In a recent case before the Armed Services Board of Contract Appeals (“ASBCA”) a major defense contractor found out that ignoring “Seeing” the terms of its government contract; not listening to “Hearing” the Termination Contracting Officer (“TCO”) decision; and arguing that the Limitation of Funding (“LOF”) “Speaking” in the contract does not apply to its Subcontractor termination settlement agreement does not equal recovery of cost in excess of the LOF.

The only issues before the court, as agreed to by the parties, were 1) whether the LOF clause of the contract limited the recovery sought, and 2) the net amount payable to the prime contractor. The Court ruled that the LOF did apply and any recovery was limited to the remaining funds available.

You may ask,if the contract included the FAR Clause 52.232-22 Limitation of Funds (Apr 1984) clause, why was the case brought before the ASBCA? The simple answer to this question is that the prime contractor’s position was that the TCO waived the LOF clause. Based on the Findings of Fact in the ruling, it is not clear why and how the Prime came to this conclusion.

The Facts as laid out in the ruling are interesting, but do not shed light on how the Prime came to the position that the TCO waived the LOF clause. However, they do present a clear picture as to how decisions made in contrast to the applicable regulations and straightforward positions taken by the government can and will result in the loss of significant monies and expended resources.

Findings of Fact

An engineering contract with a base year and nine optional years was awarded on March 1, 1997 to the Prime as an incrementally funded cost-plus-award-fee contract. The contract included the FAR 52.249-6 Termination (Cost-Reimbursement) (Sept 1996) clause and in 2000 a bilateral modification incorporating FAR 52.232.22, limitation of Funds (Apr 1984) clause.

The LOF clause stated:

  • (a)The parties estimate that the performance of this contract will not cost the Government more that (1) the estimated cost specified in the Schedule….
  • (b) The parties contemplate the Government will allot additional funds incrementally to the contract up to the full cost …. Specified in the Schedule
  • (f)(1) The Government is not obligated to reimburse the Contractor for Cost incurred in excess of the total amount allotted by the Government to this contract

The LOF clause also stated that the Prime was under no obligations to continue performance beyond that funded by the Government.

In March 2000, a bilateral modification incorporated an engineering assignment for the prime with a completion date of April 2003, which included work performed by a Subcontractor. On January 7, 2002 another bilateral modification increased the funding and extended the performance period to March 2004. In August 2003, the Prime informed the Government that the assignment would not be completed until March 2005 and that it wanted “a Cost Share Arrangement to Complete the Program”.

The Prime and the government agreed on September 10, 2003, that the assignment would continue on a cost-reimbursable basis once an agreement was reached on a new Estimate to Complete (“EAC”) and Schedule. On September 24th , the Prime provided the Government a schedule showing completion of the assignment (“Final Materials and Devices Delivered”) by September 2005, along with an estimated cost significantly higher than the last modification.

The court noted that, “There was not credible evidence that the 24 September 2003 EAC and performance schedule were accepted by the government.” In fact, the Prime and government on October 15, 2003 entered into a bilateral modification increasing the funding and keeping the contract format as a “cost-plus-award-fee” contract and extending the period of performance to March 2005.

On December 17, 2003, the procuring contracting officer (PCO) requested a proposal from the Prime for the purpose of implementing the September 10, 2003 agreement. Three meetings were held in February 2004 between the Prime and the government to develop this proposal and an internal Prime memo stated that it would submit the proposal by March 12, 2004.

On March 1, 2004, the PCO prepared a draft modification increasing the allotted funds and extending the assignment for three months beyond March 2004. However, this draft modification was never signed by the PCO or issued to the Prime.

Key 2004 dates in the finding of facts are as follows:

  1. PCO issued stop work order on March 10
  2. March 24, the PCO notified the Prime that no additional funding would be obligated “at this time”
  3. Termination for convenience (T4C) notice to the Prime was issued on March 26
  4. The Prime received the T4C on April 2 and it became effective on that date
  5. As of April 2, the Prime had not submitted its proposal in response to the PCO’s December 17, 2003 request
  6. On April 14, the Prime issued a T4C to its subcontractor
  7. August 31, the subcontractor submitted to the Prime a Subcontract Termination Proposal and Request for Equitable Adjustment with a value over $22 million
  8. The Prime notified the TCO on November 16, that it
    • Expended 95.02 percent of the funds allotted
    • Provided a termination settlement estimate of $154 million, which was based on proposals received from suppliers
    • The Prime’s notice to the TCO also contained the following:
      • “Therefore in an effort to allow the Contractor to continue to negotiated, subject to TCO approval, for settlement with each supplier we are requesting that the Government increase the funds as soon as possible.”

The Prime requested an increase in funding from the TCO despite the fact that the PCO made it clear in March 2004, that no additional funds would be obligated on this assignment. The TCO’s reply to the Prime’s request, while admitting it was rare that additional funds are added to terminated cost type contracts, stated that the Government’s preference is to adhere to the LOF clause in such contracts. The TCO also stated that per the funding status, only a little over $4.7 million was remaining on the assignment.

Undeterred, on December 10, 2004, the Prime again requested that the TCO increase funding to “cover the Contractor’s project completion price for termination of the … program.” The TCO responded by stating the following:

  • “I have discussed with you before in that this contract is a cost type contract, and the “Limitation of Funds” clause does apply; therefore, no additional funds will be requested. The amount remaining in the contract is it. As discussed earlier, if for some reason the PCO wants to obligate more funds to the contract, he can do so.”

The Prime expressed confusion to the TCO in a message dated December 13th, specifically asking: “Is the Government going to obtain additional funding?” In response, the TCO reiterated that no request for additional funds would occur and that the LOF clause applies. The PCO added: “it depends on the amount of remaining obligated funds, and the final negotiated settlement price.”

Unbelievably, on February 15, 2005 in an email, the Prime submitted a “Settlement ROM Proposal” for $37.1 million that included a request for $20 million to be obligated within 60 days with the balance “after our negotiations is *sic+ completed.” The email also included the following statement from the Prime:

  • “The Contractor understands your position on the Limitation funds clause, but want
    [s] to assure our suppliers that once negotiations has [sic] been completed and approved by you that funding will soon follow.”

The Court noted that there was no evidence that the TCO issued a written response to the February 15th email and considering the three previous TCO responses, the lack of response cannot be reasonably understood as a reversal of the government’s position.

In testimony, the Prime’s contract manager indicated that it was their understanding after several discussions with the TCO, that once the final settlement cost was known funding could be obligated based on those final figures. The Court considered this nothing more than an agreement and that such agreement was in conflict with the LOF clause.

In August 2005, the Prime and Subcontractor entered into a settlement agreement subject to TCO approval, of $10,800,000. The Subcontractor settlement agreement was included in the Prime’s certified terminations settlement proposal submitted for DCAA audit. Two audits were conducted, one issued in September 2006 and the second in February 2007. Both audits questioned all but $1,825 of the Subcontractors $10.8 million settlement agreement.

In July 2008, the TCO ratified only $182,185 of the Subcontractor’s settlement agreement. By letter dated December 19, 2008, the Prime requested additional discussions with the TCO, which were denied in a letter dated March 17, 2009. At this point the Court noted that the parties were at an impasse and that the termination settlement proposal was converted to a claim.

The TCO issued a final decision on August 3, 2010, ratifying only $280,294 of the Subcontractor settlement agreement, based on cost allowance and cost allocations grounds and invoked the LOF clause barring any cost exceeding funds allotted to the contract.

The Decision:

See no LOF

The Court noted that sub paragraphs (f) and (h) of the LOF expressly provided that the Prime was not obligated to incur, and the government was not obligated to reimburse, any cost of performing the contract, including terminations activities, that would exceed the allotted funding in the contract.

The Court stated that there was no evidence that the termination activities of the government would lead the Prime to assume that the government was waving the LOF clause.

Hear no LOF

The Court notes that three times before the Prime entered into a settlement agreement with its Subcontractor, the government made it clear that they would be enforcing the LOF clause and the discussions between the Prime and the TCO resulted in nothing more than an understanding that additional funding would be considered when the final settlement figures were known.

Speak no LOF

The Court also noted that – if the Prime truly believed that the government had waived the LOF clause, why was it requesting additional funds to be added to the allotted funds in the contract?

Conclusion:

After nearly 10 years of efforts by the Prime to convince the Government and then the ASBCA that the LOF clause did not apply to this contract and therefore did not restrict the funds that could be obligated to cover the Prime’s settlement agreement with its Subcontractor, the Court ruled otherwise. The Prime’s inability to see the LOF writing on the contract wall and hear the government’s clear position on the LOF clause led them to argue that neither affected the ability to recover the agreed to settlement cost with its Subcontractor.

The final result is that the Prime only recovered $7.4 million of the $10.8 million Subcontractor settlement agreement, losing approximately $3.4 million in addition to the cost of consultants and legal counsel supporting this failed effort.