From time to time we pretend to be lawyers and we try to interpret a recent judicial decision. We’re not lawyers, though. We’re really not. Much of the legal jurisprudence that comes our way baffles us. So keep that in mind. If you want good legal advice, hire an attorney. If you want our layperson’s thoughts on legal stuff that impinges upon government contract cost accounting, administration, and compliance, then please keep reading this blog article.

Today’s discussion concerns the Contract Disputes Act (CDA) and what claims can be adjudicated by a court. The CDA confers jurisdiction to one of two types of fora: either the Court of Federal Claims or an appellate Board such as the Armed Services Board of Contract Appeals or the Civilian Board of Contract Appeals.

But what is a claim?

The FAR defines a “claim” at 2.101; the definition states –

‘Claim’ means a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. However, a written demand or written assertion by the contractor seeking the payment of money exceeding $100,000 is not a claim under 41 U.S.C. chapter 71, Contract Disputes, until certified as required by the statute. A voucher, invoice, or other routine request for payment that is not in dispute when submitted is not a claim. The submission may be converted to a claim, by written notice to the contracting officer as provided in 33.206(a), if it is disputed either as to liability or amount or is not acted upon in a reasonable time.

Based on the FAR definition, a claim can be a demand for one of three things:

1. The payment of money in a sum certain

2. The adjustment or interpretation of contract terms

3. Other relief

But whatever a claim may be, it must also arise “under” or “relating to” a government contract.

And therein lies the question we will explore today. What does it mean to arise under or relating to a contract?

This question was tackled by the Armed Services Board of Contract Appeals (ASBCA) in its recent opinion on a government motion to dismiss a contractor’s appeal of its contracting officer’s final decision, based on an asserted lack of jurisdiction by the ASBCA. The decision, captioned “ABB Enterprise Software, Inc., f/k/a Ventyx" (ASBCA No. 60314), concerned allegations by a contractor that the Navy had violated its software agreement by using multiple copies of the contractor’s software. Eventually the contractor filed a claim with the contracting officer, who denied it because it was not a dispute covered by the CDA, in that it did not arise under and/or was not related to the contract. The contractor appealed that COFD and, during the appeal process, the government filed a motion to dismiss for lack of jurisdiction, essentially repeating that same argument the contracting officer had used to deny the contractor’s original claim.

According to Judge Prouty’s recital of the facts, ABB Enterprise Software, Inc., which was formerly known as Ventyx, which was formerly known as Tech-Assist, Inc., held two contracts with the Navy. Each contract was awarded to acquire “a number of Electronic Shift Operations Management Systems (eSOMS) clearance and database software modules.” The contracts “also expressly required Tech-Assist to provide to the Navy licenses to use the software.”

Separately, the Navy and Tech-Assist executed a software license agreement for 268 copies of the eSOMS software. The dispute arose because Ventyx (Tech-Assist’s successor-in-interest) complained that the Navy had violated the software agreement. For its part, the Navy denied (in writing) that it had violated the agreement, but also stated that any disputes would need to be resolved pursuant to the requirements of the Contract Disputes Act. There was extensive correspondence over a period of at least 18 months, “culminating in a 28 June 2013 letter from a Navy attorney to Ventyx’s general counsel, suggesting that Ventyx file a CDA claim if it wished to pursue the matter further.” Apparently Ventyx was surprised when the contracting officer rejected its claim, using the rationale that a license agreement violation was not a CDA dispute.

In its motion to dismiss, the Navy argued that the “arising under or relating to” a contract requirement was not met, since the software agreement did not expressly reference any government contract. The Navy further argued that the language must be read narrowly, such that “only direct breaches of a contract” would qualify as meeting the test. Judge Prouty quickly dismissed the Navy’s arguments, writing that “the first argument is not consistent with binding precedent; the second is belied by the uncontroverted facts.”

In making his decision, Judge Prouty cited to a 2011 Federal Circuit decision, Todd Construction, L.P., in which the Federal Circuit “instructed that this phrase is to be read ‘broadly’ in the context of CDA jurisdiction.” As Judge Prouty wrote—

Put yet another way, to be related to a contract, a claim ‘must have some relationship to the terms or performance of [the] government contract.’” Accordingly, “we reject the Navy’s proposed construction of the CDA, which would limit our jurisdiction to only those claims involving breaches in the terms of the contract or matters encompassed in the disputes clause.

As for the Navy’s second argument, Judge Prouty wrote “execution of the license agreement was part and parcel with the performance of the contract. The contract was for acquisition of software along with the associated license agreement. … Thus, the license agreement … was required by the contract and related to performance of that contract.”

It is axiomatic that our system of justice is an adversarial one. We think, however, that the Navy’s arguments were a bit too adversarial, and verged on frivolity—wasting the Board’s resources and delaying a just decision.

But what do we know about such things?

Recently we took umbrage at the phrase “the prime is responsible for managing the subcontractor” – asserting that it had been taken out of context and inflated by DCAA and GAO into a meaning the rule drafters had never intended. Despite our strong reservations with what government folks had done with the language, we were careful to distinguish certain things with which we agreed. We wrote about an official DCAA presentation –

It states: The prime contractor is primarily responsible for subcontract award, technical and financial performance, monitoring, and payment to the subcontractor for the work accomplished under subcontract terms. That’s quite true and unobjectionable ….

Indeed, there is nothing unobjectionable about the idea that the prime contractor (or higher tier subcontractor) is responsible for managing its subcontractor. If you know anything about Apogee Consulting, Inc., you should know that we have long been vociferous advocates of subcontractor management.

Let’s list those prime contractor duties found above in the DCAA presentation:

• Subcontract award

• Technical performance

• Financial performance

• Monitoring

• Payment for work accomplished

• Compliance with subcontract terms

One sticks out a bit: “monitoring” the subcontractor. What does it mean to monitor the subcontractor? What efforts are sufficient in that regard?

Well, obviously the efforts deployed to monitor a subcontractor depend on the risks. If the contract is firm, fixed-price, then cost risks are minimal, since (except for contract changes) the price to be paid to the subcontractor is fixed and won’t change based on costs incurred. That means that cost allowability issues largely disappear after subcontract award (but need to be addressed when negotiating the contract price). If the contract is FFP, then the subcontractor may not need much in the way of an adequate accounting system; and thus the prime may not have to worry overmuch about monitoring what comes out of that system.

But the converse is also true. If the subcontract type is other than FFP – if, for example, it is T&M or cost-type – then the prime contractor (or higher tier subcontractor) must monitor costs being billed. The prime contractor must review each invoice submitted and exercise due diligence to ensure that only appropriate costs – that is to say, reasonable, allowable, and allocable costs – are being billed and reimbursed. The subcontractor needs to have appropriate infrastructure in place so that the prime can rely on its controls; or, failing that, the prime needs to deploy additional controls to make up for its subcontractor’s lack. It would not be unheard-of for the prime contractor to have a team of “auditors” – its own employees – review each monthly invoice and approve that invoice for payment, just to make sure unallowable costs didn’t inadvertently get reimbursed and then passed on to the government customer through the prime contractor’s own invoices.

The effort expended by the prime (or higher tier subcontractor) depends on a risk analysis. The risk analysis needs to be performed and then appropriate action taken. That’s what we think “monitoring” means.

If the prime (or higher tier subcontractor) doesn’t fulfill its responsibility for monitoring its subcontractors, then it ends up like DynCorp.

DynCorp was the subject of a False Claims Act suit brought by the Department of Justice. According to the DoJ press release—

The United States filed a False Claims Act complaint against DynCorp International Inc. (DynCorp) alleging that it knowingly submitted inflated claims in connection with a State Department contract to train Iraqi police forces (CIVPOL contract) … in its complaint, the United States alleges that DynCorp knowingly allowed one of its main CIVPOL subcontractors to charge excessive and unsubstantiated rates for hotel lodging, translator, security guard and driving services and overhead expenses, and included these charges in the claims it submitted under the CIVPOL contract to the State Department. The complaint also alleges that DynCorp added its own markup to its subcontractor’s excessive charges, thereby further inflating the claims it submitted to the government.

What the allegations seem to say is that DynCorp failed at monitoring its subcontractor. It allegedly allowed the subcontractor to submit invoices, and receive reimbursement, for “excessive and unsubstantiated” costs. DynCorp paid the invoices and included them in its own contract costs (as one does) and then “marked-up” the costs (with some kind of indirect cost rate), which we assume included an element of fee as well. Now DynCorp is facing serious allegations and will have to hire some serious attorneys to defend it and (perhaps) negotiate a serious settlement.

This would seem to be a great illustration of the importance of monitoring subcontractors, which is an element of overall subcontractor management. Effective subcontractor management may be expensive, but we believe that ineffective subcontractor management is even more expensive.