A recent Armed Services Board of Contract Appeals (ASBCA) opinion confirms the federal courts interpretation of the FAR T-for-D clauses regarding late performance. The courts continue to interpret FAR 49.402-3 to mean that failure of the government to terminate within a reasonable time, or set a new performance date, coupled with reliance by the contractor results in waiver of default. The government must demonstrate prompt action to terminate or set a new delivery/performance date to avoid the possibility of waiving its performance rights. If the contractor can establish a minimal detrimental reliance of the government’s behavior, a waiver defense is permitted (see DeVito v. United States 413 F.2d 1147)
The Department of Labor (DOL) has issued the implementing regulations for Executive Order (EO)13495. The EO is the current Presidential Order in a history of conflicting orders by the last three U.S. Presidents.
President Clinton started the policy of right of first refusal for federal contract employees. His EO was cancelled by President Bush. Bush’s EO was cancelled by this order which not only reinstated the Clinton policy but expanded it to all SCA contractor and subcontractor employees.
The new regulation basically requires the winning contractor to offer employment to the service employees who worked on the current contract during the last 30 days who will be laid off or discharged as a result of the new contract award.
The good news is that the type of workers with the new right of first refusal are service workers covered by the Service Contract Act. Therefore, managerial, supervisory, or non-service employees on the current contract are not entitled to an offer of employment.
However the implementation is not so simple. The incumbent contractor must supply the Contracting Officer a list of service employees working on the prime and subcontracts within 30 days of contract completion. The CO then delivers the list to the successor contractor who, along with subcontractors must make a bona fide, express offer of employment to each employee including stating the time within which the employee must accept such offer, which must be no less than 10 days.
Until the right of first refusal is completed no employment is open under the successor contract. However the successor contractor can retain its own service employees if the employee has worked for the contractor or subcontractor for at least 3 months immediately preceding the commencement of the contract and who would otherwise face lay-off or discharge;
So, is the successor contractor required to hire all the service employees of the current contractor? The answer is yes, unless one of the few exceptions applies.
The successor contractor can refuse to hire a current service employee when “the new contractor has reason to believe, based on written credible information from a knowledgeable source, that an employee’s job performance while working on the current contract has been unsuitable.”
How would that happen? It probably won’t.
If the successor contractor has proof that a worker failed to perform suitably on the predecessor contract through evidence of disciplinary action taken for poor performance or evidence directly from the contracting agency that the particular employee did not perform suitably. Similarly, a successor contractor could use performance appraisal information in determining whether an employee failed to perform suitably on the job.
However, the predecessor contractor is not required to provide this information. So how would the successor contractor ever know?
Contracts exempt for the EO:
1. Contracts or subcontracts under the simplified acquisition threshold.
2.Contracts or subcontracts awarded pursuant to the Javits-Wagner-O’Day Act, 41 U.S.C. 8501-8506 (Workers employed under the National Industries for the Blind (NIB) and NISH – Creating Employment Opportunities for People with Significant Disabilities).
3. Guard, elevator operator, messenger, or custodial services provided to the Federal Government under contracts or subcontracts with sheltered workshops employing the severely handicapped as described in section 505 of the Treasury, Postal Services and General Government Appropriations Act, 1995, 103.
4. Agreements for vending facilities entered into pursuant to the preference regulations issued under the Randolph-Sheppard Act, 20 U.S.C. 107.
5. Employees who were hired to work under a Federal service contract and one or more nonfederal service contracts as part of a single job.
6. Head of a contracting department or agency to exempt its department or agency from the requirements.
Flowdown:
The clause provides that in every subcontract entered into in order to perform services under the contract, the contractor will include provisions that ensure that each subcontractor will honor the requirements of the clause in the prime contract with respect to the employees of a predecessor subcontractor or subcontractors working under the contract, as well as employees of a predecessor contractor and its subcontractors.
The subcontract must also include provisions to ensure that the subcontractor will provide the contractor with the information about the employees of the subcontractor needed by the contractor to comply with the prime contractor’s requirement, in accordance with FAR 52.222-41(n).
The contractor must also take action with respect to any such subcontract as may be directed by the Secretary of Labor as a means of enforcing these provisions, including the imposition of sanctions for noncompliance; provided, however, that if the contractor, as a result of such direction, becomes involved in litigation with a subcontractor, or is threatened with such involvement, the contractor may request that the United States enter into the litigation to protect the interests of the United States.
Failure to comply:
A contractor/subcontractor who has failed to comply with any order, or has committed willful violations of EO, or its implementing regulations, will be ineligible to be awarded any contract of the United States for a period of up to 3 years.
In the August 10, 2011 Federal Register, starting at page 49365, published the final rule eliminating the exemption from the Cost Accounting Standards (CAS) for work performed entirely outside the U.S. The change becomes effective October 11.2011
CAS would still not apply to foreign governments, their agents, and instrumentalities under the exemption still available at 48 CFR 9903.201-1 (b)(4). However other foreign concerns would be required to comply with 48 CFR 9904.401 “Consistency in Estimating, Accumulating and Reporting Costs and 48 CFR 9904.402 “Consistency in Allocating Costs Incurred for the Same Purpose”.
Several government contracting organizations and accounting consultants provided unfavorable comments on eliminating the exemption. Generally the concerns fell into the following categories:
• Difficulty in communicating of requirements to foreign concerns (CAS are in English only) and understanding the foreign concerns’ responses.
• Additional audit responsibilities and risks on the Prime U.S. Contractors when reviewing and determining “adequate” CAS coverage.
• Integration of U.S. GAAP accounting principles with foreign contractors using IFRS principles while trying to comply with CAS.
• Competitive disadvantages for U.S. contractors in their attempts to win new contracts to export defense industry products.
The unintended consequence of the change could very well be that government prime contractors will attempt to enter into subcontracts which are exempt from all CAS requirements. In addition, the more “contract savvy” foreign concerns will refuse to contract inclusive of the CAS provisions, which will require a significant increase in requests for CAS waivers, or will agree to the terms with absolutely no intentions of meaningful compliance with the strange new and foreign requirement.
The interim rule, published in the Federal Register on July 8th, requires contractors to report subcontract award data and the total compensation of the five most highly compensated executives of the contractor and subcontractor. The date is then published at http://usaspending.gov. The only exclusions are 1. classified contracts, 2contracts with individuals, 3 for contractors and subcontractors who had gross income in the previous tax year under $300,000
Here is the reporting requirement (FAR 52.204-10)
By the end of the month following the month of award of a first-tier subcontract with a value of $25,000 or more, Contractor reports the following information at http://www.fsrs.gov for each first-tier subcontract.
(i) DUNS Number for the subcontractor receiving the award and for the subcontractor’s parent company, if the subcontractor has a parent company.
(ii) Name of the subcontractor.
(iii) Amount of the award.
(iv) Date of the award.
(v) A description of the products or services (including construction) being provided.
(vi) Subcontract number assigned by the Contractor).
(vii) Subcontractor’s physical address including the congressional district.
(viii) Subcontractor’s primary performance location.
(ix) The prime contract number.
(x) Awarding agency name and code.
(xi) Funding agency name and code.
(xii) Government contracting office code.
(xiii) Treasury account symbol (TAS) as reported in FPDS.
(xiv) The applicable North American Industry Classification System code (NAICS).
(2) By the end of the month following the month of a contract award, and annually thereafter, the Contractor shall report the names and total compensation of each of the five most highly compensated executives for the Contractor’s and subcontractor’s preceding completed fiscal year at http://www.ccr.gov, if—
(i) In the Contractor’s preceding fiscal year, the Contractor received—
(A) 80 percent or more of its annual gross revenues from Federal contracts (and subcontracts), loans, grants (and subgrants) and cooperative agreements; and
(B) $25,000,000 or more in annual gross revenues from Federal contracts (and subcontracts), loans, grants (and subgrants) and cooperative agreements; and
(ii) The public does not have access to information about the compensation of the executives through periodic reports filed with the Securities and Exchange Commission.
(2) If a subcontractor in the previous tax year had gross income from all sources under $300,000, the Contractor does not need to report awards to that subcontractor.
The reporting for subcontracts of $25,000 or more started March 1, 2011. Failure to comply with reporting requires go on your contractor’s performance information under Subpart 42.15.
Contractors with ARRA funding should have implemented this requirement already, but the rest of us might be caught unaware. I was.
Good luck with this one.
From Federal Acquisition Regulation; Federal Acquisition Circular 2005-51 (FAR Case 2010-015) Effective 4/1/2011
This change has been discussed for a long time. Although it doesn’t put Women-Owned Small Business concerns on the same footing as SDB, HUBZone, and Disabled Vets, it does help some. The interim rule amends the FAR to add subpart 19.15, Women-Owned Small Business Program, which will help in achieving the 5 percent statutory goal for contracting with women-owned small business concerns.
The new opportunities apply to women-owned small business concerns (WOSB) and economically disadvantaged women-owned small business concerns (EDWOSB).
To qualify as a WOSB concern eligible under this change, the concern must be– A small business as defined in 13 CFR part 121 and not less than 51 percent directly and unconditionally owned by, and the management and daily operations controlled by, one or more women who are citizens of the United States.
To qualify as an EDWOSB concern, the concern must be–A WOSB (defined above) owned by women who are citizens of the United States and who are economically disadvantaged. A woman is economically disadvantaged if she can demonstrate certain income, asset, and other limitations established in SBA regulations who are economically disadvantaged in accordance with 13 CFR part 127.
For awards anticipated not to exceed $6.5M for manufacturing and $4M for other contracts, the new rule allows a set aside:
a. for EDWOSB under a NAICS code in an underrepresented industry
b. for EDWOSB and WOSB set aides under a NAICS code in a substantially underrepresented industry.
There are 45 NAICS codes in which WOSBs are underrepresented and 38 NAICS codes in which WOSBs are substantially underrepresented. The applicable NAICS codes are located at http://www.sba.gov/sites/default/files/files/gc_wosb_naics_grids.pdf.
As pointed out in the last blog, retainage on a construction contract in Tennessee cannot exceed 5 percent (TCA 66-34-103). Violation of this requirement is a Class A misdemeanor. The next significant point regarding retainage is that it must be held in a separate, interest bearing account.
This requirement is located in TCA 66-34-104. It applies to “any contract for the improvement of real property” and includes commercial contracts, as well as those with state and local governments, that exceed $500,000. The requirement applies to all subcontracts under the prime that exceeds $500,000 and cannot be waived by contract. Perhaps agency construction contracts are exempt, but prime contracts funded by federal grant funds seem to be included. We know it also doesn’t apply to federal contracts for facilities management, like those in Oak Ridge, because they are not for construction. What about the contracts for construction by facilities management contractors? Aren’t those commercial construction contracts?
Like the 5 percent retainage statute, violation is a Class A misdemeanor. In addition, there is a $300 per day penalty owed the “owner of the retained funds” [TCA 66-34-104 (c)]. This penalty presents an interesting question. If each subcontractor is the owner of its own retained funds, does the $300 penalty apply to each subcontractor? For example, if the prime contractor does not place the retained funds in an interest bearing escrow account for three subcontractors, is the amount owed $900 per day. The violation of this statue could be costly indeed.
This escrow account requirement creates issues for financial intuitions, land owners, contractors, and funding agencies alike. I am really interested to see what happens when a subcontractor on a construction job at a federal site, like Oak Ridge National Laboratory, tries to use the early withdrawal of retainage from the first statute I mentioned and the $300 per day penalty from this statue. The statute clearly intends inclusion. It will be up to the federal contractor to prove exemption. The potential of $300 a day could carry some real clout, especially if penalty for this statutory violation would not be reimbursed by the government.
All general construction (GC) contractors on federal funded projects, as well as their subs, need to look at this issue.
Any federally funded construction contract will have a contract clause addressing payment retention and most likely it will be, FAR 52.232-5 Payments under Fixed-Price Construction Contracts (Sept 2002). Regarding retention, this clause says “(e) Retainage. . . the Contracting Officer may retain a maximum of 10 percent of the amount of the payment until satisfactory progress is achieved. When the work is substantially complete, the Contracting Officer may retain from previously withheld funds and future progress payments that amount the Contracting Officer considers adequate for protection of the Government and shall release to the Contractor all the remaining withheld funds. . . “
As a general rule the 10 percent retention is applied to all construction subcontracts also. The 10 percent retainage is released to the GC at “substantial completion” who, in turn, pays the subs their portion of the retainage.
However, Tennessee law puts this practice into conflict. Look at Tennessee Code Sec 66-34-130 Retainage; Payment default. It says “All construction contracts on any project in this state, both public and private, may provide for the withholding of retainage; provided, however, that the retainage amount may not exceed five percent (5%) of the amount of the contract”. In addition, section (b) of the statue seems to require release of retention 90 days after completion of any subcontractor’s work rather than at the end of the entire project.
To make the apparent conflict matter more important, violation of the statue is a Class A misdemeanor, subject to a $3,000.00 fine. In addition to the fine, wouldn’t a conviction have to be reported on the contractor’s Certification Regarding Responsibility Matters? (FAR 52.209-5) Every federal agency and all their contractors require this certification. The portion of the certification of concern states the contractor has not, “within a three-year period preceding this offer, been convicted of or had a civil judgment rendered against them for: commission of fraud or a criminal offense in connection with obtaining, attempting to obtain, or performing a public (Federal, State, or local) contract.” Could that alone be grounds for elimination from a contract award as being not responsible? Better get with you attorneys and address this issue.
I will have more information of the Tennessee retention issue later.
Joel Pearman, Acquisition Strategies
Acquisition Strategies specializes in project and program contracting strategies and planning, which includes determining staffing needs, advanced planning, source selection strategies, contract administering and closeout, as well as claim resolution and analysis.
