Preventing Constructive Changes and Unauthorized Commitments

2. Michelle Currier, Professor, Defense Acquisition University Preventing Constructive Changes and Unauthorized Commitments Friday, December 10, 2010 3:30pm

3. A Change? Suddenly, a heated exchange took place between the king and the moat contractor

4. Terminology • Constructive Change: Oral or written act or failure to act by Government official (in position of authority) construed by contractor as having same effect as a written change order (existing contract) • Unauthorized Commitment:An agreement that is not binding solely because the government representative who made it lacked the authority to enter into that agreement on behalf of the government (whether a contract exists or not)

5. Constructive Change • Oral or written act, or failure to act, by Government official construed by contractor as having same effect as a written change order. That is a contract change without formal written authority. The Government official had “implied” authority to make a change. • It occurs when there is a • Change in performance beyond the minimum contract requirements, and • Word or deed by Government representative which requires contractor effort that is not a necessary part of the contract

6. Inadequate or defective requirements documents Improperly interpreted specifications Overly strict inspection Failure to recognize Government caused delays Improper technical direction Acceleration of contract performance to finish sooner than what is stated in the contract schedule Causes of Constructive Changes

7. An agreement that is not binding solely because the Government representative who made it lacked the authority to enter into that agreement on behalf of the government (both existing or no contract). Individual making the agreement is perceived to have “apparent” authority. Unauthorized Commitment FAR 1.602-3

8. Direction by individual with “apparent” authority to begin work without contractual vehicle and/or funding in place. To make changes outside the scope of the contract To “correct” inadequate or defective requirements that cause effort outside scope of contract To improperly interpret specifications To fail to act on Government caused delays To provide improper technical direction Causes of Unauthorized Commitments

9. EXPRESS AUTHORITY (Written) Warrant is issued to CO and ACO and COR has the authority to authorize the payment of invoices. IMPLIED AUTHORITY (Unwritten) COR has the authority to return an improper invoice. Summarize Types of Authority APPARENT AUTHORITY DOES NOT EXIST IN THE GOVERNMENT

10. Only Contracting Officers acting within the scope of their authority (i.e. Warrant) are empowered to execute contract changes through modifications. Other Government personnel shall not (FAR 43.102): Execute contract modifications Act in such a manner as to cause the contractor to believe that they have authority to bind the Government Direct or encourage the contractor to perform work that should be the subject of a contract modification Contract Modifications

11. FAR 43.2 Change Order • Written order signed by Contracting Officer directing contractor to make a change without prior agreement • Authorized by the “Changes Clause” under non-commercial efforts • Limitations to Changes • Contractor must continue performance, as changed • Creates “undefinitized” Government liability & Contractor may be entitled to equitable adjustment • Definitization schedule must be established

12. Supplies Changes to drawings, design or specification Method of shipping or packing Place of delivery Services Description of services to be performed Time of performance (hours of day or days of week) Place of performance of services Changes Clause Limitations to things that can be changed with no prior approval under Changes Clause. Must be executed by the Contracting Officer. 52.243-7

13. Change beyond scope of contemplated work Contractor can decline the change if they believe it is outside the scope of the contract May require a sole source justification & approval to go forward with the change CARDINAL CHANGE

14. Contracting Officer (CO) – a person with the authority to enter into, administer, and/or terminate contracts and make related determinations and findings. CO’s receive from their appointing authority clear instructions in writing regarding the limits of their authority i.e. a “warrant”. Administrative Contracting Officer (ACO) – an authorized representative of the contracting officer acting within the limits of their authority, as delegated by the CO. An ACO is a contracting officer who is administering a contract in accordance with FAR 42.302 and CO delegation direction. Also holds a warrant. Typically resides at DCMA or contractor location. Who Has Authority to Make Changes? FAR 1.6, 2.101, 42.302

15. Contracting Officer’s Representative (COR) – has specific authority from the CO which is provided in a written delegation letter. Responsible for specific administrative functions. COR’s key role is to observe, document and communicate contractor performance to the CO. Does not have any “warrant” authority. Anyone who does not hold a warrant. Who Does Not Have Authority to Make Contract Changes?

16. Notification of Contract Changes (52.243-7) Requires a contractor to notify the Government in writing as soon a possible when that contractor considers that the Government has effected or may effect a change in the contract that has not been identified as such in writing and signed by the contracting officer. ** In plain language – the contractor has a responsibility to notify the contracting officer when Government conduct appears to drive a change to the contract (in and out of scope). Contractor Responsibilities

17. Careful preparation of the initial contract documents by removing ambiguities and inconsistencies Clearly know what the contract requires – what does the contract say, not what it ought to say Keep good records – documentation can eliminate misunderstanding Always act in good faith and follow the correct procedures Communicate with your Contracting Officer – when in doubt – ask the question! Avoiding Constructive Changes & Unauthorized Commitments

18. Most constructive changes are within the scope of the contract, therefore execution of a contract modification setting forth the change is required to recognize the change and work performed. If the constructive change caused a financial impact, the contracting officer must negotiate an equitable price adjustment to the contract price. Recognizing a Constructive Change

19. Ensure all personnel involved with contract know that the Contracting Officer, or a designated ACO, is the sole authority for making changes to the contract. know you do not have contractual or purchasing authority (if not a CO/ACO) **If an action is not ratified, the individual responsible for an unauthorized commitment may be held personally accountable for restitution to the vendor Preventing Unauthorized Commitments

20. STATEMENT of LIMIT You are hereby notified that I DO NOT have the authority to direct you in any way to alter your contractual obligation. STATEMENT of LIMITITATION of AUTHORITY STATEMENT of LIMITATION of AUTHORITY You are hereby notified that I DO NOT have the authority to direct you in any way to alter your contractual obligation. Further, if the Government, as a result of the information obtained from today’s discussion DOES desire to alter your requirements, changes will be issued in writing and signed by the contracting officer. You should take no action on any change unless and until you receive such a contract modification.

21. When analyzing the “scope” of a proposed or potential change consider whether: Function of the item or service has changed Basic contract purpose has changed Dollar value of the change is proportionate to the price of the original contract Competitive factors are still the same Specifications or SOW changes are extensive Reasonably contemplated by the parties Cumulative effect of all changes on the contract Staying “In Scope” of the Contract

22. What is to be done under the contract? What are the deliverables? Who is going to do it? When is it going to be done? How will it be done? How will you know when it is done? How much will it cost? How to Determine What is in “Scope”

23. Will changes to the requirements result in: Increase in Scope or Additive Change: increased effort that results in an increase in the price of the contract Decrease in Scope or Deductive Change: effort that has not been completed is deleted, resulting in a decrease in contract price Substitutions: work, technology or brands are deleted and added resulting in a debit and credit to the contract price Changes to Contract Requirements

24. Air-A-Plane Corp. v. U.S., 408 F.2d 1030 (1969)     “The basic standard… is whether the modified job was essentially the same work as the parties bargained for when the contract was awarded.  Plaintiff has no right to complain if the project it ultimately constructed was essentially the same as the one it contracted to construct.  Conversely, there is a cardinal change if the ordered deviations altered the nature of the thing to be constructed.  Each case must be analyzed on its own facts and in light of its own circumstances, giving just consideration to the magnitude and quality of the changes ordered and their cumulative effect upon the project as a whole.” Case Law on Scope

25. RATIFICATION OR RECOGNITION OF IMPROPER ACTION What Happens Next?

26. The FAR defines ratification as the act of approving an unauthorized commitment by an official who has the authority to do so. (FAR 1.602-3) The Head of the Contracting Activity (HCA) is required to ratify an unauthorized commitment. This authority can be delegated no lower than the Chief of the Contracting Office (CCO). NAVAIR Instruction 4200.52 (16 Sep 04) delegates the ratification authority from the HCA (AIR-00) to: Headquarters: Assistant Commander for Contracts (AIR-2.0) who is the CCO for NAVAIR Headquarters. NAWC: CCO for the business units subject to specific dollar limitations contained within the Instruction Ratification of an Unauthorized Commitment

27. Ratification may only occur when (FAR 1.602-3): The supplies/services have been provided to and accepted by the Government, or the Government has otherwise received a benefit from performance of the action The ratifying official has authority to enter into a contractual commitment The resulting contract would otherwise have been proper if made by an appropriate contracting officer The contracting officer determines the price to be fair and reasonable Funds are available and were available at the time the unauthorized commitment was made Requirements For Ratification

28. KO completes D&F stating: Commitment was not made to evade normal statutes/regulations Result of urgent requirement or mistake of fact by government personnel Contractor “reasonably” relied on apparent authority Contractor has no other remedy to obtain relief Contract would otherwise be proper i.e. funds available, legitimate requirement, etc. Price was fair & reasonable KO recommendation to ratifying official Determination & Finding

29. Constructive Change: Oral or written act or failure to act by Government official (in position of authority) construed by contractor as having same effect as a written change order (existing contract) Unauthorized Commitment: An agreement that is not binding solely because the government representative who made it lacked the authority to enter into that agreement on behalf of the government (both existing or no contract) SUMMARY Two kinds of changes to avoid!

30. Know your contract! Know the limits of your authority! Document meetings and critical conversations! When in doubt – ask your Contracting Officer! SUMMARY

31. Case Studies & Examples SUMMARY

32. Trade Studies E-mail request to continue work on trade studies even though the contract period of performance had expired, but pending final approval by management Analysis: Constructive Change = performing work without proper authority Additional Examples

33. Control Panel Requirement is for control panel with 36 switches Contractor proposed legacy panel with 36 hardwired switches – awarded contract In execution, Government wants 36 pushbutton switches with two levels Difference in types of switches Analysis: Constructive Change = changing negotiated requirements during contract implementation Additional Examples

34. Aircraft fuel tanks Requirement is for fuel tanks that hold “X” quantity of fuel Contractor proposed heritage design of welded tanks with seams Inspector believes they will leak and is requiring tanks with smooth welds Smooth vs. welded seams Analysis: Constructive Change = negotiatedrequirements should prevail; unless the contractor is not meeting contractual requirements Additional Examples