Unauthorized Commitments, Ratification, and Constructive Changes

Transcription

1 Unauthorized Commitments, Ratification, and Constructive Changes A discussion of the key questions to consider, lessons learned, and best practices associated with unauthorized commitments, ratification, and constructive changes. BY GREGORY A. GARRETT and SHAW H. COHE 30 Contract Management April 2012

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3 In U.S. federal government contracts, only the authorized and warranted contracting officer may enter into, modify, and/or terminate contracts. An unauthorized commitment is an agreement that is not binding solely because the government representative who made it lacked the authority to enter into that agreement on behalf of the government. 1 Often, unauthorized commitments are made by the government s contracting officer s technical representative (COTR), program managers, financial managers, government property managers, inspectors, auditors, or other government representatives. On most occasions, unauthorized commitments are made with the best of intentions by government representatives, but not with the appropriate funding and/or authority to bind the government. Unauthorized commitments may result in additional value-added work for the government and are often considered constructive changes. However, there are and have been many instances over the years when government representatives have inappropriately and/ or illegally authorized contract changes/ upscopes for their personal financial benefit. Ratification is the act of approving an unauthorized commitment by an official who has the authority to do so. This article provides a discussion of the key questions to consider, lessons learned, and best practices associated with unauthorized commitments, ratification, and constructive changes. Unauthorized Commitments and Ratification Questions to Consider 1. What are some examples of unauthorized commitments? Answers: The COTR tells a contractor to perform work that is not authorized in the contract and the contractor performs said work. The program manager directs the contractor to perform work not required in the contract and the contractor performs the work. The contracting officer exceeds his or her authority; i.e., orders work beyond 32 Contract Management April 2012

4 the scope of the contract and/or directs work that is not appropriately funded and the contractor performs the work. The financial manager directs or improperly authorizes a contractor to perform work and the contractor does said work. Agencies should take positive action to preclude, to the maximum extent possible, the need for ratification actions. Although procedures are provided in FAR for use in those cases where the ratification of an unauthorized commitment is necessary, these procedures may not be used in a manner that encourages such commitments being made by government personnel. Subject to the limitations in FAR 1.603(c), the head of the contracting activity unless a higher level official is designated by the agency may ratify an unauthorized commitment. The contracting officer recommends payment and legal counsel concurs in the recommendation, unless agency procedures expressly do not require such concurrence; Funds are available and were available at the time the unauthorized commitment was made; and 2. What actions should the U.S. government take if it believes an unauthorized commitment has been made? Answers: Direct the contractor(s) to stop performance or delivery immediately. Determine if supplies/services have been provided to and accepted by the government. Challenge questionable actions and investigate what has occurred. Engage legal counsel for advice as needed. Consider/begin ratification process. 3. How can an unauthorized commitment be remedied? Through a formal process known as ratification. Ratification is basically a legal and regulatory process that validates or not the government s actions as legal and within the constraints of fiscal fund policy or not. 4. What are the Federal Acquisition Regulation (FAR) ratification requirements? Answers: The ratification authority in FAR 1.603(b)(2) may be delegated in accordance with agency procedures, but in no case shall the authority be delegated below the level of chief of the contracting office. Agencies should process unauthorized commitments using the ratification authority of this subsection instead of referring such actions to the Government Accountability Office for resolution. 2 Unauthorized commitments that would involve claims subject to resolution under the Contract Disputes Act of 1978 should be processed in accordance with FAR Subpart 33.2, Disputes and Appeals. 5. What FAR limitations exist in regards to ratification? The authority of FAR 1.603(b)(2) may be exercised only when: Supplies or services have been provided to and accepted by the government, or the government otherwise has obtained or will obtain a benefit resulting from performance of the unauthorized commitment; The ratifying official has the authority to enter into a contractual commitment; The resulting contract would otherwise have been proper if made by an appropriate contracting officer; The contracting officer reviewing the unauthorized commitment determines the price to be fair and reasonable; The ratification is in accordance with any other limitations prescribed under agency procedures. 6. What are non-ratifiable commitments? Cases that are not ratifiable may be subject to resolution as recommended by the Government Accountability Office under its claim procedure 3 or as authorized by FAR Subpart Legal advice should be obtained in these cases. 7. Can a government employee be held financially accountable and required to pay for an illegal, unauthorized commitment? Yes, U.S. government employees/military personnel can be held personally liable. This situation is most often seen when the action taken by the government employee/ military personnel was an illegal action. Illegal actions cannot be ratified. 8. What are the government contracting officer s authorities and responsibilities? The government contracting officer s authorities and responsibilities are outlined in FAR 1.602, Contracting Officers : Authority a. Contracting officers have authority to enter into, administer, or terminate contracts and make related determinations and findings. Contract Management April

5 Contracting officers may bind the government only to the extent of the authority delegated to them. Contracting officers shall receive from the appointing authority (see ) clear instructions in writing regarding the limits of their authority. Information on the limits of the contracting officers authority shall be readily available to the public and agency personnel. b. No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met Responsibilities Contracting officers are responsible for ensuring performance of all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the United States in its contractual relationships. In order to perform these responsibilities, contracting officers should be allowed wide latitude to exercise business judgment. Contracting officers shall a. Ensure that the requirements of (b) have been met, and that sufficient funds are available for obligation; b. Ensure that contractors receive impartial, fair, and equitable treatment; and c. Request and consider the advice of specialists in audit, law, engineering, information security, transportation, and other fields as appropriate. 9. What actions must the person who made the unauthorized commitment typically do? When one is accused of making an unauthorized commitment, he or she should submit all records and documents and provide a complete, written, signed statement of the facts, including: Why normal acquisition procedures weren t followed, Why and how the vendor was selected, A list of other sources considered, and A description of the work or products. 10. What actions can government personnel take to mitigate the potential of unauthorized commitments? Government personnel can mitigate the potential of unauthorized commitments by educating/informing all of the parties involved in the contract as to who is authorized and not authorized to direct contract changes. Government personnel should also ensure that COTRs, project managers, headquarters policy, and others use a standard disclaimer when communicating with a government contractor so they do not interpret any of your verbal or written statements as direction to change/modify the contract requirements. Constructive Changes Questions to Consider 1. What is a constructive change? A constructive change is sometimes called a change by implication and occurs when the government, by its actions, changes the contract without specifically adhering to the requirements of the Changes clause. A constructive change order has been defined as a verbal or written act or omission by the contracting officer or other authorized government official that is of such a nature that it has the same effect as a formal written change order under the Changes clause. In government contract law, the concept of constructive changes is well established. (FAR and the Notification of Changes clause ( ) both recognize this concept.) 2. Who is responsible for recognizing a constructive change? Board decisions have recognized that an informal requirement for performance of additional work, for example, is substantially equivalent to a formal requirement and must be governed by similar principles. The significance of recognizing constructive changes as a responsibility of the government representative, and its effect on the contractor, should be recognized and understood by both parties so that they may be able to identify conduct and actions that may be interpreted as constructive change orders. 3. What FAR clause addresses constructive changes? A revision to the Changes clause for construction contracts in 1968 included a provision expressly designed to address constructive changes, and was the first standard clause to do so. The present FAR provision states that written or verbal orders including directions, instructions, interpretations, or determinations by the contracting officer that cause a change within the general scope of the contract will be treated as changes under the Changes clause. As a prerequisite to the consideration of a claim based on a constructive change, however, the contractor must notify the contracting officer that he or she considers such an order to be one directing a change in the work to be performed. 4. Can erroneous interpretations lead to constructive changes? 34 Contract Management April 2012

6 Some changes to the specifications are inadvertent. Erroneous interpretations of contract requirements by the contracting officer (or his or her representative) may lead to actions that constitute constructive changes. For example, the government s insistence that the contractor comply with the misinterpretation has the effect of changing the specification. Such an interpretation of the contract language by procedures, approval by an authorized government representative is a change under the Changes clause. 7. Can defective government specifications lead to a constructive change? Defective specifications may lead to a determination of constructive change. There is an implied warranty that if the government s the contracting officer may be construed as a change if it calls for something more than the contract requires. Similarly, the insistence by an inspector that the contractor perform to a higher standard of quality than that provided by the contract specifications has been held to be a change. The inspector was considered to have been authorized to act as a representative of the contracting officer. 5. Can the contractor be compensated for constructive changes? Constructive changes increase the burden on the contractor and are compensable. In contrast, where the specification is misinterpreted by the contractor, there is no entitlement to compensation for additional costs incurred in performing any extra work required to meet the standard established by the contract. One notable exception occurs where the contractor s interpretation is reasonable under the circumstances, especially where the contractor s mistake was apparent to the government at the time of contract formation. 6. Can the government s substitution of materials cause a constructive change? Such changes are generally authorized by the Changes clause, and are compensable if they cause the contractor to incur additional cost. Similarly, where the contractor proposes a deviation in either materials or specifications are followed, the item produced will meet the contract requirements. Specifications may be considered defective because of simple error, inadequate detail, practical impossibility of performance, or a combination of these. A constructive change may be found if the defect causes the contractor to incur additional cost. Since only the contracting officer or his or her authorized representative has authority to issue change orders, the government may be able to avoid many constructive Contract Management April

7 changes if these individuals are alert to the implications of their actions. 8. How are constructive changes usually settled? Constructive changes are usually settled through a request for equitable adjustment to the contract price. If the parties cannot agree to the price for the constructive change, a dispute may arise and the contracting officer, upon request by the contractor, will issue a formal decision from which the contractor can make an appeal. All constructive changes should be presented to the contracting officer prior to final payment under the contract. There are many cases that hold that final payment bars any claims for constructive changes. These cases usually cite authority that prevailed before the Contract Disputes Act of Since the Contract Disputes Act has broadened the contracting officer s authority so that the contracting officer can now render decisions on any dispute arising under the contract, there is no need to consider a constructive change as a matter falling under the Changes clause. It was the Changes clause language that created the final payment bar. Now one can argue that a constructive change is really a breach of contract claim, and as such can be brought even after final payment. 9. What legal precedent has been established for constructive changes? It is well established that when a government contractor performs work beyond that required by the contract without a formal change order, and such work was informally ordered by the government or is caused by government fault, a constructive change has occurred, thereby entitling the contractor to an equitable adjustment. 4 The appropriate formula for pricing such an equitable adjustment is the difference between what it would have reasonably cost to perform the work as originally required and what it reasonably costs to perform the work as changed If the government prevents a contractor from proceeding in the most efficient manner, is that a constructive change? Where the government prevents a contractor from proceeding in the most efficient manner, there is a constructive change to the contract that entitles the contractor to additional compensation. 6 Managing Contract Changes: Lessons Learned and Best Practices 1. Educate/Inform the parties that contract change management starts with knowing what is within the scope of the contract and what is out-of-scope of the contract. (See FIGURE 1 below.) 2. Establish a contract change management board. Figure 1. A Contract What Is It? A Mutual Agreement On: Who? What? When? Obligations Technical Work to be Performed Delivery Requirements Work Breakdown Structure/ Responsibility Assessment Matrix Statement of Work/ Performance Work Statement Schedule How? Administrative Requirements Terms & Conditions How Much? Price Price & Payments 36 Contract Management April 2012 Source:

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9 Accepting applications beginning May 1 for the Contract Management Leadership Development Program Call for Applications: May 1 June 29, 2012 Visit cmldp2013 to learn more and apply. The CMLDP was one of the best career investments I ve ever made. Alison Nastelli, The CMLDP helped to sharpen my leadership skills, position me for advancement in my organization and local NCMA chapter, and broaden my professional network. Markesha A. McCants, CFCM, Questions and Answers Q: What is the CMLDP? A: A selective one-year program created to help accelerate the leadership development of our future leaders. Q: Why would I want to participate? A: To learn about leadership, NCMA governance, and contract management. The program is quite relevant to contract management professionals regardless of their employer, location, or industry. After 180 hours of training, you ll be ready to take on any challenge! Q: Am I going to be an NCMA leader or a leader within my office? A: Both! NCMA prepares the CMLDP class to hold volunteer positions within an association, and furthers their leadership and communication skills for the workplace. Q: What type of person is accepted into the program? A: The ideal candidate is at the early stages of their career, with an eye on that leadership role. The candidate would have a strong desire to become an inspirational leader, and they would be considered a top performer. Q: Is there a cost to participate? A: You must be an NCMA member to apply, but there is no application fee. The estimated value of the training is at $15,000; the only costs to the students involve travel expenses to attend in-resident events. Q: Where do I apply?! A: Visit

10 A contract change management board is a small group of company senior leaders who review and approve all changes prior to implementation. 3. Develop a contract change management process. While a company wants to maintain a high level of customer satisfaction, companies must take every reasonable step to ensure that their contracts accurately describe the obligations and are modified promptly to reflect changes to obligations that are over and above the contract. This allows the company to receive full payment for contract changes. A disciplined system of best practices must be in place to identify, assess, give notice, and request contract coverage for customer-caused impacts upon a company s contract performance. 4. Implement proven pricing strategies. Proven pricing strategies must be integrated with change definitions and schedule impacts to ensure cost recovery and appropriate profit/fee is realized on the additional work performed. 5. Understand the sources of contract changes. Constructive changes come from a multitude of areas that require documentation and knowledge of contractual change remedies involving customer actions or inactions that have the effect of changing the terms of the contract. The following are customer actions or inactions that can change the terms of the contract and can be construed to be changes : Acceleration; Defective specifications; Failure to cooperate; Delaying review and approval of data submittals; and Failure to disclose superior knowledge. 6. Ensure authorized personnel empowered to direct contract changes are formally appointed in writing and stated in the contract. 7. Confirm all directions to change contract requirements before implementing changes. 8. Ensure all U.S. government personnel having contact with a contractor recognize the limitations on their authority. 9. Recognize that the U.S. courts may hold silence on the part of the government contracting officer as acceptance of the change. 10. Seek the advice of specialized experts (accountants, lawyers, engineers, etc.) as needed to properly manage contract changes. Summary Unfortunately, unauthorized commitments, ratification, and constructive changes are all too common in U.S. government contracts and subcontracts. This article has provided a timely and highly relevant discussion of the salient points of unauthorized commitments, the ratification of unauthorized commitments, the sources of constructive changes, and their remedies via a question and answer approach. In addition, we provided 10 proven best practices to assist both government agencies and government contractors to more effectively manage contract and subcontract changes. CM About the Authors GREGORY A. GARRETT, CPCM, NCMA Fellow, C.P.M., PMP, is the chief operating officer and partner at AST LLC. He is a bestselling and award-winning author, international educator, highly respected consultant, highly decorated former U.S. Air Force officer, and the recipient of numerous national and international business awards. SHAW H. COHE, CAPTAIN, U.S. NAVY (RET.) is the chief executive officer and partner at AST LLC. He is a highly experienced acquisition professional and has earned the U.S. Department of Defense Level III certifications in contract management and program management. Send comments about this article to cm@ncmahq.org. Endnotes 1. See FAR (a). 2. See FAR (d). 3. See GAO Policy and Procedures Manual for Guidance of Federal Agencies, Title 4, Chapter See American Line Builders Inc. v. United States, 26 Cl Ct. 1155, 1179 (1992). 5. Ibid. See also American Asphalt Inc., ASBCA No , 95-2 BCA 27,614 (1995); and Celesco Indus Inc., ASBCA No , 79-1 BCA 13,604 (1978). 6. See Yarno & Assoc., ASBCA No , 67-1 BCA 6,312 (1967); and Mech-Con Corp., GSBCA No. 1373, 65-1 BCA 54,574. Late or defective customer-furnished property or data; Unreasonable inspections, rejections, or rework; Contract Management April