Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

With the passage of the American Recovery and Reinvestment Act of 2009 (ARRA), the federal government invested approximately $25 billion in green building, and became a key market driver in the construction industry. State and local governments have also adopted new green building regulations. But green building projects raise new risks and liabilities. For example: 

On Wednesday, June 2, 2010, from 2:00 p.m. – 3:00 p.m. EDT, please join George Ruttinger, Stephen McBrady and Christopher Cheatham from Crowell & Moring LLP’s Government Contracts group for an in-depth discussion of green building regulatory developments, certification liability issues and contract risk management. 

Click Here to Register

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On May 19, 2010, DoD issued an interim rule implementing Section 8116 of the FY2010 Defense Appropriations Act. This rule, which does not apply to commercial items, prohibits use of appropriated funds for contracts, task/delivery orders, or bilateral modifications in excess of $1 million, unless the contractor agrees not to enforce, or enter into, agreements with employees or independent contractors that require arbitration of certain civil rights claims or numerous tort actions arising out of or relating to sexual assault or harassment.

In addition, as of June 17, 2010, no appropriated funds may be expended unless the contractor certifies that it requires each covered subcontractor to agree not to enter into, and not to take any action to enforce, an agreement requiring arbitration of the claims discussed above, with respect to any employee or independent contractor performing work related to such subcontract.

This rule does not affect the enforcement of other aspects of an agreement that are not related to arbitration of civil rights claims or tort actions relating to sexual assault or harassment. This rule allows the Secretary of Defense to waive applicability to a particular contract or subcontract, if determined necessary to avoid harm to national security.

DoD has provided examples to help contractors determine applicability of the rules:

• A new order that exceeds $1 million using funds appropriated or otherwise made available by the FY10 DoD Appropriations Act, placed against an indefinite-delivery/indefinite-quantity contract for an applicable item or service, is covered by this restriction, regardless of whether the basic indefinite-delivery/indefinite-quantity contract was covered.

• A bilateral modification adding new work that uses funds appropriated or otherwise made available by the FY10 DoD Appropriations Act in excess of $1 million is covered.

• A contract valued at $1.5 million awarded today, and only $10,000 in funds appropriated or otherwise made available by the FY10 DoD Appropriations Act will be obligated, with the remaining balance being FY11 funding, is not covered, because the total value of funds appropriated or otherwise made available by the FY10 DoD Appropriations Act is less than $1 million.

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 In its annual report (.pdf) to Congress under the Competition in Contracting Act of 1984, 31 U.S.C. § 3554(e)(2), GAO disclosed the following bid protest statistics for FYs 2005-2009. 

Perhaps the most glaring trend evident from this data is the steady rise in bid protests filed at GAO since FY 2007. After dropping 2% in FY 2006, the number of GAO protests rose by 6%, 17%, and 20% in FYs 2007 thru 2009, respectively. Although the increase in FY 2007 was modest, the spikes in FYs 2008 and 2009 were substantial. There are several possible explanations for this significant rise in GAO bid protests, but the two greatest drivers are as follows:

First, expansion of GAO’s protest jurisdiction. Of the 1,989 cases filed in FY 2009, 168 can be attributed to GAO’s expanded bid protest jurisdiction over task orders (139 filings); A-76 protests (16 filings), and Transportation Security Administration protests (13 filings). These 168 filings represent 50% of the total increase in filings from FY 2008 to FY 2009 (337 filings).

 

Second, the severe economic downturn. As corporate revenues and profits fall, the importance of each contract award has a more significant impact on the bottom line. Many companies can no longer afford a “we’ll get the next one” attitude, and protests have seemingly become the last resort in corporate business capture strategy.

With the sharp rise in protests, it would be reasonable to assume a corresponding increase in the number of decisions on the merits and sustains. We all know about why one should never assume, and that holds true here. Indeed, the number of GAO merit decisions was actually lower in both FYs 2008 (291) and 2009 (315) as compared with FY 2007 (335). The same is true for the number of sustains – there were 91 sustains in FY 2007 versus 60 sustains in FY 2008 and 57 in FY 2009. How can that be so? Again, there are a number of potential explanations, but here are two most likely culprits:

First, GAO has managed its growing docket by increasing resort to a unique form of alternative dispute resolution (“ADR”) -- “outcome prediction.” Under this ADR process, the GAO decision attorney informs the parties (typically after the record is closed) about how GAO is likely to rule if forced to draft a decision. More often than not, the party facing a likely adverse decision voluntary “does the right thing.”  GAO used ADR in 149 protests in FY 2009, as compared with 78 in FY 2008 and 62 in FY 2007.    This spike in the use of “outcome prediction” not only accounts for at least a portion of the drop in the number of written decisions, but also sustains (many of the cases in which GAO uses outcome prediction would have resulted in sustains if GAO had issued a written decision).

Second, agencies are increasingly taking corrective action before even producing the agency report. Rather than digging-in and litigating, agencies have become more willing to voluntarily “pull the plug” and implement corrective measures when faced with potentially meritorious protests. Corrective action takes the matter out of GAO’s hands (at least temporarily), thereby negating the need for a written decision.    

A final note, and a good news bulletin for protesters, GAO’s “effectiveness rate” has climbed to 45%. The “effectiveness rate” reflects cases where the protester obtained some form of relief by the agency, either by virtue of a sustain or an agency’s decision to take corrective action. As such, in nearly half of the protests filed in FY 2009, the protestor apparently received some form of relief.

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Two recent bid protest decisions from the Government Accountability Office (GAO) provide a helpful reminder that a “price realism” analysis is never considered to be part and parcel with the Government’s standard price evaluation in a federal procurement, nor synonymous with a “price reasonableness” determination. A price realism review is only required when called for in the procurement solicitation. Moreover, federal agencies lack the discretion to conduct a price realism assessment when the solicitation does not advice prospective contractors of that intention. 

In SDV Solutions, Inc., B-402309 (Feb. 3, 2010), GAO denied a bid protest which alleged that the contract awardee’s price in a fixed-price procurement for computer support services was unreasonably low. GAO identified that the solicitation in question stated that the agency would conduct a “price reasonableness” review, rather than a “price realism” review. And, in what has become a frequent refrain in its protest decisions, GAO explained that “the purpose of a price reasonableness review in a competition for award of a fixed-price contract is to determine whether the prices offered are too high, as opposed to too low.” Id. at 4. Based on this, GAO found:

Arguments . . . that an agency did not perform an appropriate analysis to determine whether prices are too low such that there may be a risk of poor performance concern price realism; a price realism evaluation [was] not required here, where the solicitation provides for the award of a fixed-price contract and does not include a requirement for price realism.

Id.

While the rejection of protest grounds like the pricing argument raised in SDV Solutions are fairly routine, GAO’s decision in Milani Construction, LLC, B-401942 (Dec. 22, 2009), is an important reminder that the law in the area of price realism is a two-way street. For the first time in nearly five years, GAO addressed a situation in which a federal agency had conducted a price realism review as part of its price evaluation when the underlying solicitation did not inform offerors that price realism would be a consideration. Specifically, Milani Construction had submitted a bid that was substantially below that of the other offerors in the procurement. Rather than treating this as a plus factor in the award decision, the agency evaluators deemed Milani’s bargain price evidence that it failed to fully comprehend the complexity of the work required. As a result, the agency considered Milani’s price to be a negative in the source selection process, and Milani’s proposal was passed over for a higher priced offering. 

In its protest, Milani characterized this risk finding as the byproduct of a “price realism” analysis and argued that such a finding was improper when the solicitation did not inform prospective offerors that price realism would be considered. GAO agreed with Milani and sustained the protest. First, GAO noted that “the submission of even a ‘below-cost’ price is not by itself improper” in fixed-price procurements, since the risk of cost overruns are borne by the contractor, rather than the government. Id.at 5. Then, GAO concluded that, before a price realism analysis may take place, “offerors competing for award of a fixed-price contract must be given reasonable notice that a business decision to submit a low-priced proposal will be considered as reflecting on their understanding [of technical requirements] or the risk associated with their proposal.” Id.at 5-6. GAO determined that, upon failing to provide the necessary notice in the solicitation, the agency was not permitted to conduct a discretionary realism review of Milani’s bid.  

In recent, high profile bid protests such as General Dynamics One Source, LLC, B-400340.5 (Jan. 10, 2010), and Health Net Federal Services, B-401652.3 (Nov. 4, 2009), GAO has taken a clearer stance on the minimum requirements for a passable price realism analysis in fixed-price procurements and sustained protests when the agency’s analysis fails to pass muster. Against that backdrop, the decisions in SDV Solutions and Milani Construction provide an important reminder that the threshold question of whether the solicitation explicitly permits a realism analysis must be answered in the affirmative before GAO will consider the substantive arguments of either party regarding the propriety of the agency’s realism review (or lack thereof).

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Welcome to the Government Contracts Legal Forum, a new blog that we hope will serve as a meeting place for discussions of cutting-edge government contract issues.

More than 50 Crowell & Moring Government Contract Group attorneys are undertaking this blog as way to help identify issues and advance discussion of topics of great importance to the government contracts community -- from bid protests to insourcing. And we're at no shortage for important issues to address.

Contractors are fulfilling their missions at a time when the stakes couldn't be higher and the issues have never been as complex. Government officials are under incredible pressure to manage contracts for success. The future of government contracting is taking shape now, and the Forum will discuss issues in real time and raise questions on initiatives that may impact your business. We also hope to bring you regular Q&As with government contract thought leaders, as well as an occasional guest author from industry.

Of course, the nature of a blog does not give us the opportunity to provide the in-depth and, admittedly, often lengthy insight that lawyers so love to give. Many of the topics the GCL Forum will cover must be addressed in much deeper ways offline, as companies and procurement officials work to develop the right strategies and solutions that far exceed the scope of an online article. But, it's our hope that the GCL Forum will provide you a sort of home base to read about and address the legal issues that affect government contractors and the important roles they serve.

There are many ways to access the Forum. Over on the left, you may notice that you can subscribe by email. You can also subscribe via our RSS feed. If there is a particular author that you prefer to read, you can also sign up for that author's RSS feed on the individual author page.

Thanks for visiting. Now, let's get started. What do you want to discuss?

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Press Release Announcement

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The book begins with background on current corruption risks and the U.S. government’s efforts to fight it.  An important focus area involves measures that companies can take to build and enhance their compliance programs.  As companies increase their global  footprint, the likelihood of fraud and corruption increases.  We are seeing a greater level of enforcement of anti-corruption regulations on the federal level in the past year or two.  There are number of things that anyone can learn from the book that will help them understand the realities of working in global markets today as well as steps they can take to mitigate their risks.

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On Thursday, May 20, from 2:00 pm - 3:00 pm ET, please join Tom Humphrey, John McCarthy, and Peter Eyre from Crowell & Moring's Government Contracts Group for an in-depth discussion of the proposed rules, how these rules might impact strategic business decisions, and the implications for bid protests at GAO and the Court of Federal Claims.

The Department of Defense has issued proposed rules (.pdf) regarding organizational conflicts of interest (“OCI”), which would apply to all DoD procurements. Even for non-DoD contractors, these proposed rules merit careful attention because it is likely that the revisions to the FAR OCI provisions (which are currently underway) will closely resemble the proposed DoD rules. The proposed rules generally track decades of GAO and Court of Federal Claims decisions interpreting FAR 9.5. But there are some new elements as well. For instance, if implemented, these new rules would require many contractors to submit extensive disclosures - e.g., "any other work performed on contracts, subcontracts, grants, cooperative agreements, or other transactions within the past five years that is associated with the offer it plans to submit" - to allow agencies to analyze actual and potential OCIs. In addition, the proposed rules, implementing a specific mandate from the Weapons System Acquisition Reform Act of 2009, would prohibit (subject to a few limited exceptions) a contractor performing systems engineering and technical assistance functions for a major acquisition program from participating as a contractor or major subcontractor in the development or construction of a weapon system under such program.

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Government contractors and their counsel must not only be aware of the requirements of the FAR and other applicable statutes and regulations, but also must be attuned to situations in which government contracting intersects with other areas of law. Government contracts lawyers are periodically called upon to provide counseling or represent clients in litigation involving antitrust, tort, intellectual property and even constitutional law issues. In this posting, I will outline some issues that arise in the intersection between government contracts and antitrust. In subsequent postings, I will address other such intersections.

The government contracts market is distinct from commerical markets in a number of dimensions that bear on potential antitrust issues. At least in the context of negotiated procurements, pricing is done by negotiation after submission and certification of the contractor's cost or pricing data. If the government pays for R&D, it receives unlimited rights in technical data and can use that data to obtain competition for follow-on production contracts. The government also has to power to establish an alternative source for, e.g., weapons systems by insisting on sharing of technology or through "leader-follower" procurements.

Despite these unique aspects of the government contracting market, contractors must be attuned to antitrust issues in a number of areas, most prominently in teaming agreements (.pdf) between competitors. The limited number of cases raising antitrust issues in the context of government contracting have held that, despite the government's power to control the terms and timing of competition for products that it buys, many of those products are for unique government applications and therefore constitute "single product markets" over which an incumbent contractor can exercies market power. See Northrop Corp. v. McDonnell Douglas Corp., 705 F.2d 1030 (9th Cir. 1983 (teaming for production of F-18 aircraft); American Standard, Inc. v. The Bendix Corp., 487 F.Supp. 265 (WD Mo 1980)(leader-follower for tri-service transponder). Nevertheless, FAR 9.602 recognizes that teaming agreements, even between competitors, "may be desirable from both a Government and industry standpoint" for a number of reasons, including allowing companies to "complement each other's unique capabilities"--e.g., where one company has developed a particularly useful technology and the other company has robust manufacturing capabilities. Similarly, the DOJ/FTC Antitrust Guidelines (.pdf) for Collaborations Among Competitors recognizes that teaming agreements and joint ventures can provide pro-competitive benefits that outweigh any competitive harm that may result from the collaboration, and generally indicates that a "rule of reason" analysis will be applied to such collaborations. See Northrop, 705 F.2d at 1051-54. However, it is clear that DOD will closely scrutinize competitor collaborations, as it did in breaking up an alliance between two of the leading shipyards in the DD-21 procurement in the late 1990s.

Contractors must also be on their guard for antitrust issues relating to vertical teaming arrangements, such as those between a system integrator and a particular subcontractor or supplier. In 1999, in part in response to the DD-21 problem, Deputy DOD Secretary Jacques Gansler issued a memorandum (.pdf) for secretaries of the Military Departments on "Anticompetitive Teaming." Focusing on exclusive teaming agreements with subcontractors or suppliers with uniques technologies or capabilities, the Gansler memorandum required heightened scrutiny of such agreements by contracting officers, including use the consent to subcontracting provisions in Subpart 44.2 of the FAR to prevent sole source situations from occurring. The memorandum even proposed adding exclusive teaming agreements with the sole provider of a product or service to the list of antitrust violations in FAR 3.303(c) that must be reported to DOJ for investigation, but DOD backed down on this proposal after receiving industry comment that such a provision would chill legitimate, pro-competitive teaming.
 

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• 26% improvement in water efficiency by 2020;
• 50% of construction, recycling and waste materials will be diverted from landfills by 2015;
• 95% of all applicable contracts will meet sustainability requirements;  
• Implementation of the 2030 net-zero-energy building requirement;
• Implementation of the stormwater provisions of the Energy Independence and Security Act of 2007, section 438; and
• Development of guidance for sustainable Federal building locations in alignment with the Livability Principles put forward by the Department of Housing and Urban Development, the Department of Transportation, and the Environmental Protection Agency.

• agencies must inform the public of proposed rules before they take effect;
• the public can comment on the proposed rules and provide additional data to the agency;
• the public can access the rulemaking record and analyze the data and analysis behind a proposed rule;
• the agency analyzes and responds to the public's comments;
• the agency creates a permanent record of its analysis and the process;

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We have previously provided information about the final FAR Rule implementing the Federal Awardee Performance and Integrity Information System, known as FAPIIS. This Rule, which became effective on April 22, 2010, requires many government contractors to provide certified disclosures pertaining to certain administrative, civil, and criminal proceedings. The Government is collecting this information via a series of questions that are now active in Central Contracting Registration ("CCR"), and contractors are beginning to wrestle with the significant questions.

Below is an example of one of the questions that may be facing contractors (this image comes from p. 18 of the renewal/update screenshots made available by CCR (pdf.)):

Here are some of the reasons why this inquiry is giving rise to questions:

1) By inserting the first parenthetical - "including parent organization, all branches, and affiliates worldwide" - one could argue that the question now expands the scope of the contractors' disclosure requirements beyond the language and purpose of the underlying statute and FAR Rule. Moreover, there is another version of this question appearing elsewhere in CCR where the parenthetical reads "represented by the DUNS number on this specific CCR record," but does not request information regarding branches and affiliates worldwide. (See p. 24 of the new registration screenshots made available by CCR).

2) Whereas the text of the final FAR Rule seeks certified disclosures about certain proceedings "in connection with the award to or performance by the offeror of a Federal contract or grant", this CCR question also seeks parallel information with respect to State contracts or grants, and uses the phrase "your business or organization", rather than "offeror".

3) Whereas the text of the final FAR Rule seeks certified disclosures about certain proceedings "at the Federal or State level", this CCR question is not limited in that way and may cause confusion about whether certain foreign or local proceedings must be disclosed.

4) The phrase "or other acknowledgment of fault" is vague and seemingly broader than the final FAR Rule.

5) Does this question impermissibly broaden the FAR Rule without giving the opportunity for notice and comment?

There are many other questions and conundrums as well. Please join us for a webinar on Thursday, May 6, from 2:00 pm - 3:30 pm ET, for an in-depth discussion of the final Rule and the issues now facing government contractors.

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