Source: http://www.seidmanlaw.com/postscript-termination-convenience-far-part-12-commercial-item-contracts/
Timestamp: 2019-04-18 18:31:26+00:00

Document:
Postscript: Termination For Convenience Of Far Part 12 Commercial Item Contracts - Seidman & Associates, P.C.
In Termination for Convenience of FAR Part 12 Commercial Item Contracts: Is Fair Compensation Required?, 24 N&CR ¶ 37, Paul Seidman provided a very thorough analysis of this language, including the various interpretations that had been arrived at by the boards of contract appeals. In particular, he argued that the clause required fair compensation and that Red River Holdings, LLC, ASBCA 56316, 09-2 BCA ¶ 34304, was incorrectly decided because it did not arrive at that result. Since this was an admiralty case, it was appealed to the U.S. District Court for Maryland (rather than the U.S. Court of Appeals for the Federal Circuit), which has agreed with Paul in reversing the board decision, Red River Holdings, LLC v. U.S., Civil No. PJM 10-534, 2011 WL 2160887 (D. Md. May 31, 2011).
Red River argues that the purpose of the [commercial item rules] was to streamline federal procurement and facilitate the acquisition of commercial products, not to somehow abrogate the fair compensation principles that have long informed contractor reimbursement after terminations for convenience. Along these lines, Red River asserts that the most critical distinction between [FAR] 52.212-4(l) and those provisions of the FAR that no longer apply to commercial items is not found in its compensation provisions, but rather in its admonitions that: (1) the “[c]ontractor shall not be required to comply with the cost accounting standards or contract cost principles for [the] purpose [of demonstrating entitlement]”; and (2) “[t]his paragraph does not give the Government any right to audit the Contractor’s records.” See 48 C.F.R. § 52.212-4(l). These provisions, Red River maintains, reflect the streamlining and burden-eliminating purposes of the FASA, and thus constitute the pivotal distinction between [FAR] 52.212-4(l) and other termination-for-convenience provisions in the FAR.
Red River also notes that the newly-promulgated FAR provisions expressly state that “[c]ontracting officers may continue to use [FAR] part 49 as guidance to the extent that part 49 does not conflict with this section and the language of the termination paragraphs in 52.212-4.” 48 C.F.R. § 12.403(a). [Footnote omitted.] With this provision in mind, Red River points to those sections of the FAR, such as [FAR] 52.249-2(g), that expressly permit recovery of incurred costs and reasonable profits, see 48 C.F.R. § 52.249-2(g), and argues that–because those provisions are not, in its view, in “conflict” with [FAR] 52.212-4(l)–they should guide a decision-maker in determining what types of charges are recoverable when a commercial items contract is terminated for the Government’s convenience.
[The] potential unfairness [argued for by the Government] cannot plausibly be squared with the [commercial item statute], which was enacted to enhance the efficiency of government procurement, see S. Rep. No. 103-258, at 1-2 (1994),as reprinted in 1994 U.S.C.C.A.N. 2561, 2562, and not to somehow undercut the longstanding principle that “[a] contractor is not supposed to suffer as the result of a termination for convenience of the Government, nor to underwrite the Government’s decision to terminate.” Jacobs Eng’g [Group, Inc. v. U.S.], 434 F.3d  at 1381 [(Fed. Cir. 2006)] (internal citation and quotation marks omitted). Absent a clear statutory expression of congressional intent to abrogate prevailing principles of fairness in the administration of government contracts, the Court declines to construe [FAR] 52.212-4(l) in a manner that might allocate a disproportionate share of the risk of unexpected changes in circumstances to contractors.
[FAR 52.212-4(l)] entitles a commercial items contractor whose contract is terminated for the Government’s convenience to the following: (1) payment of “a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination”; and (2) a payment as compensation for settlement costs or costs reasonably incurred in anticipation of contract performance, provided such costs are not adequately reflected as a percentage of the work performed, [footnote 17] and provided such costs could not have been reasonably avoided. [Footnote 18.] To the extent that the Board’s decision below concluded that [FAR] 52.212-4(l)’s reference to “reasonable charges” does not include costs incurred “solely for the purpose of contract performance, or incurrence of costs in anticipation of such performance,” . . . that decision is inconsistent with the Court’s holding here and must therefore be REVERSED.
[Footnote 17.] Clearly, a contractor may not recover additional amounts, however reasonable or necessary, if the expenses with which they are associated are reflected in the percentage-of-work-performed payment. It is worth repeating that [FAR] 52.212-4(l)’s second, “reasonable charges” component contemplatesonly those expenses that–even after a percentage-of-work-performed payment–would otherwise go uncompensated. Pursuant to the regulation’s plain language, the contractor–and not the Government–bears the burden of proving that any such charges: (a) are reasonable, (b) were not reasonably avoidable, and (c) are not reflected in the mandatory percentage-of-work performed payment. Any concern that the Court’s construction of [FAR] 52.212-4(l) could erode the purposes of the [commercial item statute] by “opening the floodgates” to all manner of additional charges is fully mitigated by this three-part burden of proof that the contractor must bear.
[Footnote 18.] As the Court construes [FAR] 52.212-4(l), the regulation’s first component–payment of “a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination”– contemplates that a percentage-of-work-performed payment will generally provide a contractor with compensation for costs incurred and some amount of profit on those costs. The Court thus concludes that the regulation’s second, “safety valve” component–which permits compensation for any reasonable, unavoidable costs not reflected in the first component–generally does notcontemplate additional allowances for profit.
(1) Do Red River’s claimed loan principal and interest amounts, which it paid to finance the acquisition of a capital asset that it could–and ultimately did–retain for use on subsequent government contracts, constitute costs reasonably incurred in anticipation of performance of this contract, or are they more appropriately categorized as amounts expended to acquire a general purpose asset for which Red River has other uses?
(2) If the [vessel] is in fact a general purpose asset for which Red River has other uses, should the shipyard costs Red River incurred to modify the vessel in preparation for its contract with the Navy be considered separately, as costs reasonably incurred in anticipation of performance of this contract?
(3) If the [vessel] is in fact a general purpose asset for which Red River has other uses, should Red River be entitled to amounts reflecting asset depreciation for months 58 and 59 of its original contract with the Navy?
(4) Do Red River’s claimed insurance costs constitute unavoidable costs reasonably incurred in anticipation of performance of this contract, or, rather, should they be categorized as costs of a type that Red River would ordinarily have to carry to insure a general purpose asset–irrespective of the asset’s use in a particular contractual engagement?
ADDENDUM • The formula for recovery for terminations for convenience of commercial item contracts in paragraph (l) of FAR 52.212-4 is (1) the percentage of the contract price reflecting the percentage of completion at termination, plus (2) reasonable charges resulting from the termination. In Termination for Convenience of FAR Part 12 Commercial Item Contracts: Is Fair Compensation Required?, 24 N&CR ¶ 37, I reviewed the clause, its regulatory history, and how it has been judicially interpreted. My article discussed Red River Holdings, LLC, ASBCA 56316, 09-2 BCA ¶ 34304, which limits recovery under the second prong of the commercial item formula to just settlement expense. It concluded that such limitation on recovery is contrary to (a) the plain language of the clause, (b) its regulatory history, and (c) the “fair compensation principle,” which requires that that terminated contractors receive fair compensation.
In Red River Holdings, LLC, v. U.S., Civil No. PJM 10-534, 2011 WL 2160887 (D. Md. May 31, 2011), the Maryland District Court took a step in the right direction by reversing the ASBCA decision and holding (1) initial costs allowable under prong two of the commercial item formula for reasonable charges resulting from the termination, and (2) the “fair compensation” principle applies to Federal Acquisition Regulation Part 12 commercial item contracts. The court professes to uphold the “fair compensation” principle. Nevertheless, “unfair compensation” may result from (a) unnecessary language (dictum) indicating recovery for reasonable charges resulting from the termination under the second prong is limited to unamortized initial costs and settlement expense and (b) its holding that profit is not allowable under prong two.
Item “(2)” appears to preclude the recovery of costs unavoidably continuing after termination recoverable under the FAR 31.205-42 cost principle in traditional Government contracts.
The limitation on recovery imposed by the court on the second prong is illogical, contrary to its plain meaning, contrary to the mandate in the Federal Acquisition Streamlining Act of 1994, Pub. L. No. 103-355, that FAR commercial items clauses adopt standard commercial practices, provides for less recovery than that available under traditional Government contracts, and is inconsistent with the “fair compensation” principle that the court purports to uphold.
The court provides no explanation for its gratuitous statement that second prong recovery is limited to unamortized initial costs and settlement expense. A likely reason is that this is all that Red River requested under the second prong. The fact that Red River did not request other costs does not mean that other reasonable charges resulting from a termination are unallowable. Such costs include, but are not necessarily limited to, costs continuing after termination allowable under FAR 31.205-42 in traditional Government contracts.
Prong two is not a mere “safety valve.” Rather, it is the primary source of the net recovery to a terminated contractor. All that prong one does is restate the right to be paid for completed work at the contract price. It is irrelevant to the termination because the contractor is entitled to such amount under the paragraph (i) “Payment” term of the FAR 52.212-4 “Terms and Conditions– Commercial Items” clause irrespective of whether the contract is terminated for convenience.
• The Limitation On Recovery Is Inconsistent With The Commercial Items Clause. Prong two of paragraph (l) of the commercial items clause, FAR 52.212-4, speaks of reasonable charges resulting from the termination rather than reasonable costsresulting from the termination. It is clearly reasonable to charge for costs unavoidably continuing after termination and profit under prong two. The reasonableness of such charges is evidenced by the allowability of costs unavoidably continuing after termination and profit under FAR 31.205-42 in traditional Government contracts. Reasonableness is also evident from the fact that continuing costs and profits are recoverable as damages for cancellation of a private sector contract for commercial items under Uniform Commercial Code § 2-708.
“Standard commercial practice” is set forth in the UCC, which has been adopted in 49 states. UCC § 2-708(2) states that “the measure of damages [for cancellation by the buyer includes] . . . the profit (including reasonable overhead) which the seller would have made from full performance by the buyer.” Both costs unavoidably continuing after termination and profit on all costs incurred are recoverable under UCC § 2-708(2).
Standard commercial practice as reflected in UCC § 2-708(2) is for payment of anticipatory profit–the profit (including reasonable overhead) which the seller would have made from full performance by the buyer.” (Emphasis added.) A terminated contractor is not entitled to anticipatory profit under a traditional Government contract, FAR 49.202.
The district court in Red River did not construe the commercial items clause to adopt the standard commercial practice as required by FASA and to provide for anticipatory profit not allowable under traditional Government contracts. Instead, the court went in the opposite direction by precluding the recovery of profit allowable on unamortized initial costs under a traditional Government contract.
• The District Court Opinion Will Deprive Many Contractors Of “Fair Compensation.”The “fair compensation” principle requires that a contractor not suffer as the result of a termination, Jacobs Engineering Group, Inc. v. U.S., 434 F.3d 1378 (Fed. Cir. 2006), 43 GC ¶ 49. A contractor that cannot recover costs unavoidably continuing after termination may be deprived of fair compensation. See General Electric Co., ASBCA 24111, 82-1 BCA ¶ 15,725 recons. denied, 83-1 BCA ¶ 16,207.
As previously noted, prong two of FAR 52.212-4, paragraph (l), is the primary source of recovery for a terminated commercial items contractor rather than a mere “safety valve.” Not allowing profit under prong two will therefore deprive many contractors of “fair compensation.” The situation is particularly egregious where a contractor incurs substantial preparation costs but is terminated before making any deliveries. Under such circumstances there is no recovery of profit under either prong one (which overlaps with the “Payments” clause) or prong two.
An ASBCA opinion is the opinion of the board rather than the judge that wrote it. ASBCA opinions are therefore binding on all ASBCA judges. This contrasts with opinions of Court of Federal Claims judges, which are only persuasive authority and not binding on other COFC judges.
An ASBCA opinion has no precedential value to the extent overruled by the U.S. Court of Appeals for the Federal Circuit. However, the effect of a U.S. District Court reversal of the ASBCA in a maritime contract case on the ASBCA in nonmaritime cases is unclear. It is the law of the case for the parties to the Red River litigation. However, it is not binding on the Civilian Board of Contract Appeals, the COFC, or the Federal Circuit.
Where does that leave a commercial item contractor dissatisfied with the amount a Contracting Officer is willing to pay as the result of a termination for convenience?
A contractor can elect to challenge a final decision denying its claim in either the cognizant board of contract appeals or the Court of Federal Claims. A terminated defense contractor that seeks to recover unamortized performance costs or unavoidable continuing costs should avoid the Red River precedent by bringing suit in the Court of Federal Claims instead of the ASBCA. If the terminated contract is with a civilian agency, the contractor may want to bring suit at the CBCA based on its favorable decision in Corners & Edges [CBCA 762, 08-2 BCA ¶ 33,961]. The Court of Federal Claims has not ruled on this issue and it possibly could follow Red River. This choice of forum recommendation is premised upon the current state of the law. A contractor should check recent decisions and regulatory changes before submitting an appeal to determine if this is still a good recommendation.

References: v. 
 § 52
 § 12
 § 52
 v. 
 v. 
 § 2
 § 2
 § 2
 § 2
 v.