Case Law on Statute of Limitations Continues to Evolve
We have written and published many an article on this site addressing the “evolution” of the judicial interpretations of the Contract Disputes Act’s Statute of Limitations (SoL).
Let’s quickly set the baseline regarding what the SOL requires: Fundamentally (and in words used by non-lawyers), a claim for damages must be filed within six years from the time the party asserting damages knew, or should have known, that it had damages. The amount of damages need not be known precisely; it simply must be known (or should have been known) that damages of some extent existed, sufficient to assert a “sum certain.” (From one decision: “A claim must accrue, and the statute of limitations starts to run, as soon as a contractor can assert a claim, even if it has not yet incurred all possible costs resulting from the change or breach.”). The date on which damages are known, or should have been known, starts a six-year clock. Claims filed after that clock expires are time-barred. It used to be that time-barred claims could not be heard as a matter of the court’s jurisdiction, but after a Federal Circuit decision, the assertion that a claim was time-barred became an affirmative defense.
Both the Boards of Contract Appeals and the Court of Federal Claims hear cases involving the SoL. Although the forums seemingly agree on what the SoL requires, the decisions issued seem to vary by judge and by forum. It appears that the bases for the various legal decisions regarding whether or not a claim is time-barred are based on the circumstances and facts unique to the case at hand. Thus, it’s difficult to predict how the SoL will be applied.
Those of us who are not lawyers tend to be more than a bit confused by the seemingly inconsistent case law associated with the SoL—though I am assured by Big Law attorneys that all decisions can be reconciled. (We’re still waiting for the article that does such a thing….)
While we wait for clarity, here are two more SoL decisions that impact how one might interpret the SoL.
First, the good news:
Over at the Civilian Board of Contract Appeals (CBCA), Judge Sheridan (writing for the Board) issued a decision denying the GSA’s $3.3 million claim for disallowed costs against United Liquid Gas Company (UPE), finding that about 10 percent of the GSA’s claim was time-barred by the SoL. GSA asserted that the contractor had billed it for fuel at rates in excess of the contractually specified rates. Critically, GSA had paid the contractor at the billed rates even though those rates were higher than they should have been. The decision stated that the SoL clock started to run when GSA overpaid the contractor.
Judge Sheridan wrote—
We conclude the claims in issue began to accrue on January 5, 2011, when the Government overpaid the first task order 1 invoice submitted for payment under the MAS contract. At that point in time, the terms of the MAS contract clearly put both Ft. Irwin and GSA on notice that UPE was overbilling the Government and all events that fixed the alleged liability, specifically, in this case, overpayments in a ‘sum certain,’ were known or should have been known. Government claims continued accruing each time Ft. Irwin overpaid a task order1 invoice under the MAS contract, because every time a payment was made on an invoice, the Government knew or should have known of the overpayment and the ‘sum certain’ it was overpaying.
Although UPE is still on the hook for roughly 90% of the government’s claim against it, it must have felt nice to see the amount of the claim reduced. Judge Sheridan’s decision reminds us of a similar finding over at the Armed Services Board of Contract Appeals, in the matter of Sparton deLeon Springs. We wrote about that decision here.
And, speaking of the ASBCA, here comes the bad news:
DRS Global Enterprise Solutions, Inc. (DRS) appealed a contracting officer’s claim for $8.6 million in various disallowed costs, including both direct and indirect claimed costs included in DRS’ FY 2006 proposals to establish final billing rates. (There were actually two proposals: FY 2006 and FY2006A, but that’s not relevant here.) The submissions were made in February and March, 2008. A little more than a year later (17 July 2009), DCAA held an entrance conference to begin its audit. Nothing happened for three years—until 3 April 2012—when DCAA informed DRS that its submissions were inadequate. DRS resubmitted certain schedules and, on 22 June 2012, DCAA found the final billing rate proposals to be adequate for audit.
It had taken DCAA literally four years to get to the point where the audit agency was ready to conduct its audit.
Now, readers know that there were a couple of things happening at that time—notably, that DCAA was under fire from several sources for poor audit quality. In a fit of pique, DCAA management made the decision to stop performing audits of contractor final billing rate proposals. Eventually, a sufficient number of people and entities (including Congress) pointed out that the decision was a very bad idea, and DCAA resumed its audits—but that was years later. In the meantime, contractors such as DRS were left hanging in the wind, wondering when their proposals were going to be audited.
And when DCAA got back to performing “incurred cost audits,” its procedures had changed. But more than the audit procedures had changed: the agency’s entire audit philosophy had transformed. No longer would audits be scoped based on prior audit work; now, each audit had to stand on its own. What had been sufficient before 2008 was no longer sufficient. What had been adequate before 2008 was no longer adequate. Contractors were, almost without exception, blindsided by DCAA’s seismic shift in how it performed its “incurred cost” audits. DRS was obviously one of those contractors caught by the unexpected changes in audit approach.
Back to the case at hand.
After more than four years, the DCAA “incurred cost audit” started to move forward. As is the process, Requests for Information (RFIs) were exchanged. DRS either couldn’t, or wouldn’t respond to some of those RFIs. As is the process, DCAA didn’t take lack of responsiveness especially well. As Judge O’Connell wrote for the Board: “In September 2013, DCAA requested additional documentation from DRS, which it did not provide. On November 7, 2013, DCAA wrote to DRS to inform it that it had been denied access to data/documentation for labor transactions, direct material transactions and the other direct cost transactions.” On December 30, 2013, DCAA issued an audit report in which it questioned more than $54 million in costs for the fiscal years at issue.
Remember, DRS had initially submitted its proposals in early 2008. Now, more than five years later, DCAA had questioned a huge amount of direct and indirect costs because, allegedly, DRS couldn’t provide necessary supporting information.
Still, five years is less than six years. (Remember the SoL?)
And then the cognizant contracting officer waited another three years, until September 11, 2017, to assert the government’s claim in the amount of $8.6 million, of which $8.4 million related to other direct costs (ODCs) that the CO found to be unallowable because of “lack of an invoice for the costs, proof of payment, or a signed purchase order.” In other words, all the supporting documents that DCAA had requested during the audit, that DRS either couldn’t or wouldn’t provide.
Open and shut, right? Eight years is more than six years, so the government’s claim is time-barred. Obviously.
Not so fast, there.
Judge O’Connell wrote—
These [SoL] decisions demonstrate that determining when the government reasonably should have known of its claim requires consideration of the unique facts in the appeal. This is particularly relevant in this appeal because the final decision identifies 39 discrete direct cost items that the contracting officer found to be unallowable.
The Judge went on to discuss the specific facts of this case. He found that there was no way for the government to reasonably know that DRS lacked adequate support for its costs until the audit report concluded that was the case. For example, the largest single dollar item was questioned because DRS was unable to provide proof of payment. He wrote “… the record as currently developed lacks undisputed facts demonstrating that the government knew or should have known of its claim before September 11, 2011.”
In other words, motion for summary judgment denied. A trial on the merits will be needed.
(We hope that in the future trial, somebody asks DCAA to discuss when the audit agency began requesting such supporting documentation, and whether DRS should have reasonably expected that it would need to retain such documentation—pointing to FAR 4.7 as establishing record retention requirements.)
So that’s the bad news. On the other hand, the end of the decision offered DRS a ray of hope. Judge O’Connell wrote—
We note that DRS's motion raises only the statute of limitations. Therefore, we need not address whether the more than 10 years that elapsed between payment of the invoices at issue and the issuance of the contracting officer's final decision calls for application of the doctrine of laches.
Although we are not lawyers, we think laches is the legal doctrine that a lack of diligence and activity in making a legal claim, or moving forward with legal enforcement of a right is unreasonable and can be viewed as prejudicing the opposing party in litigation. In other words, it may be possible for DRS to assert that DCAA’s intentional deferral of its audit led to a situation where DRS was unable to provide the supporting documentation; whereas, if DCAA had performed its audits more timely then DRS would have been able to support them. We’ll have to see how that argument goes in the (future) trial.
So that’s the state of the Contract Disputes Act’s Statute of Limitations today. Still a mixed bag, in our view.
Name Change
They say you can’t judge a book by its cover but, perhaps, one can glean something from an organizational name or title. When one receives an email from an individual running a small business, whose signature includes: Founder, CEO, President, COO, and CFO then (perhaps) that offers a small insight into that individual’s character. Similarly, when one’s LinkedIn profile includes all the Certifications and Degrees right there in the title (just after the name) then that might say something as well.
In the mid-90’s it was called Defense Procurement and Acquisition Reform. That told you right there what the mission was.
Later, it became Defense Procurement and Acquisition Policy (DPAP). For many years, DPAP executed its mission to be “responsible for all acquisition and procurement policy matters in the [DoD], including serving as the principal advisor to the Under Secretary on acquisition/procurement strategies for all major weapon systems programs, major automated information systems programs, and services acquisitions.” Clearly, the new mission had de-emphasized acquisition reform in favor of strategic advisory services (“strategery”?).
A while ago DPAP spun off “Defense Pricing” which didn’t seem to have any mission of its own. At least, it didn’t have a separate website and it was challenging to figure out the chain of command. As one might guess from the title, Defense Pricing focused on the price paid by the DoD for its weapon systems. An early Defense Pricing initiative was “should-cost” analyses. Defense Pricing advised the F-35 PEO regarding negotiating strategies.
While Defense Pricing was doing its thing, DPAP continued to update the DFARS and the associated PGI, as interim and final rules were issued. Our opinion of that process is, shall we say, well known to readers of this blog.
And then Congress forced a reorganization of the Office of the Under Secretary of Defense (AT&L) and the ripple effects caused a reunion (so to speak) of Defense Pricing and DPAP, under the sole direction of the Director of Defense Pricing/Defense Procurement and Acquisition Policy. And that combined organization executed its mission—which was basically the old mission—for several months.
Then, on September 11, 2018, the organization changed its name. It is now known as Defense Pricing and Contracting (DPC). See this memo.
As we noted above, if you go by the organization’s name, you might think that it’s now superseding the Defense Contract Management Agency (DCMA) and is managing contracting activity on behalf of DoD. That does not seem to be the case.
Yet.
In fact, the mission of the newly named organization is a bit unclear at the moment. The announcement memo (link above) states “The DPC office is currently evaluating our mission, function, and responsibility. Additional information will be provided at a later date based on our determinations.”
So time will tell exactly how DPC will contribute to the success of the warfighters.
In the meantime, the newly named organization announced on August 21, 2018, that some scammers are trying to represent themselves as being DP/DPAP/DPC. The announcement (found on the DP/DPAP/DPC website, stated, “We have been advised that an individual may be impersonating Mr. Shay Assad, Director, Defense Pricing and Contracting (formerly Defense Pricing/Defense Procurement and Acquisition Policy) by email and/or telephone in an attempt to obtain software/equipment/etc. This office does not issue solicitations or buy directly; we are a policy office. The Pentagon Force Protection Agency advises you contact your local law enforcement office if you question the legitimacy of a request or solicitation. Also, forwarding a copy of the suspect email to
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
enables the Department to track the email as a phishing attempt.”
So if somebody reaches out to you and says they are Shay Assad, Director, DPC (or Director of any other DoD directorate), and asks for software/equipment/etc., then you should report the scam as requested above.
|
Proposed DFARS Rule on Contract Financing – UPDATE
Quick update here on the proposed rule we told readers about in this article. It’s DFARS Case 2017-D019. Remember that identifier, because you’ll be seeing it again as the rule-making process progresses.
If you didn’t read that article you really should. Go on, we’ll wait.
You didn’t read it, did you? Sigh.
For those who didn’t click the link, suffice to say that any contractor other than small businesses should rightfully be upset at the proposed rule, which would peg contract financing payments at 50% of (adjusted) incurred costs—though the exact recovery amount would vary by contractor.
If a contractor has legal problems (as itemized in the proposed rule), then it would be allowed to recover only 25 percent of (adjusted) costs through contract financing payments. Otherwise, the standard recovery rate would be 50 percent. If a contractor meets performance criteria in five areas (on time or accelerated contract deliveries, contractor quality, contractor business systems, increasing contract opportunities for small businesses and for the blind and severely disables, and receipt of timely quality proposals), then it may recover up to 95% of (adjusted) costs.
According to the proposed rule:
On December 1 of each year, a contractor, or higher-level owner of a contractor, may submit a representation as to which criteria it meets and request a higher customary progress payment rate. Based on the representation received, the Director of Defense Pricing and Contracting will determine the appropriate customary progress payment rate for the following calendar year, and that data will be entered into the Contract Business Analysis Repository (CBAR) by December 31.
Based on the language above, Mr. Shay Assad himself will review each contractor submission and decide, by himself with no opportunity for appeal, the appropriate cost recovery rate for that contractor.
If that doesn’t upset you, well. We don’t know what would.
Okay, that’s the baseline. What’s new?
-
On 10 September 2018, registration for the public hearing on the proposed rule was extended to 11 September. But don’t worry about it. When you woke up the next morning to read the Federal Register—as you do every morning—it was already too late. The public hearing was held 14 September in Alexandria, VA. You can still submit comments, though. The deadline for comments is 23 October, 2018.
-
On 21 September 2018, DoD announced another public meeting! We don’t know why, but perhaps the need for a second meeting may be related to the lack of timely public notice for the first meeting. We don’t really know; we’re just saying. Anyway, the second public meeting will be held 10 October, in the same Alexandria, VA location. You must register by 4 October if you would like to attend.
Readers, rarely do we advocate for a particular position vis-à-vis a proposed rule. However, this is one of those times. The proposed rule is so obviously biased against contractors and it’s potentially unworkable as written even if it weren’t. When one adds in the fact that business system adequacy is already subject to what many call punitive payment withholds, this rule is simply a very bad idea.
This is the time you will want to work with your legal counsel to develop comments for submission. This is the time you will want to work with your industry associations to help shape their comments. This is the time you will want to get involved.
Because if you don’t, you will certainly regret the outcome.
Rent vs. Lease vs. Buy
In what appears to us to be yet another sign of the dumbing-down of acquisition professionals, the FAR Councils published a proposed rule that would revise FAR Part 7.4 to “clarify … that the term ‘lease,’ as used in the subpart, includes the ‘rental’ of equipment.” Yes, because it was completely unclear for the past 34 years that the term “rental” was semantically equivalent to the term “lease.” Nobody ever understood that when the FAR told Federal acquisition professionals attempting to perform a lease versus purchase analysis to “consider … cumulative rental payments for the estimated period of use” (under the Subsection heading of “Equipment Lease or Purchase”) it was completely misusing terms, and therefore the Federal acquisition professionals who were required to adhere to the requirements were being confused.
And thus the required lease versus purchase analyses were being screwed-up. All because people were confused between “rental” and “lease”.
We are not making this up.
In fairness, it is possible that somebody looking to split hairs might argue that “rental” applies only to land or property (going by the online definition), whereas “lease” could apply to anything (including land or property). And a “rental period” is, technically, only 30 days and is automatically renewed each period, whereas a “lease” is for a specified period. Those are real differences. But Holy Heck is that a convoluted way to approach regulatory analysis! You know a lawyer must have been involved, because the differences (such as they are) are all legal differences. Legal nuances, so to speak.
However, even the FAR Councils weren’t willing to admit that there was a real semantic difference between the two terms. The new proposed language would tell Federal acquisition folks that—
While there are some differences between renting and leasing in many industries, there is no standard distinction between both renting and leasing that spans across all industries. Rental agreements are typically for shorter periods of time than lease agreements. Additionally, maintenance requirements and financial terms (e.g., fees or payment terms) differ between a lease and a rental agreement.
(Emphasis added.)
If there is no real difference and if we should all expect reasonable professionals to figure out that when the FAR says “cumulative rental payments” (under the direction regarding how to do a lease versus purchase analysis) it might be talking about the actual cumulative payments under a lease, then why did the FAR Councils feel such a burning need to address this issue?
In the comments associated with the proposed rule, we were told that “The objective of the rule is to ensure the value of rental agreements are included in the decision on whether to lease or purchase equipment. … Based on Fiscal Year 2016 data from the Federal Procurement Data System, the Government issued approximately 34,925 contract actions for the rent/lease or purchase of equipment.”
In other words, there were no known cases of a lease versus purchase analysis not being performed (or being performed incorrectly) because some hack argued that “rental payments” were somehow different from “lease payments.” Nope. Instead, the FAR Councils decided to attack this … issue … because there were a lot of transactions that required a lease versus purchase analysis—and they wanted to make it super clear to even those Federal acquisition folks at the lowest levels of reading comprehension exactly how to perform such a lease versus purchase analysis.
And just to be absolutely rock-solid certain that all Federal acquisition professionals were given a complete toolset that could be used to perform a lease versus purchase analysis—
The rule also adds a helpful link to a GSA site that provides additional guidance on renting and leasing equipment and updates the GSA office from which agencies may request information when making lease or purchase decisions. In addition, weblinks have been added to the rule for Office of Management and Budget (OMB) guidance for lease-purchase analysis, see Special Guidance for Lease-purchase Analysis (Section 13 of (OMB) Circular A-94, also see 8.c.(2)); and OMB Circular A-11 Appendix B Budgetary Treatment of Lease-Purchases and Leases of Capital Assets.
Apparently reading comprehension, and basic business analysis skills, are in such dire straits within the Federal acquisition corps that “helpful” links are being added to the Federal Acquisition Regulation, so as to walk “professionals” through the process.
We are not making this up.
It’s pretty clear—or it absolutely should be—that before entering into a lease, one should determine whether it is more economically beneficial to instead purchase. This is just Financial Analysis 101. But rather than find acquisition professionals who can actually do Financial Analysis 101, the FAR Councils have chosen to accept the current state of the workforce and simply walk the “professionals” through the required steps, with lots of hand-holding “helpful links” to make sure they don’t stumble along the way.
Anyway, as with all proposed rules, the public (that’s you) is invited to submit comments. Follow the link above (in the first sentence) if you wish to provide input to the FAR Council’s deliberative rule-making process. We do not encourage anybody to mock the rule-makers, as tempting as it may be—though of course we’ve taken that liberty here, within this blog article.
|
