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Assumption of Risk in a FFP Contract

Assumption of Risk in a FFP Contract

Everyone in the government contracting profession understands that a FFP contract means that it is a FIRM commitment by the contractor to perform the contract work at a PRICE that does not change, i.e. it is FIXED. An interesting case in August 2015 highlighted this in an interesting way.Agility was under a FFP contract to dispose of all the property in Afghanistan, Iraq, and Kuwait related to specific sites in those countries. The government provided accurate historical data for property disposal, but history was about to change. There was significantly more property to dispose of and Agility filed a claim for $6.9 M for the excess. The contracting officer allowed $236,363.93 via final decision that was appealed to the US Court of Federal Claims.The court acknowledged that this was “an unusually high-risk contract.” Even so, the legal issue was quite simple – who had assumed the risk of the bad estimate? Interestingly, Agility was allowed to keep the proceeds from sale of scrap material. Thus a reasonable assumption would suggest that with an increase in the quantity of property of which to dispose, there would be an increase in the revenue from the sale of scrap. The parties even drafted a clause in an effort to deal with actual property counts that varied significantly varied from the original estimate. The court described this clause as being “so complex and uncertain that it offered essentially no protection at all to the contractor.”The court provided a good survey on determining what ‘type” of contract the parties intended.Regarding the quantity term, there are three possible types of supply contracts: those for a definite quantity, those for an indefinite quantity, and those for requirements. … The question here is whether the contract is one for a definite quantity, as the contract itself states, or for requirements, as Agility claims. The Court is not bound by the name or label included in the contract itself. ….Rather, it must “look beyond the first page of the contract to determine what were the legal rights for which the parties bargained, and only then characterize the contract.” … “[I]f a contract is susceptible of interpretation as . . . one for requirements . . . the court should uphold it as of the requirements type.” ….A definite quantity contract contemplates a “fixed, definite quantity of goods or services be purchased and provided.” …. A contract that provides only estimates and not definite quantities is not a definite quantity contract. ….On the other hand, a requirements contract is formed when the seller has the exclusive right and obligation to fill all of the buyer’s needs for the goods or services described in the contract…. An essential element of a requirements contract is the promise by the buyer to purchase the contract subject matter exclusively from the seller.… (citations omitted).

The court concluded that this was a “high risk” FFP requirements contract. Agility argued constructive change, negligent estimating, breach of warranty of reasonable accuracy, and general equitable adjustment for a portion of the work. The court found none of those arguments persuasive.The primary message in this case is one every contractor learns quickly or goes out of business just as quickly. FFP means FIRM, FIXED, PRICE. There are almost never any exceptions. If you can’t do the work at that price, do not propose that price. A second lesson has to do with the drafting of a special contract provision. That clause was useless to Agility even though it was drafted by the government and should have been construed against the government. The Court did not address that little detail (and Agility was no novice government contractor; they should have known better.)What strikes me about this case, however, is “none of the above.” Yes, FFP means FFP and any contractor who forgets that gets what they deserve. Survival of the fittest, Darwin Principle, and stupid is as stupid does. What strikes me is that FAR 16.202-2 is extremely clear. It says, “A firm-fixed-price contract is suitable for acquiring … supplies or services on the basis of reasonably definite functional or detailed specifications … when the contracting officer can establish fair and reasonable prices at the outset….” More and more I see agencies issuing terrible requirements documents and forcing them under a FFP arrangement. Sadly there are enough hungry contractors, and from my experience even sadder, usually small businesses including 8(a)’s, who will bet their company on the hope that it can succeed. The government takes advantage of this arguing that the fact that there was competition validates the reasonableness of the requirement. This is false logic. The hungry or naive small business bites the dust (or minimally hurts itself very badly) from what is, in reality and effect, a bad requirements document promulgated by the government. In my view, this contract was void ab initio (Meaning it never existed.) The contractor should have been compensated for the fair value of benefit received by the government. The CO had no authority to even enter into the contract since he/she failed to comply with ALL of the rules and regulations as required by FAR 1.602-1 (b) “No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met.” FAR 16.202-2 is just one example. I do not think justice was done here, and it all started with a bad requirements document, coupled with a hungry contractor. That is ALWAYS a recipe for disaster and this situation played out exactly as any reasonable person would have predicted.

The identity of the entity proposing to the government is extremely important. Who can be held legally responsible for performance? Who should receive payment? Is someone trying to broker government contracts in violation of the Anti-assignment Act?

In a recent protest to GAO the protester asserted that an award was made to an entity NOT on the approved list. In a review of the file documentation, including the SAM registrations, D&B numbers, and CAGE Codes, the GAO provided an explanation of the systems used for the identification of entities.

Uncertainty as to the identity of an offering entity renders an offer technically unacceptable, since ambiguity as to an offeror’s identity could result in there being no party bound to perform the obligations of the contract. [Citations omitted] Generally, the entity awarded the contract should be the entity that submitted the initial proposal. [Citations omitted] The information readily available, such as CAGE codes and DUNS numbers, must reasonably establish that differently-identified entities are in fact the same concern. [Citations omitted]  CAGE codes are assigned to discrete business entities for a variety of purposes (e.g., facility clearances, preaward surveys, and tracking the ownership of technical data) to dispositively establish the identity of a legal entity for contractual purposes. [Citations omitted] Similarly, the DUNS numbering system is established by Dun & Bradstreet Information Services, and discrete 9-digit numbers are assigned for purposes of establishing the precise identification of an offeror or contractor. [Citation omitted] On an SF 33, the CAGE code and DUNS number are used to identify the entity that is the offeror for a given procurement.[1]

In this case the facts are rather interesting.

The record shows that LSL’s proposal identified the correct part number, but did not reference CAGE code 55064, the approved source CAGE code. Instead, throughout its proposal, including its SAM registration and the SF 33, LSL identified its CAGE code as 1HFE7.17 Additionally, while the SAM registration shows that the entities associated with CAGE codes 55064 and 1HFE7 are both named Logistical Support, LLC and have the same address, each entity possesses a different CAGE code, DUNS number, DBA name, and activation date. The record also shows that the SAM registration and D&B report offered by the agency identify the existence of multiple entities associated with the Prairie Street address and parent/affiliate relationship between LSL and the approved source.[2]

Got that? Without parsing the details, the bottom line is that the vendor had several confusing sets of data registered in SAM. What it was trying to achieve from a business perspective is not addressed. Additionally, the offeror was unclear in its proposal and the manner in which it identified itself as to its eligibility to provide items on the approved vendor/parts list. Thus the offer initially introduced the confusion in its proposal. And we all know whose responsibility it is to submit a clear proposal. When challenged, the agency attempted to clarify the offering entity and determine whether the offeror was eligible for award. According to GAO the agency botched the documentation of their efforts to resolve the confusion – leaving the confusion in place. The key questions become, who are you or who do you represent yourself to be? How do you identify yourself and validate your eligibility for the award? Both the D&B number and its associated system and the DLA CAGE code and its associated system are designed to ensure the government is crystal clear on the entity with which it is contracting. Here the contractor was less than clear and when the contracting agency attempted to clarify that identity, it failed to properly document its process that would permit the GAO to determine that it made a reasonable decision.

We have often talked about the importance of having a current and accurate SAM (previously CCR) registration. Here the awardee was given another chance via the agency’s re-evaluation of the situation. It is extremely unwise to base the success of your proposal on either luck or reliance that the government will perform their job accurately and effectively. The only thing GAO reviews is whether the agency action was reasonable based on the record it was given. When the vendor introduces the confusion into the system over their own identity, perhaps the answer is that they are too stupid to hold a government contract at all. That might sound harsh, but a lot of time, money and effort was wasted sorting it all out after the fact. Did I mention that the protestor was awarded its protest coasts as well?[3]

Moral: Don’t be stupid, and don’t rely on your government counterpart being any smarter.