Why pricing and quantities go hand-in-hand for a fixed-price contract

A contractor got into a pricing squeeze when the customer, in this case the Marine Corps, way underestimated the quantities for the services under the fixed-price contract. It learned what can happen when the legal proceedings get complicated. For details on the lessons learned, the Federal Drive with Tom Temin spoke with Haynes Boone procurement attorney Zach Prince.

Interview Transcript: 

Tom Temin Let’s start at the end here. What was the lesson learned? What’s the principle we’re talking about that every contractor needs to know here.

Zach Prince So what was interesting about this case, Tom, and the reason that I want to talk about it is because of the dispute about a release. And a release is like, it sounds like it releases the government or the contractor, depending on, you know, the language. From further claims relating to the subject matter. The government shoves these into a lot of routine modifications, and if you’re not paying careful attention, you might have signed something that says, you know, here’s this new far clause that will actually have pretty substantial costs, and that happens frequently. And executing this mod is a bilateral agreement that the parties have no further liability to one another arising from the facts, you know, giving rise to this mod. So, you have these sort of sweeping formalistic releases that come into a lot of modifications, and contractors are often not reading them and just signing them. And then when later they realize, wait a minute, what we just signed has huge costs, it’s too late.

Tom Temin Right. We have signed away our first born and can’t get it back. How did that work? In this particular case? This was between the Marine Corps and a contractor that was tailoring uniforms.

Zach Prince Yeah. So, at the end of the day, the board in this case, I think, didn’t like the idea of a formalistic waiver of rights. But what happened here is the Marine Corps awarded the contract, this company in 2018 for uniform tailoring, and the pricing was based off of the Marines estimates for types and number of alterations. And those estimates apparently proved to be grievously underestimated. And in 2021, the company submitted a request for equitable adjustment, seeking essentially a doubling of the unit prices for the task orders that had already been performed under this contract, and then a change going forward as well to the unit pricing. The government responded that it would be a good idea for the contractor to withdraw the REA submit a new one, because the amount they were seeking was constantly fluctuating just because they’re continuing to perform work. And so, it was hard for the government to nail down the exact fixed amount the contractor was seeking. Why don’t you, contractor, just submit an REA for a go forward, change the unit pricing. Then once we’ve got a unit price that’s established, submit a new REA to seek the retroactive recovery of the impact of that unit price for everything that’s happened so far.

Tom Temin Sounds like the government was maybe laying a trap there from what actually happened.

Zach Prince Based basically what actually happened. You might be right. But what I think, you know, with many things in government, there is an interesting decision in the court of federal claims recently they said I never chalk up to malfeasance what incompetence would just as easily explain.

Tom Temin Sure.

Zach Prince And that’s probably this case too. The contractor did just that. They listen to the government. They said, okay, here’s our second REA. Withdraw the first one. This one just seeks a change in the unit prices. And the government responded by issuing a draft final decision with draft modifications that granted that relief. They had some quibbling about the dates, but the government just accepted the argument. They acknowledge that their estimates are wrong, and they acknowledge that there was an impact.

Tom Temin That reworking, though, was for from this point forward on the prices, and it didn’t address so far as the contractor knew what had happened to date when it presumably lost money.

Zach Prince Exactly right. And the contractor was very clear that, good, we’re going to resolve this, and now we’re going to go ahead and submit our next REA for all the money going back. But the issue was the government had included these very broad releases in the draft modification. The contractor caught that issue and they said, hold on, we want you to go back to legal and confirm that this release doesn’t actually impact our ability to go back and seek the money for the prior period, which is what we had always said we’re going to do. The government told them to do, and we’d like you to actually amend it so that it’s really clear that that’s the case. And the government responded, said, well, we don’t have authority to change this, which is silly because it’s contracting officer. But, you know, go ahead, and execute this and it’ll be fine. And the contractor assumed that that meant that in fact, it would be fine.

Tom Temin We were speaking with. Attorney, Zach Prince. He’s a partner at Haynes Boone. And I’m afraid to ask what happened next.

Zach Prince Lo and behold, a few months after it executed the mods with these broad releases, they submitted the new REA and the government very quickly within a week I think denied the REA on the basis that it had been released. Any claims have been released pertaining to these facts, which construed most broadly, means that they also waived the lookback claim.

Tom Temin Right? So, REA, again, is a request for equitable adjustment. And when the contractor submitted that claim, that request for equitable adjustment on the prior part of the contract, Ta da, there was a release in the way, and too bad basically the government was saying.

Zach Prince That’s what they were trying to do to the contractor here. And, you know, it’s hard to swallow this. I think this is the second case in the last couple of months that I’ve spoken with you about where the government tried to pull a procedural trap that struck me as really unfair. And this is another example where the government tried to pull this card that they knew full well. When they negotiated this REA, the contractor did not think they were releasing the claim. Not only that, the government told the contractor to submit the claim this way, and then they’re trapping them. They say, we got you, we’ve got this release.

Tom Temin All right. So then what happened? Do they take them to court?

Zach Prince So they took them to the Armed Services Board of Contract Appeals, which is where the case is now. And it’s, $800,000 case. So usually in that context, you’ll do an expedited procedure where you don’t do some of the more formal trial mechanisms that you would do if it were a really big case and the government moved for summary judgment. They asked the court to decide just on the record before it that the release barred the claim and that’s that. Well, the board didn’t agree. The board found that yeah, the language of the release appears to be clear and unambiguous, but you have to look at the context, particularly in the context of a release. You have to understand the circumstances, which allows here you to bring in the intent of the parties, which means, at least for now, the government can’t win on the issue of the release. That doesn’t mean the contractor won either. That’s going to go on to later proceedings, effectively a hearing, but for now at least, the government did not win in on this issue.

Tom Temin Interesting. So, the lesson then is to read your claims, read your contracts, basically read whatever the government puts in front of you to sign.

Zach Prince Yeah, I’d say there are a few lessons here, but the two biggest ones to me are, one, make sure that you understand what you’re signing from the government always. Even if it’s a routine mod. You know, I’m thinking back to the Covid vaccine clause, because that one struck me as crazy that the government was including releases and every mod that they issued on that, saying that you’re not owed any money for something that is obviously a sweeping impact for most companies, even if the government says, don’t worry, it’s routine, read what they’re putting in front of you. Ask your lawyers if you have to make sure you understand what it is you’re signing, and if it says anywhere this is, you know, a satisfaction of any issues that could arise from the set of facts. That’s a release. And that means that you might not be able later if you realize that there is a cost to the change to get any money. The second thing I would caution contractors to be careful of is don’t rely on statements that somebody in the government makes that seems to contradict otherwise clear contract language. And I don’t think it’s because the government is always trying to trap you. There are probably people out there who are. It’s because people move around and people, you know, you’re contracting officer today might not be your contracting officer tomorrow. In this case, your contract specialist never had authority to bind the government. And it’s not fair. But it’s just the reality that if the government says something means something, that the words don’t suggest. Words matter and mean things right. And you just have to be careful that the things you sign reflect what you believe they should, and not what one of the parties says they do.

Tom Temin Got it. And by the way, this company was called Sonnabend. And what was it they were actually doing for the Marine Corps?

Zach Prince Uniform tailoring? Actually, they were, tailoring uniforms for Marine Corps recruits.

Tom Temin Recruits have their uniforms tailored.

Zach Prince It looks like. They’ve got a first fitting and a second fitting. And the issue here was all about second fitting alterations.

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