Chapter 5
The Contractor’s Responsibilities
Verifying the Authority of the Contracting Officer or Government Decision Maker
As the “other party” to a government contract, a government vendor becomes involved in a number of unique issues that the vendor would not have to deal with if the contract were between the vendor and a typical consumer. A major difference is that a government vendor gives up rights a vendor would have in a normal contract situation. Some of these rights include having the contract governed by state law and being able to sue the other party in a local court. We will discuss these differences in chapter 8.
This chapter focuses on the most litigated issues a contractor faces. We review the most fundamental but routinely overlooked requirement in government contracts: the government contractor must involve the contracting officer in all decisions—major or minor. First, this includes verifying the authority of the person with whom the contractor is dealing to ensure that this person is authorized to make decisions for the government—in other words, verifying the authority of the contracting officer. Second, a contractor must ensure that the contracting officer has been given notice of any changes the contractor believes is occurring in contract performance. Court decisions routinely show that vendors have not yet learned this principle. According to many contract specialists and contracting officers, vendors never ask about the authority of the government employees with whom they are working. It cannot be a surprise then that vendors sometimes enter into a contract with the government that the government can disavow. Why? Because the vendor did not verify the government employee’s authority, and the government employee with whom the vendor worked did not have the authority to do the deal.
We then review the problems a vendor faces when it proposes to use one group of employees if it gets the contract but uses another set of employees after winning the contract. This problem is called bait and switch. The chapter closes by looking at two fraud land mines: implied certifications make a false claim out of an honest invoice, and the wipe-out damages a contractor faces for false claims.
VERIFYING THE AUTHORITY OF THE CONTRACTING OFFICER OR GOVERNMENT DECISION MAKER
If a contractor “does a deal” with a government employee or agency that does not have authority to deal, there’s no deal. This basic principle of contract law—that the government is bound only if an act is done by someone who has the authority to do it—is often ignored. And when it’s ignored, it can be costly to a contractor.
GovWorks, a Department of the Interior franchise fund, was authorized to provide “common administrative support services” to federal agencies. A DOD agency needed office space to consolidate CIFA’s many employees. They agreed to contract for the services of a Section 8(a) small business, TKC Communications, in an indefinite delivery, indefinite quantity (IDIQ) contract for facility acquisition. Using a task order under the IDIQ contract, TKC signed a lease for office space in Crystal City, Virginia, for a term of 10 years and 7 months with varying annual rents that exceeded $6 million. After IG investigations and an audit by the Government Accountability Office (GAO), GAO agreed with the IGs that the lease was unauthorized. Neither CIFA nor GovWorks had legal authority to enter into a 10-year lease for office space. GSA “holds general leasing authority for government agencies. . . . The Administrator may delegate this authority to an official in GSA or to the head of another federal agency. Without specific statutory authority and absent GSA’s delegation of authority, a federal agency may not enter into a lease on its or the government’s behalf. . . . Our research found no statutory authority that would allow GovWorks to obligate the United States to a lease nor has GovWorks or the Solicitor of Interior on behalf of GovWorks asserted such authority.” So GovWorks did not have leasing authority. And although CIFA had DOD authority for leasing, CIFA had not followed the right procedures. GAO’s conclusion was that “because neither CIFA nor GovWorks had authority to enter into the lease transaction, the government is not bound by the contract. . . . Where, as here, a government official with no authority purports to commit the government to a transaction, the contract is void ab initio and unenforceable.” All payments made to TKC had to be recovered.1
A contract for a Navy construction project had not only the changes clause but also two Navy clauses that said that only the contracting officer could bind the government to any change order. But the lines of authority got muddled when the Navy at the preconstruction meeting presented slides that said no changed work was to be performed without “written notification” of Navy personnel but the contracting officer was not identified in the slides as one of those persons. The Court of Appeals did not think the lines of authority were very muddled. “To demonstrate entitlement to an equitable adjustment, the contractor must prove that the contract was modified by someone with actual authority. Where a party contracts with the government, apparent authority of the government agent to modify the contract is not sufficient; the agent must have actual authority to bind the government. Although the contracting officer clearly could delegate authority to others, in this case only a limited delegation of authority occurred.” None of the Navy on-site technical people had authority to change the contract. All they could do is monitor performance and be contacted about technical questions or problems. Moreover, DOD regulations prohibited the technical people from modifying the contract. Regardless of what was said on site, the contract language prevailed.2
Notice to the contracting officer is critical. Failure to do this notification will be costly.
A good example of a costly non-notification involved a contract between K-Con and the U.S. Coast Guard to design and build a prefabricated metal building in Port Huron, Michigan. Although the Coast Guard made comments on these contractor’s plans at the 35 percent and 50 percent design stage, K-Con did not object to any of them. K-Con eventually finished the project and filed a claim at the COFC, arguing that the Coast Guard “changed and modified” the contract by making K-Con do work not required by the contract. K-Con was referring to the Coast Guard’s comments and changes associated with the 35 percent and 50 percent design. The government asked the court to throw the case out because K-Con had never given the Coast Guard any notice that K-Con considered the Coast Guard’s comments to be changes.
The court did so, agreeing that K-Con had not given proper notice. The contractor’s silence was key: “where contractor silence would foreclose less costly alternative solutions or the ability of the Government to avoid contractor claims, timely notice is required.” In K-Con’s case, the notice was late by a mile. K-Con first raised its “changes” argument in a 2007 court filing—approximately three years after the Coast Guard made its 35 percent and 50 percent comments in 2004.
The court’s decision made five good points about “notice” under the Changes clause.
1. The Changes clause anticipates that the contracting officer can do something that seems like a change order without actually issuing a contract modification that formalizes it as a contract change.
2. The contractor must give the contracting officer “written notice stating—(1) The date, circumstances, and source of the order; and (2) That the Contractor regards the order as a change order.”
3. This written notice seems to be an absolute requirement for a contractor recovering for the changes because, according to clause (c), “Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.”
4. This written notice is not enough because the contractor must give the contracting officer details: after giving written notice, the contractor “must assert its right to an adjustment under this clause within 30 days after . . . the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of the proposal, unless this period is extended by the Government.”
5. The court described how these “requirements” are not really hard and fast. The determining “notice” factor is whether or not the government has been harmed by the contractor’s failing to give notice. Precedent calls for notice to be provided simply “before such time that the Government would suffer if not apprised of the facts.” Another precedent refers to a rigid application of the notice provision as being “out of tune with the language and purpose of the notice provisions, as well as with this court’s wholesome concern that notice provisions in contract-adjustment clauses not be applied too technically and illiberally where the Government is quite aware of the operative facts.”
The bottom line of the “notice” test is this:
if the contracting officials have knowledge of the facts or problems that form the basis of a claim and are able to perform necessary fact-finding and decision making, the Government is not prejudiced by the contractor’s failure to submit a precise claim at the time a constructive change occurs.3
As these decisions show, the government cannot be legally bound to a vendor unless the vendor deals with a government employee that has the authority to make decisions on behalf of the government. This is why contracting officers have warrants authorizing them to sign contracts. No warrant, no authority, no deal. That’s the rule.
This rule can cause vendors and suppliers that give the government something end up giving the government that something for free. The three ways a vendor might get paid are establishing a “third-party beneficiary” relationship with the government, proving an “institutional ratification” by the government, or proving there was “implied” authority.
Third-Party Beneficiaries
Some vendors, such as suppliers or subcontractors, are not a party to the contract between the government and the vendor, but they do provide something to the government. When the prime contractor does not pay them, they sue the government under the “third-party beneficiary” rule.
Often, these third-party beneficiaries lose.
The Defense Supply Center Columbus had a contract with Capital City Pipes, Inc., to provide air-duct hose to the government. The supplier, Flexfab, would not sell hoses to Capital City unless payment for the hoses was sent directly by the government to Flexfab. A government Small Business specialist worked out a deal that would do that. But he did not have contract authority, and he did not tell the contracting officers involved about the arrangement for getting the money to Flexfab. After Flexfab delivered the hoses to the government, it was not paid for them as agreed. So Flexfab sued the government for payment but lost. The relevant contracting officers did not know of the arrangement the Small Business specialist had with Flexfab. Because no one in the government with authority had intended to make Flexfab a beneficiary of the deal, Flexfab could not be considered a third-party beneficiary.4
In a similar situation, Flexfab was found to be a third-party beneficiary. Here, a contracting officer had clearly been involved. He had modified the contract between the government and the prime contractor, with those two parties agreeing that Flexfab would cosign government checks. When that did not happen, Flexfab successfully sued and was paid.5
The general rule is that a government contract “requires that the Government representative who entered or ratified the agreement had actual authority to bind the United States.”6 If a vendor does not check, the vendor
takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority. The scope of this authority may be explicitly defined by Congress or be limited by delegated legislation, properly exercised through the rule-making power. And this is so even though, as here, the agent himself may have been unaware of the limitations upon his authority.7
Although this rule seems harsh—and it is—its rationale makes sense to the taxpayers:
Clearly, federal expenditures would be wholly uncontrollable if Government employees could, of their own volition, enter into contracts obligating the United States.8
The way vendors protect themselves is by dealing with only a “contracting officer.” FAR 1.201 defines a contracting officer (CO) as:
a person with the authority to enter into, administer, and/or terminate contracts and make related determinations and findings. The term includes certain authorized representatives of the contracting officer acting within the limits of their authority as delegated by the contracting officer.
It is not only a contracting officer who can bind the government; a contracting officer’s representatives can do so as well if there was institutional ratification or implied authority.
Institutional Ratification
Another way a contractor might get paid—even if they have dealt with a government employee with no authority—is through ratification. This is the contracting officer’s after-the-fact approval, under FAR 1.602-3, of a previously unapproved act.
Institutional ratification is a more subtle after-the-fact approval used by courts and boards to ensure the government pays for a benefit it has received. Institutional ratification, although rare, can validate an otherwise unauthorized contract.9
In these situations, an unauthorized contract can be ratified by the agency when the government receives a direct benefit and the contracting officer involved possesses some level of authority. This is especially true if the government uses a product, benefits from it, and refuses to pay for it.
The Air Force was sued for payment of products and services provided by Digicon under a task order that had not been signed or ratified by a contracting officer. The court concluded that the Air Force had gotten into a binding, although unauthorized, contract. “In the case of an unauthorized contract, it is well-established that an agency can institutionally ratify the contract even in the absence of specific ratification by an authorized official. Specifically, institutional ratification occurs when the Government seeks and receives the benefits of an otherwise unauthorized contract.” Ratification can occur when the government receives a direct benefit and the contracting officer has some level of authority. Here, the government used Digicon’s products and services for 16 months.10
A lower court had a good discussion of how the Court of Appeals for the Federal Circuit (CAFC) has handled cases involving institutional ratification.
[The CAFC] discussed Silverman v. United States, which found institutional ratification, and City of El Centro v. United States, which did not. In Silverman, a senior Federal Trade Commission (FTC) official promised a court reporting service that the FTC would pay for hearing transcripts. Based on this representation, the court reporting service sent the transcripts to the FTC, which retained and utilized them. The senior FTC official did not have contracting authority but did have authority to approve vouchers for goods and services. The court held that “[b]y accepting the benefits flowing from the senior FTC official’s promise of payment, the FTC ratified such promise and was bound by it.” In City of El Centro, a hospital alleged that the U.S. Border Patrol breached an implied-in-fact contract to compensate it for treatment of illegal aliens who sustained injuries while fleeing U.S. Border Patrol agents. The Federal Circuit rejected the hospital’s institutional ratification argument and distinguished Silverman. The Federal Circuit explained that the FTC senior official in Silverman at least had authority to approve vouchers for goods and services, and the government received a benefit from the transcripts, whereas in City of El Centro no official with any contracting authority had promised payment to the hospital, and third parties, not the U.S. Border Patrol, received the benefits.11
Implied Authority
Having stressed the need for the contractor to deal with a government official with actual authority to bind the government, we cannot ignore the various kinds of authority. Actual authority can be express (like that of the contracting officer with a warrant) or implied (like that of the president of the United States, who certainly can bind the government).
The Department of Defense (DOD) issued contracts for transporting household goods of service members and their families. These contracts were with transportation service providers (TSPs). The government used a computerized billing and payment system administered by U.S. Bank for a fee of 1 percent. After the TSPs paid the 1 percent, the government reimbursed them. While the government and the vendors were in the process of preparing for the follow-on contract, senior government employees in charge of the program promised the vendors that the 1-percent reimbursement would continue. These employees, however, were not warranted contracting officers. The government later refused to reimburse the contractors for the billing and payment fee. So they filed a claim. The COFC concluded that these senior government officials had “implied authority” to bind the government based on their job descriptions. For example, the Chief of the Personal Property Division had the authority to “manage, allocated distribute funds” and was “responsible for effective management” of the transportation contracts. His duties included development of “personal property systems, policies and regulations in support of” the government’s mission. Another official was the traffic management specialist responsible for management of DOD worldwide competitive procurement of household goods moving services. He had “primary responsibility for the conduct of professional, technical, and administrative work in management and procurement of worldwide household goods moving services affecting military/DoD civilian personnel and commercial industry [and is] responsible for incorporating electronic billing/payment processes in the current/future” program. These job descriptions proved that these employees had implied authority to bind the government.12
BAIT AND SWITCH
When a government solicitation says that the government is looking for well-trained people, vendors have an obligation to ensure that the people they propose to use on the contract, should they win it, will actually work on that contract. They cannot bait the government into giving them the contract based on the proposed use of one group of workers and then switch to a different group after winning the contract. If a vendor does not exercise due diligence in determining the availability of personnel, the vendor stands to be disqualified from the procurement.
Lining up potential workers can be a problem for a contractor who is not the incumbent vendor, as the qualified workers are probably employed by the incumbent. The nonincumbent vendors may have problems convincing the government that they could staff a new contract if they won. On the other hand, things change. People move on to new employers.
Drawing the line between “things change” and “bait and switch” can be difficult. GAO gave an excellent summary of precisely what a prohibited bait and switch looks like:
To demonstrate a “bait and switch,” a protester must show not only that personnel other than those proposed are performing the services—i.e., the “switch”—but also that (1) the awardee represented in its proposal that it would rely on certain specified personnel in performing the services; (2) the agency relied on this representation in evaluating the proposal; and (3) it was foreseeable that the individuals named in the proposal would not be available to perform the contract work.13
The COFC gave another good example of what a bait and switch looks like:
bidders proposing people (1) who expressed no willingness to be employees of bidder submitting the employee’s name; or (2) who were unwilling or unable to show the level of commitment that the solicitation required of potential employees; or (3) were unable to be the bidder’s employees; or (4) who were not directly asked whether they would accept employment.14
One way the government can get a commitment out of vendors is to require certifications of the availability of personnel from offerors. A material misrepresentation in the certifications—a lie—can make a winning proposal a loser.
The government issued a request for quotations for a vendor to train government employees in the use of a new computer system. A losing vendor, ACS Government Services, protested the award of the contract, arguing, in GAO’s words, that the winner’s quotation “materially misrepresented the availability of certain personnel proposed. Specifically, ACS contends that three of the individuals offered and certified as available by Metrica (i.e., Messrs. A, B, and C) had never agreed to work for Metrica, nor given their consent to be proposed by Metrica, but instead had exclusively committed themselves to the incumbent ACS. . . . ACS contends that by inaccurately certifying the availability of the individuals proposed, Metrica committed misrepresentations that materially affected the agency’s evaluation of quotations and award decision.” GAO agreed: “Metrica misrepresented that three of the key personnel that it proposed had agreed to work for the firm. We also find that Metrica included in its quotation the names and resumes of these three individuals without having gained their permission to do so, and cognizant of the fact that the individuals had given exclusive permission to ACS to submit their resumes. Further, we conclude that these actions resulted in a material misevaluation of the key personnel portion of Metrica’s proposal.”15
It is not a bait and switch if an intended hire goes elsewhere. Sometimes a bidder can win a contract based on promising to provide the government with certain persons who end up not working on the contract after it’s awarded.
During an Army solicitation, the incumbent contractor, Orion International Technologies, had its employees sign a “no compete” agreement that prevented them only from helping other bidders win the contract. A competitor, Fiore Industries, talked to a Mr. Zuc-coni, one of the incumbent’s employees, before he had signed the “no compete” agreement. Mr. Zucconi agreed to work for Fiore if Fiore won. Fiore did win but did not offer Mr. Zucconi a job. Orion protested, arguing “bait and switch.” The court found no “bait and switch.” Fiore’s bid was responsive. “The extent to which Mr. Zuc-coni had to commit to Fiore depends on what the solicitation required. Thus, so long as Mr. Zucconi expressed to Mr. Sanchez the requisite level of interest in the project manager position, the agreement between Mr. Zucconi and Orion preventing Mr. Zucconi’s involvement with Fiore’s bid is irrelevant to the government’s decision to award the contract to Fiore.16
FRAUD “LAND MINES”
Implied Certifications on Invoices
Government contractors must make numerous certifications and representations starting from SAM.gov in the solicitation process to closeouts at the end of a contract. These are called express certifications. A false certification can lead to the contract being terminated for default, as well as the contractor getting debarred and being subject to civil and criminal penalties.
False certifications associated with an invoice have even worse consequences, as a contractor is subject to the False Claims Act (FCA). An invoice the contractor submits to the government can contain express contractor certifications. For example, FAR 52.232-5, Payments Under Fixed-Price Construction Contracts (MAY 2014) requires the following contractor certification as a condition of payment:
(c) Contractor certification. Along with each request for progress payments, the Contractor shall furnish the following certification, or payment shall not be made:
I hereby certify, to the best of my knowledge and belief, that—(1) The amounts requested are only for performance in accordance with the specifications, terms, and conditions of the contract; (2) All payments due to subcontractors and suppliers from previous payments received under the contract have been made. . . .
A troubling issue for government contracting has been whether an invoice contains implied certifications that subject a contractor to possible false claims. That is, can a contractor violate the FCA even though it submitted an invoice that contained honest numbers but was inaccurate or fraudulent for some other reason? For example,
• an 8(a) firm submitting perfectly valid invoices to the government after signing a prohibited comanagement agreement with a subcontractor that made the 8(a) firm no longer an 8(a) firm.17
• a Medicare provider submitting invoices for payments knowing that it was not complying with all Medicare requirements.18
• a contractor knowingly omitting from progress reports vital information concerning noncompliance with the program it was to implement.19
Federal courts nationwide disagreed on implied certifications. The Seventh Circuit Court of Appeals rejected this theory, holding that only express (or affirmative) falsehoods can violate the FCA. Other appellate courts accepted the theory but limited its application to cases where defendants fail to disclose violations of expressly designated conditions of payment. Yet others held that conditions of payment need not be expressly designated as such to violate the FCA.
In 2016, the U.S. Supreme Court settled these disagreements and set some rules for determining how implied certifications can violate the FCA.20
The case involved an invoice for reimbursement for Medicaid services that was inaccurate. The contractor billed for services different from what it had provided. Also, employees performing the billed work had misrepresented their qualifications and licensing status to the federal government. For instance, one staff member claimed to be a “Social Worker, Clinical” despite lacking the necessary credentials and licensing.
The court’s first conclusion was that the implied certification theory was valid and applied under certain circumstances.
The court’s second conclusion was that, although invoices that contain flat-out lies can violate the FCA, so can invoices that fail to tell the government something important. An example the court gave was a person’s resume that listed several previous jobs as well as a period of time in “retirement”; the resume is a misrepresentation by omission if the “retirement” is due to being in jail for a crime.
Here, the invoice claimed that the contractor was billing for services provided by qualified and licensed personnel but omitted, obviously, the fact that the providers were neither qualified nor licensed.
The court held that the health-care provider could be liable under the FCA because “at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-t ruths.” Because the company’s invoice omitted the fact that its staff was not qualified nor licensed to perform the work for which it was billing the government, the contractor was not entitled to payment for those services.
Third, whether the requirement the invoice violated was an express condition of payment was somewhat relevant but was not the ultimate issue. “Not every undisclosed violation of an express condition of payment automatically triggers liability.” On the other hand, “a statement that misleadingly omits critical facts is a misrepresentation” whether the government labeled it as a condition of payment or not.
The real issues are “materiality” and knowledge: did the contractor knowingly violate a requirement that the contractor knows is material or important to the government’s payment decision?
The court explained “materiality” as follows. The government cannot make every payment subject to a contractor certifying its compliance with the entire U.S. Code and Code of Federal Regulation because the FCA is not “a vehicle for punishing garden-variety breaches of contract or regulatory violations.” Materiality may exist if a government contractor knows the government consistently refuses to pay if contractors violate a specific regulation. On the other hand, “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”
In the end, the Supreme Court sent the case back to the lower court. Because the lower court’s decision had focused on “conditions of payment,” which the Supreme Court held was only an issue and not the ultimate issue, the lower court now had to consider the issues of materiality and knowledge.
Going forward, the decision established the implied certification theory as a valid weapon for the government to use in combating contract fraud. But that theory cannot be used to punish contractors for violating any law, regulation, or contract provision. Instead, the issue is whether contractors would anticipate that the government would refuse to pay an invoice if the government knew “the whole truth” involved in the contract performance being billed. As the Supreme Court warned, “the False Claims Act is not a means of imposing treble damages and other penalties for insignificant regulatory or contractual violations.”
Fraud in Claims
For years, the government has been trying to fight fraud in the claims process. Contractor fraud can be costly. A contractor’s misrepresentation of costs in a claim can result in forfeiture of the claim, civil penalties, and damages equal to the amount of the misrepresentation (including freight costs and overhead), plus the government’s cost of reviewing the claim.
Daewoo won a government contract to build a road overseas for $88.6 million. The contractor filed a claim for over $50 million for delay and defective government specification damages. The government responded with a counterclaim seeking almost $64 million for fraud and wanted a ruling that Daewoo had forfeited its claim because of the fraud.
The CAFC agreed that the contractor had forfeited its claim. The claim was fraudulent based on the contractor’s projected cost calculation. “That calculation assumes that the government was responsible for each day of additional performance beyond the original 1080 day contract, without even considering whether there was any contractor-caused delay or delay for which the Government was not responsible. The calculation then simply assumed that Daewoo’s current daily expenditures represented costs for which the government was responsible. Daewoo apparently used no outside experts to make its certified claim calculation, and at trial made no real effort to justify the accuracy of the claim for future costs or even to explain how it was prepared.” Perhaps even more damaging was that “Daewoo’s damage experts at trial treated the certified claim computation as essentially worthless, did not utilize it, and did not even bother to understand it.” Finally, at trial, Daewoo’s witnesses “inconsistently referred to and interchanged actual, future, estimate, calculated and planned costs.” Submitting baseless claims “contributes to the so-called horse-trading theory where an amount beyond that which can be legitimately claimed is submitted merely as a negotiating tactic.”21
UMC had a contract with the Air Force for floodlight sets. It submitted a certified delay claim of almost $4 million. UMC consistently argued that the claim reflected incurred costs. UMC, however, had a unique interpretation of the phrase “incurred costs.” It submitted as incurred costs material costs which had never been invoiced and in some cases were for material that had never been received. The COFC came down hard on UMC. Federal remedies for fraud are “cumulative and not in the alternative.”
The court found UMC liable under several statutes. First, under the Special Plea in Fraud provision of the U.S. Code, fraudulent claims are forfeited. Second, under the False Claims Act, the contractor can be liable for civil penalties if it violates its duty to examine “its records to determine what amounts the government already has paid or whether payments are actually owed to subcontractors or vendors.” Third, the Contract Disputes Act allows the government to recover the false or unsupported portion of a claim that can be tied to misrepresentation or fraud. The court found that UMC’s actions forfeited the almost $4 million claim; imposed a $10,000 civil penalty; made UMC pay to the government the unsupported portion of the claim, $223,500; and made UMC pay the government’s costs of review.22