M52: Delays, Stop Work Orders, and Termination in Grants and Contracts

Transcription

1 M52: Delays, Stop Work Orders, and Termination in Grants and Contracts Presented by: J. Michael Slocum, Esquire SLOCUM & BODDIE, P.C Shawnee Road, Suite 300 Alexandria, Virginia (703)

2 Government Action and Institution Reaction Actual and potential funding gaps/ deficiencies and budget cuts will affect contract and grant processes and existing and prospective government contracts and funding agreements Government has discretion as to how it will proceed in light of funding shortfalls and cuts What should be the counter-responses? 2

3 Reduced Funds Cause Contract/agreement changes Performance period delays Termination 3

4 Typical Damages Idle equipment and facilities Labor, material, and other cost escalation Unabsorbed overhead Disruption Acceleration 4

5 Unabsorbed Overhead What is it? What must the recipient prove for entitlement? How does the recipient prove quantum? (continued) 5

6 Unabsorbed Overhead (2) Calculation The difference between the amount bid and the amount you were able to allocate or The amount calculated using Eichleay formula 6

7 Disruption, Loss of Efficiency, Loss of Productivity Death by a thousand cuts Work not necessarily stopped, just more difficult Anything that affects the productivity the recipient would have achieved Can be combined with added, deleted, substituted, delayed or accelerated work Can be sole basis (continued) 7

8 Disruption, Loss of Efficiency, Loss of Productivity (2) Causes Delay due to adverse weather Changes Learning curve disruptions Out-of-sequence work Trade packing Anything else that affects productivity (continued) 8

9 Disruption, Loss of Efficiency, Loss of Productivity (3) Increased labor costs More direct hours to do the work More time lost to absenteeism and tardiness More time lost to rework Increased material costs due to rejects 9

10 Proving Loss of Productivity Flexy Plan Industry GSBCA 4117, 76-1 BCA Batteast Construction Co., Inc. ASBCA 35818, 92-1 BCA Shea, Proving Productivity Losses in Government Contracts, 18 Pub. Cont. L.J. 414 (1989) 10

11 Acceleration Costs Hidden Disruption loss of efficiency Clear Overtime wages More workers More equipment Expedited deliveries 11

12 Contracts and Assistance Mechanisms for Adjustments Government insists on the right to make changes in work during performance Contractor has the compensating right of access to an equitable adjustment in contract price and/or schedule whenever a change is made Rights are established in various FAR Changes clauses in contracts, but may not be explicit in agreements. 12

13 FAR Changes Clauses Changes Fixed- Price Changes Cost- Reimbursement Changes T&M or LH Changes Changes and Changed Conditions Change Order Accounting Notification of Changes Time Extensions Variations in Quantity Differing Site Conditions Continuity of Service Suspension of Work Stop-Work Order Government Delay of Work 13

14 Agreements May Not Have Equivalent Terms For Instance: DARPA 4. Amendment of Agreement: (a) Amendments maybe requested by either party. The Recipient shall detail the technical, chronological, and financial impact of the proposed amendment to the program. Changes are effective only after the agreement has been modified. (b) The Agreements Officer or the AAO may unilaterally issue minor or administrative agreement modifications (e.g., changes in the paying office or appropriation data, changes to Government personnel identified in the agreement, etc.) 14

15 So What If Grants Officer Orders Change Without Clause? Theory v. Reality Even if the directed change is breach of contract (because the Grants Officer is without authority) Recipient should probably still perform and file for damages. If the Recipient is terminated, even if the government is wrong, the effort is over and only damages (or in very rare cases, an injunction) will be awarded. Therefore Recipient response is some sort of Request for Equitable Adjustment 15

16 What is the Equitable Adjustment? FAR does not define an equitable adjustment FAR does not explain how they are to be computed These interpretations have largely been left to the courts Even more murky for GCAs (continued) 16

17 What is the Equitable Adjustment? (2) The cost impact or harm of a change or changes Corrective measure used to make the harmed party whole Difference between the reasonable cost of performance Without the change or changes, and With the change or changes 17

18 What Needs To Be Proven? A need for an adjustment (HARM) The connection of these circumstances and amounts to the contract (ENTITLEMENT) The reasonableness of the adjustment amount (QUANTUM) 18

19 Types of Changes Express or formal change Directed by the CO/GO Bilateral change including an agreed-to price Unilateral issued prior to the agreement on price Contractor must perform if within the scope of the contract But not so clear if the agreement is a GCA or other type of agreement (including CRADAs and other transactions) Constructive change Government does not know or refuses to recognize the change Up to the Contractor/ Recipient to recognize a change situation Government needs to be convinced of the value of the change Almost always priced after the change has occurred 19

20 Identifying the Adjustment Situation Recognizing situation early makes it easier to: Obtain evidence of entitlement Gather actual cost information Negotiate with the government Defend against claims of untimely performance 20

21 Common Causes of Constructive Changes Differing interpretation of performance/ payment requirements Acts of over-zealous direction, inspection or control Defective statement of work or specifications Failure of the government to disclose superior knowledge Acceleration of performance (continued) 21

22 Common Causes of Constructive Changes (2) Late or unusable data, property or other materials Failure to cooperate on the part of the government Exercising an option after right to exercise expires Variance in quantities Untimely notices Differing conditions 22

23 Delays in Performance Excusable Delays In Fixed Price situations -- does NOT allow for recovery of the cost of the delay Does allow for an extension or adjustment to contractual delivery requirements Compensable Delays Allows for the recovery of costs associated with the delay Allows for an extension or adjustment to contractual delivery dates No Cost extensions Compensation issues are different in Cost Reimbursement situations than in Fixed Price situations. Increased compensation v. Increased Cost Ceiling 23

24 Excusable Delays Labor strikes Weather Sovereign acts of the government Subcontractor or supplier delays Unforeseeable unavailability of materials Floods Fire Epidemic Embargo Acts of God Financial difficulties caused by government 24

25 Compensable Delays Fixed Price Not issuing the Notice to Proceed within a reasonable time Not making the site available or allowing access to the site Government interference with the contractor s work Failure of the government to cooperate in a timely manner Government delay in providing established funding Unreasonable delay in inspecting work Unreasonable delay in issuing change orders Unreasonable delays in gaining government approval 25

26 Delay Risks in Cost Reimbursement Situations A common misconception cost reimbursable contract is a no-lose proposition In reality, government shifts at least some risk Ceiling price Disallowed cost Cost sharing 26

27 Recovery of the Costs of Delay Fixed Price Entitled to recovery of delay costs when the delay is unreasonable in duration Contractor responsibility to establish the unreasonableness of delay Determined on a case-by-case basis Contractor s ability to mitigate the delay can impact the determination of reasonableness (continued) 27

28 Recovery of the Costs of Delay Fixed Price (2) Can recover the entire cost of delay if it is the fault of the government If the delay is the result of the exercise of a contractual right, the contractor is responsible only for the unreasonable portion of the delay No recovery for the costs of delay is possible if there are concurrent delays 28

29 Recovery of the Costs of Delay Fixed Price and Cost Reimbursement Cost of acceleration whether successful or not Delay from the time that Contractor/ Recipient could have reasonably expected to complete performance even if that date is earlier than stated in the contract/ agreement 29

30 Timely Notification of a Constructive Change Contracts some clauses may limit recovery to a set period prior to the time the contractor gives notice Notification of Changes Clause FAR Requires notification of a change within 30 days Government position NO recovery if not in compliance with the notification requirements 30

31 Notification Reality Courts have taken a broader view Most courts do not bar recovery unless: Party was prejudiced (HARMED) by the failure to provide timely notice The Party would have taken corrective action different than that actually taken had timely notice been given 31

32 Time and Material and Cost Contracts and Agreements Sporadic utilization of people causes the loss of planned efficiencies Delays reduced the overall level of effort anticipated not supporting the discounts provided Personnel had to be released or reassigned and rehiring and retraining expenses were incurred Planned personnel were not available when needed due to delays and those with more or less qualifications had to be used Performance delays do not allow recovery of indirect costs included in the negotiated rates creating unabsorbed overhead 32

33 Cost-type and Award Fee Contracts You have an award-fee, cost-type contract with negotiated target costs, base fees and award fees based on established performance parameters Start of the contract is delayed immediately after award Continual changes are made extending the contract s performance and impacting the established performance standards Increased costs incurred are paid but the base fee remained fixed No relief is given in the parameters for earning the award fees which also remain fixed Extension of the contract performance period impacts performance of other contracts at higher fees 33

34 The Would-Have-Cost/ But For Principle REA should be calculated based on the difference between the: Reasonable cost of performing on the contract without the change May be less than the amount originally proposed Reasonable cost of performing on the contract with the change 34

35 Adjustments to Direct Labor Labor rates Labor classes Labor hour efficiencies 35

36 Adjustments to Direct Material or ODC s Escalation Loss of efficiency Changes in vendors 36

37 Reclassification of Normally Indirect Costs Costs must be incurred specifically as a result of the change Avoid double counting 37

38 Unabsorbed or Misallocated Indirect Expenses A request to recoup overhead costs allocated to other work The amount of indirect expense incurred which would have been allocated to the contract Eichleay Calculation approximate determination of daily indirect expenses multiplied by the number of days of delay 38

39 Extended Program/ Contract Support Time-oriented core support function Extension of the contract period requires retention of the program/contract support function Includes program management, quality control, production management, project management, etc. 39

40 Idle or Excess Facilities and Capacity Idle facilities completely unused and excess Idle capacity partially unused facilities Costs include maintenance, repair, rent, taxes, insurance and depreciation Must try to eliminate if possible and practical Idle facility costs cannot be recovered unless Necessary to meet fluctuations in workload Were necessary when acquired Idle capacity is the cost of doing business 40

41 Personnel Costs Severance costs Required by law Required by an employee-employer agreement Paid under an established policy or implied agreement Re-hire and training costs Applies to both released and reassigned employees 41

42 Material and Equipment Storage Costs Occupancy costs (based on square footage utilized) Additional security Shelf life Re-inspection Stocking and re-stocking Inventory control costs 42

43 Settlement Expenses Costs generated internally or through outside resources are recoverable Internal costs must be removed from any indirect rate pool to eliminate double recovery Generally includes accounting, legal, clerical and similar costs Once the contracting officer makes his/her decision costs incurred are not recoverable do a good job the first time!!!! 43

44 Profit Considerations Changes in contract performance can impact a contractors ability to recover anticipated profits or profit levels sufficient to reward the contractor for performance Certain changes clauses allow changes in price and profit Need to justify the profit requested No profit on settlement costs These clauses allow for adjustments to price or fee Stop Work Order Changes- Fixed Price Changes-Cost Reimbursement Changes-T&M or Labor Hour 44

45 REA Certification Requirements Certification required under Contracting rules but must check for GCAs The Truth In Negotiation Act (TINA) requires certification in non-competitive contracts or contract modifications over $750,000 Failure to disclose accurate, complete and current cost or pricing data results in defective pricing Result in downward price adjustments along with civil and criminal penalties. 45

46 Termination Reimbursement Concept Objective is to reimburse the contractor/ Recipient fairly for: Work completed Preparations made for the terminated portion of the contract Provide a reasonable allowance for profit (where applicable) Provide an adjustment for anticipated contract loss 46

47 Methods of Settlement Negotiated agreement Determination by the Termination Contracting/Grants Officer (TCO) Costing or vouchering-out under costreimbursement contracts Combination of these methods 47

48 What is Fair Compensation? Matter of judgment No exact measure Various methods are equally appropriate No strict accounting principles Cost and accounting data are guides When appropriate use Estimated costs Compromise differences Negotiate doubtful cost recovery Other data maybe equally reliable 48

49 Contractor/Recipient Instructions Stop work immediately on terminated portion Terminate all open subcontracts Protect and preserve property of the government and dispose as directed Settle subcontract termination liabilities Promptly submit termination proposal 49

50 Subcontractor Termination Responsibility of the prime Prime performs role of TCO Subcontractor has no rights against the government Promptly notify TCO of subcontractor legal proceedings arising from the termination Subcontract settlement costs are recoverable as settlement expenses Prime is responsible for audit and negotiation of subcontractor A-110 requirement for T for C is now apparent! 50

51 No Cost Settlement Permitted under certain conditions No cost incurred under the terminated portion of the contract/agreement Contractor/subcontractor willing to waive incurred cost recovery No credits/amounts are due to the government under the contract 51

52 Inventory Basis Settlement Fixed Price Situations Separately itemizes cost associated with: Termination inventory (including shipped not billed) Unamortized initial/start-up costs Costs of terminating Settlement expenses Settlement with lower tier subcontractors Allowance for profit 52

53 Inventory Basis Settlement Amount claimed is reduced for: Un-liquidated advances and progress payments Disposals and other credits Anticipated contract loss 53

54 Total Cost Basis Settlement Itemizes all costs incurred up to the termination date Adds an adjustment for profit Reduced for: Anticipated contract loss Price of items completed and delivered prior to the termination Un-liquidated advance and progress payments Disposals and other credits (continued) 54

55 Total Cost Basis Settlement (2) Usually only authorized for: Complete contract terminations Contracts where contract activity has not yet started Where the accounting system cannot establish unit costs for work-in process Contracts that do not specify unit prices 55

56 Inventory vs. Total Cost Basis Settlement Inventory basis places risk on the contractor Limits recovery to residual items Contractor has burden to prove: Claimed costs were incurred Cost are allocable Total cost basis places risk on the government Recovery equals difference between what was incurred and what was paid 56

57 Percentage of Completion Basis Settlement Rarely used for contracts, but common for GCAs (hard to determine, must be negotiated) Establishes percentage of completion applied to total contract price Subtract all prior payments Price of items completed and delivered prior to the termination Un-liquidated advance and progress payments 57

58 Cost-Type Contract/GCA Settlement Contractor proposes all costs incurred Deduct previous payments Adjust fee based upon contract Voucher out all costs incurred Vouchering out limited to last day of sixth month following termination date Negotiate any remaining costs incurred 58

59 Failure to Exercise Priced Options Appears to be currently in favor Not considered a termination Hope to avoid termination settlement costs Areas of concern Amortization of costs over more than the base year Competitive strategy Need to contractually ensure cost recovery De-mobilization Facility refurbishment 59

60 Timing of Settlement Proposal Submission Proposal must be filed within one year of effective date of termination (contracts) Written request for extension Receive written permission for extension Failure to submit permits unilateral determination of amount due Proposal must be submitted in proper format on proper forms (work with TCO) 60

61 Need for a Request for Equitable Adjustment Before preparation and submission of termination settlement proposal the contractor should: Definitize any outstanding contractual changes Ensure all negotiated changes are included in the contract value Prepare, submit and negotiate any conditions resulting in the need for an REA WHY? Mitigate the impact of the loss factor application 61

62 Pre-contract Costs Cost must be incurred Directly pursuant to contract negotiation In anticipation of contract award To meet the proposed contract performance schedule Allowable to the extent they would have been allowable if incurred after contract award An advance agreement is advisable Types of pre-contract costs Bid and proposal Costs of contract performance Plant alteration/ rearrangement Recruitment and hiring 62

63 Initial or Preparatory Costs Starting load cost not fully absorbed due to termination Excessive spoilage or scrap due to inexperienced labor Excessive idle time Subnormal production/output due to testing and changing production methods Training Loss of efficiency due to lack of employee familiarity with performance requirements Facility alterations and rearrangements Management and personnel organization Employment advertising Recruiting Interviewing Hiring Relocations 63

64 Severance Costs (Dismissal Wages) Abnormal or mass severance Estimates may be used in interim proposals Final settlement should be based on actual payments Must be: Required by law Employee-employer agreement Established policy or practice which implies agreement Need to document: Employees severed Time actually spent working on the contract terminated Whether they can perform other work Need for bumping (employee terminated did not work on contract terminated) 64

65 Leased Facilities Rental under unexpired leases Amount must be reasonable for contract period Contractor must make all reasonable efforts to terminate, assign, settle or reduce costs Alteration of leased facilities Must have been necessary for the performance of the contract 65

66 Settlement Costs Includes accounting, legal, clerical, etc. Can be performed internally, with external personnel or both Ensure qualification of external personnel Be sure to fully document efforts (what was done by whom) Recoverable as a cost of termination settlement 66

67 Profit Considerations Usually granted on preparations made and work done on terminated portion of the contract No profit granted on settlement costs No anticipatory profits or consequential damages No profit granted on loss contracts 67

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