United States: Undefinitized Contract Action Proposed Rule

In the National Defense Authorization Acts for 2017 and 2018, Congress required the Department of Defense (DOD) to implement certain reforms for issuing and definitizing Undefinitized Contract Actions (UCAs).  After a long delay, DOD has issued a proposed rule and requested comments from industry.

UCAs are meant to be used when the Government has urgent needs that do not leave enough time for the parties to agree on all the terms, conditions, and pricing of a formal contract.  In those circumstances, the parties can agree to a general framework that allows work to begin and payments to be made on a modified cost-reimbursement basis under a UCA, and the parties agree to definitize the contract in the near future – aspirationally, no later than 180 days after the UCA award date, or before 50 percent of the work is complete, whichever is earlier.  See DFARS 217.7404-3.  The DFARS currently allows the contracting officer to extend that date to 180 days after the date on which the contractor submits a "qualifying proposal" for definitization.  In practice, as the GAO repeatedly has highlighted and as Congress has noted, poor acquisition planning has led to the unnecessary use of UCAs, and UCAs often are not definitized within the 180-day time set by regulation.

One particularly inequitable result of the delayed definitization of UCAs is its effect on profit.  Because UCAs are cost-type agreements with the contractor bearing minimal cost risk, the DFARS provides guidance for acceptable profit rates when "a substantial portion of the required performance" is completed before definitization.  If a contractor completes a large proportion of the work before the contract is belatedly definitized, an agency often will insist on a profit rate that is materially lower than it would have been if the agency had promptly definitized the contract.

This problem is exacerbated by agencies' subjective discretion to determine when a contractor's definitization proposal is "qualifying" and when the contractor will be told to go back and try again.  (Our friends in the Government would say contractors' failure to submit timely and acceptable definitization proposals in the first place is often a major cause of these delays.)

Moreover, particularly when the contractor has completed a substantial portion of the work before price is negotiated, it loses much of the negotiating leverage it would have had if a proper, formal contract had been in place from the outset.  When the parties fail to reach agreement on the definitized terms, the UCA's definitization clause allows the Government unilaterally to impose the terms and pricing the Government deems to be fair, notwithstanding the contractor's objections, and notwithstanding the fact the contractor may have refused to accept the UCA if it had known these terms and price ultimately would be imposed.  DFARS 252.217-7027(c).  At that point, the contractor's only recourse is the contractual disputes process.

The new proposed rule sets out provisions that would enact statutory reforms that have been languishing for longer than an undefinitized UCA.  They will not resolve many of the problems with UCAs, but they are a modest step forward.  Under the proposed rule:

  • If DOD delays definitization for 180 days beyond the date the contractor submits a "qualifying proposal," profit must be determined based upon the cost risk that existed on the date of the proposal submission, not on the date of the definitization.
  • DOD contracting officers must get higher-level authorization before extending the 180-day definitization deadline by more than 90 days.
  • Foreign Military Sales UCAs ordinarily will require authorization from the head of the contracting activity and definitization within 180 days of submission of a "qualifying proposal."
  • New restrictions will make it more difficult for DOD unilaterally to definitize UCAs with a value exceeding $50 million.
  • The definition of "qualifying proposal" is altered to reflect the statutory requirement for information sufficient to allow a "meaningful audit," rather than the current regulatory requirement for a "complete and meaningful audit."

Readers are encouraged to review the proposed rule and consider whether to submit comments, which are due by April 16, 2019.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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