Don’t Overlook Your Subcontracts on Federal Projects
Construction and Procurement Law News, Q1 2023
The Armed Services Board of Contract Appeals’ (“ASBCA or “Board”) decision in Fluor Intercontinental, Inc., serves as an important reminder to prime contractors to be cognizant of the clauses they include in subcontracts for commercial products or services on federal projects.
In 2010, the Army Corps of Engineers (the “Corps”) awarded Fluor and another contractor a multiple-award task order contract for electrical support services. The contract included two Termination for Convenience of the Government clauses: FAR 52.249-1, (Fixed-Price) (Short Form) and FAR 52.249-2 (Fixed-Price).
Fluor’s contract also required two flow down clauses in its commercial-item subcontracts, including FAR 52.244-6, Subcontracts for Commercial Items, and the DFARS equivalent, DFARS 252.244-7000. Fluor’s contract did not include FAR 52.212-4, the commercial items terms and conditions clause with the commercial items termination provision. Pursuant to FAR 52.244-6, however, Fluor was permitted to “flow down to subcontracts for commercial items a minimal number of additional clauses necessary to satisfy its contractual obligations.”
In anticipation of a pending task order award in 2013, Fluor issued a commercial-item subcontract purchase order to Blanchard Machinery Company (“Blanchard”) to immediately lease and ship generators, switches, and control panels to an airfield in Afghanistan. Fluor’s purchase order with Blanchard included the Short Form Termination for Convenience clause, FAR 52.249-1, and the two required commercial item flow down clauses, but did not include the commercial items terms and conditions clause at FAR 52.212-4.
After the electrical equipment was acquired and shipped, the Corps terminated Fluor’s task order for convenience as a result of a competitor’s post-award bid protest. The Corps directed Fluor to put together a termination settlement proposal and to settle its subcontractor termination proposals as quickly as possible. A portion of Blanchard's termination settlement proposal, which Fluor paid, included $1.6 million of equipment depreciation costs related to the generators that were estimated “using five-year straight-line depreciation.” This led to a dispute regarding which termination clause applied to the Blanchard’s termination costs.
On appeal to the ASBCA, the Corps moved to dismiss Fluor's complaint, arguing that FAR 52.249-1, the short form termination for convenience clause, applied because that was the clause Fluor included in Blanchard’s subcontract. The Corps maintained that because this termination for convenience clause applies and incorporates the FAR part 31 cost principles, Fluor was prohibited from recovering Blanchard's equipment depreciation costs under FAR 31.205-11, Depreciation.
Fluor argued that the cost principles were inapplicable because its subcontract with Blanchard was for commercial products, as evidenced by the two mandatory commercial-item flow down clauses incorporated in Blanchard’s subcontract. Fluor maintained that the commercial items termination provision in FAR 52.212-4 applied instead and that it should recover Blanchard's equipment depreciation costs because this clause relieves contractors from complying with the cost accounting standards and cost principles.
The Board disagreed with Fluor's position, explaining that neither of the two required commercial item flow down clauses include termination provisions nor require a prime contractor to flow down FAR 52.212-4. The Board found that the required flow down clause FAR 52.244-6 specifically permitted Fluor to include the commercial items termination provision in FAR 52.212-4 in its purchase order with Blanchard, but Fluor instead flowed down the standard short form termination provision, which required compliance with the FAR part 31 cost principles. Ultimately, the Board applied the termination provisions incorporated in the contract but denied the Corps’ motion to dismiss holding that Fluor plausibly alleged a claim based on the termination cost principles rather than the depreciation cost principles.
Fluor serves as an important reminder that federal contractors must be conscious of the clauses they include in their commercial products or services subcontract purchase orders, particularly when afforded the discretion to add additional FAR clauses. If permitted by FAR 52.244-6, prime contractors should flow down FAR 52.212-4 in their commercial purchase orders rather than the standard fixed price termination for convenience clause.