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It’s not every day that a contractor recovers nearly four times the value of its initial contract, especially when there’s a potential conflict of interest in the mix – but that is exactly what happened in Appeal of Phoenix Data Solution.  On June 21, 2018, the Armed Services Board of Contract Appeals (Board) awarded Phoenix Data Solutions LLC, formerly known as Aetna Government Health Plans (AGHP), over $11 million in claimed settlement costs plus interest arising from the Tricare Management Activity’s (TMA) termination for convenience and subsequent deemed denial of AGHP’s claim related to performance under a regional TRICARE managed care support contract.

The Setup

TMA issued the Request for Proposals (RFP) for the contract at issue in March 2008.  The RFP provided for a base period, a transition-in period, five 1-year option periods, and a transition-out period. To increase its competitiveness, AGHP’s proposal included over $88 million in pre-award transition costs, costs which AGHP began to incur in August 2008.  Almost a year later, in July 2009, TMA awarded AGHP the contract and simultaneously exercised the first option period under the contract.  The value of the award for the transition-in and first option period was approximately $2.8 billion, and if all five-option periods were exercised, the total contract price was approximately $16.7 billion.

The incumbent contractor timely protested the award, leading TMA to issue a stop-work order pending the outcome of the protest. AGHP took steps to mitigate costs but did not close down its operation entirely, given that it would be required to resume performance immediately if the protest was unsuccessful.

GAO sustained the protest in November 2009 on multiple grounds, finding among other things that AGHP had created the appearance of a conflict of interest due to its hiring of a former TMA official to help prepare its proposal.  That decision required TMA to take corrective action within 60 days, a deadline that TMA missed.  However, six months later the contracting officer (CO) terminated the contract with AGHP for convenience, finding that AGHP had an unfair competitive advantage arising from AGHP’s hiring of that former TMA official.  After four years of attempted termination for convenience settlement negotiations, AGHP’s claim was deemed denied after the CO failed to issue a final decision.  During that time, TMA was renamed to the Defense Health Agency (DHA).

 

Appeal & Board Decision

  • A conflict of interest cannot convert a termination for convenience into a termination for default. On appeal, DHA argued that AGHP’s ability to recover was limited by the conflict of interest created by AGHP’s hiring of the former TMA official to work on the bid.  The Board rejected this argument, viewing it as an attempt to convert the termination for convenience into a termination for default.  The Board explained that had TMA believed that the appearance of a conflict of interest sufficiently justified a termination for default, TMA should have taken such action when terminating AGHP in 2010.  By choosing to terminate for convenience instead of for default, TMA was required by FAR 49.201 to pay AGHP’s allowable costs incurred.

 

  • Contractor recovered pre-award costs despite lack of “shared understanding” of costs before incurred. Relying on Integrated Logistics Support Systems International, Inc. v. United States, 47 Fed. Cl. 248, 257 (2000), aff’d, 36 F. App’x 650 (Fed. Cir. 2002), DHA argued that because AGHP started incurring costs prior to award, there was no shared understanding of those costs and therefore AGHP could not recover those costs.  The Board expressly declined to follow Integrated Logistics, emphasizing that the FAR includes no such “shared understanding” requirement.  FAR 31.205-32 simply requires that the costs be incurred “pursuant to the negotiation and in anticipation of the contract award.”  In awarding AGHP significant pre-award costs, the Board found that (i) AGHP had been clear with TMA about the pre-award costs it was incurring as part of the proposal process; (ii) the record showed that AGHP’s pre-award costs were incurred directly pursuant to negotiations with TMA and in anticipation of the contract award; (iii) the costs were necessary to comply with the delivery schedule; and (iv) the costs would have been allowable had they been incurred after the contract award.

 

  • Unexercised options not part of the contract for purposes of profit claims and loss adjustments. DHA challenged AGHP’s claimed profit, arguing that because AGHP projected a loss on the contract until the second or third option year, it would have lost money on the contract awarded (which was only the base period plus one option year).  AGHP defended its claimed profit by arguing that the contract would have been profitable over the span of all the option years included in the solicitation.  FAR 52.249.2 requires that if it “appears that the Contractor would have sustained a loss on the entire contract had it been completed, the Contracting Officer shall allow no profit under this subdivision . . . and shall reduce the settlement to reflect the indicated rate of loss.”   In a matter of first impression, the Board held that unexercised options are not part of the plain meaning of “contract” — there was no guarantee that TMA would award AGHP the additional option years, and thus no associated guaranteed profit for those option years.  Therefore, the Board reduced AGHP’s award to account for the loss.

 

  • Recovery for Agency’s Delay. Lastly, the Board found DHA responsible for performance delay costs based on TMA’s refusal to issue corrective action within the ordered timeframe and six-month delay in issuing the termination for convenience  The Board also rejected DHA’s argument that AGHP’s claimed contract close-out and termination expenses were unallowable litigation expenses.

 

In sum, the Board awarded AGHP over $11 million dollars in claim settlement costs after the termination for convenience, despite an appearance of a conflict of interest.  AGHP’s detailed damages analysis were enough for it largely to prevail against an agency that failed to counter facts with facts or come to the negotiating table in good faith.