Federal Circuit Decision Involving Commercial Contracts Increases Risk for all Government Contractors

Construction and Procurement Law News, Q1 2019

Firm Alert

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Pursuant to the Federal Acquisition Streamlining Act of 1994 (FASA), Congress requires that government agencies prioritize acquisition of commercial items. Commercial items acquisition is meant to reduce the administrative and compliance burdens on government contractors and agencies. Since Congress enacted FASA, however, agencies, courts, and boards have increased the burdens of administrative and compliance obligations imposed on commercial item acquisitions. The application of the Christian doctrine is one way courts and boards have increased those burdens for contractors.

The Christian doctrine, which was established in G.L. Christian and Associates v. United States, permits boards to insert a clause into a government contract, mistakenly left out by agency officials,by operation of the law, if the subject clause (1) is mandatory, and (2) expresses a significant or deeply ingrained strand of public procurement policy. The Federal Circuit’s recent decision, K-Con v. Secretary of the Army, is an example of how the Christian doctrine increases the cost of doing business with the government for commercial-items contractors—and all federal contractors—by increasing their risk of incurring additional costs when agency officials fail to properly include all clauses in solicitations.

K-Con involved two contracts for the procurement of prefabricated buildings. The Army solicited these task orders as commercial-items procurements without performance or payment bond requirements, using Standard Form 1449. After awarding K-Con the task orders, the Army told K-Con that it needed to obtain performance and payment bonds as required by the Miller Act, 40 U.S.C.A. §§ 3131 to 3134, and FAR 52.228-15.

K-Con had not anticipated providing bonding because it was not required by either contract. K-Con notified the Army that it was unable to obtain the bonds because its bonding capacity was tied up in an ongoing dispute with the Army on another contract. Instead of terminating the contracts for convenience, the Army waited two years until K-Con was able to acquire the bonds and paid K-Con’s bonding costs. The Army, however, denied K-Con’s request for equitable adjustment to cover material and labor escalation caused by the two-year delay.

K-Con appealed the contracting officer’s final decision to the Armed Services Board of Contract Appeals (“ASBCA”), stressing that the contracts were labeled, solicited, and awarded as commercial-items contracts, and did not include FAR 52.228-15. The ASBCA found that even though the Army had issued the procurement as a commercial-items solicitation, the contracts required construction services, and the Miller Act bonding requirements apply as a matter of law to all construction contracts. Accordingly, the ASBCA read FAR 52.228-15 into the contracts via the Christian doctrine.

K-Con then appealed to the Federal Circuit. On appeal, the Federal Circuit addressed two issues: (1) whether the contracts at issue were construction contracts, and (2) whether the contacts included FAR 52.228-15 as a matter of law by way of the Christian doctrine.

Contrary to the traditional rule of contra proferentem, pursuant to which ambiguous contract terms are interpreted against the drafter, the patent ambiguity doctrine requires that government contractors seek clarification of patent ambiguities or forfeit their right to advance their interpretation of ambiguous contact terms in a post-award dispute.

On appeal, K-Con stressed that the contracts were for pre-engineered metal buildings, which are considered personal property and fit the definition of commercial items in FAR 2.101, and that the construction services included in the contracts were ancillary to the commercial items being purchased by the Army. The Army argued that the contracts were patently ambiguous on the issue of whether they were construction or commercial items contracts and, as a result, K-Con had a duty to clarify the ambiguity prior to submitting its bids.

The Federal Circuit agreed with the Army, finding that the contracts were patently ambiguous because even though the Army used the standard commercial items contract form, it also included “many indications that the contracts were for construction.” Thus, K-Con was precluded from arguing that they were for commercial items, because it had failed to inquire into the alleged ambiguity during the solicitation period.

Having rejected K-Con’s argument that the contracts were commercial items contracts instead of construction contracts, the Federal Circuit affirmed the ASBCA’s Christian doctrine analysis. The Federal Circuit found—despite the contracting officer’s ability to revise the bonding requirements pursuant to FAR 28.102-3(a)—that the Miller Act bonding requirements implemented by FAR 52.228-15 were mandatory and therefore met the first prong of the Christian test.

The Federal Circuit also found that FAR 52.228-15 met the second prong of the Christian test. The court reasoned that performance bonds protect the government by ensuring the contract will be completed at no cost to the government in the event of a contractor default. The court also noted that Congress’ awareness of these protections is evident. Thus, payment and performance bond requirements are “deeply ingrained” in procurement policy.

The Federal Circuit’s ruling in K-Con increases the risk assumed by government contractors. The decision particularly increases risk for commercial items contractors by leaving open the possibility that a contracting officer can retroactively change the categorization of a commercial-item contract—which is meant to reduce the burden of the normal acquisition process—and expose the contractor to non-commercial-item clauses that the contractor may not have accounted for in pricing its proposal. This decision is also a reminder to all federal contractors of the inequitable results that may follow an agency official’s failing to properly include all clauses in their solicitations, and the importance of carefully scrutinizing the solicitation requirements and clarifying any ambiguities.