It’s not everyday that you read about one of your longtime heroes, the Federal Acquisition Regulations (“FAR”), losing some of its mojo. The Nash & Cibinic Report read as follows: “The FAR: Does It Have Contractual Force and Effect?”
According to the article, there remains some confusion about the application of the FAR based upon the recent decision in Lockheed Martin Integrated Systems, Inc., ASBCA 59508 (Dec. 16, 2016). In Lockheed, the Army awarded two separate indefinite-delivery, indefinite-quantity, time-and-materials (“T&M”) contracts to Lockheed for various support services. Following various audits, the Government filed a complaint against Lockheed seeking more than $115 million in reimbursement based upon a claim of breach of contract. Lockheed filed a motion to dismiss, arguing that the Government’s legal theory failed because the FAR did not provide a contractual duty or obligation for Lockheed to manage its subcontractors.
What did the FAR say? Both contracts expressly incorporated FAR provisions, including 52.232-7 addressing T&M and labor-hour contracts. Based upon an audit of certain subcontractor costs, the Government determined that Lockheed violated FAR 42.202, which provides that “the prime contractor is responsible for managing its subcontractors.” Accordingly, the Government argued, the costs submitted by Lockheed without adequate record-keeping or back-up documentation were questionable.
What did the Board say? The contracting officer concluded that Lockheed was responsible for repayment of approximately $102 million because the contractor breached its duty of performance. The Board disagreed:
Notably, nowhere in either complaint or COFD does the government cite to a contract term giving rise to a contractual obligation or duty. As the government conceded in its briefs, FAR 42.202 is not a term of the contract.
Our inquiry does not end there, however. The government asserts for the first time in its briefs that there exists an implied contractual duty for a prime contractor to manage its subcontracts . . . [T]he government summarizes the essence of its claim, which is that [Lockheed]’s breach of a contractual duty to manage its subcontractors led it to breach the contract by submitting claims for subcontract costs that were unallowable because [Lockheed] breached its contractual duty to manage its subcontractors. Thus, ipso facto, if [Lockeheed] did not breach a duty to manage its subcontractors, it did not submit unallowable costs for payment, and if it did not submit unallowable costs for payment, it did not breach the contract.
Ultimately, the Board concluded that the Government incorrectly went “forward with a claim for over $100,000,000 that is based on nothing more than a plainly invalid legal theory.”
When does the FAR apply? A common misunderstanding about the FAR is its binding nature or application to government contracts. Nothing in the FAR indicates that it is contractually binding or incorporated into government contracts as a whole. According to Nash & Cibinic, “[I]n the course of our teaching we have been startled by the number of acquisition personnel in both Government and industry, including personnel with long experience, who believe that the FAR is contractually binding.” Therefore, when the Government wants to contractually bind a contractor to comply with a particular FAR provision, it must include the appropriate FAR clause within the contract.
Did the FAR lose its mojo? Nah. The real lesson from Lockheed is one about mistaken mojo—too many people think the FAR generally applies in full force to all government contracts. But according to Nash & Cibinic, the rule is simple: “In order for a contractor to be obligated to act or refrain from acting in a specified way pursuant to FAR, the contract must plainly say so. It must include a term to that effect, such as a specification or a contract clause.”