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With federal spending in sharp decline, many agencies will likely begin looking to non-traditional means of closing their budget gaps and maintaining their pre-sequestration staffing levels and rates of operation. One such means that select agencies may begin employing with greater frequency is the reimbursable services agreement (“RSA”), under which a private sector entity hires a federal agency to perform a task and reimburses the agency for its costs.

An RSA can be an extremely valuable tool for a private party, as there are many tasks that federal agencies have exclusive authority to perform (e.g., customs services at U.S. ports of entry by U.S. Customs and Border Protection) or for which federal agencies have unique subject matter expertise (e.g., engineering services by the U.S. Army Corps of Engineers). In these circumstances, the U.S. government’s involvement or assistance can be quite beneficial to – and in some cases, critical to the success of – a private party’s project or activity. For this reason, an RSA may, in many circumstances, be as attractive to a private party as it is to the government.

As is immediately apparent, an RSA reverses the funding and performance responsibilities from those in the traditional government contracts context. This change in the direction of funding has major implications for the terms that must be included in an RSA, as many provisions and clauses that are common in government contracts are only required when money is flowing from the government, not the other way around. This article aims to highlight some of these key differences between RSAs and traditional government contracts, and to identity areas where private parties may be able to negotiate a more balanced agreement with the government than may be possible in other contexts.

I. Applicability of the Federal Acquisition Regulation.

In most government contracts, the private party simply accepts as a fact of life that the Federal Acquisition Regulation (“FAR”) will govern the arrangement, and that many FAR clauses will be expressly incorporated into the contract documents or “read in” as a matter of law. But this is not necessarily so with regard to RSAs.

By its plain language, the FAR only applies to acquisitions by the government using appropriated funds. 48 C.F.R. §§ 1.104 (“[T]he FAR applies to acquisitions as defined in part 2 of the FAR . . .”), 2.101 (“Acquisition means the acquiring by contract with appropriated funds of supplies or services . . .”) (emphasis added). The FAR therefore does not automatically apply to transactions between private entities and the government where no appropriated funds will be obligated. Fidelity & Casualty of New York, B-282281, Jan. 21, 1999, 99-1 CPD 6. For this reason, the FAR does not apply to RSAs as a matter of law, and a private party is well-positioned to request the removal of most FAR clauses from its RSA.1

That said, some agencies have extended the FAR (in whole or in part) to non-FAR or non-appropriated fund transactions as a matter of policy. See, e.g., 48 C.F.R. § 570.101(d) (GSA rule extending certain FAR provisions “as a matter of policy” to certain non-FAR lease agreements). These agencies may therefore seek to include FAR clauses in their RSAs even though they may not be legally required. The agency’s negotiating position, however, is far weaker in this situation than in the case of a traditional government contract. That is, while the government generally cannot negotiate when the law or regulation requires that a clause be included, the same is not true when the government simply wants the clause included. The private party may therefore be able to negotiate some form of tradeoff from the agency in exchange for including a FAR clause that the agency has requested, but which is not required by statute or regulation.

II. Applicability of an Availability of Funds Clause.

As with FAR clauses, many agencies reflexively insert language into their RSAs providing that every government performance obligation is contingent upon the availability of appropriated funds from which payment for RSA purposes can be made. This, the agency will typically assert, is necessary to prevent the agency from violating the Anti-Deficiency Act by involving the government in a commitment in advance of, or in excess of, appropriations. But that is not really accurate in the case of an RSA.

With an RSA, the agency’s performance is ultimately financed by the private party, not from appropriations. While some appropriated funding may still be needed to pay the agency’s up-front performance costs before it is reimbursed by the private party, the amount of such funding that is needed can be reduced by establishing an aggressive reimbursement schedule, or – in some cases – eliminated altogether by agreeing to a direct financing arrangement. Thus, the availability or non-availability of appropriated funds is not the same dominant concern in the RSA context as in the government contracting context. This, in turn, means that private parties should be able to successfully water down the “Availability of Funds” clause so that only those government performance obligations that actually require the obligation of appropriated funds are conditioned by this clause.

This is significant because RSAs often relate to high-cost private activities that require considerable startup capital, such as international construction projects. As originally written, the “Availability of Funds” clause may deter potential investors or lenders, who may view the Government’s disclaimer on its performance obligations as posing a considerable risk to project execution. But by watering down the Government’s disclaimer, the private party is able to reduce this appearance of risk and help protect the project or activity’s commercial viability.

III. Termination Rights and Procedures.

For the reasons discussed above, the FAR-based termination for convenience clauses do not necessarily apply agreements like RSAs. Moreover, the standard FAR-based termination for convenience clauses are often not appropriate in the RSA context, as they are written for the scenario where the private party is providing goods or services to the government, not the other way around. See, e.g., 48 C.F.R. § 52.249-2. Accordingly, absent some showing by the agency that it is legally required to include such a clause in its RSAs, the private party will have strong grounds to resist language that would vest the agency with a unilateral right to terminate the RSA. Cf. Patio Pools of Sierra Vista, Inc., B-228187.2, B-228188.2, Apr. 7, 1988, 88-1 CPD ¶ 345 (declining government’s requests to read FAR-based termination clauses into agreement to which FAR did not apply).

To the extent that the agency may nonetheless insist that some form of termination for convenience clause be included, one option for the private party is to demand that the clause be reciprocal – that is, that the private party be given a co-equal right to terminate the RSA for its convenience. Also, as alluded above, any such clause would likely need to be retailored to reflect the actual roles of the parties (i.e., to reflect the fact that the private party is the purchaser and the government is the performing party, not vice versa), and to redefine the rights and remedies available to each party in the case of a termination for convenience.

It is important to note on this point that, with or without a termination for convenience clause, the U.S. Government may still assert that it holds the right to terminate the contract as it deems necessary in its capacity as a sovereign state (e.g., if doing so is necessary for national security; if the conduct in question is later prohibited be law; etc.). But while the inclusion or omission of the termination for convenience clause will not impact whether the Government may terminate the RSA, it will bear on whether such termination will be justified or not, and in turn, what the rights and obligations of the parties are following such a termination.

IV. Disputes Procedures.

The applicable disputes procedure for an RSA is an open question. Some agencies may seek to have disputes governed by their own unique disputes resolution authorities. E.g., 19 U.S.C. § 1514 (unique procedure for challenging decisions by U.S. Customs and Border Protection). Other agencies may argue that disputes arising under an RSA are actually “claims” for purposes of the Contract Disputes Act of 1978, and that any such dispute is therefore subject to the disputes procedures set forth in FAR 52.233-1. Either of these approaches could be correct, depending on the nature of the services to be provided under the RSA. The answer could also lay somewhere in between, with the correct disputes procedure turning on the nature of the dispute itself. In any event, given the adverse consequences that may flow from utilizing the incorrect disputes procedure (e.g., waiver of claim, untimeliness of claim, etc.), private parties must take care to carefully assess whether the disputes procedure proposed by the agency is legally appropriate.

V. Areas Not Affected by RSA Role Reversal.

While the above sections demonstrate that many issues are significantly different in the RSA context than in the traditional government contracts context, it bears noting that some areas remain the same. For instance, even in the RSA context, the Government entity will likely resist any language by which the Government would be required to indemnify the private entity. Similarly, while many private entities will demand that those doing work for them obtain and provide proof of insurance, the U.S. Government is a self-insurer and will therefore likely refuse such language in an RSA.

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These are but a few of the many unique legal considerations that arise when dealing with RSAs, and that differ from the rules to which many contractors and private parties are most accustomed. By keeping these differences in mind, private parties may be able obtain valuable services from the government under the auspices of an agreement that strikes a more fair and equitable balance between the parties than in the traditional government contracts context.

1 To the extent that an authority other than the FAR requires the inclusion of a particular clause, then such clause may still be required in the RSA. For instance, Department of Labor regulations define “government contracts” in a way that would likely include RSAs, and require that all government contracts include an Equal Opportunity clause akin to that found at FAR 52.222-26. See 41 C.F.R. §§ 60-1.3 & 60-1.4.