(November 21, 2023) - Attorneys at Venable LLP discuss the advantages and disadvantages of having a subcontract adhere to "federal common law of government contracts" following a Virginia federal court's ruling on a subcontractor's cost claims.
Government contractors often "flow down" contract clauses from the Federal Acquisition Regulation (FAR) and its supplements to their subcontractors, including clauses related to changes (e.g., FAR 52.243-1) and excusable delays (e.g., FAR 52.249-14). As a result, subcontracts commonly provide that such clauses should be interpreted consistent with the "federal common law of government contracts," which generally includes decisions by the U.S. Court of Appeals for the Federal Circuit, the U.S. Court of Federal Claims, and the Civilian and Armed Services Boards of Contract Appeals (CBCA and ASBCA).
A recent decision from the U.S. District Court for the Eastern District of Virginia (EDVA) highlights the advantages and risks that this arrangement presents. In particular, the federal common law of government contracts includes multiple "constructive" theories of liability through which prime contractors can obtain additional funds from the government.
Incorporating these standards into a subcontract can therefore permit the subcontractor to seek extra payments from the prime contractor on the same basis — even if the subcontract does not otherwise expressly state that such relief is available. These constructive theories of recovery come, however, with significant limits on their application.
What was the case about?
Accepting the facts alleged in the complaint as true for purposes of its decision, the EDVA summarized that BAE Systems Norfolk Ship Repair Inc. (BAE) held a contract with the U.S. Navy and subcontracted with L3Harris Maritime Services, Inc. (L3Harris) on a firm-fixed-price basis for ship repair services.1
The subcontractor, L3Harris, sought "$863,315.45" over and above the subcontract's fixed price for "additional costs resulting from COVID-19 testing, increased sick leave, protective measures, increase cleaning processes, and inefficiencies caused by social distancing," as well as "$4,607,111.40 in costs" allegedly incurred because "BAE engaged in acts and omissions that delayed or otherwise interfered with L3Harris' performance of the subcontract."
What legal theories did the subcontractor argue entitled it to extra payments?
L3Harris based both of its claims on "constructive" change theories — i.e., changes that L3Harris asserted BAE made, even though BAE did not issue a formal change order.
The subcontract incorporated multiple FAR clauses and, according to the court, provided that such clauses "shall be construed and interpreted according to the U.S. federal common law of government contracts." These included FAR 52.243-1, the standard "Changes" clause for fixed-price contracts, which entitles the contractor to an equitable adjustment in the contract's fixed price if the contracting officer issues a "written order" changing the terms of the contract.
In addition, the Federal Circuit and boards of contract appeals have also long interpreted the FAR's Changes clauses to permit an equitable adjustment for certain changes that the government makes to the contract "constructively," even though the government did not issue a written order for the contractor to implement the change.
As the EDVA explained: "When a contractor performs work beyond the contract requirements at the government's direction, without a formal or informal order by the government under the changes clause to do so, the situation is treated as a constructive change to the contract, and the contractor is entitled to an equitable adjustment."
Because the subcontract incorporated FAR 52.243-1 and provided that the clause should be interpreted consistent with the Federal Circuit's and boards' decisions, L3Harris argued entitlement to an equitable adjustment under two "constructive" change theories. L3Harris argued that its pandemic-related costs were a "constructive acceleration" of the subcontract schedule and that BAE constructively changed the subcontract by delaying L3Harris's performance.
Did the court agree with the subcontractor?
The EDVA allowed L3Harris's pandemic-related claims to proceed but dismissed the delay-related claims.
First, the Court held that L3Harris's "complaint adequately alleges that the COVID-19 pandemic constituted an excusable delay under 48 C.F.R. § 52.249-14, that BAE's direction that L3Harris continue performing the subcontract during the pandemic amounted to a constructive acceleration order under the changes clause, and that L3Harris' continued performance resulted in increased expenses."
Basically, the Court found that, if proved true, L3Harris's factual allegations sufficed to show that BAE had "required [L3Harris] to meet the original delivery schedule" in the subcontract "in spite of excusable delays" created by the pandemic.
Second, the Court held that L3Harris's delay-related claims could not proceed because, "while changes to the scope of work to be performed under a contract are compensable under the changes clause, damages for delay are remediable only under the suspension of work clause" at FAR 52.212-12, and the subcontract did "not include a suspension of work clause."
In other words, even if true, L3Harris's delay-related allegations did "not actually involve changes to L3Harris' scope of work under the subcontract." Rather, the alleged damages resulted from "delays caused by BAE," for which the subcontract included no clause guaranteeing extra payment.
What is the takeaway for my company?
Stipulating that certain terms within a subcontract will be interpreted consistent with the "federal common law of government contracts" has advantages and disadvantages that prime contractors and subcontractors should both consider.
One benefit is that there is a robust body of federal case law addressing almost every situation typically encountered in the federal contracting space. This provides the parties a degree of certainty regarding how various claims are likely to be resolved if litigation arises.
But a drawback is that, while the federal common law of government contracts is miles wide, it is also miles deep. Consequently, there may be ways in which the relationship between the government and a prime contractor does not map well onto the relationship between a prime contractor and its subcontractor, thus subjecting one or the other party to increased risk.
In the context of negotiating a federal subcontract (something that often occurs within a constrained time frame), it is challenging to identify every potential theory of recovery — and every corresponding legal defense — in Federal Circuit and board decisions and analyze whether to permit them under the subcontract.
Notwithstanding this challenge, federal contractors and subcontractors should engage experienced subcontracting personnel and, when necessary, legal counsel to consider the risks and implications of the terms included in their subcontracts. This should include whether interpreting these provisions under the federal common law of government contracts or the applicable state law (typically set forth in the subcontract's choice of law provision) provides the greatest protection.
Originally Published by Westlaw Today
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