General Practice, Solo, and Small Firm Division The Compleat Lawyer
Winter 1997, Volume 14, No. 1 copyright American Bar Association. All rights reserved.
Public Contract Law
BY JAMES McALEESE AND JEFFREY S. NEWMAN
James McAleese is the principal of McAleese & Associates, P.C., a government contracts and high technology law firm in McLean, Virginia. Jeffrey S. Newman is an associate with McAleese & Associates.
When do lawyers run into public contract matters? Lawyers who represent firms that operate primarily in the commercial sector, but are tangentially active in the contracting community, often find that their clients have conflicts with the federal government.
Also, lawyers may run into public contract issues when they represent subcontractors to large Department of Defense (DOD) contractors, who have potential or ongoing disputes with the prime contractor that they want to avoid or resolve.
The Federal Acquisition Streamlining Act of 1994 (FASA) helped streamline the cumbersome federal procurement process. This significant piece of legislation created new business opportunities for commercial and military contractors, and reduced the overall costs and burdens of contracting with the federal government.
The Federal Acquisition Reform Act of 1996 (FARA) (also known as the National Defense Authorization Act for Fiscal Year 1996) built upon FASA's reforms. Like FASA, it radically altered the ways in which the federal government procures supplies and services, and contractors conduct their business. Now, a "third-round" of major acquisition reform is being discussed, with both industry and government officials advocating additional reforms.
Awarding the Contract
A competition is one method the government uses to procure necessary goods and services. The government selects an awardee from the pool of offerors (bidders) who submit proposals for contract award. The government evaluates those proposals, and selects an awardee based on the list of criteria established in the contract solicitation.
The person with the authority to enter into, administer, and/or terminate contracts is called the contracting officer (CO). Traditionally, in negotiated procurements, all bidders routinely expected to hold discussions with the CO about their proposal; then, they would submit a "Best and Final Offer" (BAFO). Moreover, the CO had to include all bidders with a "reasonable chance of being selected for award" in the competitive range (i.e., the group of proposals to be considered for contract award). Under that approach, bidders often submitted initial proposals with intentional ambiguities in key technical/business details to ensure that they left their pricing options open.
Under FARA, however, bidders in both civilian agency and DOD procurements are now subject to an arbitrary "constriction" of the competitive range to an "efficient number" following the evaluation of initial proposals. As long as it states its intention in the solicitation, the government may even limit the number of bidders it intends to place in the competitive range. Therefore, the CO will now admit only the most highly rated bidders into the competitive range for discussions, or award on initial proposals. This new authority to "constrict" the competitive range to achieve "efficient competition" creates the equivalent of award on "First and Final Offers" (FAFO).
Consequently, the government approach has shifted from "when in doubt keep them in," to "when in doubt throw them out." This places an obvious premium on being highly rated in technical approach and other evaluation criteria.
While performance specifications have shifted large amounts of performance risk to contractors, the CO's new authority to constrict the competitive range multiplies this risk because contractors can no longer rely on previously held discussions to provide a timely assessment of the customer's true "technical discriminators" and price sensitivity. Therefore, successful bidders' "perceptions" of customer discriminators and price sensitivity will drive them to assume risk in areas that will not always garner beneficial evaluation ratings. This will also add unnecessary pricing risk, to the detriment of the contractor's bottom line.
The bid protest system allows contractors to challenge a contract award based on any number of different improprieties they believe resulted or will result in an improper contract award, including improper source selections, organizational conflicts of interest, improper cost/technical tradeoffs for "best-value" procurements, and unbalanced bidding.
If successful, the protesting party may have the award overturned and a new competition held. Contractors may pursue several different avenues to litigate their bid protests: agency, board of contract appeals, Court of Federal Claims, and/or other federal courts. Each forum has its own set of substantive and procedural rules. The Teaming Arrangement
Having government contract specialists on the team to help formulate and coordinate pre-award and overall strategies, recommend post-award procedures for minimizing legal and contract administration difficulties, identify significant issues and problems, and be available for immediate consultation, rather than exclusively retaining a government contracts firm to prosecute the claim, provides primary counsel with involvement and control throughout the entire litigation.
Such an arrangement may keep the costs of litigation lower, because the client is not using the government contracts firm as "first chair" in the litigation. Similarly, government contract lawyers can provide specialized advice without necessarily having to devote hours of research to a particular issue.
This "partnership" can also work to represent a client's interests in commercial litigation. Often, disputes arise throughout the different tiers of a contract, i.e., between the prime contractor and subcontractor. However, subcontractors do not have any privity with the government, thereby preventing them from filing a claim at the agency boards or in the Court of Federal Claims. Instead, they are limited to the proper state or federal court to litigate disputes. Government contract lawyers can provide specialized government contracts advice--about document control and analysis, interrogatories and depositions, or the trial--while the client's primary commercial lawyer assumes "first chair" responsibilities over the entire course of the litigation.
Contractors can still profitably win new contracts by sharing risk with fellow contractors at all tiers and by preempting or mitigating risk in their FAFOs. In the past, contractors could rely on the implied warranty of military specifications, so work-around solutions to performance difficulties were readily negotiated to compensate contractors for additional cost, lost profit, and schedule slippages. Much of legal counsel's activity naturally occurred during execution of the contract rather than prior to contract award.
However, performance specifications now potentially preclude a contractor's ability to "get healthy" during performance, because the successful bidder will have effectively assumed that risk from drafting its own statement of work. A number of strategies are available to help shift a portion of your client's risk to the other contractors involved in the procurement, thereby minimizing the client's exposure to unintended or adverse consequences.
The new constriction of the competitive range on initial proposals demands the early drafting of risk-mitigation plans. Fortunately, lawyers can develop strategies to avert, contain, share, or shift that risk without losing customer goodwill, whether or not litigation is required.
Protecting Proprietary Assets
Additional issues, from intricate negotiation of proprietary technologies to critical software subroutines on major systems, also can be defined during discussions after the bidder is safely within the constricted competitive range or is designated as the apparent awardee. Meticulous pre-award identification of technical data and computer software is required to avoid a waiver of proprietary rights and to avert unfounded civil and criminal liability claims.
The need to protect competitive advantage derived from the legitimate ownership of intellectual property assets and rights is underscored by the recent and highly controversial statements from the Navy and other services. The statements raised the possibility of eliminating research and development (R&D) funding, and requiring contractors to develop new systems as private-expense R&D. Contractors must select the vehicles that best protect their proprietary technologies, while accelerating contractor return and increasing the likelihood for winning the follow-on production (e.g., Full-Rate Production (FRP)) contract.
There are several ways to protect proprietary assets from unfounded CO challenges during performance. For example, developing technologies through nontraditional contract vehicles such as privately funded segregable portions of development may immunize contractors from CO claims of government ownership. Further, such procedures must meticulously reconstruct the source of data and software funding, the purpose of development, segregable portions, and derivative data and software modules. Inserting nontraditional placeholder vehicles into development contracts can protect assets anticipated to be developed exclusively by the contractor during performance.
This is important for the developmental phases, because the innovative technology drives the potential willingness of the customer to pay a premium for those "technical discriminators" in the subsequent FRP competition.
Claims Against and Modifications to the Contract
Due to the size and scope of many government contracts, changes to the terms and conditions of the initial contract are often warranted. Unfortunately, these changes are not always carried out in the proper manner, leading to disputes and claims between the parties. A claim is a written demand or assertion by one of the parties to the contract seeking the payment of money, adjustment or interpretation of contract terms, or other relief.
Formal adjustments to the contract such as change orders (a unilateral directive to the contractor to make the change) and bilateral modifications (a joint, supplemental agreement acknowledging the altered terms and conditions of the initial contract) are two appropriate methods of modifying contracts.
However, improper modifications, or constructive changes, result when the contractual terms change because of either government action or inaction. Moreover, the changes cause cost and schedule setbacks. There are several types of constructive changes, many of which share similar characteristics to those used to support commercial claims. For example, a claim may be based on interference and a duty to cooperate, or failure to disclose vital information (i.e., superior knowledge). Other claims include delay, disruption, and constructive acceleration. Recovery on all of these claims depends on the individual facts and circumstances of each situation, and the action (or inaction) of the parties.
Recently, President Clinton issued an Executive Order requiring the use of alternate dispute resolution (ADR) to settle claims brought by and against the government. One of the main thrusts behind the use of ADR is to avoid having to litigate disputes before an agency board or in federal court.
The use of ADR to settle disputes between the government and its contractors should increase because of the new Executive Order, the commercial sector's emphasis on efficient allocation of resources, and the government's efforts to commercialize and streamline as many processes and functions as possible.
However, if ADR is unsuccessful, contractors will have to seek relief at the agency boards or in federal court. Obviously, this process is time-consuming, costly, and demands a clear understanding of the selected forum's procedures and functions. Discovery before agency boards or federal courts warrants significant document review and careful analysis of those documents to ensure proper adjudication of the claim.