CONTRACTORS TARGETED BY LAW AND REGULATION CHANGES;
COURTS REJECT GOVERNMENT BAD FAITH

As set forth in the Legislative section below, Congress is considering a wide range of bills to increase scrutiny of contractors. The themes that are common to most of these proposals are increased competition in awards of contracts and task and delivery orders, increased transparency of government determinations to grant exceptions for contractors, publication of government audits on contractors, and increased penalties on contractors.

Rep. Waxman, Chairman of the House Committee on Oversight and Government Reform, introduced H.R. 1362, “Accountability in Contracting Act,” which the House of Representatives passed on March 6, 2007. (On February 17, 2007, Sen. Collins introduced S. 680, “Accountability in Government Contracting Act of 2007,” containing many similar provisions as H.R. 1362.) H.R. 1362, Section 101, would impose stringent requirements demanding competition in delivery order contracts, such as the currency paper contract. For “any contract in an amount greater than $1,000,000 entered into by an executive agency using procedures other than competitive procedures,” H.R. 1362 would “restrict the contract period … to the minimum contract period necessary (1) to meet the urgent and compelling requirements of the work to be performed … and (2) to enter into another contract for the required goods or services through the use of competitive procedures.” The contract period for the contract awarded under other than competitive procedures could not exceed one year.

Section 102 would require each agency to “develop and implement a plan to minimize, to the maximum extent practicable, the use of contracts entered into using procedures other than competitive procedures by the agency or department concerned.” Section 103 would require each agency to “develop and implement a plan to maximize, to the fullest extent practicable, the use of fixed-price type contracts for the procurement of goods and services by the agency or department concerned.” Like Section 102, this section would require “measurable goals” and would require the agency to submit the plan to various Congressional committees and the General Accountability Office (“GAO”).

Section 201 would require each agency to “make publicly available, within 14 days after award of the contract, the documents containing the justification and approval” for other than competitive procedures. This provision would make an agency head’s determination under Section 101 politically difficult. Within two weeks after contract award, the agency head would be required to make his/her determination not to use competitive procedure publicly available.

Section 202 of H.R. 1362 would require the agency head to submit quarterly to various Congressional committees:

Section 202 does not indicate whether the “audits performed by such agency” include only DCAA audits or also include Inspector General audits, quality audits, and other audits of contractor business systems.

S. 119, “War Profiteering Prevention Act of 2007,” introduced by Sen. Leahy on January 4, 2007, and S. 606, “Honest Leadership and Accountability in Contracting Act of 2007,” introduced by Sen. Dorgan on February 15, 2007, are also significant bills. Both bills contain similar language; S. 606 states:

• Prohibition –
  • In General – Whoever, in any matter involving a contract or the provision of goods or services, directly or indirectly, in connection with a war, military action knowingly and willfully
    • (A) executes or attempts to execute a scheme or artifice to defraud the United States or the entity having jurisdiction over the area in which such activities occur
    • …
    • (D) materially overvalues any good or service with the specific intent to excessively profit from the war, military action shall be fined [$1,000,000 or twice the gross profits or other proceeds], imprisoned not more than 20 years, or both …

S. 606 pertains to “any matter involving a contract or the provision of goods or services, directly or indirectly, in connection with a war or military action …” The language that serves as a predicate for a criminal offense – “materially overvalues any good or service” – is especially worrisome. This language appears aimed directly at contractor estimating activities. If S. 606 were enacted into law, compliance with the disclosure requirements under the Truth in Negotiations Act (“TINA”) or Cost Accounting Standards (“CAS”) would not suffice to protect a contractor in its pricing activities. S. 606 would add a new requirement – a prohibition on “materially overvaluing” a contractor’s goods or services. Moreover, S. 606 explicitly provides for extraterritorial federal jurisdiction, meaning that the offense could be committed anywhere in the world and the U.S. Government would have criminal jurisdiction.

S. 606 also contains other provisions of interest to government contractors. Section 102 would require regulatory changes to suspend and debar from government contracts, any contractor that has “exhibited a pattern of overcharging the Government under Federal contracts; or has exhibited a pattern of failing to comply with the law, including tax, labor and employment, environmental, antitrust, and consumer protection laws.” Section 102 would have a broad, adverse effect on government contractors. “Pattern of overcharging” is nowhere defined in the bill. Arguably, two adverse government audit reports could show a “pattern,” for which the result would be suspension or debarment. Similarly, a “pattern of failing to comply with law” is left undefined.

Section 103 would require a federal agency to maintain a list of audit reports that describe “significant contractor costs that have been identified as unjustified, unsupported, questioned, or unreasonable under any contract …” Section 103 would require the agency to provide complete copies of such reports to Congressional committees, and to publish information on instances in which “any major contractor has been fined, paid penalties or restitution, settled, plead guilty to, or had judgments entered against in connection with allegations of improper conduct.” Section 103 would also require publication of “information on all sole source contract awards in excess of $2,000,000 …”

Like H.R. 1362, S. 606 also contains provisions that would require competition and force agencies to explain the reasons for not awarding a contract on a competitive basis. Section 201 would prohibit the award of a delivery order contract in excess of $100,000,000 to a single contractor unless the agency head made a written determination justifying such single award. Section 202 would require competition for each delivery order under “multiple award contracts.”

H.R. 1986, “Federal Contractor Accountability Act of 2007,” introduced by Rep. Ellsworth on April 20, 2007, and H.R. 1870, “Contractor Tax Enforcement Act of 2007,” introduced by Rep. Towns on April 17, 2007, would condition eligibility to receive contract awards on tax compliance. H.R. 1986 would apply to contracts in excess of the simplified acquisition threshold; it states:

No prospective contractor may be awarded a contract with an agency, no contractor with an agency may be awarded an extension of its contract … and an agency may not issue an order for goods or services to any prospective contractor or contractor, unless the prospective contractor or the contractor … certifies in writing to the agency … that the contractor owes no Federal tax debt.

The problem with H.R. 1986 is the undefined and broad nature of the required certification. What does “owe no Federal tax debt” mean, given the complexity of the Internal Revenue Code as well as the complexity of contractor organizations and tax accounting systems? The bill’s requirement has no “good faith and belief” requirement but appears to require a “strict liability” certification.

Finally, H.R. 846, “Emergency and Disaster Assistance Fraud Penalty Enhancement Act of 2007,” introduced by Rep. Chabot on February 6, 2007, would significantly increase penalties related to major disasters and emergencies. That bill would impose up to a 30-year prison sentence and fines for fraud “in connection with a major disaster declaration … or in connection with any procurement of property or services related to any emergency or disaster declaration” as a prime contractor, subcontractor, or supplier.

The fact that both houses of Congress are considering numerous bills containing many similar provisions for increased government contractor oversight is significant. The existence of so many similar bills on both sides of Congress means that Congress will likely pass some type of legislation, and the new laws will likely reach across all types of government contracts.

Of perhaps more immediate concern, however, is the proposed change to the FAR in the definition of “cost or pricing data”. 72 Fed. Reg. 20092 (April 23, 2007). That proposed regulation would turn FAR 15.4 upside down and reverse the regulatory implementation of the Federal Acquisition Streamlining Act (“FASA”) and the Federal Acquisition Reform Act (“FARA”) implemented over ten years ago. Simply put, the proposed regulations are contrary to the law as passed by Congress.

Following on the heels of then Vice President Gore’s National Performance Review, Congress passed FASA and FARA so that the federal government could use commercial practices to procure goods and services. As part of the Acquisition Reform movement, these statutes and their implementing regulations expanded to definition of “commercial item,” and alleviated the burden on contractors to provide “cost or pricing data” in connection with many procurements. Congress and the regulators recognized that obtaining cost or pricing data was expensive and burdensome, so the policy changed to require cost or pricing data only as a “last resort.” The regulations implementing FASA and FARA accomplished this by requiring “cost or pricing data” only where no exception to TINA was available, and permitting the government to obtain “information other than cost or pricing data” (essentially sales and price information) in non-TINA covered procurements.

The proposed regulations would make submission of cost or pricing data the rule rather than the exception. The proposed regulations would:

Contrary to the promulgation comments from the implementation of Acquisition Reform, the regulators now focus on the certification of cost or pricing data as key. Previously, the regulators correctly concluded that “cost or pricing data” necessarily meant certified cost or pricing data required where no TINA exception applied. Where a TINA exception did apply, the regulators previously concluded that the government could obtain from contractors the less burdensome “information other than cost or pricing data.” Now, the regulators propose to establish “data other than certified cost or pricing data” which would include the sales and price information of “information other than cost or pricing data” and require production of “cost or pricing data” that is not certified in non-TINA covered procurements. The definition of “cost or pricing data” would remain the same as now – “all facts that, as of the date of price agreement … prudent buyers and sellers would reasonably expect to affect price negotiations significantly” – but without the certification. So, under the proposed regulations, contractors would provide, for example in commercial item procurements, “data other than certified cost or pricing data” that would include “cost or pricing data”. This is undeniably a 180-degree reversal of the regulatory scheme in place for more than ten years.

This is not the end of the matter for non-TINA covered procurements where contractors would be required to submit “data other than certified cost or pricing data.” That term would also include “any data, including cost or pricing data and judgmental information necessary for the contracting officer to determine a fair and reasonable price or cost realism where certification is not required …” So, in a commercial item procurement, a contractor would be required to submit (uncertified) cost or pricing data and “any judgmental information necessary” for the CO to determine a fair and reasonable price. The proposed regulations would make commercial item acquisition look like any TINA-covered procurement.

The regulators’ comments in support of the proposal cite to a May 30, 2001, DOD Inspector General audit report critical of contracting officers who apparently “did not obtain adequate pricing information or information other than cost or pricing data for justifying price reasonableness.” The regulators state:

The Councils believe that the terminology should be changed because they believe that it should be clear that the contracting officer should be free to ask for any information necessary to determine the price to be fair and reasonable. This could include any cost data or pricing data that would support price reasonableness even though certification is not required. The Councils believe it to be extremely important to resolve any misunderstanding amongst Government and contractor acquisition professionals by ensuring that the definition is fully clarified.

…

The Councils also changed the term “information other than cost or pricing data” to “data other than certified cost or pricing data” to be consistent with [TINA]. In addition, the Councils revised the definition to clarify that contracting officers are to obtain whatever information is necessary to determine that prices are fair and reasonable. This change clearly establishes that the underlying data can be the same (detailed cost estimates and cost or pricing data). The difference occurs when the pricing action meets the requirements [of TINA]: that data must be certified. Likewise, when the certification requirements [of TINA] do not apply, the contracting officer can obtain the same information (detailed cost estimates and cost or pricing data) when there are no other means to determine prices fair and reasonable, but that data cannot be certified. The contracting officer may also obtain only specified portions of this information, depending on the contracting officer’s needs. This clarification is especially important when purchasing noncompetitive commercial items.

The regulators’ comment that the proposed changes are a “clarification” to be “consistent” with TINA is utter nonsense. This is no “clarification” – it is a wholesale reversal of established policy implemented to achieve Congress’ direction. Moreover, the regulators’ comment suggests that the current regulations are somehow inconsistent with TINA. This is a bold statement in that it alleges that the government has acted for more than ten years in violation of Congressional will expressed in statute. The proposed changes are not a “clarification” and the current regulations are not “inconsistent” with TINA.

Additionally, in TINA-covered procurements, the proposed changes would modify FAR 52.215-20 and -21 to make contractor submission in accordance with Table 15-2 of FAR 15.408 a contractual requirement. Table 15-2 would require contractors to submit not only “certified cost or pricing data,” but any data other than certified cost or pricing data reasonably required to explain [contractor] estimating process …” So, not only would judgmental information be required for commercial item procurements, but it would also be required for TINA-covered procurements. This is a sea change in TINA law.

The regulators make an apparent reference in their comments to the government’s false claim action against SAIC of a few years ago, which action alleged fraud in failure to provide certain estimate information:

In 2005, Congress expressed concern regarding an Air Force defective pricing case related to judgmental factors as cost or pricing data. Based on the legal issues raised in the case, Congress is concerned that FAR regulations are ambiguous, especially in the definition of cost or pricing data in FAR 2.101 and the discussion of cost or pricing data in Table 15-2.

The regulators’ reliance on this “concern” is inappropriate. The regulators’ duty is to implement Congressional will as evidenced in statute. FASA and FARA are still law, and the regulations implementing that law accomplish the goal set by Congress.

Finally, the proposed changes in the regulations might create another cause of action for the government against contractors. In commercial item acquisitions, the government may have a claim if the contractor did not provide (uncertified) “cost or pricing data” – “all facts that, as of the date of price agreement … prudent buyers and sellers would reasonably expect to affect price negotiations …” – or “judgmental information necessary for the contracting officer to determine a fair and reasonable price.” Similarly, in TINA-covered pricing actions, the government would have a defective pricing claim for a failure to provide current, complete and accurate “certified cost or pricing data”, and the government may have a cause of action for a contractor’s failure to provide all of the information demanded by Table 15-2.

The proposed regulations are an unwarranted and unnecessary about-face from established law. They contradict the law Congress passed over ten years ago. The regulators should withdraw the proposed regulations.

II. Courts Reject Government Acts of Bad Faith and Enforce Duty of Good Faith and Fair Dealing

Two recent cases offer insights into the government’s duty of good faith and fair dealing and reject the government’s bad faith actions in contract administration. In Moreland Corp. and Las Vegas VA1 LLC v. United States, No. 03-2154C (COFC April 18, 2007), the court rejected the government’s default termination of a building lease used as a VA medical clinic. The court awarded the contractor almost $18 million in damages for unpaid rent, plus interest under the Contract Disputes Act.

The court discussed two examples of the government’s bad faith: (1) the contracting officer’s denial of a meritorious claim, at the behest of agency counsel, to gain negotiation leverage, and (2) the government’s attempt to impose the obligation to perform a structural loading study at no cost to the government. On the first example, the court stated:

Under the Contract Disputes Act, a contracting officer’s review of certified claims submitted in good faith is not intended to be a negotiating game where the agency may deny meritorious claims to gain leverage over the contractor. The law requires contractors to certify that their claims are “made in good faith,” that all “supporting data are accurate and complete to the best of [the contractor’s] knowledge and belief,” and that the amount requested “accurately reflects the contract adjustment for which the contractor believes the government is liable.” … Certainly, a reciprocal obligation to act in good faith should apply to the Government. As the Court noted recently … a contracting officer is obligated to “put his own mind to the problems and render his own decisions.” Such decisions must be “personal [and] independent,” and “even the appearance of coercion [must] be avoided.” … The Contracting Officer’s outright denial of meritorious contractor claims to gain some advantage over the contractor will not be condoned by this Court.

On the second example, the court noted that the VA Inspector General had issued a report addressing deficiencies involving the medical clinic’s HVAC system. The VA IG recognized that the HVAC deficiencies were the VA’s responsibility “because the accepted construction work had been substantially in compliance with contract specifications.” The VA IG recommended that the VA award a contract to identify, analyze and correct the deficiencies. Notwithstanding this report, the VA attempted to have the contractor undertake the study at no cost to the VA. The court summed up its assessment of the government’s conduct: “In the present case, the conduct of certain VA officials was deplorable by any measure, be it ‘clear and convincing’ or some lesser standard.”

In North Star Alaska Housing Corporation v. United States, Nos. 98-168C et al. (COFC April 2, 2007), the court found that government officials acted in bad faith in administering a housing contract – “driven by animus that led them to breach the contract repeatedly and to interpret other provision in a fashion calculated to deny plaintiff the benefits of the bargain.” The court found evidence of that animus in government representatives’ e-mails comparing contract administration to the “Miami Hurricane’s Game Plan.” The court was particularly troubled by the “clear proof” that government representatives “eventually co-opted the contracting officer who was responsible for ruling on North Star’s claims.” As in Moreland, the court focused on the importance of a contracting officer’s independent judgment regarding contractor claims and the need for an unbiased dispute resolution process. The court stated:

Only in exercising that judgment can the contracting officer hope to fulfill his personal obligation to “[e]nsure that contractors receive impartial, fair, and equitable treatment.” 48 C.F.R. § 1.602-2(b). Conversely, abdication of those responsibilities in the face of pressure from government officials who plainly are driven by animus against a given contractor constitutes perhaps the most pernicious form of bad faith on the part of the government, as it threatens the integrity of a dispute resolution process that is central to the government contracting system itself.

Moreland and North Star are important checks on the government’s exercise of power during contract administration. A contractor is entitled to the independent and unbiased decision of a contracting officer on claims. The contracting officer must grant a claim he/she finds to be meritorious, and may not use that claim as negotiation leverage to settle other issues. The principles of these decisions are fundamental to fair and equitable treatment of contractors.

* * * * *

For a complete list of Recent Developments in Government Contracts, please see the attached index with weblinks to the source documents. If you wish to discuss these or any other government contract issues, please contact the following individuals or view our website at www.smithpachter.com to view additional attorney biographical information:

• H.R. 1986, “Federal Contractor Accountability Act of 2007” (April 20, 2007)
• H.R. 1870, “Contractor Tax Enforcement Act” (April 17, 2007)
• H.R. 1639, “To provide that no entity performing lead system integrator functions in the acquisition of a major system by the Department of Homeland Security may have any direct financial interest in the development or construction of any individual system or element of any system of systems, and for other purposes” (March 22, 2007)
• H.R. 1362, “Accountability in Contracting Act” (March 15, 2007)
• H.R. 985, “Whistleblower Protection Enhancement Act of 2007” (March 15, 2007)
• H.R. 897, “ Iraq and Afghanistan Contractor Sunshine Act” (February 7, 2007)
• H.R. 846, “Emergency and Disaster Assistance Fraud Penalty Enhancement Act of 2007” (February 6, 2007)
• S. 1004, “Restoring Integrity in Contracting Act” (March 28, 2007)
• S. 680, “Accountability in Government Contracting Act of 2007” (February 17, 2007)
• S. 674, “Transparency and Accountability in Military and Security Contracting Act of 2007” (February 16, 2007)
• S. 606, “Honest Leadership and Accountability in Contracting Act of 2007” (February 15, 2007)
• S. 777/H.R. 1023, “Withholding Tax Relief Act of 2007” (March 6, 2007)

II.   REGULATIONS & POLICIES

• Proposed Rule, “FAR: Definition of Cost or Pricing Data,” 72 Fed. Reg. 20092 (April 23, 2007)
• Proposed Rule, “FAR: Representations and Certifications – Tax Delinquency,” 72 Fed. Reg. 15093 (March 30, 2007)
• Interim and Final Rules, “FAR: FAC 2005-16,” 72 Fed. Reg. 13584 (March 22, 2007)
• Proposed Rule, “FAR: Federal Funding Accountability and Transparency Act (FFATA) – Reporting Requirement of Subcontractor Award Data,” 72 Fed. Reg. 13234 (March 21, 2007)
• Proposed Rule, “FAR: Contractor Code of Ethics and Business Conduct,” 72 Fed. Reg. 7588 (February 16, 2007)
• Notice, “OFPP: Determination of Executive Compensation Benchmark Amount Pursuant to Section 39 of the Office of Federal Procurement Policy (OFPP) Act (41 U.S.C. 435), As Amended,” 72 Fed. Reg. 14300 (March 27, 2007)
• Interim Rule, “DFARS: Excessive Pass-Through Charges,” 72 Fed. Reg. 20758 (April 26, 2007)
• CODSIA draft letter to DOE re “Contractor Employee Pension and Medical Benefits Challenge”
• OUSD Memorandum, “Proper Use of Award Fee Contracts and Award Fee Provisions” (April 24, 2007)
• OUSD Memorandum, “Award and Incentive Fees – Data Collection” (April 24, 2007)
• OUSD Memorandum, “Commercial Item Determinations” (March 2, 2007)
• DCAA Memorandum, “Audit Alert on the Evaluation of Directly Associated Unallowable Costs” (January 18, 2007)

III.   CASES

• AT&T Corp. v. United States, No. 04-1511C (COFC April 26, 2007) (denial of contractor’s summary judgment motion on issue of “segment closing” definition”)
• Moreland Corp. and Las Vegas VA1 LLC v. United States, No. 03-2154C (COFC April 18, 2007) (default termination reversed; good discussion of government’s duty of good faith and fair dealing; “In the present case, the conduct of certain VA officials was deplorable by any measure, be it ‘clear and convincing’ or some lesser standard.”)
• Jacobs Engineering Group, Inc. v. United States, No. 02-1500C (COFC March 26, 2007) (contractor could not recover fee in DOE cost-sharing arrangement)
• North Star Alaska Housing Corp. v. United States, Nos. 98-168C et al. (COFC April 2, 2007) (contractor recovers for government’s bad faith contract administration; good discussion of contracting officer’s duty to act independently and to treat contractors fairly)
• CBS Corp. v. United States, No. 01-79C (COFC February 21, 2007) (inclusion of pension costs attributable to flexibly-priced subcontracts in segment-closing adjustment under revised CAS 413.50(c)(12) is not a change from original CAS 413; government is not entitled to equitable adjustment under FAR 52.230-2(a)(4)(i) where revised CAS 413.50(c)(12) includes costs attributable to flexibly-priced subcontracts entered into under original CAS 413)
• AAB Joint Venture v. United States, Nos. 04-1719C et al. (COFC February 28, 2007) (contractor motion to compel production of documents, including e-mails, granted against government even though cost to government would be $85,000-$150,000; good discussion of duty to preserve evidence)
• Fiber Materials, Inc., ASBCA No. 53616 (April 17, 2007) (contractor’s appeal sustained in part, pertaining to disallowed costs and penalties under CPFF contracts)
• AM General LLC, ASBCA 53610 (February 23, 2007) (contractor motion for reconsideration granted; factual development required on issue of homogeneous indirect cost pool)
• G&R Service Company, Inc., CBCA No. 121 (March 14, 2007) (title to excess material belongs to contractor after completion of FFP contract)
• United States ex rel. Rille and Roberts v. Accenture LLP, Civ. Action 4:04CV00989 WRW (E.D. Ark. Complaint filed April 12, 2007)

IV.   REPORTS