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BASIC CONTRACT ADMINISTRATION

TEXT REFERENCE

Chapters 1 13 Current Through FAC 90-46 and DAC 91-12

Prepared by:

Logistics Management Institute Center for Public Administration 2000 Corporate Ridge McLean, Virginia 22102-7805

Federal Acquisition Institute 18th and F Streets, N.W. Washington, DC 20405

BASIC CONTRACT ADMINISTRATION Table of Contents


Chapter 1: Contract Administration Planning Vignette: Erics First Day ................................................................................................. 1-1 Course Learning Objectives............................................................................................... 1-3 Introduction to Contract Administration Planning ............................................................. 1-4 Steps in Contract Administration Planning ........................................................................ 1-6 Contract Administration Planning ...................................................................................... 1-7 1.1 Review the Contract File ..................................................................................... 1-7 Vignette: Pallet Procurement Contract Administration Planning .................................. 1-10 1.2 Determine Criticality ......................................................................................... 1-10 Vignette: Which Designator for the Pallet Procurement? .............................................. 1-11 1.3 Identify Previous Issues and Problems .............................................................. 1-12 Vignette: Joannes Concern ............................................................................................ 1-15 1.4 Meet to Discuss Performance Monitoring ......................................................... 1-15 1.5 Determine the Extent of Performance Monitoring ............................................ 1-16 1.6 Delegate Contract Administration Functions .................................................... 1-20 1.7 The Contract Administration Plan ..................................................................... 1-31 1.8 Provide Notices and Instructions ....................................................................... 1-39 1.9 Provide Formal Notice to Contractor................................................................. 1-43 Vignette: Putting the Pallet Procurement in Perspective................................................ 1-46 Chapter 2: Postaward Orientations Vignette: Assessing the Need to Get Started ..................................................................... 2-1 Course Learning Objectives................................................................................................ 2-3 Introduction to Postaward Orientations .............................................................................. 2-4 Steps in Postaward Orientation Planning............................................................................ 2-5 Postaward Orientation Planning ......................................................................................... 2-6 2.1 Determine the Need ............................................................................................. 2-6 2.2 Determine the Type of Orientation ...................................................................... 2-8 2.3 Planning Orientations ........................................................................................ 2-12 Vignette: Acquisition Team Planning .............................................................................. 2-14 Vignette: Harrys Continuing Concern ........................................................................... 2-21 2.4 Conduct the Orientation ..................................................................................... 2-22 Vignette: It Never Hurts to Ask........................................................................................ 2-25 2.5 Prepare Postaward Orientation Report .............................................................. 2-25 2.6 Actions to Resolve Disagreements on Key Issues ............................................. 2-27 2.7 Identify the Need for Contract Modifications.................................................... 2-27 2.8 Document the Contract File ............................................................................... 2-28

2.9 2-10

Provide Information to Interested Parties .......................................................... 2-28 Obtain Executed Contractual Documents, Bonds, or Insurance ........................ 2-29

Chapter 3: Basic Procedures for Successful Performance Monitoring Vignette: Monitoring the Pallet Procurement ................................................................... 3-1 Course Learning Objectives................................................................................................ 3-3 Introduction to Performance Monitoring ............................................................................ 3-4 Steps in Successful Performance Monitoring ..................................................................... 3-6 Successful Performance Monitoring ................................................................................... 3-8 3.1 Respond to Contractor Requests .......................................................................... 3-8 3.2 Monitor Assigned Technical and Other Support Personnel ................................ 3-9 3.3 Obtain Data on Contractor Performance ........................................................... 3-16 Vignette: And Away We Go! Or Do We? .................................................................... 3-24 Vignette: Lessons Learned Pay Dividends ...................................................................... 3-30 3.4 Inform Others of Contract Status ....................................................................... 3-35 Chapter 4: Problem Resolution in Contract Administration Vignette: Yet Another Realm for Eric ................................................................................ 4-1 Course Learning Objectives................................................................................................ 4-3 Introduction to Problem Resolution in Contract Administration........................................ 4-4 Steps in Problem Resolution During Contract Administration .......................................... 4-5 Problem Resolution in Contract Administration ................................................................ 4-6 4.1 Verify and Document Known or Predictable Performance Problems ................. 4-6 4.2 Determine Impact of Problem on Requirement ................................................... 4-7 Vignette: Cause and Effect: A Two-Sided Coin................................................................ 4-9 4.3 Suspension or Stoppage of Work ....................................................................... 4-11 Vignette: To Stop or Not to Stop? That is the Question .............................................. 4-14 Vignette: You Handle the Paperwork Ill Handle the Job .......................................... 4-21 4.4 Performance Delays ........................................................................................... 4-22 Vignette: Unwinding a Tangled Skein ............................................................................. 4-30 4.5 Resolve Contractor Performance Problems ....................................................... 4-38 4.6 Document Final Decision .................................................................................. 4-38 4.7 Invoke Formal Remedy...................................................................................... 4-39 4.8 Inform Requiring Activity and Other Interested Parties .................................... 4-39 Chapter 5: Contract Modifications and Options Vignette: Another Challenging Frontier ........................................................................... 5-1 Course Learning Objectives................................................................................................ 5-3 Introduction to Contract Modifications and Options .......................................................... 5-4 Steps in Modifying Contracts ............................................................................................. 5-7

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Modifications ...................................................................................................................... 5-8 5.1 Modifications ....................................................................................................... 5-8 5.1.1 Consider Contractor Requests for Modifications ................................................ 5-8 5.1.2 Consider Government Requests for Modifications ........................................... 5-10 5.1.3 Determine Impact of Change on Scope ............................................................. 5-11 5.1.4 Estimate Impact of Change ................................................................................ 5-14 5.1.5 Determine Appropriate Consideration ............................................................... 5-17 5.1.6 Provide Notice of Rejection ............................................................................... 5-18 5.1.7 Determine Type of Contract Modification ........................................................ 5-18 5.1.8 Implement Contract Modifications for Supplemental Agreements ................... 5-20 5.1.9 Implement Contract Modifications for Unilateral Changes .............................. 5-26 5.1.10 Implement Contract Modifications for Other Administrative Changes ............ 5-30 Vignette: What a Difference a Clause Makes.................................................................. 5-32 5.1.11 Implement Contract Modifications for Novation Agreements .......................... 5-33 5.1.12 Implement Contract Modifications for Name Changes ..................................... 5-36 Steps in Exercising Options .............................................................................................. 5-39 5.2 Options ............................................................................................................... 5-40 5.2.1 Identify Available Options................................................................................. 5-40 5.2.2 Determine Need for Additional Supplies or Services ........................................ 5-41 5.2.3 Determine Whether Option Requires Synopsizing ............................................ 5-41 5.2.4 Determine Whether to Exercise Options ........................................................... 5-41 5.2.5 Provide Written Notice and Exercise Option .................................................... 5-45 5.2.6 Prepare Written Determination for Contract File .............................................. 5-46 Vignette: Getting in Shape to Exercise an Option ........................................................... 5-47 Chapter 6: Contract Remedies Vignette: Accountability When Things Go Wrong ............................................................ 6-1 Course Learning Objectives................................................................................................ 6-3 Introduction to Contract Remedies ..................................................................................... 6-4 Preliminary Steps for Choosing Contract Remedies .......................................................... 6-6 Identifying Types of Remedies ........................................................................................... 6-7 6.1 Identify Types of Remedies ................................................................................. 6-7 Steps in Issuing a Delinquency Notice ............................................................................... 6-8 Delinquency Notices ........................................................................................................... 6-9 6.2 Issue Cure or Show Cause Notice........................................................................ 6-9 Steps in Implementing Liquidated Damages .................................................................... 6-17 Liquidated Damages ......................................................................................................... 6-18 6.3 Liquidated Damages .......................................................................................... 6-18 Steps in Rejecting Nonconforming Supplies or Services ................................................. 6-24 Nonconforming Supplies or Services ............................................................................... 6-25 6.4 Rejection of Nonconforming Supplies or Services............................................ 6-25 Steps in Implementing Express Warranties ...................................................................... 6-31 Express Warranties ........................................................................................................... 6-32

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6.5 Express Warranties ............................................................................................ 6-32 Steps in Implementing Implied Warranties ...................................................................... 6-40 Implied Warranties............................................................................................................ 6-41 6.6 Implied Warranties............................................................................................. 6-41 Vignette: Which is It Warranty, Guarantee, or Guaranty? ........................................ 6-43 Steps in Determining Latent Defects, Fraud, or Gross Mistakes...................................... 6-45 Latent Defects, Fraud, or Gross Mistakes......................................................................... 6-46 6.7 Latent Defects, Fraud, or Gross Mistakes.......................................................... 6-46 6.8 Select Most Appropriate Remedy ...................................................................... 6-49 6.9 Withhold, Reduce, or Demand Payment from Contractor ................................. 6-49 Chapter 7: Contract Payment Vignette: Quid Pro Quo Payment for Performance...................................................... 7-1 Course Learning Objectives................................................................................................ 7-3 Introduction to Contract Payment ....................................................................................... 7-4 Steps in Processing Contract Payment................................................................................ 7-8 Contract Payment ................................................................................................................ 7-9 7.1 Inspect Invoice or Voucher and Notify Contractor of Any Defects .................... 7-9 7.2 Identify Terms and Conditions Pertinent to Payment ........................................ 7-11 7.3 Obtain Documents and Determinations Pertinent to Payment .......................... 7-11 7.4 Performance-Based Payments ........................................................................... 7-14 7.5 Identify Withholdings, Deductions, or Other Corrections ................................. 7-18 7.6 Determine if Assignee is Protected From Deductions or Withholdings ............ 7-21 7.7 Determine Amount Due Contractor ................................................................... 7-22 7.8 Notify Contractor of Differences Between Invoiced or Vouchered Amounts and Amounts to be Paid ..................................................................................... 7-22 7.9 Notify Contractor of Final Decision on Paying Lesser Amount ....................... 7-22 7.10 Forward Invoice or Voucher .............................................................................. 7-23 Chapter 8: Contract Closeout Vignette: The Whole is Greater Than the Sum of Its Parts ............................................... 8-1 Course Learning Objectives................................................................................................ 8-3 Introduction to Contract Closeout....................................................................................... 8-4 Steps in Contract Closeout .................................................................................................. 8-6 Contract Closeout ............................................................................................................... 8-7 8.1 Verify Contract is Physically Complete .............................................................. 8-7 8.2 Obtain Forms, Reports, and Clearances Required at Closeout ............................ 8-7 8.3 Verify Other Terms and Conditions Have Been Met .......................................... 8-8 8.4 Settle Any Outstanding Issues ............................................................................. 8-8 8.5 Verify No Outstanding Claims or Disputes ......................................................... 8-8 8.6 Make Final Payment or Collect Overpayment From Contractor ....................... 8-10 8.7 Identify and Recommend Deobligation of Excess Funds .................................. 8-10

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8.8 8.9

Prepare Contract Completion Statement and Dispose of Files .......................... 8-10 Determine Whether to Invoke Rights Under Continuity of Services Clause .... 8-12

Chapter 9: Disputes, Claims, and Terminations Vignette: To Be Forewarned is to be Forearmed .............................................................. 9-1 Course Learning Objectives................................................................................................ 9-4 Introduction to Disputes, Claims, and Terminations .......................................................... 9-5 Disputes and Claims ........................................................................................................... 9-7 9.1 Disputes and Claims ............................................................................................ 9-7 Terminations ..................................................................................................................... 9-28 9.2 Terminations ...................................................................................................... 9-28 9.2.1 Termination for Default ..................................................................................... 9-30 9.2.2 Termination for Convenience ............................................................................ 9-44 Vignette: Convenience, Cause, or What? ........................................................................ 9-49 Chapter 10: Consent to Subcontracts Vignette: Theres More to It Than Meets the Eye ........................................................... 10-1 Course Learning Objectives.............................................................................................. 10-4 Introduction to Consent to Subcontracts ........................................................................... 10-5 Steps in Consenting to Subcontracts ................................................................................. 10-7 To Consent or Not to Consent .......................................................................................... 10-8 10.1 Determine Consent Requirements ..................................................................... 10-8 Vignette: Some Folks Just Dont Get It ........................................................................... 10-9 10.2 Identify Subcontracts Requiring Consent ........................................................ 10-10 10.3 Obtain and Review Advance Notifications ..................................................... 10-12 10.4 Determine If FAR Prohibits Consent............................................................... 10-16 10.5 Determine to Withhold Consent for Other Reasons or Establish Conditions for Consent ....................................................................................................... 10-19 10.6 Negotiate Subcontracting Changes or Corrections .......................................... 10-23 10.7 Document the Decision .................................................................................... 10-24 10.8 Monitor to Ensure Subcontracts Are Awarded Properly ................................. 10-25 Chapter 11: Limitation of Costs Vignette: Cost Plus Whatever A Different World ....................................................... 11-1 Course Learning Objectives.............................................................................................. 11-3 Introduction to Limitation of Costs .................................................................................. 11-4 Steps in Limitation of Costs.............................................................................................. 11-6 Limitation of Costs ........................................................................................................... 11-7 11.1 Determine If Contractor Nearing Estimated Cost or Limit of Funds ................ 11-7 11.2 Meet With Government Contract Administration Team ................................... 11-9 11.3 Resolve the Problem .......................................................................................... 11-9

Vignette: When Emotions Run High .............................................................................. 11-11 11.4 Deobligate Excess Funds ................................................................................. 11-12 Chapter 12: Assignment of Claims Vignette: The Assignment of What? ............................................................................ 12-1 Course Learning Objectives.............................................................................................. 12-3 Introduction to Assignment of Claims .............................................................................. 12-4 Steps in Assigning Payments ............................................................................................ 12-7 Assignment of Claims ....................................................................................................... 12-8 12.1 Determine Contract Permits Assignment........................................................... 12-8 12.2 Determine Proper Request ................................................................................. 12-8 12.3 Determine Assignment Exists .......................................................................... 12-11 12.4 Execute and Return Assignment ...................................................................... 12-12 12.5 Approve Release of Assignment ...................................................................... 12-12 Chapter 13: Property Administration Vignette: There Comes a Time for Action ....................................................................... 13-1 Course Learning Objectives.............................................................................................. 13-3 Introduction to Property Administration........................................................................... 13-4 Steps in Property Administration ...................................................................................... 13-6 Property Administration ................................................................................................... 13-7 13.1 Establish Reporting Requirements..................................................................... 13-7 13.2 Monitor Delivery of Government Property ....................................................... 13-7 13.3 Monitor Contractor Property Control System ................................................... 13-8 13.4 Determine to Decrease or Provide Substitute GFP .......................................... 13-17 13.5 Evaluate and Document Evidence of Loss, Damage, or Destruction .............. 13-18 13.6 Identify Contractor Liability ............................................................................ 13-18 Vignette: Whos to Blame and What to Do?.................................................................. 13-19 13.7 Prepare Conclusions on Extent and Value of Loss or Damage ....................... 13-20 13.8 Issue Demand for Payment, When Appropriate .............................................. 13-20 13.9 Recover or Dispose of Government Property .................................................. 13-20

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ERICS FIRST DAY It is Eric Schmidts first day on the job, and he is understandably nervous. His boss, Joanne Davidson, is the agencys top contracting officer. While considered extremely able, she has a reputation for being tough. Eric had been introduced to the staff at its morning meeting, and he has settled into his new office. Indeed, he is ready to receive his first assignment from Joanne. Two years ago, the agency replaced some 30 small supply depots with three totally automated warehouse facilities. Each facility has 20 bays, and each bay is 10 bins high. The material dispensed at each facility is stored on pallets in individual bins. The operation of the bins is efficient, and the overall warehousing system operates well. There is, however, a nagging problem associated with the material used for pallet fabrication. The material is called out in an agencyspecific specification, and the result of its use has been troublesome because the material does not provide sufficient flexibility to withstand the flexing caused by the continual movement of pallets in and out of each facility. This movement is necessary, of course, to accommodate the ongoing flow of material within the warehousing system. Both the manufacturer of the automated system and the agencys laboratory have been working to find a solution to what has developed into an expensive problem of pallet replacement. Whatever the solution, it has to be cost effective. Until one is found, a continuing supply of pallets will be needed at the three warehouse facilities. After consulting with both the warehousing system manufacturer and agency laboratory personnel, Joanne felt that the procurement of pallets requiring fabrication under a specified material will not get the job done. She concluded it is both a waste of time and money. For instance, market research had surfaced a considerable number of pallet manufacturers, and the examination of supplier literature had proved to be a real eyeopener about what might be available in terms of currently manufactured pallets. Customary commercial practices for buyer-seller agreements were evident, and the regular use of implied warranties of merchantability or fitness for a particular purpose were found virtually everywhere. In considering alternatives with her technical and contracting colleagues, all agreed that using a performance specification and acquiring the pallets as commercial items would ensure some predictable benefits. As a result of effective planning with the agencys acquisition team, Joanne had solicited the marketplace using the procedures of FAR Part 12 (Acquisition of Commercial Items) complemented by the use of FAR Part 15 (Contracting by Negotiation) to accommodate what might be needed to clarify the agencys performance specification for the procurement of pallets. The decision was made to solicit widely, and the procurement was labeled as unrestrictive. An appropriate notice was publicized in the Commerce Business Daily (CBD), competitive offers were received, and a contract was awarded within 45 days of the procurements announcement.

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As Joanne explained to Eric, Your first job is to develop a contract administration plan for the pallet contract we awarded yesterday to Platform Industries. I realize you know nothing about the requirement or the company. However, you may be best qualified to give me a fresh look at a program covered by a performance specification and procured under FAR Parts 12 and 15. Its kind of a new experience for all of us, Eric. Read the contract file carefully and develop your plan based on the information you find. The first thing youll notice is that the contract file is diminished in size from those we generally handle for deals like this. Well meet tomorrow morning with someone involved in the program and work to finalize your plan. Any questions at this point? added the contracting officer. Eric responded cautiously. No, but Im sure that will change once Ive gotten into the contract file, Joanne. As she checked her watch and began to leave, Joanne emphasized to her new contract administrator the importance of the procurements success in light of the longstanding pallet pliability problem. Half smiling, she rubbed her hands together, backed out of the office, and left by saying, Im counting on you Eric, and I know youll come through for us. See you tomorrow morning.

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Develop a contract administration plan consistent with the complexity of the acquisition and instruct personnel on their respective roles and responsibilities during the performance period.

Individual: 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Review a contract file to identify critical contract clauses and requirements. Assign a criticality designator to the contract. From an acquisitions history, identify previous issues and problems with an existing contractor or contracts for similar requirements. Meet with a contracts acquisition team to discuss performance monitoring and surveillance. Determine the extent of any required performance monitoring and surveillance. Determine those contract administration functions, if any, that will be delegated and to whom. Develop a contract administration plan. Provide notices containing information and instructions to technical representatives and other support personnel concerning their roles, responsibilities, and limitations of authority. Provide formal notices to contractors concerning the names, roles, responsibilities, and limitations of authority of government contract administration personnel.

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INTRODUCTION TO CONTRACT ADMINISTRATION PLANNING


Contract Administration Planning Contract administration planning involves activity in setting up systems and procedures to ensure compliance with a contracts terms and conditions during performance. The administration of any contract should be considered during an acquisitions planning phase. Finalizing the plan for this administration is done once a contract has been awarded. Effective contract administration resides in tailoring its requirements to an acquisitions complexity, as well as recognizing the need for flexibility. No one plan or planning device represents a panacea for contract administration. For the acquisition of commercial items or services, the need for administration should be minimal. For the acquisition of complex systems, the need for administration will require a considerable effort by the Government and a contractor. A Common Failure and Problems Failure to read and understand a contract frequently causes contract administration problems. Remember: A contract is a written, mutually binding legal relationship between or among competent parties to do or not to do something not otherwise prohibited by law, and its terms and conditions are enforceable under law. When contract administration monitoring or surveillance systems are planned, they must be designed to ensure that the Government and a contractor live up to their promises and fulfill agreed-to responsibilities. Objective of Contract Administration Planning The principal objective of contract administration planning is twofold: to set up a system that reinforces the performance of both parties responsibilities; and to provide means for the early recognition of performance problems either before or when they occur. The result of contract administration planning is reflected in a contract administration plan. For acquiring commercial items, this plan should be simple and straightforward. Large and complex acquisitions will require more detailed plans and may call for the support of various capabilities (e.g., quality assurance, technical monitoring, and others).

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Steps in Performance

The steps in planning for contract administration are charted on the next page. Following the flowchart, each step is discussed in detail.

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STEPS IN CONTRACT ADMINISTRATION PLANNING


Input: Prospective contract.

1. Review the contract file.

2-5. Determine the extent of performance monitoring.

6. Determine which contract administration functions will be delegated and to whom.

7. Develop a contract administration plan.

8. Provide notice and instructions to representatives of the Contracting Officer (e.g., CORs/COTRs).

9. Notify contractors of names, roles, responsibilities, and limitations of authority for Government representatives.

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1.1 Review the Contract File A thorough review of the contract file will turn up any clauses that are critical to performance and any other requirements that may influence or have an impact on contract administration planning decisions. Exhibit 1-1 lists areas of prime importance. Remember: Effective contract administration planning tailors itself to reflect the need for performance monitoring and reporting. Overzealous administrative requirements may result in an unnecessary expenditure of

Tailor to Meet the Need

Contract File Areas to Study in Detail


FAR Subpart 42.2 FAR 42.1105 FAR Subpart 4.4 FAR Subpart 42.11 FAR 42.204 The assignment of contract administration functions. Criticality designator. Security requirements. Production surveillance requirements and reporting. Supporting contract administration requirements. When applicable, special contract requirements, including: Specifications, Data requirements, First article testing, Government property, Inspection and acceptance, Special Section H clauses, Contractors proposal, and Delivery schedule (or performance period).

time and money.

Exhibit 1-1

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Contract File Checklist

Exhibit 1-2 provides an example of a contract file checklist that simplifies the review of any contract file. Write in the comment column references to items that have particular or unusual importance to contract administration planning. For example, you might note a paragraph number in a preaward survey that casts doubt on the contractors plant capacity, and this may warrant an increased level of monitoring during contract administration.

Review Preaward Data

Always review preaward file documentation, especially when another person awarded the contract. For instance, if you had not attended a prebid or preproposal meeting, you might find some information in the minutes of that meeting that addresses an interpretation of a special contract clause. You might have interpreted this clause differently. After completing a review of the contract file, you should have identified all critical areas bearing on performance and monitoring. With this knowl-edge you can determine:
How critical the requirement is to the Government, and How much time and effort are needed to ensure success through

Identify Critical Areas

contract administration.

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Contract File Checklist


FAR 4.803 Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Purchase request, acquisition planning information, and other presolicitation documents. Justifications and approvals, determinations and findings, and associated documents. Evidence of the availability of funds. A copy of the solicitation and any synopsis published in the Commerce Business Daily. Security requirements and evidence of required clearances. Contractors certifications and representations. Preaward survey reports or other references. Contracting officers determination of contractor responsibility. Statement of facts justifying the waiver of SBA requests to suspend award action per FAR 19.505(f). Packaging and transportation data. Cost or price analysis. Audit reports or reasons for their waiver. Record of negotiation. Authority for deviations from regulatory, statutory, and other restrictive requirements. Notice of award. The original of the signed contract, all contract modifications, and supporting documents. Bid, performance, payment, or other bond documents, or references to them, and notices to sureties. Exhibit 1-2 Yes No Comment

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PALLET PROCUREMENT CONTRACT ADMINISTRATION PLANNING In examining the contract file for pallets, Eric read the entire file and was taken by its overall simplicity. As required, the Standard Form (SF) 1449 (Solicitation/Contract/ Order for Commercial Items) had been used. He noted that the contracting arrangement called for an indefinite-delivery indefinite-quantity contract (ID/IQ) over a two-year period with an option for one additional year. A minimum and maximum quantity of pallets was specified for both the base and option periods. A firm-fixed price per pallet based on the size of any single delivery order had been negotiated. Such pricing represented customary commercial practice, and since the pallets were definably commercial there was no requirement for the submission of cost or pricing data. Invoicing was to occur after each delivery, and payment would be made for conforming pallets. Eric did take special note of the procurements use of the clause at FAR 52.212-4 (Contract Terms and Conditions Commercial Items). There had been agreement to all these terms and conditions with the exception of one, namely, the standard warranty of merchantability had been altered to substitute for it a warranty of fitness for a particular purpose. He reasoned that this had been done to reflect the need for the contractors compliance with the performance specification and to protect the Governments interest at the time of inspection and acceptance. This had been covered by an appropriate addendum to the SF 1449. The file also provided positive past performance information on Platform Industries. 1.2 Determine Criticality FAR 42.1104 FAR 42.1105 Requirement for Use of Designators The contracting officer is required to assign a designator based on the criticality of the requirement for all supplies and services contracts (except facilities, construction, or Federal Supply Schedule contracts). Criticality refers to the degree of overall importance that a contract has to the Government. The criticality designator will be shown on the contract when this decision is made prior to the issuance of the solicitation. In a busy contract administration office, you may be called on to recommend a criticality designator. Your recommended choice will be either A, B, or C. The criterion for each of these designators is shown in Exhibit 1-3. The Government does not have sufficient resources to evaluate a contractors every action for each contract it awards. Prioritizing each contract based on its criticality to the Government is one indicator that helps in the proper allocation of contract administration resources.

Choice of Designators

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The criticality designators indicate where to concentrate surveillance efforts. These designators become particularly important when contract administration resources are spread thin.

Selection of Criticality Designator


Criticality Designator A B

Criterion Critical contracts, including DX-rated contracts, contracts containing an unusual or compelling urgency, and contracts for major systems. Contracts (other than those designated A) for items needed to maintain a Government or contractor production or repair line, to preclude out-ofstock conditions, or to meet user needs for nonstock items.

All contracts other than those designated A or B. Exhibit 1-3

Assigning Designators DFARS 242.1105

DoD assigns criticality designators based on the priority of the requirement, with Designator C used for unilateral purchase orders.

WHICH DESIGNATOR FOR THE PALLET PROCUREMENT? Eric noticed that Joanne had not yet assigned a criticality designator to the contract he was reviewing. He made a note to recommend a B designator. The pallets are necessary to maintain the Governments warehouse facilities.

DX and DO Ratings

Although the criticality designator a contracting officer may assign has significance within your office, be aware that a certain class of criticality designated A contracts, those designated DX prior to award, also has a potential impact for work in process within the contractors plant. Persons who have special authorization under the Defense Production Act can apply either a DX or a DO rating to a contract that supports the national defense. The rating is assigned prior to issuance of the solicitation and will appear on the contract. 1-11

FAR Subpart 11.6

CONTRACT ADMINISTRATION PLANNING

Defense Priorities and Allocations DoDI 4400.1 DFARS 211.602 Priority of Ratings

The DoD implementation of priorities and allocations are in DoDI 4400.1, Priorities and AllocationsDelegation of DO and DX Priorities and Allocations Authorities, Rescheduling of Deliveries and Continuance of Related Manuals. DX rated contracts have first priority in the pecking order within a contractors plant in the event of material shortages, strikes, or similar problems that impact the normal processing of production orders within the plant. This pecking order includes any commercial work in process as well as other Government contract requirements within the plant that are not rated DX. The other rating is DO. When a contractor is behind in its production scheduling, it is legally bound to give second priority to DO rated Government contracts after all DX rated orders.

Legal Significance

Realize that a contractor is legally bound to expedite DX and DO rated Government contracts. Even if you do deal with any contracts that support the national defense, be aware that contractors may not be able to expedite delivery for your order if they have received rated orders from other agencies. DX or DO rated orders have preference over an unrated order.

1.3 Identify Previous Issues and Problems

Consideration must be given to the amount of time and effort that will be necessary to ensure successful performance. This depends on such factors as:
Type of contract. (What type of contract is this? If there was a

previous procurement, did the type of contract change?)


Past experiences with this type of requirement. (Has this re-

quirement ever been purchased before? What are current problems associated with this product or service?)
Past experience with the contractor. (Did this contractor pre-

viously deliver on time? Did the contractor perform as expected?)


Type of specification. (What type of specification was used to

describe the requirement: design, function, performance, or a combination of types? Have there been any changes in the specification? Are there any other types of specifications that were used on similar contracts? What monitoring does this type of specification require to ensure compliance?)

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Type of requirement. (Does this type of requirementservice or

supplynecessitate extensive monitoring to ensure compliance?)


Warranty provisions. (Does the contract include any warranty

provisions? Are they the same as offered commercially? Were there problems in the past with reliability beyond the warranty period?)
Urgency of the requirement.

(How soon is this requirement needed and what would happen if delivery was delayed? Were there any previous problems with contractors meeting the delivery terms? Has this contractor established that it can expedite delivery, if needed?)

Consider Information to Review

If applicable, focus your review on:


Patterns of past performance, Previously applied remedies and the contractors reaction to them,

and
Key personnel for the immediate contract that are identified as ei-

ther good or poor performers in past performance data. Identify indicators of a contractors past performance by:

Reviewing files in your office covering the contractors performance history, and Reviewing an existing contract file itself.

Reviewing Past Performance Step 1 FAR 4.801 FAR Subpart 42.15

Reviewing past performance should involve the following two steps. Review the contractors performance history. An important source of information for identifying potential problem areas is a contractors performance file. The data included in this file are considered confidential and not available to non-Government personnel. Such files should include the following information:
Contracts awarded and dollar amounts, Items/services purchased, Key personnel involved with the contract, Delivery/performance results, and

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Contractor-provided past performance information.

This file represents a history of the contractors performance over a period of time on individual contracts, if one exists, plus other information on the contractors past performance from other sources. If your office has had previous experience with the contractor, past problem areas would be documented within this file. These areas will require special attention on a current contract. Generally, when a contractor has demonstrated an inadequacy on a past contract, it will have a tendency toward similar deficiencies in future work. Deficiencies in a contractors performance include:
Missed delivery dates, Labor problems, Shortfalls in technical performance capabilities, Financial difficulties, and Reporting requirements (progress reports, submission of subcon-

tracting reports, etc.). You should find any remedies that were used and the contractors reactions to them documented within this file. Step 2 Review other available indicators of past performance. Normally, records of past performance within your office will be sufficient for planning efforts. If your office has not had any previous experience with the contractor, you may want to look for other indicators of past performance. The contract file itself is the best place to look for other indicators. Past performance or responsibility determination data in the contract file may contain information from:
Other Government offices, and/or A contractors commercial clients.

This information may indicate some problem areas, even though it may not have been of sufficient magnitude to warrant a negative past performance rating or a nonresponsibility determination. Keep information provided by both Government and non-Government per-sonnel strictly confidential. The contractor should never be given

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access to these records, told of their contents, or told of those who provided the information.

JOANNES CONCERN Platform Industries was not new to the Government contracting arena. A check on its provided references, four related to government contracts and five to private-sector work, proved a valuable source of information. The record related a history of performance over the past five years that covered different kinds of work ranging from interior design and construction for a large retail establishment to providing large orders of pallets for two government agencies. One of those agencies noted some problems associated with timely deliveries to multiple locations, but they also related the contractors willingness to replace an order of several hundred pallets, each of which had been cut several inches short of what the Governments specification required. A determination of responsibility found the company financially stable with a good backlog of work. Joanne was pleased to have found a viable firm, but she suspected that its capability to deal with a per-formance specification and varying indefinite quantities of pallets to ensure timely deliveries would require some careful monitoring. 1.4 Meet to Discuss Performance Monitoring Meet with the requiring activity to discuss requirements for contract administration. This discussion should include:
Sharing of any acquisition history concerning the contractor and

the required supplies or services, and


Identifying and ranking the requiring activitys priorities regarding

the contract. Focus on User Priorities Focus your discussion for contract monitoring on the requisitioners priorities. Do not spend too much time on contract requirements that the user is not overly concerned about and, thereby, ignore the users vital concerns. The ultimate goal of any contract, Government or commercial, is to satisfy the needs of the user. So fashion your contract administration plan, as much as possible, to meet user priorities. In sophisticated or complex requirements, the use of meetings with requiring activity personnel is beneficial to ensure that:
The Government is working as a team. Priorities or potential problem areas are understood by all. Contract progress is measured by foresight, not hindsight.

Meeting Objectives

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CONTRACT ADMINISTRATION PLANNING

1.5 Determine the Extent of Performance Monitoring FAR 42.1104 Step 1 FAR 42.1104(a)

A contract is a tool the Government uses to acquire goods and services, and contract administration is an attempt to manage this tool effectively. A vital part of this management is the monitoring of contractor performance. There are two steps involved in determining the extent of monitoring that is necessary, given the criticality designator: Assess factors that indicate the appropriate monitoring level. Many factors are involved in determining how much monitoring is necessary. Some are listed in Exhibit 1-4.

Factors in Determining the Level of Monitoring


Level of the contractors own inspection system. Criticality of the requirement. Contract requirements for reporting progress and performance. Contract performance schedule. Contractors production or performance plan. Contractors history of contract performance. Contractors experience with providing the contracts supplies or services. Contractors financial capability. Contractors risks involved in performance (e.g., type of contract). Exhibit 1-4

Commercial Items and Monitoring FAR 12.208 FAR 46.202-1

When acquiring commercial items, the Government is to rely on the contractors existing quality assurance systems as a substitute for Government inspection and testing before delivery, unless customary market practices for what is being acquired include in-process inspection. If such inspection is customary, the Governments inspection must be consistent with commercial practices. The Government must not rely on inspection by the contractor if the contracting office determines that the Government has a need to test what is

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being acquired before delivery or to pass judgment on the adequacy of the contractors internal work processes. Commercial Items and Protecting the Public Interest FAR 52.212-4 Contractor Inspection FAR 46.202-1 FAR 46.202-2 FAR 46.202-3 Even though customary commercial practices may permit virtually no contract administration in the acquisition of a commercial item, the Government reserves the right to inspect or test the item as tendered for acceptance and to require its repair or replacement (or reperformance if a service) at no increase in contract price. When required, standard Government clauses specify the type of inspection system that the contractor is to maintain for the performance of the contract. For example:
FAR 52.246-1, Contractor Inspection Requirements, which relies

on the contractors own internal inspection procedures and industry standards.


FAR 52.246-2, Inspection SuppliesFixed Price, which requires a

contractor to establish and maintain an inspection system not otherwise defined except that it must be acceptable to the Government. This standard clause can be the only inspection clause in a contract, or it can be the foundation upon which other Government inspection specifications are based. It contains the Governments basic rights of inspection.
FAR 52.246-11, Higher-Level Contract Quality Requirement

(Government Specification), which requires a contractor to comply with a specific Government inspection system or quality control system or quality program. Contractor Reporting Determine what type of inspection system is required by the contract to decide whether you want to rely solely on it for monitoring a contractors performance. Note that the third factor listed in Exhibit 1-4 is reporting data on progress and performance. The Government has no right to require the contractor to submit data for monitoring purposes when the contract does not provide for it. Any required data must be specifically authorized within the schedule, specification, or by a contract clause. Contract Risks FAR 16.103 The risks of performance, the last factor listed in Exhibit 1-4, determine in part your level of monitoring and administrative effort. Because both the Government and the contractor promise to do something or keep from doing something, both are potentially at risk if either, for whatever reason, fails to live up to a contracts terms.

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CONTRACT ADMINISTRATION PLANNING

Government Risk

The Government stands to lose the benefit of a product or service at the price it agreed to pay, if, for example, required performance is physically impossible or if the contractor does not have the capability to complete the work. The contractor may lose money if, for example, its performance costs exceed the price it agreed to, or if it is assessed damages for its failure to perform. It may also lose good standing if it fails to live up to a contracts terms. A contract is basically an instrument that allocates and defines risks between the parties. Its terms and conditions set forth each partys obligations, as well as each partys rights if the other should fail to carry out its obligations. Understand how its terms and conditionsthose that are standard and those that are uniqueaffect the contractors risks. When those risks are identified, you will understand what the contractor might do to cover them, and what might have to be done through monitoring to ensure protection of the Governments interests. For instance, if stiff liquidated damages for late delivery are to be assessed in a production contract and you know progress is lagging in the last month of the contract, a stepped up level of inspection is probably warranted to ensure that the contractor will not cut corners on quality procedures to make the delivery.

Contractor Risk

Recognize and Allocate Risks

Step 2

Select the most appropriate monitoring method(s). The appropriate type of monitoring effort depends on the complexity and scope of the contract, as well as the contracts specific requirements for the submission of progress reports, schedules, and other reports. Numerous techniques and procedures for determining whether satisfactory delivery or contract completion will take place include:
Reliance on the contractors inspection system, 100 percent inspection, Sample inspection, Inspection by exception, Monitoring production or delivery schedules, and Monitoring schedules devised by Government personnel to meas-

Ways to Monitor Performance

ure contract performance.

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Predelivery Telephone Surveillance DFARS 242.1104(a)

DoD minimum rules on surveillance means that predelivery telephone surveillance is used, with on-site surveillance as required for:
Designator A contracts, Contracting officer directed on-site surveillance, and Contracts where your telephone check indicates a problem, unless

the contract administrative officer and the contracting officer decide that an on-site check is not required. Key Factors for Monitoring Make your choice for a monitoring method based on two key considerations:
How much you can rely on the contractors own system, and How much you can assume contract problems will receive neces-

sary management attention. Monitoring Related to the Requirement Progress on production work is generally easier to measure than progress on a research and development contract. For production work, an inspector can visit the plant to see if the widgets are, in fact, coming off the assembly line as scheduled and examine one or more for contract compliance. In the developmental phase of a research and development acquisition, many of the unknowns inherent in the research phase are gone. Although the work is not yet repetitive and detailed specifications are still lacking, the experience gained on earlier contracts, if such existed, provides some standard for comparison. Nevertheless, the work still depends on the contractors ability to cope with obstacles not encountered before. Monitoring is necessary. Interim Monitoring of Commercial Items and Services FAR 42.1104(c) Generally, interim monitoring of standard commercial and commerciallike items and services is not administratively cost-effective. You need only monitor timely delivery or performance and inspect the delivered items or work performed. Maximum use of and reliance on the contractors inspection system, production control, or data management system for these types of items or services is the standard. Select a method that is most likely to surface the following:
Actual or potential default situations. Act promptly and careful-

Goals of Monitoring

ly to initiate immediate improvements while preserving the Governments right to future remedies available under the contract.

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CONTRACT ADMINISTRATION PLANNING

The need for Government action. Although Government action

may supplement but not supplant the contractors own efforts to solve performance problems, you need to be aware early if Government action will be required. 1.6 Delegate Contract Administration Functions Having determined how the contract will be monitored, the next question is who will be responsible for its administration. This effort may be performed by the contracting officer, the contract administrator, or other appointed Government representatives. Some are authorized to perform contractual actions, others are limited to technical direction and clarification. The contracting officer (CO) is the official authorized to enter into, administer, and terminate contracts, and make related determinations and findings. A single contracting officer may be responsible for delegating duties to specialized contracting officers, that is:

Contracting Officers FAR 2.101

Administrative Contracting Officer (ACO): The official authorized to perform any postaward contractual action assigned by the CO. Some agencies have set up separate offices called a Contract Administrative Office (CAO) to handle postaward functions as prescribed by that agency. An ACO would be assigned to the CAO. perform postaward actions limited to the termination of contracts.

Termination Contracting Officer (TCO): The official authorized to

Your office may refer to the contracting officer as the Procuring (or Principal) Contracting Officer (PCO). For purposes of clarity, all text references to a contracting officer refer to the PCO, that is, the contracting officer responsible for all duties, regardless of whether those duties have been delegated to other contracting officers. Contract Administration Decision The contracting officer determines how contract administration will be handled. The contracting officer must determine whether or not to:
Retain the contract and perform all applicable contract administra-

tion functions,
Retain the contract and perform administrative functions with the

assistance of other Government personnel,


Assign the contract to a contract administration office (CAO), or

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Assign the contract to a CAO with specific limitations and/or spe-

cific additions. CO Retention of Contract Administration FAR 42.203 The contracting officer retains a contract and is responsible for the performance of all administrative functions unless such performance:
Must be performed at or near the contractors facility, or Is required of other organizations by agency-specific regulations

and may be based on such issues as:

Dollar thresholds. (Some agencys CAOs may not have to accept contracts below an established amount.) Type of requirement. (CAOs may not accept contracts covering off-the-shelf commercially available products.) Organization. (Agencies may require administration by CAOs available to an agency.)

Substantial assistance for the support of contract administration beyond an organizations normal contract administration functions has to be reviewed for its validity above the COs level. When DoD COs May Retain Administration DFARS 242.203(a)(i) The overall rule is that DoD activities are prohibited from retaining contract administration functions that require the performance of those functions at or near contractor facilities. Consequently, CAOs perform the contract administration of many DoD contracts. However, there are circumstances when DoD will not relinquish contract administration to a CAO. Those circumstances involve contracts for:
The National Security Agency, Research and development performed at universities, Flight training, Consultant services, Base, post, camp, and station purchases, Operation, maintenance, or installation of radar or communication

equipment at network sites,


Architect-engineer services, Airlift and sealift services,

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CONTRACT ADMINISTRATION PLANNING

Ballistic missile sites (although CAOs can perform supporting ad-

ministration at missile activation sites) and


Operation and maintenance, or installation of equipment, at mili-

tary test ranges, facilities, and installations. CAO Responsibilities FAR 42.202(e)
Perform 69 baseline functions to the extent they apply, Serve as the focal point for inquiries, Advise the contracting office of all pertinent matters, Request supporting contract administration when required, and Reassign contract administration, if required.

When a contracting officer assigns a contract to a contract administration office, the CAO is responsible to:

Typical Functions FAR 42.302(a)

The 69 functions listed in the FAR represent the baseline functions of a contract administration office. Some typical functions are:
Conduct postaward orientation conferences; Perform production support, surveillance, and status reporting; Ensure timely submission of required reports; Consent to the placement of subcontracts; Issue administrative changes; and Determine whether disclosure statements are in compliance with

Cost Accounting Standards (CAS).

Administration Outside the U.S. FAR 42.301 DFARS 242.301

Overseas contract administration should be accomplished under FAR 42.301, unless the overseas need is not specifically addressed in the FAR. In this case, you should coordinate contract administration requirements with the U.S. country team or the commander of the unified or specified command for policy and procedure guidance.

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Additional DoD CAO Functions FAR 42.302(a) DFARS 242.302(a)

DoD authorizes CAOs to:


Review and evaluate contractor estimating systems, Monitor contractor costs, Perform and negotiate schedules on industrial readiness and mobi-

lization production planning field surveys, and


Issue, negotiate, and execute orders under BOAs for overhaul,

maintenance, and repair. Withholding Functions The contracting officer may withhold any of the FAR-specified functions when:
The CO determines the contracting office can better handle the

performance of the function(s), or


Required by agency regulations or interagency cross-servicing

agreements. Any decision to withhold administrative functions should be made after consulting with the CAO. Additional Functions FAR 42.302(b) Beyond the 69 baseline functions, the contracting officer may also assign additional functions, including their administration, such as the following:
Supplemental agreements incorporating contractor proposals sub-

mitted under a clause addressing contract changes,


Prices and priced exhibits for unpriced orders under basic ordering

agreements (BOAs),
Supplemental agreements changing contract delivery schedules, Supplemental agreements providing for the deobligation of un-

spent dollar balances considered excess to known contract requirements,


Changes to interim billing prices, Adjustments to contract prices resulting from the exercise of an

economic price adjustment clause,


Changes under contracts for ship construction, conversion, or re-

pair, and

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CONTRACT ADMINISTRATION PLANNING

Reduced quantities on firm-fixed-price contracts based on incon-

sequential delivery shortages. Unless specifically assigned, these functions cannot be performed by the CAO. Tailor the Assignment of Functions Keep in mind that these functions comprise a potential menu that can be assigned to a CAO. Rarely would any contracting officer be required to actually perform all of them. In fact, some of the functions may not even be applicable to the contract involved, such as monitoring industrial labor relations matters on a contract for commercial products or maintaining surveillance of flight operations on a contract that does not involve aircraft. There are also functions that are dependent, to some extent, on events that occur during contract performance. For example, your office may have the responsibility of negotiating supplemental agreements changing contract delivery schedules. However, if no change in contract delivery schedules is required during contract performance, then this function will not be performed. Additional Support The CAO also has the authority to request supporting contract administration from another CAO for any function that has been assigned by the contracting officer. The CAO can even reassign the contract when another office is in a better position to perform administrative functions. The contracting officer may recall a contract or function previously assigned for administration when:
Warranted by a change in circumstances, and The recall has been approved by a higher level.

Terminating Support

Other Government Personnel

In addition to specialized contracting officers, delegations of contract administration functions can be made to other Government personnel, resulting in the formation of a contract administration team. The contracting officer always heads up the contract administration team. The definition of contracting officer contained at FAR 2.101 ...includes certain authorized representatives of the contracting officer acting within the limits of their authority as delegated by the contracting officer. FAR is silent on designating these authorized representatives as contracting officers representatives (CORs), contracting officers technical representatives (COTRs), or whatever the case may be.

Team Concept

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It is also silent on how technical and nontechnical representatives are to be addressed, as well as when or how they should be officially designated. The result is that these issues are covered by individual agency supplements to the FAR, but they are not considered in light of a uniform standard. They generally reflect organizational practicality. Contracting Officers Technical Representative (COTR) Contracting Officers Representative (COR) In practice, the only contracting officers representative that is always officially designated is the contracting officers technical representative (COTR). Some agencies use the term contracting officers representative (COR) instead of COTR. Most agencies use one term or the other to identify that individual who is specifically given the chief role in monitoring aspects of the contract that relate to the statement of work or specification. However, a few agencies reserve the COTR designator for these representatives, while using the COR label for individuals who have other contract administration duties. This course uses the designators COR and COTR interchangeably to parallel the practice within the majority of Government agencies. CORs/ COTRs generally perform their contract administration duties as secondary responsibilities to their primary job which is in a functional area not related to contract administration. Follow your own agencys practice. The most common places for listing this practice is in your agencys supplement to FAR Subpart 1.6 or 42.2. DoD Definition of the Contracting Officers Representative DFARS 202.101 Team Members The contracting officers representative (COR), as defined by DoD, is an individual that the contracting officer has designated and authorized in writing to perform specific technical or administrative functions.

Although they may not be specifically designated, other Government officials available to perform various contract administration tasks include:
Contract administrators and contract specialists, Engineers and scientists, Project inspectors, Quality assurance specialists, Property control administrators, Legal counsel, and Auditors.

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CONTRACT ADMINISTRATION PLANNING

Various key players of a contract administration team are depicted in Exhibit 1-5.

Contract Administration Team


Contracting Officer ACO TCO Inspector - Project Inspector - Quality Assurance Specialist Other Personnel - Paying Official - Legal Counsel - Auditors Contracting Officers Representative - Technical Representative - Project Manager - Task Manager - Engineer - Scientist

Exhibit 1-5

Team Roles

The roles and authorities of these team players depend on the size of the Government organization and the size of the contract. For instance, an engineer may be the representative for the requiring activity for a contract for testing services, one who may not only have written the technical specifications but also may perform COR/COTR functions, project inspector functions, and property control administrator functions. The delegation of contract administration responsibilities to key team members should be made in writing (e.g., letter of delegation to a COR/ COTR). While signed by the contracting officer, the designee should countersign the letter of delegation and a copy of the completed letter should be placed in the contract file. One should be provided to the designee, and one forwarded to the contractor requesting its written acknowledgment and placement in its contract file. Typical responsibilities of key contract administration personnel are generally as follows: Contracting officer responsibilities. The contracting officer is principally responsible for the existing business relationship between the Government and a contractor, including the following:
Interpreting and implementing contractual terms and conditions,

Notifications of Team Roles and Responsibilities

Team Member Responsibilities

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CHAPTER 1

Analyzing costs, Providing for the auditing of the contractors books and records, Issuing changes and negotiating modifications to the contract, and Organizing and coordinating the efforts of all the functional spe-

cialists who comprise the contract administration team. Being an effective contracting officer involves more than the application of expertise to specific problems. A successful contracting officer must also demonstrate leadership qualities to ensure that the Governments representatives work well together as a team and do not exceed their delegated authorities. Responsibilities of a COR/COTR. A COR/COTR is usually an official with expertise in the area of the contracted effort who possesses the necessary background to monitor technical aspects of contract performance. Typical primary responsibilities of a COR/COTR include:
Monitoring performance, Evaluating work as it progresses, Exercising appropriate technical direction within the scope of the

contract, and
Inspecting and accepting completed work for the Government.

Exhibit 1-6 provides more specific COR/COTR duties related to individual contract performance that may be assigned. Project inspector responsibilities. Project inspectors can report to either a contract administrator, contracting officer, or COR/COTR, depending on the contract administration plan for each project, or on how an agency has set up these reporting procedures among its organizations. In any event, their responsibilities are usually restricted to monitoring and inspection duties such as:
Reviewing the contractors progress reports; Inspecting all work performed by the contractor for contract com-

pliance;
Advising the contracting officer or COR/COTR of any unusual

problemssuch as schedule slippages, requests for changes, or nonconformance with technical specifications or quality control

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CONTRACT ADMINISTRATION PLANNING

requirements that actually or potentially affect contract compliance;


Performing on-site checks to ensure that the contractor and any

subcontractors are complying with labor standards and practices;


Maintaining a list of subcontractors on the project; and If required, submitting periodic or daily reports to the contracting

officer or COR/COTR. Roles of other government personnel. Depending on the complexity of the contract, other people may also become involved in contract administration. They include:
Program or requiring activity personnel, Administrative support personnel, Legal counsel, Cost and price analysts, and Auditors.

These individuals provide input as requested by the contracting officer.

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COR/COTR Delegations
Administration: Act as the Government technical representative for contract administration. Supervise all technical and clerical personnel assigned to assist the COR/COTR. Assist the contracting officer in conducting a postaward orientation conference. Represent the Government in conferences with the contractor and prepare memorandums of pertinent facts for the record. Confer with representatives of the requiring office and other user groups on performance matters. Maintain a file system. Prepare a project diary. Keep a current set of drawings and specifications by noting all changes or deviations. Labor: Ensure that equal opportunity in employment posters are prominently displayed at the job site. Report violations of labor standards provisions to the contracting officer. Monitor time and record keeping. Inspection and Acceptance: Inspect all work for full compliance with contract requirements. Promptly reject all work that does not comply with contract requirements and immediately notify the CO. Advise the contracting officer if the contractor fails to remove, correct, or replace rejected work promptly. Provide appropriate technical direction, advising the contractor of its formal appeal rights when there is disagreement. Prepare and maintain a running list of items that remain at variance with contract requirements, apprising both the contractor and the contracting officer of corrective action or the need for it. Maintain a master copy of the official list of defects and omissions. Ensure that all defects and omissions are corrected or completed. Changes: Administer contract modifications previously authorized and issued by the CO. Ensure that the contractor provides formal proposals for contemplated changes. Exhibit 1-6 (continued on next page)

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CONTRACT ADMINISTRATION PLANNING

COR/COTR Delegations
Payments: Review and verify the contractors invoices or vouchers, determining the Governments agreement or nonagreement with the contractors percentage of physical completion for progress reports or costs incurred. Schedule: Review and forward to the contracting officer the contractors schedule or project management chart with a recommendation for acceptance or rejection. Require the contractor to submit, if specified in the contract, a progress chart showing the actual progress at the end of each accounting or payment period. Advise the contracting officer of any delay factors (strikes, weather, etc.) and record their impact. Submissions: Determine (from the contract) and list the number and types of submittals required from the contractor. Monitor the contractors submission of required samples, shop drawings, reports, etc. for timeliness. Monitor the Governments timely and complete response to the contractors submission of samples, shop drawings, reports, etc. Maintain a record of submittals on a current basis. Approve or reject submittals as provided in contract documents. Safety: Enforce all safety and health requirements. Exhibit 1-6 (continued)

Prohibited Delegations

While other Government personnel can be assigned many surveillance and acceptance duties, there are some functions that are prohibited from delegation to them. Some of these actions, reserved for a contracting officer, are shown in Exhibit 1-7.

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Actions Not to be Delegated


Award, agree to, or execute a contract or contract modification. Authorize work outside the scope of the contract. Obligate, in any way, the payment of money by the Government. Give direction to the contractor except as provided in the contract. Make a final decision on any matter that would be subject to appeal under the Disputes clause of the contract. Resolve any dispute concerning a question of law or fact arising under the contract. Redelegate any assigned duties unless specifically authorized to do so. Cause the contractor to incur costs not specifically covered by the contract with the expectation that such costs will be reimbursed by the Government. Terminate for any cause the contractors right to proceed. Exhibit 1-7 1.7 The Contract Administration Plan Although the FAR does not require the preparation of a formal contract administration plan, the CO is responsible for ensuring that the parties have complied with all terms and conditions of the contract. At a minimum, contracting officers track the receipt of deliverables (or the performance of services), acceptance, and payment under the contract. A formal contract administration plan is essential when the contract involves large dollar amounts or complex technical requirements. Such contracts typically place many duties and responsibilities on both parties. Such a plan should be implemented immediately after award. The plan should provide for:
An appropriate level of surveillance or monitoring of contractor

Formal Plan

performance, and
Timely and proper performance of the Governments responsibili-

ties.

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CONTRACT ADMINISTRATION PLANNING

Advance Planning and Key Elements

All members of the Governments team should keep in mind the problems of contract administration and make key contract administration decisions even before a solicitation is issued. Some implementation of these key decisions may be necessary in the solicitation. Any decision to monitor through a contractor reporting procedure would need an implementing procedure in the contract itself. Key elements of a contract administration plan are identified in Exhibit 1-8. Although finalized at contract award, the contract administration plan needs to be a flexible, working document to fulfill its purpose in providing:
A baseline for project management and scheduling, A simple way of tracking the extent of contract completion, and An aid for any postaward orientation conference.

Need for Flexibility and Possible Alteration

As the contract progresses, it may be necessary to shift responsibilities or add tasks that could not have been anticipated at the time of award. Over the life of the contract, therefore, a contract administration plan may require periodic updating. Need for Simplicity Determine what actions are essential to effective and efficient contract administration. Overreaching to create needless and costly contract administration requirements serves neither the Governments nor the contractors best interests. Tailor your contract administration plan to reflect the acquisitions requirement. Dont provide for administering a system acquisition when the need is for far less complex items or services.

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Key Elements of a Contract Administration Plan


A listing of contractual terms and conditions related to administration. Contract milestones. Contractor reporting procedures. Quality assurance guidelines (from requiring activity). Inspection and acceptance process (from requiring activity). Names, roles, authorities, and limitations of authority for contract administration team members. Milestones for reports from contract administration team members. Exhibit 1-8 Planning Steps Devising a workable contract administration plan requires adherence to the following six steps. Identify contract terms and conditions related to administration. You must identify and outline all major tasks that arise from the terms and conditions of the contract. You can enhance this process by dividing it into four parts.
Part 1Contract administration preliminaries (e.g., delegations of

Step 1

responsibility, postaward orientation conference).


Part 2Contract performance (e.g., monitoring payment provi-

sions).
Part 3Inspection and acceptance (e.g., where and conditions for). Part 4Post-contract activity (e.g., duties under warranty or patent

provisions, transmittal of final technical data, audit, contract closeout activities). Be sure to list only major tasks. If you decide to hold a postaward orientation conference, for instance, you would want to list it as a major task, but would not list as a major task the subtask of preparing an official record of the orientation. Design checklist formats comprised of key tasks within these four phases, if they fit. Remember to tailor your checklist formats.

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CONTRACT ADMINISTRATION PLANNING

Your goal is to identify what must be done, when it must take place, who must do it, and, as necessary, how and where it is to be accomplished. Exhibit 1-9 enumerates some common areas you should consider. Note, however, that you may wish to expand the checklistparticularly in the quality assurance areatailoring it to unique contract requirements, as detailed in Step 3. Step 2 Identify contractor reporting procedures. Some agencies use a special form as an attachment in Section J of the contract to identify contract deliverables including reports. Others insist that all contract deliverables, including reports and technical data submissions, be given distinct contract line-items in the contract schedule. If your agency does either or both of these, identification of contractor reports will be much simpler. Otherwise, you must compile your own list. Note procedures and due dates that are pertinent to reports. It will be a part of your contract administration plan to ensure that these are complete, on time, and otherwise comply with contract terms. Step 3 Ensure that the plan provides for an inspection and acceptance process and calls for conformance to quality assurance requirements. The requisitioner will have had some input to the inspection and acceptance process by identifying unique requirements that affect it. These unique requirements will be in the contracts terms and conditions. For example, a unique inspection requirement might be a performance test. This is not covered by most agencys standard inspection and acceptance procedures. So your contract administration plan would include a checklist of required performance test parameters as well as when and where the test would be performed and by whom.

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Common Elements of a Contract Administration Checklist


After you have reviewed your contract and identified major tasks for your checklist, run through this list of common contract administration functions to see if there are others you wish to include. Applies ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ Does not Apply ______ ______ ______ ______ ______ ______ ______ ______ ______ ______ Hold a postaward orientation conference. Furnish Equal Employment Opportunity poster. Ensure contractor submits insurance and bond certifications to the CO. Provide Government-furnished property. Monitor contractor material submittals. Verify subcontracting plan submission. Verify first article submission. Obtain OSHA standards certification. Give first article approval. Obtain quarterly reports of prime contractor subcontracts with small, small disadvantaged, and women-owned small business concerns. Monitor contractor-conducted testing procedures. Monitor Government-conducted testing procedures. Review and approve contractor technical deliverables and reports. Review and approve deliverables required for interim payment. Establish acceptance procedures and conduct acceptance. Obtain instruction/maintenance manuals on newly acquired equipment. Arrange for/participate in contract audit. Notify contractor of decision on exercising options. Obtain warranty. Exhibit 1-9

______ ______ ______ ______ ______ ______ ______ ______ ______

______ ______ ______ ______ ______ ______ ______ ______ ______

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CONTRACT ADMINISTRATION PLANNING

Acceptable Quality Requirements

Examples of some areas that should be addressed are:


The standard in the contract that establishes an acceptable item or

service, such as:

The piece of equipment must run for 100 hours at a specific level of operating efficiency establishes that operating efficiency as the standard. Food on cafeteria lines set up no more than 30 minutes before opening establishes 30 minutes as a performance standard. The contractor must respond to on-call repair service within 6 hours from receipt of a telephone call from an authorized Government representative establishes six hours as a performance standard.

Allowable variations from the standard authorized by the specifi-

cation or other contract terms, such as:

Establish calibration requirements that contain a range within which calibration is acceptable. Many service contracts, which recognize human error as a fact of life for some kinds of service, state an acceptable quality level of, for example, 5 percent, meaning that if a contractor only meets the performance standard 95 percent of the time, it will still provide acceptable service.

A required or otherwise reasonable method to document test re-

sults using, for example:


An outside testing laboratory, or A standard agency form or format.

Deviations that would indicate conditional approval rather than

FAR 52.209-3(b) FAR 52.209-4(b)

rejection, for such things as:

The use of tests on a first article of production that cite easily correctable defects as an unacceptable reason for rejection.

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Step 4 FAR 2.101

Identify contract administration team members and define their roles. The roles and authorities of these team players depend on the size of the Government organization and the size of the contract. In the previous steps you identified all the necessary tasks for administering the contract. Now identify who will have responsibility for those tasks. Make sure that each task is clearly defined and any overlapping of functions will not result in confusion among team members. In addition to specific tasks associated with the contract, you need to identify who has been delegated overall responsibility for normal contract administration functions. Each member of the team should receive a copy of the list of participants and their roles and responsibilities. This will help avoid duplication of effort or confusion.

Step 5

Develop key milestones. Assign a time frame for the completion of each task. These tasks include those performed by both Government and contractor personnel from contract award to contract closeout. You need to identify which tasks are crucial to the performance of another task. This is especially true when the tasks are assigned to different team members. Exhibit 1-10 provides a typical format for documenting answers to other questions concerning what, when, and by whom.

Step 6

Document your decisions. You are now ready to present your decisions in a formal plan. There is no set format you must follow in preparing your contract administration plan. At a minimum, you need to cover all issues necessary to ensure that all parties understand their roles and due dates for assigned tasks. Remember: Keep it as simple and precise as possible. A suggested format is shown in Exhibit 1-11.

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CONTRACT ADMINISTRATION PLANNING

A Format for Phase I Milestones


Task Write COR delegation letters. Notify contractor of delegations. Submit quality control plan. Review quality control plan. Hold postaward orientation conference. Provide Government-furnished property. Milestone Date Jan. 15, 1997 Jan. 15, 1997 Jan. 23, 1997 Jan. 31, 1997 Jan. 31, 1997 Feb. 6, 1997 Person Responsible Ida Juan, Contract Administrator Ida Juan, Contract Administrator The ABC Company, Contractor Sherlock Holmes, Inspector Jane Justice, Contracting Officer Harry Altogether, Program Manager

Note: As necessary, additional columns could be added to specify where and how tasks are to be carried out, as well as a column for when the tasks were actually completed. Exhibit 1-10

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Typical Contract Administration Plan Format


Title of the contract, related identifiers, and criticality designator. Identity of the contractor and key contractor personnel. Location of files on the contract and the contractor. Brief description of the work to be performed. Place of performance and/or delivery points. Reporting requirements. The contractors milestones for such critical events as: First article testing and reporting. Performance or delivery. Submission of progress reports. Submission of invoices/vouchers and other data related to payment.

Identity of the COs Representative (COR/COTR). Tasks to be performed by Government personnel and milestones for each task for such functions as: Monitoring the contractors quality assurance program. Furnishing Government property and monitoring its use. Reviewing and responding to contractor reports/requests. Receiving, inspecting, and accepting the work. Certifying costs incurred or physical progress for payment purposes. Monitoring compliance with the small business subcontracting plan.

Tasks delegated to each COR/COTR (including any limits on their authority). Potential problem areas.

Exhibit 1-11

1.8 Provide Notices and Instructions

The following three steps will ensure providing appropriate notices and adequate instructions.

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CONTRACT ADMINISTRATION PLANNING

Step 1

Review qualifications of COR/COTR prior to issuing notices. Make sure any individual proposed as a COR/COTR has the training, qualifications, and experience commensurate with the authority the contracting officer is delegating. Some agencies require that a copy of the COTRs training record be kept in the contract file. If not, recommend that the contracting officer request a qualified substitute, unless immediate training is available to qualify the proposed individual for the COR/COTR appointment. For example, avoid having an organization nominate an administrative coordinator to administer a highly technical service contract. The technical adviser to the administrative coordinator may be a better choice as the COR/COTR. Write designation letters. There is only one Governmentwide notice to individual Government employees that contains instructions and outlines specific responsibilities in relation to a single contract: the COR/COTR designation letter. The essential elements of such a letter are outlined in Exhibit 1-12. Only the contracting officer can sign delegation letters to a COR/COTR, project inspector, or other contract administration team

Step 2

Essential Elements of a Letter of Designation


Address the individual by name and position title. Specify the contract number that applies to the delegation. Specify the authorities being delegated. Specify the tasks being delegated. Emphasize the limitations of the delegation. Specify any record-keeping requirements and the disposition of those records. Specify if the designee may redesignate any authority or task. Include a requirement for certifying that the individual has read and will abide by your agencys procurement integrity or conflict of interest requirements. members.

Exhibit 1-12

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Need for Specific Instructions

When the designee is to act for the contracting officer on more than one contract, write a separate designation for each contract. Do this because limitations, authorities, and tasks will vary depending on differing contractual terms and conditions. When instructions and responsibilities addressed to individuals in the contract administration process are contained in regulations, office procedures, and job descriptions of contract administration team players, you may not need to prepare any designation letters. COR/COTRs are from a wide variety of organizations whose main function is usually not to act in a contract administration supporting role. Therefore, guidelines and other instructional documentation within their organizations do not normally cover contract administration support activities. Project inspectors may also be in organizations where contract administration duties are secondary to their normal responsibilities. When such is the case, general instructions for COR/COTR notices apply to project inspectors as well. More typically, however, contract administration inspection duties are the main job functions of a project inspector. Exhibit 1-13 provides a sample of a COR appointment letter. A COTR appointment letter would be quite the same.

Step 3

Set up a system for changing or terminating designations. You will probably need to set up a system to make sure you are aware of when changes or terminations need to be made on lower priority projects. This is particularly true when you have no routine contact with the COR/ COTR. So you might, for example, make it a point to call each COR/ COTR each Friday. If you have too many to call, you may arrange to have the CORs/COTRs supervisor provide you with copies of personnel reassignments, long-term travel, or extensive leave approvals that affect your COR/COTR. Whatever the method, assure that you are aware of any situation having a potential effect on the performance of contract administration duties that have been delegated to others. Terminate or change designation letters in writing. When possible, issue the termination letter before the termination and specify the date on which it will become effective. Send the contractor either a copy of the termination letter or a separate letter advising of the termination.

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CONTRACT ADMINISTRATION PLANNING

Sample COR Designation Letter


TO: FROM: Tom Jones, Project Engineer Jan Justice, Contracting Officer

SUBJECT: Contracting Officers Representative (COR) Designation, Contract No. ARN 97-7028

I am hereby designating you as contracting officers representative (COR) on Contract No. ARN 97-7028 awarded to the ABC Corporation, Our Town, WI, for the production of a new concept in Super Duper Widgets. In this capacity you are delegated the specific responsibilities detailed below, but perhaps the most important aspect of this authority is its limitations. Under no circumstances are you to make changes that would affect the cost or duration of the contract. You will have the following responsibilities that may not be redelegated to any other individual: 1. To furnish the contractor with technical assistance and guidance in all aspects of the contract. You may formalize your guidance to the contractor by written technical direction, provided the direction does not affect price or duration of the contract and that it contains both a signed acknowledgment from the contractor and the following statement: In accepting this technical direction, the contractor agrees that the price and all other terms and conditions of the contract remain unchanged. 2. 3. 4. To provide me with a copy of all technical direction issued under paragraph 1, above, within 48 hours of its issuance. To provide me with written notification of any dispute that cannot be resolved between you and the contractor regarding performance of the contract. To keep accurate records of all interim and final contract testing procedures outlined in the statement of work, and send a report within five working days of any tests to the contractors project manager and to me. To keep a daily log of all contract-related activities while you are onsite at the contractors plant. To verity invoices and, upon receipt, promptly certify them for prompt payment. After verification, send me a copy of the certified invoice and send the original to Finance.

5. 6.

Exhibit 1-13 (continued on next page)

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CHAPTER 1

7.

To turn over all records pertaining to this contract to the successor COR if this COR designation is terminated for any reason before completion of the contract, and to notify me that you have taken such action.

Please note that you may not redelegate any of the contractual authority listed above, except for clerical tasks associated with that authority. I am providing you with two copies of this letter of designation. Please sign one copy in the space provided below to indicate your acceptance and return that copy to me. In addition, please sign the following certification to indicate that you have read and will abide by the Code of Ethical Conduct (copy attached). ACCEPTED: __________________________________ Contracting Officers Representative DATE: ________________________________

I have read the Integrity Awareness Act for Government Employees and will abide by its requirements in conducting all my responsibilities as a contracting officers representative. CERTIFIED: __________________________________ Contracting Officers Representative DATE: ________________________________

Attachment: Agencys Code of Ethical Conduct

Exhibit 1-13 (continued) 1.9 Provide Formal Notice to Contractor Notify the contractor, in writing, of the names of the individual(s) designated as a COR/COTR. Include in this notification what authority the COR/COTR has in relation to this particular contract. Provide a similar written notice outlining the roles of any other Government employees having a direct contract administration role. This is especially necessary when the contract itself has not identified these officials. Such a notice must include some key information. This is found in Exhibit 1-14.

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CONTRACT ADMINISTRATION PLANNING

Essential Elements of a Contractors Notice of a Contracting Officers Delegation


Specify the name and position title of the COR/COTR or other person receiving a delegation. Cite the contract number for which authority has been delegated. Specify the extent of the delegation. Emphasize any limitations of the delegation. Request a written acknowledgment of the notice from the contractor.

Exhibit 1-14 Sample Contractor Notification Exhibit 1-15 provides a sample COR notification letter to the contractor.

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Notification Letter to the Contractor


TO: Alvin Johnson, Chief Project Officer The ABC Corporation 123 Main Street Our Town, WI 12345-6789 Jane Justice, Contracting Officer

FROM:

SUBJECT: Contracting Officers Representative (COR) Designation, Contract No. ARN-97-7028

This officially notifies you that Tom Jones, Project Engineer, Government Agency, will be my onsite representative for this contract. His authority has limitations. Under no circumstances can he make changes that would affect price or the duration of the contract. Please contact me directly at (123-987-6543) when you anticipate changes that would affect price or overall time of performance. Mr. Jones is authorized to act on my behalf in: 1. Furnishing technical assistance and guidance to you in all aspects of the contract and formalizing this guidance in written technical direction, so long as the direction does not affect price or duration of the contract. 2. Verifying and certifying all invoices. You should submit invoices directly to Mr. Jones. I am providing you with two copies of this notice and request that you acknowledge one copy in the space provided below and return it. Thank you for your cooperation. ACKNOWLEDGED: _______________________________ Contractor DATE: ______________________________

Exhibit 1-15

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CONTRACT ADMINISTRATION PLANNING

PUTTING THE PALLET PROCUREMENT IN PERSPECTIVE Eric had reviewed the pallet procurement contract file and was contemplating his upcoming session with Joanne and whoever else. He had considered alternatives to a contract administration plan and knew that current initiatives throughout the Government sought to minimizeif it was realistic to do sothe expenditure of resources in administering postaward contractor performance. Certainly the pallet procurement did not require the detailed administration that otherwise would be required of a production contract tied to an agency-peculiar specification. Yet even though the pallets were being procured as commercial items, he felt there were elements that required attention and monitoring during performance. For instance, the use of a performance specification that provided Platform Industries with a description of function had to be monitored to some extent. A failure to do so might leave the Government with an unacceptable risk associated with the warranty of fitness for a particular purpose agreed to by the contractor. He was concerned about the companys past performance for timely deliveries, nothing major, mind you, but he felt that something should be done to reinforce the criticality of any delivery orders delivery schedule. Indeed, Eric had isolated some issues that should be discussed and resolved at tomorrow mornings meeting with Joanne and someone else involved in the program.

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POSTAWARD ORIENTATIONS
ASSESSING THE NEED TO GET STARTED Joanne convened a morning meeting of the team for the pallet procurement in her office at eight oclock. Knowing her penchant for timeliness, Eric arrived a bit early and found his boss on the phone. Waiting outside her office, he looked over his notes and awaited the arrival of Harry Carmichael, the requiring activitys technical representative for the procurement. Cradling a cup of hot coffee in one hand and a folder of papers in the other, Harry arrived a few minutes after eight. After the two had exchanged amenities, Joanne appeared in the doorway and signaled for them to come in. Seated at a conference table perpendicular to her desk, Joanne was quick to begin the meeting. Well, Eric, she started, I see that you and Harry have met. He represents our customer organization for the pallet procurement, and hes the one thats been living with the expensive replacement problem for some time. We trust that we can do a good job for him with this procurement, and I wanted him here to listen to what you came up with concerning the need for planning to administer our contract with Platform Industries. So, what have you got to share with us? Shuffling his papers while clearing his throat, Eric responded. The first thing I did, Joanne, was read the contract file and take note of its terms and conditions relative to the requirement for pallets. Thats a start, she interrupted, and what did you find? Actually, not very much, Eric retorted, that lends itself to what Ive always considered to be the basis for a comprehensive contract administration plan. Buying under FAR Part 12 streamlines the acquisition process and, or so it seems to me, we can minimize the need for any involved postaward administration. Harry was quick to jump in. Whoa, Eric, are you saying that we should let Platform Industries run with the ball and then come see us if it scores? Weve got to do more than that or well end up in the same mess we had with the last contractor, mostly promises and few results that carried a big price tag. Weve got to solve this pallet pliability dilemma or all kinds of criticism will fall on us. Peering at Eric, Joanne seemed to reflect Harrys sentiment. Are you suggesting a hands-off posture for this one, Eric? And if so, what leads you to believe the contractor can followthrough without some handholding?

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POSTAWARD ORIENTATION

Sensing he was off to a bad start, Eric tried to recover quickly. Im suggesting nothing of the sort. For starters, Im saying that the contract file, particularly since it represents a FAR Part 12 acquisition, gives us good cause to abide by some of the customary commercial practices that are inherent in the use of FAR 52.212-4. But not all of them. At this point, Harry looked puzzled and jumped in. Youre way ahead of me, Eric. I havent the foggiest idea about what youre saying, and Im not anxious to mount some huge contract administration effort with Platform Industries. After all, were not buying some exotic product here, but we do have a considerable risk if this contractor fails to perform. Lets get down to specifics, Eric, said Joanne. What do we need, why do we need it, and whos going to do it in administering this contract? Eric leaned forward in his chair, looked at both Joanne and Harry, and responded forthrightly. First, we need to agree among ourselves, especially with Harrys input, what it will take to monitor Platforms implementation of the performance spec to see that were not running in circles. Second, we have to make certain, as much as we can, that before we issue any delivery orders for pallets that the contractor has demonstrated an outcome that we can hold it to in terms of the agreed-to warranty of fitness for a particular purpose. Third, given what weve ascertained about Platform meeting delivery schedules, weve got to drive home the point that on-time delivery is essential. Joanne seemed to get the message. Sounds good to me, Eric, for starters. What do you suggest to get the ball rolling, and what do you see for Harry and his staff in all this? I suggest that Harry and I sit down, said Eric, to isolate his concerns representing the user community and mine from a contractual perspective. Then we assess those concerns in terms of what the contract says. Once weve done that, we can determine Harrys role in the contract administration process, shape a reasonable agenda for a postaward meeting with Platform Industries, and get the job underway. Joanne looked at the technical representative and responded with a sense of finality. Is that okay with you, Harry? You bet! he shot back. Better now than trying to figure it all out later. Do it Eric, concluded his boss, and get back to me first thing tomorrow morning with an agenda for a postaward meeting with Platform Industries.

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CHAPTER 2

COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 Determine the need for a postaward orientation. Determine the appropriate type of orientation. Plan an orientation. Conduct an orientation. Prepare a report on an orientation. Select a course of action when agreement on a key issue cannot be reached. Identify the need for unilateral or bilateral contract modifications. Document the contract file. Provide contractual information to interested parties. Obtain from a contractor any executed contractual documents or bonds within the time specified. Conduct postaward orientations for contractors.

2-3

INTRODUCTION TO POSTAWARD ORIENTATIONS


Purpose of Postaward Orientations Conducted in person, through correspondence, or by teleconferencing, a postaward orientation aids both the Government and the contractor in achieving a clear and mutual understanding of all contract requirements and identifying and resolving potential problems. It is neither a substitute for the contractors understanding of requirements at the time offers were submitted, nor is it to be used to alter the final agreement reached in any negotiation leading to contract award. As a planned, structured discussion between the Government and the contractor, a postaward orientation focuses on: Understanding the technical aspects of the contract, Identifying and resolving oversights, Preventing problems, Averting misunderstandings, Determining how to solve problems that may occur later, and Reaching agreement on common issues. Policy on Postaward Orientations FAR 42.501 The contracting officer decides whether a postaward orientation (and the form it might take) is necessary. Such orientations are especially encouraged to assist small, small disadvantaged, and women-owned small business concerns. When used, a postaward orientation should be conducted promptly after contract award to achieve maximum benefits. The steps in planning for a postaward orientation are charted on the next page. Following the flowchart, each step is discussed in detail.

Focus of Postaward Orientations

Steps in Performance

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CHAPTER 2

STEPS IN POSTAWARD ORIENTATION PLANNING


Input: The contract and contract administration plan.

1. Determine the need for a postaward orientation.

No Needed?

Yes 2-5. Plan, conduct, and document postaward orientations.

6-8. Take any necessary follow-up action (e.g., a contract modification).

9. Provide information on the contract to interested parties.

10. Obtain any executed contractual documents or bonds from the contractor within time specified after award.

2-5

POSTAWARD ORIENTATION

POSTAWARD ORIENTATION PLANNING


2.1 Determine the Need FAR 42.502 For contracts awarded under simplified acquisition procedures or for the acquisition of commercial items or services, contractor performance and its administration by the Government can begin smoothly and proceed without incident. Other contracts require immediate administrative action to ensure that performance starts off on the right track. Such action may signal the need for a postaward orientation. Identify Performance Issues or Concerns The success of a postaward orientation rests on the contract administrators ability to identify issues or concerns that may (or will) impact contract performance. These are three steps to follow in identifying issues or concerns. Identify a need to review specific key contract requirements and milestones. Postaward orientations are most vital when potential risks to the contractor or the Government have not been addressed within the contract itself. In these cases, a postaward orientation identifies these risks and considers ways to reduce the probability of their resulting in serious problems during contract performance. Risk is diminished, for example, when the contract states that Government-furnished Equipment (GFE) will be available 60 days after contract award at the contractors plant. Failure to do this presents an additional risk if the contractor assumed the GFE would be available within the first couple of weeks of contract performance. Were that the case, the Governments failure to provide the GFE would delay and disrupt the contractors planned schedule. If the contract had not specified when and where GFE would be delivered, it would be a discussion item for a postaward orientation. You would want to learn when the contractor needed the GFE, determine if the Government could provide it at that time, and investigate what the impact would be if it arrived at a later time. Analyze any requirement identified from contract administration planning to determine if you really need some form of a postaward orientation. Consider such issues as: Did the contract fully explain the requirement? Would an incorrect interpretation of a performance requirement damage the Government?

Step 1

Reduce or Eliminate Risks

Analyzing Contract Requirements

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CHAPTER 2

Would potential problems endanger tight scheduling? Do contract requirements rely on close interaction between Government and contractor personnel? What is the extent of any subcontracting requirements, and might these be clarified by a postaward subcontractor conference? Are financing arrangements given to complexities such as progress or interim financing payments? Step 2 Identify the need for a general briefing on one or more aspects of contract administration. The postaward goals of any contract are to assure that supplies or services are: Delivered or performed when and where specified in the contract, Acceptable in terms of conforming to the contracts specification or statement of work, and Furnished in compliance with other terms and conditions of the contract. Compliance with other terms and conditions includes requirements such as: Security classifications and requirements, Record-retention requirements, Service Contract Act requirements, Federal and state labor requirements, and Federal policies on nondiscrimination because of age. Even though ignorance of contract terms does not excuse responsibility for complying with them, many contractors overlook the finer points of a requirement in the preaward stage. Postaward orientations ensure that a contractor fully understands all the details of the Governments requirement, including those incorporated by reference, that it agreed to perform when it signed the contract.

FAR 4.403 FAR Subpart 4.7 FAR Subpart 22.10 FAR 22.1001 FAR 22.1002 FAR Subpart 22.9

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POSTAWARD ORIENTATION

Extent of Orientation

The extent of information provided or discussed at an orientation depends on: A contractors past experience with Government contracts (small, small disadvantaged, and women-owned small business concerns with little Government experience will generally need more guidance); and The degree of difficulty encountered by experienced contractors on similar requirements. Exhibit 2-1 provides a menu of items to consider in your analysis.

Step 3

Document the decisions you make. Include the Exhibit 2-1 checklist as a part of your contract file. It provides an easy way to record the basis for your decision to hold a postaward orientation. This is particularly important if you decide that you dont want to hold an orientation. If things go wrong later, it demonstrates that you exercised good judgment in your early contract administration decisions. If you do hold a conference or conduct some other form of postaward orientation, you will supply additional documentation to the file on these activities. See Section 2-8 below. You may accomplish a postaward orientation in three ways: Hold a face-to-face orientation conference when you believe the contractor does not have a clear understanding of the:

2.2 Determine the Type of Orientation Face-to-Face FAR 42.502

Scope of the contract, Contracts technical requirements, or Rights and obligations of the parties in any area.

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CHAPTER 2

Should I Hold a Postaward Orientation Conference?


Some common considerations in deciding whether to hold a postaward orientation conference are listed below. This checklist will help you crystallize your thoughts. The Yes answers favor a conference. Yes ____ ___ ____ _____ ____ ____ ____ ____ No ____ ____ ____ ____ ____ ____ ____ ____ Is this the contractors first Government contract? Has the contractor had little or no previous experience with this type of product or service? If the contractor has had previous Government contracts, were an unusual number of problems associated with them? Can you foresee specific potential problems for this contract? Is any aspect of this contract urgent or critical to the Government? Does the contract type require a relatively high degree of administration? Is the requirement relatively complex and of a relatively high-dollar value? Have you had little previous conversation with the contractor about this contract? (In contrast, you may have had detailed conversations during an onsite preaward survey or during negotiation sessions.) Is there any indication that misunderstandings exist? Does the procurement history of the required supplies or services reveal recurring problem areas? Is a lengthy production cycle planned? Does the contract involve spare parts and related equipment? Is the contractor a small, small disadvantaged, or women-owned business concern? Is extensive subcontracting involved? Are safety factors involved in the performance of work? Are progress payments or other interim financing arrangements involved? Can you anticipate contract changes that would require the contractor to use specialized accounting procedures? Exhibit 2-1

____ ____ ____ ____ ____ ____ ____ ____ ____

____ ____ ____ ____ ____ ____ ____ ____ ____

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POSTAWARD ORIENTATION

Letter FAR 42.504

Generally, you can use a letter as an alternative to a formal postaward conference when: Only minor details need to be conveyed to the contractor, The contractor has had previous experience in producing the items or providing the services, and The procurement is not particularly complex. For example, a letter may suffice if you need only communicate specifics about onsite availability, instructions for paperwork submissions, or such other fairly straightforward elements. You can include a notice of the CORs/COTRs designation within this letter as well. Exhibit 2-2 provides a sample postaward orientation letter.

Phone

A telephone conference is usually sufficient when: You have had good prior experience with the contractor, Matters for discussions are relatively straightforward, or You do not anticipate problems for good reasons.

Combining Orientation Methods

A postaward orientation may represent a combination of these methods. You may have an uncomplicated procurement with a new contractor for which performance is not required at your installation. In this case, especially if the contractor is not located near your installation, you may find it useful to have a letter convey a few important points. You may also decide to use a telephone conference to establish a personal working relationship.

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An Alternative: The Postaward Orientation Letter


TO: FROM: Gary Green, Project Manager, XYZ Power Co. Al Jones, Contracting Officer

SUBJECT: Contract No. 104230-97-C-1234

To avoid any potential difficulties, I am writing to point out a requirement of the subject contract that has led to problems in other contracts. Also, I would like to clarify the contract completion date and identify the Government personnel who will play a role in the contracts administration. To install the four pieces of equipment required in contract line item #4, you will need to have a power outage in the west wing of Building 569, a heavily populated office building. Please note the paragraph 2.a(1) of the statement of work requires that this power outage take place on Sunday, a Federal holiday, between the hours of midnight and 6:00 a.m. In addition, paragraph 2.a(5) of the statement of work requires that you provide me with seven calendar days notice of your need for this outage. (Send the original notice to Mr. Smith see below.) The reason for the preceding requirement is that we have computers on-line 24 hours a day in that wing of the building, as well as other operations, that cannot be disrupted. Since performance time is expressed in the contract as 120 calendar days after contract award, I want to affirm the date for contract completion as January 30, 1997. Mr. Howard Smith is my representative for the technical aspects of this contract. Accordingly, he is referred to as the contracting officers representative (COR). He is not authorized to make any changes to the contract as written. He does have the authority to inspect and accept the equipment for the Government. You will receive any change to the contract as an official modification signed by me or another Government official.

Exhibit 2-2 (continued on next page)

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POSTAWARD ORIENTATION

An Alternative: The Postaward Orientation Letter


The list below summarizes your paperwork submissions and identifies the individuals to whom you should send them: Final quality control plan. (You provided a draft plan at the preaward survey.) Ms. Jane Doe Quality Assurance Specialist Dept. DEF - Room 829 Your Agency 123 Main Street Our Town, PA 10000-9876 Mr. Howard Smith Plant Manager Your Agency Dept. XYZ - Room 117 123 Main Street Our Town, PA 10000-9876

Request notice for the power outage, request for interim inspection required by paragraph 10.a(7) of the statement of work, and technical reports required by contract line item #7. All other submissions and correspondence (inincluding nontechnical questions) should be addressed to me.

Mr. Al Jones Contracting Officer Dept. ABC - Room 401 Your Agency 123 Main Street Our Town, PA 10000-9876

Dont hesitate to call me if you want to discuss any aspect of this contract. My telephone number is 100-123-1234, and Im usually in my office between the hours of 7:30 a.m. and 4:00 p.m.

Exhibit 2-2 (continued)

2.3 Planning Orientations

Once the need for an orientation is established, plan it carefully to make certain that its goals are accomplished. Detailed planning is particularly important when you use a formal postaward conference. It is also important to plan what will be addressed in a letter or telephone orientation. Addressing the steps listed in Exhibit 2-3 ensures that you are thoroughly prepared for the orientation and have considered all potential problem areas.

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CHAPTER 2

The Planning Process

The following seven steps identify basic activities associated with planning a postaward orientation conference. Prepare the Governments position. You may recognize the need to make judgments on issues such as: Government-furnished property procedures (if the contract does not outline them), Ambiguous or unclear contractual specifications or clauses, or Testing or quality control procedures (if they are incomplete in the contract or otherwise need to be supplemented). Postaward problems in these areas might affect the quality of the product or work, cause delays in delivery, increase the scope of work and cost, and

Step 1

Orientation Planning Tasks


Prepare the Governments position and its understanding on key issues. Prepare a conference agenda and determine the time and place for meeting. Designate the Governments participants and name the chairperson. Traditionally the CO is the chairperson. Brief the Governments chairperson and participants on their roles. Provide the contractor with a copy of the conference agenda. Obtain the contractors response to the agenda. Finalize the conference agenda. require a contract modification to remedy the situation.

Exhibit 2-3

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POSTAWARD ORIENTATION

ACQUISITION TEAM PLANNING Recall that Joanne asked Eric to provide an agenda for a postaward orientation meeting with Platform Industries. In doing so, Eric met with Harry to isolate and iron out key technical and contractual issues and concerns that both felt would affect contract performance. During their meeting, Harry pointed out the need for making sure that Platforms pursuit of a performance specification effort was monitored effectively. He suggested that an early understanding with Platform about reporting the results of its effort was very important, since any delivery orders for pallets had to await the successful completion of the companys effort to meet the performance functions set forth in the specification. Eric expressed his concern about making sure that Platform understood the basis for the issuance of delivery orders under an indefinite-quantity arrangement, and he wanted to drive home the point that delivery order schedules had to be met. Both Eric and Harry agreed that Platforms warranty of fitness for a particular purpose was a front-burner item that had to be strongly reinforced. To ensure reasonable monitoring of the contractors effort, Eric determined that Harry should have a contract administration role in representing the contracting officer as a designated technical representative. Harry agreed with this. Yet again, Eric reviewed the contract clauses under FAR 52.212-4 to determine those that needed to be stressed with Platform at a postaward orientation meeting.

Step 2

Prepare the agenda and set the time and place for the conference. Include in the agenda all matters needing clarification or otherwise requiring discussion with the contractor to avoid later misunderstandings. Items for the agenda should consider: Special contract clauses, Critical milestones, Contractor quality control procedures, Contractor reporting requirements, Billing and payment procedures, Roles of the Governments contract administration team members, and

Possible Agenda Items

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Roles of the contractors contract administration team members. Tailor the Agenda Use the checklist at Exhibit 2-4 as the basis for outlining your agenda. The less complex the procurement, the more you will use the N/A column. If necessary, add any item(s) that do not appear on the checklist. Remember: Tailor your agenda to fit the orientations needs. Discuss those topics that are most important to reinforcing mutual obligations and contractor performance requirements. Items that may only affect Government team members and not what the contractor is required to do can be discussed at a separate in-house session. (See Step 4.) Length of Orientation The complexity of an agenda will influence the length of any orientation. In the case of a conference, you may need to convene more than one session. Resorting to multiple sessions, however, should occur only for the most complex contracts. When an agenda addresses both high- and lowpriority items, it may be more efficient to cover the high-priority items at a formal conference and deal with those of lower priority via a teleconference, letter, or facsimile transmission. Time. There are really only two concerns about the timing of the conference: Hold the conference as soon as possible after contract award. Make sure the time is mutually agreeable before you firm it up. Where Location. Be sensible in your choice of a conference site. Certain locations will typically have advantages, for example: Contract performance sites offer ready access to physical conditions that may have a bearing on issues being discussed. Conference rooms near or within your office area offer convenience for your contract administration teams busy schedule. Sometimes you will have to analyze one sites advantages relative to those of another to make the best choice. Try to minimize travel time for all participants.

When FAR 42.501(d)

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POSTAWARD ORIENTATION

Number of Attendees

Before you finalize your choice of a site, determine the number of contractor attendees and the number of participants among your own contract administration team. Make sure the site can accommodate the groups size. Unless you can guarantee no interruptions, always discard the temptation to have smaller conferences in your own or the contracting officers office. The convenience will not be worth the ill will and frustration felt by other attendees, both Government and contractor, for wasting their time with your other unrelated business.

Productive Versus Convenient Sites

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Checklist/Record for Postaward Orientation Conference

PART IGENERAL
1. Contract No. 5. Preaward Survey? YES NO PART IICONFEREES 1. Government 2. Contractor 2. Total Amount 6. Contractor Name 3. Type of Contract 7. Contractor Address 4. Date of Conference

PART IIICONFERENCE PROGRAM Subject A. GENERAL 1. Function and authority of assigned personnel 2. Routing of correspondence 3. Omissions or conflicting provisions 4. Other (specify) B. REPORTS: PREPARATION AND SUBMITTAL 1. Work progress 2. Financial 3. Other (specify) C. SUBCONTRACTS 1. Consent to placement 2. Primes responsibility for administration 3. Cost or pricing data 4. Source inspection 5. Other (specify) D. SB, SDB, and WOSB Subcontracting 1. Contractual requirements 2. Program to facilitate E. CONTRACT MODIFICATIONS F. GOVERNMENT PROPERTY 1. Use of facilities and tooling Check if applicable Clause No. if applicable Significant conclusions, further action to be taken (attach additional sheets if necessary

Exhibit 2-4 (continued on next page)

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Checklist/Record for Postaward Orientation Conference


Check if Applicable Clause No. if Applicable Significant conclusions, further action to be taken (attach additional sheets if necessary

Subject 2. Maintenance and preservation 3. Property procedure approval 4. Property disposal procedures 5. Other (specify) G. SPECIAL CLAUSES 1. Repricing 2. Liquidated damages 3. Government financing 4. Special tooling 5. Overtime 6. Bill of materials 7. Data rights 8. Warranties 9. Work performed at government installations 10. Other (specify) H. GENERAL CLAUSES 1. Limitation of cost 2. Allowability of cost 3. Other (specify) I. DELIVERY SCHEDULES J. TRANSPORTATION K. INVOICING AND BILLING INSTRUCTIONS l. PROCESSING OF COST AND PRICE PROPOSALS M. LABOR 1. Actual and potential labor disputes 2. Davis-Bacon Act 3. Work Hours Act 4. Walsh-Healey Act 5. Copeland Anti-Kickback Act

Exhibit 2-4 (continued on next page)

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Checklist/Record for Postaward Orientation Conference


Check if Applicable Clause No. if Applicable Significant conclusions, further action to be taken (attach additional sheets if necessary

Subject N. QUALITY ASSURANCE AND ENGINEERING 1. Quality control system 2. Waivers and deviations 3. Drawing/design approval 4. Manuals 5. Preproduction sample 6. Qualifications and environmental tests 7. Inspection and acceptance 8. Specification interpretation 9. Laboratory facilities 10. Value engineering clause 11. Other (specify) O. PRODUCTION 1. Production planning 2. Milestones and other monitoring devices 3. Production surveillance 4. Safety

(Additional Notes)

Exhibit 2-4 (continued)

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Step 3

Designate Government participants to attend a preliminary meeting. Invite Government representatives to attend who will interact with the contractor during performance. Invite only people who will have a significant role such as: COR/COTR, Program manager, Project inspector, Quality assurance specialist, and Other appropriate subject matter experts. One preliminary group meeting is usually sufficient. However, if you, the ACO, anticipate lengthy discussions with one Government representative, hold a separate one-on-one meeting with that person. You might invite using organizations if the work will take place in their office area and if one of their office employees is not participating in another capacity. If the conference would result in a discussion of price or cost issues, invite your cost/price analyst. For a smooth transition from preaward to postaward when contract administration functions are delegated, invite the procuring contracting officer. Questions might be raised that only the procuring contracting officer could answer adequately.

Step 4

Brief Government participants on their roles. On larger contracts, it may be useful to hold a preliminary meeting with appropriate Government personnel to ensure that the Governments expectations are clearly expressed and understood. You may have some strong personalities on your contract administration team. Emphasize who is in charge and chairing the meeting. It is either you (the contract administrator) or the contracting officer. The COR/COTR might also chair the meeting if the contract administrator and the contracting officer could not attend. Also, the COR/ COTR could chair a preliminary meeting covering only technical issues. Final decisions affecting contract terms and conditions must be made by the contracting officer. Distribute your contract administration plan at the preliminary meeting and conduct a page-by-page review of its contents. The purpose of this preliminary meeting, or individual briefings, is to: Identify all actions that must be taken by the Government,

Purpose of Internal Briefings

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Ensure that all Government personnel involved have a clear understanding of the contracts terms and conditions and their respective responsibilities, Establish a common front relative to the contractors responsibilities, Identify which Government participants will be making a presentation at the postaward orientation conference and restrict the time and subject matter of each, and Otherwise finalize agenda items with Government participants.

HARRYS CONTINUING CONCERN Eric received a call from Harry about an hour after their meeting. Im not left with a warm, fuzzy feeling, Eric, about the business of monitoring Platforms effort to get after the procurements performance specification. I mean I can visit them periodically. After all, their factory is only 100 miles or so down the road. My concern runs to what alternative methodologies theyll utilize to conclude that they have whipped the pallet pliability problem. Well, I share your concern, Eric said, and perhaps we should have been more specific about all this in Platforms contract. Actually, the contractors responsibility is to meet the functional conditions of the spec. We didnt set forth any specific reporting or progress requirements about all that, except that meeting the specs functions was to be done not later than 40 calendar days after award. Okay, Mike joined in, but cant we just ask Platform to provide us with a modest written report on its progress, say weekly? I sure want to understand what theyre doing and why theyre doing it. Eric winced a bit and was quick to share his understanding. Hey, Im with you, Mike, on what you want, but weve got a fixed-price arrangement here, and I cant require the submission of any information thats not set forth in the contract. Unless, of course, you want to pay for it. Mike took a deep breath. Were already on the hook for a lot of bucks in this deal, Eric, if it happens the way we trust it will. Cant we just ask Platform to stretch itself a bit in accommodating our need to let us know what theyre doing? Maybe so, responded Eric. Ill have to raise that one with Joanne and see what we can do.

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Step 5

Provide a copy of the agenda to the contractor. When you do this, ask for feedback by a specific calendar date. Obtain the contractors response to the agenda. If you dont get a response by the time you asked for feedback, provide the contractor with a written or oral notice that the agenda provided earlier is final. If the contractor responds, discuss its input. Make changes to your agenda as necessary. Provide the contractor and Government attendees with copies of the final agenda. Finalize the agenda. If preliminary conference discussions point out the need for a possible change to the contract or to the Governments normal method of operations, get agreement among appropriate Government personnel prior to the meeting. Also discuss and finalize the handling of potential problems you identify. You need to show a united Government front at the orientation meeting. Goals for conducting a postaward orientation, whether by letter, tele-

Step 6

Step 7

2.4 Conduct the Orientation

Your Orientation Goals


Clarify any procedures to implement contract requirements smoothly. Clarify roles of both Government and contractor key personnel. Detail the more critical or complex requirements to ensure understanding. Invite questions from the contractor on any requirement needing clarification. phone, or in person are the same. See Exhibit 2-5.

Exhibit 2-5

Steps to Attain Goals

Any orientation conference agenda should permit a logical step-by-step approach to fulfill its goals. The following six steps allow this to occur.

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Step 1

Introduce the participants. At the opening of the conference, the chairperson introduces each attendee by name and title, along with a onesentence explanation of the role that person will play in contract administration. You can detail these roles later, but first make sure that that everyone knows who is speaking during the session. If you are the chairperson and dont know all the contractors attendees, ask the contractor to make those introductions. Explain the purpose of the conference. Go over the points outlined in Exhibit 2-5, but also emphasize that the conference is not intended to change or alter the contract in any way. Emphasize that the only way the contract will be changed or altered is by a written modification signed by the contracting officer. DoD publishes a post-award conference procedure program, outlined in DD Form 1484, Post-Award Conference Record.

Step 2 FAR 42.503-2

DoD Post-award Procedure DFARS 242.503-2 DD Form 1484 Step 3

Summarize the roles of Government key personnel. Clarify the limits, authorities, roles, and responsibilities of each Government representative. Ask the contractor to advise the Government of the roles, responsibilities, limits, and authorities of each contractor representative. Emphasize that the contracting officer is the Governments agent to change or alter the contract. Any exception to this must be specified clearly. Affirm that conference participants without authority to bind the Government must take no action that in any way changes or alters the contract. Further advise the contractor that the Government is not obligated to make any contract adjustments as a result of an action taken by a Government representative unless the action has been specifically authorized in the representatives letter of designation or by the contract itself.

Step 4

Provide general instructions. General contract administration instructions include information necessary for the contractor to understand its risks as well as the Governments, and they address contractor responsibilities for: Management and supervision of the work force, Protection and control of Government property, data, and reports, Compliance with contract clauses, and

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Other appropriate areas of concern. Advise contractors of the proper routing of correspondence. Explain that matters pertaining to technical performance may be addressed directly to the COR/COTR or project officer, but that matters pertaining to questions of fact dealing with contractual terms and conditions must be sent to the contracting officer. Step 5 FAR 22.805(b) FAR 22.1020 FAR 22.1304 FAR 22.1404 Provide the contractor with posters, notices, and other data. Labor law implementation will sometimes require that the contractor post equal employment opportunity posters at the job site, including posters that outline the rights of handicapped persons. If the contract requires posting laborrelated notices, the Government is responsible for providing them. The Government may also need to provide seniority lists from incumbent service contractors ranking its current employees to new follow-on contractors for new service periods. Often Government publications are listed as Government-furnished material. Consider distributing these and other data you need to provide at this orientation conference. Secure agreement on milestones or interpretation of terms and conditions. For milestones that require the contractors input, seek the contractors agreement now. If you identified ambiguities in key contract terms when drawing up your contract administration plan, get agreement on these now. If not, emphasize significant and critical terms. Key discussion items would be any uncertainty about terms that would affect: Performance, Interim delivery, and Payment. During the conference, request any information or response from the contractor to ensure a mutually uniform understanding of key terms and conditions.

Step 6

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IT NEVER HURTS TO ASK When Eric took Harrys continuing concern about the performance specification to Joanne, the contracting officer threw the ball back to her contract administrator. Well, she asked, whats your recommendation about that? Eric was quick and decisive in his response. I say we should ask Platform what its customary commercial practice is in reporting to its customers on dealing with a performance spec. If the answer is favorable to Harry, then lets record it in our postaward orientation memo, and leave it at that. If the answer is unfavorable, then lets press the issue and see if Platform will buy a reporting requirement, which Ill put together for the meeting, at no cost to the government. In any event, lets not agree to pay for something until we exhaust all that we can do to bargain for a reasonable delivery from the contractor without increasing the price. Thats just good business practice. Joanne flashed one of her infrequent smiles. Okay, Eric, lets do that. After all, nothing ventured, nothing gained.

2.5 Prepare Postaward Orientation Report FAR 42.503-3

Use any convenient format for an orientation report as long as it contains all the information necessary to document the events of the meeting. Common key elements of a report are contained in Exhibit 2-6. Make sure that the contracting officer, the COR/COTR, the contractor, and others as appropriate, receive copies of the report. Include a copy in the contract file. If the contracting officer does not write this report, it is a good practice to have that person review it initially to ensure an awareness

Key Elements of a Postaward Orientation Report


The names and affiliations of all participants. The main points discussed and all agreements reached. Areas requiring resolution. Names of participants assigned responsibility for further actions. Completion dates for the actions.

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of any problems or the need for future action.

Exhibit 2-6 DoD Report Form DFARS 242.503-3 DD Form 1484 Report for the Record Exhibit 2-7 is an example of a brief memorandum that can be attached to the checklist in Exhibit 2-4. It may also be used to record specific probYou may use DD Form 1484, Post-Award Conference Record, for the report.

Report for the Record


February 1, 1997 I chaired a postaward orientation conference on Contract NO. ISR 97-2498-NR for repairs to a conveyor system in the Federal Building on Main Street in Our Town, PA. A detailed list of the points we covered and the names of those in attendance is attached to this record. The most pressing problem that surfaced was that none of the Government attendees knew the location of the Government-furnished replacement parts that the Government is to provide, per paragraph 1.2.3a of the statement of work. The building superintendent, Mr. Howard Ames, one of the attendees, went back to check his records after the conference. He advised me on this date that the parts in question had been ordered through the Federal Supply Schedule and had not yet been received. Our supervisor of simplified acquisition procedures, Ms. Janet Doe, found the order (Order ISN 97-9424-SP) and advised me today that the replacement parts were shipped on January 20, so Mr. Ames should be receiving them any day. Since the parts will not be needed until the second week in March, their near-term delivery is not holding up performance.

Sam Smart Contract Administrator Concurred: Jane Justice Contracting Officer

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lems resolved during the orientation.

Exhibit 2-7 2.6 Actions to Resolve Disagreements on Key Issues Events that occur when the Government and the contractor discover a point of disagreement during an orientation conference reflect the nature of the problem. A key factor is whether the problem can be resolved easily. Remember: Each contractual problem is different, and no one approach can be used to resolve every disagreement that may arise. In general, four steps may be used to resolve points of disagreement. Document the contractors position in detail. During the conference, delve into the reasons for the contractors position and include it in the conference report. If disagreement results in an emotionally charged atmosphere, consider deferring its resolution, but assure the contractor that it will be resolved, if possible. If the problem requires joint contractor/ Government problem solving, set up an early time for a separate meeting with only those who need to be in attendance. Take appropriate action to resolve the problem. Seek technical or legal advice when necessary. Look at all possible solutions. Select the best solution to the problem and seek agreement on it. It is important that you resolve each issue in a fair and equitable manner and as quickly as possible. Although not always practicable, it is best to resolve all problems before the contractor begins any work under the contract. In seeking mutual agreement, your actions can include: Further discussions with the contractors top management, or Consideration and negotiation of a contract modification. Step 4 FAR 43.103(b) FAR Subpart 43.2 When agreement cannot be reached, take appropriate unilateral action. If a contract clause allows the contracting officer to issue a unilateral modification, this action is a likely Government solution to the stalemate.

Step 1

Step 2

Step 3

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2.7 Identify the Need for Contract Modifications FAR 43.103 FAR Subpart 43.2

If a contract change seems necessary, you must clearly define the extent of the proposed change and implement it promptly. The contracting officer must sign a contract modification in all cases. Chapter 5 addresses contract modifications.

2.8 Document the Contract File

Include the conference report detailed in 2.5, above, as well as all other material, correspondence, or actions from the postaward orientation. In the event of any subsequent disagreements with the contractor, this material can be used to reconstruct facts and events as they occurred. A welldocumented contract file will identify and verify the Governments initial position on any performance problems that were anticipated during the orientation or in the early steps of implementation.

2.9 Provide Information to Interested Parties FAR 24.202

Provide any documentation to members of your contract administration team as well as the contractor when that information affects their role in contract performance. You may also get requests for information from other interested parties, such as other companies that have proposed but were evaluated and determined to be unsuccessful offerors. Release of any information is subject to the Freedom of Information Act (FOIA). Examples of information you may not release are: Classified information, and Contractors proprietary data, including trade secrets. Your agency will have an organization tasked with providing advice on information that is or is not releasable under FOIA. Your own procurement organization may have a staff analyst to help you in these decisions. FOIA imposes a response time on answering requests for information. So initiate action on them quickly.

DoD FOIA Policy DoDD 5400.7 DoD 5400.7-R DFARS 224.203

You can find DoDs FOIA procedures in DoDD 5400.7, DoD Freedom of Information Act Program, and DoD 5400.7-R, DoD Freedom of Information Act Program.

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Generally, nonconstruction contracts do not require payment or performance bonds. The contracting officer may include bonds in solicitations for services under certain circumstances. Another contract requirement may call for the submission of insurance certificates. 2.10 Obtain Executed Contractual Documents, Bonds, or Insurance FAR 28.103 FAR 28.301 FAR 28.103-3 Since bonds and certificates of insurance must be executed before performance begins, the deadline for submission should be stated in the contract. It is usually within 10 days after award. When bonds and certif-icates are required, request them immediately, normally in the letter accompanying contract award. Reference the contract clause that requires the submission and establish a time for receipt, if the contract does not provide a date. When you receive the forms, review them and, in the case of bonds, check the Treasury Department list to be sure the surety company has the requisite bonding authority. Bonding companies have limits on the amount they may bond.

FAR 28.202

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POSTAWARD ORIENTATIONS
ASSESSING THE NEED TO GET STARTED Joanne convened a morning meeting of the team for the pallet procurement in her office at eight oclock. Knowing her penchant for timeliness, Eric arrived a bit early and found his boss on the phone. Waiting outside her office, he looked over his notes and awaited the arrival of Harry Carmichael, the requiring activitys technical representative for the procurement. Cradling a cup of hot coffee in one hand and a folder of papers in the other, Harry arrived a few minutes after eight. After the two had exchanged amenities, Joanne appeared in the doorway and signaled for them to come in. Seated at a conference table perpendicular to her desk, Joanne was quick to begin the meeting. Well, Eric, she started, I see that you and Harry have met. He represents our customer organization for the pallet procurement, and hes the one thats been living with the expensive replacement problem for some time. We trust that we can do a good job for him with this procurement, and I wanted him here to listen to what you came up with concerning the need for planning to administer our contract with Platform Industries. So, what have you got to share with us? Shuffling his papers while clearing his throat, Eric responded. The first thing I did, Joanne, was read the contract file and take note of its terms and conditions relative to the requirement for pallets. Thats a start, she interrupted, and what did you find? Actually, not very much, Eric retorted, that lends itself to what Ive always considered to be the basis for a comprehensive contract administration plan. Buying under FAR Part 12 streamlines the acquisition process and, or so it seems to me, we can minimize the need for any involved postaward administration. Harry was quick to jump in. Whoa, Eric, are you saying that we should let Platform Industries run with the ball and then come see us if it scores? Weve got to do more than that or well end up in the same mess we had with the last contractor, mostly promises and few results that carried a big price tag. Weve got to solve this pallet pliability dilemma or all kinds of criticism will fall on us. Peering at Eric, Joanne seemed to reflect Harrys sentiment. Are you suggesting a hands-off posture for this one, Eric? And if so, what leads you to believe the contractor can followthrough without some handholding?

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Sensing he was off to a bad start, Eric tried to recover quickly. Im suggesting nothing of the sort. For starters, Im saying that the contract file, particularly since it represents a FAR Part 12 acquisition, gives us good cause to abide by some of the customary commercial practices that are inherent in the use of FAR 52.212-4. But not all of them. At this point, Harry looked puzzled and jumped in. Youre way ahead of me, Eric. I havent the foggiest idea about what youre saying, and Im not anxious to mount some huge contract administration effort with Platform Industries. After all, were not buying some exotic product here, but we do have a considerable risk if this contractor fails to perform. Lets get down to specifics, Eric, said Joanne. What do we need, why do we need it, and whos going to do it in administering this contract? Eric leaned forward in his chair, looked at both Joanne and Harry, and responded forthrightly. First, we need to agree among ourselves, especially with Harrys input, what it will take to monitor Platforms implementation of the performance spec to see that were not running in circles. Second, we have to make certain, as much as we can, that before we issue any delivery orders for pallets that the contractor has demonstrated an outcome that we can hold it to in terms of the agreed-to warranty of fitness for a particular purpose. Third, given what weve ascertained about Platform meeting delivery schedules, weve got to drive home the point that on-time delivery is essential. Joanne seemed to get the message. Sounds good to me, Eric, for starters. What do you suggest to get the ball rolling, and what do you see for Harry and his staff in all this? I suggest that Harry and I sit down, said Eric, to isolate his concerns representing the user community and mine from a contractual perspective. Then we assess those concerns in terms of what the contract says. Once weve done that, we can determine Harrys role in the contract administration process, shape a reasonable agenda for a postaward meeting with Platform Industries, and get the job underway. Joanne looked at the technical representative and responded with a sense of finality. Is that okay with you, Harry? You bet! he shot back. Better now than trying to figure it all out later. Do it Eric, concluded his boss, and get back to me first thing tomorrow morning with an agenda for a postaward meeting with Platform Industries.

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 Determine the need for a postaward orientation. Determine the appropriate type of orientation. Plan an orientation. Conduct an orientation. Prepare a report on an orientation. Select a course of action when agreement on a key issue cannot be reached. Identify the need for unilateral or bilateral contract modifications. Document the contract file. Provide contractual information to interested parties. Obtain from a contractor any executed contractual documents or bonds within the time specified. Conduct postaward orientations for contractors.

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INTRODUCTION TO POSTAWARD ORIENTATIONS


Purpose of Postaward Orientations Conducted in person, through correspondence, or by teleconferencing, a postaward orientation aids both the Government and the contractor in achieving a clear and mutual understanding of all contract requirements and identifying and resolving potential problems. It is neither a substitute for the contractors understanding of requirements at the time offers were submitted, nor is it to be used to alter the final agreement reached in any negotiation leading to contract award. As a planned, structured discussion between the Government and the contractor, a postaward orientation focuses on: Understanding the technical aspects of the contract, Identifying and resolving oversights, Preventing problems, Averting misunderstandings, Determining how to solve problems that may occur later, and Reaching agreement on common issues. Policy on Postaward Orientations FAR 42.501 The contracting officer decides whether a postaward orientation (and the form it might take) is necessary. Such orientations are especially encouraged to assist small, small disadvantaged, and women-owned small business concerns. When used, a postaward orientation should be conducted promptly after contract award to achieve maximum benefits. The steps in planning for a postaward orientation are charted on the next page. Following the flowchart, each step is discussed in detail.

Focus of Postaward Orientations

Steps in Performance

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STEPS IN POSTAWARD ORIENTATION PLANNING


Input: The contract and contract administration plan.

1. Determine the need for a postaward orientation.

No Needed?

Yes 2-5. Plan, conduct, and document postaward orientations.

6-8. Take any necessary follow-up action (e.g., a contract modification).

9. Provide information on the contract to interested parties.

10. Obtain any executed contractual documents or bonds from the contractor within time specified after award.

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POSTAWARD ORIENTATION PLANNING


2.1 Determine the Need FAR 42.502 For contracts awarded under simplified acquisition procedures or for the acquisition of commercial items or services, contractor performance and its administration by the Government can begin smoothly and proceed without incident. Other contracts require immediate administrative action to ensure that performance starts off on the right track. Such action may signal the need for a postaward orientation. Identify Performance Issues or Concerns The success of a postaward orientation rests on the contract administrators ability to identify issues or concerns that may (or will) impact contract performance. These are three steps to follow in identifying issues or concerns. Identify a need to review specific key contract requirements and milestones. Postaward orientations are most vital when potential risks to the contractor or the Government have not been addressed within the contract itself. In these cases, a postaward orientation identifies these risks and considers ways to reduce the probability of their resulting in serious problems during contract performance. Risk is diminished, for example, when the contract states that Government-furnished Equipment (GFE) will be available 60 days after contract award at the contractors plant. Failure to do this presents an additional risk if the contractor assumed the GFE would be available within the first couple of weeks of contract performance. Were that the case, the Governments failure to provide the GFE would delay and disrupt the contractors planned schedule. If the contract had not specified when and where GFE would be delivered, it would be a discussion item for a postaward orientation. You would want to learn when the contractor needed the GFE, determine if the Government could provide it at that time, and investigate what the impact would be if it arrived at a later time. Analyze any requirement identified from contract administration planning to determine if you really need some form of a postaward orientation. Consider such issues as: Did the contract fully explain the requirement? Would an incorrect interpretation of a performance requirement damage the Government?

Step 1

Reduce or Eliminate Risks

Analyzing Contract Requirements

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Would potential problems endanger tight scheduling? Do contract requirements rely on close interaction between Government and contractor personnel? What is the extent of any subcontracting requirements, and might these be clarified by a postaward subcontractor conference? Are financing arrangements given to complexities such as progress or interim financing payments? Step 2 Identify the need for a general briefing on one or more aspects of contract administration. The postaward goals of any contract are to assure that supplies or services are: Delivered or performed when and where specified in the contract, Acceptable in terms of conforming to the contracts specification or statement of work, and Furnished in compliance with other terms and conditions of the contract. Compliance with other terms and conditions includes requirements such as: FAR 4.403 FAR Subpart 4.7 FAR Subpart 22.10 FAR 22.1001 FAR 22.1002 FAR Subpart 22.9 Security classifications and requirements, Record-retention requirements, Service Contract Act requirements, Federal and state labor requirements, and Federal policies on nondiscrimination because of age. Even though ignorance of contract terms does not excuse responsibility for complying with them, many contractors overlook the finer points of a requirement in the preaward stage. Postaward orientations ensure that a contractor fully understands all the details of the Governments requirement, including those incorporated by reference, that it agreed to perform when it signed the contract.

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Extent of Orientation

The extent of information provided or discussed at an orientation depends on: A contractors past experience with Government contracts (small, small disadvantaged, and women-owned small business concerns with little Government experience will generally need more guidance); and The degree of difficulty encountered by experienced contractors on similar requirements. Exhibit 2-1 provides a menu of items to consider in your analysis.

Step 3

Document the decisions you make. Include the Exhibit 2-1 checklist as a part of your contract file. It provides an easy way to record the basis for your decision to hold a postaward orientation. This is particularly important if you decide that you dont want to hold an orientation. If things go wrong later, it demonstrates that you exercised good judgment in your early contract administration decisions. If you do hold a conference or conduct some other form of postaward orientation, you will supply additional documentation to the file on these activities. See Section 2-8 below. You may accomplish a postaward orientation in three ways: Hold a face-to-face orientation conference when you believe the contractor does not have a clear understanding of the:

2.2 Determine the Type of Orientation Face-to-Face FAR 42.502

Scope of the contract, Contracts technical requirements, or Rights and obligations of the parties in any area.

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Should I Hold a Postaward Orientation Conference?


Some common considerations in deciding whether to hold a postaward orientation conference are listed below. This checklist will help you crystallize your thoughts. The Yes answers favor a conference. Yes ____ ___ ____ _____ ____ ____ ____ ____ No ____ ____ ____ ____ ____ ____ ____ ____ Is this the contractors first Government contract? Has the contractor had little or no previous experience with this type of product or service? If the contractor has had previous Government contracts, were an unusual number of problems associated with them? Can you foresee specific potential problems for this contract? Is any aspect of this contract urgent or critical to the Government? Does the contract type require a relatively high degree of administration? Is the requirement relatively complex and of a relatively high-dollar value? Have you had little previous conversation with the contractor about this contract? (In contrast, you may have had detailed conversations during an onsite preaward survey or during negotiation sessions.) Is there any indication that misunderstandings exist? Does the procurement history of the required supplies or services reveal recurring problem areas? Is a lengthy production cycle planned? Does the contract involve spare parts and related equipment? Is the contractor a small, small disadvantaged, or women-owned business concern? Is extensive subcontracting involved? Are safety factors involved in the performance of work? Are progress payments or other interim financing arrangements involved? Can you anticipate contract changes that would require the contractor to use specialized accounting procedures? Exhibit 2-1

____ ____ ____ ____ ____ ____ ____ ____ ____

____ ____ ____ ____ ____ ____ ____ ____ ____

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Letter FAR 42.504

Generally, you can use a letter as an alternative to a formal postaward conference when: Only minor details need to be conveyed to the contractor, The contractor has had previous experience in producing the items or providing the services, and The procurement is not particularly complex. For example, a letter may suffice if you need only communicate specifics about onsite availability, instructions for paperwork submissions, or such other fairly straightforward elements. You can include a notice of the CORs/COTRs designation within this letter as well. Exhibit 2-2 provides a sample postaward orientation letter.

Phone

A telephone conference is usually sufficient when: You have had good prior experience with the contractor, Matters for discussions are relatively straightforward, or You do not anticipate problems for good reasons.

Combining Orientation Methods

A postaward orientation may represent a combination of these methods. You may have an uncomplicated procurement with a new contractor for which performance is not required at your installation. In this case, especially if the contractor is not located near your installation, you may find it useful to have a letter convey a few important points. You may also decide to use a telephone conference to establish a personal working relationship.

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An Alternative: The Postaward Orientation Letter


TO: FROM: Gary Green, Project Manager, XYZ Power Co. Al Jones, Contracting Officer

SUBJECT: Contract No. 104230-97-C-1234

To avoid any potential difficulties, I am writing to point out a requirement of the subject contract that has led to problems in other contracts. Also, I would like to clarify the contract completion date and identify the Government personnel who will play a role in the contracts administration. To install the four pieces of equipment required in contract line item #4, you will need to have a power outage in the west wing of Building 569, a heavily populated office building. Please note the paragraph 2.a(1) of the statement of work requires that this power outage take place on Sunday, a Federal holiday, between the hours of midnight and 6:00 a.m. In addition, paragraph 2.a(5) of the statement of work requires that you provide me with seven calendar days notice of your need for this outage. (Send the original notice to Mr. Smith see below.) The reason for the preceding requirement is that we have computers on-line 24 hours a day in that wing of the building, as well as other operations, that cannot be disrupted. Since performance time is expressed in the contract as 120 calendar days after contract award, I want to affirm the date for contract completion as January 30, 1997. Mr. Howard Smith is my representative for the technical aspects of this contract. Accordingly, he is referred to as the contracting officers representative (COR). He is not authorized to make any changes to the contract as written. He does have the authority to inspect and accept the equipment for the Government. You will receive any change to the contract as an official modification signed by me or another Government official.

Exhibit 2-2 (continued on next page)

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POSTAWARD ORIENTATION

An Alternative: The Postaward Orientation Letter


The list below summarizes your paperwork submissions and identifies the individuals to whom you should send them: Final quality control plan. (You provided a draft plan at the preaward survey.) Ms. Jane Doe Quality Assurance Specialist Dept. DEF - Room 829 Your Agency 123 Main Street Our Town, PA 10000-9876 Mr. Howard Smith Plant Manager Your Agency Dept. XYZ - Room 117 123 Main Street Our Town, PA 10000-9876

Request notice for the power outage, request for interim inspection required by paragraph 10.a(7) of the statement of work, and technical reports required by contract line item #7. All other submissions and correspondence (inincluding nontechnical questions) should be addressed to me.

Mr. Al Jones Contracting Officer Dept. ABC - Room 401 Your Agency 123 Main Street Our Town, PA 10000-9876

Dont hesitate to call me if you want to discuss any aspect of this contract. My telephone number is 100-123-1234, and Im usually in my office between the hours of 7:30 a.m. and 4:00 p.m.

Exhibit 2-2 (continued)

2.3 Planning Orientations

Once the need for an orientation is established, plan it carefully to make certain that its goals are accomplished. Detailed planning is particularly important when you use a formal postaward conference. It is also important to plan what will be addressed in a letter or telephone orientation. Addressing the steps listed in Exhibit 2-3 ensures that you are thoroughly prepared for the orientation and have considered all potential problem areas.

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The Planning Process

The following seven steps identify basic activities associated with planning a postaward orientation conference. Prepare the Governments position. You may recognize the need to make judgments on issues such as: Government-furnished property procedures (if the contract does not outline them), Ambiguous or unclear contractual specifications or clauses, or Testing or quality control procedures (if they are incomplete in the contract or otherwise need to be supplemented). Postaward problems in these areas might affect the quality of the product or work, cause delays in delivery, increase the scope of work and cost, and require a contract modification to remedy the situation.

Step 1

Orientation Planning Tasks


Prepare the Governments position and its understanding on key issues. Prepare a conference agenda and determine the time and place for meeting. Designate the Governments participants and name the chairperson. Traditionally the CO is the chairperson. Brief the Governments chairperson and participants on their roles. Provide the contractor with a copy of the conference agenda. Obtain the contractors response to the agenda. Finalize the conference agenda.

Exhibit 2-3

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ACQUISITION TEAM PLANNING Recall that Joanne asked Eric to provide an agenda for a postaward orientation meeting with Platform Industries. In doing so, Eric met with Harry to isolate and iron out key technical and contractual issues and concerns that both felt would affect contract performance. During their meeting, Harry pointed out the need for making sure that Platforms pursuit of a performance specification effort was monitored effectively. He suggested that an early understanding with Platform about reporting the results of its effort was very important, since any delivery orders for pallets had to await the successful completion of the companys effort to meet the performance functions set forth in the specification. Eric expressed his concern about making sure that Platform understood the basis for the issuance of delivery orders under an indefinite-quantity arrangement, and he wanted to drive home the point that delivery order schedules had to be met. Both Eric and Harry agreed that Platforms warranty of fitness for a particular purpose was a front-burner item that had to be strongly reinforced. To ensure reasonable monitoring of the contractors effort, Eric determined that Harry should have a contract administration role in representing the contracting officer as a designated technical representative. Harry agreed with this. Yet again, Eric reviewed the contract clauses under FAR 52.212-4 to determine those that needed to be stressed with Platform at a postaward orientation meeting.

Step 2

Prepare the agenda and set the time and place for the conference. Include in the agenda all matters needing clarification or otherwise requiring discussion with the contractor to avoid later misunderstandings. Items for the agenda should consider: Special contract clauses, Critical milestones, Contractor quality control procedures, Contractor reporting requirements, Billing and payment procedures, Roles of the Governments contract administration team members, and

Possible Agenda Items

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Roles of the contractors contract administration team members. Tailor the Agenda Use the checklist at Exhibit 2-4 as the basis for outlining your agenda. The less complex the procurement, the more you will use the N/A column. If necessary, add any item(s) that do not appear on the checklist. Remember: Tailor your agenda to fit the orientations needs. Discuss those topics that are most important to reinforcing mutual obligations and contractor performance requirements. Items that may only affect Government team members and not what the contractor is required to do can be discussed at a separate in-house session. (See Step 4.) Length of Orientation The complexity of an agenda will influence the length of any orientation. In the case of a conference, you may need to convene more than one session. Resorting to multiple sessions, however, should occur only for the most complex contracts. When an agenda addresses both high- and lowpriority items, it may be more efficient to cover the high-priority items at a formal conference and deal with those of lower priority via a teleconference, letter, or facsimile transmission. Time. There are really only two concerns about the timing of the conference: Hold the conference as soon as possible after contract award. Make sure the time is mutually agreeable before you firm it up. Where Location. Be sensible in your choice of a conference site. Certain locations will typically have advantages, for example: Contract performance sites offer ready access to physical conditions that may have a bearing on issues being discussed. Conference rooms near or within your office area offer convenience for your contract administration teams busy schedule. Sometimes you will have to analyze one sites advantages relative to those of another to make the best choice. Try to minimize travel time for all participants.

When FAR 42.501(d)

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Number of Attendees

Before you finalize your choice of a site, determine the number of contractor attendees and the number of participants among your own contract administration team. Make sure the site can accommodate the groups size. Unless you can guarantee no interruptions, always discard the temptation to have smaller conferences in your own or the contracting officers office. The convenience will not be worth the ill will and frustration felt by other attendees, both Government and contractor, for wasting their time with your other unrelated business.

Productive Versus Convenient Sites

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Checklist/Record for Postaward Orientation Conference

PART IGENERAL
1. Contract No. 5. Preaward Survey? YES NO PART IICONFEREES 1. Government 2. Contractor 2. Total Amount 6. Contractor Name 3. Type of Contract 7. Contractor Address 4. Date of Conference

PART IIICONFERENCE PROGRAM Subject A. GENERAL 1. Function and authority of assigned personnel 2. Routing of correspondence 3. Omissions or conflicting provisions 4. Other (specify) B. REPORTS: PREPARATION AND SUBMITTAL 1. Work progress 2. Financial 3. Other (specify) C. SUBCONTRACTS 1. Consent to placement 2. Primes responsibility for administration 3. Cost or pricing data 4. Source inspection 5. Other (specify) D. SB, SDB, and WOSB Subcontracting 1. Contractual requirements 2. Program to facilitate E. CONTRACT MODIFICATIONS F. GOVERNMENT PROPERTY 1. Use of facilities and tooling Check if applicable Clause No. if applicable Significant conclusions, further action to be taken (attach additional sheets if necessary

Exhibit 2-4 (continued on next page)

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POSTAWARD ORIENTATION

Checklist/Record for Postaward Orientation Conference


Check if Applicable Clause No. if Applicable Significant conclusions, further action to be taken (attach additional sheets if necessary

Subject 2. Maintenance and preservation 3. Property procedure approval 4. Property disposal procedures 5. Other (specify) G. SPECIAL CLAUSES 1. Repricing 2. Liquidated damages 3. Government financing 4. Special tooling 5. Overtime 6. Bill of materials 7. Data rights 8. Warranties 9. Work performed at government installations 10. Other (specify) H. GENERAL CLAUSES 1. Limitation of cost 2. Allowability of cost 3. Other (specify) I. DELIVERY SCHEDULES J. TRANSPORTATION K. INVOICING AND BILLING INSTRUCTIONS l. PROCESSING OF COST AND PRICE PROPOSALS M. LABOR 1. Actual and potential labor disputes 2. Davis-Bacon Act 3. Work Hours Act 4. Walsh-Healey Act 5. Copeland Anti-Kickback Act

Exhibit 2-4 (continued on next page)

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Checklist/Record for Postaward Orientation Conference


Check if Applicable Clause No. if Applicable Significant conclusions, further action to be taken (attach additional sheets if necessary

Subject N. QUALITY ASSURANCE AND ENGINEERING 1. Quality control system 2. Waivers and deviations 3. Drawing/design approval 4. Manuals 5. Preproduction sample 6. Qualifications and environmental tests 7. Inspection and acceptance 8. Specification interpretation 9. Laboratory facilities 10. Value engineering clause 11. Other (specify) O. PRODUCTION 1. Production planning 2. Milestones and other monitoring devices 3. Production surveillance 4. Safety

(Additional Notes)

Exhibit 2-4 (continued)

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POSTAWARD ORIENTATION

Step 3

Designate Government participants to attend a preliminary meeting. Invite Government representatives to attend who will interact with the contractor during performance. Invite only people who will have a significant role such as: COR/COTR, Program manager, Project inspector, Quality assurance specialist, and Other appropriate subject matter experts. One preliminary group meeting is usually sufficient. However, if you, the ACO, anticipate lengthy discussions with one Government representative, hold a separate one-on-one meeting with that person. You might invite using organizations if the work will take place in their office area and if one of their office employees is not participating in another capacity. If the conference would result in a discussion of price or cost issues, invite your cost/price analyst. For a smooth transition from preaward to postaward when contract administration functions are delegated, invite the procuring contracting officer. Questions might be raised that only the procuring contracting officer could answer adequately.

Step 4

Brief Government participants on their roles. On larger contracts, it may be useful to hold a preliminary meeting with appropriate Government personnel to ensure that the Governments expectations are clearly expressed and understood. You may have some strong personalities on your contract administration team. Emphasize who is in charge and chairing the meeting. It is either you (the contract administrator) or the contracting officer. The COR/COTR might also chair the meeting if the contract administrator and the contracting officer could not attend. Also, the COR/ COTR could chair a preliminary meeting covering only technical issues. Final decisions affecting contract terms and conditions must be made by the contracting officer. Distribute your contract administration plan at the preliminary meeting and conduct a page-by-page review of its contents. The purpose of this preliminary meeting, or individual briefings, is to: Identify all actions that must be taken by the Government,

Purpose of Internal Briefings

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Ensure that all Government personnel involved have a clear understanding of the contracts terms and conditions and their respective responsibilities, Establish a common front relative to the contractors responsibilities, Identify which Government participants will be making a presentation at the postaward orientation conference and restrict the time and subject matter of each, and Otherwise finalize agenda items with Government participants.

HARRYS CONTINUING CONCERN Eric received a call from Harry about an hour after their meeting. Im not left with a warm, fuzzy feeling, Eric, about the business of monitoring Platforms effort to get after the procurements performance specification. I mean I can visit them periodically. After all, their factory is only 100 miles or so down the road. My concern runs to what alternative methodologies theyll utilize to conclude that they have whipped the pallet pliability problem. Well, I share your concern, Eric said, and perhaps we should have been more specific about all this in Platforms contract. Actually, the contractors responsibility is to meet the functional conditions of the spec. We didnt set forth any specific reporting or progress requirements about all that, except that meeting the specs functions was to be done not later than 40 calendar days after award. Okay, Mike joined in, but cant we just ask Platform to provide us with a modest written report on its progress, say weekly? I sure want to understand what theyre doing and why theyre doing it. Eric winced a bit and was quick to share his understanding. Hey, Im with you, Mike, on what you want, but weve got a fixed-price arrangement here, and I cant require the submission of any information thats not set forth in the contract. Unless, of course, you want to pay for it. Mike took a deep breath. Were already on the hook for a lot of bucks in this deal, Eric, if it happens the way we trust it will. Cant we just ask Platform to stretch itself a bit in accommodating our need to let us know what theyre doing? Maybe so, responded Eric. Ill have to raise that one with Joanne and see what we can do.

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POSTAWARD ORIENTATION

Step 5

Provide a copy of the agenda to the contractor. When you do this, ask for feedback by a specific calendar date. Obtain the contractors response to the agenda. If you dont get a response by the time you asked for feedback, provide the contractor with a written or oral notice that the agenda provided earlier is final. If the contractor responds, discuss its input. Make changes to your agenda as necessary. Provide the contractor and Government attendees with copies of the final agenda. Finalize the agenda. If preliminary conference discussions point out the need for a possible change to the contract or to the Governments normal method of operations, get agreement among appropriate Government personnel prior to the meeting. Also discuss and finalize the handling of potential problems you identify. You need to show a united Government front at the orientation meeting. Goals for conducting a postaward orientation, whether by letter, telephone, or in person are the same. See Exhibit 2-5.

Step 6

Step 7

2.4 Conduct the Orientation

Your Orientation Goals


Clarify any procedures to implement contract requirements smoothly. Clarify roles of both Government and contractor key personnel. Detail the more critical or complex requirements to ensure understanding. Invite questions from the contractor on any requirement needing clarification.

Exhibit 2-5

Steps to Attain Goals

Any orientation conference agenda should permit a logical step-by-step approach to fulfill its goals. The following six steps allow this to occur. Introduce the participants. At the opening of the conference, the chairperson introduces each attendee by name and title, along with a onesentence explanation of the role that person will play in contract administration. You can detail these roles later, but first make sure that that eve-

Step 1

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ryone knows who is speaking during the session. If you are the chairperson and dont know all the contractors attendees, ask the contractor to make those introductions. Step 2 FAR 42.503-2 Explain the purpose of the conference. Go over the points outlined in Exhibit 2-5, but also emphasize that the conference is not intended to change or alter the contract in any way. Emphasize that the only way the contract will be changed or altered is by a written modification signed by the contracting officer. DoD publishes a post-award conference procedure program, outlined in DD Form 1484, Post-Award Conference Record.

DoD Post-award Procedure DFARS 242.503-2 DD Form 1484 Step 3

Summarize the roles of Government key personnel. Clarify the limits, authorities, roles, and responsibilities of each Government representative. Ask the contractor to advise the Government of the roles, responsibilities, limits, and authorities of each contractor representative. Emphasize that the contracting officer is the Governments agent to change or alter the contract. Any exception to this must be specified clearly. Affirm that conference participants without authority to bind the Government must take no action that in any way changes or alters the contract. Further advise the contractor that the Government is not obligated to make any contract adjustments as a result of an action taken by a Government representative unless the action has been specifically authorized in the representatives letter of designation or by the contract itself.

Step 4

Provide general instructions. General contract administration instructions include information necessary for the contractor to understand its risks as well as the Governments, and they address contractor responsibilities for: Management and supervision of the work force, Protection and control of Government property, data, and reports, Compliance with contract clauses, and Other appropriate areas of concern. Advise contractors of the proper routing of correspondence. Explain that matters pertaining to technical performance may be addressed directly to 2-23

POSTAWARD ORIENTATION

the COR/COTR or project officer, but that matters pertaining to questions of fact dealing with contractual terms and conditions must be sent to the contracting officer. Step 5 FAR 22.805(b) FAR 22.1020 FAR 22.1304 FAR 22.1404 Provide the contractor with posters, notices, and other data. Labor law implementation will sometimes require that the contractor post equal employment opportunity posters at the job site, including posters that outline the rights of handicapped persons. If the contract requires posting laborrelated notices, the Government is responsible for providing them. The Government may also need to provide seniority lists from incumbent service contractors ranking its current employees to new follow-on contractors for new service periods. Often Government publications are listed as Government-furnished material. Consider distributing these and other data you need to provide at this orientation conference. Secure agreement on milestones or interpretation of terms and conditions. For milestones that require the contractors input, seek the contractors agreement now. If you identified ambiguities in key contract terms when drawing up your contract administration plan, get agreement on these now. If not, emphasize significant and critical terms. Key discussion items would be any uncertainty about terms that would affect: Performance, Interim delivery, and Payment. During the conference, request any information or response from the contractor to ensure a mutually uniform understanding of key terms and conditions.

Step 6

IT NEVER HURTS TO ASK

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When Eric took Harrys continuing concern about the performance specification to Joanne, the contracting officer threw the ball back to her contract administrator. Well, she asked, whats your recommendation about that? Eric was quick and decisive in his response. I say we should ask Platform what its customary commercial practice is in reporting to its customers on dealing with a performance spec. If the answer is favorable to Harry, then lets record it in our postaward orientation memo, and leave it at that. If the answer is unfavorable, then lets press the issue and see if Platform will buy a reporting requirement, which Ill put together for the meeting, at no cost to the government. In any event, lets not agree to pay for something until we exhaust all that we can do to bargain for a reasonable delivery from the contractor without increasing the price. Thats just good business practice. Joanne flashed one of her infrequent smiles. Okay, Eric, lets do that. After all, nothing ventured, nothing gained.

2.5 Prepare Postaward Orientation Report FAR 42.503-3

Use any convenient format for an orientation report as long as it contains all the information necessary to document the events of the meeting. Common key elements of a report are contained in Exhibit 2-6. Make sure that the contracting officer, the COR/COTR, the contractor, and others as appropriate, receive copies of the report. Include a copy in the contract file. If the contracting officer does not write this report, it is a good practice to have that person review it initially to ensure an awareness of any problems or the need for future action.

Key Elements of a Postaward Orientation Report


The names and affiliations of all participants. The main points discussed and all agreements reached. Areas requiring resolution. Names of participants assigned responsibility for further actions. Completion dates for the actions. Exhibit 2-6

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POSTAWARD ORIENTATION

DoD Report Form DFARS 242.503-3 DD Form 1484 Report for the Record

You may use DD Form 1484, Post-Award Conference Record, for the report.

Exhibit 2-7 is an example of a brief memorandum that can be attached to the checklist in Exhibit 2-4. It may also be used to record specific problems resolved during the orientation.

Report for the Record


February 1, 1997 I chaired a postaward orientation conference on Contract NO. ISR 97-2498-NR for repairs to a conveyor system in the Federal Building on Main Street in Our Town, PA. A detailed list of the points we covered and the names of those in attendance is attached to this record. The most pressing problem that surfaced was that none of the Government attendees knew the location of the Government-furnished replacement parts that the Government is to provide, per paragraph 1.2.3a of the statement of work. The building superintendent, Mr. Howard Ames, one of the attendees, went back to check his records after the conference. He advised me on this date that the parts in question had been ordered through the Federal Supply Schedule and had not yet been received. Our supervisor of simplified acquisition procedures, Ms. Janet Doe, found the order (Order ISN 97-9424-SP) and advised me today that the replacement parts were shipped on January 20, so Mr. Ames should be receiving them any day. Since the parts will not be needed until the second week in March, their near-term delivery is not holding up performance.

Sam Smart Contract Administrator Concurred: Jane Justice Contracting Officer

Exhibit 2-7

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2.6 Actions to Resolve Disagreements on Key Issues

Events that occur when the Government and the contractor discover a point of disagreement during an orientation conference reflect the nature of the problem. A key factor is whether the problem can be resolved easily. Remember: Each contractual problem is different, and no one approach can be used to resolve every disagreement that may arise. In general, four steps may be used to resolve points of disagreement. Document the contractors position in detail. During the conference, delve into the reasons for the contractors position and include it in the conference report. If disagreement results in an emotionally charged atmosphere, consider deferring its resolution, but assure the contractor that it will be resolved, if possible. If the problem requires joint contractor/ Government problem solving, set up an early time for a separate meeting with only those who need to be in attendance. Take appropriate action to resolve the problem. Seek technical or legal advice when necessary. Look at all possible solutions. Select the best solution to the problem and seek agreement on it. It is important that you resolve each issue in a fair and equitable manner and as quickly as possible. Although not always practicable, it is best to resolve all problems before the contractor begins any work under the contract. In seeking mutual agreement, your actions can include: Further discussions with the contractors top management, or Consideration and negotiation of a contract modification.

Step 1

Step 2

Step 3

Step 4 FAR 43.103(b) FAR Subpart 43.2

When agreement cannot be reached, take appropriate unilateral action. If a contract clause allows the contracting officer to issue a unilateral modification, this action is a likely Government solution to the stalemate.

2.7 Identify the Need for Contract Modifications FAR 43.103 FAR Subpart 43.2

If a contract change seems necessary, you must clearly define the extent of the proposed change and implement it promptly. The contracting officer must sign a contract modification in all cases. Chapter 5 addresses contract modifications.

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POSTAWARD ORIENTATION

2.8 Document the Contract File

Include the conference report detailed in 2.5, above, as well as all other material, correspondence, or actions from the postaward orientation. In the event of any subsequent disagreements with the contractor, this material can be used to reconstruct facts and events as they occurred. A welldocumented contract file will identify and verify the Governments initial position on any performance problems that were anticipated during the orientation or in the early steps of implementation.

2.9 Provide Information to Interested Parties FAR 24.202

Provide any documentation to members of your contract administration team as well as the contractor when that information affects their role in contract performance. You may also get requests for information from other interested parties, such as other companies that have proposed but were evaluated and determined to be unsuccessful offerors. Release of any information is subject to the Freedom of Information Act (FOIA). Examples of information you may not release are: Classified information, and Contractors proprietary data, including trade secrets. Your agency will have an organization tasked with providing advice on information that is or is not releasable under FOIA. Your own procurement organization may have a staff analyst to help you in these decisions. FOIA imposes a response time on answering requests for information. So initiate action on them quickly.

DoD FOIA Policy DoDD 5400.7 DoD 5400.7-R DFARS 224.203

You can find DoDs FOIA procedures in DoDD 5400.7, DoD Freedom of Information Act Program, and DoD 5400.7-R, DoD Freedom of Information Act Program.

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2.10 Obtain Executed Contractual Documents, Bonds, or Insurance FAR 28.103 FAR 28.301 FAR 28.103-3

Generally, nonconstruction contracts do not require payment or performance bonds. The contracting officer may include bonds in solicitations for services under certain circumstances. Another contract requirement may call for the submission of insurance certificates. Since bonds and certificates of insurance must be executed before performance begins, the deadline for submission should be stated in the contract. It is usually within 10 days after award. When bonds and certif-icates are required, request them immediately, normally in the letter accompanying contract award. Reference the contract clause that requires the submission and establish a time for receipt, if the contract does not provide a date. When you receive the forms, review them and, in the case of bonds, check the Treasury Department list to be sure the surety company has the requisite bonding authority. Bonding companies have limits on the amount they may bond.

FAR 28.202

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING


MONITORING THE PALLET PROCUREMENT After a brief period on the job, Eric had been assigned responsibility for monitoring the performance of nine contracts, one of which was the pallet procurement awarded to Platform Industries. Having met with Joanne to discuss her expectations of how he should undertake his expanded responsibility, he decided to unscramble some notes he had taken at their meeting. Joanne had provided Eric with a good deal to think about. As he worked to put his notes in some reasonable order, he listed the following points as a summary of their conversation:
Monitoring contractor performance comes in a variety of sizes; not every contract re-

quires the same amount of effort.


When all else fails and people start pointing fingers in several different directions, its

time to go back and read the contract.


Contractors are frequently unaware that what the big print giveth in a Government con-

tract the small print can taketh away.


Any contract of any size should have a contract administration plan; some may be less

than a page in length, and others may be of considerable size.


Keep the contract administration team advised about contractor performance and a con-

tracts status.
Make certain that technical and other support personnel understand the limitations of

any delegated authorities.


Remember that it takes two to tango; consider the contractor a partner, even though one

at arms-length. Eric felt fortified with some good, basic maxims. Right from the mouth of one he said to himself, who has the experience and insights. Reflecting on the pallet procurement, he took out the record of the postaward orientation conference with Platform Industries. It seemed to be a good tool to use for assessing the need to mon-itor the contractors performance. Having used the procedures of FAR Parts 12 and 15 to acquire the pallets, Eric knew that he could streamline the contract administration process.

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

The postaward orientation record noted that several points had been made to the contractor concerning the terms and conditions of FAR 52.212-4 (Contract Terms and ConditionsCommercial Items). For instance, Eric had invited Platforms attention to the terms and conditions for inspection and acceptance, those covering risk of loss, and the importance of meeting prescribed delivery schedules. Both Eric and Harry Carmichael, who had been designated as the COTR for the procurement, had been very specific in dealing with the warranty provision for the pallets. Eric had explained that Platforms warranty was one of fitness for a particular purpose. Harry had further explained the importance of the performance spec under which Platform would develop and test a process for wood preservation that would ensure the required pliability of the pallets. Eric had made it very clear at the postaward orientation that the Government wanted to stay on top of the development and test of a process for wood preservation. He had requested that Platform provide the COTR with a weekly written report on its progress and permit the COTR to visit and review the work of those involved in the wood preservation effort. Platforms purchasing agent had responded almost unhesitatingly. Sure, well provide Harry with a weekly report, and he can come see us anytime he wants. Then, as Eric recalled, Platforms technical representative at the orientation leaned forward and interrupted. Excuse me, Eric, he had interjected, but remember that youve bought our in-house inspection system for this procurement under FAR 52.246-1. You bet we have, Eric had replied, and well abide by that. But then he placed an important condition on the postaward table. May we assume, he had asked, that the weekly report youre willing to provide is a no-cost item to the Government? The purchasing agent had smiled and shrugged his shoulders. Sure! he had blurted out. Why not? Doing that reflects our companys customary practice in dealing with its customers. Its no big deal, so long as youre not expecting something the size of a metropolitan phone book. At the time, Eric seemed delighted and Harry looked visibly relieved. Tell you what well do, Eric had said, well draw up a brief requirement for the weekly progress report, you can review it, and if its okay well issue a modification to incorporate it into your basic indefinite-quantity contract. Again shrugging his shoulders, the purchasing agent had agreed. Sure, that makes good business sense, he had responded. I see no problem in doing it that way. After the postaward orientation, Eric and Harry met to confirm their understanding of what had been explained to Platform Industries, and to set a time for getting together to draw up a reporting requirement for the wood preservation process and to discuss the monitoring of Platforms contract. And Harrys comment to Eric after the postaward orientation had stuck in the contract administrators mind. Hey, Eric, the COTR had said, so far so good. Lets hope it stays that way.

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 3.1 3.2 3.3 3.4 Respond to contractor requests. Monitor actions of assigned Government technical and other support personnel. Obtain data on contractor performance from the commencement of work through final inspection and acceptance. Inform a requiring activity and other interested parties of a contracts status. Monitor performance under a contract of both contractor and Government personnel as well as any actions required by the contracting officer.

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INTRODUCTION TO PERFORMANCE MONITORING


Performance Monitoring Performance monitoring involves contract administration activities that contracting officers and other Government personnel use to ensure that supplies or services acquired under contracts conform to prescribed quality, quantity, and other requirements. Monitoring activities include, but are not limited to, inspection and acceptance as well as quality assurance techniques. Under a contract, both parties are obligated to perform as each has promised to do under specified terms and conditions. Not all contracts, however, are performed according to their terms and conditions or within required time frames. Poor performance or late deliveries may cause costly delays in a program. Thus the Government monitors contract performance to ensure that required supplies or services are delivered on time. Performance monitoring supports many objectives, including those given to the following:
Identifying potential delinquencies, Isolating specific performance problems, Supporting contractor requests, Pointing out the need for Government assistance, Revealing actual or anticipated default, and Identifying Government-caused delays.

Objectives of Perfor-ance Monitoring

Policy on Performance Monitoring FAR 46.102

Governmentwide policy requires agencies to ensure that:


Deliverables tendered by contractors meet contract requirements, Procedures are in place for assuring that contract requirements are

met before the acceptance of deliverables,


No contract precludes the Government from performing appropri-

ate inspection, and


Inspection and acceptance services by other agencies are used

when it is more practical or beneficial to the Government.

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Quality Program Policy DFARS 246.102

DoD policy requires:


Cost-effective quality programs, Quality audits, Quality assurance functions tailored to the specific acquisition, and Contractors provided maximum flexibility to establish quality pro-

grams in meeting contract requirements. Monitoring Contracts for Commercial Items FAR 46.102(f) Contracts for commercial items rely on a contractors existing quality assurance system as a substitute for compliance with Government inspection and testing before:
The tender of items for acceptance, unless Customary market practices for the items permit a buyers

in-process inspection. Any Government in-process inspection must be conducted in a manner consistent with customary commercial practice. Steps in Performance The steps in executing successful performance monitoring are charted on the next page. Following the flowchart, each step is discussed in detail.

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

STEPS IN SUCCESSFUL PERFORMANCE MONITORING


Input: Contract and delegations authority to contracting officers representatives.

1. Respond to contractor

2. Monitor CORs/COTRs and other ment personnel.

3-4. Obtain feedback on contractor mance or deliverables (including first tests, if applicable).

No Any problems? 12-13. Document the file and status of contract.

Yes

With deliverables from FAR Part 8 sources? No

Yes

14. Investigate and resolve as prescribed in FAR Part

5-8. Investigate actual or potential ance problems, constructive changes, or breaches.

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(Flowchart continued from prior page)

5-8. Investigate actual or potential performance problems, constructive changes, or other breaches.

Yes Constructive change?

9. Determine whether to modify the contract or to satisfy constructive changes.

No 10. Informally resolve problems.

No Problem resolved?

11. Invoke formal contractual remedies.

Yes 12-13. Document the file and report status of contract.

SUCCESSFUL PERFORMANCE MONITORING

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

3.1 Respond to Contractor Requests

The Government will be called on to review, approve, make decisions, or take other actions during the performance of a contract. Most Government actions are based on contract requirements. For instance:
The interpretation of technical specifications, Obtaining approval for contractor entry to or on a Government site, Providing an escort in controlled areas, Arranging for utility outages when required by the contractor for

maintenance or installation purposes,


Authorizing the use of overtime under certain types of contracts,

and
Authorizing used or surplus material as a substitute for new ma-

terial. Track and Respond to Requests Since the contractor is responsible for direction of the work, it is in the best position to determine when to submit requests to the Government. As a contract administrator, you should be prepared to handle requests by establishing a system to:
Track contractor requests, and Provide timely responses in accordance with the contract or other

regulatory prescriptions. Tracking Requests Many requests a contractor submits require input from other Government officials. Use a tracking system, manual or automated, so that requests that might be out of sight are not also out of mind. Remember: A request may be crucial to contract performance. In fact, the contractor may not even be able to proceed until the Government responds. For instance, a specification might call for the submission of a material sample for the Governments approval of color. While the program manager may be charged with overall responsibility for approving the color, other officials may have to concur. The contractor may be at a complete standstill until approval is received. If you have not set up a tracking system, it may take days just to locate the sample. You can use a tracking sheet such as shown in Exhibit 3-1 to monitor all such material approval requests, including those for used surplus or reconditioned material.

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Timeliness

Respond to contractor requests in a timely and efficient manner. Timely responses set the tone for a relationship with the contractor and pay dividends by minimizing the amount of contract administration required for contracts that are running smoothly. Untimely responses may have major consequences. The contractor may legitimately point to an inability to act on its request as the reason for not meeting a delivery or performance schedule. Contracts should specify both the requests a contractor must make and the amount of time the Government has to respond. If a contract does not specify a time, the Government should establish one. An effective tracking system will identify not only who is handling the response but also its due date.

Unforeseen Circumstances

Contractors may submit requests to the Government based on unforeseen circumstances. For some, the contractor may be entitled to delay delivery or performance. A timely response to these requests ensures that the contractor is held accountable for delivery or performance requirements. Unintended modifications to an existing contract often result from the action or inaction of Government personnel, frequently without their being aware of the effect of such action or inaction. This can create troublesome situations that result in a contractors efforts requiring the expenditure of time and money. That is, the contractor may claim that it construed such action or inaction to have required the performance of compensable work. Such actions are often called constructive change orders. A constructive change order may be defined as an oral or written act, or omission, provided by a presumably authorized government official that is construed to have the same effect as a formal, written change order. Despite the longstanding history of what is called the doctrine of constructive changes, the FAR contains no definition of the term con-structive change. The adjective constructive is grounded in the verb to construe. That tells us that a constructive change is one that infers or implies that an appropriate course of action is (or was) required to be taken. It can result from either a specific action or a failure to act.

3.2 Monitor Assigned Technical and Other Support Personnel

Meaning of Constructive Change Order

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

Material Approval Tracking Sheet


Contract Number: ______________________ Contractor: ___________________________

Submittal ID No.*

Contract Paragraph Number

Description of Material or Submittal

Date Request Received

Approval Needed by or Due by

Date Review Completed

Date Returned to Contractor

Approved or Rejected

Previous Submittal ID No.

*Give each resubmittal its own ID number, then cite the previous submittal number in the column on the far right.

Exhibit 3-1

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Indicative Situations for Constructive Changes

Constructive change orders are often attributed to letters, telegrams, or other documents from Government personnel that are misconstrued as directing the performance of changed or additional work. But a caution is in order: Simple suggestions, advice, comments, or opinions by Government personnel are, more often than not, held to be baseless grounds for pursuing compensation associated with alleged constructive change orders. Indicative situations that serve as the basis for constructive changes include the following:
Specifications that are impossible to perform, either in whole or

part,
Specification provisions that are defective because of conflicting

or excessive requirements,
The acceleration of work or performance despite a contractors va-

lid claim of an excusable delay,


Government inspection that exceeds any reasonable interpretation

of what a contract may require,


Government failure to disclose its superior knowledge when such

knowledge is essential to the performance of required work, and


Unauthorized technical direction by Government personnel.

Resolution of Constructive Changes

Given, for example, the determination that an alleged constructive change order was issued by a contract administration official, the Governments avenues for resolution may be to issue a formal change order under the contracts Changes clause, or to pursue some kind of ratification procedure. In both instances, a costly and time-consuming process has to occur, and the virtual impossibility of any prepricing puts the Government in a disadvantageous negotiation position. Monitoring for constructive changes can be achieved through one or more of the following methods:
Obtain copies of correspondence from technical and other support

Monitor for Constructive Changes

personnel.
Instruct contractors to submit notices for constructive changes and

other potential changes.

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

Obtain feedback on meaningful oral communications with the

con-tractor.
Periodically contact CORs/COTRs and other support personnel. Make unscheduled site visits.

Include Appropriate Changes Clause

With few exceptions, a Government contract must include an appropriate Changes clause or its applicable alternate. Each of these clauses prescribes for the issuance of change orders by the Government under specified conditions. The following clauses are required when certain types of contracts are used:
FAR 52.243-1 ChangesFixed Price. FAR 52.243-2 ChangesCost Reimbursement. FAR 52.243-3 ChangesTime-and-Materials or Labor-Hours. FAR 52.243-4 Changes (for dismantling, demolition, or removal of

FAR 43.205

improvements, and for construction when a firm-fixed-price contract is contemplated and the amount is not expected to exceed the simplified acquisition threshold).
FAR 52.243-5 Changes and Changed Conditions (for construction

when the contract amount is not expected to exceed the simplified acquisition threshold). Contract Modifications DFARS 243.205-71 Contractor Notices of Potential Changes FAR 43.104 FAR 43.107 FAR 52.243-7 Use the following clause when you plan and use a fixed price contract:
DFARS 252.243-7001, Pricing of Contract Modifications.

When used, the clause at FAR 52.243-7, Notification of Changes, requires a contractor to notify the Government in writing, as soon as possible (a specific time frame for which is to be negotiated), when the contractor determines that the Government has effected or may effect a change in the contract. This clause is not intended to be universally applied. Its use is primarily available for negotiated research and development or supply contracts for the acquisition of major systems or principal subsystems. While not prohibited from use for smaller procurements, the prescribed threshold for its optional application is $1,000,000.

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Contracting Officers Representative DFARS 243.107 FAR 52.243-7 FAR 202.101 Substantial Impact on Employment DFARS 243.107-70 DFARS 249.7003 Benefits of Notification of Changes

DoD defines the specifically authorized representative (SAR) referenced in FAR 52.243-7, Notification of Changes, as a contracting officers representative as defined in FAR 202.101.

If a modification of a major contract or subcontract will have a substantial impact on employment, the Secretary of Defense has to notify the Secretary of Labor. DoDs procedures require that contractors provide the specific impact information in all major defense program contracts. The notification procedures are established in DFARS 252.249-7002, Notification of Anticipated Contract Termination or Reduction. When appropriate, the use of the Notification of Changes clause permits the Government to (1) evaluate an alleged change and confirm that it is one, direct further performance resulting from the change, and plan for its funding; (2) countermand the alleged change; or (3) notify the contractor that no change is considered to have been made. The Notification of Changes clause specifies the responsibilities of the contractor and the Government concerning any notification of changes. The basic content requirements for the contractors notice of change are shown in Exhibit 3-2. The Governments responsibilities for responding to a contractors notice of change are shown in Exhibit 3-3.

Contractor and Government Responsibilities FAR 52.243-7(b) and (d)

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

Notice of Change Content Requirements


The date, nature, and circumstances of the conduct or action regarded as a change. The name, function, and activity of Government or contractor personnel who know about such conduct. The identification of any documents and the substance of any oral communication involved. The basis for any allegation of accelerated performance or delivery. Any element of contract performance that the contractor may use as a basis for an equitable adjustment (a change in time or money), including: Contract line-items affected. Specific labor or material categories affected. To the extent practicable, what delay and disruption in the manner and sequence of performance and their effect on continued performance have been or may be caused by the alleged change. Contractor estimates of adjustments to contract price, estimated cost, delivery schedule, or other contract terms.

The contractors estimate of a reasonable response time by the Government that would minimize cost, delay, or disruption of performance. Exhibit 3-2

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Responsibilities in Responding to a Notice of Change


Either: Confirm that the circumstances constitute a contract change. Countermand any communication regarded as a change. Deny that the alleged Government conduct constitutes a change and direct further perfor-mance. Or: If additional information is needed from the contractor to make a decision, advise the contractor what information is required and establish a date for its submission and a date by which the Government will respond. If it is determined that the alleged change did in fact occur, prepare to make an equitable adjustment in price, estimated cost, and/or delivery schedule and in such other provisions as may be affected, including the funding of the change. Modify the contract in writing. Exhibit 3-3

Importance of Communications FAR 42.1104(d)

All Government officials involved in contract administration must report to a contract administrator any meaningful communications they have held directly with the contractor. Meaningful communications would include any information that might potentially affect:
Performance, Price, cost, or Other contract requirements.

Meaningful communications help control actions that are otherwise inconsistent with contract requirements. Contact Other Government Personnel A contract administration plan may require a designated COR/COTR or other support personnel to provide periodic progress reports or daily logs of contract activity. Follow up immediately when these are not received. Analyze them for constructive changes.

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

If a contract administration plan does not include the submission of reports from support personnel, contact them on a regular basis and ask how things are going. Sometimes they will not bother you with something they think is insignificant. However, you want to have an early warning of any contract performance difficulties. Often these insignificant events can cause major future headaches. Use Other Monitoring Methods Sometimes an unannounced site visit is the most effective way to find out what is really happening. When both contractor and government personnel are there to listen to the others answers to a contract administrators questions, the result is less likely to portray a one-sided picture of events that have taken place or are currently happening. Monitoring may uncover more direct evidence of such problems as constructive changes. For instance:
Requests for change orders from the contractor, and Invoice or voucher items or amounts that are not consistent with

contract requirements. Remember: The more quickly you identify contract administration problems, the easier it will be to resolve them. 3.3 Obtain Data on Contractor Performance In addition to monitoring the actions of Government officials, you should obtain sufficient data to verify satisfactory performance. You need to recognize any evidence of potential performance problems by either the contractor or the Government. Sources for obtaining information on potential contractor performance difficulties are summarized in Exhibit 3-4.

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Sources of Contract Performance Status


FAR 42.1106 Progress and other monitoring reports. Requiring activity personnel and end users. Personal site visits and/or observations of work. Inspection and acceptance officials. Other data supporting acceptance or rejection. Other persons (both Government and contractor officials).

Exhibit 3-4

Progress and Other Monitoring Reports

Daily logs or progress reports required by a contract administration plan or the contract itself often provide early warning indicators of potential changes, delays, or other problems in contractor performance. Reports may be provided by Government officials or the contractor. CORs/COTRs may initiate written reports identifying potential or actual delays in performance. They should be advised to provide such reports:
In sufficient time for necessary action by the contracting office,

and
With a specific recommendation for action.

Submission Requirements

The required submission of written data from a contractor must be covered by a contract. However, some well-timed questions may produce valuable oral information. If your information needs are not simple enough to be answered by a brief question-and-answer session, you probably have (or should have) a contract submission requirement to fulfill that need. A contract may call for, among other things, the following:
Shop plans, Shop travellers, Blueprints,

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

Stick drawings, Wiring diagrams, Reprocurement data packages, Identification of subcontractor sources, and Progress reports.

Remember: Progress reports will be the long-term contract administration monitoring tool for a contract administrator. Progress Report Content Requirements Because the information needs of different contracts vary widely, there are no standard FAR clauses addressing content requirements for progress reports. However, progress reports do tend to have some common elements. These are listed in Exhibit 3-5.

Common Elements of Contractor Progress Reports


Actual deliveries or performance milestones met. Scheduled deliveries or projected performance milestones. Factors causing delays. Status of the work in general and by specific element. Reasons for any difficulties or delay factors. Actions taken or proposed to overcome difficulties or delay factors. Assistance needed from the Government.

Exhibit 3-5

CAO Review and Comment DFARS 242.1106(b)

The contract administration office (CAO) has to review the contractors progress reports, and then has to provide comments to the contracting officer within four working days. If the report states that the contractor is on schedule, and the CAO agrees, the CAO does not have to add comments. In all other cases, the CAO has to include comments and recommend corrective actions.

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Progress Report Actions

Normally, the COR/COTR reviews and verifies the contractors progress reports, but some contracts require direct submission to the contracting office. In this case, your contract administration plan should include a separate report from the COR/COTR. Make a comparison of similar reports and resolve any discrepancies. The fact that a monthly progress report is required does not relieve the contractor of its obligation to report anticipated or actual delays to the COR/COTR or the contracting office as soon as such delays are recognized. Once an initial analysis is made and reported, the contractor does not need to repeat the analysis in regularly scheduled progress reports, but progress toward correction must be tracked if correction was indicated in the analysis. In contracts for maintenance and overhaul, progress generally is reported and measured by the percentage of work completed.

Production Contract Reports FAR 42.1107 FAR 52.242-2

Production progress reports are generally required unless the work is performed under a Federal Supply Schedule, a construction contract, or a facilities contract. Delays in furnishing production reports allow the contracting officer to withhold from payment an amount not exceeding $25,000 or 5 percent of the total contract amount, whichever is less. Some production contracts require a phased schedule for reporting progress. There is no standard format, but these schedules are often characterized by reporting associated with various stages of the production cycle, such as:
Planning, Purchasing, Plant rearrangements, Tooling, Component manufacture, Subassembly and final assembly, Testing, and Shipping.

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

R&D Contract Reports FAR 35.002

Since the primary purpose of research and development (R&D) contracts is to advance scientific and technical knowledge, they represent some unique monitoring problems. The Government must closely monitor technical progress. Therefore, progress reports are often required from the contractor and may include such things as:
Number and names of key personnel working on the project during

the reporting period,


Facilities currently set aside for the work, Direction of the work, Experiments being conducted, Other work in process, Negative results of work or experimentation, Problems encountered, and Efforts taken to resolve problems in terms of costs, schedules, and

technical objectives. FAR 35.010 These progress reports are normally in addition to the scientific and technical reports that become a permanent record of the work accomplished under the contract. DoDs Defense Technical Information Center (DTIC) collects all scientific and technical reports from DoD and contracted efforts.

Scientific and Technical Reports DFARS 235.010 Graphic Progress Presentations

Production and other contracts may require a contractor to submit graphic displays comparing actual with scheduled progress. In the past, this was a time-consuming task, but now computer graphic software programs can create these comparison graphics with relative ease. Bar charts and milestone charts represent more simple graphic displays. An example of a milestone chart is shown as Exhibit 3-6. However, these kinds of charts do have limitations. They do not show complex interrelationships among:
Events, Tasks, Time, and

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Contractor progress.

Moreover, bar and milestone charts are difficult to revise when changes take place. Complex Graphic Presentations When a contract involves a complex web of interdependent relationships between tasks, decisions, and resources, the contractor may be required to prepare a more elaborate graphic displayone that shows what has to be done and when. This usually will help a contractor perceive the relationship among various tasks, the order in which events and decisions take place, and the need for specific resources (e.g., material, equipment, and labor). This kind of chart can serve as both a planning and a contract performance and management tool. Examples of techniques used as a basis for more elaborate display systems include:
Program Evaluation Review Technique (PERT), and Critical Path Method (CPM).

PERT and CPM charts detail interrelationships. A contract may require the contractor to submit such a chart with its offer or after contract award. On occasion, a contractor will submit them voluntarily, because it uses them for internal project management purposes. When these charts are available to the Government, they are important contract monitoring tools. (More detail on these methods is provided in Appendix A.) Meet With Requiring Activity Hold periodic meetings with requiring activity and end users to obtain, as well as provide, pertinent information on a contracts status. These meetings help foster a team approach to contract administration. When a contractor performs on-site work, they can provide early warnings of any potential performance problems. The acquisition of supplies or services from or through Government supply sources are not exempt from requirements for appropriate monitoring. These sources include:
Federal Prison Industries; The Committee for Purchase From People Who Are Blind or Se-

Monitoring Required Sources of Supplies and Services FAR 8.001

verely Disabled;
Wholesale supply sources (General Services Administration, De-

fense Logistics Agency, the Department of Veterans Affairs, and military inventory control points);

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Mandatory Federal Supply Schedules; and Optional use Federal Supply Schedules.

Acquiring Agency Monitoring Under Coordinated Acquisition DFARS 208.7001 DFARS 208.7002-1 FAR 8.405 FAR 8.407

Under the DoD Coordinated Acquisition Program, where contracting responsibilities are assigned to one or more of the departments, agencies, or the General Services Administration, the Acquiring Department is the one that has contracting responsibility under the coordinated program. The acquiring department also performs or assigns contract administration, including follow-up and expediting of inspection and transportation. While regulatory requirements vary for remedies arising from the noncompliance or nonperformance of Government supply sources, the administration of contracts with these sources should include appropriate monitoring and oversight.

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Sample Milestone Chart


PROJECT PHASES AND KEY ACTIVITIES PROJECT SCHEDULE (WEEKS AFTER START) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PERFORMANCE APPRAISAL DESIGN 1. Interview staff to determine training needs and specifications. 2. Review state-of-the-art training designs and those used in other federal agencies. 3. Identify all materials needed for data base. 4. Present concept, including linkages with other training efforts and publications. TRAINING PROGRAM DESIGN 5. Develop briefing materials. 6. Develop training materials for workshops. 7. Prepare and produce manuals. TRAINING DELIVERY 8. Develop program schedule; register participants. 9. Conduct briefings and workshops. 10. Train trainers. 11. Develop trainer manual. 12. Support trainers during initial sessions. FOLLOW-UP EVALUATION 13. Develop evaluation design. 14. Assist with evaluation. = Project milestone event

Exhibit 3-6

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AND AWAY WE GO! ... OR DO WE? About ten days after the postaward orientation for the pallet procurement, Harry Carmichael decided to visit Platform Industries facility where work had gotten un-derway on the wood preservation effort. He called ahead to Clyde Ruskin, the facilitys manager who had attended the postaward orientation, to make an appointment. Harry was determined to get things off to a good start. The facilitys manager was most cooperative. Seems like were open from dawn to dusk around here, Harry. Come when you want to. Id suggest that early morning might be a good time. That sounded good to Harry, who indicated he would drive to Platforms location the next day. He added that perhaps two or three hours onsite would be suf-ficient time for him to see what was being done and to talk with those on the job. Harry left early the next morning, arrived at Platforms facility about nine oclock, and was in Clyde Ruskins office soon thereafter. The manager seemed most accommodating. Trust you had a pleasant drive down here, Harry. And now that youre hear, what can we do for you? Harry took a folder from his briefcase and asked Clyde if he had a copy of the postaward orientation conference report. Well, uh ... no, Harry, I dont. Purchasing keeps all the paperwork. But let me get Caroline Moore to join us. Shes the one who heads up our laboratory for materials testing. Been here for years, does a fine job, and works well with everybody. Clyde called Caroline to join them, and she was there in no time. Wanting to make sure that Platforms team understood what the COTR had in mind, Harry began somewhat slowly. Appreciate the opportunity to meet with you folks to confirm what we expect of Platform in administering its contract and the orders that will be placed under it. What I want to do this morning is make certain that were all in sync as far as your weekly progress report is concerned. And beyond that, Id like you, Caroline, to show me your laboratory area and, if you will, explain how youre going about conforming to the performance spec we provided for dealing with the pallet pliability problem. Clyde and Caroline looked at each other and then at Harry. They appeared somewhat perplexed. Sure, Harry, said Clyde. Were glad to do what you want and show you what we can, but maybe we ought to get purchasing in here, since theyre the ones who handle all the paperwork. Harry sat back in his chair and said he thought that was a fine idea. In calling purchasing, Clyde found that the cognizant purchasing agent was off for the day. With an apologetic tone, he told Harry that no one else in purchasing would really know the details of Platforms contract. And as he carried on about that, Caroline interrupted him saying that she had to be at a corporate meeting in Building 1 at ten oclock. What do you want to do, Harry? asked Clyde. It looks like were short on

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people to get after things today. Maybe we can schedule all this for a later visit over the next few days. With a sense of embarrassed self-reflection, the COTR realized that he was in the middle of wasting almost an entire day. That was his problem. But as he prepared to accept Clydes suggestion for rescheduling the meeting, he was beset by a gnawing feeling that Platforms approach to administering its contract left something to be desired. Maybe he was wrong, but he sensed a feeling of benign indifference on the part of Platform after his virtually useless meeting with Clyde and Caroline. He hoped that wasnt the case, but something had to be done and he would take this up with Eric later in the day on his return to the agency.

Personal Site Visits

Hold periodic site meetings with contractor and Government technical personnel who have contract administration responsibility. Your goal is not only to identify potential change situations, as discussed earlier, but to obtain monitoring data through your own observations. On-site meetings allow both Government and contractor personnel to surface, as well as resolve, technical problems at the operating level. There are certain rules that must be followed before making a site visit when your contract administration office has delegated specific contract administration functions to another contract administration office (CAO). This type of delegation often occurs when your office has a production contract in a plant where another agency has an on-site contract administration activity. When making on-site visits to such facilities, prior notification is required, as detailed in Exhibit 3-7. If the CAO has already gathered data that will fill your data requirements, personnel within the CAO will generally discourage your visit and provide you with the existing data. When your contractor facility visit requires access to classified information, you must give advance written notice to the contractor.

Visits to Contractors Facilities FAR 42.402

Access to Classified Information During Visits to Contractors DFARS Post-Visit Reporting

In addition to the notification requirements shown in Exhibit 3-7, you are expected to inform the CAO of any agreements you reach with contractor personnel or other results of your visit that may affect CAO operations. The type of data you can expect to receive from Government officials responsible for inspection will depend on what inspection and acceptance methods are specified contractually. Under its contract, the contractor assumes responsibility for timely delivery and satisfactory performance. Performance includes furnishing the quantity and quality of items the con-

Data from Inspection Officials

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

tractor agreed to deliver and the Government agreed to pay for. Although the contractor is fundamentally responsible, the Government, through contract administration, protects its interest to ensure a quality product. Inspection and acceptance requirements included in a contract are the basis for this protection.

CAO Notification Requirements for Contractor Facility Visits


Names, official positions, and security clearance information for all visitors. Date and duration of visit. Name and address of the contractors facility and personnel to be contacted. Contract number, any program involvement, and purpose of the visit. Request for CAO representation, if desired. whether or not desired.) (The CAO may accompany visitors,

Identify data to be obtained in conjunction with the visit. Exhibit 3-7

Purpose of Inspection

The purpose of inspection is to determine whether a product or service conforms exactly to what the Government has ordered. The extent of inspection varies with the dollar value of the contract and the type of supply or service. Inspection means examining and testing supplies or services (including, when appropriate, raw materials, components, and intermediate assemblies) to determine whether they conform to contract requirements. Quality assurance is a planned pattern of all actions needed to give adequate confidence that:
Adequate acceptable technical requirements have been established, Products and services meet technical requirements, and The contractor achieves satisfactory performance.

Inspection Defined FAR 46.101 Quality Assurance Definitions DFARS 246.101

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Quality audit is a systematic examination related to quality procedures designed to independently verify or evaluate the quality program, specifications, or contract requirements. Quality program is a beginning through completion effort to develop, plan, and execute material and service quality through design, production, deployment, operations, and support. Contractual Coverage for Inspection Whenever possible, contractor self-inspection systems are used. There are basically three types of inspection systems:
Government reliance on inspection by the contractor.

FAR 52.246-1, Contractor Inspection Requirements, is the standard clause used to identify this quality level. The clause is required for use for supplies or services when the contract amount does not exceed the simplified acquisition threshold, unless the contracting officer decides that some form of Government inspection and testing is necessary. The clause does allow some specialized Government inspection and testing, but it relies on the contractor for overall inspection. An example of a specialized test for a contract not exceeding the simplified acquisition threshold could be an environ-mental test for an outdoor herbicide product. The standard inspection clause, FAR 52.246-2, Inspection of SuppliesFixed-Price, requires that the contractor establish and maintain an inspection system not otherwise defined except that it must be acceptable to the Government. The standard inspection clause can be the only inspection clause in a contract, or it can be the foundation for other Government inspection specifications. The FAR specifies other clauses for use with different contract types and in specific situations. With minor adjustments in wording for contract type and applications, these are basically the same as the standard inspection clause. FAR 52.246-11, Higher-Level Contract Quality Requirement (Government Specification), is the clause used when the technical requirements of a contract mandate closer control of work processes or attention to such factors as planning. This type of clause will require the contractor to comply with Government inspection or quality assurance procedures, if such are described in the contract.

Standard inspection requirement.

Higher-level quality control requirement.

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BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

Inspection Methods and Data

The data desired from Government inspections result from several different inspection methods. The most commonly used methods and their resultant data are:
Sensory and dimensional checks. Sensory checks are examina-

tions by an inspector using eyes, ears, and other senses. The inspector exercises a good amount of personal judgment in this method. This kind of examination reveals surface defects, missing pieces, noisy operations, and parts out of alignment. The inspector makes dimensional checks using gauges and micrometers to determine whether the dimensions of the items conform to contract specifications. Data obtained from an agencys inspection and acceptance personnel for routine commercial supply items, or items that were previously inspected at a plant, will be based on this type of inspection. Factors involved in this type of inspection are listed in Exhibit 3-8.
Physical or performance tests. This kind of inspection provides

actual performance data. Requiring that a motor run or an operating system perform at a certain level for a specified period of time are examples of this kind of inspection. Chemical tests to determine chemical composition and physical tests to determine hardness are also in this category of examination.
Destructive tests. This kind of inspection often provides data on

a worst case performance environment. Some contracts require that end products meet certain reliability standards or withstand a specific level of stress. Inspectors test these requirements simulating abuse until the item is destroyed. For instance, to test fireproofing, the inspector heats the product until it burns.

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Elements of a Commercial Item Inspection


Proper type or kind. Correct quantity. Damage check. Operability check. Preservation check for spoilage and other signs of age deterioration. Packaging and labeling requirements check. Appropriate packaging, if applicable. Proper item identification. Exhibit 3-8

LESSONS LEARNED PAY DIVIDENDS Returning from his near-useless visit to Platform, Harry consulted Eric, and the contract administrator was immediately candid with him. You blew it, Harry! You assumed that because you were ready the contractor would be, too. Doesnt always happen that way. Before you visit any contractor, youve got to make sure there is an understanding about why youre coming, what you want, and who you want to see. Thats being businesslike. Once youve established that kind of relationship, a contractor knows what to expect. Harry had taken Erics upbraiding in stride and found that lessons learned do pay dividends. Subsequent visits to Platform were preceded by either a facsimile trans-mission or E-mail that provided a brief agenda for the visit. Platform always confirmed its receipt of these, and Harry placed a copy in his contract administration file. Indeed, things had improved considerably since his first visit to Platform. His most recent visit was to observe Platforms demonstration test for pallet pliability. Harry had come to respect Carolines expertise, and she, in turn, had come to understand the COTRs frustration over the pallet pliability problem. As Clyde had told her, Treat Carmichael as though he were the customer. Be responsive and keep him fully in-formed. She had no problem in measuring up to that. It was a comprehensive demonstration test for pallet pliability and lasted the better part of a week. Within short time periods, the processed wood was exposed to extremes in temperature associated with good and bad weather. Fabricated pallets of the wood 3-29

BASIC PROCEDURES FOR SUCCESSFUL PERFORMANCE MONITORING

were tested to hold various weights, and they were lifted and lowered numerous times as would be the case in filling bins throughout the warehousing system. I guess alls well that ends well, at least up to this point, opined Harry at weeks end. He was satisfied that the new pallets met the functional requirements of the agencys performance specification. Everyone seemed pleased. Before Harry left to drive back to the agency, Clyde approached him. Can we consider the results of this week a go-ahead signal to start producing pallets, Harry? Wed like to get a leg up on things while weve got a decent inventory of lumber we can process. The COTR was equal to the occasion. Clyde, he said, what you may choose to do is up to you. As far as the results of the demonstration test are concerned, youll be hearing from our agency, in writing, over the next week. If everything is on target, it may be that youll start receiving delivery orders for pallets within the next two weeks. But I remind you that the decision to order is not mine to make and that any order must come from the contracting officer. Okay? Clyde shook his head in agreement. After Harry drove off he said to Caroline, You know, Ill never understand these Government people. Nice enough and most friendly, but theyre a cautious bunch. If we ever dealt with our suppliers and customers that way, wed be out of it. Maybe so, responded Caroline. But Ive learned a lesson or two this past week about a Government customers monitoring, especially when the stakes are pretty high. Then she added, I think were the better for it.

Interim Inspections

Even if a contract calls for reliance on the contractors inspection system, the Government retains the right to inspect and probably will inspect for adequacy and perform sensory checks. The Government has the right to inspect all materials and workmanship at any time and any place in a manner that will not unduly delay the work. Interim Government inspections may focus on different aspects of performance. For instance, determining whether:
On-schedule performance can be expected, Cost will be within the initial estimate for cost-reimbursement

types of contracts or for fixed-price types of contracts with progress payments,


Resources are being applied at originally predicted levels, Quality of end products will be consistent with the specification, Progress payments are warranted,

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New components need to be incorporated in major systems, or A contractors own inspection system is adequate.

Improper Inspections

Inspection clauses provide the Government with certain rights in contract monitoring, but the improper application of inspection procedures can jeopardize these rights. Be alert for any indication of improper inspections, most of which fall into the following categories:
Unspecified tests that are improper. The Government does not

have to specify the method it will use to test a product or service for contract conformance. It can perform tests that are unspecified. When unspecified tests impose a stricter standard of performance than is otherwise prescribed, they are improper.
Erroneous tests. Inspection testing is improper if it is not a rea-

sonable measure of contract compliance. If, however, your inspector failed to accurately perform a interim test so that a de-fective item passed through an interim inspection undetected, it will usually not prevent rejection later.
Repeated tests.

The Government generally has the right to inspect items or services it had inspected previously. If such reinspections are inconsistent with prior inspections, they are improper. Reinspections are also improper if they are unreasonable as to time and place so that undue or unnecessary delays result. Reinspections for acceptance purposes at destination when the supplies have previously been accepted at a place other than destination is inappropriate as well, except for an inspection associated with quantity, dam-age in transit, or possible substitution for fraud.

Unusual Inspections and Incompetency

When a Government inspector conducts an inspection exactly according to a contracts specifications, a rejection of supplies cannot be overturned by another test method, even though the other test shows that the supplies met the specifications of the contract. However, if a contractor produced an item that exactly conforms to a Government-furnished sample, a rejection based on improper operation is not valid because the contractor has complied with performance requirements under the contract. If the contractor can demonstrate that a Government inspector is incompetent, a rejection based on inspections made by that inspector may be invalidated through a formal appeals process. If the negligence of a Govern-ment agent causes damages to a contractor, then in all likelihood the Government will be held liable for those damages.

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Data Supporting Acceptance or Rejection

The acceptance procedure is important, because at the time and place of formal acceptance, title passes from the contractor to the Government. Acceptance is final except for:
Latent defects, Fraud, or Gross mistakes that amount to fraud.

Acceptance Standards

Acceptance is based on essentially three types of inspection standards:


Strict compliance standards. The Government generally has the

right to enforce strict compliance with contract specifications by either rejecting the work or requiring a price reduction for noncomforming work, but discretionary standards in the form of subjective standards or first article approvals are sometimes necessary.
Subjective standards. Comfortable fit or easy operation are

examples of such standards used in specifications. Brand name or equal specifications also fall into this category. Industry standards and customary commercial practices govern in these situations. FAR 52.209-3(b) FAR 52.209-4(b)
First article approvals. Because the primary purpose for first ar-

ticle approval is to prove a contractors capability of producing end items that will meet a contracts specifications, easily correctable defects are not cause for rejection of first articles. Instead, the first article approval clauses provide for conditional approval. The contract controls where items will be accepted. The point of accept-ance is:
The contractors plant, A prescribed destination point, or Anywhere else, if mutually agreeable.

Place of Acceptance FAR 46.503

Normally, when a contract requires Government quality assurance actions at a plant, acceptance will be done at the plant. When quality assurance actions are performed at destination, acceptance will ordinarily be done at destination.

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Time of Acceptance

After delivery is made, a reasonable period of time is allowed for Government acceptance or rejection. Although the Government may not have formally accepted items, acceptance may be implied by either the Governments conduct or by the Governments delay. Acceptance or rejection of supplies must be made as promptly as possible after delivery. A notice of rejection must be provided to the contractor when the product or service has been found unacceptable. Specific actions by the Government may imply acceptance when none was intended. For example, if the Government consumes part or all of delivered but defective items, then acceptance of the consumed portion has generally occurred. In other words, Government alteration of items prior to rejection, or use of the items, constitutes acceptance. The contractor is responsible for removing rejected supplies and paying the Government for any storage and similar charges. When a contractor refuses to remove rejected supplies, the Government has the authority to ship them back to the contractor at the contractors expense. The Government may be able to sell those supplies and use the proceeds against storage charges.

Notification of Acceptance or Rejection

Transfer of Ownership FAR 46.505

Ownership (title) transfers to the Government upon formal acceptance. The time of this ownership transfer is significant when damage or loss occurs. The Government becomes responsible for the damage or loss based on the following delivery requirements: F.O.B. (Free on board) Origin F.O.B. (Free on board) Destination Contractor has delivered conforming supplies to the carrier. Contractor has delivered conforming supplies to destination and the supplies have been accepted by the Government.

Evidence of Final Inspection or Acceptance

As evidence of final inspection or acceptance, you usually see one or more of the following documents:
A receiving report.

This report is signed by an official authorized to accept supplies or services for the Government. It is usually written evidence of final acceptance. DD Form 250, Material Inspection and Receiving Report, is the document generally used for formal acceptance by the Department of Defense (DoD). Other agencies usually have their own unique forms as found in agency FAR supplements.

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A copy of an invoice (or voucher).

Signed by an authorized official, this can serve as an acceptance document if permitted by a contract. portation carrier is responsible to the contractor for any damage or loss, and the contractor, in turn, is responsible to the Government. When a contract so states, a CBL usually means that the Government is responsible for freight payments.

A contractors bill of lading (CBL). Under a CBL, the trans-

FAR 52.246-15

Certificate of Conformance.

This certificate may be used in certain instances instead of source inspection (whether the contract calls for acceptance at source or destination) at the contracting officers discretion. The following conditions apply: (1) acceptance on the basis of a contractors certificate of conformance is in the Governments interest; (2) small losses would be incurred in the event of a defect; or (3) the contractors past-performance reputation makes it likely that deliverables will be acceptable and any defective work will be replaced or corrected without contest. The Government still retains the right to inspect the deliverables.

Application of FAR Clauses for Transportation FAR Subpart 42.14

There is a series of 67 solicitation provisions and contract clauses found within the framework of FAR 52.247 that deals with transportation. Almost one-third of these deal with the postaward aspects of the F.O.B. point or the payment of freight. A contract administrator must carefully assess which one or more of these is required for any given solicitation or contract document. The legal significance of the F.O.B. point is that it signifies the point of acceptance which, in turn, almost always indicates the point at which title (ownership) passes from the contractor to the Government.

3.4 Inform Others of Contract Status

When a contract progresses to its successful completion according to plan, the contract administrator should provide the status of that contract to all interested parties. Transmitting a contracts status can take one or more of several forms:
Individual or conference telephone calls. This is a simple and

timesaving device as long as caution is exercised in sharing information about contractor performance that is appropriate for telephone conversations.
Individual or group meetings. If what is to be shared requires

the distribution of information (e.g., contractor or Government progress or other reports), then a one-on-one meeting with an interested party or a group meeting of several may enhance the mes3-34

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sage and permit a dialog to occur that otherwise would not if information were transmitted by courier, mail, or electronically.
Oral briefings. On occasion, especially where there may be high

levels of interest in contractor performance because of a programs sensitivity, dollar amount, importance to the agency, or whatever, it may be advisable to present a contracts status through the use of an oral briefing along with supporting visual aides and/or other summary information presented by key Government contract administration personnel. This may be especially helpful when those to be briefed represent a variety of organizational functions.
Routing information for comments. A commonly used method

for informing interested parties, again exercising appropriate caution in the process, is to place information in a folder, tag it with an organizational routing sheet, and include a handwritten note requesting a review of the material and its return, if necessary, by whatever date. If appropriate, encourage the receivers questions or comments concerning what the information relates about a contractors performance.

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION


YET ANOTHER REALM FOR ERIC Eric was in Joannes office providing her with an update on the pallet procurement with Platform Industries. She seemed pleased with the results thus far and reinforced the need for Eric, along with Harrys input, to get after the preparation of a series of delivery orders for pallets. She reminded the contract administrator that there was a warehousing system and its customers to be serviced. Eric assured her that pallet delivery orders was a front-burner item on his agenda. Shifting gears in their conversation, Eric noted that he had run across what appeared to be some problems associated with missed or questionable delivery schedules in several ongoing contracts. He had been contacted by both Government and contractor personnel, all of whom were after him to provide some resolution of known or anticipated delivery schedule slippages. Theres no doubt I can handle these, he was quick to say, but whats your perspective on these sorts of things? As always, Joanne responded forthrightly and to the point. Perspective? Yeah, Ive got one, and its quite simple. Failure to deliver in a timely manner, unless for some excusable reason, equals a condition that amounts to default. I start there and then look at the facts of any delay situation with the objective of resolving it as best I can, making a decision based on what I find out along with inputs from both Government personnel and the contractor. Then she added jokingly, And if things really get tough, I read the contract to figure out what resolution alternatives may, or may not, be available to me as the Governments business manager. Well, Eric added quickly, that paints a fairly straight line down what can become a zigzag highway. Like Ive got three deals involving slipped deliveries and each ones different. How so? queried the contracting officer. With that opening, Eric vented his spleen. It seems that one deal has the technical people screaming about a contractors inability to deliver on time, and that is causing system problems because a required inventory of components is dangerously low. Another arrangement involves a contractor that calls weekly about the badgering he is taking from some Government field personnel who are pressuring his manufacturing people to increase deliveries against some ill-defined need for more than has been promised under the contract. And the third situation is clearly the most confusinga primes subcontractor has refused to force the issue of timely delivery with one of its vendors, claiming that the vendors most reliable distribution center, with which it always does business, has been unjustly put under lock and key by federal agents for alleged fraud in its taxreporting practices.

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Before Eric could continue, Joanne jumped in. Well! she said raising her voice, welcome to the imperfect world of contract performance, Eric. Do you know where to turn to search out what alternatives are available to you in these situations? Are you ready to exercise some busi ness judgment, or do you expect that buried in those contracts terms and conditions youll find some magical answers to your problems? She had done it to him again. No, he responded, I don't expect to find any patent leather answers, but I do expect to uncover some alternatives that can serve as a basis for, as you put it, the exercise of some business judgment. How would you approach it? Joanne was beginning to sense Erics increasing confidence in sharing his concerns during their brief conversations. She liked that. And she didnt let the opportunity pass by to do some on-the-spot training. How would I approach it? Well, certainly not like a bull in a china shop. Lets see ... And then she unloaded. Common to all three situations, Eric, Id look for solutions, if at all possible, that might satisfy both sides. Guess that means Id have to involve both sides. And then theres the matter of what each contract may contain that provides a basis for examining alternatives. Yeah, Id look for solutions through resolution. And Ill be delighted to have you report to me on how you expect to handle each situation you mentioned. By when can you do that? After all, we dont want delays in prudent business management to contribute to the muddled resolution of performance delays in Government contracts. Give me a couple of days, will you Joanne? And Ill come in with an approach to each of them. She nodded favorably, and he left understanding, yet again, why she was the boss. He was determined to measure up.

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Take all necessary steps for the resolution of performance problems identified through monitoring your Government contracts and inform a contractor and other interested parties of decisions reached and actions taken.

Individual: 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Verify and document evidence of known or predictable performance problems, including those dealing with breach of contract. Determine the impact of any problem on the requirement. Issue a suspension-of-work order or stop-work order, if needed. Prepare the Governments position on any performance delays. Resolve performance problems short of invoking a formal contractual remedy. Prepare a final decision. Invoke a formal remedy. Inform the requiring activity and other interested parties of the decision reached and action taken.

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INTRODUCTION TO PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION


Perspective on Problem-Solving Methods The key to effective, innovative problem-solving techniques is not merely to search for textbook or regulatory solutions. Proactive problem solving involves careful thought, a sense of practicality, and, wherever possible, a positive approach. Consult regulatory guidance to ascertain what may be required as a function of contractual terms and conditions. A performance problem is any known or predictable situation that may endanger or disrupt the efficient execution of a contracts terms and conditions, regardless of whether the situation was or may be caused by the contractor, the Government, or both. This chapter provides some ideas for creative approaches to the resolution of known or predictable contract performance problems associated with the suspension or stoppage of work and delays in performance. Creative approaches means:
Looking for solutions that will satisfy both parties, Seeking solutions from the contractor, and Seeking solutions from Government personnel.

Performance Problem

Determine Creative Approaches

Steps in Performance

Steps for seeking resolution to performance problems in contract administration are charted on the next page. Following the flowchart, each step is discussed in detail.

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STEPS IN PROBLEM RESOLUTION DURING CONTRACT ADMINISTRATION


Input: Contract with a stop-work order clause.

1-2. Verify and document known or predictable performance problems or other breach and determine the impact.

3. Issue a suspension-of-work order or a stop-work order, if needed.

4. Prepare the Governments position on the delay of work.

5-6. If possible, resolve the problem short of a formal contractual remedy and prepare a final decision.

7. Inform the requiring activity and other interested parties of the contracts status.

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION


4.1 Verify and Document Known or Predictable Performance Problems The careful monitoring of a contract pays dividends in the early identification of performance problems. Performance problems that can occur are

Examples of Performance Problems


SCHEDULE: COST: Failure to deliver or make progress toward timely delivery. Exceeding cost estimates or budgets on cost-reimbursement or fixed-price types of contracts so as to endanger both schedule and performance (or even its very survival). Supplies or services in process or being delivered do not meet contract requirements or are not expected to do so. Contractor noncompliance with other terms and conditions of a contract (e.g., with clauses on labor rates, clean air and water, subcontracting goals, or maintaining specified working conditions).

QUALITY: OTHER COMPLIANCE:

shown in Exhibit 4-1.

Exhibit 4-1

Common Cause of Performance Problems

Each of the problems in Exhibit 4-1 has a common denominator. It involves a potentially broken promise, technically known as a breach. A breach of contract is a failure, without legal excuse, to perform any promise that forms the whole or part of a contract. For instance, when a party to a contract:
Fails to perform, either in whole or in part, Gives notice beforehand that it will not perform the contract when

the time for performance arrives (constructive breach), or

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Makes performance impossible for itself or the other party.

Every breach of contract gives the injured party the right to pursue and collect damages. Moreover, the party harmed by a breach may sometimes, in addition to pursuing and collecting damages, be excused from its performance responsibilities. Breach Under a Government Contract The Government can be guilty of a breach when it:
Issues a unilateral change to a contract that is outside the scope of

the contract, or
Fails to disclose pertinent site information for on-site work.

The contractor can be guilty of a breach when it:


Abandons contract performance, or Commits a fraudulent act in connection with a contract.

Determine Symptoms and Cause

You may need to conduct factfinding with the officials involved in a problem to identify its symptoms and cause. Methods used in factfinding include:
Discussions with the contractor, Personal observations at the work site, Discussions with a COR/COTR, Discussions with audit personnel, Discussions with quality assurance personnel, and Discussions with requiring activity and user personnel.

4.2 Determine Impact of Problem on Requirement

When a problem surfaces, immediately ask: What does the contract say regarding this situation? Always consider a problem as it mirrors or relates to a contracts terms or conditions. Many problems disappear when you isolate terms and conditions that apply to them. For example, a technical specialist may report that the contractor is using inferior material. Required contract clauses generally make contractors responsible for overall product or service quality, offering for acceptance only those items that conform to contract requirements. While the technical specialist may be disappointed in the

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

quality of the product, a review of the actual contract requirement may indicate that the product was in conformance and, therefore, acceptable. Relate Problems to Contract Language Many so-called problems can be avoided simply by reading the contract. You may discover after factfinding that the problem is in the contract itself. The Government may have made one interpretation of what is required and the contractor another. In problems arising out of differing interpretations, the contract administrator will first need to determine whether a contracts language is ambiguous or whether unreasonable in-

Rules of Contract Interpretation


Everyday words are given their dictionary definition. Technical words are defined as is usual or common in the trade or technical area, unless the context or usage indicates a different meaning. Words defined by the contract are interpreted as the contract defines them. The same word, used in different parts of the contract, is presumed to mean the same thing. Contract language should not be interpreted or defined so as to render the language meaningless or the rights and obligations of either party unrealistic. The contract should be read as a whole and, wherever possible, consistently. When there is a conflict between two of a contracts sections and there is no specific direction to the contrary: Handwritten language takes precedence over typed language. Typed language takes precedence over printed language. Specific clauses take precedence over general clauses. (The presumption is that a specific clause qualifies a general clause and, therefore, carries more weight.)

Where the public interest is affected, an interpretation is preferred which favors that interest.

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terpretations have made. Use the guidelines in Exhibit 4-2.

Exhibit 4-2

Be a Calming Force

If there is a problem involving someone who is making an unreasonable interpretation, your job is to convince that person, calmly and with cool logic, that the position being advocated is unrealistic. Ambiguous language is usually interpreted against the drafter, unless the other partys interpretation is unreasonable. Moreover, if the ambiguity is obvious, the other party (the nondrafter) has the duty to request clarification before contract award. If the nondrafter does not and the ambiguous language is obvious, the courts would probably say that the nondrafter had the last opportunity to correct the deficiency and did not. If a contracts words do not point to a solution, see if there is any evidence as to what the Government and the contractor intended initially. Look for inconsistencies with past interpretations of the same language by either the Government or contractor. Courts and boards will generally hold a contracting party to interpretations that it held, or at least did not challenge, prior to the dispute. A Government interpretation of language in the specifications at the postaward orientation will prevail over a later contradictory Government opinion. Similarly, when the Government can show that the contractor originally calculated certain work as required by the contract and is now trying to claim the work is extra, that work will be considered part of the basic contract and not additional work. Your documentation and factfinding efforts may be hampered by someone trying to cover up actions that are now regretted. A problem-solving attitude always yields better results than a finger-pointing approach.

Deal With Ambiguous Language

Intentions Related to Interpretations

Get Everything On the Table

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CAUSE AND EFFECT: A TWO-SIDED COIN In delving into the netherworld of performance delays, Eric began to realize that oper-ational contract administration was far more than the simple application of regulatory prescriptions or the enforcement of numerous contract clauses. Indeed, as he often said, Theres no end to the intricacies of it all. And in many instances, the answer to a problem is not found in strict contractual language, but rather in ascertaining its cause and determining the impact of its effect. In the three cases he had briefly conveyed to Joanne, he found contractual language in each that set forth the parties rights and responsibilities concerning performance delays. If a delay was excusable, that was one thing. If a delay rested on the Governments shoulders, that was another. If a delay was occasioned by Government action or inaction under a change order, that could produce another. And on and on. In reviewing each case, Eric determined that its resolution had to deal with issues associated with cause and effect. And a big factor had to be the significance of a delay in terms of its ripple effect. This was the stuff, he concluded, from which a final decision could be shaped and justified. Certainly there were cut-and-dried contractor delin-quencies that represented airtight default situations, as well as examples of overzealous Government administration that had contributed to contractor performance problems and subsequent delays. But in many instances, it was clear that separating the wheat from the chaff was not an easy job. The contract administrator determined that for any performance delay, including those that appeared to be open-and-shut cases, he would exercise a four-step methodology in working to establish a justifiable course of action. He tapped out the following on his computer, ran a copy for Joanne, and banked it for future reference.
First, determine the cause or causes of the delay by questioning and listening

to both sides.
Second, examine the contractual responsibilities and rights of both parties in

the event of a performance delay.


Third, assess the extent of the delays impact, both operationally and

fi-nancially, on the Governments interests.


Fourth, document the results of the previous steps, share them with interested

parties, and make a written final decision for action.

Determine the Extent of Problem Damage

When a known or predictable performance problem has been identified and it is not just a simple matter of clarifying a contracts requirements, you must determine the problems significance. The overriding issue is

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the extent of damage the Government will incur if the problem is not resolved. Factors that must be considered include:
Delivery, Price or cost, Quantity, and Quality.

The amount of time and effort you will need to resolve the problem has a direct relationship to the problems significance to the users requirement. 4.3 Suspension or Stoppage of Work One of the first issues you must deal with when a serious problem surfaces is whether the contractor should continue performance. Some of the questions you need to ask are:
How serious is the problem? How long will it take to correct the problem? Which is more costly to the Governmentpaying additional

mon-ey for suspending or stopping the work until the problem is fixed or paying money for the work to be corrected later? A contract administrator is responsible for making decisions that are in the Governments best interest, not only as that interest relates to one contract, but as it relates to the Governments overall well-being. Identify Need to Suspend Work FAR 42.1302 Under a construction or architect-engineer contract, if provided by the contract, the contracting officer may order a suspension of work for a reasonable period of time. If the suspension is unreasonable, the contractor may submit a written claim for increases in the cost of performance, excluding profit. If the performance of all or any part of the work under a construction or architect-engineer contract is suspended, delayed, or interrupted by an act of the contracting officer, or a failure to act within the time specified in the contract (or within a reasonable time if not specified), an adjustment is to be made for any increase in cost, excluding profit, that is necessarily caused by an unreasonable suspension, delay, or interruption of the work. No adjustment is to be made for any other cause, including the fault or negligence of the contractor, unless provided under any other term or condition of the contract.

Conditions for Claims Under Suspended Work FAR 52.242-14

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

More specifically:
Any adjustment to the contract must be in writing. A claim is not allowed for any costs incurred more than 20 days

before the contractor notified the contracting officer in writing of the act or failure to act (except this condition does not apply to a claim resulting from a suspension order).
A claim, in an amount stated, must be asserted in writing as soon

as practicable after the termination of the suspension, delay, or interruption, but not later than the date of final payment under the contract. Identify Need to Stop Work FAR 42.1303 Under any negotiated fixed-price or cost-reimbursement type of supply, research and development, or service contract, if provided by the contract, the contracting officer may issue a stop-work order if stoppage is required for reasons such as advancement in the state of the art, production or engineering breakthroughs, or realignment of programs. Generally, a stop-work order is issued only if it is advisable to suspend work pending a decision by the Government and a supplemental agreement providing for the suspension is not feasible. Issuance of a stop-work order must be approved at a level higher than the contracting officer, and a stop-work order must not be used in place of a termination notice after a decision to terminate has been made. Sequence of Events on Issuance FAR 52.242-15 The following general sequence of events must occur in a non-facilities acquisition stop-work order action. (Stop-work orders for facilities contracts are treated under the clause at FAR 52.242-16, Stop-Work OrderFacilities.)
The contracting officer may issue a stop-work order, in writing, at

Conditions for Issuing Stop-Work Orders FAR 42.1303(a) and (b)

any time requiring the contractor to stop all or any part of the work called for by the contract for a period of 90 days (this may reduced to a lesser time in the contract) and for any further period agreed to by the parties. (A lesser time period, if one can be specified, will enable to contractor to hold down costs associated with any work stoppage.)
On receipt of an order, the contractor must comply with its terms

and take all reasonable steps to minimize the incurrence of costs allocable to work covered by the order during the period of work stoppage.

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Within the 90-day (or other) period, the contracting officer must

either cancel a stop-work order or terminate the work covered by the order as provided in the contracts termination clause(s).
If a stop-work order is canceled or the period of the order expires,

the contractor must resume work and is entitled to an equitable adjustment in cost, price, and/or delivery, if the order resulted in an increase of the time required to perform or in the cost properly allocable to performance of the contract.
The contractor must assert its right to an adjustment within 30 days

after the end of a work stoppage, but the contracting officer may deal with a claim submitted any time before final payment under the contract.
If a stop-work order is not canceled and the work covered by the

order is terminated for convenience, the contracting officer must allow reasonable costs resulting from the order in arriving at a termination settlement.
If a stop-work order is not canceled and the work covered by the

order is terminated for default, the contracting officer must allow, by equitable adjustment or otherwise, reasonable costs resulting from the order. Contents of Stop-Work Order FAR 42.1303(c) A stop-work order should include the following:
A description of the work to be suspended, Instructions concerning the contractors issuance of further orders

for materials or services,


Guidance to the contractor on action to be taken on any subcon-

tracts, and
Other suggestions to the contractor for minimizing costs.

After Issuing Stop-Work Order FAR 42.1303(d) and (e)

Promptly after issuing a stop-work order, the contracting officer should discuss the order with the contractor and, if appropriate, modify the order in light of the discussion. As soon as feasible after issuing a stop-work order, but before its expiration, the contracting officer must take appropriate action to do one of the following, as detailed above:
Terminate the contract,

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Cancel the stop-work order (such a cancellation requires the same

approvals as its issuance), or


Extend the period of the stop-work order if necessary and if the

contractor agrees (such an extension requires a supplemental agree-ment).

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TO STOP OR NOT TO STOP? ... THAT IS THE QUESTION Eric was in the middle of a secure phone call from Chuck Aimsley, the agencys director of material management. Chuck was explaining to him that the agencys firm-fixed-price contract with Manufacturing Unlimited for 25,000 security devices, to be distributed worldwide, was bordering on a problem. The contractor had been performing well, and its deliverables, with few exceptions, were on time and in compliance with the Gov-ernments specification. After three months of performance, everyone was pleased. So whats the problem, Cbuck? asked Eric. Aimsley than went into an extended explanation of national security requirements for the devices which, as the contract administrator recalled, had set the stage for the requirement several months ago. As Aimsley carried on about this, he reached the bottom line of his phone call. In a nutshell, Eric, the problem we have is that top-side is about to issue new regulations concerning security procedures that reflect what weve learned from terrorist activities over the past year. Okay, Eric said, that sounds responsible to me. But whats that got to do with Manufacturing Unlimiteds deal? Aimsley responded very simply. A whole lot, Eric. And then he added, The impending regulations require the use of upgraded security devices. And that means the ones being produced now are quite useless, because they fall short of lock-and-detection requirements under the new rules. Im anxious to know what we can do about this in terms of our current contract. To date, only about 8,000 of the 25,000 devices have been delivered, and as we speak the contractors production line continues to roll. At almost $1,500 a device, were talking the better part of four million bucks. Cant we modify the spec for those yet to be delivered and have the contractor provide some sort of retrofit kit for the ones already in hand? Erics suggestion was a good one, but Aimsley said, No, Eric, we cant do that. Weve already considered that alternative and concluded that the cost would be prohibitive, if indeed it could be done at all. And even if it could, wed be distributing security devices, along with retrofit kits, hoping that people could modify a complex piece of equipment to make it work. No, thats out of the question. Far too many risks in that approach. Erics mind was swirling with thoughts as Aimsley continued to talk. Finally, he interrupted. Tell you what Ill do, Chuck. Let me get with the contracting officer, discuss some alternatives, and Ill be back to you before the end of the day. Reinforcing the need to define and set some course of action, Aimsley agreed with the contract administrator and said he would be at his desk all day. With that, the phones clicked at both ends. Eric had learned that Joanne was not one for aimless talk about anything. If he was to get her involved, he had to present alternatives that could be discussed with her. Okay, he mumbled to himself, what can we do? He then proceeded to tap into his computer, cleared the screen, and started to list what he felt were the salient points he thought the contracting officer would want to deal with. His list looked like this:

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

Is there a legitimate need for action? If so, who says so, by when does it have to be taken, and who must approve it? Would it be appropriate to issue a stop-work order to Manufacturing Un-limiteds contract pending a decision about what should be done? Why would we want to issue such an order? If a stop-work order is appropriate, how long should it last and can we approximate its cost to the Government? Should we discuss the situation with the contractor before we decide on a contractual course of action or after we decide? Should we consider a termination for convenience, go through all that, and then recompete the requirement based on a modified specification? We cant fool around with this one. What course of action will assure a reasonably quick resolution of the problem for all parties? After completing his list, Eric called the contracting officer. Ive got a hot one, Joanne, and I need your help. Can I see you? She told him yes, but cautioned him to bring along his own thoughts about whatever the matter might involve. She was too busy to get into some purely philosophical discussion. As Eric put down the phone, he assured her that the situation was very real and required her time.

Practicalities in Considering Work Stoppage

The necessity for a stop-work order can result from actions initiated by either Government or contractor personnel.
Government actions necessitating a stop-work order.

These actions may be taken by the contracting office to reduce the Governments liability when, for instance:

The correction of defective specifications is necessary, Government-furnished supplies or services will be delivered late, Termination for default is being considered (provided that the stop-work order is not used in lieu of termination), Quality assurance or inspection personnel notify the contracting office that the production line must be stopped for tool calibration, or

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The requiring activity notifies the contracting office that it needs time to initiate changes that would substantially change the end product or service.

Contractor actions necessitating a stop-work order. Contrac-

tor actions may necessitate a stop-work order and represent the Governments best interest. For instance:

Contractor submission of a value engineering proposal that will take the Government time to evaluate, but one that appears to offer a production or engineering breakthrough that would be in the Governments interest to pursue; or Contractor notification to the contracting office of conditions at a Government work site that make the performance of work unsafe and are not immediately correctable.

Determine Impact of Work Stoppage

Work stoppages should only occur after the Government has made a determination of their impact. Factors that determine such an impact are

Factors That Determine Stop-Work Order Impact


Estimated cost for delaying the work. Potential effect on labor (loss of skilled labor, loss of efficiency, etc.). Potential damage to perishable goods. Estimated effect on overhead (inventory, indirect labor, etc.). Any adverse effects the delay may have on contract completion. shown in Exhibit 4-3.

Exhibit 4-3

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Decide Whether to Stop Work

A decision must be made based on an estimation of the risks and benefits involved in letting work continue versus those involved in its discontinuance. This risk/benefit analysis should involve several considerations. For instance:
The origin of or purpose for stopping the work. This may over-

ride any other consideration. An example would be when the Occupational Safety and Health Administration (OSHA) orders the closing of a Government job site.
A cost assessment. Analyze the estimated cost for work stoppage

versus the cost liability of the Government if the work continues.


Other alternatives. There may not be other alternatives, but often

there are. In some cases, a termination for convenience may be a practical alternative. Document Decision to Stop Work In documenting the risk/benefit analysis for stopping work, include documentation as to why a supplemental agreement is not possible between the parties. Remember: You may not issue a stop work order unless certain prerequisites exist, as shown in Exhibit 4-4.

Prerequisites for Issuance of a Stop-Work Order


Do not issue a stop-work order unilaterally unless all of the following prerequisites are met: There is a clause in the contract that allows the Government to issue a unilateral order to stop work. It is advisable to suspend work pending a decision by the Government. A supplemental agreement between the parties covering the suspension is not feasible. The issuance of the stop-work order is approved at a level higher than the contracting officer.

Exhibit 4-4

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Issuing Order

Contracting officers can issue stop-work orders orally or in writing. ACOs can only recommend to the contracting officer the issuance of a stop-work order when a CAO is monitoring the work. Highly urgent reasons, such as life-threatening safety violations, may make oral orders necessary. Contracting officers should only issue oral orders when the situation precludes waiting for the issuance of a written one, and a time frame for work stoppage needs to be conveyed. The decision to issue an oral order should be based on minimizing the Governments cost liability. Immediately follow up oral orders and confirm them with written ones. Include all of the content requirements listed in Exhibit 4-5 in a written order. Oral orders should cover as many of these minimum content requirements as is practicable.

Oral Orders

Written Orders

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Minimum Content Requirements for a Stop-Work Order


The effective date and time. Nature of or reason for work stoppage. A description of the work to be suspended. Instructions concerning the contractors issuance of further orders for materials or services. Guidance to the contractor concerning subcontractors. Other suggestions to the contractor for minimizing costs. When a written order confirms an oral one, the written order should reference the oral order by identifying: The date and time of the oral order, Who conveyed the order for the Government, The contractor employee who received the oral order, The method of transmission (for exampletelephone, facsimile, E-mail, personal conference, or whatever), and The location where the oral order was presented in person, if applicable.

Exhibit 4-5

Work Stoppage Uncertainties

If a contract is stopped because of realignment of program priorities within an agency due to budget cuts, there may not be a resumption of work at all. In situations like this, keep the contractor informed of other alternatives the Government may be considering. This will allow the contractor to make better business decisions concerning its other commercial and Government work. However a stop-work order is conveyed, make sure you obtain the signature of a contractors employee acknowledging its receipt. Without this acknowledgment, you documentation is incomplete as to when the stop-work order actually became effective. You need to establish when 4-20

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the Government is released from the responsibility for payment of any costs incurred for contract work as a result of the stoppage. Government-Contractor Discussion of Order Inform the contractor of all the circumstances and considerations that led up to the issuance of a stop-work order. In the interest of minimizing disruption and promoting better planning for both parties, your goal should be to keep the lines of communication open. At a minimum, include in your discussion the topics shown in Exhibit 4-6.

Topics for Stop-Work Order Discussions With Contractors


Fully discuss the reasons for issuing the stop-work order. Explain the factors considered when reaching any specified time frame and the degree to which it is certain or subject to revision. Explore the appropriateness and impact of possible time frames for work stoppage. Obtain an estimate of labor and other costs associated with the expected work stoppage. Discuss any alternative actions to continuing the stop-work order. Ask the contractor for suggestions. Investigate the contractors willingness to extend the stop-work order bilaterally beyond a 90-day interval in the event that becomes necessary. Discuss the type of costs that the Government can agree to cover and those for which it is unable to provide compensation.

Exhibit 4-6

Determine Need to Terminate

Once a contractor has stopped work, a decision may eventually be made never to resume it. In this case, a termination action is proper. Any decision to terminate should be made within the period of the stop-work order. Since reasonable costs resulting from the stop-work order must be allowed in arriving at any settlement, an efficient termination should be made and the contractor informed promptly.

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Maintain Daily Contacts

Daily communication may seem excessive, but it serves as a reminder that stop-work situations are highly undesirable and should be discontinued as quickly as possible. At a minimum, contact the parties responsible for the stoppage. Consider including the offices most affected by the decision, because requiring organizations can greatly influence the cancellation of the order. The contractor will resume work on the expiration (or any extension) date of the stop-work order unless you cancel the order or the contract is terminated. If you have determined to cancel the order, contact the contractor orally first, advising the contractor when to resume work. You must follow up with written confirmation. Contractors are not required to resume work until a written notice has been received. If you take no official action when the stop-work order expires, the contractor will again be free to resume work and the Government will be liable for all costs it incurs in contract performance.

Cancel the Order

YOU HANDLE THE PAPERWORK . . . ILL HANDLE THE JOB Karla Thurston was frustrated. As the COTR for an agencys large environmental re-mediation project, she was on-site, virtually everyday, at the location being remdiated by Geo-Ecology, Inc., under an indefinite-quantity contract that permitted the issuance of firm-fixed-price and time-and-materials task orders. Having undertaken much site-characterization activity, the contractor had been consistently late in delivering in-vestigatory reports and the results of soil sample tests. Delays attributable to site characterization were beginning to have an effect on remedial action schedules for cleaning up the location. Karlas frustration had surfaced numerous times in progress meetings with the contractor. She had been persuaded, time and time again, that any delivery slippages were manifestations of unanticipated difficulties in the work. She finally decided to confront the contractors project director, Brent Harrison, and sent him an E-mail that expressed her point of view. In part, it read as follows: We are losing time and public support for the overall remediation effort, and thats unacceptable. I realize that engaging in site-characterization activities is not like producing baskets, but we must get from remedial design to remedial action as originally scheduled or our agencys customer will be reluctant to provide funding for future remediation work. None of us wants that to occur, Brent. We must move more rapidly and give greater attention to timely delivery.

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Brent got the message, talked to his companys Director of Environmental Services, reiterated the continuing difficulties associated with the work, and was told to do whatever was necessarywithin reasonto satisfy the customer. He was also advised to identify any additional costs that had been generated by the Governments insistence on improved delivery, as well as those attributable to any efforts associated with what the Government had labeled as performance delays in reporting. With marching orders in hand, Geo-Ecologys project director informed his own team that a new day was at hand, and within 48 hours thereafter, he responded to Karlas E-mail with one of his own. In part, it conveyed the following: Youve made us aware of the necessity for increased action on our part to meet your customers requirement. As you know, Karla, we have rectified unintended schedule slippages over the past few months and fully intend to apply whatever resources are necessary to meet future schedules. I would like to speak with you at our next meeting about how to accommodate the impact of these changes within our contract and its task orders. On its receipt, Karla made two copies of Brents E-mail, placing one in her own contract file and sending one to the agencys cognizant contract administrator. To the latters copy, she attached her earlier E-mail message to Harrison and scribbled a note across the top of it: Action delayed is action denied. This contractor now understands what the name of the game is. Ill keep you posted.

Obtain and Verify Evidence of Delay

Problems that involve delays are serious. One of the goals of Government contracting is to acquire what is needed when it is needed. Every contract, therefore, includes a completion time frame or delivery date. In obtaining and verifying evidence of a delay, remember that there are basically two types of performance criteriathose for end products (including finished services) and those for levels of effort. Risks associated with performance delays (events that slow the perfor-mance of work) covered by appropriate clauses in Government contracts have been traditionally allocated as follows:
The contractor bears both schedule and cost responsibility for a

4.4 Performance Delays

FAR 52.249-8 and -9

delay that it causes or that is within its control.

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FAR 52.249-14

For a delay not caused by the contractor or for one beyond its con-

trol, the contractor is entitled to an extension of the delivery schedule proportionate to the excusable delay, but the contractor bears the risk of increased cost resulting from the delay.
The Government is responsible for both the schedule and cost ef-

FAR 52.242-14 FAR 52.242-17 FAR 52.249-14(b)

fects of a delay that it causes, for one under its control, or for one that it has agreed to compensate the contractor.
A delay attributable to failure to perform by a subcontractor that is

beyond the control and without the fault or negligence of both its prime contractor and itself is not deemed to be the basis for default, unless:

The subcontracted supplies or services were obtainable from other sources, The contracting officer ordered the prime contractor in writing to acquire the supplies or services from another source, and The contractor failed to comply reasonably with this order.

End Products Versus Levels of Effort

End Products. Some contracts call for a measurable amount of

work, such as preparation of training course materials to be delivered in camera-ready form or for the manufacture of a product as required by specifications. This type of performance requirement states a specific time for delivery or completion.
Levels of effort. In other contracts, the contractors obligation is

to apply a stated level of effort toward a specified objective or kind of work during a specified period. In these contracts, their expiration date marks the end of the contractors obligation. When that date has passed, the contractor is not obligated to provide additional effort, even if the objective was not met during the life of the contract. Importance of Type of Performance Determining which type of performance criteria is contained in a contract is a key to verifying evidence of a delay. The program planning background surrounding the delivery date helps to determine how important the date is. Supported by this information, you can more intelligently and usefully apply the necessary efforts to assure timely completion of work or resolve any delay problems. A delay occurs when:
The delivery period has passed and what should have been done

Causes of Delay

was not done, or

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There is an anticipated delay in delivery or performance and the

contractor has advised that it will not perform the contract when the time for performance arrives. Importance of Taking Action

Failure to meet the scheduled delivery or completion date usually originates with a problem that occurred much earlier in the course of performing contract work. Take action as soon as you identify a potential delay. Delay in meeting the delivery schedule could endanger an entire Government program or mission and may result in:
Increased cost, Reshuffling of a programs effort, Disruption of personnel, Decreased efficiency, Inability to proceed with the mission or program, or Public embarrassment for the agency.

Determine Basis and Impact of Delays

Careful planning will not avoid all delays. Verify any evidence of a performance delay that results from your monitoring methods or from a contractors notification. Check with all parties to:
Identify the existence of an actual or anticipated delay, Determine if the delay will impact delivery or completion, Determine the cause and who is responsible, Determine the duration of the delay, and Select an appropriate action to resolve the problem.

A contractor is usually quick to provide notice when a delay is not its fault, because it may be entitled to an extension of time, additional money in the case of a compensable delay, or both. When a delay is the contractors fault, you may not discover this until the date for completion has arrived. Careful monitoring of a contract helps identify any actual or anticipated delays, including those caused by the contractor.

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

Identify Type of Delay

The type of delay mirrors who is responsible. For instance:


The Government, The contractor, Both the Government and the contractor, or Neither party.

Delays invariably cause damage, either in the form of lost revenue or in the form of extra cost to the Government or the contractor. Three Classifications of Performance Delays FAR 49.505(d) FAR 52.249-8 and -9 FAR 52.249-14 There are three basic classifications of performance delays: excusable; other than excusable; and commingled and concurrent.
Excusable delays.

These delays are beyond the control and without the fault or negligence of a contractor or its subcontractors at any tier. The basic Termination for Default clause and the Excusable Delays clause indicate that a contractor will not be held liable if its failure to perform a contract arises from such delays. Examples of these delays include:

Acts of God or of the public enemy, Act of the Government in either its sovereign or contractual capacity, Fires, floods, epidemics, and quarantine restrictions, Strikes and freight embargoes, Delays of common carriers (for commercial items), and Unusually severe weather.

Other than excusable delays.

These are delays that the Government has not authorized and for which a contractor is responsible. The contractor is responsible for meeting a contracts requirements when it cannot justify a delay as being beyond its control. It is, therefore, responsible for all costs incurred in making up for the lost time associated with other than an excusable delay. a middle ground, ones that are neither excusable nor other than

Commingled or concurrent delays. There are delays that fall in

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excusable. A commingled delay occurs when both parties are at fault for one or more events contributing to that delay. A concurrent delay occurs when two or more delays happen at the same time. These kinds of delays can be difficult to resolve, but the effort must be taken to determine their causes and results. When such causes and results can be segregated and measured separately, it may be that the contractor can be assessed for the amount of a delay attributable to its actions as well, say, as the Government or a subcontractor for its actions. Appropriate deductions of time for the delay, including their cost or schedule consequences, can then be placed against the definable party (or parties) and the contract modified to reflect this. Reasonableness of Delay A total delay adjustment can be divided into its reasonable and unreasonable portions, with an adjustment being granted for that portion considered to be reasonable. For example, if performance was suspended for 30 days while the Government made a decision and a period of five days is recognized as a reasonable time within which to make that decision, then the additional 25-day delay may be considered unreasonable. In this case, the contractor would probably be entitled to any costs resulting from the 25-day delay. A contractor may be held liable for a delay that is otherwise excusable if the delay was within the contractors (or subcontractors) control. For example, a strike-caused delay is normally excusable. It cannot be excused, however, if the contractor (or subcontractor) could have acted to end the strike by:
Filing an injunctive relief with the appropriate Government labor

Liabilities for Otherwise Excusable Delays

relations board,
Using other available Government procedures, or Using a private board, organization, or other arbitration medium to

settle the dispute. Government Performance Delays Government procurements contemplating fixed-price types of arrangements for supplies other than commercial or modified commercial items must contain the clause at FAR 52.242-17, Government Delay of Work. (This clause is optional for contemplated fixed-price types of arrangements for supplies or services that are commercial or modified-commercial. It is not applicable if a contract otherwise provides for an equitable adjustment because of delay or interruption, as when a Changes clause may apply). 4-27

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FAR 42.1304 FAR 52.242-17

When the Government delays work, it provides for the administrative settlement of contractor claims that arise from delays and interruptions in performance caused by acts, or failures to act, of the contracting officer. The Government Delay of Work clause does not authorize a contracting officer to order (or justify) a suspension, delay, or interruption of performance. If a contracting officer has notice of an unordered delay or interruption covered by the Government Delay of Work clause, then the contracting officer must act to end the delay or take appropriate action as soon as practicable.

Bases for Government Delays

Examples of actions that cause Government delays or interruptions include instances when authorized Government officials act or fail to act, such as:
Directing a contractor to stop work, Making a change to the contract, Performing other acts within the Governments sovereign capacity, Not obtaining process approvals or funding, Not issuing timely changes or responding to contractor requests, Not furnishing timely Government property, and Not inspecting or accepting when required.

Checklist for Identifying Delays

Use Exhibit 4-7 as a quick reference to help you identify the type of delay that occurred or may occur.

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Is This Delay Excusable?


Note: If you can answer yes to any of these questions, the delay was probably excusable. But before you make a final decision, you must make sure that the contractor had no control over the circumstances that caused the delay. Yes If the delay was caused by a labor strike, did the contractor: File a charge with the appropriate labor relations board to seek injunctive relief in court, or Use other available Government procedures or private boards or organizations in an attempt to settle or arbitrate disputes that caused the strike? N/A No

Was the delay caused by Government interference or disruption? Examples of Government interference or disruption include: Delay in making payments that are rightfully due. Late delivery of Government-furnished property. Failure to reply to a contractors request for clarification. Failure to disclose all facts applicable to performance. Site conditions that are different than portrayed. Scarcity of supplies due to Defense Production Act priorities over commercial or nonrated orders. Delay in issuing a required notice to proceed. Delay in issuing changes. Delay in performance by other Government contractors. Delay caused by protesting the award of the contract by an interested party. Delay in making the site available. Delay in providing funding. Delay in inspection or acceptance. Delay due to defective or ambiguous specifications. Delay in granting approvals. Exhibit 4-7 (continued on next page)

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

Is This Delay Excusable?


Yes If the delay was caused by a subcontractor, is the delay excusable to the subcontractor(s) at each tier? You would answer No to this question if: The delay was caused by a dispute between the subcontractor and the prime, or The subcontracted products or services were available from other sources in time for the prime to complete performance. N/A No

Was the delay caused by any other occurrences specifically mentioned in the Default or Excusable Delays clauses (or other clauses) as being generally excusable? For example, these include: Acts of God or of the public enemy. Acts of the Government in either its sovereign or contractual capacity. Fires. Floods. Epidemics. Quarantine restrictions. Strikes. Freight embargoes. Delays of common carriers. Unusually severe weather. Was the delay caused by other circumstances not previously mentioned that were: Not caused by the contractor, and Over which the contractor had no control? Exhibit 4-7 (continued)

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UNWINDING A TANGLED SKEIN Karla Thurstons E-mail package arrived at Courtney Burnsides desk two days after it had been sent. Courtney was the agencys contract administrator for Geo-Ecologys contract. She read the E-mail messages and cover note and took a deep breath while shaking her head in disbelief. She was immediately on the phone to Thurston, who an-swered on the first ring. Karla, this is Courtney Burnside in contracts. I got your E-mail package, and I think what youve done puts us at great risk. Why didnt you give me a call about all this before you committed your thoughts to writing and shared them with the contractor? Cmon, Courtney, interrupted Karla, the remediation job is moving along at a snails pace, and Im being pressured by my management and the customers agency to have the contractor get off its backside and on with the job. Brent Harrison knows whats at stake, and I think weve made our case without a lot of ifs, and, or buts. Pretty heady stuff, Karla, Courtney shot back, but you and I must meet over the next day to take stock of what you may not realize is in the mill. And then, given everything thats happened, Ive got to face my contracting officer. Believe me, Im not looking forward to that. I think both you and the contractors project director may have put a noose around your necks, and it will be the customer and the contractor who will feel the pain. Karla responded abruptly. Youre metaphor eludes me, Courtney. Whatever youre saying, put in plain English. Okay. You bet, said the contract administrator. Im telling you that whats happened is a ticking time bomb. And when it goes off, my guess is that well be faced with contractor claimsdocumented with dates, places, and namesthat will add up to a mighty amount. And what for? Well, for starters, think on these: performance delays attributable to Government actions, technical direction way beyond what it should have been, and all of it will be sent to us in a package labeled Excusable Delay Claims Under Contract Umpty-ump. Oh yes, the metaphor might elude you, Courtney, but the message shouldnt. I advise you to get over here early tomorrow morning. There was a silence at the other end of the phone followed by a simple question. Ive just cleared my calendar for tomorrow, Courtney. Tell me when to be there and what to bring. Prepare Finding of Facts After addressing excusability issues, your next step is to document the Governments position in a finding of facts. In doing so, present clear and concise evidence for your conclusions. Include:
A list of the persons with factual knowledge of the delay,

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

Relevant statements or evidence, A history of contract performance, indicating when work began

under the contract,


Progress made to date, Reasons for both excusable and/or other than excusable parts of

the delay,
The contractors remaining obligations under the contract, and The contractors expectations regarding contract completion.

Include this finding of facts in the official contract file for any future reconstruction of events. Develop Governments Position Developing the Governments position on a delay basically deals with:
Deciding if the delay was excusable, and If so, then calculating the amount of any time and cost adjust-

ments. Unless it is obvious, you can require the contractor to:


Substantiate the evidence of the delay, Substantiate the costs associated with the delay, Demonstrate that the delay was reasonable, and Demonstrate that the delay was void of any commingled or con-

current delays. Contractor Burden of Proof A delay is excusable when the contractor can prove:
An event that caused a delay has occurred and the event was not

the contractors fault,


The event was the type for which an excusable delay can be

grant-ed,
The overall progress of the work was delayed by the event which

caused the delay,


The event was unforeseeable, and

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The requested additional time is appropriate to compensate for lost

time. Consult Requiring Activity If you have determined that a delay is excusable, consider what impact the delay will have on the requiring activity. Always consult this activity before preparing the Governments position. This can assist you in:
Estimating a reasonable additional time for performance, Identifying and analyzing any potential alternatives to a revised

delivery schedule, and


Establishing any recoverable damages due the contractor.

Before meeting with the requiring activity, review the contract clauses that pertain to delay and any background information used to select those clauses. The acquisition plan, purchase request, and any determinations and findings are good sources of background information. This information will enable you to temper any unrealistic reactions of a requisitioner. By consulting with the requisitioner, you will become aware of current needs as well. What was not critical in the past may be critical now. Additional Performance Time As stated in the contract, the delivery requirement is probably based on a delivery that reflects one of the following:
A Market Standard. The delivery or performance reflects stan-

dard market or industry practices. While the requisitioner needs the requirement, timeliness is not critical to its mission.
Critical Need. The delivery or performance reflects an exact date

or time that the requisitioner depends on for the satisfaction of a mission or program. A delay would seriously jeopardize this.
Semi-Critical Need. The completion date cited in the contract is

based on a bona fide need of the requisitioner, but would only cause inconvenience if the delivery date were missed. However, at some point, the delivery requirement would become critical. The contractors expectations for the impact of a delay on final delivery or performance may be minimal or nonexistent. However, you also need to investigate if any portion of the contractors continuing performance has a potential negative impact on the requiring activity. After you establish the impact and current criticality of the requirement, you can make a better choice among possible alternatives to resolve any problems caused by a delay.

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

Extending Time

Allowing a time extension commensurate with the delay is the appropriate action when the delay is excusable. For example, when flood conditions force a plant to close for five days, the completion date can be extended for the same number of days, plus any additional time it actually took to clean up the plant for continued operation. You may allow a time extension only when the requisitioner has determined the requirement is not critical. When the requirement is critically needed, you must explore other alternatives. These alternatives would probably result in a change to the contract. Examples include:
Use a different method of shipment, Delete a low priority task, Change the place for inspection, Allow a material substitution, Allow other specification changes, or Accelerate performance.

Accelerated Delivery

Accelerated delivery can occur when an authorized Government official does any one of the following:
Makes a request to accelerate delivery, Fails to grant a time extension when one should have been granted, Threatens to terminate for default, or Pressures the contractor to complete a schedule.

Remember: There is no acceleration unless an action or inaction causes the contractor to perform work at a faster rate. It is very important, therefore, to determine if the contractor was on or ahead of schedule when acceleration began. Adjust Schedule for Acceleration A contractor has the burden of proving the need or validity of a proper time extension. It should be able to explain how it could have met the schedule had it not been accelerated. This can serve as the benchmark for measuring an adjustment for a delay. If an analysis of a contractors progress at the time of acceleration shows that, at the time, the contractor was behind schedule, then the time it

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lagged behind schedule can be deducted from the adjustment the contractor might otherwise be due for the acceleration. Impact of Accelerating Performance Acceleration of contract performance includes adhering to the original delivery date when the contractor is entitled to an extension of time for a delay. Acceleration can occur from both action and inaction in dealing with delay issues. If the Government accelerates contract performance, the contractor may have to do one or more of the following to meet the prescribed delivery date:
Hire more employees, Add additional shifts, Pay overtime, or Purchase more expensive products from other sources.

In these circumstances, the contractors right to an equitable adjustment is derived from a contracts Changes clause. Typically, this clause sets forth that:
If any change causes an increase or decrease in the cost of, or the

time required for, performance of any part of the work under the contract, whether changed or not by a change order, the contracting officer must make an equitable adjustment in the contracts price (or estimated cost and any fee), delivery schedule, or both, and must modify the contract accordingly. By not granting a timely extension, the effect may change the contract by shortening the time allowed for delivery under its terms and conditions. As with other changes it initiates, the Government is liable to a contractor for the effect of accelerating performance on both time and costs. Importance of Prompt Resolution It is important to resolve delay issues promptly after determining that a delay is excusable. Not recognizing these delays by granting an extension of time may result in such action or inaction being treated as a con-structive change by the contractor. When a contract modification is not issued in recognition of a delays excusability and the contractor makes a claim for cost and/or time based on acceleration, then the contractor has the burden of proof to show that:
An excusable delay occurred, The contracting officer (or authorized representative) had know-

ledge of the delay, 4-35

PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

Action by the Government indicates that delivery was accelerated, The contractor actually accelerated performance, The contractor incurred additional costs as a direct result of the

acceleration, and
The contractor notified the Government of the existence of an ex-

cusable delay and a time extension was not granted. Incurred Costs The Government may be required to pay for any additional costs to the contractor when it was a party to a delay or other change. As a general rule, use standard principles of cost and price analysis to arrive at the Governments position concerning delay costs. However, recognize that your job in developing the Governments position for delay costs is often more difficult if actual cost data are not available and costs are difficult to prove. The contractor can use subjective measures to estimate its costs when presenting requests for additional money. Total Cost Cautions Be wary of an approach that presents actual cost compared with originally expected cost. There are two dangers in this:
Total actual costs can include both costs properly attributable to

the delay, and those that may have been incurred through the contractors mismanagement.
Total originally expected cost can be based on what at the time

was an unrealistically low offer (i.e., a buy-in situation). Proof of Entitlement to Claim The contractors burden of proof is twofold:
It must present evidence that it had no control over the situation

that caused the delay and increased its costs or that the Government was directly responsible for the delay. If it is unable to prove its entitlement to the costs it claims, you may not process payment for them.
It must be able to show that the costs it is claiming resulting from a

delay are reasonable. The contractor is not expected to know exact costs for delays that it was not anticipating and over which it had no control. But it must present a logical basis for the costs it is claiming so that you can conclude they show a reasonable estimate of actual damages.

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Major Recoverable Costs From Excusable Delays

To the extent the contractor can document them, verifiable expenses that are generally recoverable include:
Idle time of facilities or equipment.

Idleness of rental equipment is not normally an allowable expense since the equipment can be returned to the rental agency. However, if the contractor can show that it is less expensive to continue renting, these costs may be allowed. increases with supplier invoices or letters substantiating them.

Increase in material prices. The contractor should support these

Increase in wages. You can normally verify these costs by con-

sulting local labor union officials, by interviewing contractor personnel, or by examining payroll records in an audit.
Loss of efficiency.

This is the most difficult expense to document, but it is also one of the most common costs of delay and disruption. When the contractor has been forced to work out of sequence, that is in a poorly organized, inefficient manner instead of one given to an originally scheduled sequence of work, learning curve efficiencies will be lost. To be allowable, costs reflecting these conditions could not have had an effect on perfor-mance were it not for the change in performance due to the delay. You can verify conditions of unusually adverse weather by U.S. Weather Service reports for the affected period. Compare these with those of the original performance period to verify the degree or extent of unusual weather conditions that could have contributed to delays. The contractor bears the burden of documenting that the weather was unusually severe, and that it also had an actual effect on the contractors performance.

Unusually severe weather conditions.

Other Recoverable Costs

Insurance and bond coverage. If the contractor extended these

coverages for the period of the delay and would not have otherwise done so, it should provide you with a notice from the bonding or insurance companies for the amount of any increased premium resulting from the extension.
Protection or storage of materials. These must be actual addi-

tional costs. Examples are rehandling and transportation charges that would not have been necessary if the work had proceeded without delay or interruption.

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

Additional make-ready costs.

If a production run was interrupted, there will be additional costs for restarting the production line. tractor laid off personnel during the delay, there will be administrative rehiring costs. If the delay was long and the contractor is unable to rehire part of the original work force, recruitment advertising and employment fees to recruitment agencies may be included within these costs.

Demobilizing and mobilizing the work force. When the con-

Interest.

Interest on funds necessary to finance the extended performance time caused by the delay is recoverable. Unabsorbed overhead, when it applies, can include both direct labor personnel underutilized because of the delay and general office overhead expenses directly attributable to or chargeable against the contract. However, before you determine that these expenses are appropriate, make sure that the

Unabsorbed overhead.

Prerequisites for Payment of Unabsorbed Overhead


The contractor must prove that it attempted to mitigate the damages for the delay, that is, sought other work to offset this overhead cost and spread it out across other jobs. The contractors overhead must be unabsorbed or increased over what it would have been during a normal period that did not include a delay. The contractor must be agreeable to an audit of its books and records in order to verify the unabsorbed overhead amount. Note that you do not necessarily have to conduct an actual audit. You need only obtain the contractors agreement to one. prerequisites shown in Exhibit 4-8 are met.

Exhibit 4-8

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Discuss Government Position With Contractor

Discuss your findings with the contractor. These discussions should include:
The Governments analysis of the evidence concerning the back-

ground and reasons for the delay,


The Governments position reached as a result of this analysis, and The contractors position regarding the delay, including all the

supporting facts and documentation for it. Prepare Final Decision When discussions are concluded, prepare a written decision of your intended action. The notification to the contractor should include:
The Governments determination on the nature of the delay, Acceptable reasons for believing the delay is excusable and a de-

termination concerning any other than excusable part of the delay,


Recoverable damages (if any), A revised delivery schedule, and The contractors appeal rights.

4.5 Resolve Contractor Performance Problems

You should assist the contractor in identifying and solving performance problems that would not be considered excusable. The earlier problems are identified the simpler the solution. You should attempt to reach informal resolution with all parties prior to invoking a formal contractual remedy. Document any informal agreement on corrective steps to be taken to bring performance back into compliance through:
Either a memorandum of concern requesting a written plan from

4.6 Document Final Decision

the contractor for correcting performance, including:


A statement of the problem, Suggested corrective steps, A response time, and A place for the contractor to provide acknowledgment by signature of its receipt.

Or a formal contract modification.

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PROBLEM RESOLUTION IN CONTRACT ADMINISTRATION

4.7 Invoke Formal Remedy

If the contractor is unwilling or unable to resolve its performance problem, you will need to invoke a formal contractual remedy. (Remedies are discussed in Chapter 6.) Advise the requiring activity of the final decision. This activity will need to be prepared to make adjustments on other program actions that may be affected by any schedule change. You may need this activitys support if the contractor decides to appeal the final decision. As appropriate, other interested parties should be informed of the final decision.

4.8 Inform Requiring Activity and Other Interested Parties

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CONTRACT MODIFICATIONS AND OPTIONS


ANOTHER CHALLENGING FRONTIER In requiring her staff to measure up to the agencys expectations of them, Joanne was known for her strong support of training programs for contracts personnel. She had always set the stand-ard for her contract specialists, administrators, and others by seizing the opportunity to complete both mandatory and, when she could, optional courses that were offered in the field of procurement and related management. Whenever possible, she participated as an instructor. In discussing his career development with Eric, Joanne had encouraged him to develop and stay with a training plan that would reinforce his performance capabilities and skills, as well as keep him current with new developments in the field of acquisition management. She frequently said, You can hide behind a million rules that nobody else knows, but thats not the name of the game. In todays environment, youve got to concentrate on developing a wide range of skills that permit you to be a business manager, someone who can contribute to an acquisition team. Eric was scheduled for a course in postaward contact management that emphasized the planning and execution of modifications and options, two areas of more than passing interest for him. He had already been involved in a modification for the pallet procurement, and assuming that Platform Industries performed successfully, an extension of its performance could be realized via the Governments exercise of a one-year option period. As he reflected on the modification to Platforms indefinite-delivery indefinite-quantity contract (ID/IQ), Eric remembered that the contractor had agreed to a no-cost modification covering the submission of a weekly progress report on the wood preservation effort. In light of this, the contract administrator had executed a change using a Standard Form (SF) 30, and with the contractors agreement to it, a bilateral modification was effected. That had been a fairly straightforward procedure. Eric had been sent a syllabus for the course he was to attend, and after reviewing it somewhat carefully he was taken aback by three things: the differing types of contract modifications, the possible ripple effect their issuance could have on multiple areas of contractor performance, and the fairly substantial work that had to go into exercising options. In thinking about all this, he was struck with ambivalence over the dramatically different approaches of the public and private sectors to dealing with contract modifications. On the one hand, the world of commercial contracting frowned on, or so it seemed, the idea of including a changes article in buyer-seller agreements. On the other, the world of government procurement rarely bypassed the inclusion of a changes article in its contracts. Wonder why this difference in application? he thought to himself.

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CONTRACT MODIFICATIONS AND OPTIONS

The deal with Platform Industries included a Changes clause under FAR 52.212-4(c), but that was short and sweet. All it said was Changes in the terms and conditions of this contract may be made only by written agreement of the parties. That was far different than the unilateral right expressed in a Government contract whereby a contracting officer could issue changes within the general scope of a contract, and the contractor had to undertake the change as issued. And then there was the business of pricing out changes for fixed-price types of contracts versus costing them out for cost-reimbursement types. He thought he understood the business of working toward some net amount which either added or deleted dollars in the pricing out of fixed-price types of changes. But doing this for changes under a cost-reimbursement arrangement, where an estimated cost, not a price, had been agreed to, had him confused. And then there was the nomenclature associated with modifications: unilateral issuances leading to bilateral or supplemental agreements; equitable adjustments in either price, cost, or delivery; the in-scope versus out-of-scope dilemma and situations in which technical direction altering contractor performance was not considered to have the same effect as the issuance of a change order; and the use of modifications to reflect novation and change-of-name agreements. He had much to learn. Eric had a practical interest in understanding options. At some point in time, Platforms contract would require the Government to consider exercising one. He wondered how much time and effort would be required to justify an extension of work for Platform. There certainly wasnt an immediate need for concern, but he knew that unless he made time his friend it would surely become his enemy in the options arena. Putting aside the course syllabus, he reached toward his computer to check for any recent E-mail correspondence. Finding none, he scarfed up three items from his in basket requiring attention. As he tried to clear his focus for what had to be done, he was left with a lingering thought about what Joanne had said concerning the development of a wide range of skills that would permit one to become a business manager. Its like an endless trail, he mumbled to himself. Shes right, and Ive got to expand my horizon to know more than rules. Indeed, the business of modifications and options is another challenging frontier for me!

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 5.1.1 5.1.2 5.1.3 5.1.4 5.1.5 5.1.6 5.1.7 5.1.8 5.1.9 5.1.10 5.1.11 5.1.12 5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.2.6 Determine whether to consider modifications proposed by contractors. Determine that a Government request for a modification is sufficient. Determine whether to meet a requirement through a new procurement or a modification. Estimate the impact of a proposed change on price, cost, delivery, and performance. Determine whether any consideration is appropriate for a modification. Document a decision to reject a modification. Determine the appropriate type of modification. Implement modifications for supplemental agreements. Implement modifications for unilateral changes. Implement modifications for other administrative changes. Implement modifications for novation agreements. Implement modifications for name changes. Identify available options. Consult requiring activities to determine the need for additional supplies or services covered by an option. Determine whether a synopsis is required for an option. Determine whether to exercise an option. Provide written notice to the contractor and exercise an option. Prepare a written determination for a contract file. Develop skill in modifying contracts through administrative modifications, change orders, supplemental agreements, and in exercising options.

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CONTRACT MODIFICATIONS AND OPTIONS

INTRODUCTION TO CONTRACT MODIFICATIONS AND OPTIONS


Rationale for Contract Modifications During the administration of a Government contract, specified terms and conditions may require modification. This may be necessary to incorporate revised performance requirements or to handle contingencies that develop during performance. Some of these modifications are made in accordance with a contracts terms and conditions; others, however, are neither anticipated nor were they expected to occur under the original business arrangement. Options may be included in Government contracts when it is in the Governments best interest. In supply-type contracts, options may be appropriate when basic quantities are learning or testing quantities and com-petition for the options is impracticable once initial contracts have been awarded. In service-type contracts, options may be appropriate to ensure continuity of operations and the diminution of disrupted support if there are anticipated needs for similar services beyond initial performance periods. Contract modification means any written change in the terms of a contract. A contract modification is either bilateral (agreed to by both the Government and the contractor) or unilateral (signed only by the contracting officer). Option means a unilateral right in a contract by which, for a specified time, the Government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the term of the contract. Only contracting officers acting within the scope of their authority are empowered to execute contract modifications on behalf of the Government. Other Government personnel are prohibited from executing contract modifications, acting in such a way as to encourage contractors to believe they have authority to bind the Government, or directing or encouraging contractors to perform work that should be the subject of a contract modification.

Rationale for Options

Definition of Contract Modification FAR 43.103 Definition of Option FAR 17.201

Policy on Contract Modifications FAR 43.102(a)

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FAR 43.102(b)

All contract modifications are to be priced before their execution, if this can be done without adversely affecting the Governments interest. In any event, at least a maximum price or estimated cost must be negotiated unless impractical (and such impracticality should be rare). For the acquisition of commercial items or services acquired under the policies and procedures of FAR Part 12, the applicable Changes article requires that changes may be made only by the written agreement of the parties. The terms and conditions of traditional Government contracting Changes clauses that reserve the Governments right to issue changes, to whatever prescribed extent within the scope of a contract, are absent. Unless both parties have agreed to some conditions for the issuance of changes under other contract clauses, the net result of this is that changes for acquisitions made under FAR Part 12 cannot be made unilaterally by the Government. Whatever the basis for a modification, the authority to invoke one is always restricted to situations in which the Government receives adequate value in exchange for an agreement to modify a contract. For example:
In some instances, adequate value will reflect the release of a con-

FAR 52.212-4(c)

Basic Tenet of Contract Modifications

tractor from some of its obligations, and the result will probably be a reduction in price or estimated cost.
In other instances, adequate value will reflect new or additional

contractor obligations, and the result will probably be an increase in price or estimated cost.
In some instances, adequate value will reflect a trade-off of factors

resulting in no increase or decrease in price or estimated cost, as in a no-cost contract modification. Policy on Options FAR 17.207(a) Only contracting officers acting within the scope of their authority are empowered to exercise options on behalf of the Government. In doing so, a contracting officer must provide a written notice to the contractor within the time period specified in the contract. An option may be exercised only after a determination that: (1) funds are available; (2) the requirement covered by the option fulfills an existing Government need; (3) the exercise of the option is the most advantageous method of fulfilling the need, price or cost and other factors considered; and (4) the option was synopsized in accordance with appropriate prescriptions, unless exempted therefrom.

FAR 17.207(c)

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CONTRACT MODIFICATIONS AND OPTIONS

When an option is exercised, the contract modification or other written document that notifies a contractor must cite the contracts option clause as authority. Common Misconception One frequently hears the terms amendment and modification used interchangeably. Such usage is incorrect. The term amendment means the revision of or addition to a Government solicitation document. In brief, it is correct to say, The Government amends its solicitation documents and modifies its contracts. What is common to both is the form by which each is executed, the Standard Form (SF) 30, Amendment of Solicitation/Modification of Contract. The general steps in modifying contracts are charted on the next page. Following the flowchart, each step is discussed in detail. Similarly in the subsequent section, the steps in exercising an option and documenting it in a contract modification are charted and then discussed in detail.

Steps in Performance

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STEPS IN MODIFYING CONTRACTS

1-2. Review a proposed modification for sufficiency.

3. Determine whether to meet the requirement through a new procurement or a modification.

Should a new procurement be initiated?

Yes

The contract remains as is.

No 4-6. Determine whether to modify the contract.

Modify the contract

No The contract remains as is.

Yes 7. Determine the type of modification. 1. 2. 3. 4. 5.

Types of Modifications Supplemental agreements. Unilateral changes. Other administrative changes. Novation agreements. Name changes.

8-12. Implement the selected type of modification.

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CONTRACT MODIFICATIONS AND OPTIONS

5.1 Modifications 5.1.1 Consider Contractor Requests for Modifications

A contractor may request a contract modification when the reason for the change was something:
Beyond the Contractors Control An excusable delay. A stop-work order. Due to Action by the Contractor Its name is changed. Submission of a value engineering proposal. Consideration offered for other than an excusable delay. Required by the Contract An economic price adjustment. A price redetermination. A Department of Labor (DOL) wage rate increase when services are continued by exercising an option.

A constructive change.

A settlement for a termination for convenience.

A novation agreement.

Contractor Motivations for Change

A contractor is required to provide all necessary documentation when sub-mitting requests. The documentation varies with the reason for the modification. The contractor must provide sufficient documentation to support any request for a change in delivery and/or performance. Contractors may attempt to make up for losses they would have incurred had there been no change. They may also perceive an opportunity to increase profit margins. Carefully evaluate every request for a modification. You must be satisfied the contractor has made its case for the change. There are no specific guidelines for documentation requirements except when a change affects the legal status of a company. A contractor submitting a request for either a novation agreement or name change must submit, at a minimum:
Three signed copies of the proposed novation agreement. A list of all affected contracts and purchase orders remaining un-

Document Changes FAR 42.1204

settled between the transferor and Government showing for each the:

Contract number and type, Name and address of the contracting office, Total dollar value as amended, and

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CHAPTER 5

Remaining unpaid balance.

The opinion of legal counsel for the transferor and transferee stat-

ing that the change was properly effected under applicable law and the effective date of transfer. Novation agreements require additional documentation to support the request for a modification. Your agencys counsel must determine the adequacy of this additional documentation. Restructuring Costs Under DoD-related Novation Agreements DFARS 242.1204(e) A recent aspect of the consolidation of DoD contractors has included restructuring agreements where several DoD contractors have merged. The process may involve allowable restructuring costs, where the proposed consolidated contractor can prove that there will be a reduction of overall costs. Restructuring costs have to be audited, and the administrative contracting officer may be in excellent position to assist the cognizant contracting officer in developing an evaluation plan. Many requests from a contractor for a contract modification involve the technical requirements of the contract. Cautiously examine changes that indicate performance has changed but not the function of the end item. In a firm-fixed-price contract, the contractor is generally free to use any method or manner of performance to provide the end item or service, as long as the end item or service meets the needs of the Government. Determining if the Government will be harmed may require you to involve the requiring activity and any technical advisors involved in a project. Requiring activities are the best source for determining the:
Impact of any delivery delays on the requirement, Value of proposed considerations other than price, Acceptability of a value engineering proposal, or Acceptability of substitute materials.

Obtain Guidance From Requiring Activities

Understand that requiring activities may not be amenable to any change to the original terms of the contract and may have justification for this kind of reaction. Consider their point of view carefully. The contract administrator is the middle person between the contractor and the user. You may want to ask the contractor to provide a briefing or further documentation to support its request for a change.

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CONTRACT MODIFICATIONS AND OPTIONS

Make the Determination

After you have all the documentation from a contractor, decide if a modification to the contract is necessary. Do not approve the modification when:
What would be modified is already covered by the contract, Technical changes cannot be supported to the requiring activitys

satisfaction,
Changes to nontechnical business terms and conditions are unac-

ceptable, or
Additional funds are not available to fund the modification.

Importance of Funding

Funding is always a consideration for approving a modification. Even when a contractor is entitled to an equitable adjustment, the modification cannot be simply summarily approved and issued. If funds are not available, a contract may have to be otherwise adjusted so that overall price or cost does not change. Decreasing the total quantity under a contract, for instance, is one means of otherwise adjusting it. At any time after award, the Government may have to make changes to requirements covered by a contract. You will need to examine whether any Government proposed change is sufficient for processing. At a minimum, the request should:
Be clear and understandable as to what the change encompasses, Not be covered currently by the contract, Be agreeable to all appropriate Government officials, Contain appropriate and adequate documentation to support the

5.1.2 Consider Government Requests for Modifications

need for the change, and


Detail the Governments position as to the proposed changes im-

pact on:

Quality, Quantity, Completion date, and Price or cost.

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5.1.3 Determine Impact of Change on Scope

In dealing with any change, initiated by either the Government or the contractor, it is essential to determine whether the change is within the scope of the contract. This determination is not always an easy one to make. The basis for ascertaining the impact or extent of a change on a contracts scope of work is to be found in the contracts Changes clause. In all cases, the extent of any change and its implementing change order must be within the general scope of one or more specified areas set forth in a contracts Changes clause.

Understand Different Changes Clauses

There are numerous Changes clauses, along with specified alternates, and each has a function given the type of contract for which it is prescribed and the specified areas within which it permits changes to occur within the general scope of a contract. For instance, the Changes clause in a firm-fixed-price supply contract for other than commercial items acquired under FAR Part 12 permits changes to be issued within the general scope of the contract in one or more of the following:
Drawings, designs, or specifications when the supplies to be fur-

nished are to be specially manufactured for the Government in accordance with the drawings, designs, or specifications;
Method of shipment or packing; or Place of delivery.

In contrast, the Changes clause in a cost-reimbursement type of contract for services (no supplies to be furnished) permits changes to be issued within the general scope of the contract in one or more of the following:
Description of services to be performed, Time of performance (i.e., hours of the day, days of the week,

etc.), or
Place of performance of the services.

Common Characteristics of Changes Clauses

Despite different Changes clauses for different types of Government contracts, all of them possess the following common characteristics for the issuance and implementation of a change order:
Government:

The authority to issue it is found in the contract itself.

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CONTRACT MODIFICATIONS AND OPTIONS

A contracting officer must issue it in writing and without notice to sureties, if any. Its issuance may occur at any time up until final payment. The extent of its issuance must be within the general scope of the contract for any one or more specified areas subject to change.

Contractor:

It must proceed promptly, assuming the change is in compliance with the Changes clause. It must assert its right to receive an equitable adjustment within a specified number of days from its receipt of the change (and the contracting officer may, if the facts justify it, extend this time and receive and act on a proposal for an equitable adjustment up and until final payment under a contract). An equitable adjustment may be reflected in price or cost, schedule, and/or other affected terms and conditions of the con-tract.

Both Government and contractor:

An equitable adjustment, when agreed to, must be expressed in writing. Failure to agree to an equitable adjustment is a dispute under the contracts Disputes clause.

Determine In-Scope Changes

As noted earlier, determining whether a change is within a contracts scope is, in many instances, not easy. Exhibit 5-1 lists several factors that should be considered in this determination.

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Factors Indicating In-Scope Changes


The function of the item or service has not changed. The basic purpose of the contract has not changed. The dollar magnitude of the change is proportionate to the price or cost of the original contract. Competitive factors of the original solicitation are the same. Specification or statement of work changes are not extensive.

Exhibit 5-1

Questions Dealing With In-Scope Changes

Questions that deal with in-scope/out-of-scope changes need to be answered.


Does the changed work represent what both parties reasonably

contemplated at the time of award?


Is the changed work essentially the same as was initially bargained

for?
Is the nature of the requirement altered by the change? Would this type of change normally be expected for this kind of

requirement?
Were the drawings or specifications defective, requiring extensive

redesign? Minor or Major Variations of Scope It may appear that any change resulting in either an increase of items or a longer period of performance would be considered outside the scope of a contract. Judicial authorities have suggested thinking in terms of major and minor variations, not merely in terms of an increase per se. Such thinking helps determine whether quantity changes are within the scope of the contract. For example:

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CONTRACT MODIFICATIONS AND OPTIONS

Minor Variation The Governments design for a sophisticated machine required the use of 100 widgets. The contractor had to use 150 widgets to make the machine function properly The increase of 50 units was within scope, because the function of the end item did not change.

Major Variation An existing contract covered the purchase of 100 widgets as a line-item. The Government increased the total to 150. The increase of 50 units was not within the scope of the contract, because the widgets were the end item.

Contractor Perspectives

Generally, contractors are less concerned with changes that are beyond the scope of their own contracts than with changes on their competitors contracts. When out-of-scope changes are made to a competitors contract, a contractor is likely to view it as a missed business opportunity. However, when a contractor is faced with an out-of-scope change to its own contract, it may not object to that change not being within the contracts scope because additional compensation is clearly due. A contractors competitors may protest any change that would be considered outside the scope of a contract to the General Accounting Officer (GAO). The GAO describes changes that are within scope as those that the competing offerors would have reasonably anticipated under the terms of the contract. The GAOs focus is the competitive process. At times, the GAO has concluded that a change is new work and therefore represents a new procurement. In these circumstances, the GAO may rule that an agencys appropriate action is to terminate the modified portion of the contract. In the case of the 50 extra widgets previously reviewed as an example of a minor change, competition has been achieved. However, in the example of a major change, a competitive price was not obtained. Even if the price negotiated for the change was the same unit price as for the basic contract, there is no way of knowing whether the increased quantity would have resulted in a lower unit price among competitors in the open marketplace. Consequently, the GAO would likely determine that the statutory requirement for competition was circumvented.

5.1.4 Estimate Impact of Change

Before issuing a contract modification, you must determine what impact a change will have on:
Price or cost, Delivery, and/or Performance.

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Bases for Change

The Government may anticipate and therefore address the need for some changes prior to award. Various contract clauses provide the basis for modifying contracts when specified situations arise or if information not known at the time of award becomes subsequently available. For instance, and if provided for within a contract, modifications may be effected to accomplish the following:
Options for additional work and economic price adjustments, Change orders, Equitable adjustments under inspection terms and conditions for

nonconforming supplies or services,


Equitable adjustments for the delivery of defective (or late) Gov-

ernment-furnished property,
Adjustments in agreed-to dollars if certain taxes are increased or

decreased,
Variation-in-quantity limitations for deliverable items, and Increases

in the total estimated cost-reimburse-ment types of contracts.

cost

limitation

for

Technical Evaluation of Impact

Obtain a technical evaluation of a proposed change when a contractors request would result in a change to basic contract requirements not anticipated before award. Request technical evaluators to address how the change will impact delivery and performance. According to the effect a change has on a resulting equitable adjustment, changes to basic fixed-price types of contract requirements can be placed in one or more of three categories. Usually a single change will embody elements of more than one category. These categories are:
Additive Changes. Work added to the contract, resulting in more

Price/Cost Evaluation of Impact

money for the contractor.


Deductive Changes.

Work a contractor has not yet performed deleted from the contract, resulting in a reduction of the contract price. work, resulting in either no change in contract price or a change that is tempered by the monetary effect of the substitution involved. (Even when work of equal value is substituted, it is im-

Substitution Changes. Added work being substituted for deleted

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CONTRACT MODIFICATIONS AND OPTIONS

portant to get the change in writing so that the requirement is accurately documented.) For cost-reimbursement types of contracts involving substitution changes, there is no net dollar amount negotiated for the difference between added or deleted work as there would be for such changes under fixed-price types of contracts. Cost or Pricing Data Examine cost or pricing considerations in the same way you would examine them for a basic contract. If your independent Government estimate appears to be somewhat defective, use other means of comparison, for example:
A history for similar requirements, Current market prices, or A cost-realism analysis.

Required Cost or Pricing Data FAR 15.804-2(a)

Unless an exception applies or a waiver is applicable, a contractor must submit cost or pricing data as part of its change proposal if the value of the change is $500,000 or more. This may be required, if justified, for actions below $500,000 but exceeding the simplified acquisition threshold ($100,000). A contracting officer is prohibited from requiring the submission of cost or pricing data (but may require information other than cost or pricing data, but only to the extent necessary) to support a determination of price reasonableness or cost realism for the following:
Agreed-to prices based on: (1) adequate price competition, or (2)

Exceptions to Cost or Pricing Data

FAR 15.804-1(a)(1)(i)

prices set by law or regulation.


The acquisition of a commercial item meeting the definition in

FAR 15.804-1(a)(2) FAR 15.804-5(c)(1) through (3)

FAR 2.101. (If the contracting officer does not have sufficient information to determine a fair and reasonable price, then information other than cost or pricing data for a commercial item must be limited to information that it is regularly maintained by an offeror in its commercial operations.)
Exceptional cases where a waiver has been granted. For modifications to contracts or subcontracts for commercial

FAR 15.804-1(a)(3) FAR 15.804-1(a)(4)

items, if the basic contract or subcontract was awarded without the submission of cost or pricing data under an approved exception

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and the modification does not change the contract or subcontract to one for the acquisition of other than a commercial item. If the modification changes the nature of the work to the commercial item or adds other noncommercial work, then obtaining cost or pricing data for the changed work is not prohibited. Obtaining Cost or Pricing Data Certification FAR 15.804-4 When cost or pricing data are required, the contractor must be required to execute a Certificate of Current Cost or Pricing Data, which must be included in the contract file.

Processing Delays

Evaluating a change can be extremely time-consuming. You may need to comply with legal or administrative requirements that apply to contracts for the increased dollar value of the contract as changed. Two examples make the point. EEO Clearance. When a change raises a contracts total value over $1,000,000, you need to obtain an approval for compliance with equal opportunity. If the Department of Labor has no compliance approval on record for the contractor, there would be a delay while an approval was processed. Wage Determinations. When a modification includes a significant amount of new work covered by the Service Contract Act and/or performed by new categories of service workers not included on wage determinations obtained for the basic contract, you are required to obtain a wage determination covering these new categories. The regulations are not clear as to when new service work is significant, but certainly when the dollar value of work to be performed by persons within these new service categories exceeds $2,500, the threshold for applicability of the Act on a new procurement, an additional wage determination would be appropriate for a modification as well.

FAR 22.805(a)(1)(ii)

FAR 22.1007(b)

5.1.5 Determine Appropriate Consideration FAR 48.104

The job of a contract administrator is to ensure fairness to both contracting parties, and to evaluate the relevance of consideration to both the contractor and the Government. Base your evaluation on what is equitable and reasonable for the particular circumstances surrounding a change. Sometimes consideration has been predetermined or limited based on a formula or a restriction contained within a contract itself, as with a sharing arrangement relative to acquisition savings calculated for a value engineering change proposal.

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CONTRACT MODIFICATIONS AND OPTIONS

5.1.6 Provide Notice of Rejection

You must notify all parties involved when a decision is made to reject a change. You must advise the contractor in writing when rejecting a request. When the contractor initiates a request, you will not only owe the contractor a response, but should notify the requiring or program office of a decision as well. If the requiring or program office initiated a modification, you would obviously owe the initiating office notification of any decision to reject the change. You may choose not to notify a requiring or program office on a contractor-initiated modification when its input was not required in the decision-making process.

FAR 48.103

The terms of the contract or regulatory guidelines may state when a specific type of response is due. For example, you must ensure the contracting officer responds with a decision to value engineering change proposals within 45 days from the Governments receipt of them by either providing:
A notice of the decision, or The anticipated decision date with an explanation for the delay.

Otherwise, the contractor must be notified promptly to avoid costly delays or other performance problems. 5.1.7 Determine Type of Contract Modification FAR 43.103
Unilateral as signed only by the contracting officer.

There are two types of contract modifications:


Bilateral (supplemental agreement) as signed by the contractor and

the contracting officer, and

Bilateral Modifications (Supplemental Agreements)

Bilateral or supplemental agreements are used to:


Make negotiated equitable adjustments resulting from the issuance

of unilateral changes,
Definitize letter contracts, Approve changes required by a contract, such as economic price

adjustments, or
Reflect other agreements of the parties modifying the terms and

conditions of a contract.

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Most supplemental agreements involve the negotiation of price, cost, and other terms, usually entailing tasks that are similar to those involved in the award of a basic contract. Use of Bilateral Modifications Select a bilateral modification when, for instance:
A change has an effect on the substantive rights of either party, There is sufficient time to negotiate a supplemental agreement, or There is no basis in the contracts terms and conditions for issuing

a unilateral modification. Unilateral Modifications Unilateral modifications are used to:


Make administrative changes. These are changes that are minor

in nature and do not materially affect contract performance. They deal mainly with a contracts administrative recitals. Examples of administrative changes include:

Correction of a funding citation, Change in a paying office, Addition of a zip code on a delivery address, Novation agreements, and Name-change agreements.

Issue change orders. This term refers to the actual issuance of a

change authorized by the Changes clause in the basic contract. The Changes clause is cited as the authority for the modification. As defined in FAR 43.101, Change order means a written order, signed by the contracting officer, directing the contractor to make a change that the changes clause authorizes the contracting officer to make without the contractors consent.
Make changes authorized by other contract clauses. Although

these are not termed change orders, they can be issued unilaterally. Examples are the issuance of a stop-work order, a termination notice, and the exercise of an option. Use of Unilateral Modifications Select a unilateral modification when, for instance:
A change has no effect on the substantive rights of the contractor

or the Government,

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CONTRACT MODIFICATIONS AND OPTIONS

A change can be made unilaterally under a specific contract term,

such as the Changes, Stop-Work Order, or Termination clauses,


The contractors agreement to a change is not otherwise required,

and
The time required to negotiate a bilateral agreement would cause a

delay that would adversely affect the Governments interests. As unilateral changes, change orders should be followed up with bilateral modifications (supplemental agreements) when negotiations are concluded on the change. If exhaustive negotiations do not result in a mutual agreement, the contracting officer may issue a final decision as the basis for definitizing a unilateral change. 5.1.8 Implement Contract Modifications for Supplemental Agreements Step 1 In implementing a unilateral change that requires a supplemental agreement between the parties (e.g., a change order), there are nine steps to follow in dealing with fixed-price types of contracts. Obtain a proposal from the contractor. Most Government agencies prescribe formal change-order procedures. The contractors proposal for a change should include price, schedule, and performance data as well as an indication of the maximum equitable adjustment that could result from the change. Evaluate the contractors proposal. Make sure that the proposal covers all elements of the change, that is, increases, decreases, and substitutions. When you evaluate a contractors proposal for a change, actual cost or value is just one factor to consider. Generally, a contractor should make the same overall percentage of profit or loss after a change that it would have made without the change. Allowing a contractor to get well on changes encourages the practice of buying in (i.e., submitting an offer below anticipated costs expecting to increase the contract amount after award through unnecessary or excessively priced change orders). DoD uses the contract administration office for field pricing support on:
Fixed-price proposals over $500,000,

Step 2 FAR 3.501

Field Pricing Support for Proposal Evaluation DFARS 215.805-5

Cost proposals over $500,000 from offerors with estimating sys-

tem deficiencies, or
Cost proposals over $10 million.

The contract administration officers price/cost analyst supports the administrative contracting officer in preparing the field pricing report by: 5-20

CHAPTER 5

Working with the auditor to establish a deadline for the auditors

report,
Identifying areas for special consideration, Arranging for exchange of technical and audit information, and Acting in full responsiveness to requests for technical information

from the auditor. Step 3 Do factfinding, if necessary. Never enter any negotiation without being adequately prepared. Extensive factfinding is necessary when a change covers issues not required by the original contract or when you suspect that the contractor is in a loss position. Invite other Government officials involved in the change to provide pertinent facts to use during any negotiations. Contractors are usually more accommodating when a change is in their favor. Be prepared to counter any contractor arguments. Develop a prenegotiation position on price. Select and use whatever price analysis techniques will ensure a fair and reasonable price. The procedures followed on an original fixed-price type of award may provide a sound foundation for developing the prenegotiation position for a change. When there is no adequate basis for price analysis, use cost analysis techniques as the basis for the Governments pricing position, addressing:
The pertinent issues to be negotiated, The cost objectives, and A profit objective.

Step 4 FAR 15.805-2 FAR 15.807

Take Account of Contractor Position

In negotiating a contract change, you must also consider the current position of the contractor. One case that is often cited to illustrate the concept of maintaining the contractor in the same profit or loss position is Keco Industries, Inc. (176 Ct.Cl. 983, 1966). Keco had been awarded a contract for 200 refrigeration units. One hundred of the units were to be electricity-driven and 100 gasoline-driven. Before any of the gasoline units were produced, the Government issued a change order directing that all 200 units be electricity-driven. A Government audit revealed that the contractor was in a loss position on both types of units. However, the loss position on the electric units was $332.58 per unit, whereas the loss on the gasoline units was only $148.80 per unit.

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CONTRACT MODIFICATIONS AND OPTIONS

Calculate Adjustment From Change

The contractors total loss position before the change was $48,138. For the contractor to be left in the same position it had been in before the change was issued, the adjustment had to be figured as follows: Price per gasoline unit Less cost difference between the gasoline unit and the electric unit ($1,868.80$1,603.58) Price per unit for the 100 units covered by the change order Contractors loss position after the adjustment: 100 electric units unchanged by the order: $1,603.58 (cost per unit) minus 1,271.00 (contract price per unit) $ 332.58 (loss per unit) x 100 units = $33,258.00 $1,720.00 265.22 $1,454.78

100 units covered by the change order: $1,603.58 (cost per unit) 1,454.78 (equitable adjustment price per unit) $ 148.80 (loss per unit) x 100 units = $14,880.00 $48,138.00

Total loss on contract after the adjustment:

A price adjustment reflecting only the price difference between the electric unit and the gas unit would put the contractor into an even greater loss position than had been the case. An adjustment giving the contractor its actual cost for manufacturing the units altered by the change order would enable the contractor to recoup some of the loss it would have suffered originally. Step 5 Develop negotiation strategies and tactics. Review any methods and techniques previously used to negotiate with the contractor. Inquire about the contractors strategies and tactics with other contract administrators or contracts personnel who have negotiated with the contractor. Be prepared to counter any of the contractors strategies and tactics that you can anticipate. Conduct negotiations. Practically speaking, the principle of equitable adjustment for contract changes means that the Government will do whatever is fair, right, or reasonable if the contractor can prove that it is entitled to the cost it claims. Have the flexibility to change your objectives as new information is provided by the contractor during the negotia5-22

Step 6

CHAPTER 5

tion process. If required, meet with appropriate officials and consider any new information before making a final decision. Step 7 FAR 43.301 Prepare the agreement and obtain approvals Most agencies use the Standard Form (SF) 30, Amendment of Solicitation/Modification of Contract, to modify their contracts, but your agency may require its own form. A sample SF 30 used as a supplemental agreement is shown in Exhibit 5-2. When a SF 30 does not provide enough room to document the change, use the Optional Form (OF) 336, Continuation Sheet, or a blank sheet of paper as the second page of the modification. Internal approval policies vary from agency to agency. Make sure you are familiar with your agencys requirements. Step 8 FAR 43.204(c) Obtain a release of claims. To indicate the finality of the settlement and to avoid subsequent controversy on supplemental agreements that result from unilateral modifications, a release of claims should be pursued. Refer to Exhibit 5-3 to review the FAR-prescribed terminology for a contractors release.

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Sample Supplemental Agreement

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Exhibit 5-2

Contractors Statement of Release


(For supplemental agreements definitizing unilateral changes) In consideration of the modification(s) agreed to herein as a complete equitable adjustment for the Contractors ______describe_______ proposal(s) for adjustment, the Contractor hereby releases the Government from any and all liability under this contract for further equitable adjustments attributable to such facts or circumstances giving rise to the proposal(s) for adjustment (except for ..).

Exhibit 5-3

Implications of Release of Claims

A release of claims generally terminates a contractors right to further claims unless it excepts a particular issue, reserving both parties rights to a future settlement. There are some recognized exceptions that may make a signed general release of claims invalid, such as when:
A modification increases the price for a change to the contract and

the change is later recognized as being part of the original contract;


The Government breaches the contract or fails to perform in accord-

ance with a supplemental agreement;


A mutual mistake exists, but not a mistake about which only one of

the parties knew or reasonably could have known;


The Government uses economic duress, such as threats to termi-

nate for default, in getting the contractor to sign the release;


The circumstances involve fraud, unless both parties had know-

ledge of the fraud when the settlement agreement and/or claims release was signed; or
The official who signed the release lacks the authority to sign it.

(This has been held to apply to, among others, the signature of a duly authorized contracting officer when that person did not follow appropriate procedures in settling a claim.)

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CONTRACT MODIFICATIONS AND OPTIONS

Step 9

Document the file and distribute the agreement. The supplemental agreement should be signed by both parties on three copies. Signed copies are to be distributed to each of the following:
The official Government file, The contractor, and The paying office.

Other offices may be on your normal distribution list for duplicates of the signed copies in accordance with agency regulations. 5.1.9 Implement Contract Modifications for Unilateral Changes Step 1 Implementing a unilateral modification for an administrative change is different than implementing a bilateral modification. There are usually eight steps to follow. Incorporate the change in the contracting office suspense system. Generally, issuing a supplemental agreement is the most common method for definitizing a unilateral modification. It is important to establish goals for definitizing any unilateral change. Establish due dates for interim steps in the process including a date for the overall goal. Identify the clause authorizing the change. A Changes clause is not the only clause authorizing a modification. When the Government issues a stop-work order, for instance, the contractor is required to stop work until given the go-ahead. The clause allows the contractor to obtain an equitable adjustment for the delay. Make sure you cite the appropriate clause for the change. Determine whether to issue a telegraphic order. When unusual or urgent circumstances demand quick action, you may implement unilateral changes by telegraphic messages, but only if you comply with all requirements as listed in Exhibit 5-4. Prepare and issue the change order or other unilateral change. Prepare your unilateral change on your agencys prescribed form for contract modifications, usually the SF 30. Exhibit 5-5 shows a sample of a SF 30 used as a change order.

Step 2

Step 3 FAR 43.201

Step 4

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Prerequisites for Unilateral Issuance by Telegraphic Message


The circumstances are urgent or compelling. Furnish copies of the message promptly to the same addressees who received the basic contract. Take immediate action to confirm the change by issuance of a SF 30, Amendment of Solicitation/Modification of Contract. The message must contain substantially the same information required by the SF 30, except it would: Not indicate the estimated change in price, and Include in the body of the message the statement: Signed by (Name), Contracting Officer.

The contracting officer must manually sign the original copy of the message.

Exhibit 5-4

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CONTRACT MODIFICATIONS AND OPTIONS

Sample Change Order

Exhibit 5-5

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Step 5 FAR 33.213

Inform the contractor of its obligation to continue work under the contract as changed. When a Government contracting officer issues a unilateral change, the contractor must proceed with the work as changed. This holds true even if an agreement as to adjustment in price and performance time has not been reached or there is open and intense disagreement on these adjustments. There are a few exceptions. A contractor need not proceed if:
It needs and requests, but does not obtain, clear direction from the

contracting officer on how to proceed with the change;


The Governments action leaves the contractor in an untenable po-

sition. (An example of this is when faulty Government testing procedures result in the rejection of delivered items.); FAR 52.216-24 FAR 52.232-7 FAR 52.232-20 FAR 52.232-22
A contract clause permits the contractor to stop work when funds

are exhausted or when a certain percentage of the costs has been expended;
The Government grossly and materially breaches its duties and ob-

ligations under the contract;


Performance is impossible.

(However, when performance is temporarily impossible, as in the case of temporary unavailability of Government-furnished materials, the contractors duty to proceed will remain effective and the contractor must continue performance after the obstacle to performance has been removed.); or

An issued change is beyond the scope of the contract.

Step 6 FAR 43.203 FAR 43.205(f) FAR 52.243-6

Inform the contractor of any need to segregate the costs of performing changed work. A contractors standard accounting method may not be designed to segregate the costs of performing changed work. You can demand this cost segregation only when a contract requires a contractor to do so. When there is such a requirement, alert the contractor to the possible need for a revision to its normal accounting procedures to track the following direct costs categories:
Nonrecurring costs (e.g., engineering costs and costs of obsolete or

reperformed work),
Costs of specific work caused by the change (e.g., new subcontract

work, new prototypes, or new retrofit kits), and


Costs of recurring work (e.g., labor and material costs).

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CONTRACT MODIFICATIONS AND OPTIONS

Step 7

Document the file and distribute the modification. It is important to document the file adequately for unilateral changes. You need to identify what follow-up action is required for definitizing a change. Definitizing a unilateral change. After a unilateral change has been issued, you need to issue a bilateral agreement or otherwise definitize the change. The following steps for definitizing unilateral changes are the same as for bilateral changes:
Establish a prenegotiation position, Negotiate a supplemental agreement on the amount of the equita-

Step 8

ble adjustment and other terms,


Obtain a release of claims or resolve the claim, and Document the file and distribute the supplemental agreement or

other document used to definitize the change. 5.1.10 Implement Contract Modifications for Other Administrative Changes Step 1 Most administrative changes correct nonsubstantive errors in the original contract document. Follow three steps to implement them.

Verify that the change does not affect the substantive rights of the parties. Normally this is merely a matter of reading the change request and making a judgment. Prepare and issue the change. Use a SF 30. Exhibit 5-6 provides a sample unilateral modification to effect an administrative change. Document the file and distribute the modification. Send signed copies of the modification to the contractor, the paying office, and retain one signed copy for the contract file.

Step 2

Step 3

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Sample Modification for an Administrative Change

Exhibit 5-6

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CONTRACT MODIFICATIONS AND OPTIONS

WHAT A DIFFERENCE A CLAUSE MAKES After having studied both the nature of and regulatory requirements for contract modifications, Eric began to realize that changing or altering a Government contract requires more than meets the eye. He became particularly alert to the specific terms of the traditional Changes clauses used in Government contracts. And while he found a similarity of conditions expressed in each, it was a wake-up call for him to realize that what can be changed under any Changes clause is not merely a question of its being within the general scope. The business of general scope, he concluded, while sometimes difficult to determine relative to a proposed change, is further clarified in each clause by expressed areas within which, and only which, changes can be issued. It all added up to a lot more than pushing paper and simply getting it out the door. In some cases, there were decisions to be made that reflected a multitude of interests, from the requiring activity and funding sources to the contractor and its subcontractors. In other cases, modification procedures were simple. I guess, he said to himself, the whole nine yards of it reinforces the fact that if youre gonna alter a Government contract, for whatever reason, you gotta do it in some form of writing. Throughout his study of contract modifications, he reflected on the ease with which Platform Industries had agreed to a no-cost, bilateral change to its contract for the submission of a weekly progress report. All of that resulted in a supplementary agreement. It wasnt considered a big deal, but it was critical to Harry Carmichael and the requiring activity. And yet again, Eric wondered what might have been the case had Platform not agreed to the change. For under FAR 52.212-4, the Changes article merely said that both parties had to agree, in writing, to any change in the contracts terms and conditions. It almost seemed too simple. Eric zipped into his computer and banked the following questions concerning the Changes article under FAR 52.212-4. He would raise them with Joanne when she had time for one of their general conversations. How should I approach changes, assuming some might be necessary, for items or services procured under FAR Part 12 (Acquisition of Commercial Items) using FAR Part 13 (Simplified Acquisition Procedures), 14 (Sealed Bidding), or 15 (Contracting by Negotiation) as the method of contracting? Without a unilateral right to issue a change, how do I persuade the contractor to agree to one? And if we get hung up at the outset, how do we bridge the gap? Does the Changes article under FAR 52.212-4 infer an equitable adjustment in the event of a change, and what exists to resolve their differences if both parties cant agree to one?

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5.1.11 Implement Contract Modifications for Novation Agreements FAR 42.1201

A novation agreement is a legal instrument executed by:


The contractor (transferor), The successor in interest (transferee), and The Government.

A novation agreement provides for:


The transferor to guarantee performance of the contract by the

transferee,
The transferee to assume all obligations under the contract, and The Government to recognize the transfer of the contract and re-

lated assets. Dealing With Novation Agreements FAR 42.1203(f)(4) Sometimes you will receive a copy of an administrative modification from another contracting office affecting one of your contracts. If you do, then distribute it as you would any other such modification. The contractor must submit proper documentation to support a novation agreement. Such documentation is shown in Exhibit 5-7. For a novation, first look at the list of all affected contracts and other orders. The contracting officer or ACO administering the largest unsettled balance has the responsibility to execute the novation agreement for the Government. Obtain any missing or deficient documentation if your contract has the largest unsettled balance of the listed contracts. Provide all contracting offices affected by a proposed novation agreement with:
A list of all affected contracts, and A request for comments or feedback within 30 days.

FAR 42.1202(c)

FAR 42.1203(b)

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CONTRACT MODIFICATIONS AND OPTIONS

Documentation Requirements for Novation Agreements


Three signed copies of the proposed novation agreement. An authenticated copy of the instrument effecting the transfer of assets (e.g., a bill of sale, certificate of merger, contract, deed, agreement, or court decree). A list of all affected contracts and purchase orders remaining unsettled between the transferor and Government, showing for each the: Contract number and type, Name and address of the contracting office, Total dollar value, as amended, and Remaining unpaid balance.

A certified copy of each resolution of the corporate parties boards of directors authorizing the transfer of assets. A certified copy of the minutes of each corporate partys stockholder meeting necessary to approve the transfer of assets. An authenticated copy of the transferees certificate and articles of incorporation, if a corporation was formed for the purpose of receiving the assets involved in performing the Government contracts. The opinion of legal counsel for the transferor and transferee stating that the transfer was properly effected under applicable law and the effective date of transfer. Evidence of the transferees capability to perform the contracts. Balance sheets of the transferor and transferee, as of the dates immediately before and after the transfer of assets, certified for accuracy by independent accountants. Evidence that any security clearance requirements have been met. The consent of sureties on all contracts if bonds are required or a statement from the transferor that none is required.

Exhibit 5-7

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Processing and Executing Novation Agreements Step 1 FAR 42.1203(d)

The processing and execution of a novation agreement involves the following five steps. Obtain legal review of sufficiency. As with any legal documentation about which you are generally unfamiliar, obtain Government counsels clearance on the basis for the modification and the supplemental agreement itself. Execute the agreement. Sign the document when it is consistent with the Governments interest to execute the agreement. However, it may not always be appropriate to process a novation agreement. Base a decision not to execute one on:
Feedback from other contracting offices, or A determination that the proposed transferee is not responsible.

Step 2 FAR 42.1203(c)

A lack of responsibility can be based on information that would include, but not be limited to, the transferees inclusion on the List of Parties Excluded from Federal Procurement and Nonprocurement Programs. FAR 42.1204(e) Follow the format provided in the FAR for executing an agreement when the contractor has not provided the agreement. Make any changes that might be necessary to the standard novation agreement. Forward the novation agreement. After documents have been reviewed and approved by the Government, forward a copy to both the transferor and the transferee. Request them to sign the approved agreement and return it for the Governments signature. Ask the contracting officer to sign the novation agreement only after the transferor and transferee have signed. Prepare a contract modification incorporating the agreement. A contract modification (using a SF 30 unless otherwise directed by agency requirements) must:
Reference the novation agreement, Incorporate a summary of the agreement in the modification, and Have attached a complete list of affected contracts.

Step 3

Step 4 FAR 42.1203(f)

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CONTRACT MODIFICATIONS AND OPTIONS

Step 5 FAR 42.1203(f)

Distribute the modification. Send a copy of the modification to the following:


The transferor, The transferee, Each contracting office listed by the contractor as having current

contracts that would be affected by the agreement,


Each administration office, if different from the contracting office,

listed by the contractor as having current contracts that would be affected by the agreement, and
All who received a copy of the contract currently being adminis-

tered. 5.1.12 Implement Contract Modifications for Name Changes FAR 42.1201 Dealing With Change-of-Name Agreements FAR 42.1203(f)(4) Sometimes you will receive an administrative modification based on a change-of-name agreement signed for the Government by a contracting officer in another contracting office that affects your contract. If you do, then distribute it as you would any other such modification. The contractor must submit proper documentation to support a change-of-name agree-ment. Such documentation is shown in Exhibit 5-8. As with novation agreements, first look at the list of all affected contracts and purchase orders. The contracting officer or ACO administering the largest unsettled balance has the responsibility to execute the change-of-name agreement for the Government. Obtain any missing or deficient documentation if your contract has the largest unsettled balance of the listed contracts. A change-of-name agreement is a legal instrument executed by the contractor and the Government that recognizes the legal change of a contractors name without disturbing the original contractual rights and ob-ligations of the parties.

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Documentation Requirements for Change-of-Name Agreements


Three signed copies of the change-of-name agreement. The document effecting the name change, authenticated by a proper official of the State having jurisdiction. The opinion of the contractors legal counsel stating that the change of name was properly effected under applicable law and showing the effective date. A list of all affected contracts and purchase orders remaining unsettled between the contractor and the Government, showing for each the: Contract number and type, Name and address of the contracting office, Total dollar value, as amended, and Remaining unpaid balance.

Exhibit 5-8

Processing and Executing Change-of-Name Agreements

The processing and execution of a change-of-name agreement involves the following five steps.

Step 1

Verify that the contractors rights and obligations are unaffected. If the contractors basic rights are affected, a change-of-name agreement is inappropriate. A novation agreement or an assignment of payment may suit the circumstances. As with any legal documentation about which you are generally unfamiliar, obtain Government counsels clearance on this issue. Execute the change-of-name agreement. When it is consistent with the Governments interest to sign the agreement and the contractor has provided a signed agreement, you would include it with the review of legal sufficiency obtained in Step 1.

Step 2

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CONTRACT MODIFICATIONS AND OPTIONS

FAR 42.1205

Follow the format provided in the FAR for executing name changes when the contractor has not provided the agreement. Make any changes that might be necessary to the standard change-of-name agreement. Obtain the contractors signature on the agreement. Obtain the contractors signature before the contracting officers. Provide one copy to the contractor and retain one copy of the signed agreement in the contract file as backup for a subsequent contract modification. Prepare a contract modification incorporating the agreement. A contract modification (using a SF 30 unless otherwise directed by agency requirements) must:
Reference the change-of-name agreement, Incorporate a summary of the agreement in the modification, and Have attached a complete list of affected contracts.

Step 3

Step 4

Step 5

Distribute the modification. Send a copy of the modification to the following:


The contractor, Each contracting office listed by the contractor as having current

contracts that would be affected by the agreement,


Each administration office, if different from the contracting office,

listed by the contractor as having current contracts that would be affected by the agreement, and
All who received a copy of the contract currently being adminis-

tered.

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STEPS IN EXERCISING OPTIONS

1-2. Identify available options and the need for additional supplies or

3. Determine whether a synopsis is for an

4. Determine whether to exercise an after: A formal solicitation, Market

Exercise the option?

No

Obtain required supplies services through other

Yes 5. Provide written notice and an

6. Prepare a written determination for contract

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CONTRACT MODIFICATIONS AND OPTIONS

5.2 Options FAR 17.204(e)

Options provide the Government with firm prices for additional quantities or periods of performance, but only for a specific period of time. That time period may extend beyond the basic contract period and must be identified in the contract. Unless agency procedures specify otherwise, the total of a contracts basic and option periods cannot exceed:
Five years in the case of services, or Five years requirements in the case of supplies.

These limitations do not apply to information technology contracts, and statutes applicable to various classes of contracts (e.g., the Service Contract Act) may place additional restrictions on the use of contract options. 5.2.1 Identify Available Options FAR 52.102-1(b)(2) There are four standard FAR option clauses. These are summarized in Exhibit 5-9. Read the clause provided in the contract carefully, because the contracting officer has the discretion to alter the language to fit a particular situation. If the clause is incorporated by reference, then it uses the clauses standard language. DoD has two options in addition to the four standard FAR options. The first enables DoD to fulfill foreign military sales commitments. The second enables DoD to support an industrial mobilization program by:
Increasing the quantity of supplies or services at a stated percen-

DoD Options for Foreign Military Sales and Surge Requirements DFARS 217.208-70(a) DFARS 252.217-7000 DFARS 217.208-70(b) DFARS 252.217-7001

tage rate, and/or


To accelerate the rate of delivery originally called for in the con-

tract. Time for Exercising Options FAR 17.204(b) Every option will state a time period during which it may be exercised. It may not be exercised at any other time. Your contract administration plan should include a suspense date for review of options that allows sufficient time prior to their expiration for verifying the need and researching current market prices. Options are usually contained within the contract as a separate line-item in the schedule.

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5.2.2 Determine Need for Additional Supplies or Services

Consult requiring activities to verify that:


The requirement covered by an option fulfills an existing Govern-

ment need, and


Funds are available for exercising the option.

5.2.3 Determine Whether Option Requires Synopsizing FAR 5.202(a)(11)

A notice in the Commerce Business Daily (CBD) is required prior to exercising an option unless:
The original contracts synopsis provided sufficient detail on the

option, or
Another exception to synopsizing applies.

FAR 5.205(a) 5.2.4 Determine Whether to Exercise Options

Additionally, you may use a Research and Development Sources Sought announcement as a market research tool. Options must be exercised exactly as stated in the contract. You may not change quantities, unless the option itself, not the basic contract, authorizes partial deliveries, in which case, you may order less than the stated quantity. You may never order more than the stated quantity. You may not mutually agree to vary the price or any other term or condition for a stated additional quantity or continued performance period except for:

FAR 22.1007(b)

Any increase in wages contained in a new wage determination

from the Department of Labor when services a contractor will provide under an option are subject to the Service Contract Act; or
Economic price adjustment, but only if:

FAR 17.207(b) FAR 16.203

The contract contains specific terms that allow economic price adjustment in contract prices, and The contractor specifically requests a price revision in strict compliance with those terms.

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CONTRACT MODIFICATIONS AND OPTIONS

Standard Contract Clauses for Options


Clause FAR 52.217-6 Option for Increased Quantity Use Used if the option quantity is expressed as a percentage of the basic contract quantity or as an additional quantity of a specific line-item. Substance The contracting officer may increase the quantity at the unit price specified for the appropriate line-item.

Provides for a written notice within a time frame specified in the contracts Schedule. Option deliveries will be at the same rate as for the basic requirement, unless the parties otherwise agree. FAR 52.217-7 Option for Increased QuantitySeparately Priced Line Item Used if the contract Is not a service contract, and The option quantity identified as a separately priced line-item is the same as a corresponding basic lineItem with the same nomenclature. Specifies that option deliveries will be at the same rate as for the basic requirement, unless the parties otherwise agree. Calls for a written notice within a specified period of time.

Exhibit 5-9 (continued on next page)

5-42

CHAPTER 5

Standard Contract Clauses for Options


Clause FAR 52.217-8 Option to Extend Services Use Used if the contract is recurring and continuing services are required to assure continued performance in the event of delays in the follow-on procurement process. Substance Limits the total extension of line-item services to six months. Provides for a written notice within a time frame specified in the conSchedule. Allows adjustment in line-item prices only for Service Contract Act wage rates.

tracts

FAR 52.217-9 Option to Extend the Term of the Contract

Used if Work covered under the option requires start-up or phase-in; or Contract extensions should be addressed; and The contract applies to either supplies or services.

Provides for a preliminary written notice of the Governments intent to exercise the option at least 60 days before contract expiration. Specifies a time frame for exercise of the option. Limits the total contract duration to a specific time frame. States that a contract extension extends the option as well.

Exhibit 5-9 (continued)

Consider Alternatives to an Option

When exercising an option, you save considerable time and administrative expense. However, if market conditions changed favorably for buyers of the supplies or services contained in the option, the savings realized by issuing a new procurement may be worth the time and expense of a resolicitation. In considering alternatives to an option, apply the following four steps. Consider whether the contract awarded is an indicator of current market conditions. This consideration is only valid when:
Options were considered in evaluating the basic contract, and

Step 1

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CONTRACT MODIFICATIONS AND OPTIONS

The time between contract award and exercising the option is neg-

ligible. Step 2 FAR 17.207(c) FAR 15.405-1 FAR 5.205(a) Decide whether market research provides sufficient evidence. Some factors to consider for an informal investigation of market prices are contained in Exhibit 5-10. When the contract award was noncompetitive, your research is primarily to identify whether any competitors have entered the market. Your primary tool for seeking competition will probably be a Research and Development Sources Sought announcement in the CBD or a solicitation for information or planning purposes. These mechanisms avoid the expense of a formal solicitation if there are still no other sources available.

Factors for Obtaining Comparative Data to Assess Option Prices


The relationship of the option price to the price for the initial contract period. The adequacy of competition at the time of initial award compared with competition at the time of the potential exercise of an option. Changes in the general economy having a potential effect on the cost of performance. The findings of an informal poll of other contracting activities surveying significant changes in offered prices for similar items or services. Potential savings in administrative costs in exercising the option compared with awarding a new contract, including service disruption costs. Administrative or budgetary constraints that cause an inability to process a new solicitation. Exhibit 5-10

Step 3

Issue a formal solicitation if market research is insufficient. Use a formal solicitation only if the first two steps do not provide sufficient data. The purpose of using an option is twofold:
To avoid the expense of a formal solicitation, and To take advantage of a lower option price.

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CHAPTER 5

So use a formal solicitation as a last resort when there is no other way of confirming that the option price is at least equal to current market prices. Step 4 Make a decision based on the evidence at hand. You may discover that the Governments right to exercise an option has expired because:
A proper preliminary notice was not given, or Funds were not available.

When you discover that the required date for a preliminary notice has passed, discontinue the option process unless the contractor is willing to waive its right to a preliminary notice. When the actual date for exercising an option is passed, the Governments right to exercise it cannot be restored. If still required, items or services under an expired option must be procured using another contracting procedure. 5.2.5 Provide Written Notice and Exercise Option Remember that an option in a basic contract represents a considerable risk for a contractor. If the cost of deliverables increases after contract award beyond what a contractor anticipated when initially pricing an option, then the contractor must absorb the loss represented by the difference between the market price and the option price. Therefore, if costs have risen and the contractor has not received a preliminary notice, it may not consent to the exercise of an option. A contractor will usually agree to waive its right to a preliminary notice when market pricing is the same as or lower than its contractually specified option price. In providing a written notice and exercising an option, apply the following three steps. Step 1 FAR 52.217-6 through -9 Provide a preliminary notice. The four standard FAR option clauses require a preliminary written notice to a contractor within a period specified in a contracts Schedule. This notice must be provided within the specified time period or the Government loses its unilateral right to exercise the option, unless the contractor waives its right to a preliminary notice. Obtain a new wage determination for services subject to the Service Contract Act, when required. If the basic contract contained a Service Contract Act wage determination, then the option will probably require one. The only time it will not is when one of the following occurs:
The basic contract contained both supplies and services, but the

Step 2 FAR 22.1007(b)

option applies only to supplies.

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CONTRACT MODIFICATIONS AND OPTIONS

No personnel within the service categories subject to the Service

Contract Act will be used to perform services contained in the option (as when both professional services and services subject to the Service Contract Act are in the basic contract, but only professional employees will be used to provide services contained in the option). When in doubt, question the contractor on the categories of labor to be used in performing specific option services. FAR 22.1008-6 When filling out the SF 98a, Notice of Intention to Make A Service Contract and Response to Notice, indicate Mod-Exercise of Option in Block 2 of the form, which asks for the estimated solicitation date. Exercise the option. To exercise a contract option, use a SF 30 or the form that you agency prescribes for modifications. This ensures that everyone who was provided a copy of the basic contract is aware of the additional requirement. It also provides the most uniform way of documenting it. Generally follow the procedures in 5.1.9, above, for implementing unilateral contract modification changes. In the rare instance when you might be issuing a bilateral modification for the contractor to acknowledge it has waived a required preliminary notice, generally follow the procedures in 5.1.8, above, for implementing supplemental agreements. Before presenting the SF 30 to the contracting officer for signature, double-check to ensure that there is enough time to provide it to the contractor within the period specified in the basic contract. Provide a note to the contracting officer highlighting the expiration date. 5.2.6 Prepare Written Determination for Contract File FAR 17.207(f) As contract administrator, you will prepare this determination for the contracting officers signature. Exhibit 5-11 provides content requirements for a determination to exercise an option.

Step 3

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CHAPTER 5

Content Requirements for a Determination to Exercise An Option


The option exercise complies with the terms of the option. Funds are available. The requirement covered by the option fulfills an existing Government need. The exercise of the option is the most advantageous method of fulfilling the Governments need, price and other factors considered. A statement that the option exercise was synopsized or a reference to the exception that authorized not synopsizing. The option exercise complies with the requirements of FAR Part 6 regarding full and open competition.

Exhibit 5-11

GETTING IN SHAPE TO EXERCISE AN OPTION Its amazing, Eric thought to himself, how we use terminology without really un-derstanding what its all about. He had listened carefully during that part of his training experience that covered the subject of options, and he realized how superficial his knowledge had been of this important area. An option clause is an option clause, he remembered himself saying. When it comes time to exercise it, you just do it. He had learned that things were not quite that simple. As a matter of fact, things could get downright complex in the business of options. Looking toward dealing with the option available to the Government in Platforms contract, Eric thought he would try to get a bit of a head start by examining the con-tracts terms and conditions related to exercising the option. First, he found that the solicitation document (a SF 1449) had referenced the inclusion of the provision under FAR 52.217-5 (Evaluation of Options). Going to FAR 17.208(c)(1), he confirmed why this particular solicitation provision had been used. He then examined the solicitations addendum in which the applicable option clause was referenced. He consulted his on-line FAR to read the clause under FAR 52.217-6 (Option for Increased Quantity). Okay, he thought to himself, were dealing with supplies here, not services, and thus the cited clause.

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CONTRACT MODIFICATIONS AND OPTIONS

Yet again, Eric zipped into his computer and banked a series of questions concerning the exercise of an option under Platforms contract. More grist, he muttered smilingly, for Joannes mill! When should I start to consider exercising the option? With whom should I consult about the option, and what questions should I ask? What responsibility do I have to test the marketplace before deciding to exercise the option, and how do I execute that responsibility? The price of any option quantity has been fixed in the basic ID/IQ contract. What if Platform comes at me claiming increased costs based on unknown and un-controllable conditions at the time of initial award? Why might we reject exercising the option?

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CHAPTER 6

CONTRACT REMEDIES
ACCOUNTABILITY WHEN THINGS GO WRONG It was Monday morning, and after a restful weekend Eric had settled in at his desk for what he knew would be a busy few days. He checked his voice mail and found a few messages. None was of any real consequence. Then he turned to his computer, booted-up, and began to read messages in his E-mail system. There were only three, but they were more than enough for a Monday morning. The first message was from Pat Fazio in the agencys finance and payment office. Eric: Received a call from Terry Kelley in inspection and acceptance concerning Argos current contract. Kelley wants me to stop payment on Argos recent invoice for the delivery of its tenth lot of generator engines. Seems that on-the-spot inspection at destination found several of the engines had cracked casings. Kelley, who sounded quite upset, was uncertain of the cause or the extent of the damage. I was called to stop payment before Kelley called Argos production chief to inform the contractor of the problem and to make immediate arrangements for transporting the delivered generator engines back to its plant. I need your advice in this matter. Please respond within 48 hours. The second message was from Harry Kaplan, a colleague of Erics in contract administration. Eric: I need your help. Just got a call from our field office in Dallas. Seems that a call came in from a requisitioner in Houston about the delivery of 500 boxes of mapping paper that appear useless. The paper was to be used for the transposition and recording of information related to aerial photography taken from a spacecraft. Far as I can determine, the aerial photography had to do with something about the shifting curvatures of the earths continental surfaces. The bottom line is that what is to be transposed and recorded from the aerial photography has got to be done within the next month so that its ready for distribution and use at an international conference in Houston, one thats being co-sponsored by the U.S. and several other countries. The problem with the mapping paper, or so Im told, is that it is not light-sensitive enough to record some of the minute shifts in geologic formations surfaced by the aerial photography. We bought the paper under FAR Part 12 as a commercial item, and, in checking the contract, I find that we neither included an express warranty for the paper nor did we accept the lowest offered price. Rather, we accepted Argos price as representing a best-value deal, principally because of the demonstrated quality of its paper. Kind of a mess. And the pressure for its resolution is very strong, especially with the international conference only a stones throw away.

6-1

CONTRACT REMEDIES

What would you do about all this? start?

And more important, where would you

The third message appeared as if in some form of code. It was sent by Dawson Gibbs, one of Joannes CORs. Eric: In checking Rapid Responses vouchers for the past month, Ive run into a real problem in trying to separate fact from fiction. The contractors most recent voucher for the past two weeks includes costs incurred for direct labor activities that bear no relationship to what we expected. Documentation of costs has referenced four reports which, while required, evidence no correspondence between their titles and contents. Its like someone took something off the shelf, housed it in a three-ring binder, and then plugged in a title page to make it seem appropriate. Obfuscation is too lenient a term to characterize my reaction to it. And these people have been warned on prior occasions about charging for things that we feel are purposely misleading. Youll recall that I never felt that Rapid Response should have gotten this job. When are we going to learn? If you have the time, perhaps youll respond to this. Well, thought Eric, welcome to Monday! Aside from other work in front of him, he decided to call Pat Fazio before mid-morning. Harry Kaplans plea for help would have to wait until Eric found some time. The message from Dawson Gibbs left him with an uncomfortable feeling. His immediate thought was that there could be a real problem with Rapid Response. For all three situations, he knew that Joanne would cut to the chase. Oh yes, she would zero in on them unflinchingly. He could hear her now. Whats common to all three, Eric? she might ask. And then would answer her own question. First, youve got to verify what appear to be the facts. Second, youve got to consult with the parties, including our in-house people, and determine the cause. Third, given the cause youve got to ascertain accountability. And fourth, once youve isolated accountability, then you can reach for an appropriate remedy. Where would you look for remedies, Eric? Verify, consult, ascertain, and apply the appropriate remedy. It came through to him as a reasonable, four-step methodology, and he wondered how helpful each contract file would be in getting after each case.

6-2

CHAPTER 6

COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Identify remedies that might be appropriate. Determine whether to use a cure or a show cause notice. Invoke liquidated damages. Reject nonconforming supplies or services. Invoke an express warranty. Invoke an implied warranty. Prove the existence of latent defects, fraud, or gross mistakes amounting to fraud. Select one or more remedies as the best for a particular performance problem. Determine whether to withhold, reduce, or demand payment from a contractor. Select and pursue a formal contract remedy for performance problems associated with a contractors nonperformance or noncompliance under a contract.

6-3

CONTRACT REMEDIES

INTRODUCTION TO CONTRACT REMEDIES


Government Contract Remedies Government contract remedies are forms of relief that can be pursued in light of a contractors nonperformance or noncompliance with a contracts terms or conditions. These forms of relief can be provided by contract clauses or from basic rights provided in Government contract law and, occasionally, in commercial contract law. In seeking contract remedies, Government policy requires its agents to:
Document and verify the sufficiency of evidence for the remedy

Government Policy on Choosing Contract Remedies

sought,
Notify the contractor of the Governments intention to seek relief,

and
Seek and obtain contractor feedback on a proposed Government

action. Reaching a bilateral agreement on solutions to contract problems is always preferred to unilateral Government action. Sometimes, however, unilateral action is required. Addressing Remedies Not Covered Elsewhere This chapter addresses contract remedies that are not discussed separately in other chapters. These are:
Actions preliminary to a termination for default, Liquidated damages, Rejecting work and demanding reperformance, Accepting work with minor nonconformities for a reduced contract

amount or other consideration,


Pursuing rights under a warranty, or Seeking postacceptance rights due to:

Latent defects, Fraud, or Gross mistakes of the contractor. 6-4

CHAPTER 6

Steps in Performance

The general steps in seeking corrective actions to defective performance are charted on the next page. Following the flowchart, each step is discussed in detail. In subsequent sections, steps involved in seeking some specific remedies are charted at the beginning of each section and then discussed in detail.

6-5

CONTRACT REMEDIES

PRELIMINARY STEPS FOR CHOOSING CONTRACT REMEDIES

Identify and select one or more contractual remedies.

Remedies 1. Cure or show cause notice. 2. Liquidated damages. 3. Rejection of noncomforming supplies or services. 4. Invoke rights under an express warranty. 5. Invoke rights under an implied warranty. 6. Remedies for latent defects, fraud, or gross mistakes. 7. Any other remedy specified in a specific clause at issue.

6-6

CHAPTER 6

IDENTIFYING TYPES OF REMEDIES


6.1 Identify Types of Remedies Monitoring identifies or permits the surfacing of performance failures or other breach of contract situations, such as:
Anticipated or actual late delivery, Failure to control costs adequately, and Unsatisfactory performance.

Remedies Without Resorting to Termination

The Government has several methods at its disposal to remedy a given situation without resorting to contract termination. These include:
Issuing cure or show cause notices, Imposing liquidated damages, Rejecting nonconforming supplies or services, Invoking written warranties, Invoking implied warranties, and Proving the existence of latent defects, fraud, or gross mistakes

amounting to fraud. Selecting the most appropriate remedy for a situation is covered in 6.8 of this chapter.

6-7

CONTRACT REMEDIES

STEPS IN ISSUING A DELINQUENCY NOTICE

1. Issue a notice and obtain a response.

2. Evaluate the contractors response.

3-4. Select and implement a course of action.

Options Based on the Contractors Response to a Cure or Show Cause Notice 1. Defer termination action. 2. Seek alternatives to default. 3. Initiate proceedings as detailed in Chapter 9 (Disputes, Claims, and Terminations)

6-8

CHAPTER 6

DELINQUENCY NOTICES
6.2 Issue Cure or Show Cause Notice Contractors should, if practicable, be notified of the possibility of being terminated for failing to perform their contractual obligations. Notification will take one of two forms:
Cure notice, or Show cause notice.

Issue Cure Notice

A cure notice is used when:


The contractor fails to make progress and performance is endan-

gered,
At least 10 days or more remain for contract performance and cor-

rection of the problem can reasonably be expected to take place within the remaining time, or
The intent is to terminate the contract prior to the delivery date.

Contents of Cure Notice FAR 49.607(a)

At a minimum, a cure notice must:


Specifically state the failure believed to be endangering per-

for-mance,
Allow the contractor at least 10 days to cure the failure, Be in writing and sufficient to support a default termination, and Be sent with proof of delivery requested.

The FAR format for a cure notice is shown in Exhibit 6-1. Cautions About Cure Notices Issuing a cure notice when the time remaining for performance does not permit a cure period of 10 days or more endangers the Governments position (i.e., it would appear that the Government is permitting the contractor to extend performance beyond the required delivery date). In this case, a cure notice should not be issued. Failure to issue a cure notice when required will probably result in an invalid termination for default, resulting in that terminations conversion to one for convenience.

6-9

CONTRACT REMEDIES

After a cure notice has been issued, a contract cannot be terminated until the time for cure specified in the notice has expired, unless there is evidence of wrongful conduct or repudiation by the contractor.

FAR Format for a Cure Notice


You are notified that the Government considers your _______________________ [specify the contractors failure or failures] a condition that is endangering performance of the contract. Therefore, unless this condition is cured within 10 days after receipt of this notice [or insert any longer time that the contracting officer may consider reasonably necessary], the Government may terminate for default under the terms and conditions of the ________ ___________ [insert clause title] clause of this contract.

Exhibit 6-1

Issue Show Cause Notice

A show cause notice is used when there is insufficient time remaining in a delivery schedule for the contractor to cure or correct the delinquency. Usually a show cause notice is issued when there are fewer than 10 days remaining; however, it can be used at any time when you can determine there is not sufficient time within the delivery schedule to permit a realistic cure. The notice must afford the contractor an opportunity to provide evidence that a delinquency, for instance, was beyond its control. At a minimum, a show cause notice must:
Inform the contractor of its liabilities in the event of default,

Contents of Show Cause Notice FAR 49.607(b)

Permit the contractor to show cause why the contract should not be

terminated for default,


Inform the contractor that failure to explain the cause of the defi-

ciency may be taken as admission that no valid explanation exists,


When appropriate, invite the contractor to discuss the matter at a

conference, and
Be sent with proof of delivery requested.

The FAR format for a show cause notice is shown in Exhibit 6-2.

6-10

CHAPTER 6

FAR Format for a Show Cause Notice


Since you have failed to _______________________[insert perform Contract No. ____ within the time required by its terms, or cure the conditions endangering performance under Contract No. ____ as described to you in the Governments letter of _______(date)], the Government is considering terminating the contract under the provisions for default of this contract. Pending a final decision in this matter, it will be necessary to determine whether your failure to perform arose from causes beyond your control and without fault or negligence on your part. Accordingly, you are given the opportunity to present, in writing, any facts bearing on the question to ____________ [insert the name and complete address of the contracting officer], within 10 days after receipt of this notice. Your failure to present any excuses within this time may be considered as an admission that none exist. Your attention is invited to the respective rights of the Contractor and the Government and the liabilities that may be invoked if a decision is made to terminate for default. Any assistance given to you on this contract or any acceptance by the Government of delinquent goods or services will be solely for the purpose of mitigating damages, and it is not the intention of the Government to condone any delinquency or to waive any rights the Government has under the contract. Exhibit 6-2

Requirement for Sending Copies of Notices FAR 49.402-3(e)(4) FAR 49.402-3(e)(3)

Copies of either a cure or show cause notice must be sent to:


The contracting offices small business specialist and the Small

Business Administration Regional Office nearest the contractor when the contractor is a small business, and
The contractors surety when a payment and a performance bond

were required for contract performance. Evaluate Contractor Response Cure Notice Response A contractors response to delinquency notices can take several forms. A contractor is not required to respond to a cure notice since the contractor is told to correct the problem before the contract becomes delinquent. However, unless the problem is actually cured, the Government, upon expiration of the delivery period, has the option of issuing either a:
Show cause notice, or Termination notice.

6-11

CONTRACT REMEDIES

Show Cause Notice Response

If you choose to issue a show cause notice (either with or without a prior cure notice), the contractor has 10 days to respond. Typical responses are summarized in Exhibit 6-3.

Typical Contractor Responses to Show Cause Notices


An offer to cure performance. An offer to provide substantial performance in exchange for relief from some terms or conditions of the contract. Presentation of a case for an excusable delay. Agreement with the facts of the notice, but no offered solution. No response.

Exhibit 6-3

Actions After Evaluation of Response

Commensurate with a response, the Government may:


Defer termination action, Modify the contract, or Begin default proceedings.

Defer Termination Action

Forbearance is the more formal term used to describe deferring termination action. This strategy is appropriate when a contractor has provided a workable solution to the performance deficiency you formally brought to its attention. It is possible to unintentionally waive the Governments right to default, but only under certain conditions. For instance:
The Government fails to terminate within a reasonable time after

Waiver of Right to Default

the condition for the default occurs,

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CHAPTER 6

The contractor relies on the Governments failure to terminate and

incurs additional expenses in its continuation of efforts to complete performance, or


The Government has indicated a willingness for the contractor to

continue performance. When the Government indicates its concurrence with continued perfor-mance, such an indication must be clearly demonstrated to the contractor in order for it to constitute a waiver of the Governments right to terminate. If the contracting officer does not make such a clear indication, the contractor may choose to discontinue performance. Protection of Right to Default To protect the Governments right to further action:
Provide a notice to the contractor that includes all of the elements

contained in Exhibit 6-4, obtaining a receipt for the notice, and


Continue with default proceedings immediately after the contrac-

tors commitment for correcting performance has expired. By outlining the conditions of forbearance, you eliminate the contractors defense of relying on the Governments inaction to own its detriment. An example of a forbearance notice is shown in Exhibit 6-5.

Necessary Elements of a Forbearance Notice


To ensure preservation of the right to future remedial action for deficient performance, a letter of forbearance must: Acknowledge the contractors stated method for and commitment to cure performance. Put the contractor on notice that the Government is deferring its right to future corrective actions only if the contractor fulfills its commitment to remedy deficient performance. Declare the Governments intention to pursue corrective contractual remedies, including default, if the contractor fails to fulfill its commitment. Document a finding of facts that forms the basis for the Governments actions. Exhibit 6-4

6-13

CONTRACT REMEDIES

Sample Forbearance Notice


Dear Mr. Corporate Official: SUBJECT: Contract No. LX74920-97-C-0891, Deficient Performance This notice is a direct response to your reply of January 18, 1997, to the cure notice I issued on January 11, 1997, to the ABC Company. In your January 18 reply, you outlined your companys plan for making delivery of the first run of 160 widgets that was due, according to the delivery schedule of the subject contract, by December 31, 1996, stating in part that: 1. The delinquency of the first run of widgets was due to: (a) (b) Employee absenteeism and overall lack of production during the end-of-year holiday season, and The late delivery on January 4, 1997, by a material supplier of chemical compound X3-NY that is necessary to complete the final stage of production.

2. Your company projected delivery of the first run of widgets by February 1, 1997, by adding a third production labor shift for the five-day work week beginning January 21, 1997. 3. Your company projected that the second production run of widgets would be delivered on time on April 1, 1997. In response to these statements, I find the following facts are very pertinent: 1. Since the holiday season was a well-established fact on June 28, 1996, the day you signed the proposal on which the Government contract award was based, any delay that may have been caused by it is not excusable under paragraph (b) of the Default clause in this contract. 2. Since you offer no explanation for the delinquent delivery of your material supplier, I am unable to determine if its late delivery was excusable under paragraph (b) of the Default clause. Since you provided no evidence to the contrary, I would presume it was not excusable. Exhibit 6-5 (continued on next page)

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CHAPTER 6

Sample Forbearance Notice


Your use of the term projected does not convey to me a firm commitment on the part of the ABC Company to meet the February 1 delivery date for the first run or the contractually scheduled delivery dates for the second and third. It was only on my questioning your intent during a telephone conversation on January 15, 1997, that you affirmed your companys commitment to these delivery dates. Based on this evidence, and in spite of the apparent non-excusability of the delayed shipment, the Government is prepared to temporarily defer default action; however, this forbearance is conditioned on the following events: 1. 2. Delivery of the first run of widgets on February 1, 1997. Delivery of the second and third widget production runs as scheduled in the contract.

If delivery is not made as indicated above, the Government reserves its right to take all remedies available to it under the contract, including the right to terminate for default, and under the general rights provided by Government contract law based on all of the evidence it has accumulated to date concerning the initial late delivery and any subsequent late deliveries. If I may be of assistance in further explaining the Governments position in this matter, please contact me immediately. Sincerely

Jane Justice Contracting Officer

Exhibit 6-5 (continued)

Inadvertent Waiver of Right to Default

If the Government does inadvertently waive its right to default, the contracting officer can regain this right by establishing a new delivery date either unilaterally or bilaterally. Any new delivery date must be reasonable considering the contractors capabilities to meet it at the time it is established.

6-15

CONTRACT REMEDIES

Seek consideration from a contractor in establishing a new delivery date. A delivery date can be extended, however, without consideration in order to set forth the contractors obligation and protect the Governments rights to damages. Seek Alternatives to Default There are alternatives to termination for default. For instance:
A revised delivery schedule can be established. The contractor may be permitted to use a third party to continue

performance.
The contract may be terminated at no cost when a requirement is

no longer needed. Whatever the alternative, pursue and execute the following:
Establish the Governments position for any consideration, a new

delivery schedule, and/or other terms and conditions of the contract.


Negotiate sufficient consideration for appropriate relief from terms

and conditions.
Execute a supplemental agreement. Document the contract file to explain the reasons for the action

taken.

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CHAPTER 6

STEPS IN IMPLEMENTING LIQUIDATED DAMAGES

1-2. Document all evidence pertinent to the liquidated damages clause and compute the amount due.

3. Discuss the case for invoking liquidated damages with the contractor.

Entitled to relief?

Yes

Do not impose liquidated damages.

No 4. Prepare and issue liquidated damages notice.

5. Obtain and analyze the contractors reply.

6. Withhold payment.

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CONTRACT REMEDIES

LIQUIDATED DAMAGES
6.3 Liquidated Damages Liquidated damages represent a predetermined rate(s) or amount of damages expressed in a contract that is payable to the Government by a contractor for that contractors breach of contract or failure to perform. If a liquidated damages provision is to be used in a contract, then the applicable clause and appropriate rate(s) or amount of such damages must be included in the procurements solicitation document. Policy on Liquidated Damages FAR 11.502(a) and (d) Contracts should contain liquidated damages clauses only when both:
The time of delivery or performance is such an important factor

that the Government may reasonably expect to suffer damage if de-livery or performance is delinquent, and
The extent or amount of such damage would be difficult to ascer-

tain or prove. In deciding whether to include coverage for liquidated damages in a contract, a contracting officer should consider the probable effect of such coverage on pricing, competition, and the cost and difficulties of contract ad-ministration. In deciding whether to include coverage for liquidated damages for delay, the Comptroller General (CG), on the recommendation of the head of a concerned agency, is authorized and empowered to make a remission (the act of refraining to enforce the damages either in whole or part) that in the discretion of the CG is just and equitable.

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CHAPTER 6

Importance of Reasonable Liquidated Damages

The rate(s) of liquidated damages used must be reasonable and considered on a case-by-case basis. This is so because such damages fixed without any reference to probable actual damages could be held to be a penalty, and therefore unenforceable. A contracting officer must take all reasonable steps to mitigate (to lessen in force or intensity) liquidated damages.

FAR 11.502(b)

A contracts provision for liquidated damages may include both an overall maximum dollar amount or period of time, during which damages may be assessed, to ensure that the result is not an unreasonable assessment of such damages. The efficient administration of contracts containing liquidated damages clauses is essential to prevent undue loss to defaulting contractors and to protect the Governments interests. If a liquidated damages clause is included in a contract and a basis for termination exists, the contracting officer should take appropriate action expeditiously to obtain a contractors performance or to terminate the con-tract. If delivery or performance is desired after a termination for default, then efforts must be made to obtain delivery or performance elsewhere within a reasonable time.

Where Right to Terminate for Default Exists

Differing Applications

The following may be inserted in solicitations and contracts when liquidated damages are appropriate.
FAR 52.211-11, Liquidated DamagesSupplies, Services, or Re-

FAR 11.504(a)

search Development. For use when a fixed-price type of contract is contemplated.


FAR 52.211-12, Liquidated DamagesConstruction. For use for

FAR 11.504(b) DFARS 211.504(b)

construction, except for construction contracts awarded on a cost-plus-fixed-fee basis. This clause is mandatory in DoD for all construction contracts greater than $500,000 except CPFF contracts or those in which the contractor cannot control the pace of work. It is discretionary on contracts of less than $500,000.
When a construction contract specifies different completion dates

FAR 11.504(c)

for separate parts of stages of the work, the contracting officer must use FAR 52.211-12 with its Alternate I. This, in turn, requires the use of FAR 52.211-13, Time Extensions.

6-19

CONTRACT REMEDIES

FAR 19.708(b)(2) DFARS 219.708(b) and (c)

FAR 52.219-16, Liquidated DamagesSubcontracting Plan. For

all solicitations and contracts containing the clause at 52.219-9, Small, Small Disadvantaged and Women-Owned Small Business Subcontracting Plan, or its Alternate I. In contracts with contractors who have approved comprehensive subcontracting plans under the DoD test program this clause should not be used.
FAR 52.222-4, Contract Work Hours and Safety Standards

FAR 22.305

ActOvertime Compensation. For use when a contract may require or involve the employment of laborers or mechanics, unless a contract not exceeding the simplified acquisition threshold or a contract for commercial items under FAR Part 12. Other exceptions also apply.

Document Evidence for Liquidated Damages

When enforcing liquidated damages, document any evidence of a contractors failure to deliver supplies or perform services within the time specified in the contract. Focus this documentation on:
The stage of completion, if appropriate, The probable amount of damages sustained by the Government, The excusability and reason therefore of a delay, if appropriate,

and
The contractors capability to complete the contract.

Compute Amount Due FAR 11.503(b) and (c)

When an assessment of liquidated damages is appropriate, the contracting officer withholds payment based on an accurate computation of the a-mount due. The actual computation will depend not only on the specific amount or formula set forth in the contract, but also on actual events that occurred during the administration of the contract. It is critical to identify all factors that control how to compute the amount of liquidated damages in order to determine an accurate maximum amount authorized under a specific contract clause. If appropriate to reflect the probable damages, because the Government can terminate for default or take other appropriate action, the rate of assessment of liquidated damages may be in two or more increments that provide a declining rate of assessment as the delinquency continues.

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CHAPTER 6

Construction Contracts FAR 11.503(b)

The rate(s) of liquidated damages to be assessed against a contractor should be for each day of delay and the rate(s) should, as a minimum, cover the estimated cost of inspection and superintendence for each day of delay in completion. Whenever the Government will suffer other specific losses due to a contractors failure to complete work on time, the rate(s) should also include an amount for these items. For instance, the following are examples of specific losses:
The cost of substitute facilities, The rental of buildings and/or equipment, or The continued payment of quarters allowances.

Evaluate Calculated Amount for Damages FAR 32.111(c)(2)

Examine a contract for any restrictions. Generally, a contract will restrict a total amount to be withheld to the greatest amount that can be withheld under the authority of a single contract clause. Compute amounts that would be authorized under each clause. To ensure that the total liquidated damages amount is reasonable and not a penalty, you may have special contract terms limiting the overall amount or period of time, or both, for assessing liquidated damages. Courts and administrative boards have traditionally denied liquidated damages that are excessive to the extent that they can be construed as punitive (i.e., a penalty).

Discuss Assessment With Contractor

After determining the Government is entitled to assess liquidated damages, discuss the situation with the contractor. Explain the Governments position and permit the contractor to present evidence to refute that position. Prior to the actual assessment of liquidated damages, advise the contractor of:
The Governments intention to assess liquidated damages unless

the contractor provides evidence to the contrary by a specified date that such an assessment would be improper,
The basis or bases for the Governments assessment of the damag-

es, and
The amount of the planned liquidated damages assessment, detail-

ing the reasons for any reduction in a specified amount stated in the contract.

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CONTRACT REMEDIES

Prepare and Issue Liquidated Damages Notice

A liquidated damages notice should indicate:


The reason for assessing the damages provided in the clause, The dollar amount of the damages, and Any steps the contractor may be able to take to avoid further as-

sessment of liquidated damages. By issuing this notice, the contractor has one last opportunity to provide evidence for not assessing the damages. Obtain and Analyze Contractor Response A contractors response may:
Document the case for an excusable delay, Claim impossibility of performance, or Claim that the work is substantially complete.

Liquidated damages are generally not appropriate after the work can be considered substantially complete. Substantial completion occurs on the day the product is ready for use in the manner intended by the Government at the place required by the contract (e.g., F.O.B. destination). The practical basis for this theory is that minor defects that do not affect use are not a reason to continue the liquidated damages period. However, this theory has limited application to supply and service contractsapplying mainly to equipment installationand is based on decisions of courts and boards of contract appeals. Withhold Payment Based on gathered evidence, you will either:
Forego assessing liquidated damages, Assess a reduced amount, or Assess maximum allowable liquidated damages.

When you decide that it would be fair to forego a liquidated damages assessment, provide the contractor with a written explanation of the reason. Underscore that this case of nonassessment is not indicative of probable action in other similar circumstances. Assess Reduced Amounts Reduced amounts may be assessed when the total amount of liquidated damages is excessive relative to:

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CHAPTER 6

The total dollar amount of the contract, or The probable amount of damages sustained by the Government.

Before you actually deduct this amount from any payment, you must advise the contractor that the contracting officer has made a decision to deduct a specific amount. When the contractor has been authorized partial payments based on Government acceptance of some of the supplies or services under a contract, apply the amount due from your computations and consideration to the invoice the contractor submits for payment of late partial shipments. Do not deduct the amount of liquidated damages due the Government on requests for progress payments. Wait until the supplies or services have been accepted by the Government before actually deducting the amount due. This is true even when acceptance results from a repurchase against the contractors account. If payment is not due until final acceptance, deduct the amount on the final invoice.

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CONTRACT REMEDIES

STEPS IN REJECTING NONCONFORMING SUPPLIES OR SERVICES


1. Gather evidence for rejection.

Sufficient?

No

Do not reject and/or obtain sufficient evidence.

Yes 2. Determine whether to accept a minor nonconformance.

Minor?

Yes

Notify the contractor that the nonconformance has been deemed minor.

No 3. Reject and notify contractor.

4. Determine whether to accept the nonconforming deliverable(s).

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NONCONFORMING SUPPLIES OR SERVICES


6.4 Rejection of Nonconforming Supplies or Services FAR 46.103(d) and (e) Policy on Nonconforming Supplies or Services When they retain contract administration responsibility, contracting offices are responsible for ensuring that nonconformances are identified and for establishing the unacceptability of supplies or services that do not meet contract requirements. The general rule is that contracting officers should reject supplies or services not conforming to contract requirements. There are, however, specified situations that permit contracting officers to deviate from the general rule. For instance:
Where deviation from the general rule is in the Governments best

FAR 46.407(a) and (b) DFARS 246.407

interest, any accepted supplies or services must be accepted as authorized by the prescriptions of FAR 46.407.
Contractors ordinarily should be given an opportunity to correct or

replace nonconforming supplies or services when this can be done within the required delivery schedule.
When correction or replacement is permitted, it must be without

additional cost to the Government, unless the contract specifies otherwise, as might be the case in some cost-reimbursement types of contracts.
The contracting officer is authorized to solicit and accept consid-

eration (including a refund) if supplier or services that are nonconforming will nevertheless be accepted by the Government. Discoveries After DoD Acceptance DFARS 246.407(f) If the nonconforming defect is discovered after acceptance, and:
The defect appears to be the contractors fault, Any warranty has expired, and There are no other contractual remedies, the governments position

tends to be one of persuasion rather than legal entitlement. In this situation, the possible steps the contracting officer or administrative contracting officer may take include:
Notification to the contractor of the defects, A request for repair or replacement at no cost to the government,

and

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CONTRACT REMEDIES

Acceptance of consideration if offered.

Critical or Major Nonconformances

When a nonconformance is critical or major, a contracting officer must ordinarily reject the nonconforming supplies or services. But even in these instances, there may be circumstances (e.g., reasons of economy or urgency) when acceptance may be in the Governments best interest. In such circumstances, a contracting officer must base a decision to accept supplies or services on the following:
Advice by the requiring activity that the nonconforming delivera-

FAR 46.407(c)(1)

ble is safe to use and will meet its intended purpose,


Information concerning the nature and extent of nonconformance, If feasible, a request from the contractor for acceptance of the de-

liverable,
A recommendation for acceptance or rejection with supporting ra-

tionale, and
A contract adjustment considered appropriate, including any ad-

justment offered by the contractor. Sealing Acceptance FAR 46.407(c)(2) and (f) A contracting officers determination to accept nonconforming supplies or services considered to be critical or major must be documented in writing, except that in urgent cases it may be furnished orally and later confirmed in writing. In any case, the contracting officer must obtain the concurrence of the requiring activity responsible for the requirement, as well as the concurrence of appropriate agency health officials where health factors are involved. The acceptance of nonconforming supplies or services considered to be critical or major requires that the contract under which they are accepted be modified to provide for an equitable reduction in price or cost or for some other consideration. Minor Nonconformances FAR 46.407(d) When a nonconformance is minor, the cognizant contract administration office may make the determination to accept or reject, unless this authority has been retained by the contracting office. To assist in making this determination, the contract administration office may establish a joint contractor-contract administration office review group, but such a group can-not deal with critical or major nonconformances.

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FAR 46.407(f)

The acceptance of minor nonconformances does not require that the contract be modified unless:
It appears that the savings to the contractor in making the noncon-

forming supplies or providing the nonconforming services will exceed the Governments cost in processing the modification, or
The Governments interests otherwise require a contract modifica-

tion. Accepting a minor nonconformance on one contract or order does not provide relief for correcting similar defects on pending or future work. Each contract is its own arrangement, and what may be taken as an acceptance or rejection action under one does not, therefore, automatically apply to another. Conditions for Accepting Minor Nonconformances Generally, a minor nonconformance does not adversely affect one or more of the following:
Safety or health, Reliability, durability, or performance, Interchangeability of parts or assemblies, Weight or appearance, if contract requirements, or Any other basic objective of the contract.

Excusability

There is a reason for nonconforming supplies or services, and that reason must be determined to assess which party is responsible. You will need to verify, for instance, that one or more Government officials involved in a procurement did not direct a contractor to make any changes that may have contributed to nonconformances. An example reinforces the point:
The acquisition of a fire truck may require the inclusion of 300 feet

of hose. If a Government official (e.g., a COR/COTR) tells the contractor to provide only 250 feet of hose and in place of the other 50 feet provide five fire extinguishers, then a constructive change has occurred, assuming the Government official had the authority to make such a substitution. The missing 50 feet of hose may cause a different inspector to recommend rejecting the work.

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CONTRACT REMEDIES

Rejection Before Acceptance

Supplies or services that do not conform to contract requirements should be rejected before acceptance. After a product or service has been accepted, you cannot later reject it. Acceptance is final except for:
Latent defects, Fraud, or Gross mistakes amounting to fraud.

Because acceptance is final, determine if the Government still has the right to reject nonconforming supplies or services. Investigate whether:
The work has been explicitly accepted, There is any evidence of implied acceptance (e.g., by silence, by

late rejection, or by retention and use of delivered items or performed services), or


The Government accepted nonconforming work under a prior con-

tract for the same requirement. Gather Evidence for Rejection Investigate the circumstances of a nonconformance to:
Establish that acceptance has not already occurred, Provide a basis for rejection, Determine the seriousness of the problem, and Determine if the contractor is at fault.

Notices of Rejection FAR 46.407(g)

Notices of rejection must include the reasons for rejection and be furnished promptly to the contractor, including a stated time period for the contractors reply. If timely notification is not provided, acceptance in certain cases may be implied as a matter of law. A notice of rejection must be in writing if:
The supplies or services have been rejected at a place other than

the contractors plant,


The contractor persists in offering nonconforming supplies or

serv-ices for acceptance, or


Delivery or performance was late without an excusable delay.

A written notice of rejection requires a written receipt from the contractor.

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Timeliness of Notices

The requirement for the Government to provide prompt notice is measured within the context of the rejected supplies or services. For instance:
The Government may not delay issuing a notice of rejection to the

point where the contractor is prevented from reworking or correcting a defective item. In this case, the contractor may have grounds for asserting that the notice was not prompt.
Likewise, a notice may not be considered prompt if a delay in its

issuance caused a contractor additional work or expense. Remember: A notice of rejection does not extend the specified delivery schedule, and the contractor remains obligated to provide supplies or serv-ices that conform to the contract within that delivery schedule. Make Final Decision on Acceptance A contractor may reply to a notice of rejection by submitting:
A proposal to repair or correct the work, A proposal to provide a downward adjustment in price or cost as a

basis for acceptance,


No reply, or A refusal to repair or correct the work or to offer any considera-

tion. Exhibit 6-6 illustrates several situations of nonconformance and a decision that could result from an analysis of each.

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CONTRACT REMEDIES

Nonconforming Deliverables
Minor Nonconformance If Consideration would be less than the cost of modifying the contract. Consideration would be greater than the cost of modifying the contract. Then Accept as is (once). Consideration None.

Accept as is (once).

Consideration comparable to the value of the loss sustained by the Government. Consideration Cost to reinspect or retest.

Substantive Nonconformance If The contractor agrees to correct the deliverable (or reperform the service) within the delivery schedule. The contractor agrees to correct the deliverable (or reperform the service) but needs an extension of the delivery date. Repair can be accomplished through warranty provisions. Acceptance: Would not affect safety or performance, and Is justified on the basis of economy or urgency. The contractor refuses to make repair or provide appropriate consideration. Either: Correct the product or service through other means (contract or in-house), or Terminate for default and reprocure. Then Withhold acceptance until receipt of the corrected deliverable (or reperformed service). Withhold acceptance until receipt of the corrected deliverable (or reperformed service). Accept as is.

Cost to reinspsect or retest. Appropriate consideration for the delay. None.

Accept as is.

Consideration comparable to the value of the loss sustained by the Government.

Contractor to pay all costs for the correction or reprocurement.

Exhibit 6-6

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Acceptance of Contractor Proposal

Accept a contractors proposal for correction of the nonconforming supply or service based on:
Advice of the technical activity concerning safety and perfor-

mance,
Information regarding the nature of the nonconformance, A request from the contractor for acceptance of the supplies or

services, if feasible,
A recommendation by the requiring activity and, when appropri-

ate, a program office for acceptance or rejection with supporting ration-ale, and
An appropriate contract adjustment.

If you are ordering correction of defects at the contractors expense, be sure to give the contractor a chance to correct the work. The contractor is liable for the cost of Government or third party correction costs only if it was given the opportunity to make the correction itself and failed to do so within a reasonable time.

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CONTRACT REMEDIES

STEPS IN IMPLEMENTING EXPRESS WARRANTIES

1. Verify that a contracts warranty applies.

Does it apply?

No

Pursue other remedies.

Yes 2. Select the appropriate remedy.

3. Notify the contractor that the Government is invoking its rights under the warranty.

Will the contractor honor the warranty?

Yes Document the file.

No 4. Correct or replace nonconforming deliverables from another source and charge the contractor.

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EXPRESS WARRANTIES
6.5 Express Warranties FAR 46.701 In typical procurements for supplies and services, the Government specifies its requirements and validates that they have been met through the inspection and acceptance process. Written warranties limit the Gov-ernments risk when relying on the contractors own inspection methods or systems to ensure the quality of performance requirements. Criteria for Use of Warranties FAR 46.703 DFARS 246.703 and 246.770-2 The use of warranties is not mandatory. The use of a warranty is mandatory in the acquisition of weapon systems. A useful reference for the development, negotiation and administration of weapon systems warranties is the Warranty Guidebook prepared by the Defense Systems Management College, Ft. Belvoir, Virginia. In determining whether a warranty is appropriate for an acquisition, the contracting officer must consider the following:
The nature and use of the supplies or services (i.e., complexity and

An express warranty is a written promise or affirmation given by a contractor to the Government regarding the nature, usefulness, or condition of the supplies or performance of services furnished under a contract.

function, end use, difficulty in detecting defects before accept-ance);


The cost (i.e., contractors cost created by the warranty and Gov-

ernment administration and enforcement of the warranty);


The requirements for administration and enforcement (i.e., the

ade-quacy of an administrative system for reporting defects);


The existence of a trade-practice warranty (i.e., the acquired item

may be customarily warranted and cost to the Government may be the same whether or not a warranty is included); and
The reduction of the Governments quality requirements (i.e., to

the extent that the contractors liability may be partially or completely offset and its warranty provides adequate assurance of a satisfactory product).

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CONTRACT REMEDIES

Limitations on Warranties FAR 46.705 DFARS 246.705

Contracting officers must not include warranties in cost-reimbursement types of contracts unless authorized by agency regulations. Three prescribed exceptions to this rule call for the use of warranties under:
FAR 52.246-3 (Inspection of SuppliesCost-Reimbursement), FAR

52.246-8 (Inspection of mentCost-Reimbursement, and

Research

and

Develop-

DFARS 252.246-7001 (Warranty of Data), is an exception to the

prohibition of the use of warranties in cost-reimbursement contracts. Warranty clauses do not limit the Governments rights under an inspection clause relative to latent defects, fraud, or gross mistakes that amount to fraud. Warranty clauses, except for those in construction contracts, must provide that the warranty applies notwithstanding inspection, acceptance, or other clauses or terms of a contract. Warranties of Commercial Items FAR 46.709 Contracting officers are exorted to take advantage of commercial warranties, including extended warranties, where appropriate and in the Governments best interests, as offered by a contractor for the repair and re-placement of commercial items. Conducting market research may surface customary commercial warranty practices that are appropriate for the acquisition of many supplies or services. Such practices should be considered for incorporation into solicitations and contracts if a contracting officer determines them appropriate for business arrangements satisfactory to both parties and not otherwise precluded by law or executive order. FAR 12.302(d) Express Warranties for Commercial Items FAR 12.404(b) When used in a contract for commercial items, express warranties are included by an addendum. To the maximum extent practicable, solicitations for commercial items must require offerors to offer the Government as least the same warranty terms, including offers of extended warranties, that are offered to the general public in customary commercial practice. Solicitations may specify minimum warranty terms, such as minimum duration, appropriate for the Governments intended use of an item. Any express warranty must meet the Governments needs, and a contracting officer should analyze any commercial warranty to determine if:

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CHAPTER 6

The warranty is adequate to protect the Governments needs, both

in terms of the items covered and the length of the warranty;


The warrantys terms allow the Government to exercise effective

postaward administration of the warranty to include:


The identification of warranted items, Procedures for the return of warranted items to the contractor for repair or replacement, The collection of performance information; and

The warranty is cost-effective.

Examine Express Warranties FAR 12.404(b)(2)

In some markets, it may be customary commercial practice for contractors to exclude or limit the implied warranties contained in the provisions of an express warranty. In such cases, a contracting officer must ensure that the express warranty provides for the repair or replacement of defective items discovered within a reasonable time after acceptance. Acceptance by the Government imposes a major limitation on its rights. Standard inspection and acceptance clauses make acceptance by the Government final and conclusive (unless otherwise stated in a contract). The contractor is not liable for patent defects after acceptance by the Government unless a warranty clause was made a part of the contract. A patent defect is a defect that was either known by the Government or could have been made known through reasonable inspections or tests prior to acceptance. Warranties, expressed in a written specification provision or other written form, are a necessity whenever there is concern that inspection and testing may not be diligently carried out by the Government before acceptance. Warranties preserve the Governments rights after acceptance. Express warranties are the contractors way of assuring the Government that supplies or services:
Are free from defects in workmanship, and Will conform to a contracts requirements.

Post-Acceptance Rights Through Warranties

Specification Provisions

Specification provisions that focus on the quality of the requirement can be a warranty provision. An example of a provision routinely found in a specification is:
The contractors design shall ensure safe, efficient, and economi-

cal operation under normal operating conditions. This provision 6-35

CONTRACT REMEDIES

is an attempt to protect the Government from defects discovered after acceptance. Unlike specific warranty clauses or provisions, this specification provision would not survive acceptance. The Government would have to test this provision prior to acceptance to determine if an item conformed to it. Warranty Inclusions Express warranties (including specification provisions) must:
State the duration of the warranty, and Specify a period during which notice of any defect must be given

to the contractor. Assume that the specification provision example, provided above, were to read:
The product shall be capable of reproducing copies for 30 calen-

dar days without experiencing failure to any nonconsumable part. (5,000 copies per day represent the estimated normal daily usage.) If this were the case, the provision would be considered an express warranty. The Governments rights would be protected after acceptance for the 30-day period. In this case, the 30 days represent both the duration of the express warranty and the period of time for notification. Written Guarantees A contractor can make written guarantees to the Government through:
Accepting a warranty clause in a contract, or Incorporating its commercial warranty in a contract.

Remember: Oral guarantees of a contractor are not considered warranties. Warranties included in a contract define the rights and obligations of the contractor and the Government concerning defective items and services after acceptance. Warranty clauses extend the Governments right to correction of defects or replacement of a deliverable until after acceptance. Clauses requiring written warranties from a contractor are shown in Exhibit 6-7.

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CHAPTER 6

FAR Clause 52.246-17

Title Warranty of Supplies of a Noncomplex Nature

Purpose Fixed-price supply - Alt I (Reserved) - Alt II (Transportation costs to correct) - Alt III (Contractor only source) - Alt IV (Fixed-price incentive contract) - Alt V (Disassembly required for inspection or replacement) Fixed-price supply or R&D - Alt I (Reserved) - Alt II (Transportation costs to correct) - Alt III (Fixed-price incentive contract) - Alt IV (Disassembly required for inspection or replacement) Fixed-price supply, service, or R&D when performance specifications or design are of major importance - Alt I (Transportation costs to correct) - Alt II (Fixed-price incentive contract) - Alt III (Disassembly required for inspection or replacement) Fixed-price service when 52.249-19 is not used Fixed-price construction - Alt I (Brand name and model equipment specified in contract) When extended liability is desired: Under contracts containing the clause at DFARS 252.227-7013, Rights in Technical Data and Computer Software; In fixed price incentive contracts; In firm fixed price contracts.

52.246-18

Warranty of Supplies of a Complex Nature

52.246-19

Warranty of Systems and Equipment under Performance Specifications or Design Criteria

52.246-20 52.246-21

Warranty of Services Warranty of Construction

DFARS 252.246-7001

Warranty of Data

DFARS 252.246-7002

Warranty of Construction (Germany)

When fixed price construction contracts are to be performed in Germany.

Exhibit 6-7

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CONTRACT REMEDIES

Types of Warranties

Government warranty clauses provide for various types of warranties in supply and service contracts, which generally fall into four basic categories:
Failure-free or hardware warranty. The contractor accepts the

responsibility to correct any failure or defect that occurs during a specified or measured amount of use or operation. Refer to FAR 52.246-17, Warranty of Supplies of a Noncomplex Nature, for an example of this type of warranty.
Correction of deficiencies warranty. The contractor agrees to

correct any deficiency in design, material, or workmanship that becomes apparent during a test or early operation and that results in the specific items performing below the required standard. This type of warranty in a major systems contract usually also applies to spare parts and other supplies included in the contract. Refer to FAR 52.246-19, Warranty of Systems and Equipment under Performance Specifications or Design Criteria, for an example of this type of warranty.
Supply warranty. The contractor is obligated to replace or re-

perform work on contract items if defects in material or workmanship existed at the time of acceptance. This is very similar to a consumer warranty for commercial products. Refer to FAR 52.246-18, Warranty of Supplies of a Complex Nature, for an example of this type of warranty.
Service warranty. The contractor agrees to reperform defective

services if defects in workmanship existed at the time of accept-ance. This is similar to a repair warranty in a retail establishment. Refer to FAR 52.246-20, Warranty of Services, for an example of this type of warranty.
Data warranty. The contractor agrees either to correct or replace

data which does not at the time of delivery conform with the specification and all other requirements of the contract. If correction or replacement is no longer required by the Government, the Government may elect a price or fee adjustment. This warranty lasts for a period of three (3) years after delivery of the data. If a contractors standard warranty applies, obtain a copy for a contracts file and provide one to the user.

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CHAPTER 6

Enforcement of Warranties

Since users are usually the first to identify defects under a warranty, it is essential that they be provided information, such as:
A summary of warranties that applies to a specific product or

serv-ice,
Specific components to which a warranty applies, if all compo-

nents are not included,


Who has Government responsibility to report warranty incidents

and the authority to implement a warrantys clauses,


Duration of the warranty, The contact person in the Government procurement office and the

contractors contract person, if the latter is allowed,


Documentation and other warranty requirements, and Packaging and transportation requirements.

Application of Warranties

Verify that a warranty clause applies to a specific failure. The basic considerations for determining applicability are:
Confirm that the Government has officially accepted the items or

services.
Examine the written terms and conditions of the warranty. This

examination should reveal:


Duration of the warranty, and Coverage for specific defects.

Determine if any Government obligations under the warranty were

met or ensure that they will be met.


Confirm that the facts support invoking the warranty.

Select Appropriate Remedy FAR 46.706(b)(2) DFARS 246.706(b)(5)

It is important to determine the contractors responsibilities and the Governments rights under the terms and conditions of a warranty. The contractor must mark warranty items in accordance with Military Standards 129 and 130. This is necessary in order for the Government to administer and seek enforcement of the warranties it has acquired under its contracts. Warranties may provide alternate remedies such as:
Repair the defect,

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CONTRACT REMEDIES

Replace the item, Reperform the service, Make an equitable adjustment, or Pay for repairs, replacements, or reperformance the Government

has obtained from other sources. Unless a specific clause states otherwise, the Government has the right to choose the remedy that is in its best interest. Obligation of Contractor The contractors obligation to repair, replace, or agree to a price or cost ad-justment includes the labor and material necessary to:
Reinspect items the Government reasonably expected to be defec-

tive,
Repair or replace the defective items, and Inspect, package, pack and mark the repaired or replaced items.

Notify Contractor

Contact the contractor about a warranty problem. Resolve the issue by:
Obtaining the contractors position and reasons for taking that po-

sition,
Reaching agreement on how and when the warranty will be ap-

plied, and
Documenting the results.

There will be less room for argument if you notify the contractor before the warranty period expires. Warranties may be administered by other organizations besides the contracting office. A supply organization or the user with this responsibility may issue the notification to the contractor. Make other Government organizations aware of the need for quick internal Government coordination to ensure that the Governments rights are not forfeited or lost. Correct or Replace Nonconforming Items or Services You may arrange for repair or replacement by the Government, or another source, at the expense of the contractor, but take this action only as a last resort when other actions have failed.

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6-41

CONTRACT REMEDIES

STEPS IN IMPLEMENTING IMPLIED WARRANTIES

1. Verify that an implied warranty exists.

Does it apply?

No

Pursue other remedies.

Yes 2-3. Notify the contractor that the Government intends to invoke its rights under the warranty.

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IMPLIED WARRANTIES
6.6 Implied Warranties An implied warranty is an unwritten warranty that exists through the operation of commercial law. The legal concept is one of fairness. That is, an item of supply or a service should live up to the claim of the manufacturer or provider. If it does not, the buyer is generally entitled to a legal remedy through the concept of an implied warranty. As noted previously, the concept of a warranty is based on the sellers assurance to the buyer that an item of supply or a service will meet certain standards. Since a warranty imposes a duty on the seller, a breach of warranty is a breach of the sellers promise. Uniform Commercial Code (UCC) For commercial buyer-seller arrangements, the Uniform Commercial Code (UCC) designates five types of warranties that can arise:
Warranty of title (UCC 2-312), Express warranty (UCC 2-313), Implied warranty of merchantability (UCC 2-314), Implied warranty of fitness for a particular purpose (UCC 2-315),

and
Implied warranty arising from the course of dealing or trade usage

(UCC 2-314[3]). Implied Warranties for Commercial Items FAR 12.404(a) In terms of implied warranties, the Governments postaward rights for the acquisition of commercial items are:
The implied warranty of merchantability, and The implied warranty of fitness for a particular purpose.

Additionally, the Governments rights extend to the remedies contained in the inspection/acceptance paragraph under FAR 52.212-4(a). Warranty of Merchantability FAR 12.404(a)(1) This implied warranty provides that an item is reasonably fit for the ordinary purposes for which it is used. The item must be of at least average, fair, or medium-grade quality, and it must be comparable in quality to

6-43

CONTRACT REMEDIES

those that will pass without objection in the trade or market for items of the same description. Warranty for a Particular Purpose FAR 12.404(a)(2) This implied warranty provides that an item is fit for a particular purpose for which the Government will use the item. The Government can rely on this implied warranty when:
The seller knows the particular purpose for which the Government

intends to use an item, and


The Government relied on the contractors skill and judgment that

the item would be appropriate for the known particular purpose. Before taking action in asserting any claim for a breach of an implied warranty, a contracting officer should consult with appropriate legal counsel. Implied Warranty Cautions Remember: Warranties are invoked after acceptance. But there are limits to doing so. For instance, the Government may not invoke an implied warranty under the following:
The inspection and acceptance clause of a contract provides for fi-

FAR 52.246-2

nality of acceptance. For example, FAR 52.246-2, Inspection of SuppliesFixed Price, covers acceptance as follows: (k) Inspections and tests by the Government do not relieve the contractor of responsibility for defects or other failures to meet contractual requirements discovered before acceptance. Acceptance shall be conclusive, except for latent defects, fraud, gross mistakes amounting to fraud, or as otherwise provided in the contract. Under this condition, a contractor is relieved of any obligation of an implied warranty once acceptance is made.
A warranty clause is included in a contract and it specifically ex-

cludes implied warranties. For example, FAR 52.246-17, Warranty of Supplies of a Noncomplex Nature excludes implied warranties as follows: (4) All implied warranties of merchantability and fit-ness for a particular purpose are excluded from any obligation contained in this contract.

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CHAPTER 6

Any defects are latent (i.e., a defect that was not known or would

not be known through reasonable inspection and testing at the time of acceptance). Notify Contractor Notify a contractor when the defect in an item is covered by an implied warranty. The procedure for notification is essentially the same as the one for notifying a contractor concerning express warranties. That is:
Obtain the contractors position and its reason for taking that posi-

tion.
Reach agreement on how and when the warranty will be applied. Document the results and place it in the contract file.

Invoke Appropriate Remedy

The Government has the same basic rights under implied warranties as under express ones. You may, therefore, choose to:
Obtain a corrected deliverable from a contractor, Have a contractor reperform a service, Make an equitable adjustment, or Have the deliverable corrected or the services reperformed by oth-

er means at the contractors expense.

WHICH IS IT ... WARRANTY, GUARANTEE, OR GUARANTY? The whole business of contractors promises or affirmations regarding the nature, use-fulness, or condition of their deliverables has become a murky miasma for many. Re-alizing there was a need to have everyone sing from the same sheet of music in this arena, Joanne scheduled a group meeting for her contracts people to square things away. The contracting officer made assignments among her staff, asking some to make brief presentations at the meeting about various aspects of contractors promises and af-firmations. Eric was not left without his. Joanne had asked him to take about 15 minutes in delineating the differences between various types of warranties. Keep it simple and try to use examples, she had told him. The group meeting had been scheduled for a Friday afternoon, to begin after lunch and last for a couple of hours. What a time for a meeting, the contract administrator had

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CONTRACT REMEDIES

said to himself. Wholl be listening at the end of a busy week? And then he caught himself when he remembered who had scheduled the meeting. Came the Friday. Came the staff. And came the opportunity for Eric to give his pitch. And he was prepared or so he thought. He began by addressing the regulatory envi-ronment for warranties, crisply citing pieces of FAR Subpart 46.7 and in the process moving smartly into the Governments use of warranties for commercial items, both express and implied. For the latter he used examples dealing with standard commercial items and services, and reflected on how they mirrored customary commercial practices. He capped his presentation by telling the group about the warranty of fitness for a particular purpose that had been included in Platforms ID/IQ arrangement. Indeed, it had seemed to go well. As Eric went to take his place in the audience, his boss spoke up. Good job, Eric, she started, but I thought you might have expanded somewhat on your coverage of com-mercial warranties. Im sure there are those among us who have no practical feel for whats becoming increasingly important to our business. That is the need to know about warranties as they relate to customary commercial practices in the private sector. And of equal importance, where can we go to find out what they are. Why dont you look into that for our next group meeting. And while youre at it, inform us of the distinction between (and here she spelled them out) a warranty, a guarantee, and a guaranty. He nodded affirmatively, smiled, and sat down. While others presented, he cheated a bit and made some notes to himself, mostly questions.
What sources exist to help me uncover information about commercial

warran-ties, and more specifically customary commercial practices for warranties?


Check out the results of some recent market research that weve done. Isnt

this supposed to give us a heads-up about warranties?


Shes bound to ask me about advantages and disadvantages among

commer-cial warranties. Where can I find out about that?


Seems to me that a warranty and a guarantee may be synonymous. Check

this out.
Guaranty? Sounds like some assurance for something.

Like what?

Products? Debts? Security instruments? Check this out. It was about three oclock when the group meeting ended. Joanne adjourned the session by thanking everyone and wishing them all a pleasant and restful weekend.

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CONTRACT REMEDIES

STEPS IN DETERMINING LATENT DEFECTS, FRAUD, OR GROSS MISTAKES


1. Verify that the failure has been caused by a latent defect.

A latent defect?

No 2. Determine if acceptance resulted from fraud (or a gross mistake amounting to fraud).

Fraud or a gross mistake?

No

Pursue other remedies (e.g., a warranty), if any.

Yes 3. Notify the contractor--coordinating with the Inspector General or debarring official when fraud is suspected.

Unilateral Actions . 1. Adjust price downward and collect from the contractor. 2. Correct or replace nonconforming deliverables at the contractors expense.

4. If the contractor refuses to make restitution, select a course of action.

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CHAPTER 6

LATENT DEFECTS, FRAUD, OR GROSS MISTAKES


6.7 Latent Defects, Fraud, or Gross Mistakes The Governments acceptance of a contractors supplies or services is final unless:
A defect or failure is latent, There is evidence of fraud, or There is evidence of a gross mistake amounting to fraud.

When defects are found after award and no warranties apply to their correction, your final task in proving or clearing contractor liability is to determine that a latent defect, fraud, or a gross mistake was not involved. Verify Failure Due to Latent Defect For a defect to be latent it must be:
Not susceptible to discovery using inspection methods that are

reasonable under the circumstances, and


In existence at the time of acceptance.

A reasonable inspection is one that would normally be performed as a custom of the trade. Deciding what is latent is essentially deciding what is reasonable. Exhibit 6-8 summarizes the necessary evidence.

Steps in Verifying a Latent Defect


Identify the contractors liability for the defect. Determine if the Government has fulfilled its obligations for inspection and acceptance. Identify what test could have revealed the defect at the time of acceptance. Identify whether such tests would have been reasonable under the circumstances.

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CONTRACT REMEDIES

Exhibit 6-8

Contractor Responsibil-ity for Latent Defects FAR 52.246-2(k) FAR 52.246-12(i) Determine Existence of Fraud (or Gross Mistake Amounting to Fraud)

Under the standard inspection clauses, the contractor is responsible for latent defects discovered at any time after final acceptance. For instance: A latent defect can be in the design of a product rather than in the manufacture of it. There is no expiration to liability for a latent defect, but the extent of the liability is prorated over the useful life of the item.

The only difference between fraud and a gross mistake is intent. To provide a gross mistake you need only prove that the mistake was truly irresponsible. To prove fraud, you must show that a misrepresentation or con-cealment of fact was made with an intent to mislead. When the Government cannot establish a contractors intent to mislead, but all the other factors are present, then basing its case on a gross mistake amounting to fraud is an alternative to pursue.

Prepare Finding of Facts

Document evidence of fraud in a finding of facts. A summary of all the

Necessary Elements of a Finding of Facts for Fraud


A finding of facts for fraud must show evidence of: A misrepresentation of fact (actual or implied), or a concealment of a material fact. Contractor knowledge of the fact concealed or misrepresented. An intent to mislead the Government into relying on a misrepresentation or concealment. Government injury suffered as a result of the misrepresentation or concealment.

necessary elements for a finding of facts is contained in Exhibit 6-9.

Exhibit 6-9

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Contractor Responsibility to Correct

The contractor can be forced to repair or replace supplies or reperform services at its own cost any time after acceptance when fraud is proven. The Government can avail itself of all other remedies as well, including termination for default. Provide evidence of potential fraud to your agencys debarring official, Inspector General, and other officials who have a need to know. Most agencies have hot lines for reporting incidences of fraud to the agencys Inspector General.

Report Evidence of Potential Fraud

DFARS 209.4

Your agencys debarring official will probably be identified in your a-gencys supplement to FAR Subpart 9.4, but use normal supervisory channels to report information for considering a suspension or debarment. The designated debarring officials in DoD are set forth in DFARS 209.403. If you suspect fraud, notify the contractor only in coordination with your agencys Inspector General or debarring official. Otherwise, you are responsible for:
Obtaining the contractors position and its reasons for taking that

Contact Contractor

position,
Requesting a proposal to repair or replace the deliverable or reper-

form the service and/or make a downward adjustment in price or cost,


Preparing the Governments position, using principles of price or

cost analysis as you would on any other proposal, and


Negotiating a supplemental agreement with the contractor reflect-

ing a new delivery schedule and/or some other consideration. As with any other negotiation, document the results and include it in the contract file. Take Unilateral Action You may take unilateral action if a contractor refuses to make restitution. Unilateral action includes:
Determining a downward price or cost adjustment and collecting it

from the contractor, and


Correcting or replacing nonconforming deliverables from another

source and charging the contractor for the costs incurred by the Government.

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6.8 Select Most Appropriate Remedy

Exhibit 6-10 provides a decision table for selecting a remedy for given situations. Notice the type of remedy selected is based on the delivery of an item or service. Withholding or reducing payment to the contractor is appropriate when sufficient funds remain for payment. The Government has the right to demand payment from the contractor when the contract has been paid in full. As with any modification, attempt to secure a supplemental agreement. You may reduce payment on a unilateral modification under the authority of the Disputes clause in the contract when negotiations for a supplemental agreement fail.

6.9 Withhold, Reduce, or Demand Payment From Contractor

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Decision Table for Selecting a Formal Contractual Remedy


Problem LATE DELIVERY Note: When the contracting officer has determined that the deliverable has been or will be delivered late and that the delay is other than excusable. Options 1. Postpone the delivery date in exchange for consideration. Comment Appropriate when (1) no liquidated damages clause was included in the original contract, (2) there is a reasonable probability of delivery by the new date, and (3) the requiring activity can live with the new date. But only if there is a reasonable probability of delivery by a date that the requiring activity can tolerate. When there is little probability of delivery by a date that the requiring activity can tolerate and/or the contractor has not offered adequate consideration. When the nonconformance is minor and obtaining consideration is not in the Governments interest. When the requiring activity can tolerate nonconformance. When there is an express warranty and immediate acceptance will benefit the requiring activity.

2. Accept late delivery and invoke the liquidated damages clause. 3. Send a cure notice (10 days or more prior to the contracts delivery date) or a show cause notice (immediately upon expiration of the delivery period). THE DELIVERABLE HAS NOT BEEN ACCEPTED AND DOES NOT CONFORM TO CONTRACT REQUIREMENTS Note: When the contracting officer has determined that the deliverable has not been implicitly or explicitly accepted and does not conform to contract requirements. 1. Accept the deliverable without consideration.

2. Accept the deliverable in exchange for consideration. 3. Accept the deliverable and invoke an express warranty to have the deliverable brought up to specification after acceptance. 4. Reject the deliverable and obtain correction or replacement at no cost to the Government.

When there is a reasonable expectation that a satisfactory replacement will be provided by the delivery date in the contract, or, for consideration, within a reasonable time thereafter. When there is little expectation of receiving an acceptable deliverable within a reasonable time.

5. Reject the deliverable and send a cure or show cause notice.

Exhibit 6-10 (continued on next page)

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Decision Table for Selecting A Formal Contractual Remedy


Problem THE DELIVERABLE HAS BEEN ACCEPTED BUT DOES NOT CONFORM TO CONTRACT REQUIREMENTS Note: When the contracting officer has determined that the Government has a reasonably strong case based on the terms and conditions of the contract. OTHER BREACHES Note: When the contracting officer has exhausted all efforts at informal resolution of the problem. Options 1. Invoke an express warranty. 2. Invoke an implied warranty. 3. Demand that the deliverable be replaced or corrected and/or that the price or cost be adjusted downward. Comment If an express warranty applies. If an implied warranty applies. If there was a latent defect or acceptance was based on fraud or a gross mistake.

1. Invoke whatever remedy (if any) is established by a clause (e.g., liquidated damages for failing to comply with the subcontracting plan). 2. Send a cure notice (10 days or more prior to the contracts delivery date) or a show cause notice (immediately upon expiration of the delivery period). When the breach is of sufficient magnitude to warrant a termination for default if not corrected.

Exhibit 6-10 (continued)

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CHAPTER 7

CONTRACT PAYMENT
QUID PRO QUO PAYMENT FOR PERFORMANCE Joanne had always cautioned her contract specialists and administrators about the importance of proper terms and conditions for payment under a Government contract. Whether youre buying the simplest of supplies or the most complex of systems, she would say, you must give attention to the basis for paying a contractor relative to the job to be done. Getting this into a solicitation is important and covering it by an appropriate contract clause is critical. Eric had reflected on Joannes point in dealing with three situations before him. Two involved invoices under firm-fixed-price contracts. And the third had to do with the withholding provision for fee under a cost-plus-fixed-fee arrangement. For all that we do to try and make things clear, he said to himself, we seem to end up confusing contractors, who should know better, and taking it on the chin in the process. As he reviewed the invoices, the first one dealt with a performance-based payment arrangement for the comprehensive operation and maintenance of an agency facility, everything from housekeeping requirements to building upkeep and repair. The contract had included the clause at FAR 52.232-32, Performance-Based Payments, and the contractor was complaining that the agency had applied a liquidation rate to the contracts line-item for exterior building care in excess of what the contractor was owed. This complaint came on top of the contractors phone call of a few days ago that the agency had violated its obligation to pay in accordance with the prompt payment period specified for contract financing. The contractor asserted that it was due interest on the invoice in question. Okay, Eric mumbled, Ive got to check this out. He made a short list of questions for himself. Get to and read FAR 52.232-32. mance-based payments? What does it say about liquidation of perfor-

Check out the performance criteria for exterior building care. What dollar amount did we place on this line-item? Arent performance-based payments to be treated like progress payments? If so, does the Prompt Payment Act apply? Also check out the contractors invoice to determine if it was submitted properly. The second invoice, one for partial payment on the delivery of the first of three lots of roofing material, had a note appended to it from the requiring activitys inspection representative. It read as follows: Roofing material in both quantity and quality is accepted as delivered. This first lot, however, was delivered ten days late. A few more questions for himself. Seems like we should get something for late delivery. If so, what might it be? 7-1

CONTRACT PAYMENT

Wonder whos at fault for this? Check out why the late delivery. If we suffered no damage or inconvenience, do we have any right to some sort of adjustment? Get to counsel on this one. The third situation dealt with a voucher submitted under a cost-plus-fixed-fee contract. The voucher had cleared the technical people who had a few comments about questionable costs concerning some travel the contractors staff had incurred in conducting three field visits over the past month. These had to do with airport-to-location cab fares and return, plus the rental of a four-wheel drive vehicle for use in visiting what the contractor described as remote agency sites for required interviews with field personnel. He was certain these could be resolved. The issue, as Eric saw it, was whether or not to recommend that a portion of the fee be withheld. He checked his contract file and noted that, as of the last voucher, a bit more than 85 percent of the fixed fee had been paid. Under the clause at FAR 52.216-8, Fixed Fee, the Government had the right to withhold further payment beyond the 85 percent level if in its best interest. A final set of questions for himself. What constitutes the Governments best interest as a basis for withholding fee? (Better get to Joanne on this one.) With approximately $75,000 of fixed fee yet to be vouchered, how much could be withheld? The contractors expended almost 65 percent of the estimated cost and reportedly completed about 50 percent of the envisioned effort. Is this a factor to consider in any determination to withhold fee? And away we go! he thought. Eric called his administrative assistant to bring him the three contract files associated with the invoices and voucher he had examined. He was ready to get on with it.

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CHAPTER 7

COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 Inspect an invoice or voucher for completeness and notify a contractor of any defects. Identify terms and conditions of the contract that are pertinent to the amount to be paid. Obtain documents and determinations that are pertinent to the amount to be paid. Determine the basis for and use of performance-based payments. Identify withholdings and deductions or other corrections that are necessary. Determine whether an assignee is protected from a deduction or withholding. Determine the total amount due a contractor. Contact a contractor to explain any differences between the amount of a submitted invoice or voucher and the amount the Government proposes to pay. Notify a contractor of a final decision on paying a lesser amount. Forward the invoice or voucher to a payment office and set up a follow-up file. Process contractor invoices and vouchers by determining whether they are accurate and make a further disposition according to that determination.

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CONTRACT PAYMENT

INTRODUCTION TO CONTRACT PAYMENT


The Language of Billings Every buyerwhether a private consumer, company, or governmental organizationexpects promised contract performance and good work. When this occurs, a contractor is entitled to compensation based on whatever financial arrangement was agreed to. Whatever the financial arrangement, the contractor will present its billings to the buyer or buying organization and expect to get paid. In Government contracting, the general notion of billings is dealt with in terms of specific terminology. That is, a billing under any fixed-price type of contract is called an invoice, and a billing under any cost-reim-bursement type of contract is called a voucher. Invoices Fixed-price types of contracts are billed using invoices. What must be presented on an invoice is set forth in a contracts terms and conditions for payment (i.e., what is to be included, where it is to be sent, and so forth). There is no FAR-prescribed standard form for an invoice. Cost-reimbursement types of contracts are billed using vouchers. What must be presented on a voucher is set forth in a governmentwide standard form prescribed for use in a contracts terms and conditions. This is Standard Form (SF) l034 (Public Voucher for Purchases and Services Other Than Personal) and SF 1035 (Public Voucher for Purchases and Services Other Than Personal Continuation Sheet). Even though the distinction between invoices and vouchers is correct, there are clauses in cost-reimbursement types of contracts that refer to both (e.g., FAR 52.216-7, Allowable Cost and Payment Clause). Do not be confused by this. The fundamental premise for payment under a cost-reimbursement type of contract requires the submission of a SF 1034/35, whether one refers to it as an invoice or a voucher. As there is nomenclature for types of contractor billings, so there is nomenclature for different types of payments under Government contracts. What type of payment may apply in a given situation depends on the type of financing that the Government has agreed to. Under a firm-fixed-price supply contract, the Government may have a-greed to the submission of one invoice for a total (lump sum) payment after the acceptable delivery of all items, or it may have agreed to the submission of periodic invoices based on the acceptable delivery of partial quantities (partial payments).

Vouchers

Terms Sometimes Confuse

Types of Payments

Lump Sum or Partial Payments FAR 32.111

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CHAPTER 7

Progress Payments FAR Subpart 32.5 DFARS 232.5 DFARS 232.102(e)(2)

In some fixed-price types of contracts, the Government may have agreed to provide progress payments to the contractor. A progress payment is a form of contract financing made before work or deliverables are accepted. Progress is defined within the context of an affected contract and such payments are recouped by the Government through the deduction of liquidations, determined by an expressed liquidation rate, from payments that otherwise would be due the contractor for completed contract items. Contractors request progress payments, usually based either on cost incurred or on a percentage of completion. Progress payments based upon percentage or stage of completion are only authorized for use in construction, shipbuilding, and ship conversion, alteration or repair contracts. When used, this form of contract financing payment is made without direct reference to costs incurred. Other forms of progress payments are normally tied to or based upon costs incurred. They do not submit an invoice for them. The governmentwide standard form for requesting progress payments is SF 1443 (Contractors Request for Progress Payment). The Department of Defense has authorized three basic forms of progress payments based on costs.
Customary uniform progress payments [DFARS 232.501-1(a)(i)]

which establish set rates for large, small and small disadvantaged businesses (see DFARS 252.232-7004).
Customary flexible progress payments [DFARS 232.501-1(a)(iii)]

which base the rate on a formula that is keyed to the level of contractor investment in working capital to sustain contract performance (see DFARS 252.232-7003). This form of progress payment has not been permitted for use on contracts arising from solicitations issued on or after November 11, 1993.
Unusual progress payments [DFARS 232.501-2(a)] which must be

reviewed and approved by the Director of Defense Procurement. Cost Incurred Payments FAR Subpart 16.3 Under cost-reimbursement types of contracts, the Government does not pay at the conclusion of the work, partially during it, or progressively along the way. Rather, it pays a contractor periodically based on the contractors incurred costs, so long as those costs are determined to be allowable (which includes both allocable and reasonable).

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CONTRACT PAYMENT

Advance Payments FAR 32.402(b) FAR 32.202-2 DFARS 232.470

Advance payments may be provided on any type of contract, but aside from the use of commercial advance payments they must be issued sparingly. Except for their possible use in limited situations, they are considered the least preferred method of contract financing. Advance payments may be involved in two special situations also:
Advance payments can be made under an Advance Payment Pool

Agreement (see DFARS 252.232-7000) by which such payments are made in a consolidated manner involving more than one contract.
Advance payments may be made by a prime contractor to a small

disadvantaged business subcontractor under a Mentor-Protg Program (see DFARS 252.232-7005). When made by the prime contractor to the protg firm, such payments become eligible for reimbursement to the mentor firm. Implications for Prompt Payment FAR Subpart 32.9 DFARS 232.9 The general rule is that all contractor billings should be handled expeditiously and paid promptly. But there are also statutory requirements associated with the prompt payment of contractor billings. In the case of in-voices submitted under fixed-price types of contracts, the Prompt Payment Act (31 U.S.C. 3901, as amended) applies. It is DoD policy to assist small disadvantaged businesses as much as possible in contract financing matters by paying their invoices as quickly as possible after receipt, irrespective of the payment timing guidelines in the Prompt Payment Act or other agency policy. The Prompt Payment Act, however, does not apply to vouchers submitted under cost-reimbursement types of contracts, except to the final voucher submitted under the Allowable Cost and Payment clause. The reason for this: A contractors voucher requires an interim or provisional payment subject to a final audit and resolution under the Allowable Cost and Payment clause. Vouchers, as differentiated from invoices, do not represent billings for work completed (either partially or completely). They represent billings for costs that have been incurred in the performance of work. Steps in Performance The steps for determining the appropriateness of an invoice or voucher, in-cluding the amount to be paid, are charted on the next page. Following this flowchart, each step is discussed in detail.

FAR 52.216-7 DFARS 252.232-7005

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CHAPTER 7

Several of the contract clauses discussed in this chapter require an equitable adjustment in a contracts price, cost, and/or schedule. Actions associated with executing such equitable adjustments are included with the corrective steps outlined in Chapter 6.

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CONTRACT PAYMENT

STEPS IN PROCESSING CONTRACT PAYMENT

1. Inspect an invoice or voucher for completeness and provide notice of any defects.

7. Notify the contractor of any differences between the amount invoiced or vouchered and the payment.

Notify contractor of defects. No

8. Notify the contractor of a final decision on paying a lesser amount. Complete?

Yes 2-3. Identify contractual terms and conditions related to the invoice or voucher and other relevant documents and data.

9. Forward the invoice or voucher and set up a followup file.

4. Identify any withholding or deduction.

5. Determine whether an assignee is protected from any withholding or deduction.

6. Compute the total amount due the contractor.

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CHAPTER 7

CONTRACT PAYMENT
7.1 Inspect Invoice or Voucher and Notify Contractor of Any Defects A contract may require the contractor to send its invoices or vouchers to:
The contract administrator, The administrative contracting officer (ACO), The contracting officers representative (COR), The contracting officers technical representative (COTR), or The payment office directly.

Receipt of Invoice and Importance of Prompt Payment Act FAR 32.905

Under both fixed-price and cost-reimbursement types of contracts, a contract will specify an office of payment. In the case of fixed-price types of contracts, the Prompt Payment Act infers that the person who first receives an invoice in an agencys name receives it for the purpose of payment. Agencies must pay the contractor after the receipt of a properly completed invoice within strict time limits or the Government will owe interest for any late payment. A contractor may inadvertently send its invoice directly to the contract administrator, whether or not this person is designated as the office of payment. If so, the contract administrator should date stamp the invoice, and this date will be used as the date of receipt by the Government.

Check Invoice for Completeness FAR 32.905(e)

An invoice for a fixed-price type of contract must contain eight basic elements in order to be considered complete or proper for payment purposes. These are:
Name and address of the contractor; Invoice date; Contract number or other authorization for the items or services

performed (including order number and contract line-item number);


Description, quantity, unit of measure, unit price, and extended

price of supplies delivered or services performed;


Shipping and payment terms, if any (involved Government bills of

lading require that their numbers and the weight of shipment be shown); 7-9

CONTRACT PAYMENT

Name and address of contractors official to whom payment is to

be sent (must be the same name and address as shown in the contract or on a proper notice of assignment);
When applicable, name, title, phone number, and mailing address

of the person to be notified in event of a defective invoice; and


Any other information or documentation required by the contract

such as:

Taxpayer or Employer Identification Number; and Evidence of shipment or completion.

Notify Contractor of Any Defects

Notify the contractor of any defects found in an invoice. There are two basic rules for this notice:
It must be made within seven calendar days after the agency rece-

ives the invoice.


It must specifically state the defect(s).

Annotate When Defects Are Corrected

Keep a record of the number of days a contractor caused a delay by submitting an incomplete invoice. If you are sent a new invoice showing the date of the original invoice, annotate a statement, as follows, before sending it to the payment office:
After receipt of invoice, the contracting office waited _____ days

for the contractor to supply necessary information for invoicing. Therefore, the invoice was not proper until __________ and any interest payment that may be due the contractor shall be based on this later date. Review Voucher for Compliance A voucher for a cost-reimbursement type of contract must conform to the requirements of a SF 1034. It may be possible to tailor some aspects of the SF 1034 that would represent an Advance Agreement between the parties. Then again, it may be that the parties have agreed to the representation of certain costs in a certain way reflecting a negotiated contract man-agement procedure. Remember: Even though the Prompt Payment Act does not apply to cost-reimbursement types of contracts, except to their final vouchers, it is important to deal with a contractors vouchers as expeditiously as possible. Where they may occur, differences over incurred costs should be resolved with the contractor.

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CHAPTER 7

7.2 Identify Terms and Conditions Pertinent to Payment

Terms and conditions that might generally have an effect on the payment amount for an invoice include:
Contract price, Type of fixed-price contract, Method of payment, Discounts, Liquidated damages, and Service Contract Act.

Constructive Versus Actual Acceptance FAR 32.905(a)(1)(ii)

Implied or constructive acceptance may also have a bearing on the computation of interest owed a contractor. For the sole purpose of determining an interest penalty, Government acceptance is based on:
A constructive acceptance period.

Government acceptance is considered to have constructively occurred on the seventh day after delivery or performance, although the contract may state a longer period.

Actual acceptance.

The actual acceptance (not the constructive acceptance) period used for computing interest when:

Less than the constructive acceptance period was needed for acceptance, or Acceptance was beyond the constructive acceptance period due to a properly documented disagreement over quantity, quality, or contractor compliance.

7.3 Obtain Documents and Determinations Pertinent to Payment

Supporting information and data for invoices and vouchers are essential to reinforce a contractors billings for work that has been completed, for work in process, or for costs incurred for a specified period of time. While the extent of such information and data may vary considerably under different types of contractual arrangements, the principle of reasonable doc-umentation for expended public dollars rests behind every Government contract.

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CONTRACT PAYMENT

Invoice

Supporting information and data for invoice payments might include the following:
Inspection or receiving reports, Commercial or Government shipping documents, Determinations on billing rates, Reports on contractor indebtedness, Determinations for reductions in progress payments, and Determinations for the adjustment of liquidation rates for progress

payments. Voucher A contractors submitted SF 1034/35 must include corroborating information or data concerning all incurred costs. These may be provided as vendor or supplier billings, contractor internal cost sheets or displays, refer-enced cost expenditure files wherein information or data are stored, and so forth. All vouchered costs, even though their interim payment is provisional, must ultimately stand the test of allowability (including allocability and reasonableness). That is, such costs are subject to a determination of allowability by audit under the cost principles found in FAR Part 31, under applicable Cost Accounting Standards, or, as in some cases, may be agreed to by the contractor and the Government and recorded in Advanced Agreements or some form of contract management procedures. For any cost-reimbursement type of contract, its total cost is the sum of allowable direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any allocable cost of money (i.e., facilities capital cost of money, as under FAR 31.205-10). In ascertaining what constitutes a cost under a cost-reimbursement arrangement:
Any generally accepted method of determining or estimating costs

Vouchered Costs and Cost Principles and Other Rules

Application of Cost Principles and Practices FAR 31.201-1 Ascertaining Costs

that is equitable and consistently applied (unless a required accounting standard is invoked under Cost Accounting Standards [CAS]) may be used, including cost properly adjusted for applicable variances.

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CHAPTER 7

Cost Allowability FAR 31.201-2

Factors for determining whether a cost is allowable include the following:


Reasonableness.

(A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business [FAR 31.201-3].) to one or more cost objectives on the basis of relative benefits received or other equitable relationship [FAR 31.201-4].)

Allocability. (A cost is allocable if it is assignable or chargeable

Standards promulgated by the Cost Accounting Standards Board, if

applicable. (Otherwise generally accepted accounting principles and practices appropriate to the particular circumstances).
Terms of the contract. Any limitations set forth in FAR Subpart 31.1 (Applicability).

Indirect Costs and Their Closeout

Under a cost-reimbursement arrangement, the closing out of indirect costs (i.e., costs not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective) can be a time-consuming process. Aside from the normal audit of costs toward contract closeout, there is a quick-closeout procedure for negotiating the settlement of indirect costs for a specific contract, in advance of a determination of final indirect costs, that a contracting officer must use.

Quick-Closeout Procedure FAR 42.708

The quick-closeout procedure for negotiating the settlement of indirect costs must be used by a contracting officer if:
A contract is physically complete; The amount of unsettled indirect costs to be allocated to a contract

is relatively insignificant. Insignificant indirect cost amounts occur when:

The amount of unsettled indirect cost to be allocated to any one contract does not exceed $1,000,000; Unless agency procedures provide otherwise, the cumulative unsettled indirect costs to be allocated to one or more contracts in a single fiscal year do not exceed 15 percent of the estima-ted total unsettled indirect costs allocable to cost-reim-bursement types of contracts for that fiscal year; and

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CONTRACT PAYMENT

Agreement can be reached on a reasonable estimate of allocable

dollars. (A contracting officer may waive the 15 percent restriction based, in part, on a risk assessment that considers a contractors accounting, estimating, and purchasing systems.) Cautions for Quick-Closeout Procedure Quick-closeout procedures provided for by the Allowable Cost and Payment clause (FAR 52.216-7 or -13) are final for the contracts they cover. No adjustments are to be made to other contracts for over- or under-recoveries of costs allocated or allocable to contracts using the quick-closeout procedure. Indirect cost rates used in the quick closeout of a contract are not considered a binding precedent when establishing final indirect costs for other contracts. 7.4 Performance-Based Payments FAR Subpart 32.10 Performance-based payments are contract financing payments that do not constitute payment for accepted items. These payments may be used for non-commercial acquisitions, and they do not apply to payments under:
Cost-reimbursement types of contracts, Contracts for architect-engineer services or construction, or for

ship conversion, alteration, or repair when progress payments are provided for based on a percentage or stage of completion,
Contracts for research and development, or Contracts awarded through sealed bidding or competitive negotia-

tion procedures. Performance-Based Payments Policy FAR 32.1001 FAR 32.1002 Performance-based payments are fully recoverable, in the same manner as progress payments, in the event of a default. Except when a contract provides for other methods of contract financing, performance-based payments are permitted. For Government accounting purposes, performance-based payments should be treated like progress payments based on cost, and they are not subject to the interest penalty provisions of prompt payment. Performance-based payments are the preferred financing method when a contracting officer finds them practical and a contractor agrees to their use.

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Unless otherwise prescribed by an agencys regulations, performance-based payments may be made either on a whole contract or on a deliverable line-item basis. Bases for Payment Performance-based payments may be made on any of the following bases:
Performance measured by objective, quantifiable methods, Accomplishment of defined events, or Other quantifiable measures of results.

Criteria for Use

Performance-based payments are to be used only under the following conditions:


Both the Government and a contractor are able to agree on perfor-

mance-based payment terms,


The contract is a definitized fixed-price type of contract, and The contract does not provide for other methods of contract fi-

nancing (except that advance payments or guaranteed loans, if appropriate, may be used). Establish Performance-Based Finance Payment Amounts FAR 32.1004(b) FAR 32.1005 A contracting officer must establish a complete, fully defined schedule of events or performance criteria and payment amounts when negotiating a contracts terms and conditions. In case of a contract modification, a contracting officer must adjust the performance-based payment schedule to reflect any change or alteration resulting from the modification. When used, performance-based contract financing must insert the clause at FAR 52.232-32, Performance-Based Payments, in the solicitation document and contract with a description of the basis for the prescribed liquidation of payments. In solicitations for undefinitized contracts, a contracting officer may include the same clause with a provision that the clause is not effective until the contract has been definitized and a performance-based payment schedule included in the contract. Rationale for Performance-Based Financing The payment of contract financing has a cost to the Government in terms of interest paid by the Treasury to borrow funds to make the payment. With a contracting officers wide discretion as to the timing and amount of performance-based payments, there must be assurance that the total contract price is fair and reasonable, all factors considered (including the financing costs to the Treasury).

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CONTRACT PAYMENT

Payment Rules FAR 32.1004(b)

Performance-based payment amounts may be established on any rational basis determined by a contracting officer or agency procedures. Such a basis may include, but is not limited to:
Engineering estimates of stages of completion, Engineering estimates of hours or other measures of effort to be

expended in the performance of an event or the achievement of a performance criterion, or


The estimated projected cost of performance of particular events.

Total performance-based payments cannot exceed:


90 percent of the contract price (if on a whole contract basis), or 90 percent of the delivery item price (if on a delivery item basis).

Liquidation of Performance-Based Payments FAR 32.1004(d)

Performance-based amounts must be liquidated by deducting a percentage or a designated dollar amount from delivery payments, and the contracting officer must specify the liquidation rate or designated dollar amount in the contract. Whatever the method of liquidation, it must ensure complete liquidation no later than final payment under a contract.
If payments are established on a whole contract basis, liquidation

must be by predesignated liquidation amounts or liquidation percentages.


If payments are on a delivery item basis, the liquidation amount for

each line-item must be the percent of that delivery item price that was previously paid under performance-based finance payments or the designated dollar amount. Administration and Payment FAR 32.1007 The contracting officer responsible for the administration of a contract is responsible for the review and approval of performance-based payments, including the following:
Receiving, approving, and transmitting all performance-based

pay-ment requests to the appropriate payment office,


Specifying the amount to be paid, necessary contractual informa-

tion, and the appropriate account(s) to be charged for a payment

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Payment Cautions

Entitlement to a performance-based payment is solely on the basis of the successful performance of specified events or performance criteria. In this regard:
A contracting officer is prohibited from approving a perfor-

mance-based payment for a specified event or performance criterion or for a cumulative event until whatever has been prescribed contractually has been successfully accomplished.
If there is a Government-caused delay, a contracting officer may

renegotiate the performance-based payment schedule to facilitate the contractors billings for any successfully accomplished portions of the delayed event or criterion. FAR 52.232.32(e)
A contracting officer may reduce or suspend performance-based

payments, liquidate such payments by deduction from any payment under the contract, or take a combination of these actions after finding any of the following conditions:

The contractor failed to comply with any material requirement of the contract, Performance is endangered by the contractors failure to make progress or its unsatisfactory financial condition, or The contractor is delinquent in the payment of any subcontractor or supplier under the contract in the ordinary course of bus-iness.

Request for Performance-Based Payment FAR 52.232-32(l)

A contractors request for a performance-based payment must contain the following:


Contractors name and address, Date of request for payment, Contract number and/or other identifier of the contract under

which the request is made,


Such information and documentation as is required by the con-

tracts description of the basis for payment, and


Contractors certification that the request for payment is true and

correct, signed by an official authorized to bind the contractor.

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CONTRACT PAYMENT

7.5 Identify Withholdings, Deductions, or Other Corrections

A withholding implies that a subtracted amount may be paid at a later date. A deduction implies that an amount is permanently subtracted, unless a contractor provides appropriate supporting evidence for the reinstatement of any deducted amount. The special terms of a contract may specify the Governments right to deductions under certain circumstances. Likewise for the case of withholdings. Unresolved late delivery may serve as the basis for a deduction in a contracts amount. Some service contracts specify deductions for defects that do not meet an acceptable quality level, usually referring to the number of defects in a sampled service area. Common deductions include amounts for items shown on Exhibit 7-1.

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CHAPTER 7

Common Deductions
FAR Reference 52.232-8 46.407 52.232-11 52.232-1(b) 52.222-4 52.222-41 52.211-11 and 12 52.233-1(c) 52.233-1(c) 32.804 Discounts for prompt payment. Nonconforming supplies or services. Extras. Requested partial payments amounting to at least $1,000 or 50 percent of the total contract price. Violation of and liability for unpaid wages. Liquidated damages. Adjustments for amounts that are disputed. Adjustments the contracting officer makes by issuing a final decision on a claim. Setoffs for the collection of contractor debts, unless: An assignee has not made a loan or commitment for a setoff, or The amount due on the contract exceeds the amount of any loans made or in process under a firm commitment for financing. 52.216-10(c) that Payment on the basis of a lesser fee under cost-plus-incentive fee contracts; is, when the contractor is not likely to achieve the target cost. 52.242-1 52.232-10 52.216-7(g) Unallowable costs. Payment and withholding provisions under fixed-price architect-engineer contracts. Reduced or adjusted payments under audit rights. Costs that are in excess of an estimated amount. Restrictions may be in in reference to: 52-232-20 52.232-22 52.232-7 52.216-26 52.216-12 35.003(c) tors that sell, lease, or license products. Taxes the Government is exempt from paying when the tax is a state or local tax, furnishing the contractor evidence of the tax exemption. These include: 52.229-3 52.229-6 52.229-8 and 9 cost-reimbursement type of contract. 42.1403 Improperly supported reimbursement for transportation charges. After-imposed federal taxes; After-imposed or after-relieved foreign taxes; and Any tax or duty of a foreign Government from which the U.S. is exempt by specific agreement and that is vouchered under the terms of a A limitation of cost in a cost-reimbursement type of contract; A limitation of funds in a cost-reimbursement type of contract; Time-and-materials or labor-hour contract ceilings; The limitation of reimbursement and reimbursement rates in letter contracts; The cost-share limit on matching payments in cost contracts; or Recoupment under research and development contracts; that is, recovery by the Government of Government-funded nonrecurring costs from contracTopic

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CONTRACT PAYMENT

Exhibit 7-1 Royalties FAR 52.227-9 Another deduction covers royalties in excess of the amount the Government owes. Royalty payments are improper under circumstances in which royalty payments are excessive. Approving invoiced amounts under fixed-price types of contract for a royalty is improper when:
The Government has a royalty-free license covering the royalty. Amounts are billed at a rate in excess of the rate for which the

Government is licensed.
The royalties in whole or in part otherwise constitute an improper

charge.
The Government is entitled to a refund under FAR 52.227-9, Re-

fund of Royalties. Identify Appropriate Withholdings

Common Withholdings
FAR Reference 52.232-16 52.216-11 52.216-8 52.232-7 Topic Suspended or reduced progress payments. Retaining 1 percent or $100,000, whichever is less, of total estimated costs, when appropriate, in a cost contract (with no fee). Retaining up to 15 percent or $100,000, whichever is less, of the fixed fee in a cost-plus-fixed-fee contract. Retaining up to 5 percent of amounts billed for time charges under time-and-materials and labor-hour contracts, but not greater than a total withholding of $50,000. Reduction or suspension of contract payments based upon a findof fraud by the head of the agency.

DFARS 252.232-7006 ing

Exhibit 7-2 identifies several common withholdings.

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Exhibit 7-2

7.6 Determine If Assignee Is Protected From Deductions or Withholdings FAR 32.804

An assignee is a bank, trust company, or other financial institution that has been transferred the right to receive a Government contractors payment due under a Government contract. You may find a no-setoff commitment in a Government contract that protects the assignee from withholdings and deductions that might otherwise be appropriate according to the contracts terms and conditions. Any contract of a department or agency of the executive branch of the U.S. Government, except a contract under which full payment has been made, may include a no-setoff commitment only when a determination of need is made by the head of the department or agency in accordance with the Presidential delegation of authority of October 3, 1995, and after such a determination has been published in the Federal Register. The following guidance for the Presidential delegation of authority has been approved by the Office of Federal Procurement Policy (OFPP) for the appropriate use of a no-setoff provision:
To facilitate the national defense, To meet the exigencies of a national emergency or natural disaster,

Guidance on No-setoff Commitments FAR 32.803(d)

or
When its use may facilitate the private financing of contract per-

formance. In any case, a contracting officer must consider whether the inclusion of a no-setoff provision is in the best interests of the U.S. DFARS 232.803 The Director of Defense Procurement issued a determination on May 10, 1996 that DoD would not reduce or set off any money due or to become due under a contract the proceeds of which had been validly assigned. When it applies, this protection from withholding and deduction extends to:
Any contractor liability to the Government independent of the

Assignees Protection FAR 32.804

con-tract you are administering;

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CONTRACT PAYMENT

Any of the following contractor liabilities to the Government re-

sulting from the assigned contract you are administering:


Renegotiation under any statute or contract clause, Fines, Penalties except for amounts being withheld or collected for failure to comply with the terms of the contract, Taxes or social security contributions, Withholding or nonwithholding of taxes or social security contributions.

However, even when there is a no-setoff commitment, you can still pursue withholdings or deductions when:
The assignee has not made a loan under the assignment and has not

committed to do so, or
The amount due on the contract exceeds the amount of any loans

made or loan commitments. In the latter case, you can withhold or deduct as long as the setoff does not exceed an amount that it is in excess of loans or loan commitments. You will have the amounts of any loan assignments in your contract file. 7.7 Determine Amount Due Contractor 7.8 Notify Contractor of Differences Between Invoiced or Vouchered Amounts and Amounts to Be Paid With all appropriate withholdings and deductions identified, determining the amount due is merely a mathematical calculation. As with other notifications you make to contractors, your main reason for giving notice of payment for a lesser amount is to get feedback. Present all factual data that justifies the lesser amount and be willing to listen to any evidence for paying an increased amount or the full amount. Another reason for prior notice is to defuse any unfavorable reactions. Providing the supporting facts in a businesslike manner may diminish an adverse emotional response. If a contractor presents no evidence rebutting the initial decision, advise the contractor of the Governments final decision to:
Pay in full, Pay after withholding or deducting an appropriate amount, or

7.9 Notify Contractor of Final Decision on Paying Lesser Amount

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Reject the invoice or voucher, specifying the exact reasons for re-

jection and return it to the contractor for correction and resubmission. In the case of an invoice under a fixed-price type of contract, make this notification within seven days after receipt of a properly submitted invoice and carefully document it to avoid any interest payment that might otherwise be due the contractor under the provisions of the Prompt Payment Act. 7.10 Forward Invoice or Voucher Certify the proper invoice or voucher for payment and send it on to the payment office. Follow your agencys procedures. One of the purposes for certifying the invoice or voucher is to acknowledge that the supplies or services were acceptable or the effort expended is reflected in incurred costs. Paying offices cannot make a payment until they have received:
A proper invoice or voucher, and Evidence that the supplies, services, or performance were accepta-

ble. You may be required to provide a certification on an original or duplicate invoice or voucher, or you may need to provide a separate receiving report evidencing the approval of supplies or services. Create a Follow-up File DFARS 232.905 A reasonable follow-up date is 30 days after receipt of a proper invoice under a fixed-price type of contract. However, individual contract terms may require quicker payment. They would rarely, if ever, authorize a later payment. DoD paying offices are encouraged to make payments to small disadvantaged businesses as soon as possible after receipt of a voucher or invoice. Examples of standard earlier payment requirements are: FAR 8-709
Payments under contracts with a sheltered workshop for the Blind

or Other Severely Handicapped, for which a payment within 30 days is normal;


Payments under contracts with UNICOR, a program associated

with Federal Prison Industries, Inc., for which a 20-day payment is standard. Carefully read payment terms for individual UNICOR product schedules.

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CHAPTER 8

CONTRACT CLOSEOUT
THE WHOLE IS GREATER THAN THE SUM OF ITS PARTS Joanne had convened another of her Friday sessions for contracts people. This topic of this one was contract closeout. As he expected, Eric was assigned 15 minutes to deliver a message on the contract administrators role in preparing a contract administration office contract file as a principal function of the contract closeout process. As he chatted with others about the upcoming session, he wondered how difficult it all could be. After all, he muttered to himself, by the time one gets to closing out contracts, it doesnt take much more than a storage box to deposit all the paper. Tape it up, store it away, and thats that. He was to leave the session far more educated than he suspected would be the case. For his own time frame, he went to the well and ferreted out from FAR Subpart 4.8, Government Contract Files, the requirements for a contract administration office contract file. He had never really examined much of FAR Part 4, Administrative Matters, and he assumed others were in the same boat. As one of his colleagues had mentioned earlier, Closeout is really a clerical function. Lots of mechanical requirements. One of those things you get to when youve got the time, which, or so it always seems, you never have. In preparing his 15-minute pitch, Eric noted there were 19 specified content requirements for a contract administration office contract file. And these requirements were by no means the lengthiest of those set forth for Government contract files. Looking at what a contracting office contract file should generally consist of, he noted 43 specified content requirements. There seemed to be no end to it. Curious, he looked beyond the content requirements for contracting office and contract administration office contract files and found yet another set of four requirements for a paying office contract file. Indeed, it was revealing. Eric decided to titled his presentation The Blind Contract Administrator and the Elephant. That seemed engaging enough, and the group was filled with smiling faces, including Joannes, when he began. His initial burst went right to the content requirements for a contract administration office contract file. He laid those out in crisp and definitive fashion in about 10 minutes. But he saved the best for last, at least as he saw it. Eric may not have had them on the edge of their seats, but his concluding remarks brought everyone to appreciate his presentations title. In sum, he made the following points: If you think that a contract administration office contract file is something that grows independent of other actions ... take off your blinders and look around. If you think that contract administration documentation is cut from its own cloth ... take off your blinders and look around.

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CONTRACT CLOSEOUT

If you think that the content requirements for contract administration documentation derive entirely from postaward management actions ... take off your blinders and look around. And if you think that your piece of the contractual elephant is a separate, sovereign state .... take off your blinders and look around. And then to the joy of Joanne, whose face would have cracked wide open had she smiled any more brightly, he made his final point. The problem with all of us ... in contract administration ... contract formation and placement ... or whatever ... is that we fail to recognize that were all touching the same contractual elephant. Hey, read ... no study ... FAR Part 4 and let the sun shine in! As he was about to sit down, four of Erics buddies held up individual 8 1/2 by 11 sheets of paper. On each had been recorded the number 10. Not a bad Friday afternoon. Not bad at all!

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CHAPTER 8

COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 Verify that a contract is physically complete. Obtain all forms, reports, and clearances required for closeout. Verify that the Government and a contractor have met other applicable terms and conditions for closeout. Settle any outstanding issues. Verify that there are no outstanding claims or disputes. Make final payment or collect overpayments from a contractor. Identify and recommend the deobligation of excess funds. Prepare a contract completion statement and dispose of contract files. Determine whether to invoke the Governments rights under the clause at FAR 52.237-3, Continuity of Services, for phase-in, phase-out services. Develop the ability to carry out closeout procedures effectively and efficiently.

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CONTRACT CLOSEOUT

INTRODUCTION TO CONTRACT CLOSEOUT


Contract Closeout Contract closeout refers to the procedure for verifying that all administrative matters have been concluded on a contract that is otherwise physically complete. That is, the contractor has delivered the required supplies or performed the required services and the Government has inspected and accepted them. The office administering a contract is responsible for initiating (automated or manual) the administrative closeout of a contract after receiving evidence of its physical completion. The cognizant contracting officer must ensure that all contractual actions required have been completed and prepare a statement to that effect. This statement is authority to close a contract file and must be made part of the official contract file. In preparing for and performing contract closeout, the contract administration office will normally use DD For 1597, Contract Closeout Checklist, DD Form 1593, Contract Administration Completion Record and DD Form 1594, Contract Completion Record. These forms help to ensure that all required actions have been planned and executed and that all involved parties have been appropriately informed of actions required and taken to complete the closeout process. The cognizant paying office must close the contract file on its issuance of the final payment instrument. Time Standards for Closeout FAR 4.804-1 Except for a contract in litigation or under appeal, or in the case of an incomplete termination action, the following are time standards for closing out contract files:
Files for contracts using simplified acquisition procedures should

Policy on Contract Closeout FAR 4.804-2, -3, and -5 FAR 4.804-5(b) DFARS 204.804

be considered closed when the contracting officer receives evidence of completed performance and final payment, unless agency regulations specify otherwise.
Files for firm-fixed-price contracts, other than those using simpli-

fied acquisition procedures, should be closed within six months af-ter the date on which the contracting officer receives evidence of physical completion.
Files for contracts requiring the settlement of indirect cost rates

should be closed within 36 months of the month in which the contracting officer receives evidence of physical completion.

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CHAPTER 8

Files for all other contracts should be closed within 20 months of

the month in which the contracting officer receives evidence of physical completion. Required Closeout Procedures FAR 4.804-5 FAR 42.708 Contracting officers are required to use the procedures set forth at FAR 4.804-5 for closing out contract files with the following exceptions:
Closeout actions may be modified to reflect the extent of adminis-

tration that has been performed.


Quick-closeout procedure must be used, when appropriate, to re-

duce administrative costs and to enable the deobligation of excess funds. Steps in Performance The steps in closing out a contract are charted on the next page. Following the flowchart, each step is discussed in detail.

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CONTRACT CLOSEOUT

STEPS IN CONTRACT CLOSEOUT

1. Verify that the contract is physically complete.

2. Obtain all forms, reports, and clearances.

3. Verify that all other terms and conditions have been met.

4. Settle any outstanding issues.

5. Verify that there are no outstanding claims or disputes.

6-7. Make final payments and, if appropriate, deobligate funds.

8. Prepare contract completion statement; dispose of files.

9. Determine whether to invoke phase-in, phase-out rights under FAR 52.237-3.

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CONTRACT CLOSEOUT
8.1 Verify Contract is Physically Complete FAR 4.804-4 A contract is considered to be physically complete when one of two events has occurred:
All required supplies or services have been delivered or performed,

inspected, accepted and all existing options have been exercised or have expired, or
A notice of complete contract termination has been issued to the

contractor. Facilities contracts and rental, use, and storage agreements are considered physically complete when:
The Government has given the contractor a notice of complete

con-tract termination, or
The contract period has expired.

8.2 Obtain Forms, Reports, and Clearances Required at Closeout FAR 4.804-5

The purpose of closeout is to ensure that there is no further administrative action necessary on a contract. Part of this task is to make sure that all paperwork has been submitted. Forms, reports, and clearances that may be outstanding after a contract is physically complete include:
Contractors final invoice or voucher, Contractors closing statement or release of claims, Final patent report, Clearance for the final patent report, Final royalty report, Clearance for the final royalty report, Plant clearance report, Property clearance, and Closeout audit report for cost-reimbursement types of contracts.

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CONTRACT CLOSEOUT

Meet Agency Requirements FAR 4.801 8.3 Verify Other Terms and Conditions Have Been Met

Your agency may also have forms to evaluate contractor performance. Document the contractor performance file in whatever form or format your agency requires. Administrative tasks incidental to contract performance may need to be accomplished before a contract file can be closed out. Final payment cannot be authorized until a contractor has accomplished all administrative tasks, such as:
Return or other disposition of Government-furnished property, Proper disposition of classified material, Settlement of terminated subcontracts, and Procedural requirements of termination proceedings.

8.4 Settle Any Outstanding Issues

There may be unsettled issues related to basic contract performance that have not been resolved. These kinds of unsettled issues include:
Unresolved value engineering change proposals, Disallowed costs, The final total price of a fixed-price incentive contract, The award amount of an award-fee contract, The final fee of a cost-plus-incentive-fee contract, and Contractor settlement costs under terminated contracts.

8.5 Verify No Outstanding Claims or Disputes

There may be some issues that a contractor may not have raised before contract closeout action is undertaken. To avoid having to reopen a contract file that has been closed, some agencies make it a standard practice to request a release of claims from a contractor as a condition of final payment. An example of a format for obtaining a release of claims and other required information is contained in Exhibit 8-1. When a contractor provides a conditional release, document the file with as much information as you can gather on the issue that the contractor excepts from the general language of the release. If the contractor does pursue the issue, say, a year after closeout, the unrecorded memories of your contract administration team may be of little value.

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Notification of Closeout Action Format


(Contractor name and address) Dear _________________ : Reference __________(agency) for Contract No. .

(describe supplies or services)

In order to expedite final payment and contract closeout, please forward the following items to my attention by (date) : (List only items that apply, renumbering paragraphs after deleting an item.) 1. Any outstanding reports or data items such as technical manuals or instruction manuals per (reference contract line-item number or paragraph citation) . 2. Government-furnished property. 3. Inventory schedules for Government property. 4. Contractors release of claims (form enclosed). 5. Final voucher (cost-reimbursement types of contracts only). 6. Other (cite specific requirement). (Use the following paragraph only if it applies.) Under the terms of the contract, a warranty (describe) is still in effect. Final payment and contract closeout do not relieve you of your obligations to the Government under the warranty clause. (signed) ________________________________ Contracting Officer

Exhibit 8-1

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CONTRACT CLOSEOUT

8.6 Make Final Payment or Collect Overpayment From Contractor

A contract may not give its contract administrator an active role in final payment. The payment office may make payment based on the contractors invoice or voucher and its receipt of a receiving report from a requiring activity. On more complex requirements, a contract administrator may have a much more active role. Overpayments can result from a variety of reasons. For instance,
Assessing excess costs of reprocurement on a defaulted contract, Assessing liquidated damages can result in an overpayment, Adjustments after an audit on a cost-reimbursement type of con-

tract,
Unliquidated progress payments, Retroactive price reductions, and Advance payments.

8.7 Identify and Recommend Deobligation of Excess Funds

Identify the amount of any funds remaining on a contract, and if there is no known potential for their future use on the contract, then recommend their deobligation. Since many agencies have taken cuts in some basic programs, this step becomes increasingly important in order to maximize the use of scarce funds. As noted earlier, the contracting officer in charge of contract administration is required to sign a contract completion statement that contains all of the information required by Exhibit 8-2. It may be the contract administrators job to prepare this statement.

8.8 Prepare Contract Completion Statement and Dispose of Files FAR 4.804-5(b)

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Content Requirements of a Contract Completion Statement


Contracting administration office name and address (if different from the contracting office). Contracting office name and address. Contract number. Last modification number. Last call or order number. Contractors name and address. Dollar amount of excess funds, if any. Invoice or voucher number and date, if final payment has been made. Invoice or voucher number and date, if the final approved invoice or voucher has been forwarded to a disbursing office of another agency or activity and status of the payment is unknown. A statement that all required contract administration actions have been fully and satisfactorily accomplished. Name and signature of the contracting officer. Date. Exhibit 8-2

Placement of Contract Completion Statement FAR 4.804-5(c)

Place the signed original of the contract completion statement in the contracting office contract file. When preaward and contract administration responsibilities are split between two offices, forward the original to the contracting office for inclusion in its official contract file and place a copy in the contract administration office file.

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CONTRACT CLOSEOUT

Disposition of Files FAR 4.804-5(a) DFARS 204.805

Individual agencies prescribe procedures for the handling, storage, and disposal of contract files. Sometimes files are stored in a different building and occasionally in a different part of the city or even in another city. In these cases, retrieving files to deal with and settle unresolved issues can be time-consuming, thus making your thoroughness of closeout review particularly important. Completed contract files are to be held by the office responsible for the contract for a period of 12 months after completion. Any files relating to certified cost and pricing data must be retained for 6 years following final payment. If the exact date of final payment cannot be accurately determined, then such files must be retained for 9 years after contract completion. The contract administration activity may keep a log of closed out files containing such information as:
The date the file was closed out, The date the file was physically transferred to a storage center, Where it was sent for storage, and A filing location provided by the storage facility. (It is of vital

importance to record and safeguard the container number for stored contracts. The storage facility may not retain such and may not be able to locate your particular contract without this number.) FAR 4.805(b) Some information in contract files must be kept for a specific number of years. These record retention requirements are sometimes the result of a statutory requirement and sometimes the result of administrative regulations. When the Government anticipates difficulty in transitioning from an incumbent contractor to a follow-on (successor) contractor for essential services, it includes the clause at FAR 52.237-3, Continuity of Services. This clause specifies that the incumbent contractor agrees, on written notice from the contracting officer and subject to the contracting officers approval, to:
Furnish phase-in, phase-out services for up to 90 days after its

8.9 Determine Whether to Invoke Rights Under Continuity of Services Clause FAR 37.110(c) FAR 52.237-3

con-tract expires, and


Negotiate in good faith a plan with the follow-on contractor to de-

termine the nature and extent of required phase-in, phase-out services, including a training program and a date for transferring re-sponsibilities.

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The incumbent contractor must be reimbursed for all reasonable phase-in, phase-out costs and a profit or fee not to exceed a pro rata portion of the profit or fee under its current contract. When continuity of services is required, the Government must notify the incumbent contractor of its need for phase-in, phase-out services. Such a notice must include all the elements shown in Exhibit 8-3. Once activated, the requirement for phase-in, phase-out services should be administered like any other contract. When Continuity of Services May Not Be Required A requirement for continuity of services may not be appropriate if the follow-on contractor:
Has provided the services under another contract, or Is hiring a substantial number of employees of the incumbent con-

tractor for work on the successor contract.

Minimum Content Requirements for Phase-In, Phase-Out Notice


Specify a time frame, by calendar date, during which the Government requires phase-in, phase-out services. Specify a date for the contractor to submit a training program for Government review. Outline specific areas that the training program should cover. Specify a date when the responsibility for contract performance will be transferred from the incumbent contractor to the follow-on (successor) contractor. Exhibit 8-3

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DISPUTES, CLAIMS, AND TERMINATIONS


TO BE FOREWARNED IS TO BE FOREARMED One of the contracts that Eric had inherited as a contract administrator had been assigned by Joanne. It was an ongoing effort performed by Rotchfort, Inc., a well-known and highly regarded firm. The contract was for road paving and general sidewalk repair. It had been awarded under FAR Part 12 (Acquisition of Commercial Items) using FAR Part 14 (Sealed Bidding) as the method of contracting. The specification for the buy was straightforward, including specific stretches of roadway requiring paving and designated walkways, including cited intersections, that required repair. The procurement had been competitive and resulted in a firm-fixed-price contract of $850,000. Several contract modifications had been issued over the past year. Most were required to deal with changed conditions associated with subsurface problems that neither the Government nor Rotchfort anticipated at the outset of the work. Fortunately, all of these changes had been mutually agreed to as required by FAR 52.212-4(c). A bit late for work one morning, Eric arrived at his office and found his phone already hard at work ringing persistently. Grabbing it quickly, he blurted out Schmidt here. Can I help you? At the other end of the line was Pat Frazier, a road construction engineer and the COTR for Rotchforts contract. Eric, this is Pat Frazier. Got to talk to you about Rotchforts contract. Gordon Rotchfort, the contractors project manager, left my office yesterday afternoon in a huff. Having navigated himself into his chair after placing his briefcase on the floor, his lunch bag in its usual desk drawer, and picking up the phone, Eric was quick to respond. In a huff you say, Pat. Why? Whats the problem? Frazier was equally quick to respond to Eric. Rotchforts upset about our inspection of the recent quarter-mile stretch of road and accompanying sidewalk repairs that were completed about two weeks ago. Hes complaining that the applied inspection standards went way beyond what the contract calls for. The bottom line is that the inspector found subsurface gravel levels not deep enough and the consistency of sidewalk concrete susceptible to cracking at the first sign of a deep frost. With pen and paper in hand, the contract administrator began to take some notes. Tell me, Pat, why would our inspector apply any different inspection standards now than have been applied over the past several months? That doesnt seem to make much sense to me. Do you think that Rotchforts complaint has any legitimate basis in fact?

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Well, Ive got to check it out, Eric. The inspector is a new guy but not unfamiliar with the contract. I briefed him on the job over a month ago. Maybe he mistook, or overreacted to, what I told him about the importance of staying on top of it. I dont know. All kinds of things were going through Erics mind. Do you think, Pat, that Rotchforts anger, I guess is a ploy to get the inspector off his back, or something about which he might pursue some form of relief? What? What do you mean, Eric? I havent the foggiest notion about any ploys or forms of relief. Hey, the guy was in my office wearing a wrinkled brow and evidencing a testy voice. He just sounded mad. When he left, he added some final sentiments about Rotchfords good performance track record and that he didnt want that compromised by an inspector who appeared to be on a different wavelength. He left saying that unless things were rectified, hed have to turn the inspection problem over to his company lawyer. Given everything, I thought you should be informed. And right you are, said Eric. What I want you to do, Pat, is E-mail me a note doesnt have to be long about what occurred in your office yesterday with Gordon Rotchfort. Make it as factual as you can, and relate the key points that you believe he made. Then get your inspector on the phone, or better yet in your office, and ask him about Rotchforts complaint. Is there something substantive to it, or may it be a matter of personalities? We dont want something like this to fester for any length of time. An audible sigh was heard from Frazier. Okay, Eric, Ill get after the E-mail and talk with the inspector. But I dont want us to get involved in some useless shouting contest with Rotchfort. Been there, done that. Nobody ever wins those things, and it takes time for wounds to heal. I hear you, Pat, interrupted the contract administrator, and I dont want something like this to blossom into a needless problem. But to be forewarned is to be forearmed, and weve got to be prepared to deal with it. Having ended the conversation with Have a nice day, Pat, Eric turned on his computer and clicked in the following:
Get Rotchfort contract file and check requirements for inspection and acceptance. Check on receipt of E-mail from Frazier and call him to see what inspector related

about the Rotchfort job.


Check with former inspector. Any problems he had with inspection and acceptance?

If not, why the difference now?


When information gathered, see Joanne and be ready to: (1) give her the facts; (2)

discuss the chronology of events; and (3) lay out the risks, if any, for moving to resolve the situation.

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Best case only a misunderstanding between the parties. Worst case overzeal-

ous inspection resulting in a dispute with Rotchfort and a claim for damages if unnecessary rework is required. Eric was careful to save his notes and paused to think about what else he might jot down. Seem like theres always a wrinkle or two, he thought to himself, that one fails to consider in these cases. Is there anything else I should get after?

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COURSE LEARNING OBJECTIVES


At the completion of this course, you will be able to: Overall: Understand when a claim is valid and know the steps for processing claims. Identify the actions required for terminating a contract for default or convenience. Individual: 9.1 Given a dispute between the Government and a contractor: Identify the major provisions of the Contract Disputes Act of 1978. Recognize when a dispute becomes a claim. Identify the features of a contractors demand that establish the validity of a claim. Know the prescribed procedures once a demand becomes a claim. 9.2 9.2.1 9.2.2 Use the termination remedy as a last resort. Termination for default. Termination for convenience.

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INTRODUCTION TO DISPUTES, CLAIMS AND TERMINATIONS


Disputes FAR 52.233-1 A dispute is formed under a contract when a controversy develops as to the interpretation of:
Payment, Time, or Money due to either party.

Claims FAR 33.201

A claim is a written demand or written assertion by one of the contracting parties seeking, as a matter of right:
Payment of money in a sum certain, Adjustment or interpretation of contract terms, or Other relief arising under or relating to a contact.

Terminations FAR 49.101

Termination of contract, either in whole or in part, for either convenience or default, is a right of the Government if a contracting officer determines that exercising this right is in the Governments interest. The Governments termination of a contract requires a:
Written notice to the terminated contractor, Determination as to the method of termination settlement, and Final accounting of all matters affected by the termination.

Contracting Officers Role

The contracting officer plays a major role prior to and during matters involving disputes, claims, and terminations. For instance:
Being the arbiter of first resort concerning contract disputes, Being responsible for final decisions that must be made under the

Disputes clause of a Government contract, and


Resolving dilemmas concerning possible termination actions.

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Policy on Disputes, Claims, and Terminations

The Governments policy is to try to resolve all contractual issues, to the maximum extent practicable, by mutual agreement at the contracting officers level. This includes, if permitted and appropriate, the use of alternative disputes resolution procedures. Where not possible to do so, remedies usually exist within the construct of a Government contract that may be opted (or must be followed) in pursuit of protecting the public interest. The Contract Disputes Act (CDA), as amended, establishes procedures and requirements for asserting and resolving claims by or against contractors arising under or relating to a contract subject to the Act. It requires that its disputes procedures be used by all federal agencies. The major provisions of the Act are illustrated in Exhibit 9-1.

Contract Disputes Act of 1978 FAR 33.202

Major Provisions of the Contract Disputes Act of 1978


Civil penalties for contractor claims that are fraudulent or based on a misrepresentation of fact. The requirement for contracting officers final decisions. Certification of contractor claims in excess of $100,000. The payment of interest regarding claims. Provides the contractor a choice to proceed to boards of contract appeals or directly to the United States Court of Federal Claims. Introduced the language all claims relating to a contract as opposed to arising under a contract. Gives the Government the right to appeal board decisions to the courts. Allows agencies to require the contractor to continue performance pending final appeal, suit, or settlement. Provides that all claims must be in writing and submitted directly to a contracting officer.

Exhibit 9-1

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DISPUTES AND CLAIMS


9.1 Disputes and Claims There are usually warning signs that signal a potential dispute. Exhibit 9-2 explores some of the signals that may indicate a potential dispute which, in turn, may ultimately lead to a claim. Some are subtle, others

Warning Signs of a Potential Dispute


A lack of specific information from a contractor during a preproposal conference as to how the job will be completed. Failure of a contractor to begin work within approximately 10 percent of a contracts total duration. Repeated failure of a contractor to meet dates on the critical path of a projects schedule. Repeated safety violations or accidents, indicating poor management. Repeated incidents of poor quality or rework. Complaints from site workers to Government personnel about conditions. Refusal by a contractor to sign bilaterally negotiated contract modifications or agreements containing the required release language. Letters received from a contractor that allude to field problems, but without specific details regarding those problems. Receiving a barrage of correspondence from a contractor requiring replies to very insignificant matters, creating a nightmare of paperwork. Persistent complaints from a contractor concerning the behavior, motives, or requirements of the inspector or contract administrator that are found to be without foundation. Receipt of complaints from subcontractors concerning late payments or nonpayment. are graphic.

Exhibit 9-2

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Sources of Disputes and Outcomes

Many controversies stem from disagreements over an agreed-to bargain. For instance:
The complexity of projects in terms of interrelationships can be

troublesome.
Lengthy contract documents and numbers of drawings can create

misinterpretations.
Changing weather conditions can disturb delivery schedules and

create nonperformance ramifications.


Unforeseen conditions can create downstream problems. Constructive changes can result from well-intended actions.

The resolution of disagreements that lead to disputes under contracts may determine the:
Amount or quality of work to be performed, Price to be paid, and Identity of the party responsible for problems that occur.

Ascertaining Intent

When interpreting contract clauses, there is no set of standard rules or well-defined analytical framework to follow as far as courts and boards of contract appeals are concerned. Ascertaining a partys intent requires:
Performing an analysis of the language contained in contract

doc-uments, and
Examining evidence, extrinsic to contract documents, pertaining to

facts and circumstances surrounding contract formation and performance. If this fails to provide an applicable interpretation, it is appropriate to consult with legal counsel to review the various rules of interpretation that courts and boards of contract appeals have applied. In reasonable, logical interpretations, courts and boards of contract appeals look to find the real meaning of contract language and usually reject interpretations that:
Are twisted or strained, Would render any provision meaningless, or Would cause a conflict.

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Exhibit 9-3 outlines the interpretive rules that are generally followed by courts and boards of contract appeals.

Rules in Aid of Contract Interpretation


Read the contract as a whole. Determine the order of precedence by reading the clauses. If enumerated items are called for in one place and not in another, apply one of two basic rules: If the contract contains a specific list of items without words of qualification, the contractor may reasonably assume, absent other contract provisions to the contrary, that those items not listed are not included. Where words of qualification are included, and where the meaning of a word is doubtful, it will take its coloring from, and be limited by, the words with which it is associated.

Consider evidence outside the contract document (i.e., extrinsic evidence): Discussions and concurrent actions. This type of evidence consists of parties discussions and actions occurring prior to the submission of offers, such as: Requests for clarification, Pre-bid or proposal conferences, Pre-dispute interpretations, Pre-dispute actions that may have led to evidencing an interpretation, or Failure to act, which was interpreted to be acquiescence by the Government. Prior dealings in similar matters. Custom and trade usage.

Post-interpretation ambiguities. Interpretation against the drafter of the specification. Duty to seek clarification. Exhibit 9-3

Good Intentions Sometimes Fail

Remember: Honest disputes over performance and the interpretation of contract clauses occur in the smoothest of contractual relationships. Even

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clear contract terms and conditions can give rise to the necessity of interpretation. Resolving Disputes Techniques for avoiding a claim and settling a dispute include:
Continuing to consider, discuss, and negotiate the various elements

of any disagreement, especially during the early stage of any potential controversy.
Dividing a problem into its separate elements, such as the technical

and monetary aspects. (This method provides the parties with an opportunity to discuss the merits of the technical aspect without considering the dollar impact. From that may spring the basis of entitlement and the financial aspects can then be considered).
Talking with individuals who have not participated substantially in

the matter, particularly if an impasse is reached. Documentation is Essential Both the Government and contractor must be in a position to rebuild on paper the events leading to a dispute. Only by careful documentation can the interest of both parties be protected. The acquisition of commercial items under FAR Part 12 requires the use of terms and conditions set forth in FAR 52.212-4 (Contract Terms and ConditionsCommercial Items). FAR 52.212-4(d) covers disputes and relates that:
The contract is subject to the Contract Disputes Act of 1978, as

Disputes and Acquiring Commercial Items FAR 52.212-4(d) DFARS 233.215

amended;
Failure of the parties to reach agreement on any request for an

equitable adjustment, claim, appeal or action under or related to the contract is a dispute to be dealt with under FAR 52.233-1; Alternate I of this clause is to be used when:

acquiring aircraft, space craft and launch vehicle, naval vessels, missile systems, tracked combat vehicles related electronic systems; and either the contracting officer determines that continued performance by the contractor is vital to national security or the public welfare; or

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the head of the contracting activity determines that continued performance is necessary while the matter is being resolved, and

The contractor is obligated to proceed diligently with performance

pending the final resolution of any dispute under the contract. Effective Disputes Management The need for effective disputes management is critical. Exhibit 9-4 lists criteria that reinforce the importance of good disputes management.

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Criteria for Effective Disputes Management


Meet the issues head-on. Before arguments and disputes escalate, both parties should recognize that a difference of opinion exists. Separate the side issues and concentrate on the real ones. After the issues have been identified and the facts gathered, the parties should move to resolve disputes quickly. Managing a dispute does not end with its identification. Resolution is often difficult because of unreasonable positions. Avoid the attitude that a situation is hopeless. Reassess your own position and request the contractor to do the same. Dont personalize an issue. Dont hesitate to ask for assistance.

Resolve disagreements quickly.

Manage the dispute.

It may be helpful in analyzing a current dispute or claim to obtain information from other contracting officers concerning previously filed claims by the contractor (DFARS 233.204). Negotiate the dispute. fair, be professional, and once a bona fide compromise is reached, delineate all the matters discussed and promptly obtain full accord and a satisfactory agreement. Recognize that disputes are time sensitive. Whether you are looking at internal disposition procedures, the contractors demands, or time constraints pursuant to regulations, there are constant pressures brought to bear. Given the nature of what may be required, take reasonable time to act, but act with purpose to bring about closure. This is the key to having the critical documentation the Government requires in order to provide a timely response to a dispute. Exhibit 9-4 Be timely, be prepared, and know the issues for which you may (or may not) be able to compromise. Be

Perform proper contract file maintenance.

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Claims

A contractor that believes your arguments over a dispute carry little or no merit will usually make it known to you that a claim will be filed. This is referred to informally as putting you on notice of a claim. Exhibit 9-5 defines a claim.

Definition of Claim
FAR 33.201 Claim means a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. A claim arising under a contract, unlike a claim relating to that contract, is a claim that can be resolved under a contract clause that provides for the relief sought by the claimant. However, a written demand or written assertion by the contractor seeking the payment of money exceeding $100,000 is not a claim under the Contract Disputes Act of 1978 until certified as required by the Act and 33.207. A voucher, invoice, or other routine request for payment that is not in dispute when submitted is not a claim. The submission may be converted to a claim, by written notice to the contracting officer as provided in 33.206(a), if it is disputed either as to liability or amount or is not acted upon in a reasonable time.

Exhibit 9-5

The Ubiquitous Element of Claims

Everyone involved in contracting needs to develop an appreciation of claims because they are an important element of managing contracts.
From the time that a dispute manifests itself until final action is

taken, the manner in which claims are handled is a reflection on your organization.
You need to know not only the basics for analyzing a claim but to

be able to put together a quality claims package as well. Handling Claims It takes skill, persistence, and clear knowledge of the regulations concerning disputes and claims in order to deal with them, and you may find that there are few new skills required for analyzing them. For example:
The same skills are used in evaluating the merits of an agency pro-

test against a proprietary specification or an experience clause in a construction contract.

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If you have looked at a request for bid correction in terms of

whether a contractor has presented clear and convincing evidence of the existence of a mistake and the intended bid, you have performed the same kind of examination that takes place when reviewing a claim submitted under the Disputes clause.
The skills required for allowing time extensions are the same as

those used in analyzing a delay claim. Responding to a Claim When trouble initially appears and a claim seems to be inevitable, the matter is not merely placed in the hands of a Government lawyer to resolve. Everyone who participated in the situation leading to the trouble will be directly or indirectly involved. Although the contracting officer is ultimately responsible for arriving at and issuing a final decision, you may be responsible for:
Assembling all of the needed information, Proposing a recommendation based on your analysis, or Identifying and consulting with those who will be:

Conducting the legal review, Providing a technical analysis, and Responsible for making a final decision at a higher level.

Contracting Officer Authority FAR 32.211 DFARS 233.210 and 243.105(a)

Contracting Officers are authorized to decide or settle all claims arising under or relating to a contract subject to the Contract Disputes Act, except for:
Claims or disputes for penalties or forfeitures prescribed by statute

or regulation that another federal agency is to administer, or


Claims covered by the False Claims Act. Claims requesting an adjustment in price under a shipbuilding

contract (entered into after December 7, 1983) arising out of events that occurred more than 18 months before submission of the claim or request. Non-Monetaray Claims The bulk of contract claims involve equitable adjustments resulting from contract performance, although there are other claims issues such as:
Data rights, Warranty responsibilities, and

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Reinstatements of terminations.

Appropriate Claims Under the Contract Disputes Act

In many instances, determining what is a claim is neither obvious nor easy. Unfortunately there is no criterion that can be applied in every instance to reach a fail-safe decision. If you receive a letter from a contractor that raises more questions than it answers and you are uncertain about the contractors intentions, you may consider:
Talking to someone who may have dealt with the problem you are

facing for the first time,


Consulting a staff attorney and seeking advice, or Writing a letter to the contractor that asks if a claim is being sub-

mitted, offering at the same time some reminders about what needs to be furnished. The contracting officers denial of a contractors request (for whatever) does not automatically convert it into a claim. A claim does not arise on the occurrence of a dispute or controversy. The contractor must first assert a demand upon the Government by requesting that a final decision be issued by a contracting officer. For a contractors communication to constitute a claim it must manifest a clear intent to seek relief as a matter of right. Time for Initiation of Contractor Claims FAR 33.206(a) Contractor claims must be submitted, in writing, to:
A contracting officer within six years after accrual of a claim, un-

less the parties agree to a shorter time period.


(This six-year time period does not apply to contracts awarded

prior to October 1, 1995.) Time for Government Decisions FAR 33.206(b) FAR 32.209 A contracting officer must issue a written decision on any Government claim initiated against a contractor within six years after accrual of the claim, unless the parties agree to a shorter time period. This six-year period does not apply to:
Contracts awarded prior to October 1, 1995, or A Government claim based on a contractor claim involving fraud.

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Accrual of Claim FAR 33.201

The accrual of a claim occurs on the date when all events, which fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be fixed:
Some injury must have occurred; But monetary damages need not have been incurred.

Non-Monetary Actions

There are some Government actions taken under a contract that do not involve immediate Government claims for money, but these may (or may not) give rise to Government or contractor claims for later monetary relief. Some common examples:
Default termination, Asserting rights under the Patents Rights clause, Rejection of work under inspection or warranty clauses, and Rescission (revocation) of a contract.

There is some uncertainty as to whether the Contract Disputes Act requires that these non-monetary actions be made the subject of a contracting officers decision in order to be adjudicated under the disputes process. In the case of default terminations, however, the Government has traditionally followed disputes procedures. In contrast, the Government has not followed these procedures in cases involving rescission. Subcontractor Claims Subcontractors have no privity of contract with the Government. A subcontractor, therefore, cannot file a direct claim but must file its claim through a prime. An exception is made for SBA 8(a) contracts. Even though the prime contractor is technically SBA and the subcontractor is the 8(a) firm, 8(a) contractors are allowed to submit claims directly to a contracting officer. Before a dispute can achieve the formal status of a claim, the following must occur:
The contractor must submit the claim in writing. It must be submitted directly to the contracting officer. It must assert any specific rights or basis for the specific monetary

Written Requirements for Proper Certification FAR 33.207

relief being sought.

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The contractor must request a valid contracting officers final de-

cision.
The claim must be properly certified if in excess of $100,000.

Proper certification means:


A statement is provided that the claim is made in good faith. Supporting data are accurate and complete. The amount requested accurately reflects the contract adjustment

for which the contractor believes the Government is liable. When the written demand does not meet all the criteria for a claim, return it, explaining how it is deficient according to the Disputes clause of the contract. Determining Amount of Claim To determine the dollar amount of a claim, you must aggregate the increased and decreased costs that are involved. For example: A $15,000 claim resulting from a contractual decrease of $85,000 and an increase of $25,000 would require the claim to be certified, since the combination of the decreased and increased costs exceed $100,000. On receipt of a claim, the recipient may develop an adversarial attitude. Although some claims may lack merit, not every one is fraudulent or inflated. When confronted with a contractors demand for extra compensation:
Set personal feelings aside and give the claim careful, unbiased,

Reaction to a Claim

thorough, and reasonable consideration.


Solicit technical advisors to provide information that bears on the

claims validity. Take advantage of technical expertise that is familiar with the project. Assuming that a contractor gives you a complete claims package, the general procedure that should be followed in analyzing the claim is outlined in Exhibits 9-6 and 9-7.

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Initial Claim Review


Read the contractors letter and identify the issues involved. It is the contractors claim. Allow ample opportunity and give your undivided and impartial attention to examine the basis of the claim. Review the contractors documentation to develop a chronology for each of the separate issues involved. Review the contract file and other contract documents to further develop or substantiate the chronology of events. Review the relevant contract provisions and identify the kind and type of information called for. Return to the contractors letter and identify each of the allegations made. Using the data provided by the contractor and data you have collected, prepare a point-by-point response to each of the allegations.

Exhibit 9-6

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Detailed Analysis of Claim


Step One: Based on the initial analysis, ascertain whether the alleged basic facts are true, not true, or partially true and determine if the claim has standing. Make a technical analysis of the claim, which should consist of a thorough analysis of the specifications, for instance, both as originally written and as changed. This should be performed, whenever possiby persons connected with the initial drafting of them or by someone who has the technical expertise to do so. Step Three: Have a technical expert perform an analysis of the engineering approach that was employed by the contractor, if necessary. From an engineering standpoint, establish the reasonableness of any additional time and person-hours expended. Perform a cost analysis (including an audit if applicable)* of the costs claimed by the contractor to verify that: The costs are actually recorded on the contractors books in accordance with generally accepted accounting principles, They are allowable and allocable to the contract as claimed, and Their recovery is not prohibited by law or regulation. Step Five: Subject the claim to a legal analysis.

Step Two:

ble,

Step Four:

*The Defense Contract Audit Agency or other audit organization. Exhibit 9-7

Checklist for Claims

A checklist of factors for analyzing claims is particularly useful in briefing team members and planning an agenda in preparation for negotiations to settle a claim. Exhibit 9-8 provides a checklist of factors to be reviewed prior to meeting with a contractor.

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Factor Analysis Checklist for a Claim


Contract Number ________________________________ Government Estimate _____________________________ Date ___________________________ Contractors Proposal _____________

Job size, points, and areas of work. (Brief description) _________________________________________________________________________________________ _________________________________________________________________________________________ Plans and specifications have been examined. ______ Quantity and quality of materials has been verified. ______ Labor and equipment usage and cost. Cost $ ______ List idle time, wasted time, or dragged-out time. (List dates extracted from monitoring reports).

List possible over-personing or over-equipping. List materials, labor, equipment and overhead over-consumption or diversions into this change.

Note contractor diligence and production efficiency.

Work environment factors: Dust. Weather. Temperature. Access and congestion. Quality and availability of labor. Superintendency. Overhead support. Supplier support. Government cooperation. Morale. Quality of work. Contractor quality control. Contractor on schedule. Contractor behind schedule. By _____ number of days. Number of change orders to date. Audit available.

Exhibit 9-8

An Early and Informed Start

Once a claim has been identified it is never too early to begin preparing the claims file. The assembly of evidence must be undertaken if the case goes to litigation, so it is worth doing at the outset and worth doing well.

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Evidence can be obtained from many places and take many forms. The documents submitted by both parties constitute the appeal file. Exhibit 9-9 presents a list of some important items that need to be assembled in order to research and prepare a claim file.

Preparation of a Claim File


The contract specification and drawings. Correspondence files. Working drawings. Include all modifications. At minimum, these should include the engineering preaward, contract administration, and legal files. Of particular importance are those that were originally approved, plus those that have incorporated all of the changes. An analysis as to why changes were made, and their dates, is important. Daily records, if applicable, and logs or reports by inspectors and contractor personnel. Include only those pertinent to the claim. Bar and other charts and all changes. These may be particularly useful because these notes are frequently of critical value in establishing expectations and understandings of both parties concerning a particular provision of the specifications or anticipated problems. These are important for general reference purposes and should be reviewed during the course of a claims preparation. In some cases, the contract may incorporate by reference a clause that should be studied in full text. Photographs can and should be used to document key points whenever possible. Logs, such as change order logs, or submittal approval logs are often beneficial. Interim evaluations are sometimes issued during a contractors performance. These will usually point out weaknesses.

Inspection records. Memoranda of meetings. All progress charts and information concerning progress. Copy of the postaward orientation meeting notes.

Copy of contract clauses.

Copy of all photographs taken (as for a construction contract). Copies of pertinent logs. Copies of interim or final performance evaluations of the contractor.

Exhibit 9-9

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The Final Decision FAR 33.211(a)

Conceptually, the analysis process leading up to a contracting officers final decision may be categorized into five phases:
Identify the issue(s), Perform an impact analysis, Evaluate project documentation, Perform a price/cost analysis and damage apportionment, and Prepare a report.

In some offices, the contract specialist, with technical assistance, is expected to perform this process. A Decision of Last Resort FAR 52.233-1 A final decision under the Dispute clause is the last resort after efforts to settle the matter by agreement have failed. The decision may reflect:
Complete rejection of the claim, Complete acceptance of the claim, or Partial acceptance or rejection of the claim.

Content Requirements

The decision must be in writing and should be dispatched to the contractor by certified mail, return receipt requested, or by any other method that provides evidence of receipt. It should contain the following elements:
Reference to the contract involved; A summary of the contractors claim, including a statement of the

additional compensation sought, and a succinct statement of the factual basis of the contractors claim, including a reference to particular parts of the specification (and drawings, if applicable), and how the contractor uses them to support its position;
Findings of fact; A determination and reasons therefore supporting a rationale and a

statement of factual areas of agreement and disagreement; and


A closing statement, identifying it as the final decision of the con-

tracting officer and advising the contractor of the right to appeal.

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Coverage of Decision

The contracting officers final decision is the very foundation of the appeal process. Without it, there is no issue, no appeal, and no review. The final decision must be:
Responsive to all issues of the claim, Personal and independent, Impartial and unbiased, and Able to withstand a sound legal opinion.

Timely Response FAR 33.211(c)

The contracting officer must issue a decision within the following statutory time limitations:
For claims of $100,000 or less, 60 days after receiving a written

request from the contractor that a decision be rendered within that time period, or within a reasonable time after receipt of the claim if the contractor does not make such a request.
For claims over $100,000, 60 days after receiving a certified claim;

provided, however, that if a decision will not be issued within 60 days, the contracting offer must notify the contractor, within that period, of the time within which a decision will be issued. Undue Delay in Decision FAR 33.211(f) Failure to Issue Decision FAR 32.211(g) Amount Payable Under Decision FAR 32.211(h) Appealing the Final Decision In the event of an undue delay by the contracting officer in rendering a decision on a claim, the contractor may request the tribunal or board concerned to direct the contracting officer to issue a decision in a specified time period determined by the tribunal or board. A contracting officers failure to issue a decision within a required time period is deemed a decision by the contracting officer denying the claim and authorizes the contractor to file an appeal or suit on the claim. The amount determined payable under a decision, less any portion already paid, should be paid, if otherwise proper, without awaiting a contractors action concerning an appeal. Such payment should be made without prejudice to either partys rights. A contracting officers final decision is final and conclusive and not subject to review by any forum, tribunal, or Government agency unless appealed by the contractor after receipt of the decision to:
A board of contract appeals within 90 days, or

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The United States Court of Federal Claims within 12 months.

The contractor must initially choose one or the other. It may not seek a ruling from both. A contracting officers final decisions committed to discretionary measures by law or contract terms are not reviewable by boards of contract appeal under the Contract Disputes Act. For example, decisions concerning the following:
Processing of payment invoices or vouchers, Settlement of contract claims, Reinstatement of a previously terminated contract, Termination of a breached contract for default, or The acceptance or rejection of nonconforming items.

An appeal made to a board of contract appeals is considered an administrative review while an appeal to the United States Court of Federal Claims is a judicial review. Where to File DFARS 233.215-70 and 252.233-7001 The Contractor may make its selection of where to file as follows:
Board of Contract Appeals:

Offers a quicker review, particularly for smaller claims. Generally this is less expensive for a contractor. A contractor may proceed under a boards small claims procedure (for claims under $50,000) or its accelerated procedure (for claims of $100,000 or less).

United States Court of Federal Claims: The Courts time limit on

filing an appeal is longer than the boards time limit: 12 months as opposed to 90 days after the contracting officers final decision is issued. If a contractor procrastinated in deciding whether to appeal, it may have no other choice than to take it to court.
If a contract is to be performed outside the United States, its pos-

sessions or Puerto Rico, the contractor must normally waive any right to invoke the jurisdiction of a foreign court or tribunal. (This may be important to contractors for claims involving an agency-wide practice that is not standard Governmentwide. A contractor may feel the Court is a wiser choice because of its organizational independence and broader experience with practices of other agencies.)

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Further Appeal

A decision rendered by either a board of contract appeals or the United States Court of Federal Claims can be further appealed to the Court of Appeals for the Federal Circuit. The issuance of a final decision and the filing of an appeal by a contractor does not deprive the contracting officer of the authority to negotiate and execute an agreement settling a claim at any time. The contracting officer may settle a claim during litigation at boards of contract appeals but not during litigation at the United States Court of Federal Claims. There are practical and legal considerations a contractor must weigh in deciding whether or not to appeal a final decision. Some of the most frequently cited are:
Chance of success, Cost of litigation, Impact on business relations, Desire to establish a legal precedent, and Extent of disruption.

Continuing Effort to Settle

Decision Not to Appeal

Notice of Appeal

To appeal the contracting officers decision, a contractor must submit a Notice of Appeal. To be legally effective, it must contain six basic requirements as noted in Exhibit 9-10.

Notice of Appeal Requirements


Be in writing. Express discontent with the final decision. State an intention to seek review of the decision by higher authority. Identify the contracting officer, the agency, or departmental location. Provide the contract number and description. State the decision from which relief is being sought. Exhibit 9-10

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DISPUTES, CLAIMS, AND TERMINATIONS

Modify the Contract

If an appeals decision favors a contractor, the contracting officer may negotiate an equitable adjustment, unless the dollars and time have already been established in the decision. In any event, a contract modification is the vehicle that would be used. The Government must pay interest on a contractors claim on the amount found due and unpaid computed from:
The date the contracting officer receives the claim (certified if re-

quired by FAR 33.207(a)), or


The date payment otherwise would be due, if that date is later, un-

til the date of payment. Pay Interest FAR 33.208 Interest rates are adjusted every six months by the Secretary of Treasury and vary considerably. These rates are published in the Federal Register every six months, but may also be obtained from the appropriate office within your agency. A claim that has gone from a final decision through the appeal process can span several periods of different interest rates that must be calculated on a daily basis. For claims having defective certifications:
Interest must be paid from either the date the contracting officer

initially processes the claim or October 29, 1992, whichever is later.


If a contractor provided a proper certificate prior to October 29,

1992, after submitting a defective certificate, interest must be paid from the date of receipt by the Government of the proper certificate. Claims Against Contractor The filing of a claim and the availability of remedies are not one-way streets. The Government may also file claims under the contract and seek remedies against the contractor for reasons such as:
Defective performance, Violation of statutes (civil and criminal), Violations of the regulations, or Demands for excess costs in reprocurement resulting from a de-

fault. In order to file a claim against a contractor, the contracting officer must:

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Be familiar with all of the available remedies and what actions are

necessary, and
Fully understand the principal elements of each type of claim, its

defenses, and how to invoke the best remedy. Guidelines are found in Exhibit 9-11 on what steps to take when the Government wishes to file a claim against a contractor.

Guidelines for Filing Claims Against Contractors


Take prompt action to determine the claims dollar amount and collect it. The claim must be thoroughly researched and reviewed before it is asserted. Have it reviewed by engineering, accounting, and legal experts in order to assure that the claim is well founded. The demand for payment should contain a concise statement of the claim. Where there is reason to believe that negotiations may be futile, or there is reason to expedite collection, the demand should be cast in the form of a final decision. Make sure any deferment agreement is in agreement with agency policy. Make sure that all Government claims are represented in bankruptcy proceedings. Do not overlook the possibility of asserting common law damage claims (e.g., a supplement to an excess reprocurement cost claim, delay in performance, and defective performance not covered by the inspection and warranty clauses). Final decisions should be prepared in the same manner as for a contractor claim and include, at least, a statement of original contract requirements, the conduct that gave rise to the liability, and the amount and nature of the price adjustment or damages claimed. It should state that it is issued under the Disputes clause and contain advice concerning the appeal process. Exhibit 9-11

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DISPUTES, CLAIMS, AND TERMINATIONS

TERMINATIONS
9.2 Terminations Contract termination involves the administrative process that exercises the Governments contractual right to discontinue performance under a contract, either in whole or in part. There are two types of termination:
Termination for Default:

The contractor fails to perform in ac-

cordance with the contract.


Termination for Convenience: The contractor is required to dis-

continue performance when it is in the Governments best interest. The preferred method of contract termination is to effect a no-cost settlement without using termination procedures, but only if:
The contractor will accept one, No Government property was furnished under the contract, There are no outstanding payments, debts due the Government, or

other contractor obligations, and


The supply or service can readily be obtained elsewhere.

Resorting to Termination

The high price that may be paid for a wrongful termination warrants a careful review of contract clauses and surrounding circumstances before making a decision to recommend termination. The Governments legal right to do so is not the only factor to be considered. The most crucial issue is how best to complete the project or the work.
It may be decided that the most promising of choices is to continue

working with the contractor in spite of a continued delinquency; or


Immediate default action may be the quickest and best means of

completing the project or work. The decision to terminate is highly discretionary, based on the business judgment of the contracting officer and the advisors who will assist in making it. Exhibit 9-12 lists some criteria to consider before initiating a termination action.

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Considering Factors Before Terminating


FAR 49.402-3 Clauses of the contract and applicable laws and regulations. Specific failure of the contractor and reasons provided by the contractor for such failure. Availability of supplies or services from other sources. Urgency of the need and the period of time that would be required for work by other sources as compared with the time in which completion could be obtained from the delinquent contractor. Degree of essentiality of the contractor, such as unique contractor capabilities. Availability of funds to finance reprocurement costs that may prove uncollectible from the defaulted contractor, and the availability of funds to finance termination costs if the default is determined to be excusable. Any other pertinent facts and circumstances. Exhibit 9-12

Termination Action Alerts

Events that surface the possibility of a termination action include:


A contractors response to the Governments cure or show cause

notice fails to show that a contract will be completed in accordance with its terms.
There is no longer a need for the item or service called for under

the contract.
Funds are not available for continued contract performance. There has been a radical change in the requirement that goes

beyond the contractors expertise.


A surety notifies you that it is aware that the bonded contractor is

in default and requests the Government to withhold progress payments because of the contractors:

Failure to progress, Bankruptcy, or Failure to pay subcontractors.

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DISPUTES, CLAIMS, AND TERMINATIONS

(Not complying with the bonding companys request may result in the Government being liable to the surety.) 9.2.1 Termination for Default FAR Subpart 49.4 The right to terminate a contract may originate from either the general principles of contract law or the express terms of the contract. Contracts may be terminated for default in accordance with the following:
Failure to make progress so as to endanger performance. If a

contractor fails to perform in a timely manner, it is in default and its contract can be terminated.
Failure to deliver supplies or to perform services within the

time specified. Prior to 1966, the general rule was that the Government could insist on completion by the exact due date, because timely delivery on any Government contract was considered of the essence. However, in 1966 the former Court of Claims issued an important decision indicating that contractors may be entitled to a reasonable time after the contract completion date to correct minor deficiencies in work that was considered substantially complete. In the years following this decision, boards and courts have increasingly applied the doctrine of substantial completion. In most cases the Government does not consider termination for default actions when only minor corrective work remains to be done.
Repudiation of the contract by the contractor. A repudiation

or anticipatory breach occurs when a contractor clearly indicates that it cannot or will not perform. Examples pointing to an anticipatory repudiation include:

A letter stating an intention of nonperformance, Job abandonment, and A bankruptcy filing.

The contractors intent must be clear and unequivocal. Whenever possible it should be obtained in writing.
Failure to perform any other provisions of the contract.

Termination or default clauses are not the only elements in a contract that authorize terminating a contract for default. Exhibit 9-13 provides a list of other clauses, statutes, or regulations.

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Termination Clauses, Statutes, or Regulations


Covenant Against Contingent Fees clause. Equal Opportunity clause. Anti-Kickback Act violations. Walsh Healey, Service Contract, or Davis Bacon Acts. Failure to obtain required bonds within a specified time. Defective workmanship. Failure to submit progress schedules or reports. Fraud or other criminal behavior. Exhibit 9-13

Exercising Termination in Good Faith

Even though the power to terminate is expressly reserved by a contract, the power of termination must be exercised in good faith based on the stipulated conditions of a termination clause or on a material breach of contract terms. In determining matters such as the Governments good faith, courts will look beyond the facts that immediately proceeded the termination and investigate all the circumstances under which a contract was executed, including the conduct of the parties throughout performance.

Protecting the Governments Interest

Default clauses are included in a contract solely for the purpose of protecting the Government from loss or damage. They are not to be used for arbitrary, coercive, or punitive damages. A termination for default decision has broad ramifications for all parties. Exhibit 9-14 examines some of them from each partys viewpoint.

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The Effect of Default Termination on Parties


Viewpoint
Contractor

Impact
Termination for default is a traumatic experience for any contractor. Not only does the action put an end to contract performance but in all probability to a contractors hopes for a profit. It also subjects a contractor to possible liability for the Governments extra costs of having the contract completed by another source. It has a negative connotation concerning the contractors management and ability to perform on future contracts. Not infrequently, it can lead to a contractors financial ruin. For the Government, a default termination is the ultimate method of dealing with a contractors unexcused present or prospective failure to perform in accordance with a contracts specification and schedule. The default action for failure to perform is permissive; it is not mandatory. Since termination causes a cessation of performance, with still further delays to be encountered in carrying out the procedure, to terminate for default is considered a drastic action. For this reason, it is unusual for the Government to immediately take action to default a contractor on its initial failure to perform. Termination for default procedures under fixed-price types of contracts provide for excess costs to the Government in reprocurement. Since the procedure is unanticipated, the extra administrative burden must somehow be absorbed into an already busy schedule. It is a necessary act at times, but one that no contracting officer relishes. Occasionally, the Government will find itself holding the bag by a contractor filing for bankruptcy and abandoning the project either before, during, or after termination proceedings. When a contractor files for bankruptcy, the Government must participate in the bankruptcy proceedings to protect its interest. In such cases, the Government is generally bound by the same restrictions as any other creditor. There are, however, some important exceptions. The Bankruptcy Act provides, for example, that contingent debts and contingent contractual liabilities and claims for anticipatory breach may be proved and allowed. It also allows priority in recovery, second to that of payment of taxes.

Government

Contracting Officer

Bankruptcy Court

Exhibit 9-14 (continued on next page)

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The Effect of Default Termination on Parties


Viewpoint
Boards and Courts

Impact
A termination for default is considered by the courts to be a drastic measure; thus, the Government is accordingly required to be strictly accountable for any such termination. Absent complete substantiating evidence, the Governments decision to terminate may be overturned for such reasons as: Terminating too soon, Terminating too late, Substantial completion by the contractor has been accomplished, or Government actions constituted a waiver due to lack of discretion. When the courts or boards are convinced that discretion has been exercised in making the decision to terminate a contract, it will not substitute its judgment for that of a contracting officer. The obligation of a surety under a performance bond is to indemnify the Government up to the amount of the bond in the event of a contractors default. However, courts have ruled that the Government owes an equitable obligation to a contractors surety. In Ohio Casualty Ins. Co. v. US., 12 Cl. Ct. 590 (1987), the Claims Court held that by failing to terminate an irresponsible, dishonest, incompetent, and abusive contractor whose performance was two years behind schedule, the Contracting Officer had abused the discretion and consequently violated the equitable duty owed to the surety. A surety does not contract to assume the risk of a contracting officers unreasonable conduct that results in excess payments to subcontractors, suppliers, or for other expenses. The surety has a right to demand partial payments be made directly to it in certain instances when default is imminent or in process. Courts have consistently held that a surety which satisfies a contractors obligations to pay laborers and material persons under a payment bond has an equitable interest in the contract. In addition, the bonding company has the right to decide whether to complete the work, provide a subcontractor to complete the work, or rely on the Government to complete the work in-house (cases were there is substantial com-pletion) or via a reprocurement contract.

Bonding Company

Exhibit 9-14 (continued)

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DISPUTES, CLAIMS, AND TERMINATIONS

Alternatives to Default

The Government does have some alternatives that should be considered in lieu of default. Some of the Governments alternatives to default that must be considered in order to demonstrate that discretion was used are contained in Exhibit 9-15.

Alternatives to Default Action


No action with respect to default proceedings. Permit the contractor to continue as long as it provides clear and convincing evident that performance will be cured by the completion date already established. However, the Contracting Officer should document the findings of fact and notify the contractor in writing that: The Government accepts the contractors commitment to cure performance, and The contractors failure to cure performance and/or to fulfill contractually specified requirements will reinstate the Governments right to terminate for default.

Revision of the completion schedule. Permit the contractor or the surety to continue under a revised completion schedule. Advise the contractor that under the revised schedule liquidated damages will not be assessed until after the revised delivery date passes. Obtain consideration for the change in the form of a reduced price, improved work methods, or whatever. Completion of the contract by a third party contractor. You may allow continued performance by a subcontractor or other comparable arrangement. The third party must be acceptable to the Government. Assurances must be provided that performance and payment bonds, as well as insurance, will be provided. [See FAR 49.402-4(b)] Surety-Takeover Agreement. If the surety for the failing contractor offers another firm to complete the work, this can be accomplished by a four-party agreement (i.e., the Government, the existing contractor, a new contractor, and the surety). This is normally an agreeable arrangement unless there is evidence that the proposed contractor is neither competent nor qualified. [See FAR 49.404]. No-cost settlement. Occasionally, a requirement is no longer valid and default proceedings are contemplated. In this case, you may use the no-cost settlement arrangement if the contractor has not incurred costs and is not liable for damages. [See FAR 49.402-4(c)]. Deductive contract modification. You may consider a deductive modification for a project that is nearing completion. With this method, you can quickly resolve the issues and complete the project by other means. Exhibit 9-15

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Forbearance

Because of the gravity and consequences of a decision to terminate for default, boards of contract appeals and courts generally recognize the need for some period of time beyond scheduled performance during which the Government may pause and reflect on such action. This is called a period of forbearance. A default termination is a drastic sanction. Exercising a reasonable period of forbearance also demonstrates the exercise of discretion.

Waiver of Rights

A waiver of the Governments right to terminate may come into play if the forbearance period is too lengthy. During the forbearance period, the contracting officer may terminate at any time without notice. However, it is frequently difficult to establish when a forbearance period ends and a waiver of rights has occurred. The Government frequently attempts to preclude a finding of waiver of rights by expressly reserving its right to terminate during a period of reasonable forbearance. One version included in a show cause letter states:
Any assistance given to you on this contract or any acceptance by

Precluding a Waiver of Rights

the Government of delinquent goods or services will be solely for the purpose of mitigating damages, and it is not the intention of the Government to condone any delinquency or to waive any rights the Government has under the contract. Another version is more specific:
None of the following shall be regarded as an extension, waiver,

or abandonment of the delivery schedule or a waiver of the Governments right to terminate for default: (i) the delay by the Government in terminating for default; (ii) acceptance of delinquent deliveries; and (iii) acceptance or approval of samples submitted either after default in delivery or in insufficient time for the contractor to meet the delivery schedule. The exact time that may be allowed for forbearance is not clear, nor have higher authorities agreed about what constitutes a reasonable time. Exhibit 9-16 contains general information that offers guidance concerning waivers based on court and board findings. You are cautioned, however, not to use these statements as precedents. Every situation must be evaluated on its own merits.

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DISPUTES, CLAIMS, AND TERMINATIONS

General Guidance Concerning Waivers


If you encourage a contractor to continue performance and in reliance on this inducement the contractor does, then a waiver may have occurred. Approving a revised schedule may create a waiver if the contractor follows the approved schedule. Entering into negotiations for or issuing a change order to the contract will constitute a waiver if a new completion date is required but not established. If a contractor is incurring costs in a continuing effort to perform, you have an obligation to act quickly in making a decision on whether to terminate. An indispensable element toward waiving the Governments right to terminate for default is an indication, in some manner, of a willingness to have a contractor continue performance. This can be manifested by such actions as stalling for an unreasonable length of time in initiating default actions, making express statements to a contractor about a delinquency, or leading a contractor to believe that a late completion is forgiven. If by silence your action would be interpreted as meaning that you have elected (or acquiesced) to permit a contractor to continue performance, you may have waived the right to default. Exhibit 9-16

Maintaining the Right to Terminate

If statements are made reminding a contractor that liquidated damages will be collected on late completion, it does not constitute a waiver. This demonstrates that withholding liquidated damages has not waived the Governments right to default. Following a waiver, and in order to assert that time once more is of the essence, the right to terminate must be reestablished. Failure to do so will waive future rights to terminate. This can be accomplished by giving a contractor notice of a new completion date established unilaterally by the Government or by bilateral agreement. If the date has been set unilaterally, the Government has the burden of proving that the date is reasonable.

Notice of Termination FAR 49.102

Contracting officers must terminate contracts for convenience or default by giving written notice to a contractor. When the notice is mailed, it must be sent by certified mail, return receipt requested. If hand delivered, a written acknowledgment must be obtained from the contractor.

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Distribution of Notice DFARS 249.105-1

A termination notice must be distributed to:


A surety, if any, Any known assignee or guarantor of the contractor, and The same Government personnel to whom an initial distribution of

the contract was made. When a contract administration office receives notice of a termination it will prepare and distribute a Contract Termination Status Report (DD Form 1598). Notice Inclusions A termination notice must state:
The contract is being terminated for convenience or default under

the contract clause authorizing the termination,


The effective date of the termination, The extent of the termination, Any special instructions, and The steps the contractor should take to minimize the impact on

personnel if the termination, together with all other outstanding terminations, will result in a significant reduction in the contractors workforce. Exhibit 9-17 gives five practical rules you should remember when exercising the right to issue a termination notice. DFARS 249.7000 The U.S. Department of Defense and the Department of Defense Production (Canada) are parties to a special letter of agreement that covers the termination of contracts with the Canadian Commercial Corporation. This Agreement provides for special processing of the actual termination actions by Canadian authorities. In certain incrementally funded R&D contracts the head of the agency may approve the inclusion of a clause covering special termination costs (DFARS 252.249-7000). In these cases, the contractor and the contracting officer must work together to establish the amount and procedures for the special termination costs.

DFARS 249.501-70 and 252.249-700

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DISPUTES, CLAIMS, AND TERMINATIONS

DFARS 249.7001 DFARS 249.7003 DFARS 252.249-7002

Congressional notification of a termination or potential termination may be required if the impact of the termination involves a reduction in employment of 100 or more contractor employees. Also, termination or significant reduction in major defense programs may give rise to a requirement to notify the Secretary of Labor and all affected prime con-

Rules to Remember in Issuing Termination Notices


If the contractor receives notice of a termination and it does not state whether it is for default or convenience, and the contractor believes it to be a termination for convenience and acts accordingly, boards of contract appeals and courts have held that under these circumstances it will be considered a termination for convenience. You may not call a termination for default a termination for convenience in order to protect the contractors reputation. If there is genuine uncertainty on the part of the Government when either a termination for default or one for convenience is appropriate, the termination for convenience should be used. Termination for convenience is a final action; you cannot issue a termination for convenience and tomorrow change it to a termination for default. You can, in fact, reinstate a terminated part of a contract, either in whole or in part, but only with the contractors written permission. tractors.

Exhibit 9-17

Involvement of Surety and Disbursing Office

You must accompany a notice of termination for default with a request that the Government be advised if a surety desires to enter into any arrangement for completion of the work. In addition, you must also notify your activity disbursement officer to withhold further payments under the terminated contract pending further advice that will be furnished at the earliest practicable time. You will need to work closely with the disbursement officer during all phases of any reprocurement or takeover procedures.

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Exhibit 9-18 explores the impact from the Governments and contractors points of view as to what takes place on the issuance of a termination for default notice under a fixed-price type of contract.

Some Consequences of Termination for Default


Government Government not liable for unaccepted work. Entitled to return of all payments for defaulted work (e.g., progress, advanced, or partial). Government has the right, (not duty) to appropriate any residual material. (Negotiate a price for material.) Delays. Contractor
Liable for excess costs of reprocurement. Liable for actual and liquidated damages.

Subcontractors are notified to stop work

immediately.

Inventory of material on hand must be

initiated.
Must cooperate with any bonding company

in an effort to mitigate damages. Exhibit 9-18

Warning Signs

On occasion you may see evidence or hear rumors that a contractor is in financial trouble. Warnings of an impending bankruptcy or financial difficulties sometimes go hand in hand with a delinquent contract when:
A contractor fails to pay subcontractors on time. Late deliveries are being made of materials to the job site, usually

brought in on a C.O.D. basis.


A contractor is falling behind the schedule. Complaints occur by laborers on the job. Telephone calls go unanswered. Sloppy performance and workmanship is evident.

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DISPUTES, CLAIMS, AND TERMINATIONS

If all indications point in the direction of a possible bankruptcy and you are already contemplating default actions, discuss your concerns with the contracting officer and legal counsel at once. Exhibit 9-19 is the full text of the Bankruptcy clause (FAR 52.242-13) that sets forth the actions a contractor must take on entering into bankruptcy proceedings.

Bankruptcy (JUL 1995)


If the event the Contractor enters into proceedings relating to bankruptcy, whether voluntary or involuntary, the Contractor agrees to furnish, by certified mail or electronic commerce method authorized by the contract, written notification of the bankruptcy to the Contracting Officer responsible for administering the contract. This notification shall be furnished within five days of the initiation of the proceedings relating to bankruptcy filing. This notification shall include the date on which the bankruptcy petition was filed, the identify of the court in which the bankruptcy petition was filed, and a listing of Government contract numbers and contracting office for all Government contracts against which final payment has not been made. This obligation remains in effect until final payment under this contract. Exhibit 9-19

Surety

Having notified the surety of a termination for default, you must provide an opportunity for a bonding company to assess the situation and make its decision as to what course it may choose to follow. If the surety decides not to complete the work and you are so informed in writing, then other options include:
Accomplishing the work by other forces, or Proceeding with a reprocurement.

If the surety decides to complete the work, completion should normally be permitted, unless you have reason to believe it is not in the Governments best interest (i.e., you believe that the firm the surety proposes to employ would be neither reliable nor competent under a surety-takeover agreement).

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CHAPTER 9

Surety-Takeover Agreements (Primarily for Construction FAR 49.404

Because of the possibility of conflicting claims over the unpaid, prior earnings of a defaulted contractor, a surety may condition its offer of completion on the execution by the Government of a surety-takeover agreement, fixing the suretys rights to payment from those funds. Under a surety-takeover agreement:
The surety will take over management of the contract in order to

assure its completion.


This will be done in accordance with all the terms and conditions

of the original contract.


The Government will pay the suretys costs and expenses, which

will be the balance of the contract price at the time of default, subject to several conditions. (See Exhibit 9-20)

Conditions of a Surety-Takeover Agreement


Any unpaid earnings of the defaulted contractor, including retained percentages and progress estimates for completed work prior to default, are subject to claims by the Government against the contractor. The agreement does not waive or release the Governments rights to liquidated damages. If the contract has been assigned to a financial institution, the proceeds from the contract will not be available to the surety unless it enters into an agreement with the bank. In no event will the surety be entitled to be paid any amount in excess of its total expenditures made in completing the work and discharging its liabilities under the payment bond. Exhibit 9-20

Accomplishing Work by In-House Forces

The default clause gives the Government the right to take over the work and complete it by contract or otherwise.
This normally occurs only when the work is substantially com-

plete.
It is done with the approval of a bonding company, if applicable.

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DISPUTES, CLAIMS, AND TERMINATIONS

It may use materials brought to the site, but not yet incorporated.

Excess costs are generally recoverable when:


An urgent need can be demonstrated. There is no reasonable alternative under the circumstances. It can be proved that there would have been such excess costs if a

completion contract had been awarded to a private firm. Accomplishing Work by Reprocurement FAR 49.402-6 FAR 49.405 Reprocurement is one of the Governments rights in the event it suffers damages resulting from a contractors default under a fixed-price type of contract. The Government can assess the costs of reprocurement against the account of the defaulted contractor. The Government is expected to act reasonably in the solicitation and award of a reprocurement contract in order to protect both the interests of the contractor and the Government. Failure to do so could result in the conversion of a termination for default into one for convenience if the contractor can demonstrate that the Government failed to act reasonably in mitigating costs. In order to successfully assess damages against a defaulted contractor, you must present a good case that:
Reprocurement was done within a reasonable time. The price obtained was reasonable. Reasonable efforts were made to mitigate damages. The reprocurement contract was performed and the reprocurement

contractor was paid. Reprocurement by the Government is subject to various limitations such as those found in Exhibit 9-21.

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CHAPTER 9

Guidelines for Reprocurement


Work will need to be completed by awarding a new contract based on the same plans and specifications. The Government must reprocure substantially according to the terms and conditions of the original contract. Equitable adjustments due the contractor prior to default will have to be offset against excess costs. The Government cannot recover overhead or routine administrative costs in the reprocurement. The Government may utilize negotiation rather than sealed bidding. It may also negotiate a sole-source award, if justified. The contracting officer must exercise reasonable diligence to obtain the lowest price available for completing the contract. Failure to act reasonably to minimize reprocurement costs in awarding the reprocurement contract may result in a failure to recover excess costs. Exhibit 9-21

Common Contractor Defenses

Two of the most common defenses raised by contractors in excess cost assessment cases are that the Government:
Acquired dissimilar work or the reprocurement contract was dis-

similar in material respect, and


Failed to mitigate its damages as a result of an unreasonable re-

procurement method, time, or price. Timeliness The Government is allowed a reasonable time in which to conduct a reprocurement. Unreasonable delays, however, that result in higher reprocurement costs can be used by a defaulted contractor to demonstrate that its case has been prejudiced by a delay. For example, fluctuating steel prices may have escalated in price, or some other commodity may have taken a rapid increase. Labor wage rates could have also escalated due to a new bargaining agreement.

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DISPUTES, CLAIMS, AND TERMINATIONS

Appeals

A contractor who believes that its contract has been defaulted unfairly or improperly can contest that action by appealing to:
An appropriate board of contract appeals, or The United States Court of Federal claims.

Even when a contractor fails to take a timely appeal from a termination for default, it can still challenge the propriety of that termination, as well as the propriety of any reprocurement procedure. Damages The Government is entitled to recover actual damages for breach of contract just as any other party to a contract. For instance:
The cost of Government supervisory personnel, such as inspectors

and engineers, incurred during a contractor-caused delay;


The costs caused by the delay that the Government had to pay to

another contractor on the same or a related projected; or


Any unliquidated progress payments.

9.2.2 Termination for Convenience

The right of the Government to terminate a contract when its completion is no longer in the Governments best interest has long been recognized. The Government has the right to terminate without cause and limit the contractors recovery to costs incurred, profit on work done, and the cost of preparing a termination settlement proposal. Recovery of anticipated profit is precluded. There is little guidance in the FAR concerning criteria that should be considered before a termination for convenience, except for some instances when it may be in the best interest not terminate a contract. A logic chart in Exhibit 9-22 provides some criteria for making a decision to terminate for convenience. Although recommendations may be made by engineers, legal, or technical staff, it is the contracting officer who makes the final decision.

Decision to Terminate for Convenience FAR 49.101(b)

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CHAPTER 9

Logic For and Against Termination for Convenience


FOR When in the best interest of the Government. Budgetary considerations make it necessary. The requirement no longer exists. Termination for convenience would eliminate unnecessary losses.
The propriety of an award must be Relationship the termination may have to

AGAINST
Cost of termination for convenience should

not be expended when a no-cost settlement can be effected.


The undeliverable balance of a contract is

$5,000 or less.

other contracts.
Contractors reputation would be affected if

resolved.

terminated for default. (Termination for convenience should not be used in lieu of default merely to save a contractors reputation.)

Requested by GAO, courts, or

boards of contract appeals. Exhibit 9-22

The Termination for Convenience Process

Once a decision is made to terminate, there are procedures prescribed in the FAR that must be followed. Exhibit 9-23 describes each briefly.

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DISPUTES, CLAIMS, AND TERMINATIONS

The Termination for Convenience Process


FAR Reference Notice of Termination: FAR 49.102 Initial Conference: FAR 49.105(c) Prepare and Submit Inventory Schedules by the Contractor: FAR 45.508-1 Disposal of Termination Inventory: FAR 45.603 Requirement The contractor must be notified in writing that the contract has terminated for convenience. The contracting officer, the contractor, and important subcontractor personnel discuss the effect of termination and the procedures to be followed in effecting a settlement. The contractor must list the property acquired for and allocable to the terminated arrangement. The terminated inventory must be disposed of by: purchase or retention by the contractor; return of material to suppliers; use by the Government; or by donation, sale, destruction, or abandonment. Termination inventory may result in a credit against the amount the Government owes the contractor in the final settlement. The contractor must submit a proposal for compensation. Use of the inventory basis for termination proposals in preferred over the total cost basis. A contractor must submit its settlement proposal within one year from the effective date of a termination, unless the Government extends this period. Obtain audit report, as appropriate. The Government and the contractor negotiate the amount of the final settlement. If both parties agree to a sum of money, the settlement is by negotiation. If the parties fail to agree, the contracting officer must make a unilateral determination of the amount due the contractor. This determination may be appealed. The memorandum must be written explaining the basis for the settlement in order to assist reviewing authorities. The Government and the contractor enter into a final agreement on the amount of the settlement. If some areas of the settlement are disputed, the contractor will be paid the amount the Government believes proper, pending final resolution of an appeal concerning the disputed amount.

Submission of Settlement Proposal: FAR 49.206-1 Inventory or total cost basis: FAR 49.206-2

Audit Report: FAR 49.107 or FAR 49.303-2 Settlement by Negotiation: FAR 49.109

Memorandum of Negotiation: FAR 49.110 Settlement Agreement: FAR 49.109 or FAR 49.303-4

Exhibit 9-23

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CHAPTER 9

Termination and Acquiring Commercial Items FAR 12.403

The Government reserves the right to terminate a contract for commercial items either for convenience or cause, when to do so would be in its best interest. The word cause related to a termination action is the term customarily used in the commercial marketplace, and for acquisitions under FAR Part 12 it replaces the word default as traditionally used in Government contracting. The termination clauses for the acquisition of commercial items contain concepts that differ from those contained in the termination clauses set forth in FAR Part 49. Because of this, the follow prescriptions apply to FAR Part 12 acquisitions:
The requirements of FAR Part 49 do not apply when terminating

contracts for commercial items.


Contracting officers are not to follow the requirements of FAR

Part 49, but they may use FAR Part 49 as guidance to the extent it does not conflict with FAR Part 12 and the termination provisions of FAR 52.212-4.
Before taking action to terminate for cause, a contracting officer

should consult with counsel. Commercial Items: Termination for Cause FAR 52.212-4(m) Contractors are required to notify a contracting officer as soon as possible, after commencement, of any excusable delay (see FAR 52.212-4(f)). In most instances:
Such notification should eliminate the need for a show cause no-

tice prior to terminating a contract for cause;


But in all instances for other than late delivery, a contracting offic-

er must send a cure notice. The Governments rights after a termination for cause include all remedies available to any buyer in the marketplace. When a termination for cause occurs, the Governments preferred remedy is:
To acquire similar items from another contractor, and To charge the defaulted contractor with any excess reprocurement

costs together with any incidental or consequential damages incurred because of the termination. When a termination for cause is appropriate, a written notification must be sent to the contractor and include, at least, the following:
Indicate the contract is terminated for cause.

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Specify the reason(s) for the termination. Indicate which remedies the Government intends to seek or pro-

vide a date by which the Government will inform the contractor of a chosen remedy.
Specify that the notice constitutes a final decision of the contract-

ing officer and that the contractor has the right to appeal the decision under the Disputes clause. Commercial Items: Termination for Convenience FAR 52.212-4(l) When the Government takes action to terminate for convenience, the parties should mutually agree on the requirements for a termination proposal. The Governments interest is to obtain sufficient documentation to support payment against the goal of having a simple and expeditious settlement. The contractor must be paid:
The percentage of the contract price reflecting the percentage of

work performed prior to the notice of termination, and


Any charges the contractor can demonstrate resulted directly from

the termination. For any charges beyond the contract price reflecting the percentage of work performed, the contractor may demonstrate those charges using its standard record-keeping system. In doing this, the contractor is not required:
To comply with Cost Accounting Standards, or To comply with the contract cost principles in FAR Part 31.

The Government has no right to audit the contractors records solely because of a termination for convenience.

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CONVENIENCE, CAUSE, OR WHAT? Excel Products was a small business concern that had been awarded a contract for grounds maintenance and external cleaning at an agency field installation. Excels contract had been awarded using FAR Part 12 (Acquisition of Commercial Items) procedures and FAR Part 13 (Simplified Acquisition Procedures). It had been a competitive set-aside for small business concerns, and the total firm-fixed price for the job was $87,500. The work was to be completed in three months from the date of award. The work called for a series of general grounds maintenance tasks, including minor repairs, and the high-pressure hosing of some external surfaces and metal awning areas. The outside surfaces of two small buildings were to be cleaned and painted. After-work cleanup was a general requirement. About two months into performance, the COTR for the contract, Ray Lawson, called Eric and explained that he had overheard Excels subcontractor, a small groundskeeping company, complaining loudly about Excels late payment of billings. And, from what he had overheard, a failure on Excels part to pay for work that had been done was affecting the subcontractors performance of work. As a small disadvantaged business concern, the subcontractor had to delay some grounds maintenance until Excel could pay its bills. As Lawson told Eric, I heard the guy say that his company simply couldnt afford to carry some people over several weeks without being paid for them. And in the case of grounds maintenance, the subcontractor hired on mostly daily laborers to get the job done. So whats the problem, Ray? interjected Eric. Is Excel behind in meeting the schedule? Do you have any proof that what you heard is other then the babbling of a disgruntled person who got up on the wrong side of the bed? Do you have any indication that Excels work is suffering from what might be attributable to an alleged failure to pay its subcontractors on time? Whoa, Eric! shot back Lawson. Im merely try to pass along what I believe is a fairly significant message that may have ramifications for the completion of Excels work. Eric knew that he had reacted too quickly and sharply to Lawsons call. I didnt mean to take you to task, Ray. Sorry if I sounded harsh. Look, I appreciate your call, and thats exactly what you should have done. Let me think about what youve said, and Ill get back to you over the next day. Until then, Id appreciate your sending me a brief E-mail conveying what you heard and what your concerns might be as the result of it. Glad to, Eric, replied the COTR, and I understand that you cant do much with something if you dont have some facts to support it. But weve been there before with these kinds of things and had to run through some troublesome wickets to make things right.

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DISPUTES, CLAIMS, AND TERMINATIONS

Okay, said Eric, and thanks for the call, Ray. Ill be back to you about this. As he reflected on Lawsons call, Eric clicked into his computer, yet again, and tapped out the following notes:
Weve got an $87,500 fixed-price deal with a small business that usually does

good work.
Someone says the contractor is not honoring the billings, in a timely manner,

from a small disadvantaged business subcontractor.


If we have a fixed-price deal, why should we worry about any subcontracting

relationships? Theres no privity between the Government and any subcontractor under a firm-fixed-price contract. Right?
But what if what Lawson heard was right? Do we have any recourse to effect

a remedy on behalf of the subcontractor? Or is it none of our business?


And if it comes to a no good end, might we have to consider a termination

action? (I hope not.) But if we do, will it be for cause or convenience? And on what basis will Joanna make the decision?

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CONSENT TO SUBCONTRACTS
THERES MORE TO IT THAN MEETS THE EYE Brenda Stilson, one of Joannes contract administrators, was on the phone with Bradley Moore, the purchasing agent for Kingman & Foster (K&F), a firm known for its excellence in the field of integrated logistics support. The agency had recently awarded the firm a completion-form, cost-plus-fixed-fee contract. The award has been made after an aggressive competition among several offerors, and Brenda has been assigned as the contract administrator. Bradley Moore was fairly new to the firms purchasing function. He had been on the job for about 18 months, attended some training sessions, and talked with Brenda on several occasions. Whenever possible, she had been helpful in pointing him in the right direction to better understand what cost-plus contracting was all about. Bradleys call to Brenda concerned the Subcontracts clause of K&Fs cost-reimbursement arrangement. He was anxious to confirm his understanding of some of the clauses requirements, especially those dealing with a contractors responsibilities to inform the Government about intended subcontracts. Whats up, Brad? was Brendas opening question. Hey listen, Brenda, he replied, Im a bit confused about the business of what we have to do to award subcontracts, and Ive got five on my desk that my boss wanted to award ... like last week! So, whats the problem? she asked. Well, Im not sure I really know. Ive got two firm-fixed-price subcontracts for off-the-shelf items with Integron for analytical software programs, one on a time-and-materials basis for logistics support computer runs with Keltney Resources, one on a cost-plus basis for constructing a logistics model dealing with inventory stockage levels with Logomods Inc., and ... oh yes, one on a firm-fixed-price basis for the rental of a computer from Logomods that can do things that none of ours can. Thats about the size of it. Thats sounds like a pretty husky group of subcontracts, the contract administrator commented. Whats it all add up to in dollars? Ah ... lets see, he responded. The fixed-priced ones come to $30,000, The T&M has a ceiling of $13,500, and the cost-plus rings in at a respectable $90,000. The whole thing comes to $130,000 plus change.

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CONSENT TO SUBCONTRACTS

Brenda breathed heavily. Thats a good deal of work to subcontract, Brad. And what was the total estimated cost of K&Fs cost-plus-fixed-fee contract? I havent got it in front of me, but I think it was about $700,000, wasnt it? Youre close, Brenda, but on the short side by fifty grand. Its $750,000. So tell me, what do I have to do to get your approval of these subcontracts so I can award them? Brenda had grown a bit impatient with the discussion, but as always her inclination was to help. She asked Bradley if he had a pencil in hand and a pad close by. He answered yes, and she advised him to take down whatever he felt would be helpful. She began with a series of questions, Where did you get the idea that the Government has to approve your subcontracts? And do you remember that I pointed out the importance of your contracts Subcontracts clause at K&Fs postaward orientation conference? I understand what you mean by fixed-price and time-and-materials deals, but what do you mean by cost-plus? Then she added somewhat brusquely, Cost-plus what, Brad? He responded quickly. I thought the approval business was because we have a relatively inexperienced purchasing system in dealing with Government contracts. Sure, I remember the post-award orientation, but that Subcontracts clause is included in our contract by reference, and Im told the newest version is dated February 1997. Havent got that version in my computer-based FAR as yet. And cost-plus means cost-plus-fixed-fee. The contract administrator continued on. Your contract sets forth quite clearly what K&Fs responsibilities are in the matter of obtaining the Governments agreement to specified subcontracts you want to award, including the requirement for advance notification in some cases and what that means. Excuse me, Brenda, Bradley interrupted, but Im under considerable pressure to get these deals out the door to vendors that have been selected to deliver the goods or perform the work. Have you got any shortcuts I can use to get, as you put it, the Governments agreement to the subcontracts Ive identified? Huh ...? she interjected. Shortcuts? No, Im afraid not. Uncle Sam doesnt deal in subcontracting shortcuts. I strongly suggest you get a current version of the Subcontracts clause for K&Fs contract. What youve got to do, or whoever has to do it, is set forth therein. The purchasing agent felt that he had run into a stone wall. Well look, Brenda, can you give me some key words or phrases that will help me zero in on the right things about what weve got to do? Sure, she said. I have no problem doing that, Brad. But Ive got a few pressing things myself to handle before the end of this day. So heres what Ill do. Ill call you ... or your voice mail ... before six oclock this evening and leave some key words or phrases. Better yet, Ill fax them to you. Let me do that, although Ill call to see if you got them. In the meantime, I suggest you get the current version of that Subcontracts clause to read.

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Bradley thanked her and said he looked forward to her fax and phone call later in the day. Tapping the keys of her computer, Brenda began a list of key words and phrases to send the purchasing agent. She titled the list, Theres More to It Than Meets the Eye. She came up quickly with the following: consent, proposed subcontract, dollar values, more than one subcontract with a single subcontractor, advance notification, ratification, and purchasing system. What others can I add? she asked herself.

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CONSENT TO SUBCONTRACTS

COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 10.1 10.2 Determine whether Government consent to individual subcontracts is required under a contract. Determine if a contractor is required to submit advance notifications of subcontracts for consent and identify the types of subcontracts for which prime contractors must submit such notifications. Review advance notifications for subcontracts, obtaining revisions or modifications when necessary, as well as Equal Employment Opportunity (EEO) clearance from the Department of Labor, when required. Determine whether the Federal Acquisition Regulation (FAR) prohibits consent. Determine whether to withhold consent and identify any changes or corrections necessary prior to consent. Negotiate changes or corrections in a contractors subcontracting procedures or a contract itself, when appropriate, obtaining the contracting officers approval in writing for those changes or corrections if they conflict with previously approved plans. Consent, decline to consent, or make appropriate recommendations to a contracting officer concerning any changes or corrections for a contractors subcontracting procedures, or a contract itself, and obtain the contracting officers decision, document it, and transmit it in writing to a contractor. Monitor contract performance to ensure that subcontracts are not awarded without required consent. Consent or decline to consent to the placement of proposed subcontracts.

10.3

10.4 10.5 10.6

10.7

10.8

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INTRODUCTION TO CONSENT TO SUBCONTRACTS


Definition for Subcontracting FAR 44.101 Subcontract means any contract, as defined in FAR Subpart 2.1, entered into by a subcontractor to furnish supplies or services for the performance of a prime contract or subcontract, including purchase orders, and changes and modifications to purchase orders. Subcontractor means any supplier, distributor, vendor, or firm that furnishes supplies or services to a prime contractor or another subcontractor. Consent to subcontract means a contracting officers written consent for a prime contractor to enter into a particular subcontract. Policy On Consent Requirements FAR 44.102 Consent to subcontracts is required when a subcontract is complex, the dollar value is substantial, or the Governments interest is not adequately protected by competition and the type of prime contract or subcontract. Consent requirements may be waived when a contractors purchasing system has been reviewed and approved in accordance with FAR Subpart 44.3 (Contractors Purchasing Systems Reviews). Consent Responsibilities FAR 44.202-1 Approval Versus Consent A cognizant administrative contracting officer is responsible for consent to subcontracts, except when the contracting officer retains a contract for administration or withholds the consent responsibility from delegation to an administrative contracting officer. While the Government may reserve the right to approve a contractors purchasing system, it grants its consent to subcontracts. What the Government consents to is not the capacity and credit of a subcontractor to perform, but rather the cost or pricing arrangement between one contractor (a prime) and another contractor (a subcontractor) or, in some cases, subcontracts selected by a contracting officer requiring special surveillance. Contractors and subcontractors, at all tiers, are required, to the maximum extent practicable, to incorporate commercial items or nondevelopmental items as components of items delivered to the Government. In doing so, contractors and subcontractors are not required to apply to any of their divisions, affiliates, subcontractors, or suppliers that are furnishing any commercial items or commercial components any clause, except those:

Subcontracts for Commercial Items and Components FAR 44.402

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CONSENT TO SUBCONTRACTS

Required to implement provisions of law or executive orders ap-

plicable to subcontractors furnishing such items or components, or


Determined to be consistent with customary commercial practice

for the item being acquired. Subcontracting Clause for Commercial Items and Components FAR 44.402(b) and 44-403 DFARS 244.403 FAR 52.244-6, Subcontracts for Commercial Items and for Commercial Components, implements the policy requirements of FAR 44.402(a) and is required for use in solicitations and contracts for supplies or services other than commercial items. Notwithstanding any other clause in a prime contract, only those clauses identified under FAR 52.244-6 are required to be in subcontracts for commercial items or commercial components. In contracts that contain the clause mandating a preference for domestic specialty metals (DFARS 252.225-7014), these requirements must be flowed down to subcontracts at any tier when the items being acquired under those subcontracts contain specialty metals. Steps in providing consent to subcontracts are charted on the next page. Following the flowchart, each step is discussed in detail.

Steps in Performance

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STEPS IN CONSENTING TO SUBCONTRACTS


1. Determine whether consent is required under the contract. 6. Negotiate changes or corrections in contractors subcontracting procedures where necessary.

7. Consent or decline to consent. Required? No Consent not necessary.

Yes 2-3. Identify types of subcontracts for which consent is required; obtain advance notifications.

8. Monitor to ensure subcontracts are not awarded without required consent.

Is consent required for subcontract at issue?

No

Consent not necessary.

Yes 4. Determine whether the FAR prohibits consent.

Consent prohibited?

Yes

Do not consent.

No 5. Determine whether to withhold consent for other reasons; establish conditions for consent.

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CONSENT TO SUBCONTRACTS

TO CONSENT OR NOT TO CONSENT


10.1 Determine Consent Requirements Step 1 There are three major steps involved in determining a contracts requirements for consent to subcontracting. Review the contract. The key to determining whether the Government has the right to consent to or to reject a subcontract is found in the contract itself. The first step is to review it carefully. In this review, pay close attention to:
FAR clauses incorporated in the contract, Special clauses relating to subcontracting, The type of contract and subcontract, and The contract and subcontract dollar amounts.

Generally, Government consent to a subcontract is required in a prime contract when the Governments interests in subcontract arrangements are not protected by the contract type or when the Governments interests are not protected by the competitive practices of the prime contractor. Breadth of Consent FAR 44.201-1(b) Consent may also be required when a subcontract is recognized in the preaward phase of a procurement as being particularly critical to overall performance, even though the Governments interests are generally protected by the contract type and/or competitive practices. Such subcontracts may be specified in the schedule of a prime contractors contract as requiring consent, while others will not. A prime contract may even specify other special surveillance requirements for critical subcontracts, such as approval of a subcontractors quality control program. Determine if the Governments interests are protected by the contract type. Generally, consent to a subcontract is not required under prime contracts that are firm-fixed price or fixed-price with economic price adjustment clauses. Consent is generally required for other contract types. Consent may also be required under fixed-price prime contracts, depending on the nature of the subcontract. For instance, consent is required when:
The subcontract results form an unpriced modification to a prime

Step 2 FAR 44.201

contract, or

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The subcontract is a cost-reimbursement, time-and-materials, or

labor-hour type of arrangement. Step 3 FAR Subpart 44.3 Determine if the Governments interest is not adequately protected by competition. If a prime contractor has a Government-approved purchasing system, consent is generally not required, because part of the review for approval for such a system is its adherence to Government competition requirements and general good business practices. Exceptions occur when:
Contracts that are not facilities contracts are issued as letter con-

tracts or as cost-reimbursement types of contracts, or


A contract is for a major system, subsystem, or for component

parts of the system or subsystem. Contractors Purchasing Systems Reviews There is assurance that the Governments interests in a primes subcontracting procedures are being protected when a contractor purchasing system review (CPSR) has been conducted and the system has been approved. These reviews are usually required for each contractor whose negotiated sales (not sealed bid or sales of commercial items pursuant to Part 12) to the Government are expected to exceed $25 million during the next 12 months. Generally, the Government analyzes a prime contractors overall purchasing system. A CPSR is not done to satisfy the needs of a specific contract.

SOME FOLKS JUST DONT GET IT Joanne was at her desk at eight oclock this morning and checking her voice mail for any messages. She noted a call from Harlan Shoemaker, Director of Purchasing and Supply Management for ACME Construction and Supply . Wonder what he wants? she said to herself. ACME was a worldwide company and recently had grown its business with the Government to the point where it anticipated more than $25,000,000 of negotiated prime and subcontract awards over the next 12 months. Given this expected level of sales, the company became a candidate under FAR Subpart 44.3, Contractors Purchasing Systems Reviews, for a CPSR. So far as Joanne knew, ACMEs CPSR had been conducted by the Defense Contract Management Command (DCMC), and she was expecting to hear the results in the near future. The near future, unbeknown to her, was about to occur when she responded to Harlan Shoemakers call of the previous day. Mr. Shoemaker, this is Joanne Davidson responding to your phone call. What can I do for you?

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CONSENT TO SUBCONTRACTS

Thanks for calling, Ms. Davidson. I appreciate your prompt response. Chances are that if we had connected yesterday, Id have tried to chew your head off. Really, Joanne said with a sound of mild surprise in her voice. Then she added, What seems to be the problem? Harlan seized the opportunity to respond. As you know, we had DCMC in here for a CPSR. Turned the place inside out for them. They must have been here for the better part of a month. Looked at more paper and records than I thought we had. Nice people, I guess, but we came up short. We got a letter from the cognizant DCMC leader indicating that the Government was withholding approval of our purchasing system. Said we showed weaknesses in the submission of required cost or pricing data, that our small, small disadvantaged, and women-owned small business subcontracting practices were out of whack with our rules, and some other things as well. Wanted to call you to see what might be done about all this. Well, I havent seen the CPSR report as yet, the contracting officer began. Will probably be on my desk in a day or two. Before I can suggest anything, Mr. Shoemaker, Ive got to see what it says. But in the meantime, I think it appropriate for you and your staff to take account of the period within which youve been asked to submit a plan that responds to the deficiencies in your purchasing system that require correction. Look, Ms. Davidson, Harlan interrupted, all our company is trying to do is good work at a good price to be of good report. And it troubles me no end when the Gov-ernment steps in and tries to tell us how to run our business. Do you think its fair to do that ... or what? How many times had she heard this over the years? And she responded as she always had. Mr. Shoemaker, our objective is not to run your business. No sir, our objective, in the case of a CPSR, is to evaluate your purchasing procedures and practices to see if the business you conduct is compatible with requirements that speak to the protection of public funds spent for public purposes. Well, that all sounds mighty nice, Ms. Davidson, and you can put it any way you want, but Ill never understand why we just cant do it the way we know that works. Thanking Harlan for calling, Joanne ended the conversation, hung up the phone, and began to deal with the many items on her desk.

10.2 Identify Subcontracts Requiring Consent

Having identified prime contracts that contain clauses requiring the submission of subcontract information, you must now consider which subcontracts need a notification for consent from the contractor. A prime contractor is not required to submit an advance notification for all of them. Prime contractors need only submit notifications for those subcontracts with a substantial dollar value or those that contain complex requirements. Two steps may be used to ascertain substantial dollar value or complex requirements.

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Step 1 Fixed-Price Types of Contracts FAR 52.244-1

Determine if the dollar value is substantial. For fixed-price types of contracts, other than firm-fixed price or fixed-price with economic price adjustment, FAR 52.244-1, Subcontracts (Fixed-Price Contracts), sets forth that a contractor must notify the contracting officer reasonably in advance of entering into any subcontract if the contractor does not have an approved purchasing system and if the subcontract:
Is proposed to exceed $100,000; Is one of a number of subcontracts with a single subcontractor,

under the contract, for the same or related supplies or services that in the aggregate are expected to exceed $100,000; or
Results from unpriced modifications to the contract.

Cost-Reimbursement Types of Contracts FAR 52.244-2

For cost-reimbursement types of contracts, FAR 52.244-2, Subcontracts (Cost Reimbursement and Letter Contracts), sets forth that a contractor must notify the contracting officer reasonably in advance of entering into any subcontract if the subcontract:
Is

one of the following types: cost-reimbursement, time-and-materials, or labor-hour (the contractor may enter into these subcontracts without consent if it has an approved purchasing system, but advance notification is still required); tal estimated cost of the contract under which it would be awarded (the contractor may enter into this subcontract without consent if it has an approved purchasing system, but advance notification is still required);

Is fixed-price and exceeds either $25,000 or five percent of the to-

(For DoD, Coast Guard, and NASA, the fixed-price amount is the greater of the simplified acquisition threshold or five percent of the total estimated cost of the prime contract.)
Has experimental, developmental, or research work as one of its

purposes; or
Is to be awarded under a non-facilities prime contract and provides

for the fabrication, purchase, rental, installation, or other acquisition of special test equipment valued in excess of $25,000 or of any items of facilities.

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CONSENT TO SUBCONTRACTS

Consent to Advance Notifications and Ratifications

When advance notification is required, a contractor is required to obtain a contracting officers written consent before placing any subcontract. When a contracting officer ratifies (after the fact), in writing, consent to a subcontract, such ratification constitutes the same consent as if it had been given before the fact. Determine if the requirement is complex. ment is considered complex if it is for: A subcontracted require-

Step 2

FAR 44.201-2(a)

Special test equipment valued at more than $25,000 under a

cost-reimbursement type of prime or letter contract that is not a facilities contract, whether for the fabrication, purchase, rental, installation, or other acquisition of the special test equipment;
Experimental, developmental, or research work;

FAR 44.201-2(c) FAR 44.201-3

A major system, subsystem, or components; Mortuary services, refuse services, or the shipment and storage of

personal property when an agency requires prior approval of subcontractor facilities; or


A subcontract selected by the contracting officer as needing spe-

cial surveillance. A contractor may be required to submit an advance notification to subcontract for complex requirements not otherwise specified in a subcontracts clause, but only if such a requirement for advance notification is set forth in a contracts schedule. 10.3 Obtain and Review Advance Notifications FAR 52.244-1 FAR 52.244-2 Step 1 Check advance notifications for content requirements. FAR Subcontract clauses at FAR 52.244-1 and -2 not only require an advance notification, but also outline content requirements for it. These content re-quirements are listed in Exhibit 10-1. Use this checklist to make sure that an advance notification meets all of the content requirements. In obtaining and reviewing advance notifications and identifying EEO required clearances, four steps must be taken.

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Assessing the Adequacy of An Advance Notification to Subcontract


A No answer to any question on this list indicates that you do not have all the required content information, as described in paragraph (c), FAR 52.244-1, Subcontracts (Fixed-Price Contracts) (FEB 1995) and paragraph (b)(2) of FAR 52.244-2, Subcontracts (Cost-Re-imbursement and Letter Contracts) (FEB 1997). YES N/A Does the notification describe the supplies or services to be subcontracted? Does the notification identify the contract type of the proposed subcontract? Does the notification identify the proposed subcontractor, with an explanation of why and how it was selected, including the competition obtained? Does the notification identify the proposed subcontract price, accompanied by the prime contractors cost or price analysis? If required by the contract, does the notification contain the subcontractors accurate, complete, and current cost or pricing data? If required by the contract, does the notification include a Certificate of Current Cost and Pricing Data? If required by the contract, does the notification include the subcontractors Disclosure Statement or Certificate relating to Cost Accounting Standards? Does the notification include a memorandum of negotiation, if appropriate, from the prime contractor for the proposed subcontract? Exhibit 10-1 (continued on next page) NO

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CONSENT TO SUBCONTRACTS

Assessing the Adequacy of An Advance Notification to Subcontract

YES N/A Does this memorandum of negotiation reflect: The principal elements of any subcontract price negotiations? The most significant considerations controlling the establishment of initial or revised prices? The reason why cost or pricing data were or were not required? The extent, if any, to which the prime contractor did not rely on the subcontractors cost or pricing data in determining the price objective and in negotiating the final price? The extent, if any, to which it was recognized in the negotiation that the subcontractors cost or pricing data were not accurate, complete, or current? The resulting action, if any, taken by the prime contractor and subcontractor as a result of any defective pricing? The effect of any defective pricing data on the total price negotiated? The reasons for any significant difference between the prime contractors price objective and the price negotiated? If incentives were used in the subcontract, a complete explanation of the incentive fee or profit plan?

NO

Exhibit 10-1 (continued)

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Step 2

If all required information is not received, request revisions or additions to the advance notification. A review of the content requirements as referenced in Step 1 may surface:
Any obvious mistakes or inconsistencies, Omissions, or Other deficiencies.

If so, request either a revised notification or a modification that clarifies mistakes or inconsistencies, adds omitted material, or otherwise corrects deficiencies in the original notification. Request a modification only when a few corrections are required. Otherwise, return the original notification and request a revised one that conforms to content requirements. Step 3 Check advance notifications for any EEO clearance requirements. One piece of information contained within an advance notification is the proposed subcontract price. This, along with other notification content requirements, determines if an EEO clearance is required for the subcon-

Determining When EEO Subcontract Clearances Are Required


IF The prime contract contains: FAR 52.222-28, Equal Opportunity Preaward Clearance of Subcontracts. AND The proposed subcontract price is: 1. For a first-tier subcontract, and 2. Equals or exceeds $1 million. THEN EEO clearance is required.

tract. Refer to the decision chart in Exhibit 10-2.

Exhibit 10-2

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CONSENT TO SUBCONTRACTS

Step 4

Request the EEO clearance. Your agency must request the EEO clearance from the appropriate regional office of the Department of Labors Office of Federal Contract Compliance Programs. A contracting officer may not consent to a subcontract unless fully within the conditions shown on Exhibit 10-2, and the prime contractor cannot award it unless this clearance is obtained. After determining that all advance notification content requirements have been met, examine the notification for any FAR prohibitions requiring the contracting officer to withhold consent to the subcontract. These prohibitions are shown in a checklist format in Exhibit 10-3.

10.4 Determine If FAR Prohibits Consent FAR 9.405-2 FAR 44.203

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FAR Prohibitions Against Subcontracting


A Yes answer to any question on this list indicates that the FAR prohibits consent to a subcontract. If your checkmarks appear in the No or N/A columns, other discretionary factors must be considered by the contracting officer before making a determination on whether to consent to a subcontract. See FAR 44.202-2 and Exhibit 10-4. YES N/A If the subcontract is for experimental, development or research work performed under a cost-plus-fixed-fee agreement, does the fee exceed 15 percent of the subcontracts estimated cost? If the subcontract is for architect-engineering services for public works or utilities, does the estimated cost and fee for the production and delivery of designs, plans, drawings, and specifications exceed 6 percent of the estimated cost of construction? If the subcontract is for another cost-plus-fixed-fee arrangement, does the fee exceed 10 percent of the subcontracts estimated cost? If the subcontract is for a cost-plus-incentive-fee or cost-plusaward-fee subcontract and a deviation has not been obtained, does the fee(s) exceed 15 percent of the estimated cost for experimental, developmental or research work or 10 percent of the estimated cost for other requirements? Are payments under the subcontract to be made on a cost-plus-apercentage-of-cost basis? Does the subcontract obligate the contracting officer to deal directly with the subcontractor? Exhibit 10-3 (continued on next page) NO

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CONSENT TO SUBCONTRACTS

FAR Prohibitions Against Subcontracting

YES N/A Does the subcontract make the results of arbitration, judicial determination, or voluntary settlement between the prime and subcontractor binding on the Government as well?1 Does the subcontract, in consonance with other subcontracts under a prime contract, show a repetitive or unduly protracted use of costreimbursement, time-and-materials or labor-hour contracts? Is the proposed subcontractor on the List of Parties Excluded From Procurement and Nonprocurement Programs?2 If the subcontract requires an EEO clearance (see Exhibit 10-2), has it been refused clearance by the appropriate regional Office of Federal Contract Compliance Programs? If the proposed subcontract contains a requirement for jewel bearings and related items, is a clause requiring that these items be obtained from the William Langer Plant absent from the subcontract?

NO

You are not to answer yes to this question merely because the subcontract contains a clause giving the subcontractor the right of indirect appeal to an agency board of contract appeals, as long as this clause does not attempt to obligate the contracting officer or the appeals board to decide questions that do not arise between the Government and the prime contractor or that are not a matter for dispute under FAR 52.233-1, Disputes.
2

The contracting officer has some leeway to consent to a subcontract award to a firm on this List. See FAR 9.405-2, FAR 52.209-6 and DFARS 209.405.

Exhibit 10-3 (continued)

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10.5 Determine to Withhold Consent for Other Reasons or Establish Conditions for Consent FAR 44.202-2 Step 1

After examining a contractors advance notification to subcontract as detailed in 10.3 and after discarding all FAR consent prohibitions as inapplicable, you are ready to consider whether consent would be appropriate and to make a recommendation to the contracting officer. Follow three steps in doing so.

Research the appropriateness of providing consent. Base your research on the considerations listed in FAR 44.202-2 and in Exhibit 10-4. Provide your recommendation promptly to the contracting officer on the evaluation of the contractors advance notification to subcontract. A delay in acting on this notice may constitute, depending on the terms of the contract:
An excusable delay for additional time or compensation, or Implied consent, since no refusal to consent was provided.

Step 2

Pay close attention to previous commitments the prime has made that affect subcontracting. Notice the first item in Exhibit 10-4. The clause at FAR 52.219-14, Limitations on Subcontracting, is only required for prime contracts that were awarded as a small business set-aside or are Section 8(a) procurements. For nonconstruction services, this clause requires that at least 50 percent of the cost of performance must be expended for employees of the subcontractor. Notice the third item in Exhibit 10-4. The term make-or-buy program is that part of a contractors written plan for a contract that identifies:
Major items to be produced or work efforts to be performed at the

primes own plant, and


Those items to be subcontracted.

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CONSENT TO SUBCONTRACTS

Discretionary Factors in Consenting to Subcontracts


The contracting officer may take the following discretionary factors into account in deciding whether to consent or withhold consent to a subcontract. The subcontracts effect on the total amount of subcontracting when the clause at FAR 52.219-14, Limitation on Subcontracting, is included in the prime contract. The necessity for subcontracting. The consistency of the subcontract with the prime contractors make-or-buy program. The availability of special test equipment or facilities from Government sources that would otherwise be procured under the subcontract. The technical justification for the selection of specific supplies, equipment, or services. The prime contracts requirements concerning small, small disadvantaged, and women-owned small business subcontracting, including, if applicable, its subcontracting plan, as discussed in FAR Subpart 19.704, Subcontracting plans requirements. The adequacy of price competition or justification for its absence. The contractors assessment and disposition of alternate proposals from subcontractors, if offered. The basis for selecting the particular subcontractor and determining its responsibility. The adequacy of the contractors cost or price analysis. Whether the contractor obtained accurate, complete, and current cost or pricing data, including any required certifications. The type of subcontract given the risks involved and current policies on the use of that type of contract. The adequacy of consideration to the Government for any proposed subcontract involving the use of Government-furnished property or facilities. The adequacy and reasonableness with which the contractor has translated prime contract technical requirements into subcontract requirements. Compliance with applicable Cost Accounting Standards for awarding the subcontract as discussed in FAR 30.201-2, Types of CAS Coverage.

Exhibit 10-4

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Make-or-Buy Considerations FAR Subpart 15.7 DFARS 215.704

Although there are some exceptions, prospective prime contractors are generally required to submit make-or-buy programs for negotiated acquisitions with an estimated value of $5 million or more. In DoD procurements, the requirements for a formal make-or-buy program applies to actions with a minimum value of $1 million. When the Government obtains a make-or-buy program, it is required to give primary consideration to the effect of the proposed program on price, quality, delivery, and performance, including the technical or financial risk involved. Approval of a make-or-buy program involves careful consideration in the preaward phase of an acquisition and constitutes an endorsement of the way the prime contractor intends to manage contract performance. Any divergence from that program warrants an inquiry.

Reasons to Examine Variations From Make-or-Buy Programs


When a make-or-buy program has been incorporated into a contract, it is an enforceable contract requirement. When FAR 52.215-21, Changes or Additions to Make-or-Buy Program, is in a contract, the Government may be entitled to an equitable reduction in contract price for any alteration to an agreed-to make-or-buy program. If a program was an evaluation factor for award, allowing changes that would be less beneficial to the Government may prejudice the rights of others who competed for the acquisition. If a program was not incorporated into a contract, it may be necessary to review and agree on the program during an acquisitions postaward phase. Exhibit 10-5 summarizes why.

Exhibit 10-5

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CONSENT TO SUBCONTRACTS

Small Business Subcontracting FAR 19.702 FAR 19.704 DFARS 219.702 DFARS 219.704

Notice the sixth item in Exhibit 10-4. Small, small disadvantaged, and women-owned small business subcontracting plans are, with few exceptions, required in contracts that are:
Expected to exceed $500,000 ($1,000,000 for construction), or Otherwise offer a substantial potential for subcontracting.

The DoD is participating in a test program through the end of fiscal year 1998 in which contractors will prepare corporate, division or plant-wide subcontracting plans that are comprehensive of all contracts in those business units. Reasons for closely observing subcontracting inconsistencies with these

Reasons to Examine Variations From Subcontracting Plans


When FAR 52.219-16, Liquidated DamagesSubcontracting Plan, is included in a contract, the Government may be entitled to monetary damages for the prime contractors divergence from its Small, Small Disadvantaged and Women-Owned Small Business Subcontracting Plan. Examining inconsistencies fulfills other responsibilities you have in monitoring these programs (see FAR 19.706, Responsibilities of the cognizant administrative contracting officer). As with a make-or-buy program, if a subcontracting plan were an evaluation factor for award, condoning changes that would be less beneficial to the Government may prejudice the rights of others who competed for the acquisition. The DoD can also utilize an incentive provision to encourage aggressive subcontracting to small, small disadvantaged, and historically black colleges and universities and minority institutions. Under this provision, a contractor can earn incentive payments (of up to 10 percent) of the excess subcontracting actually done with such organizations. This incentive may not be used in contracts with contractors who have comprehensive subcontracting plans. (see DFARS 252.219-7005) plans are summarized in Exhibit 10-6.

Exhibit 10-6

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Step 3

Obtain assistance in the evaluation from Government support personnel. Support personnel who may provide valuable assistance in deciding the appropriateness of factors listed in Exhibit 10-4 include:
Auditors, Pricing specialists, and Technical experts.

Use their expertise especially when you have cause for concerns but do not have enough information to base a reliable judgment on your concerns. 10.6 Negotiate Subcontracting Changes or Corrections Assume you have contacted the contractor regarding missing or inconsistent data, and you now have all the information your contract requires for the submission of a consent notification. Three steps should be taken in coming to a conclusion about consent. Distinguish between legitimate concerns and micromanagement. You may be in complete accord with the primes subcontracting decision. In fixed-price types of contracts, you normally would be. The prime has assumed most of the risk of successful contract performance under these arrangements. Micromanaging them is not appropriate. Voice subcon-tracting concerns about fixed-price types of contracts only when there is an obvious cause for them. For instance, when you discover that the subcontractor is on the List of Parties Excluded From Procurement and Nonprocurement Programs. Concentrate negotiation efforts on the extent of subcontracting competition. Competition at the subcontractor level should be strongly encouraged. The Office of Federal Procurement Policy (OFPP) recommends that agencies develop procedures to reach this goal in specific areas. Exhibit 10-7 summarizes these recommendations. In the process of consenting to subcontracts, you can strongly support the goals for the second and fourth items on Exhibit 10-7. It is useful, however, to keep the other goals in mind when asked to participate in early acquisition planning.

Step 1

Step 2

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CONSENT TO SUBCONTRACTS

Ways to Increase Subcontractor Competition


Plan for subcontract competition early in the acquisition process. Emphasize the importance and benefits of competition in subcontracting and consider it in the evaluation and source selection process. Increase emphasis on Contractors Purchasing Systems Reviews. Direct prime contractors to seek second sourcing on key noncompetitive subcontract components in major contracts where a potential for competition exists. Use award fee provisions, where appropriate, to motivate prime contractors to increase competition for subcontracts. Exhibit 10-7

Step 3

Voice legitimate concerns. Do not hesitate to voice legitimate concerns. For instance, you would have a legitimate concern if the submission of cost or price analysis information shows that an estimate of cost or price for a subcontract was based on a primes own estimate because no offers were received from prospective subcontractors. Query your technical experts about the contractors estimate. Most certainly query the contractor about what appears to be a lack of competition. Have the contractor document, if the case, that an attempt to solicit subcontracting competition produced no results and why. Voicing concerns based on suspicions or baseless information does not encourage an effective business relationship. A contractor may consider it to be a form of harassment, one that obstructs its authority to manage its own business. Where changes are required or additional information is necessary to support a consent decision, then so inform the contractor in a businesslike way.

10.7 Document the Decision

Document the consent or nonconsent decision in the contract file. As for other aspects of contract administration, you must back up the decision for your actions so there is no second-guessing at some later date, if problems should arise that cast doubt on the wisdom of the decisions you made or recommended. Use the checklists provided in this chapter as means for documenting the decision process.

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FAR 44.202-1(b)

Document the decision to the prime contractor. There are only a few rules regarding this documentation:
It must be prompt, It must be in writing, It can include a requirement for changes or corrections.

Those are the requirements, but you might include suggestions for the primes consideration. For example, in consenting to a subcontract, you could voice concern over any noncompetitive aspects of the subcontract, even though price analysis appeared adequate. You might include suggestions for enhancing competition, perhaps with the help of your agencys Competition Advocates Office. 10.8 Monitor to Ensure Subcontracts Are Awarded Properly When the Government exercises its right to inspect a primes books and records, compliance with contract clauses requiring the Governments consent to subcontracts should be among an auditors checklist of items. There is one instance when close and timely monitoring of subcontract consent clauses is most appropriate. That is, when the Government has refused consent to a subcontract and an unusual period of time elapses without any feedback from the prime. In this case, informal inquiries will usually get to the cause and indicate if and when further action is necessary. There may be legitimate reasons for a lack of feedback. The prime may have decided to perform the work originally earmarked for subcontracting, or the prime may just be ignoring subcontract consent requirements. In this case, specific monitoring efforts are justified.

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LIMITATION OF COSTS
COST PLUS WHATEVER A DIFFERENT WORLD Among the most interesting facets of a contract administrators responsibilities are those associated with the administration of cost-reimbursement types of contracts. Dealing with cost-pluswhatever arrangements was, as Eric had come to believe, a different world. Most of Erics contracts were firm-fixed price, but he had several cost-reimbursement arrangements to administer. These represented performance requirements that were difficult to describe in other than reasonably well-written statements of work. Among these contracts, one was a cost-plus-fixed-fee arrangement that had been near the top of Erics agenda for the past 48 hours. He was working on it now. It was a cost-plus-fixed-fee contract with Haverford Laboratories for a research study on environmental pollution controls, including a required worldwide search for bibliographic resources on the subject of pollution-induced illnesses. The estimated cost of performance was $350,000, exclusive of fee, and work had been in progress for about 12 months. So far as he could determine from progress reports and talking with the requirements side of the house, Haverford had been performing well. Erics attention had been drawn to Haverfords effort when Joanne forwarded a letter she had received three days ago from Casey Maynard, the contractors chief financial manager. She asked her contract administrator to check it out. Maynard had sent the contracting officer, in part, the following: Under our contract, we are required to inform you in writing when we expect to reach an expenditure level over the next 60 days, when added to all previously incurred cost, that will exceed 75 percent of the estimated cost of performance (FAR 5.232-20 - Limitation of Cost). As of this date, we have expended about 87 percent of the estimated cost and, given our ongoing effort, will reach the 100 percent mark over the next month. Our expenditure rate for the past month rose rather precipitously as a result of unforeseen circumstances encountered by our team of professional bibliographic researchers. An intended one-week trip to London by half of the team and a similar trip to Moscow by the other half resulted in unexpected difficulties attributable to translation problems and breakdowns in the transmission of electronic databases. What had been planned as oneweek trips developed into at least two-week trips, with all the associated costs of travel, per diem, salaries, and the like. Our accounting system reports to me on a monthly basis concerning incurred costs for the preceding month. As of our last voucher, I had no indication, of course, of any anticipated cost growth as it happened over the past month. Quite clearly, the increase in our rate of expenditure was the result of conditions beyond our control. 11-1

LIMITATION OF COSTS

Given what has occurred, and considering what is yet to be done under our contract, we estimate that completing performance will require an additional $70,000 which, when supplemented by our current 6 percent fee, approximates $74,200. We stand ready to be advised by you in this matter, and trust that you will understand the circumstances that have caused cost growth to occur. Okay, Eric thought, what do I do with Haverford Laboratories? It appeared from the companys letter that there was enough money left for about one month of effort. And while Casey Maynard sounded almost a bit nave, the contract administrator had the strong feeling that the companys next letter might indicate that the money had run out and the contractor was under no further obligation to perform. Another set of questions for himself before he dug into it.
How come we get a letter at the 87-percent level when reporting was required at the 75-

percent level?
Aside from what may have happened, do we have a case of breach here? Better check with the requirements people. Theyre not going to take lightly to all this.

Theyll be anxious to know whats in an additional $70,000, plus fee, to complete performance.
Contact finance and payment. Whats the status of Haverfords vouchers? What does

Joanne know about them?


Bottom line: What alternatives are open to us?

Much to do as Eric picked up the phone and tapped in the number of the agencys project leader for the study.

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 11.1 11.2 Determine if a contractor is approaching the estimated cost or limit of funds allotted, as reflected in an estimated amount in a cost-reimbursement type of contract. Meet with contract administration team members, including requiring activity representatives and/or a contracting officers technical representative to examine and resolve cost limitation problems. Resolve cost limitation problems by making appropriate choices among possible solutions. Deobligate and remove excess funds in the event of a cost underrun. Know the steps to take in responding to situations of cost overruns or funding depletions on cost-reimbursement types of contracts.

11.3 11.4

11-3

LIMITATION OF COSTS

INTRODUCTION TO LIMITATION OF COSTS


Contract Funding Requirements FAR 32.703-1 DFARS 232.703-1 DFARS 232.703-70 If a cost-reimbursement arrangement is incrementally funded, funds are obligated to cover the amount allotted and any corresponding increment of fee. Although the general policy is that fixed price contracts shall be fully funded, they may be funded incrementally if:
the contract is funded with an R&D appropriation, and either Congress has incrementally appropriated program funds, or the head of contracting activity approves the practice for base ser-

If a contract is fully funded, funds are obligated to cover the price or target price of a fixed-price type of contract or the estimated cost and fee, if any, of a cost-reimbursement type of contract.

vices or hazardous/toxic waste remediation contracts. In any event, such fixed price contracts shall be fully funded as soon as practicable after sufficient funds are available. Limitation of Cost or Funds FAR 32.705-2 DFARS 232.705-70 DFARS 252.232-7007 For incrementally funded fixed price contracts, the funding limitation concept is termed a limitation of the Governments obligation. Basic Differences in Fixed-Price and CostReimbursement Arrangements Under a fixed-price type of arrangement:
The contractor bears the greater cost risk. The contractor guarantees completion of the job or work. Overruns are the contractors to pay.

An important part of the backbone of cost-reimbursement contracting is the function served by limitation-of-cost coverage for fully funded contracts and limitation-of-funds coverage for incrementally funded contracts. Limitation-of-cost and limitation-of-funds coverage provides protection for both the Government and a contractor in cost-reimbursement arrangements, a protection not needed under fixed-price types of contracts.

Under a cost-reimbursement type of arrangement:


The Government bears the greater cost risk.

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The parties agree that performance of the work will not cost the

Government more than the negotiated cost estimate, exclusive of any fee(s).
The contractors promise is to use its best efforts to perform the

work within the negotiated cost estimate, and this promise is contingent on performance within this estimate.
There is no obligation of the contractor to continue performance

when costs exceed the negotiated cost estimate or funding level in the contract unless and until the Government provides additional funding and a revised estimated cost of performance.
There is no obligation by the Government to pay for any work the

cost of which exceeds the negotiated cost estimate. Caution Concerning Anti-Deficiency No officer or employee of the Government may create or authorize an obligation in excess of available funds. Government personnel encouraging a contractor to continue performance in the absence of funding may be subject to a civil or criminal penalty (Revised Statutes, Section 3670 (31 U.S.C. 1341). Additional Cautionary Note: Military construction contracts, other than those for environmental restoration at installations being closed or realized or those specifically approved for environmental work, may not be of a cost plus fixed-fee type when funded under an annual military construction appropriations act. Steps in Performance The steps in monitoring and controlling costs through cost-limitation provisions are charted on the next page. Following the flowchart, each step is discussed in detail.

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LIMITATION OF COSTS

STEPS IN LIMITATION OF COSTS

1. Determine if the contractor is approaching the estimated cost or allowed limit of funds.

No Nearing the limit? Continue monitoring.

Yes 2. Meet with Government contract administration team members.

Possible Solutions 3. Resolve the problem. 1. Provide additional funding and/or time to complete the contract. 2. Downscope the work to fit remaining funds. 3. Defer a decision until factfinding. 4. Terminate the contract. 5. Take no action (if the contract is on schedule).

4. Deobligate excess funds, if any.

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LIMITATION OF COSTS
11.1 Determine If Contractor Nearing Estimated Cost or Limit of Funds To monitor and control costs and stay within the funding limitations of a cost-reimbursement type of contract, you must be able to determine if a contractor is approaching:
The negotiated cost estimate specified in a contracts schedule, or The limit of allotted funds.

Contractual Coverage

A cost-reimbursement arrangement may contain either or both of the following clauses:


FAR 52.232-20, Limitation of Cost, for a fully funded contract,

and
FAR 52.232-22, Limitation of Funds, for an incrementally funded

contract. Whether or not they provide for the payment of a fee, cost-reimbursement arrangements for consolidated facilities, facilities acquisition, or facilities use must contain the clause at FAR 52.232-21, Limitation of Cost (Facilities). Contracting Officer Responsibility When learning that a contractor is approaching the estimated cost or the limit of allotted funds, a contracting officer must promptly obtain funding and programming information pertinent to the continuance of work and notify the contractor in writing that:
Additional funds have been allotted, or the estimated cost has been

increased, in a specified amount;


There will be no further funding of the contract and the contractor

should submit a proposal for an adjustment of fee, if any, based on the percentage of work completed relative to the total work called for under the contract;
The contract is to be terminated; or The Government;

Is considering whether to allot additional funds or increase the estimated cost,

11-7

LIMITATION OF COSTS

Recognizes the contractor is entitled to stop work when the funding or cost limitation is reached, and Reaffirms that any performance done beyond the funding or cost limitation will be at the contractors own risk.

Contractor Responsibility FAR 52.232-20 FAR 52.232-22

A contractor is usually the first to become aware of any problem concerning the amount of available funds, especially those that remain for the performance of work. Under the clauses at FAR 52.232-20 and -22, the contractor has responsibility to notify the contracting officer, in writing, when it has reason to believe one or the other of the following:
That the total cost for performance expected to be incurred within

DFARS 252.232-7007 DFARS 232.704-70

an expressed time period (set forth in the clause) when added to all costs previously incurred will exceed an expressed percentage (also set forth in the clause) of the estimated cost, or
That the total cost for performance, exclusive of any fee(s), will be

either greater or substantially less than had been previously estimated. For incrementally funded fixed price contracts, the contractor has an obligation to report to the contracting officer when total cost to the Government will reach 85 percent of the allotted amount within the next 90 days. The concepts of and processing for these types of contracts are similar to incrementally funded cost reimbursement type contracts. As a part of this notification, the contractor must provide a revised estimate of the total cost of performance. Consequence of Contractor Notification If a contractors notification specifies that the estimated cost will not permit the completion of performance until the Government increases the estimated cost, then any contractor incurred costs before the increase that are in excess of the initially estimated cost:
Are to be treated as allowable To the same extent as if incurred after the increase in the estimated

cost. Obtain Input From Other Government Representatives Relying solely on a contractors indication of cost problems could create some last-minute difficulties. Effective monitoring should provide early warnings when cost or available funds are approaching a specified percentage of cost under limitation of cost or funding clauses.

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Receiving input from other Government representatives is particularly important when it may alert the contract administration function to problems that otherwise might have gone unnoticed and caused a work stoppage prior to the completion of performance. Early warning systems provide the contract administrator with the ability to:
Verify a contractors notification under limitation-of-cost or limi-

tation-of-funds clauses, and


Prohibit a contractor from performing without funding.

11.2 Meet With Government Contract Administration Team

When a problem of limitation of cost or the availability of funds is identified, you will need to meet with involved Government officials. The purpose of this meeting, reinforcing what has been mentioned earlier, is to discuss:
Alternatives available under a contracts terms and conditions; The best estimate of the requiring activity or program office con-

cerning the following:


Cost to complete the work, Time required to complete the work, Minimum tasks yet to be completed, and What can be accomplished within the current level of funding; and

The ability and willingness of the requiring activity or program of-

fice to provide sufficient additional funds to cover a cost overrun. This meeting should result in:
Funding and program information pertinent to the contractors

continuance, and
Sufficient information to determine an appropriate course of ac-

tion. 11.3 Resolve the Problem Based on the information provided by the contractor and other Government officials, select the most appropriate course of action. For instance:

11-9

LIMITATION OF COSTS

If the course of action is to: Provide extra funds or time.

Then perform these steps Meet with the contractor to review the statement of work and verify that the contractor and the Government understand the remaining tasks or work. Negotiate the contractors proposal for additional cost and/or time to complete performance. Establish the amount of additional funds required and, if necessary, a new delivery schedule. Obtain clearance from the finance office to obligate additional funds.. Determine what consideration is due the Government (frequently completion of the contract with no increase in fee(s), if a fee-bearing contract). Prepare and execute a supplemental agreement.

Downscope the statement of work.

Obtain the contractors proposal for an adjustment of any fee(s). Negotiate an altered statement of work and fee(s). Prepare and execute a supplemental agreement.

Defer the decision.

Either:

Allot additional funds to the contract or increase its estimated cost, or Stop work when the dollar limitation under the contract has been reached.

Advise the contractor that any work done beyond the limitation of cost or funds is at the contractors own risk.

End the contract.

Either:

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Close out the file, Terminate for default, Terminate for convenience, or

Terminate for convenience at no cost to the Government. Take no action (Expectation that limitation of cost or funding will not be exceeded). Record the decision for the contract file. Continue to monitor costs closely.

WHEN EMOTIONS RUN HIGH Erics call to Dr. Volker, the agencys project leader for the study being conducted by Haverford Laboratories, started slowly and threatened to become explosive. After exchanging amenities, the contract administrator informed the project leader that the contractor was at the 87-percent expenditure level and projected a cost overrun of 20 percent. He added that there would be, in all likelihood, a need to extend Haverfords delivery schedule. Dr. Volkers reaction was unexpected. What! was his initial response. And then he quickly added more. I dont believe it, he started. When we cut the deal almost a year ago, Haverford swore up and down that the probability of an overrun was zero. Ever since then, theyve been all smiles and doing decent work, but never a whisper from anyone that an overrun was in the making. Hey, if they want more money, let them print it! Our budget is down to virtually nothing. We havent got 70,000 of anything, especially dollars. How come were in this position, Eric? I thought we had the right kind of deal with the right kind of controls in place to obviate anything like this. As Volker drew a deep breath, the contract administrator interrupted. What may have been, Dr. Volker, is now all past tense. Weve got a situation staring us in the face that requires a decision of some kind, and you guys are perhaps the most important piece of the decision-making process. Hows that? interjected Volker. Aside from wishing that we had been tougher along the way with Haverford, what can we do now? What Id like to do is shut the whole thing down, take what weve gotten thus far, and then finish the work in-house. He seemed to swallow hard with that, but then added, Weve got a timetable to meet, Eric, with what Haverford contracted to do for us. In about three months, the agencys Administrator has got to face a congressional committee and the first question will probably be, What can you tell us about the report on environmental pollution controls you promised to

11-11

LIMITATION OF COSTS

deliver the last time you appeared before the committee? If the Administrators not ready for that one, Ill be landed on unmercifully. While sympathetic to the project leaders state of mind, the contract administrator tried to move their conversation in a more productive direction. We can dump all over Haverford, Dr. Volker, but lets consider the facts. Were not in a fixed-price situation here, and the contractor has incurred more costs than either of us anticipated. Assuming that those costs have been expended for legitimate, allowable purposes under the contract, theres not a whole lot we can do about that. And if we were to terminate the contractor, it would be foolish even to consider anything other than a termination for convenience. And if we do that, were faced with a set of termination procedures, the costs thereforincluding settlement expensesand the time it will take to get through it all. Those things alone will chew up the remaining dollars in the contract. Listening intently, Dr. Volker posed a question. So what do you suggest, Eric? From the tone of his voice, the contract administrator could tell that the project leader had simmered down somewhat. And if were as important at this point as you indicate, what do you require of us to set things straight? Things were looking up just a bit. I need to know the following from you, Eric began. Where is Haverford at in terms of the overall study? What do you guys require to meet the Administrators need for an appearance on Capitol Hill? Could we cut off Haverfords effort at this point, yet get what you require, and then have you folks finish it? If you dont believe that bringing it in-house to finish it is really feasible, what about having Haverford continue but under a reduced scope of work which might have them get the job done in a reasonable time? Nothings easy, is it? Volker responded. Hey look, let me get with our folks and get back to you. To which Eric added a final note, No problem with that Dr. Volker, but do it within the next 24 hours, because Ive got to brief my contracting officer before the close of business tomorrow. With that, the phones clicked at both ends. 11.4 Deobligate Excess Funds After a contract is completed and you find provided funds exceeded the amount needed:
Informally notify the contractor of the Governments intent to re-

move excess funds from the contract.


Obtain feedback from the contractor regarding this action. Consult the requiring activity or program office and prepare a re-

vised cost estimate:


To complete the work, and To record the amount of excess funds remaining. 11-12

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Issue a unilateral modification to the contract deobligating and re-

moving the excess funds.

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CHAPTER 12

ASSIGNMENT OF CLAIMS
THE ASSIGNMENT OF WHAT? At the end of a long day, Joanne had called Eric into her office to discuss one of the agencys contracts with the Fairlington Company. Fairlington was a midsized firm and had performed well over the years in providing various types of building supplies and related hardware items. The firm was competitive in its pricing, and given the emphasis on FAR Part 12 (Acquisition of Commercial Items) over the past few years, it had expanded its distribution capability to service a wider geographic area. Currently, Fairlington had four contracts with the agency, and Joanne was the contracting officer for three of them. One of them was a one-year requirements contract for the delivery of heating and plumbing supplies to the agencys five facilities located in the Mid-Atlantic region. About six months had expired under the contract, and issued firm-fixed-price delivery orders had amounted to approximately $750,000. Each delivery order had exceeded $10,000. But all, or so it seemed, was not well with the contractor, and this was the reason for Joannes discussion with her contract administrator. Your remember the Fairlington Company, dont you, Eric? she began. His response was immediate. Sure. One of our better suppliers, Joanne. Theyve got a good requirements contract with us. I rarely hear much about them, which as things go in this business probably means theyre doing a good job. Thats what we all think, Eric, his boss said with a grimace. But as is so many times the case, its what we dont know that hurts us. The contract administrator looked perplexed. Have we a problem with Fairlington, Joanne? It just may or may not be, she replied quickly. This morning I received a Notice of Assignment from Fairlington that assigns any further payments under its requirements contract to the United Bank and Trust Company. I had no idea they were in some sort of trouble or facing financial difficulties. Did you? Eric responded unhesitatingly. Absolutely not, Joanne! If its true, it comes as a total surprise to me. Well, Joanne continued, I want you to look into this for me, and lets see what gives. Leaning forward, she gave Eric the Notice of Assignment from Fairlington. I want you to gather whatever the facts might be, she told him, so that if the assignment of payments is to be made we can properly document the contract file. With that, the contracting officer asked him to report back over the next day or so, and Eric returned to his office. Sitting at his desk and having read the companys Notice of Assignment, Eric mumbled to himself, What is there in the strange and unexpected world of contract administration that doesnt

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ASSIGNMENT OF CLAIMS

cross my desk every time I turn around? His answer was to sigh a bit, read the notice again, and call for Fairlingtons contract file. In examining the contract file, Eric found that FAR Part 12 had been used as the basis for the buy, and the requirements contract had been negotiated under FAR Part 15 (Contracting By Negotiation). In looking for any coverage concerning the assignment of claims, he noticed that the contract contained the terms and conditions set forth under FAR 52.212-4 (Commercial Terms and ConditionsCommercial Items). Therein, he noticed item (b), which set forth the following: Assignment. The Contractor or its assignees rights to be paid amounts due as a result of performance of this contract, may be assigned to a bank, trust company, or other financing institution, including any Federal lending agency in accordance with the Assignment of Claims Act (31 U.S.C 3727). Well, Eric said out loud, there it is. Plain as the nose on Fairlingtons face. They have the right of assignment, we have a Notice of Assignment from the contractor, and now we have to get after whats involved to protect the Governments interests. As was his style, the contract administrator committed himself to a series of questions, the answers to which he would use in getting back to his boss sometime over the next day or so.
If this were a non-FAR Part 12 deal, it would contain the clause at FAR 52.232-23, As-

signment of Claims. That says a lot more than the current contract about assignment.
The Assignment of Claims Act seems an important driver here. Must check out FAR Sub-

part 32.8, Assignment of Claims, to see what it says. Must determine if the Notice of Assignment is properly executed.
Whoa! We have a commercial items deal here under FAR Part 12. Wonder what com-

mercial practice is in the matter of the assignment of claims?


Note that the contracts payment clause is a standard one (Payment shall be made for

items accepted by the Government that have been delivered to the delivery destinations set forth in the contract.) Okay ... so were not involved with advance or installment payments. I guess that helps keep it cleaner for any assignment of claims. Yet again, the contract administrator had his work cut out for him.

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 12.1 12.2 12.3 12.4 12.5 Determine if the assignment is permitted by a contract. Determine if the assignment request is proper. Determine if an assignment already exists. Execute and return an assignment. Approve the release of an assignment. Review and approve a contractors request for the assignment of contract payments.

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INTRODUCTION TO ASSIGNMENT OF CLAIMS


Assignment of Claims FAR 32.801 Assignment of claims means the transfer or making over by the contractor to a bank, trust company, or other financing institution, as security for a loan to the contractor, of its right to be paid by the Government for contract performance. A contractor may assign moneys due or to become due under a contract if:
The contract specifies payments aggregating $1,000 or more; The assignment is made to a bank, trust company, or other financ-

Conditions for Assignment of Claims FAR 32.802(a) - (d)

ing institution, including any federal lending agency;


The contract does not prohibit the assignment; and Unless otherwise expressly permitted in the contract, the assign-

ment:

Covers all unpaid amounts payable under the contract, Is made to one party, except that any assignment may be made to one party as agent or trustee for two or more parties participating in the financing of the contract, and Is not subject to further assignment.

Policy on Assignment of Claims FAR 32.803 DFARS 232.803(b)

Any assignment of claims made under the Assignment of Claims Act of 1940, as amended, to any type of financing institution (i.e., a bank, trust company, or other financing institution, including any federal lending agency) may thereafter be further assigned and reassigned to any such situation if the conditions in FAR 32.803 (d) and (e) continue to be met. A contract may prohibit the assignment of claims if determined to be in the Governments interest. Only contracts for personal services may prohibit the assignment of claims. Under a requirements or indefinite-quantity contract that authorizes ordering and payment by multiple Government activities, amounts due for individual orders for $1,000 or more may be assigned. When an assigned contract does not include a no-setoff commitment, the Government may apply against payments to the assignee any liability of

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the contractor to the Government arising independently of the assigned contract if the liability existed at the time notice of the assignment was received, even though the liability had not yet matured so as to be due and payable. Extent of Assignees Protection FAR 32.804 No payments made by the Government to the assignee under any contract assigned in accordance with the Assignment of Claims Act of 1940, as amended, may be recovered on account of any liability of the contractor to the Government. The assignees immunity is effective whether the contractors liability arises from or independently of the assigned contract. No set-off commitment means a contractual undertaking that, to the extent permitted by the Assignment of Claims Act of 1940, as amended, payments by the designated agency (any department or agency of the executive branch of the U.S. Government) to the assignee under an assignment of claims will not be reduced to liquidate the indebtedness of the contractor to the Government. The Director of Defense Procurement issued a determination on May 10, 1996 that DoD would not reduce or set-off any money due or to become due under a contract the proceeds of which had been validly assigned. The head of an agency or a contracting officer may, however, exclude this no set-off commitment in the case of a significantly indebted contractor. Any contract of a designated agency, except a contract under which full payment has been made, may include a no-setoff commitment unless a determination of need is made by the head of the agency in accordance with the Presidential delegation of authority of October 3, 1995, and after such determination has been published in the Federal Register. Use of a no-setoff provision may be appropriate:
To facilitate the national defense, In the event of a national emergency or natural disaster, or When its use may facilitate private financing of contract perfor-

Use of No-Setoff Commitment FAR 32.801 DFARS 232.803(d)

Conditions for NoSetoff Commitment FAR 32.803(d)

mance. When an offeror is significantly indebted to the U.S., a contracting officer should consider whether the inclusion of a no-setoff commitment is in the best interests of the Government.

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Initiating Assignment of Claims DFARS 232.806(a)

An assignment of claims can be initiated by a contractor or by a federal court. This chapter concentrates only on those assignments initiated by a contractors request. When a federal court orders an assignment, an agency does not have the discretion to act against the courts direction, and under a court order the agency would be required to lift any contractual prohibition on payment assignments. When contract performance will be in a foreign country, the prior written approval of the Contracting Officer is required for an assignment. The steps in assigning payments on a Government contract are charted on the next page. Following the flowchart, each step is discussed in detail.

Steps in Performance

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STEPS IN ASSIGNING PAYMENTS


1. Determine if assignment is permitted by the contract.

2. Determine if the assignment request is proper.

Documents proper?

No

Do not process until corrected.

Yes 3. Determine if assignment already exists.

Assignment already made?

Yes

Is there a writtten notice of release?

No Do not process.

No 4. Execute and return the assignment.

Yes

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ASSIGNMENT OF CLAIMS

ASSIGNMENT OF CLAIMS
12.1 Determine Contract Permits Assignment Before processing any requests for assigning payments, determine whether the contract addresses this issue. One of three clauses would apply:
FAR 52.212-4, Commercial Terms and Conditions - Commercial

Items.
FAR 52.232-23, Assignment of Claims. FAR 52.232-24, Prohibition of Assignment of Claims. DFARS 252.232-7008, Assignment of Claims (Overseas)

You may process a request even if the contract is silent on the issue but only when:
The contractor provides an appropriate consideration for modify-

ing the contract to include the right to assign claims, and


There is no reason to prohibit an assignment of claims.

12.2 Determine Proper Request FAR 32.805

The contractor must submit a true copy of the assignment instrument. A true copy is either a certified duplicate or a photostat (a facsimile) of the assignment instrument. Exhibit 12-1 provides a summary of conditions required to permit an as-

Conditions Permitting Payment Assignment


The assignment must be properly executed based on the character of the contractor. The assignment was made to only one party, either: A recognized financial institution, A trustee, or An agent. The assignment covers only the remaining unpaid amounts due under the contract. Remaining unpaid amounts exceed $1,000. Classified information that would be disclosed is authorized by the Contracting Officer. The assignment is not inconsistent with any other terms and conditions of the contract. signment of claims.

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Exhibit 12-1 If the contractor is organized as a: Corporation. Then the assignment must (or may, if the case): Be executed by an authorized representative, Be attested by the secretary or assistant secretary of the corporation, Be impressed with the corporate seal, or Be accompanied by a certified copy of the resolution of the corporations board of directors authorizing the signing representative to execute the assignment. Partnership. May be signed by one partner if it is accompanied by an acknowledged certification that the signer is a general partner of the partnership, and Contain the signatures of all partners unless there is a certification for the signature of a general partner. Single Proprietorship. Be signed by the owner, and Contain a signature acknowledged before a notary public or other person authorized to administer oaths. The contractor should transmit an assignment by written notice. The Government must acknowledge receipt after examining the notice. The notice of assignment should contain language similar to the sample format in Exhibit 12-2.

Written Notification.

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ASSIGNMENT OF CLAIMS

Suggested Format for Notice of Assignment


To: Contracting Officer Disbursement Officer Surety Official This has reference to Contract No._____________ dated _________, entered into between [contractors name and address] agency, name of office, and address], for and [Government

[describe nature of the contract] .

Moneys due or to become due under the contract described above have been assigned to the undersigned under the provisions of the Assignment of Claims Act of 1940, as amended, 31 U.S.C. 3727, 41 U.S.C. 15. A true copy of the instrument of assignment executed by the Contractor on [date] , is attached to the original notice.

Payments due or to become due under this contract should be made to the undersigned assignee. Please return to the undersigned the three enclosed copies of this notice with appropriate notations showing the date and hour of receipt and signed by the person acknowledging receipt on behalf of the addressee. Very truly yours, By Title [Name of assignee] [Signature of signing officer] [Title of assignee] [Title of signing officer] [Address of assignee] ACKNOWLEDGEMENT Receipt is acknowledged of the above notice and of a copy of the instrument of assignment. They were received at [Signature] [Title] On behalf of [Name of addressee of this notice] Exhibit 12-2 (a.m.) (p.m.) on , 19 .

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Number of Submissions FAR 32.805(b) FAR 32.802(e)

The contractor must submit an original and three copies of the written notice with the true copy of the assignment to each of the following:
The contracting officer or agency head, The surety of any bond issued for the contract, and The disbursing officer designated to make payment.

12.3 Determine Assignment Exists

Once an assignment of claims has been made, the financial institution, trustee, or agent may further assign (or reassign) its rights to another qualified source. Reassignment is permitted under FAR 32.232-23, Assignment of Claims. Before processing any request for reassignment, you must verify that:
The contract permits reassignment, The conditions of the reassignment are satisfactory, and The documents executing the reassignment are proper.

Verify Before Processing Request for Reassignment

Documentation to Support Reassignment FAR 32.805

The documentation to support reassignment requires the new assignee to submit:


A written notice releasing the contractor from the assignment and

restoring its rights to payment under the contract;


A copy of the release instrument itself; A written notice that the rights to payment under the contract have

been further assigned or reassigned, but only if the contract allows further assignment or reassignment; and
A copy of the actual document that further assigns or reassigns the

rights to payment under the contract, if appropriate. The assignee must provide these documents to the same officials as the original assignment:
The contracting officer or agency head, The surety of any bond issued for the contract, and The disbursing officer designated to make payment.

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ASSIGNMENT OF CLAIMS

12.4 Execute and Return Assignment

The assignment of claims is considered approved when the Government acknowledges receipt. It is very important the assignment not be acknowledged unless it is determined to be:
Complete, and Properly executed.

After completing your review of a request for assignment, dispose of the request by returning three copies of the notification and:
Indicate acceptance by signing the acknowledgement block, or Provide the requestor with the reason an acknowledgement was not

made because of:


Improper or incomplete documentation, or An assignment is not permissible.

12.5 Approve Release of Assignment

Sometimes an assignee will release the contractor from the assignment prior to full payment under a contract. The contractor can only reestablish its rights to contract payment by filing:
A written notice of release by the assigning financial institution,

and
A true copy of the release of assignment.

Separate sets of this documentation must be filed with:


The contracting officer or agency head, The surety of any bond issued for the contract, and The disbursing officer designated to make payment.

Advise the contractor of any problems with the documentation and of corrective steps it must take to reestablish its rights to payment. Upon receipt of all appropriate documentation, ensure that the payment office will make payments directly to the contractor.

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PROPERTY ADMINISTRATION
THERE COMES A TIME FOR ACTION During the past couple of months, Eric had become concerned over a few phone calls between himself and Kathy Meyers of Excel Aircraft Engines. For almost a year, Excel had been the source for 100 aircraft engines for the agencys fleet of helicopters used for travel and air surveys across an eight-state region in the western United States. The engines were being acquired as commercial items under FAR Part 12 (Acquisition of Commercial Items), using FAR Part 15 (Contracting By Negotiation) as the method of contracting. Under the precepts of acquisition reform, the agencys acquisition team had targeted the engines as a commercial item. For years, Excel had manufactured a similar type of helicopter engine and distributed it worldwide. The current contract called for engine production, testing, flight trials, and preventive and corrective maintenance based on specified cycles. The agencys customer organizations seemed satisfied, and Excel had been delivering on time and performing all required maintenance. All these were plus factors as Kathy never failed to remind Eric. But as he reminded her, he had received several reports from the agencys Government property administrator about Excels administration of Government property for the procurement. Even though bought under FAR Part 12, the agency determined it would be in the Governments interest to provide certain manufacturing tools, equipment, and a few items of special test equipment. Given some specified modifications to the enginesfor reasons of safety, reliability, and operability over long stretches of timethe agency determined that furnishing the property, which it knew was available from examining appropriate Governmentwide screening information, would cost less than requiring a contractor to modify or buy such property on its own. Since the required property was available for use, the agency saw no need for it to be bought by a successful offeror and become contractor-acquired property under the contract. Certainly there was no need for a second set of what the agency was willing to provide. The Standard Form (SF) 1447 (Solicitation/Contract/Order for Commercial Items) used for the engine procurement had included an addendum concerning Government property. This spoke to the relevance of the property for the evaluation of offerors, as well as referencing the inclusion of the clause under FAR 52.245-2 (Government PropertyFixed Price Contracts). A few terms and conditions concerning special test equipment were taken from FAR 52.245-18 (Special Test Equipment). It was the requirements of Government property terms and conditions that had occasioned the calls between Eric and Kathy. She was Excels property manager and her office was located at the front of a large facility, one covering several acres, that served as the companys property area.

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PROPERTY ADMINISTRATION

Their conversations always began with Erics repeating what he had said the previous time. Kathy, Eric Schmidt here. Yet again, Ive received a report from our property administrator about the failure of Excels property administration system to measure up to its contractual responsibilities. This the fourth call Ive made about this, and my contracting officer wants some action taken to correct Excels deficiencies. Well, yet again, Eric, Im telling you that were trying to measure up in getting after what your property administrator doesnt like. But Im working here with myself and a staff of four admin types trying to stay even with everything weve got to do. And your Government property is not the only property we have to deal with. The contract administrator had little patience with Kathys being overworked or understaffed. All that was Excels problem, and he knew that she had received a copy of the Government property administrators periodic reports. He was determined to make a clear case this time, lest she be left to infer that the Governments failure to do something might be interpreted as acquiescence to Excels practices. Whatever managerial and staffing problems you may have, Kathy, are not mine to solve, and I suggest you bring them to someones attention within Excel. My concerns are contractual. I urge you meet shortly with our property administrator and provide a written plan for the correction of cited deficiencies. If any of them are of our making, well work to correct them equitably. She sensed the seriousness in his voice. Look, Eric, if we have erred in some way ... Okay, Ill look over the property administrators reports and get after it. No wanting to end the phone call with things left up in the air, the contract administrator pressed on. Having erred, as you put it, is not what Im referring to. And then he unloaded. Im referring to existing deficiencies like ... unlabeled property ... improper storage of tools and equipment ... a computer database of Government property that doesnt square with what Excel has been furnished ... apparent commingling of our property and yours ... and then there is the matter of what may be the unauthorized use of special test equipment for some of your commercial work. Its not a pretty picture. At the other end of the line, Excels property administrator was feverishly attempting to uncover the most recent Government property administrators report she had received about a week ago. It was buried someplace on her desk, and she simply couldnt uncover it. Look, Eric, were going to get after these things. You betcha. Ill call your property administrator as soon as were finished and schedule an appointment for next week. The balls in your court, Kathy, and I suggest that it may be in Excels best interest to take some immediate action for the correction of its property administration deficiencies. With that, the phone call ended. Taking a gulp of cold coffee Eric thought to himself, I better make one more phone call before I get on to other things. Picking up the phone, he tapped in the number of the Government property administrator at Excel. He wanted to convey what had transpired.

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COURSE LEARNING OBJECTIVES


At the end of this course, you will be able to: Overall: Individual: 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 Establish reporting requirements to keep a contracting officer abreast of property administration. Monitor the delivery of Government property as stipulated in a contract. Monitor a contractors property control system and use of Government property. Determine whether to decrease property to be provided or substitute other property and the amount of any related equitable adjustment. Evaluate and document evidence indicating that Government property has been lost, damaged, destroyed, or misused. Identify the extent to which a contractor is liable for damage to Government property under a contract. Prepare written conclusions on the extent and value of damages. Issue a contractor a written demand for payment or make any equitable adjustment for the repair of property when the Government has assumed the risk. Recover or dispose of Government property at the end of contract performance. Determine contractor liability for Government property and assess appropriate amounts for losses or damage to Government property.

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INTRODUCTION TO PROPERTY ADMINISTRATION


Property Administration Property administration means those policies and procedures:
Required for use when providing Government property to contrac-

tors,
Contractors must follow in using and managing Government prop-

erty, and
The Government and the contractor must follow in reporting, redi-

stributing, and disposing of Government property. Classifications of Government Property FAR 45.101 DFARS 245.301 Definitions of key classifications of Government property are essential to understand how policies and procedures are applied.
Government property means all property owned by or leased to the

Government or acquired by the Government under the terms of a contract. It includes both Government-furnished property (GFP) and contractor-acquired property (CAP).
Government-furnished property (GFP) means property in the pos-

session of, or directly acquired by, the Government and subsequently made available to a contractor.
Contractor-acquired property means property acquired or other-

wise provided by a contractor for performing a contract and to which the Government has legal title.
Agency-peculiar property means military property that is not readi-

ly available as a commercial item.


Facilities project means a Government project to provide, upgrade

or replace facilities for use by a contractor or subcontractor.


Industrial plant equipment (IPE) means plant equipment with an

acquisition cost of $15,000 or more that is used in manufacturing, maintenance, supply, processing, assembly or research and development operations.
Mapping, charting and geodesy (MC&G) property means specia-

lized data presented in maps and graphics, or charts and publications that is in simulated, photographic, digital or computerized formats. 13-4

CHAPTER 13

Other plant equipment (OPE) means equipment, regardless of dol-

lar value, other than that categorized as IPE. Policy on Property Administration FAR 45.102
Eliminate any competitive advantage that might arise from it, Require contractors to use it in performing Government contracts, Permit its use only when authorized, Charge appropriate rentals for it when authorized for use on other

Contractors are ordinarily required to furnish all property necessary to perform Government contracts. If, however, contractors possess Government property, then agencies must to the maximum practicable extent:

than a rent-free basis,


Ordinarily require contractors to be responsible and accountable

for it, including keeping the Governments official records of it,


Require contractors to review and provide justification for retain-

ing it when not in use, and


Ensure maximum practical reutilization of contractor inventory

within the Government. Steps in Performance The steps in supplying and controlling Government property provided to contractors under the terms of a Government contract are charted on the next page. Following the flowchart, each step is discussed in detail.

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STEPS IN PROPERTY ADMINISTRATION

1. Establish property reporting requirements.

2. Monitor the delivery of property to the contractor.

3. Monitor use of the property.

4. Determine whether to decrease or substitute property.

5-8. Determine and demand consideration for loss, damage, or misuse of property.

9. Recover or dispose of property.

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PROPERTY ADMINISTRATION
13.1 Establish Reporting Requirements Request a report from a contractor only when a contract contains a requirement for submitting it. Standard reports that have a bearing on property administration include:
Reports on a contractors overall property control system, Contractor notification that property is damaged or in need of re-

pair,
Reports of any shortages, losses, damage, destruction, or misuse,

and
Periodic property audits.

13.2 Monitor Delivery of Government Property Suitability FAR 45.308 FAR 52.245-19

Ensure that Government property is made available according to the schedule. Make certain the exact property described in the contract is provided in the quantities stated in the contract. The Government is responsible for providing GFP in serviceable condition. In effect, the Government warrants that GFP will be suitable for its intended purpose except when the property is furnished as is. The contractor is put on notice that if it decides to use the property, it does so at its own risk. This does not mean, however, that the Government is completely protected from contractor claims. Unless disclaimers are very clear, the courts and boards of contract appeals have usually found them ineffective. It is not necessary that material be defective in order to be unsuitable. The standard for suitability is the industry norm. If a solicitation puts a contractor on notice that the property does not meet the industry norm and specifies the degree to which it does not, courts and boards will generally not provide relief for its substandard condition. The contractor is required to provide written notification of any GFP deficiencies. When the property is deficient, you must direct the contractor to:
Repair it, Modify it, Return it, or Dispose of it.

Suitability Standard

Repair or Replacement FAR 52.245-2(e) FAR 52.245-5(e)

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PROPERTY ADMINISTRATION

Equitable Adjustment

A deficiency in as well as late delivery of GFP can result in delay for a contractor. The contractor may be due additional time or money as a result. A contractor is required to maintain a property control system for all GFP provided to itself and subcontractors. Monitor that system and a contractors use of GFP to ensure that the contractor fulfills its responsibilities. Contractor obligations are summarized in Exhibit 13-1.

13.3 Monitor Contractor Property Control System FAR 45.104 FAR Subpart 45.5 DFARS 245.505-6 DFARS 245.505-74 DFARS 252.245-7001

Contractor GFP Responsibilities


Upon delivery of the property: Files a statement of any overages, shortages, or damages. Identifies, marks, and records property actually received. Furnishes a receipt, if necessary. Prepares a DoD Property Record for IPE (DD Form 1342)

During the contractor performance period: Maintains a property control system. Obtains all required approvals for property use. Uses the property for authorized purposes. Segregates Government property from contractor property. Maintains, repairs, protects, and preserves the property. Periodically inventories the property. Keeps required property records. Files all required reports.

When the property is no longer needed: Prepares inventory schedules. Corrects inaccurate or incomplete inventory schedules. Executes the inventory schedule certificate. Prepares a DoD Property Record for IPE (DD Form 1342)

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CHAPTER 13

Exhibit 13-1 Property Records FAR 45.105 FAR 45.505 FAR 45.505-1 DFARS 245.5 A contractors property records must provide a complete, current, and auditable record of all transactions that have occurred. These records must be:
Readily accessible to authorized Government personnel, and Safeguarded from tampering or destruction.

Some contracts may specify that the Government maintains property control records rather than the contractor.

Basic Record Information for Each GFP Item


Name and description, including National Stock Number, if known or applicable. Quantity received (or fabricated), issued, and on hand. Unit price and unit of measure. Contract number or equivalent code designation. Exact location of the GFP. Disposition after use. Posting reference and date of transaction. Exhibit 13-2 lists the basic information required for GFP records.

Exhibit 13-2

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PROPERTY ADMINISTRATION

Records of Material FAR 45.301

Some specific categories of GFP require additional or more specific information. For example:
Material. Government-furnished material (GFM) means property

that may be incorporated into or attached to a deliverable end item or that may be consumed during contract performance. It includes assemblies, component parts, raw and processed materials, and small tools and supplies.

Material Control Substitute Systems

A contractor is required to maintain custodial records for items issued to individuals for use in work under a contract. Because material is more cumbersome to control, the Government sometimes allows substitution of a record-keeping system that is more suited for material control. Cross-referenced system in lieu of stock records. This system evidences the receipt, issue, and use of Government-provided material issued for immediate consumption, and is, therefore, not entered in inventory records. The cross-referenced system may be authorized for the following material categories:
Material charged through overhead, Material under research and development contracts, Subcontracted material or outside production items, Nonstock or special items, Material produced for direct charge to a contract, or acquired for

Cross-Referenced System FAR 45.505-3(d)

installation upon receipt, and not subject to spoilage, or


Items issued from contractor-owned inventory direct to production

or maintenance. Multicontract Cost and Material Control System FAR 45.505-3(f) DFARS 245.505-3 Multicontract cost and material control system in lieu of the requirement for a physical identification system. This system depends on financial accounting rather than a physical accounting and allows:
Commingling of GFM with other material from other contracts

(but exceptions may exclude specific material, for example, on the basis of high-dollar value or short supply); and
Usage analysis to determine the reasonableness of consumption

and expenditure of GFM. 13-10

CHAPTER 13

Prerequisites for authorizing such a system are listed in Exhibit 13-3.

Criteria for Authorizing a Multicontract Cost and Material Control System


Contracting officers may authorize a multicontract cost and material control system if: It will result in: A cost savings, Improved operations, or Other benefits to the Government. It is applied to existing Government contracts only. The contractors accounting system is adequate to: Provide a clear audit trail, Reflect separate inventory balances for GFM and contractor-acquired material, Determine material cost for each material item, Calculate amounts for cost reimbursements and progress payments by applying or allocating unit costs to specific contract line-items, and Track GFM for one contract to another follow-on contract for which the same GFM is authorized, assuring credit for the initial contract. The contractors material management and accounting system (MAS) must have been reviewed and found adequate by the ACO. (See DFARS 242.7205 and DFARS 252.2427004. ) Exhibit 13-3

Records of Special Test Equipment and Special Tooling

Special test equipment and special tooling are other categories of GFP requiring additional or more specific information, like the requirement for referencing the identification number and the item to which it applies. They may also be identified and reported by a specific retention category, such as assembly tooling or critical tooling for spares.
Special test equipment and tooling.

FAR 45.101 FAR 45.505-4 DFARS 245.505-6

Special test equipment means either single or multipurpose integrated test units engineered, designed, fabricated, or modified to accomplish special purpose testing in performing a contract. Special tooling means specialized items, excluding special test equipment, that are so specialized that without modification or alteration their use is li13-11

PROPERTY ADMINISTRATION

mited to the development or production of specific items or to the performance of a specific service. Common examples of special tooling include:

Jigs, Dies, Fixtures, Molds, Patterns, and Gauges.

Records of Plant Equipment FAR 45.101 FAR 45.505-5 DFARS 245.505-5 DFARS 245.505-6 DFARS 252.245-7000

Plant equipment is another category of GFP that requires additional information.


Plant equipment. Plant equipment means personal property of a

capital nature used to manufacture supplies, to perform services, or to achieve any administrative or general plant purpose. It excludes special test equipment and special tooling, but includes general purpose test equipment and most machine tools. It can include such things as overhead cranes, compressors, generators, desks, chairs, and so forth. All contractor records of GFP classified as plant equipment, must also include:

Federal Supply Code for the manufacturer, Federal Supply Classification, and Original manufacturers model or part number.

For plant equipment that exceeds a unit cost of $5,000 or more, contractor records must also include:
Serial number and year built, if available, Government identification/tag number, and References to acquisition and disposition documents and dates.

The use of summary stock records may be authorized for plant equipment of less than $5,000, or additional record-keeping requirements may be applied to plant equipment of $5,000 or more or to specific equipment below that threshold. Make an individual determination based on what is needed for effective control, calibration, or maintenance. 13-12

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Contractors are encouraged to use DD Form 1342, DoD Property Record, to record transactions involving IPE and OPE. Special handling and control of MC&G is required. Records of Real Property FAR 45.101 FAR 45.505-7 Real property is another category of GFP that requires additional information.
Real property.

Real property means land, buildings, or other things permanently attached to or growing upon the land and buildings. Real property includes the area below the surface of the land as well as the area above the land. The latter is commonly referred to as air rights to real property. In addition to basic record-keeping information, contractors must include a record of all alterations and construction work, including sites connected with such alteration and construction. These additional records would include such things as:

Maps, Plans, Drawings, and Specifications.

FAR 45.505-7 contains guidelines for when the contractor must capitalize costs associated with real property. Records of Scrap or Salvage FAR 45.501 FAR 45.505-8 DFARS 245.601(2) Scrap and salvage are other categories of GFP that require additional information.
Scrap and salvage items. Scrap means personal property that has

no value except for its basic material content. Salvage means property that, because of its worn, damaged, deteriorated, or incomplete condition or specialized nature, has no reasonable prospect of sale or use as serviceable property without major repairs, but has some value in excess of its scrap value. Record-keeping requirements for scrap or salvage items are listed in Exhibit 13-4. The contractor may be required to perform or arrange for the performance of demilitarization of equipment or material to prevent further military or lethal uses.

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Record Requirements for Scrap or Salvage Items


Contract number, if practical, or equivalent code designation from which the scrap or salvage is derived. Nomenclature or description of salvable items or classification (material content) of scrap. Quantity on hand. Posting reference and date of transaction. Disposition. Exhibit 13-4

Noncompliant Property Systems FAR 45.104(c)

When the contractors property control system is not in compliance, notify the contractor in writing. Requirements for this notification are contained

Requirements for Property Control Deficiency Notices


Property control deficiency notices must: Be in writing, Establish a schedule for the completion of actions to correct deficiencies, Caution that a failure to correct deficiencies may result in withholding or withdrawing of system approval, and Advise the contractor that its liability for loss or damage to Government property may increase if approval is withheld or withdrawn. in Exhibit 13-5.

Exhibit 13-5

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Commingling with Other Property FAR 45.507 DFARS 245.505-3

Generally, Government property must be physically separated from a contractors own property and the property of its commercial customers. If the contractor has an approved material management and accounting system (MMAS), some degree of physical and financial co-mingling may be permitted. There are exceptions. For example, commingling of scrap or salvage items is authorized when:
Scrap of a uniform nature is produced from both Government-

owned and contractor-owned material, making physical separation impracticable,


Scrap produced from Government-owned material is insignificant

when compared to the cost of segregation and control,


Government contracts involved are fixed-price and provide for the

retention of scrap by the contractor, or


Otherwise approved by the property administrator.

Non-Government Use of Plant Equipment FAR 45.407 DFARS 245.407

Any non-Government use of active plant equipment requires the contracting officers advance written approval. Before the contracting officer can authorize non-Government use exceeding 25 percent of total use for any piece of equipment, special approvals are required. The Government may require a contractor to insure such property against loss or damage. Approval of non-government use of IPE exceeding 25% is vested at the Assistant Secretary levels of the services and the Director of DLA. These individuals may delegate approval authority to the heads of contracting activities. Rather than monitoring individual preventive maintenance tasks, you monitor a contractors program that manages and schedules those tasks. Preventive maintenance is maintenance performed on a regularly scheduled basis to prevent the occurrence of defects and to detect and correct minor deficiencies before they result in serious consequences. The contractor is responsible for the proper care, maintenance, and use of Government property in its possession. This obligation remains even when the property is in storage or is earmarked for transfer. Refer to Exhibit 13-6 for guidelines to assess the adequacy of a contractors preventive maintenance program.

Preventive Maintenance Program FAR 45.509

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Preventive Maintenance Program Requirements


Inspection of buildings at periodic intervals to assure detection of deterioration and the need for repairs. Inspection of plant equipment at periodic intervals to assure detection of maladjustment, wear, or impending breakdown. Regular lubrication of bearings and moving parts in accordance with a lubrication plan. Adjustments for war, repair, or replacement of worn or damaged parts and the elimination of causes of deterioration. Removal of sludge, chips, and cutting oils from equipment that will not be used for a period of time. Exercise of necessary precautions to prevent deterioration caused by contamination, corrosion, and other substances. Proper storage and preservation of accessories and special tools furnished with an item of plant equipment but not regularly used with it. Exhibit 13-6

Contractor Inventory Practices FAR 45.508 DFARS 245.505-14 DFARS 252.245-7001

With the approval of the property administrator, a contractor establishes the type, frequency, and procedures for performing physical inventories of Government property under its control. The type and frequency of inventory procedures should be based on:
The contractors established practices, The type and use of the Government property involved or the

quantity and dollar value of Government property involved, and


The reliability of the contractors property control system.

Unless a contractors organization is extremely small, personnel who perform the physical inventory should not be the same individuals who maintain the property records or who have physical custody of the property. Contractors are required to file a report of all Government property accountable to a contract on an annual basis during the life the contract and at the end of the period of performance.

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Contractors Final Inventory Schedule FAR 45.606 DFARS 245.603-70 DFARS 252.245-7000

At the completion or termination of a contract, accept the contractors inventory schedules only when you or a Government contract administration team member has verified that the:
Property is present at the indicated location, Property is allocable to the contract, Quantity and condition of the property are correctly stated, and

FAR 45.605-2

Contractor has tried to direct inventory items to other Government

work, or return contractor-acquired property to the original supplier for appropriate credit at the close of the contract or when it is no longer needed.
Contractors may be authorized to perform certain plant clearance

functions by the contract administration office. In the case of MC&G property, the alternatives available are limited to destruction or return of such items at the completion of the contract. Completion or Termination Inventory FAR 45.508-1 The requirement for an end-of-contract physical inventory can be waived when the property is authorized for use on a follow-on contract, but only if:
The Government has established the adequacy of the contractors

property control system, with an acceptable degree of variance, through past experience with that system; and
The contractor provides a statement indicating that:

Record balances have been transferred in lieu of preparing a formal inventory list, and The contractor accepts responsibility and accountability for inventory balances under the terms of the follow-on contract.

13.4 Determine to Decrease or Provide Substitute GFP FAR 52.245-2(b) FAR 52.245-5(b)

The contracting officer is allowed to unilaterally decrease or substitute GFP, but must bilaterally modify the contract to increase the amount of GFP. You may want to decrease GFP when the estimated need for it was overstated. This is more common with material than with other types of property. You may also need to substitute GFP when it is deficient or otherwise not suited for contract purposes.

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13.5 Evaluate and Document Evidence of Loss, Damage, or Destruction 13.6 Identify Contractor Liability FAR 45.103(a)

Evaluate and document any evidence indicating that Government property furnished under the contract has been lost, damaged, stolen, destroyed, or misused. Establish a complete record of such information for the official contract file. Unless otherwise provided by a contract, a contractor is responsible and liable for Government property in its possession. There are several standard FAR clauses that relate to the contractors loss liability for Government property. Government Property (Fixed-Price Contracts) This is the basic fixedprice clause that places liability for all risk on the contractor except for reasonable wear and tear or consumption of the property in the normal performance of a contract. Due to a shorter standard clause, this clause is sometimes referred to as the long-form clause. Alternative I of this clause further limits the contractors risk to losses:
Caused by contractor negligence, Expressly required to be insured under the terms of the contract, Covered in fact by the contractors insurance, or For which the contractor is otherwise reimbursed.

GFP (Fixed Price) FAR 52.245-2

Alternate I is generally used for negotiated contracts that are not based on adequate price competition and for service contracts on a Government installation when Government personnel also have potential access to the property. Alternate II to this basic clause is used for basic or applied research at nonprofit institutions of higher education and has a limited risk of loss stipulation essentially the same as Alternate I. GFP (Short Form) FAR 52.245-4 Government-Furnished Property (Short Form). The risk of loss is the same as the basic fixed-price clause without any of its alternates. The contractor assumes the risk of loss, except for reasonable wear and tear to the extent that property is consumed in the performance of the contract. This clause is used for fixed-price, time-and-material, and labor-hour contracts involving property that is $100,000 or less. Government-Furnished Property (Cost-Reimbursement, Time-andMaterial, or Labor-Hour Contracts). This basic cost-reimbursement type clause assigns liability to the contractor only for negligence and for risks covered under its ordinary business insurance.

GFP (Other Types) FAR 52.245-5

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Overall Responsibility FAR 45.103(f) DFARS 252.245-7001

A prime contractor providing Government property to a subcontractor is not relieved of any of its responsibility to the Government under the terms of its prime contract.

WHOS TO BLAME AND WHAT TO DO? Government property administration at Excel Aircraft Engines had been improved considerably since Erics last phone call to Kathy Meyers. The Government property administrator had met with Excels property administration team, a plan had been put in place to correct cited deficiencies, and both the contracting officer and contract administrator had closely followed the progress made by Excel. There remained things to be done, especially in the proper storage of Government property, but the company had set aside a large area for this property and devised a special bar-coding system that would ease its use and require its return. Excel had a number of subcontractors that manufactured minor components for its engines, including those being made for the Government. One of its subcontractors, Kemo Supplies and Parts, had noticed a Government-furnished milling machine at Excels production facility, and asked if it could use the machine for doing tighttolerance work on agency engine housings. The subcontractor said it would lead to less time for the work and produce a better end product. Excels production manager raised the point with Kathy Meyers, saying that the machine had met its purpose for the recent lot of engines. The property administrator agreed and made arrangements to ship the property to Kemos nearby facility. About three weeks later, Kathy received a call from Kemos production floor manager. Ms. Meyers, this is Lefty Jones at Kemo. Weve got a problem with that milling machine you folks sent us some time ago. Thought it best to call you about it. Seems that we cant get it to work quite right most of the time. I dont know whether there was damage from shipment that dislocated some internal mechanism or what, but I do know weve treated it like a baby. Right now, its a useless piece of expensive property, and if we dont do something, its gonna hold us up in delivering engine housings. What do you think about this, Ms. Meyers? Kathy took a deep breath and responded. At the moment, Lefty, I dont know what to think about it. But I appreciate your calling. Ill have to get back to you. And with that she indicated she would try to call before the end of the day. What next? she thought to herself. Sitting back and sifting things through her mind, she decided to call the Government property administrator at Excel. That seemed like a good first move. And a good move or not, it got some results. The Government property administrator advised her to think about a number of things. Among them: reviewing the liability provisions of the shipping document used to transport the machine to Kemo ...

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PROPERTY ADMINISTRATION

Kemos written property administration procedures ... Excels subcontract provisions that flowed down responsibility for Government property, more specifically any relevant risk-of-loss coverage ... and any idea she might have, or be able to gather, about the cost of repairing or replacing the machine. She was asked to call back when she had compiled her information. Thanking the property administrator, Kathy hung up and almost slumped over her desk. Oh boy, she uttered softly, when and where does it all end with this property stuff? Her first move was to call Excels purchasing department and speak with the person who negotiated Kemos subcontract. But, having learned from the past, she decided to construct a series of questions or things to ask of the purchasing agent, the answers to which, she hoped, would permit her to get back to the Government property administrator. Lets see, she thought, what do I want to ask the purchasing agent ... and why? Ive got to find out whos to blame and what to do.

13.7 Prepare Conclusions on Extent and Value of Loss or Damage FAR 45.504

In writing, estimate the value of the loss or damage to Government property by:
Obtaining proposals from the contractor to repair or replace the

damaged property, and


Obtaining Government estimates and/or audit reports.

The value of lost or damaged items usually includes depreciation. Prepare the Governments position on the loss amount and the most appropriate Government remedy for the loss or damage. Provide the contractor an opportunity to present its position and the supporting data for it. If the Governments position is that it must assume the risk of loss or damage, an equitable adjustment to the contract for property repair may be appropriate. 13.8 Issue Demand for Payment, When Appropriate The method used for the demand for equitable compensation for loss or damage when the contractor is liable depends on the contractual circumstances, but a contract deduction is most commonly used. Any demand for payment must be in writing. At the end of contract performance, or when Government property is no longer required, obtain control of the property or properly dispose of it as outlined in your agencys procedures. Methods of recovery or disposal are listed in Exhibit 13-7.

13.9 Recover or Dispose of Government Property FAR 45.603

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Disposal or Recovery Methods for Government Property


(Contractor Inventory OnlyIn Order of Priority) Purchase or retention at cost by a prime contractor or subcontractor of contractoracquired property. Return of contractor-acquired property to suppliers. Utilization within the Government through the use of prescribed screening procedures. Donation to eligible donees (but the donation of surplus property to an authorized donee is subordinate to any need for property by a federal agency). Sale (including purchase or retention at less than cost by a prime or subcontractor). Donation to public bodies in lieu of abandonment. Abandonment or destruction. Exhibit 13-7

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