It is not uncommon for the Government to require that its prime contractor use specific subcontractors or suppliers. When it does, a potential contractor (or “offeror”) may believe that the Government guarantees or warrants the performance of such specified sources and/or that they are available to provide the required parts or services and bid the job accordingly. A recent decision from the Armed Services Board of Contract Appeals (“ASBCA”) serves as an important reminder to Government contractors that there is no such warranty and that the prime contractor—and not the Government—is responsible for the performance of (or lack thereof) their subcontractors and suppliers, even when use of those subcontractors or suppliers is specified by the Government.
In Metro Machine dba General Dynamics NASSCO-Norfolk, the specifications required the contractor to have a technical representative of the original equipment manufacturer (“OEM”) to be present for testing of a ship component before disassembly and during reassembly. The prime contractor’s subcontractor had difficulties scheduling the OEM’s technical representative’s presence, and the Government agreed to allow the testing to proceed without the OEM. Inspection of the component revealed that it needed to be refurbished by the OEM. When the OEM returned the refurbished component, the subcontractor reinstalled it without the oversight of the OEM’s technical representative. When the component was activated, it was badly damaged, which significantly delayed the project.
The contractor appealed the Government’s assessment of liquidated damages. The ASBCA denied the appeal, finding that the Government had not participated in the contractor’s (and its subcontractor’s) decision to proceed without the required OEM technical representative. In addressing the contractor’s argument that the performance problems it encountered were caused by the Government’s specified OEM not performing the required services, the ASBCA surveyed its earlier decisions dealing with Government-specified sole sources for parts and reasoned that “with the exception of the warranty that the sole-source supplier identified by the Government is capable of performing the work, the government makes no other warranties when such a subcontractor is identified by contract, and the prime contractor is as responsible for that subcontractor’s work as it would be any other subcontractor.” The ASBCA continued: “[g]iven the limits of that warranty, the government is not liable for the acts or omissions of a sole-source contractor who, though capable, does not meet the performance needs of the prime and the identification of such a sole source contractor would not make a deficient specification for which the government is liable.” Thus, the ASBCA found that the contractor was the only party with privity of contract with the OEM and was responsible for managing its performance appropriately.
While the ASBCA ultimately held that the delays were not the fault of the OEM, the decision provides an important warning to offerors that Government-specified sources do not shift all risks to the Government. Contractors need to ensure that their subcontractors—including government specified sources—will perform before competing for work. This may increase proposal costs, particularly on complex projects, but neglecting to do so comes with risk. Thus, contractors entering into contracts with government specified sole source suppliers or subcontractors should be aware that they are assuming the risk of that specified source’s untimely performance and should ensure that the subcontract contains appropriate controls and remedies in the event of performance troubles. Moreover, the prime contractor should usually consider asking the Government for help with a sole-source supplier when it balks at timely performance: that may get relief, and it may also assist the prime contractor’s argument that untimely performance is in fact non-performance. Furthermore, it should involve the Government in the decision to proceed without the required inspection.