## AMS Change Request Number: 01-60 Date Received: July 31, 2001

**Title: Indemnification Actions**

# NAME: Yvonne Joseph

BRANCH: ASU-110

PHONE: 78638

TYPE OF CHANGE REQUEST: Guidance

DESCRIPTION OF REQUEST: The guidance expresses the authority of the DOT
Secretary and others related to indemnification and also provide
expanded guidance for the contracting officer.

REASON FOR CHANGE: Correct, clarify, expand existing guidance.

EXTENT OF DEVELOPMENT & REVIEW: Reviewed by AGC

TARGET AUDIENCE: Contracts personnel

POTENTIAL FAST LINKS: None

ATTACHMENTS: Language of change

BRIEFING PLANNED: No

ASAG RESPONSIBILITIES: None

  --- ----------------------- ----------------------------------------------------- --------------------
                              [Issue Date (revision)]{.underline}                   
                              [October]{.underline} [2001 (rev.1)]{.underline}      

      [Section]{.underline}   [Topics in the Section]{.underline}                   [Page]{.underline}

      **A**                   **Extraordinary Contractual Actions**                 

      1                       Authority                                             1

      2                       Guidance                                              2

                                                                                    

      **B**                   **Clauses**                                           10

                                                                                    

      **C**                   **Forms**                                             10
  --- ----------------------- ----------------------------------------------------- --------------------

**A. EXTRAORDINARY CONTRACTUAL ACTIONS**

**1.** **AUTHORITY**

a\. *Public Law 85-804 and Executive Order 10789.* Public Law 85-804, as
amended,

(referred to as the \"the Act) and Executive Order 10789 (hereinafter
referred to as the \"the EO\") grant the Adminstrator and the DOT
Secretary authority to conduct extraordinary contractual actions
(entering or modifying contracts) in support of the national defense.

\(1\) *Indemnification Approval Authority Reserved to the Department of
Transportation Secretary.*

\(a\) One of the provisions of the ACT and the EO permits the FAA to
indemnify contractors in situations that involve unusually hazardous or
nuclear risks to protect them from undue risk incident to performing
such contractual activities. The FAA may protect contractors from this
type of risk through incorporation of Clause 3.10.7 or its Alternate I -
\"Indemnification Under Public Law 85-804\" (the clause). These clauses
must not be used in any other type of situation and must have the prior
approval of the approving authority as specified the following (b).

\(b\) The DOT Secretary is the approving authority and his/her advance
appoval is required prior to including the indemnification clause in a
screening information request (SIR), contract or modification.

\(2\) *The Adminstrator as Approving Authority Authority.* The
Administrator is the approving authority for all other extraordinary
actions that facilitate the national defenses except for those involving
unusually hazardous or nuclear risks discussed in subparagraph (1)
above. The Administrator may also delegate this authority to a Contract
Adjustment Board. (See the following subparagrph (3) "Contract
Adjustment Board".

\(3\) *Contract Adjustment Board.* The Administrator may establish and
delegate his/her authority under subparagraph A.1.a to a contract
adjustment board (the board). The board, by virute of the delegation,
has authority to approve, authorize and direct appropriate action and to
make all appropriate determinations and findings. The determinations of
the board are not subject to appeal; however, the board may reconsider
and modify, correct, or reverse its previous determinations. The board
will also establish its own procedures and has authority to take all
actions necessary or appropriate to conduct its functions.

b\. *Limitations.*

\(1\) The authority conferred by the Act and the EO may not be (i) used
unless the approving authority finds that the action will facilitate the
national defense and/or (ii) relied upon when other sufficient or
adequate legal authority exists within the agency. The fact that losses
occur under a contract is not sufficient basis for exercising the
authority conferred by the Act. Whether appropriate action will
facilitate the national defense is a judgment to be made on the basis of
all the facts of the case.

\(2\) The Act is not authority for:

\(a\) Using a cost-plus-a-percentage-of-cost system of contracting;

\(b\) Making any contract that violates existing law limiting profit or
fees;

\(c\) Providing for other than reasonable access to contracts for
supplies or services;

\(d\) Waiving any bid bond, payment bond, performance bond, or other
bond required by law;

\(e\) Obligating the FAA for any amount over \$25 million, unless the
Senate and House Committees on Armed Services are notified in writing of
the proposed obligation and 60 days of continuous session of Congress
have passed since the transmittal of such notification.

c\. Actions authorized under the Act and EO must be accomplished as
expeditiously as practicable, consistent with the exercise of sound
judgment appropriate to the use of such extraordinary authority. The Act
and EO that every contract entered into, amended, or modified under this
section contain:

\(1\) A citation of the Act and the EO;

\(2\) A brief statement of the circumstances justifying the action; and

\(3\) A description of the finding that the action will facilitate the
national defense.

**2. GUIDANCE**

a\. *Types of Actions.* Most actions under this section fall into one of
three categories. They are:

\(1\) *Modifications* *Without Consideration*.

\(a\) A modification without consideration may be allowed if a
contractor, whose continued performance is essential to the national
defense, is faced with an actual or threatened loss under a contract
that would impair the contractor's ability to continue its production
capability. A modification may also be justified when a contractor
suffers losses resulting from actions by the FAA acting as the other
contracting party, even though the FAA is not directly liable under the
contract.

\(b\) When a contract modification without consideration becomes a
factor, the CO should obtain additional information such as the
following in addition to that specified in subparagraph d. \"Facts and
Evidence\" to conduct an investigation:

\(i\) Statement and evidence of the contractor\'s original breakdown of
estimated costs, including contingency allowances, and profit;

\(ii\) A statement and evidence of the contractor\'s present estimate of
total costs under the contracts involved if it is enabled to complete
them, broken down between costs accrued to date and completion costs,
and between costs paid and those owed;

\(iii\) A statement and evidence of the contractor\'s estimate of the
final price of the contract, taking into account all known or
contemplated escalation, changes, extras, and the like;

\(iv\) A statement of any claims known or contemplated by the contractor
against the Government involving the contracts, other than those stated
in response to the foregoing subparagraph (c) of this section;

\(v\) An estimate of the contractor\'s total profit or loss under the
contract(s) if it is enabled to complete them at the estimated final
contract price, broken down between profit or loss to date and
completion profit or loss;

\(vi\) An estimate of the contractor\'s total profit or loss from other
Government business and all other sources, from the date of the first
contract involved to the estimated completion date of the last contract
involved;

\(vii\) A statement of the amount of any tax refunds to date, and an
estimate of those anticipated, for the period from the date of the first
contract involved to the estimated completion date of the last contract
involved;

\(viii\) A detailed statement of efforts the contractor has made to
obtain funds from commercial sources to enable contract completion;

\(ix\) A statement of the minimum amount the contractor needs as a
modification without consideration to enable contract completion, and
the detailed basis for that amount;

\(x\) An estimate of the time required to complete each contract if the
request is granted;

\(xi\) A statement of the factors causing the loss under the contracts
involved;

\(xii\) A statement of the course of events anticipated if the request
is denied;

\(xiii\) Balance sheets, preferably certified by a certified public
accountant, (i) for the contractor\'s fiscal year immediately preceding
the date of the first contract, (ii) for each subsequent fiscal year,
(iii) as of the request date, and (iv) projected as of the completion
date of all the contracts involved (assuming the contractor is enabled
to complete them at the estimated final prices), together with income
statements for annual periods subsequent to the date of the first
balance sheet. Balance sheets and income statements should be both
consolidated and broken down by affiliates. They should show all
transactions between the contractor and its affiliates, stockholders,
and partners, including loans to the contractor guaranteed by any
stockholder or partner;

\(xiv\) A list of all salaries, bonuses, and other compensation paid or
furnished to the principal officers or partners, and of all dividends
and other withdrawals, and of all payments to stockholders in any form
since the date of the first contract involved.

\(2\) *Correction of Mistakes.*

\(a\) Correction of a mistake involves such things as failure to express
the intent of the parties in the contract, an obvious mistake by the
contractor that was overlooked by the contracting officer, or a mutual
mistake as to a matter of fact. An upward adjustment of a contract price
may be granted under these conditions.

\(b\) When a request involves possible correction of a mistake, the
contractor may be asked to furnish, in addition to the facts and
evidence listed in subparagraph (d) \"Facts and Evidence\", any of the
following information:

\(i\) A statement and evidence of the precise error made, ambiguity
existing, or misunderstanding arising, showing what it consists of, how
it occurred, and the intention of the parties.

\(ii\) A statement explaining when the mistake was discovered, when the
contracting officer was given notice of it, and whether this notice was
given before completion of work under, or the effective termination date
of, the contract.

\(iii\) An estimate of profit or loss under the contract, with detailed
supporting analysis.

\(iv\) An estimate of the increase in cost to the Government resulting
from the adjustment requested, with detailed supporting analysis.

\(3\) *Formalization of an Informal Commitment.*

\(a\) The third category of contractual adjustments, formalization of an
informal commitment, is authorized in order to permit payment to persons
who have taken action without a formal contract. For instance, a
contractor, acting in good faith and relying on the apparent authority
of an FAA official, may have carried out work for which there was not a
proper contractual arrangement.

\(b\) When a request involves possible formalizing of an informal
commitment, the contractor may also be asked to furnish the following
information in addition to those specified in subparagraph d. \"Facts
and Evidence\":

\(i\) Copies of any written instructions or assurances (or a sworn
statement of any oral instructions or assurances) given the contractor,
and identification of the Government official who gave them.

\(ii\) A statement as to when the contractor furnished or arranged to
furnish the supplies or services involved, and to whom.

\(iii\) Evidence that the contractor relied upon the instructions or
assurances, with a full description of the circumstances that led to
this reliance.

\(iv\) Evidence that, when performing the work, the contractor expected
to be compensated directly for it by the Government and did not
anticipate recovering the costs in some other way.

\(v\) A cost breakdown supporting the amount claimed as fair
compensation for the work performed.

\(vi\) A statement and evidence of the impracticability of providing, in
an appropriate contractual instrument, for the work performed.e.

b\. *Contractor's Responsibility.* It is the contractor\' responsibility
to seek contract adjustment when appropriate. The contractor should do
this in a written request to the contracting officer. The request should
include all the information necessary for the contracting officer to
conduct an investigation such as the following:

\(1\) The precise adjustment requested:

\(2\) The essential facts, summarized chronologcally in narrative form;

\(3\) The contractor\'s conclusions based on these facts, showingwhen
the contractor considers itself entitled to the adjustment; and

\(4\) Whether or not\--

\(a\) All obligations under the contracts involved have been discharged;

\(b\) Final payment under the contracts involved has been made;

\(c\) Any proceeds from the request will be subject to assignment or
other transfer, and to whom; and

\(d\) The contractor has sought the same, or a similar or related,
adjustment from the General Accounting Office or any other part of the
Government, oranticipated doing so.

c\. *Contracting Officer's Responsibilities.*

\(1\) *Gather Information.* The contracting officer is responsible to
gather information necessary to conduct an initial investigation.
Information such as that specified in subparagraphs A.2.a.(1) -
\"Modifications Without Consideration\", A.2.a.(2) - \"Correction of
Mistakes\", A.2.a.(3) - Formalization of an Informal Commitment\", and
A.2. d. "Facts and Evidence" are examples of the types of information
that may be useful to establishing the facts. The contracting officer
should assemble a case file containing all the pertinent documentation
including information submitted by the contractor. The case file will
serve as a basis for review and approval or rejection of the case and
should be well-organized to facilitate review by the product team,
legal, and if necessary, the approving authority. The contracting
officer should maintain complete records of all actions taken under this
Section 3.10.7 - Extraordinary Contractual Actions as part of the case
file, whether approved or denied,.

\(2\) *Perform the Initial Investigation.* The contracting officer in
concert with legal and the product team will make a thorough initial
investigation to establish the facts necessary to decide a given case.
Facts and evidence, including signed statements of material facts within
the knowledge of individuals when documentary evidence is lacking, and
audits if considered necessary to establish financial or cost facts,
shall be obtained from contractor and Government personnel. As part of
this initial investigation, the contracting officer should ascertain if
other Government agencies are involved - see the following subparagraph
(3) \"Liaison With Other Agencies\". This initial investigation will
determine whether to reject the case or process it further. If rejection
is warranted at this juncture, the contracting officer will notify the
contractor in writing.

\(3\) *Involve Affected Agencies.* When a case involves matters of
interest to more than one Government agency, the contracting officer
should do the following:

\(a\) Maintain liaison with affected agencies to determine whether joint
action should be taken.

\(b\) Assure availability of funds required from other agencies. When
additional funds are required from another agency, the contracting
agency may not approve adjustment requests before receiving advice that
the funds will be available. The request for this advice shall give the
contractor\'s name, the contract number, the amount of proposed relief,
a brief description of the contract, and the accounting classification
or fund citation. If the other agency makes additional funds available,
the agency considering the adjustment request shall be solely
responsible for any action taken on the request.

\(c\) When essentiality to the national defense is an issue, agencies
considering requests for amendment without consideration involving
another agency shall obtain advice on the issue from the other agency
before making the final decision. When this advice is received, the
agency considering the request for amendment without consideration shall
be responsible for taking whatever action is appropriate.

\(4\) *Submit Cases to* *the Administrator as Approving Authority.*The
contracting officer will submit cases that have merit through
appropriate channels to the approving. The contracting officer should
include a memorandum for the signature of the approving authoritythat
contains the following information:

###  (5) *Insert* *Contract Iinformation.* The contracting officer should include the following information in contract(s) entered into or modified under the Act and the EO:

###  (a) A citation of the Act and the EO

\(b\) A brief statement of the circumstances justifying the action; and

\(c\) A recital of the finding that the action will facilitate the
national defense.

\(6\) *Reports to Congress*. **\*\*\*\*\*\*\*I DON'T KNOW WHO PREPARES
THIS REPORT\*\*\*\*\*\*\*\***The EO requires the submission of an annual
report to Congress by March 15, listing actions taken on requests for
relief, including indemnity, under the Act\'s authority. The contracting
officer should provide input as follows for the report to???????????:

\(a\) The total number of requests, total dollar amount requested and
the total dollar amount approved or denied; and

\(b\) For each approved request that involves actual or potential cost
to the FAA in excess of \$50,000, the report should include the name of
the contractor, the actual cost or estimated potential cost, a
description of the property or services involved, and a statement of the
circumstances justifying the action. The report should omit any
information classified \'Confidential\' or higher.

d\. *Facts and Evidence.*

\(1\) *General*

*.*

\(a\) Description and information of the contract(s) such as key dates,
modifications, items acquired, price or prices, schedules, special
provisions;

\(b\) History of performance such as when work began, progress made,
exact statement of contractor\'s remaining obligations, and the
contractor\'s expectations regarding completion;

\(c\) Statement of payment received, due, yet to be received or to
become due, including advance and progress payments, amounts withheld by
the FAA and information as to any obligations of the FAA yet to be
performed under the contract(s);

\(d\) A detailed analysis of the request\'s monetary elements, including
precisely how the actual or estimated dollar amount was determined and
the effect of approval or denial on the contractor\'s profits before
Federal income taxes;

\(e\) A statement of the contrator\'s understanding of why the
request\'s subject matter cannot now, and could not at the time it arose
be disposed of under the contract\'s terms;

\(f\) The best supporting evidence available to the contractor,
including contemporaneous memorandums, correspondence, and affidavits;

\(g\) Relevant financial statements, cost analyses, or other such data,
preferable certified by a certified public accountant, as necessary to
suport the request\'s monetary elements;

\(h\) A list of persons connected with the contract(s) who have factual
knowledge of the subject matter, including when possible, their names,
offices or titles, adresses and telephone numbers;

\(i\) A statement and evidence of steps taken to reduce losses and
claims to a minimum;

\(j\) Any other relevant statements or evidence that may be required.

e\. *Indemnification Requests.*

\(1\) *Contractors that request inclusion of the indemnification clause
should supply information such as the following to the contracting
officer. The information should be adequate for the contracting officer
to ascertain the validity of the request. Information such as the
following aregenerally relevant:*

\(a\) Identification of the contract for which the indemnification
clause is requested;

\(b\) Identification and definition of the unusually hazardous or
nuclear risks for which indemnification is requested, with a statement
indicating how the contractor would be exposed to them;

\(c\) A statement, executed by a corporate official with binding
contractual authority, of all insurance coverage applicable to the risks
to be defined in the contract as unusually hazardous or nuclear,
including\--

\(i\) Names of insurance companies, policy numbers, and expiration
dates;

\(ii\) A description of the types of insurance provided (including the
extent to which the contractor is self-insured or intends to
self-insure), with emphasis on identifying the risks insured against and
the coverage extended to persons or property, or both;

\(iii\) Dollar limits per occurrence and annually, and any other
limitation, for relevant segments of the total insurance coverage;

\(iv\) Deductibles, if any, applicable to losses under the policies;

\(v\) Any exclusions from coverage under such policies for unusually
hazardous or nuclear risks; and

\(vi\) Applicable workers\' compensation insurance coverage.

\(d\) The controlling or limiting factors for determining the amount of
financial protection the contractor is to provide and maintain, with
information regarding the availability, cost, and terms of additional
insurance or other forms of financial protection.

\(e\) Whether the contractor\'s insurance program has been approved or
accepted by any Government agency; and whether the contractor has an
indemnification agreement covering similar risks under any other
Government program, and, if so, a brief description of any limitations.

\(f\) If the contractor is a division or subsidiary of a parent
corporation,\--

\(i\) A statement of any insurance coverage of the parent corporation
that bears on the risks for which the contractor seeks indemnification
and

\(ii\) A description of the precise legal relationship between parent
and subsidiary or division.

### e. *Disposition.* When approving or denying a contractor\'s request, the approving authority will sign and date a Memorandum of Decision containing\--

\(1\) The contractor\'s name and address, the contract identification,
and the nature of the request;

\(2\) A concise description of the supplies or services involved;

\(3\) The decision reached and the actual cost or estimated potential
cost involved, if any;

\(4\) A statement of the circumstances justifying the decision;

\(5\) Identification of any of the foregoing information classified
\"Confidential\" or higher (instead of being included in the memorandum,
such information may be set forth in a separate classified document
referenced in the memorandum); and

\(6\) If some adjustment is approved, a statement in substantially the
following form: \"I find that the action authorized herein will
facilitate the national defense.\" The case files supporting this
statement will show the derivation and rationale for the dollar amount
of the award. When the dollar amount exceeds the amounts supported by
audit or other independent reviews, the approving authority will further
document the rationale for deviating from the recommendation.

**B. CLAUSES - See FAST Procurement Toolbox for applicable clauses.**

**C. FORMS - See FAST Procurement Toolbox for applicable forms.**