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In JKB Solutions and Servs., LLC, the Court of Federal Claims denied the contractor’s breach claim and held that the Government constructively terminated the contract for convenience. At issue was an Army contract to provide instructors for the Army’s Operation Contract Support program. The contract required JKB to perform 14 classes per task order, but the Army ordered fewer than 14 classes for all three task orders. In the motion to dismiss stage, the Court rejected the Army’s argument that the contract unambiguously required the Army to pay for only the services it ordered. The court instead found on the merits that the Army constructively terminated the contract for convenience and, therefore, did not breach it, even though the Army did not actually terminate the contract for convenience. In invoking the constructive termination for convenience doctrine on behalf of the Army, the Court found that (1) the Army did not act in bad faith by constructively terminating the contract because the Army never explicitly invoked the doctrine (the Court did) and (2) the Army could have invoked its right to terminate under the circumstances. The Court also ruled that since JKB did not submit a termination for convenience settlement proposal or ask for termination costs in its complaint, JKB was not entitled to recover any costs.

While this case appears to be an outlier in the longstanding termination for convenience jurisprudence, particularly those principles that preclude invocation of constructive termination for convenience in certain circumstances—e.g., after the performance period ends, or in order to circumvent an otherwise alleged breach—contractors should take caution in similar circumstances. When the Government breaches its ordering/payment obligations by reducing the scope of work, and depending on the extent of the reduction, contractors should promptly consider whether to request an equitable adjustment for a deductive change, or submit a termination for convenience settlement proposal to preserve the ability to recover termination settlement costs.

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On November 6, the Information and Communication Technology (ICT) Supply Chain Risk Management (SCRM) Task Force, a public-private supply chain risk management partnership, published Lessons Learned During the COVID-19 Pandemic. In laying out the challenges posed by the pandemic, the report highlights the inevitable tension in supply chain risk management between achieving efficiencies and cost savings on the one hand and ensuring resiliency through geographic diversification and other measures on the other. Among the key takeaways from the report is the recommendation that companies focus on supply chain transparency in order to effectively identify and manage risks.

Before the pandemic, global supply chains had experienced regional shocks for decades due to natural disasters, fires, or other similar events. These shocks in conjunction with other challenges such as the increasing U.S. – China trade tension for the past few years had led many industries to begin seeking alternative sources or relocating manufacturing and assembly facilities outside of Asia. The study conducted by the Task Force revealed that many of the supply chain weaknesses were amplified and highlighted during the pandemic. Specifically, the study found three key issues that have affected nearly all Information and Communication Technology supply chains:

  1. COVID-19 has expedited the trend of geographically diversifying supply chains and avoiding single source/single region suppliers.
  2. Just-in-time delivery and lean inventory models, which provide efficiency and cost effectiveness in normal environments, left many manufacturing companies unprepared for the impact of the pandemic on resource availability or order fulfillment.
  3. COVID-19 underscored the difficulties companies have in trying to understand and map their Tier 2 and 3 suppliers and their locations.

The report described the limited supply chain for certain ICT components and specifically focused on the semiconductor supply chain for which there are limited manufacturers and assembly plants largely located in Asia. While the U.S. Government has been emphasizing onshoring and supply chain security efforts for a few years now, semiconductor supply chains are of particular importance to the government as can be seen in the draft 2021 NDAA bills which seek to require a national strategy for developing the national semiconductor industry and contemplate making grants available to construct, expand, and modernize semiconductor manufacturing and research and development facilities.

To promote the transparency and geographic diversification endorsed by the Task Force, the Task Force provided the following recommendations:

  1. Proactive Risk Classification. Large and small companies may want to deploy a systematic classification of risks, continually analyze developments and events that are happening around the world, and undertake the development of a related response strategy to improve supply chain resilience strategically.
  2. Map the Corporate Supply Chain. Companies can work with Tier 1 suppliers to gain transparency further upstream, including suppliers’ locations and financial stability.
  3. Broaden Supplier Network and Regional Footprint. This process would include examining both multiple vendors and different geographic locations. It would also include considering establishing backup vendors and plans to ready such vendors both before and when a crisis occurs.
  4. Potential Development of Standardized Mapping and Other Illumination Tools. This is a recommendation for the ICT sector and could be applied to any industry. The lack of consistency in mapping sub-tier suppliers creates inefficiency in the process and thus companies could benefit from a standardized sector-wide approach.
  5. Work to Hold Buffer Amounts of Inventory. Holding more buffer inventories and/or working with suppliers to hold more inventory at their warehouses will allow businesses to respond more rapidly in the event of a crisis. Similarly, preparing contingency plans in the event of workforce changes (e.g. home v. office; safety during a crisis) will also enable quick adaptation to crisis events.
  6. Plan Alternatives in Logistics and Transportation. Mapping out alternative transportation plans and addressing potential bottlenecks will enable companies to bring supply chains back online more quickly. Companies should consider using technology platforms that provide real-time, blockchain visibility into available logistics capacity.

This report comes at a time when supply chain risk management is top of mind for the U.S. government and becoming increasingly important to remaining competitive in the government contracting space. Contractors may find the recommendations in the report useful as they continue to focus on supply chain security and risk management.

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From the inception of the Paycheck Protection Program (PPP), borrowers questioned the meaning of the economic necessity certification that the Small Business Administration (SBA) required borrowers to make in the PPP loan application. While the SBA provided some definition to this certification in such Frequently Asked Questions as FAQs 31, 37, and 46, uncertainty remained. Now, months after the last PPP loan application was submitted, the SBA is beginning to undertake an information collection effort to allow SBA loan reviewers to scrutinize a borrower’s certification that economic necessity made the loan request necessary.

The SBA is poised to collect this information from PPP borrowers through newly-created Paycheck Protection Program Loan Necessity Questionnaires, with a version for for-profits (SBA-Form-3509) and for non-profits (SBA-Form-3510). The following details about this information collection effort can be gleaned from these two forms (which have yet to be publicly released by SBA or Treasury and could still be subject to further revision prior to formal release):

  • From whom is SBA collecting information? Borrowers that, together with their affiliates, received PPP loans with an original principal amount of $2 million or greater. (Note, the SBA has not publicly stated whether all such borrowers will receive this form or merely a subset of such borrowers.)
  • What information is SBA requesting? Through the Questionnaires, the SBA is requesting extensive information about the borrower’s activities (including but not limited to whether the borrower was ordered to significantly alter its operations by a state or local authority, the borrower voluntarily ceased or reduced its operations due to COVID-19, or the borrower began new capital improvement projects not due to COVID) as well as regarding the borrower’s liquidity (such as whether the borrower paid any dividends or other capital distributions, made any debt repayments, or has any employees compensated in an amount that exceeds $250,000 on an annualized basis, etc.).
  • What time frame does the borrower have to respond? Borrowers must complete the Questionnaires within 10 business days of receipt of the Questionnaire from their lender.
  • What certifications must be made in this form? Among other certifications, borrowers have to certify that the information provided in the Questionnaire and in all supporting documentation is true and correct in all material respects and the certification is made after a reasonable inquiry of people, systems, and other information available to the borrower.
  • What are the consequences for failing to complete the Questionnaire and provide the necessary supporting documents? The SBA may determine that the borrower was ineligible for the PPP loan, the PPP loan amount, or any forgiveness amount claimed, and the SBA may seek repayment of the loan or pursue other available remedies.
  • What standard will the SBA use when reviewing the Questionnaire? The SBA’s determination will be based on the totality of the borrower’s circumstances.

While the SBA notified the public of the existence of these Questionnaires in a Notice published to the Federal Register on October 26, 2020, as of November 12, 2020, the SBA has not yet publicly released these forms on either the SBA’s or Treasury’s websites. BUT, the SBA has already provided lenders with these forms, and some lenders have begun sending these forms to their PPP borrowers.

In light of the significant amount of information and documentation required by these Questionnaires, including whether and when they will be issued to all (or some subset of) borrowers with an original principal amount of $2 million or greater, and what consequences borrowers will face if SBA takes issue with information conveyed in the form, a PPP borrower with loans at or above the $2 million threshold would be well-advised to begin considering how it would respond to the Paycheck Protection Program Loan Necessity Questionnaire. We stand by ready to assist as PPP borrowers work through this anticipated new hurdle and will provide prompt updates as the SBA releases more information about this information collection effort.

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This week’s episode covers the ASBCA’s FY2020 report, GAO’s recent Tetra Tech case, an OFCCP final rule, and the Federal Circuit’s LAX Electronics ruling, and is hosted by partner Peter Eyre and counsel Monica Sterling. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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Just days after the anniversary of its launch, the Department of Justice’s Procurement Collusion Strike Force has expanded its ranks to include 11 new national partners. The U.S. Air Force Office of Special Investigations and the Department of Homeland Security’s Office of Inspector General, as well as nine additional U.S. Attorneys’ Offices, have joined the government’s effort to combat collusion, fraud, and antitrust crimes in the public procurement process. Assistant Attorney General Makan Delrahim promised “even more success” for the PCSF in the coming year “[b]y growing [its] national footprint, and folding in additional subject-matter experts.” The PCSF currently has more than 360 agent, analyst, and other law enforcement and OIG working members, hailing from 46 unique agencies and offices at the federal, state, and local levels.

This expansion – on top of news that DOJ has appointed Daniel Glad, former assistant chief of the Chicago field office, as the PCSF’s first permanent director – underscores the Antitrust Division’s continued focus on potential antitrust violations involving public procurement and the increased importance of enlisting counsel experienced in both antitrust and government contracts.

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The Armed Services Board of Contract Appeals published its FY2020 Report of Transactions and Proceedings, which provides statistics regarding the adjudication of appeals between contractors and the Army, Navy, Air Force, Corps of Engineers, CIA, NASA, DLA, DCMA, and other Defense agencies, Non-Appropriated Fund Instrumentalities, and the Washington Metropolitan Area Transit Authority. According to this year’s report, the contractor prevailed in 53% of the appeals decided on the merits, up from 48% a year ago. The Report also indicates that, as usual, the Board had a high success rate in resolving matters via ADR. Of the cases that went through non-binding ADR, 85% were resolved successfully—including mediation, arbitration, and ADR of undocketed appeals—a good reminder to contractors and the Government that the Board’s successful ADR program remains an important tool to resolve disputes at the ASBCA.

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This week’s episode covers the DOJ’s first charges under the Procurement Collusion Strike Force, an interesting bid protest decision involving COVID impacts, a DCMA development focusing on TINA, and an update on SAM.gov-generated unique entity identifiers, and is hosted by partner Peter Eyre and associate Michelle Onibokun. Crowell & Moring’s “Fastest 5 Minutes” is a biweekly podcast that provides a brief summary of significant government contracts legal and regulatory developments that no government contracts lawyer or executive should be without.

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The NAACP Legal Defense and Education Fund, Inc. has filed suit on behalf of the National Urban League and the National Fair Housing Alliance in the United States District Court for the District of Columbia challenging the lawfulness and validity of Executive Order 13950, Combating Race and Sex Stereotyping, issued on September 22, 2020. The EO prohibits the use by federal contractors or subcontractors, and certain federal grantees, of training materials that “inculcate[ ] in its employees any form of race or sex stereotyping or any form of race or sex scapegoating.” The Department of Labor has since released its own guidance regarding the EO and a Request for Information seeking materials “concerning workplace trainings involving prohibited race or sex stereotyping or scapegoating” and has set up both email and phone hotlines to receive complaints about training that may violate the EO.

The suit names as defendants President Trump, Eugene Scalia in his capacity as Secretary of Labor, and the Department of Labor itself, and identifies the representative class as federal contractors and federal agencies, departments, or divisions that offer or intend to offer workplace training of the type prohibited by the EO. The suit alleges:

  1. An ultra vires action in violation of the First Amendment in the form of viewpoint discrimination;
  2. A violation of the Fifth Amendment, namely that the EO is void for vagueness; and
  3. A violation of the Equal Protection clause of the Fifth Amendment.

The Complaint seeks a declaratory judgment that the EO is unlawful and invalid, pursuant to 28 U.S.C. § 2201, and a preliminary and permanent injunction to stop implementation or enforcement of any part of the EO, as well as costs and fees.

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Crowell & Moring’s “All Things Protest” podcast keeps you up to date on major trends in bid protest litigation, key developments in high-profile cases, and best practices in state and federal procurement. In this episode, hosts Rob Sneckenberg and Christian Curran interview Anuj Vohra regarding GAO’s recent decision finding an apparent conflict of interest due, in part, to weekly social gatherings for “camaraderie, friendship, dinner, and . . . competitive foosball.”

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In Chronos Solutions et al., GAO sustained a pre-award protest challenging the terms of a solicitation issued by the United States Department of Housing and Urban Development (HUD). The solicitation sought asset management services to support the disposition of properties conveyed to HUD following foreclosure of loans guaranteed by the Federal Housing Authority. The solicitation was initially issued in June 2019, but HUD encountered multiple delays, including a prior pre-award bid protest. Following that protest, on April 27, 2020, HUD issued a solicitation amendment that changed the procurement to a total small business set-aside and reset the deadline for receipt of proposals to June 30, 2020, but did not update the solicitation’s original 2019 estimated quantities of services.

Three potential offerors filed pre-award protests, alleging that HUD had failed to account for the effects of the COVID-19 pandemic on the real estate market. In particular, the protesters argued that the public policy response, including foreclosure protections included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), would dramatically distort the number of foreclosures over the life of the resulting contracts by first depressing the number of foreclosures while the CARES Act protections were in place, and then by prompting a significant upsurge in foreclosures once those protections expired. As a result, the protesters asserted the solicitation’s estimated quantities did not reasonably reflect HUD’s actual requirements, and challenged the decision to set the procurement aside for small business.

GAO sustained the protest, finding that HUD unreasonably failed to consider that the pandemic and resultant legislation had materially changed HUD’s requirements. GAO rejected HUD’s argument that because the solicitation anticipated the award of Indefinite-Delivery Indefinite-Quantity (IDIQ) contracts, it was not required to consider the impact of such changes. GAO explained that the IDIQ contract type did not relieve the agency of its obligations to provide reasonable estimates of anticipated work volumes. And because the estimates provided in the solicitation were based on historical data that HUD acknowledged was unlikely to be representative of what contractors would experience during performance, GAO found the agency’s failure to make any attempt to update the estimates or otherwise amend the solicitation to account for the COVID-19 pandemic was unreasonable. Anticipating that reconsideration of these issues could also impact the small business set-aside rationale, GAO also recommended that HUD revisit its set-aside decision as well.