breakout session - ncma home contracts battlefield — ... • defective specifications ... –...

Breakout Session #: C06

Lawrence M. Prosen; Stuart Young; David J. Hatwell & John P. Greenwell

Date: Monday, July 25

Time: 4:00pm–5:15pm

Lessons Learned From the Government Contracts Battlefield— Takeaways for Every Government Contractor

Our Panelists

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Larry Prosen, Esquire Partner, Kilpatrick, Townshend & Stockton LLP, Construction & Infrastructure Team, Lead Government Contracts Partner

Stuart Young, Esquire SVP & General Counsel, AECOM Management Services

David J. Hatwell President, Aegis Project Controls

John P. Greenwell Chief Operations Officers, Hess Construction

Top Ten Lessons Learned

1. Watch out for solicitation & proposal phase issues that can spell trouble later.

2. Nip personnel issues in the bud & be aware of them. 3. Effectively manage and preserve changes & change/claim

issues. 4. Manage your contract to identify and prove claims 5. Preserve timeliness/SOL issues in claims appeals

(Sikorsky). 6. Reserve & preserve rights clearly (Bell/BCI). 7. Be careful what you say in writing when a problem arises -

and know what you said before you pursue a claim. 8. Do your due diligence before you sign a release

certifications - develop corporate polices – field to C-level). 9. Ambiguous language is a potential FCA trap. 10. SO is implied certification & lack of proper internal

procedures.

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Contracts Gone Bad – Why? TOPICS • Change management, IP rights, lack of Government

Cooperation, Quality of Contract Documents & Specifications – Contractor’s & Government’s Side

• Claims Appeal Rights & Timeliness - Sikorsky • Waivers & Releases – the Bell/BCI Gambit • Compliance with SBA Requirements

– Mentor/Protégé Expansion – BE ON THE LOOK OUT

• FCA – Implied Certification; Damages & Ambiguity

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What About The Audience?

• WHO IS FROM THE GOVERNMENT SIDE? • CONTRACTOR SIDE? • WE WANT YOU TO PARTICIPATE

– Feel free to ask questions as we proceed – Answer Audience Participation Questions in RED

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Lesson No. 1 – What Makes a Government Contract Go Bad?

• Contracts going bad – Change management, IP rights, lack of Government Cooperation, Quality of Contract Documents & Specifications – Contractor’s Side – Government’s Side

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What Makes A Government Contract Go Bad?

It all starts up-front – Contractor Perceptions: 1.Solicitation establishes adversarial versus partnership relationship 2.Contract type or delivery method – Know what you are getting into 3.Sloppy solicitation 4.Personnel issues 5.Scope Gaps 6.Objectives 7.Solicitation Method – Performance vs. Prescriptive

LESSON: NEED TO RECOGNIZE THAT, IN THE END, CONTRACTOR HAS LITTLE CONTROL OVER THE MANNER & METHOD

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So?

What Makes a Government Contract Go Bad? Is your Agency acting as a “Partner”?: • Issues draft RFP for Industry Comment/Input • Allows for industry day and other early exchanges • Allows for ample time to prepare proposals • Allows for oral presentation • Provides for and answers Q&As/Requests for Clarification • Allows for negotiation • Uses incentives or award fees • Encourages or even mandates partnering sessions during

contract performance • Clearly established vision and goals for the project

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What Makes a Government Contract Go Bad? Agency as Procurement Award Adversary • “My way or highway” procurement process • No engagement pre-solicitation • Extremely tight timeframe for responding to proposals • Little to no window for Q&A/RFCs and responses are

vague and nonresponsive – Q&A/RFC most important step/opportunity

• No opportunity for oral presentation • No opportunity for negotiations • Heavy on LDs (no incentives or awards) • No informal mechanisms established during contract

administration to air issues

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WHAT DO YOU SEE/OBSERVE?

Sloppy Solicitation Documents What does this mean? • Missing exhibits or

attachments • Multiple amendments • Missing required

regulatory clauses ‒ Is the quality of

contract documents (specs & designs) getting worse?

‒ Poor Coordination ‒ Over-inclusion or

incorporation by reference

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What are you signing up for?

Why does this matter? • Shows agency in a hurry • Shows agency (or contracting

officer) might lack expertise or experience

• U.S. Veteran’s Administration & Construction – See, Kiewit-Turner, JV v. Dept. of Veterans Affairs, CBCA 3450

• Amplifies risk (protests and claims)

Lesson Learned No. 2 - Personnel Issues

• The Government is people to!! • Agency and contractor may or may not have prior

experience together. – What are the possible impacts of this?

• Contractor and subcontractor entities have no experience working together. – SAME QUESTION

• Contractor personnel (prime level or prime-sub level) have never worked together

• Bad cultural fit among prime/subs • Clear definition of who owns what • Avoid scope gaps &develop and open, communicative

environment – COMMUNICATION IS KEY at all levels

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Lesson Learned No. 3 - Changes to Government Contracts, Are They Inevitable? • Changes are a routine part of government contracting.

– Are they inevitable? – Best Contracts are those with no changes or a lot?

• Management of those changes can make the difference between a contract “going bad” and being performed successfully

• The best management is identification and reduction of the impact of a claim

• This is true both for formal changes directed by the Contracting Officer via a contract modification and for the constructive changes that creep in during contract performance

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Types of Constructive Changes to Watch For • Disagreements over contract requirements • Defective specifications

– Remember the implied warranty of specifications – Consider whether specifications are impracticable

or impossible to perform • Failure to disclose vital performance

information/superior knowledge • Failure to cooperate/interference with performance • Constructive acceleration • LESSON LEARNED: Did Agency Rep. have authority

to direct change? • Do you have systems in place to identify possible

changes, particularly before they happen - NOTICE 13

From a Contractor’s Perspective, Effective Change Management is Important for Many Reasons: • Cash flow • Earnings • Bookings • Schedule performance • Business process compliance • CUSTOMER SATISFACTION

– Disagreements and confusion about contract requirements lead to unhappy customers– which lead to poor past performance and lower award fees

– Nobody likes a surprise – Mitigation of Cost & Exposure/Liability

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Contractors Often Hesitate to Raise Constructive Changes, Why? • Bad reasons for failing to raise potential constructive

changes include: – Trying to keep the customer happy – Not wanting to appear uncooperative, especially

early in contract performance – Not recognizing a change – Assuming the program will get back on schedule

later, before anything really bad happens – Perceived direction from management “not to

pursue” changes – Wanting to protect the reputation within the

company of those who may be perceived as having agreed to the changes

– Not wanting to alert senior management that a program is off-track

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QUESTION TO THE GOVERMENT

• As Government Employees and Representatives, do you want notice “up front” of a change?

• How do you prefer to address change?

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Effective Change Management Benefits Both the Contractor and the Government Customer • A contractor may flag issues that the government had

not considered when it developed the specifications • Fleshing out the requirements can facilitate the

government’s decision about whether and how to proceed down a given path of performance, as well as improve its understanding of what its course of action may cost

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Changes - Vigilance & Understanding

• Be as vigilant to constructive changes in commercial contracts between private parties as you are to constructive changes in government contracts

• In both situations, a contractor needs to understand the MINIMUM REQUIREMENTS of the contract or subcontract

• A contractor or subcontractor may decide to “invest” and do more than is required

• Part of the role of in-house counsel is to ensure that the appropriate level of management is aware of, and approves, that “investment” decision

• Establishing a change procedure should be part of every contract

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Identifying a change

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• Understanding a change starts with understanding your project. – What are the deliverables? – What are the contract milestones? – What are your assumptions? – What is your plan?

• A change (more on this later) is a change to one of these items

• Proving a change often requires a plan

Risk Mitigation Plan

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• Before initiating a project a successful risk management plan needs the following: – A plan (timeline, staffing, manpower, equipment) to

perform the work within the time frame allowed – An understanding of the various risks and how

those risks could effect your plan – Incorporation, if possible, of those risks into the

plan – Notice matrix

Notice Matrix

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Issue DefinitionRelevant Contract Section

Notice Requirement

(time)Notice Requirement (Content) Developer Requirements Opposition to Determination

Errors and Omissions in Documents

Acquiring knowledge of any errors, discrepancies, omissions, duplications, conflicts, or inconsistencies in the Contract Documents.

9.1 5 calendar days Submit a written proposal detailling if error or ommision will have a net effect on the Contract Sum and/or Contract Time.

No timeline specified. Per Article 16.4, Developer has 10 calendar days to issue formal change order. If Developer does not issue, it is assumed the change order is denied.

Per Contract Article 26, file claim within 20 calendar days after Owner denial.

Owner Issued Change Proposals

Request for Change 16.3 10 calendar days

Submit a written proposal detailling if change will have a net effect on the Contract Sum and/or Contract Time.



Prime General Contractor Request for Change

An event or condition entitling the Prime Contractor to an increase in the Contract Sum or the Contract Time.

16.4 7 calendar days Submit a written proposal detailling if change will have a net effect on the Contract Sum and/or Contract Time.

10 calendar days to issue formal change order. If Developer does not sign, it is assumed the change order is denied.


Claims for Concealed or Unknown Conditions

(1) subsurface or otherwise concealed physical conditions, (2) unknown physical conditions

16.7 21 calendar days

Notify 21 days after first observance, and before conditions are disturbed.

The Developer will promptly investigate such conditions and determine merit.

Claims by either party in opposition to such determination must be made within 21 calendar days after the Developer has given notice of the decision. If no agreement can be reached moved to Article 26.

Force Majeure (a) fire, (b) industry wide labor disputes, (c) adverse weather conditions not reasonably anticipated (d) unavoidable casualties or other causes

17.3 5 calendar days after such occurrence

Prime General Contractor provides Developer with the details of such event and the length of the anticipated delay within an additional 7 calendar days after notice as been issued.



Developer and Third Party Delay

Developer or person other than the developer.

17.4.2 & 17.4.3

10 calendar days

Notify in writing that request for change is forthcoming to deal with delays. Provide a change proposal within 7 calendar days of issuing notice.



Acceleration by Developer

Developer desires to accelerate the Project Master Schedule for reasons other than delays caused by or attributable to Prime General Contractor.

17.5 7 calendar days Issue a written proposal whether such Request for Change will have a net effect on the Contract Sum and/or Contract Time. Prime General Contractor shall require its personnel and its Subcontractors and Vendors to work such overtime hours and/or to increase their respective work forces as reasonably necessary to meet Developer's acceleration goals.



Your Plan

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• A good plan can help in a number of ways: – Integral to determining the necessary steps to be

successful – Forces the team to think about the project before

starting the project – Find out if you are track – Can be used to demonstrate a change – Helps instill full and open communication too!!

Your Plan

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• So what makes a good plan? – Detail, detail and more detail – Logic – Consideration for equipment, resources,

manpower, weather, etc… – Realistic – Trackable – Updated


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• In terms of time, a change can be historical, current or upcoming.

• The goal of a risk mitigation plan is to identify changes before they occur. – This allows your team to identify the effects of the

change before it occurs. – It allows your team to provide timely notice – It allows the Owner to understand the issue before

it becomes an impact – It allows people to make smart decision on how to

move forward • Historical changes allow none of this.


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• You’ve identified a change, it has not occurred yet – what do you do? – Notice – Update your plan – Show the change in your upcoming plan – Compare that change to the original plan – Present this information to the stakeholders

• Mitigation opportunity – Price change – Change request

Proving / Presenting a Change

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• A change may result in lost time and invariably result in lost cost.

• Direct cost changes should track back to your plan or estimate. – What did you plan vs. what actually happened? – Having a good estimate/plan is essential to

showing a cost loss or increase. – Entitlement – you must show that the additional

costs are due to ‘not you’. • Copy of the plan • Change documents • Invoices • Letters/correspondence

Proving / Presenting a Change

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• Time changes cost money (staffing, equipment, rentals, etc…). – What did you plan vs. what actually happened? – Having a good plan or schedule is key.

• It must be detailed enough to identify the affected work and show the impact.

– Entitlement – you must show that the additional time are due to ‘not you’.

• Copy of the plan or schedule • Notice • Change documents • Letters/correspondence

Changes – What

• Notice under FAR “Changes” Clause; AOC Regs, FAA’s AMS, etc. – Cause & Effect – Time, Cost, Etc. – Is a Change an REA? Are they one and the same?

• During Notice & Performance: – Preservation & Development of Record & Strong

Documentation (entitlement & quantum) • Claim and REA are NOT THE SAME

– Claim = Certification = FCA – BUT – Did you know that the DOD REA Clause

does have a certification requirement? Just not as definitive as the CDA Provision

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Lesson No. 3 - Sikorsky & Claim/Appeals Timeliness • Federal Circuit found that 6 year SOL is not

jurisdictional so it cannot provide basis for dismiss appeal on a lack of jurisdiction basis. Sikorsky Aircraft Cop. v. United States, 773 F.3d 1315 (Fed. Cir. 2014).

• So what does this mean? – Statute of Limitation is no longer the initial gate

which must be decided before an appeal can move forward

– Burden of proof shifts from Government to Contractor

– Not only is the S/L litigated later in the process, it may also be more difficult to establish

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Practical Impact of Sikorsky

• Before Sikorsky: Appeal of Raytheon Missile Systems, ASBCA No. 58011 – Government claim for violation of cost accounting

standards ($10M + $7M penalties) – Raytheon asserts that claim is time barred;

Government contends claim accrued when a September 2006 audit report calculated a specific price impact of the CAS noncompliance

– ASBCA ruling (January 2013) • Accrual of Government claim is not suspended

until it performs an audit • Single party cannot postpone unilaterally and

indefinitely the running of the statute of limitations

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After Sikorsky…

• Appeal of Raytheon Company, ASBCA No. 58849 – Board rules that briefings on motion to dismiss will

not necessarily be considered when making a merits determination

– Ruling on the statute of limitations issue was premature in the absence of adequate discovery and development of the record – therefore motion to dismiss is denied

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After Sikorsky…

• Appeal of Alion Science and Technology Corporation, ASBCA No. 58992

– FY 2005 indirect cost submission filed as Excel spreadsheet on March 31, 2006

– November 2006 - February 2008 – DCAA requests further supporting data, Alion responds

– DCAA audit report issued April 19, 2012 questioning numerous cost elements

– Final decision issued on August 21, 2013 asserts penalties for submission of unallowable claims in FY 2005 indirect cost submission

– Determining factor on summary judgment: was it knowable from March 31, 2006 cost submission that expressly unallowable costs were included

– Motion for summary judgment denied, genuine issue of material fact

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DCAA Audit Risks & Timeliness

• DCAA incurred cost audits are an iterative process • Significant interest and penalties accrue while statute of

limitations runs • “Low risk” cost reimbursable contracts may present

significant risk factors well down the road • Clear data submissions will help Contractors assert that

“events fixing liability” have occurred • Proving statute of limitations defenses will now occur

during merit determinations with the burden of proof on the contractor, rather than at a motion to dismiss gate with the burden of proof on the Government

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Lesson Learned No. 4 – Waiver & Release – Welcome to the Real World

• Case Study 1 – Large Corps of Engineers Project – Hospital – GC had subs sign their standard form partial

releases every month for progress payments – Sub signed blindly without carveout or reservation – Sub had $17 million in claims – GC submitted and passed through claims to

Agency • Recovery?

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Claims – Waiver & Release

Bell/BCI – Welcome to Hades (at least for contractors)

Paragraph 8 of Mod 93 read: “The modification agreed to herein is a fair and equitable adjustment for the Contractor's direct and indirect costs. This modification provides full compensation for the changed work, including both Contract cost and Contract time. The Contractor hereby releases the Government from any and all liability under the Contract for further equitable adjustment attributable to the Modification.” • Bell/BCI Co. v. U.S., 81 Fed. Cl. 617 (2008), aff’d. 570

F.3d 1337 (Fed. Cir. 2009)(emphasis added). • DOES THIS LANGUAGE WAIVE FUTURE OR

CUMULATIVE IMPACT OR DELAYS NOT YET EXPERIENCED OR DISCOVERED? – Note that the same language was in later

modifications.

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Bell/BCI – Federal Circuit Held: “We hold that the language in paragraph 8 of Mod 93 is unambiguous, and the court clearly erred in holding that Bell did not release its cumulative impact claims attributable to that modification. The language plainly states that Bell released the government from any and all liability for equitable adjustments attributable to Mod 93. At best, there may be ambiguity as to which claims are ‘attributable to’ a given modification, but we cannot glean any ambiguity about which types of claims are released-Mod 93 clearly, unambiguously releases the government from “any and all” liability. As the Supreme Court stated in United States v. William Cramp & Sons Ship & Engine Building Co., “[i]f parties intend to leave some things open and unsettled, their intent so to do should be made manifest.” 206 U.S. 118, 128, 42 Ct.Cl. 532, 27 S.Ct. 676, 51 L.Ed. 983 (1907)….In the absence of an ambiguity, we decline to examine the parties' extrinsic evidence. We therefore remand to the [COFC] so it can determine which of Bell's cumulative impact claims, if any, are “attributable to” modifications other than those modifications that contain the release language discussed above.” [Emphasis added].

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Subcontractor hereby releases GC from all claims, causes of action, change orders, pending change orders, delay damages and the like, except to the extent identified here:

DATE OF NOTICE ISSUE ROUGH ORDER OF MAGNITUDE NOTE: If this area is left blank, then this is definitive proof of no claims, causes of

action or the like.

The Actual Answer – So, What Happened?

• Sub had signed partial releases without any carve-out or reservation language: – Sub’s CFO or President had signed over 14

months, 14 partial releases – Release stated:

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Sub either left area blank or wrote “None” for 14 months

Lesson Learned No. 5 – Protect Your Rear

• Don’t sign partial releases if you know or have reason to know of claims – Neither President nor CFO asked field personnel or

PMs if there were issues – PMs and field personnel did not communicate well

with home office – No defined change management plan.

• Could this have turned out different? – SAME GC as Case Study 1 – Same Partial Release Form as Case Study 1

• Different Result – WHY?

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So What Should I Have Done? Same Release, Different Subcontractor & Project

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Open PCO Log – Claim Exhibit F

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Bell/BCI – How are Agencies Reacting?

• GSA, Construction Contract Agreement This language is NOW in virtually every construction project for GSA:

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III.J. Finality of Contract Modifications

As set forth elsewhere in this Contract, the Contractor is entitled to additional consideration under certain conditions, including the issuance of change orders. It is the Contractor's duty to include in proposals for equitable adjustment or other consideration all compensation to which it may be entitled, including cost and time. Unless otherwise explicitly stated in a modification to the Contract providing such consideration, adjustments to the Contract price or time agreed upon therein shall be deemed to provide all compensation to which the Contractor is entitled, and shall constitute final settlement of the Contractor's entitlement to compensation on account of the change or other condition giving rise to the modification.

Any thoughts on this? Will you see it expand?

Bell/BCI – Recent Developments • Zeno v. Department of State, CBCA No. 4867 (May 6,

2016) – Appeal of “improper” termination of individual contractor. – Contractor Zeno signed release of claims against

government at termination close-out; “Zeno…does hereby remise, release and discharge the Government…of and from all liabilities, obligations, claims and demands whatsoever under or arising from the said contract.” “NONE” was written in the blank for excepted claims.

• Because the appeal was of the Government's Claim, namely Zeno’s disputing the Government's claim of a proper termination, the release did not apply. – Release was specific to his entitlement to wage

and leave compensation. – State Dept. did not release its claim but to dispute,

Zeno had to appeal it. 42

So What, I’m a Prime and That’s Just a Sub? Case Study 1 - Further facts: • GC never put Owner/Agency on notice of Sub’s claims

– GC exposed itself to possibly (a) prejudicing Sub’s rights; (b) direct exposure, even if a no damage for delay clause existed.

– Why? • Prevention Doctrine – A party cannot use a

contract’s provisions to defend itself if it is already in breach under that contract.

• GC also waived its right to its claims by (a) not listening to its subs; and (b) not recognizing that sub’s Owner-caused impacts were causing GC impacts too!

• Sometimes listening to the sub is a good thing!!

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Lesson Learned No. 6 - Waivers & Releases – Change Orders

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Sub’s Change Order Reservation

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Deleted Old & Inserted in future Change Orders

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Results

• Saved GC from possibly waiving multiple-subs’ claims for delay, impact and LOP

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Lesson Learned No. 7 – Quality of Documentation & Make Sure You Can Support Your Position Be careful what you wish for and say. This applies to ALL PARTIES

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Constructive Change – Example • Design-Build Project, Government Directive Changes

Interpretation of Specifications Post-Award & After Design:

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As-Planned As-Built

Be Careful What You Say

“We also wanted to ensure that they understood that the requirements outlined in the RFP were based on 1-TR per 10,000GSF as specified in sentence 4 (In hindsight, we should have specifically stated cabling to make it clearer). The last part of the last sentence deals ONLY with the Horizontal cabling requirements and not with Vertical Backbone Cabling (Appendix-A, Table D-1)” [Emphasis added].

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Lesson Learned – Be Careful What You Say

• Government insisted for over 5 years that it was not liable and no culpability – this is design/build – Government provided performance specifications – GC D/B team developed proposal based on those

Specs • Agency found that the Proposal

– Its Own RFP and Specs were Ill conceived – Admitted this internally post award BUT found

documents that said “don’t tell the GC”

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Be Careful What You Say

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Lesson Learned No. 8

• False Claims Act & Be Careful What You Sign – Imputed Certification

• Extends to Pay Apps, Small Business Certifications (SBA, Subcontracting, DBE, etc.)

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United States v. United Technologies Corp., 782 F.3d 718 (6th Cir. 2015)

Background • Alleged fraudulent pricing for fighter jet engines that

Pratt & Whitney submitted to the Air Force in 1983. • Pratt & Whitney (UTC’s predecessor company)

submitted cost and pricing data certified it: “reflect[ed its] best estimates and/or actual costs.”

• At program conclusion USAF audit found PW’s proposal included false cost estimates.

• USAF filed FCA action against PW seeking dollar-for-dollar damages based on Pratt allegedly overestimated costs.

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Background (continued) • Dist. Court rejected the Air Force’s damages calculation -

finding that it suffered no damages, but awarded the Air Force $7 million in statutory penalties.

• The Air Force appealed & 6th Circuit affirmed the $7 million fine, but vacated the damages: – The Sixth Circuit instructed Dist. Court to consider

warranties, discounts and the Contract’s FMV when reviewing the issue of damages.

• On remand, Dist. Court adopted USAF’s damages calculation and awarded $657 million in damages (trebled).

• UTC appealed to the Sixth Circuit.

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Holding: • Trial court failed to calculate damages based on a

benefit-of-the-bargain theory- – Compare what the government paid under the

contract vs. the fair market value of the contract performance that the government received.

– “When the government gets what it paid for despite a contractor's misstatements, it has suffered no ‘actual damages.’”

• To determine “fair market value” look to – comparable sales, competitor pricing, and

similar indicators of fair market value.

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United States v. United Technologies Corp., 782 F.3d 718 (6th Cir. 2015) Holding (continued) • Dist. Court incorrectly presumed that “when someone

defrauds the government, each dollar of overstated costs translates into a dollar of damages.”

• The Sixth Circuit remanded the damages issue to the D.C., but the Sixth Circuit was clearly frustrated stating:

– We are tempted to say that, after seventeen years of litigation about a fraud that occurred thirty-two years ago, the time has come to end this dispute. The government proved its case under the False Claims Act and will be $7 million richer as a result, as we established in the last appeal. After we remanded the case, the government had every opportunity to put on an expert to show whether competition affected its damages. It not only refused to do so, but it also successfully objected to Pratt's own efforts to put on a pricing expert. On this record, there is something to be said for leaving it at that. The government had the burden of proving damages, and it never did.

Takeaway • Government has to prove actual loss for False Claims

Act damages and should compare price paid vs. FMV. – FCA penalties will still be assessed

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Lessons Learned No. 9 - False Claims Act – Express & Implied Certifications • Lessons Learned:

1. Heightened scrutiny and oversight means superheated investigatory environment a. How will new president impact this?

2. Have a procedure and training in place on who and what can be signed – multiple levels of approval key

3. Expansion & Big Questions on Implied certifications and how far will implication go – June 16 SCOTUS Universal Health Services, Inc. Decision - MAJOR GOV CON IMPACTS.

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Contracts Gone Bad – Why? • What are your experiences with

“Good Contracts Gone Bad”?

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Thank You

Questions??

• Contact Information:

– Larry Prosen: [email protected] – 202.481.9940 – Stuart Young: [email protected] – 301.944.3205 – David J. Hatwell: [email protected] - 240.880.4433x6 – John Greenwell: Jgreenwell@hessconstruction - 240.599.4757

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