause Contractor to be listed on the Debarred List.

  32. Overview of “Termination for Convenience” • Government has the unilateral right to terminate for convenience at any time and for any appropriate reason. • Contractor can receive: • Contract price for completed work • Costs incurred for work terminated • Cost of subcontract termination settlement proposals • Reasonable costs of settlement (accounting, legal, clerical, and other expenses incurred to submit proposal), storage, and transportation. • Should be avoided, if possible, for at least two reasons; • Loss of revenue and profit • Potential reputational damage

  33. Responding to Termination Notices Example: You receive a formal Cure Notice from the Contracting Officer informing us that the Agency believes that there are sufficient performance reasons that the contract should be terminated for default and asks us to either cure the default or explain why the termination should not be made. Consider: A termination for default has such reputational damage for future proposal opportunities that any and all terminations for default, regardless of the contract size, need immediate, broad and Senior Management attention. Request a meeting to learn as much as possible as quickly as possible. Solutions: • Prepare a full and forceful response with clear and convincing evidence of either how we can cure the default or why the default is inappropriate. • Consider a No-Cost Termination in lieu of termination for default. • Submit the response on or before the due date.

  34. Avoiding Termination Notices Example: • For various reasons, you are substantially behind schedule with key/important deliverables Consider: • Delays are due to Government actions or inactions (e.g., untimely OMB clearance for survey tool). • Delays are due to Force Majeure (act of God) • Delays are due to poor subcontractor performance • Delays are due to poor Contractor performance Solutions: • When delays are due to Government actions or inactions, or Force Majeure, provide official notice to the Client of expected delay with a proposed/revised delivery schedule. • When delays are due to poor subcontractor or Contractor performance, provide a project schedule recovery plan.

  35. Termination for Convenience • Example: • Contractor receives a Termination for Convenience during the 3rd year of a 5 year contract. In accordance with FAR 52.249 (e), the contractor has one year from the date of notice to submit a final termination settlement proposal. • Consider: • What type of contract (FP vs. CR)? • Are there 5 year commitments to subcontractors (e.g., leases)? • What type of Subcontract (FP, Time and Material (T&M), CR)? • If FP Prime, is the contractor in a profit or loss circumstance? • Solutions: • Take reasonable steps to mitigate Government cost exposure. • Seek a “reasonable and fair” settlement. • Submit your Settlement Proposal on time.

  36. Questions?

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