What Happens When Funding Runs Out for Your Project?

Hall of Fame Philadelphia Eagles radio man Merle Reese once saw a play that seemed improbably — and perhaps against the rules — to which he disclaimed “he can’t do that!  Yes, he can do that!”  You might be thinking the same thing when you receive notice from your federal government client that the project is being shut down for lack of funding and you will be paid only for the work already in place.  This is a hard pill to swallow because your profit may not have come until a later part of the project that now will not be completed.

Almost all government contracts contain a termination for convenience clause that allows the government to terminate a contract without liability for breach of contract.  Such clauses owe their roots to military procurement contracts as a way for the government to avoid liability once a war ended. Under federal regulations, you may not recover anticipatory or consequential damages following a termination for convenience.  However, you are entitled to compensation for the work you performed at the time of termination and potential other costs delineated in your contract.

Yet, there are three exceptions to this general rule:  (1) when the government terminates the contract in bad faith; (2) the government abuses its discretion in its decision to terminate the contract; or (3) when the government enters into a contract knowing it will terminate it before it is completed.

Unfortunately, you burden of proving “bad faith” is a high. To establish a breach based on bad faith in this context, you must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.   The clear and convincing standard is stricter than the preponderance of evidence standard that is normally applied in civil cases.  In determining whether the government clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.

Termination for convenience clauses are just another factor you need to deal with in performing public work.  As is usually the case, yes the government can do that.

Are You Violating The False Claims Act?

One of the great things about living in a large city is being able to walk everywhere.  I like walking because it is when I do my thinking.  Sometimes I do too much thinking that it causes me to walk several blocks past my intended location. We sometimes lose focus on what is happening around us while we are focused on the task at hand.  It is easy to lose focus on the bigger picture on a complex construction project with its multiple moving parts, men, and material.  Unfortunately, the consequences of losing your focus on a construction project are much worse than simply walking past your intended location.

In recent years, federal prosecutors have raised the stakes for contractors that lose focus on a construction project.  One area where you can easily lose focus is in complying with the multiple federal laws that apply to the project.  Under the False Claims Act, contractors — and their executives — can be prosecuted for failing to assure that their subcontractors are following certain those laws.

A False Claims Act violation occurs when a person “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.”  Importantly, unlike common law fraud, the government need not show that you intended to defraud the government when you submitted your claim.  The false certification need not be an expressly false statement for there to be a False Claims Act violation.  Under the implied certification theory of liability you can be liable for violating the “continuing duty to comply with the regulations on which payment is conditioned.”

The case U.S. ex rel. Wall v.Circle C Construction, LLC, is a good example of what can happen when you fail to make sure that your subcontractors are following federal regulations before submitting an application for payment.  The defendant, Circle C Construction, had a contract with the Army to perform work on buildings at Fort Campbell in Tennessee.  Prosecutors claimed that Circle C violated the False Claims Act by submitting applications for payment falsely claiming that all of its subcontractors paid prevailing wages under the Davis Bacon Act.

As is typically the case, Circle C’s contract with the Army required Circle C and its subcontractors to pay prevailing wages, to submit certified payroll showing the payment of prevailing wages, to insure its subcontractors complied with the Davis Bacon Act, and to assure that the certified payroll submitted to the Army was accurate and complete.

Circle C, however, neglected to submit certified payroll for its electrical subcontractor, Phase Tech.  The reason for the failure to submit accurate certified payroll for Phase Tech was not because of some scheme to defraud the government by Circle C, rather, it was Circle’s C sloppiness in determining who was working on the project.  In other words, it was not intentional. However, intent was not required because the court applied the implied certification theory of liability and found against Circle C and awarded the government over $500,000 in damages, which it then trebled (tripled) under the False Claims Act, for a total damage award in excess of $1.5 million.

The Circle C case is just one example of easily you can run afoul of the False Claims Act by failing to be diligent that you and your subcontractors are following the federal laws and regulations regarding your project.  Other examples where contractors have run into similar False Claims Act issues are when it fails to assure that federal DBE rules are being complied with on a project.   You should be particularly concerned about the False Claims Act because False Claims Act prosecutions have nearly doubled over the last few years and there have become “en vogue” for federal prosecutors.

Is Your Disparity Study Accurate?

(This guest blog post from John Sullivan, Esquire, a Baltimore lawyer who specializes in DBE and MWBE disparity studies. John’s website is Croson Legal Services.  He can be reached via email at jcharlessullivan@yahoo.com)

For more than two decades it has been true that subcontracting goals – Disadvantaged Business Enterprise goals on federal work and Minority and Women Owned Business Enterprise goals on state and local contracts – must be supported by a disparity study. More than 300 of these studies have been completed around the country to support various DBE and MWBE programs.  Without a viable disparity study, DBE programs are subject to constitutional challenge.  However, just how credible are the disparity studies that state and local government rely upon?

Take for example the Austin, Texas based economic consulting firm, NERA, who finds itself is serious trouble for the disparity studies it produced.  NERA produced dozens of the disparity studies for state and local agencies such as SEPTA, the City of Baltimore, New York State, Hawaii DOT, and the City of Cleveland.

Cleveland awarded NERA a $758,000 no bid contract to complete a disparity study intended to support the city’s MWBE program. It turns out that large chunks of the study were cut and pasted from other NERA studies.In fact, the 36 page legal section of NERA’s Cleveland study is a word for word copy of the legal section done for the Missouri DOT. NERA did not conduct new surveys for Cleveland, instead relying on survey answers for a study done on behalf of the Northeast Ohio Regional Sewer District. One sentence in the Cleveland study referred to the “Houston market area” when the study meant to be discussing Cleveland.

The Cleveland Plain Dealer has run a series of articles on the NERA study. The president of the local Black Contractors Association announced, “Fraud has been perpetrated here.” The Plain Dealer dismissed the study as “slickly repackaged recycling.”

The heart of all disparity studies is the determination of availability – what percentage of contractors who are qualified, willing and able to complete public work are MWBEs or  DBEs? NERA disparity studies apply a headcount approach to availability. All construction firms, regardless of size, are considered the same. The reality that only big construction firms can complete the biggest construction contracts is ignored.

The NERA disparity study for Cleveland concluded that there was sufficient evidence of discrimination to justify continuation of the city’s MWBE program. The City Council agreed. Two lessons are to be learned here.

The first is that a disparity study cut and pasted together is not, or at least should not be, evidence of discrimination justifying preferences in public construction contracts. The law and a sense of fairness require that if there are to be preferences in local contracting, evidence of discrimination in local contracting is needed. Evidence from other parts of the country should not suffice.

The other lesson is that politicians voting on disparity study-based programs don’t really understand what they are voting on. To be fair, disparity studies are often long (the Cleveland study exceeds 700 pages) and complicated documents. Few decision makers have the time, interest, or expertise to read the studies.

PA Board of Claims Has Exclusive Jurisdiction Over Contractor Claims

My age makes me part of perhaps the last generation to go to college where computers, the internet, and email were not in widespread use.  Before the internet age, Villanova University, where I went to undergraduate and law school, would notify students of the time and location of final exams by posting several small print pages that you would need to decipher to find the date, time, and location of your final exam.  The date, time, and location of the final exam for every class Villanova offered appeared on these print outs.  You can imagine what they must  have looked like.  I can remember trying to find my class and then following the small print line over to find the date, time, and location when it would be held.

On one occasion, most likely attributable to a few Yuengling’s the night before, I wrote down the wrong place and time for my final exam.   I showed up on at the time and location when I thought the exam should begin only to find the classroom empty and locked.  Luckily, I was able to contact the professor, which required me to actually call or go see him in person — no email, and he agreed to let me take the final exam.  However, I still ended up with a C, in a class when I should have done much better.  The grade was no doubt influenced by my failure to show up at the right place and time.

Moral of the story – don’t be in the wrong place at the wrong time.  This adage applies to bid protest litigation involving the Commonwealth of Pennsylvania as well.   In Scientific Games Intern, Inc. v. Commonwealth of Pennsylvania, the Pennsylvania Supreme Court held that under the Pennsylvania Procurement Code the Commonwealth Court did not have jurisdiction over a successful bidder’s claim for specific performance.

The case involved an award of a bid for a computer system to monitor slot machine’s for the Department of Revenue.  The plaintiff, SGI, was submitted the winning bid and contract negotiations ensued.  Eventually, an agreement on terms was reached and the Office of Chief Counsel transmitted a copy to SGI for execution.  SGI signed the contract and returned it to the Commonwealth.  However, before the Commonwealth could fully execute the contract.  The Commonwealth cancelled the contract under Section 521 of the Procurement Code.  SGI then brought an action against the Commonwealth in Commonwealth Court seeking specific performance of the contract.  The Commonwealth raised preliminary objections challenging the Commonwealth Court’s jurisdiction to hear the dispute, which the Commonwealth Court overruled.  On appeal the Supreme Court overturned the Commonwealth Court and explained:

“The Procurement Code establishes administrative processes to address disputes arising in the procurement setting. On account of the doctrine of sovereign immunity, however, contractors, bidders, and offerors have limited recourse and remedies. Relative to controversies in matters arising from procurement contracts with Commonwealth agencies, the Board of Claims retains exclusive jurisdiction (subject to all jurisdictional prerequisites), which is not to be supplanted by a court of law through an exercise of original jurisdiction.As to challenges to cancellations of solicitations asserted under Section 521 of the Procurement Code, the Legislature did not implement any waiver of sovereign immunity and afforded no remedy to aggrieved bidders and offerors which have not yet entered into an executed contract with a Commonwealth agency. For those attaining the status of contractor—which we find should be deemed to occur at the time a contract is executed by all parties (as that event is also understood for purposes of Section 521)—the remedial procedure is via Section 1712.1, subject to review within the exclusive jurisdiction of the Board of Claims.”

As a result, the plaintiff’s claim was dismissed.  When dealing with a challenge to an action involving the Procurement Code it pays to file your claim at the right place at the right time.

DBE/MBE Goals Threaten to Make Complete Mess of Project

Here is one I have not seen before, a project that threatens to get derailed because the general contractor proactively included M/WBE goals in its contract.  The story reported in the Baltimore Business Journal  involves M/WBE hiring goals in Whiting-Turner’s contract to build the Horseshoe Casino in Baltimore.  According to the story, Whiting Turner, the project’s general contractor, preemptively set M/WBE participation goals before the Maryland Lottery and Gaming Control Commission, the state agency in charge of the project, set its official M/WBE hiring goals.  Whiting-Turner established a 25% MBE goal and a 2% WBE goal.  However, the Maryland Minority Contractors Association believes that goal is arbitrary and too low and is threaten to bring suit to prevent the project from proceeding until the state sets its official hiring goals for the project.  Interestingly, the Maryland Governors office concedes that state’s MBE regulations apply to the project.

There are several interesting aspects of this story.  First, there is the issue of standing.  As a threshold matter, the MCA must demonstrate that it has a protected right or interest that the Gaming Commission actions has harmed.  However, the MCA has no “right” to have a certain amount of work set aside to its members.  In fact, strict quotas and set aside are invalid.

Second, if Whiting-Turner already has a contract with the Gaming Commission with W/MBE hiring goals that the Commission accepted, the Commission would be in a tough legal position to demand that Whiting -Turner change those goals.  Whiting-Turner would be on sound legal ground to refuse any change to the W/MBE goals in its contract with the Commission.

Finally, the legal theory that the Minority Contractors Association is positing to challenge the goals is interesting.  The MCA claims that the State must establish hiring goals based upon a disparity study and is apparently relying upon the Maryland District Court’s holding in Associated Util. Contractors of Maryland, Inc. v. Mayor & City Council of Baltimore, 83 F. Supp. 2d 613, 622 (D. Md. 2000).  What’s interesting is that case involved the challenge to MBE program by a — largely — non-minority contractor’s association, who claimed that their non-minority members would be injured by the program.  The holding in that case reaffirmed the long standing proposition that in order to survive constitutional muster courts would apply a strict scrutiny analysis to MBE programs and that in order to survive such scrutiny that state proposing the race based program needs to come forward with compelling evidence of discrimination, i.e. a disparity study.

Here, a challenge to Whiting-Turner’s contract based on this theory could very well blow up in the MCA’s face because a disparity study is used to just the constitutionality of the program.  If the Court comes back and requires a disparity study which shows that the goals should be less than what Whiting Turner proposed, it could trigger a lawsuit by non-minority firms while also decreasing the number of minority firms participating on the project.

The MCA may want to rethink their strategy here.

Bid Protests Are Worth It!

So concludes an upcoming report by the former Dan Gordon, the former head of the Office of Federal Procurement Policy.

According to Gordon, among the pro’s of a bid protest are:

Protests introduce a relatively low-cost form of accountability into acquisition systems by providing disgruntled participants a forum for airing their complaints;

They can increase potential bidders’ confidence in the integrity of the procurement process if the GAO is directly responsive to participants’ complaints, leading more players to participate;

Protests can increase the public’s confidence in the integrity of the public procurement process; –The known availability of the protest avenue empowers those in contracting agencies who face pressure to act improperly;

Protest decisions made public provide a high level of transparency into what is happening in the federal procurement system; and

Protests provide guidance.

Contractors considering a GAO bid protest frequently grapple with whether the protest will hurt their chance for future contracts. The conclusion from this study seems to be that this is not a valid concern.  Could this report push even more contractors to protest bids with the GAO?

How to File a Federal Bid Protest

In recent years, as private work has become more scare, the competition for public projects has increased.  In turn, so have the number of bid disputes challenging the awards of those public contracts.  Since 2006, the number of bid protest filed with the Government Accountability Office (“GAO”) has nearly doubled from approximately 1,300 protest filed in 2006 to over 2,400 filed in 2012.

 The rules for challenging a contract award and bringing a bid protest depends on the whether the contract is a federal, state, or local government contract.  This blog post gives an overview filing a bid protest for a federal government contract.

Where:  Disappointed bidders on a contract being let by a federal government agency have a choice of filing a bid protest in four different places: (1) the agency giving the award; (2) the GAO; (3) the Court of Federal Claims; and (4) the disappointed bidders local federal district court.

Each forum has it pros and cons. However, the GAO is by far the most popular forum for filing a bid protest on a federal contract award because of the detailed rules for hearing and disposing of the protest and the speed at which the matter is disposed of.  Indeed, the GAO will rule on a bid protest within 100 days of a bid protest being filed with it.  Moreover, with few exceptions, a claim filed with the GAO results in an automatic stay of award of the contract subject to the dispute.

When:  A post-award bid protest must be filed with the GAO within ten (10) days.  While there is no set time frame for filing a bid protest with either the Court of Federal Claims or a local federal district court, because bid protest filed there seek preliminary injunctive relief, they should be filed as soon as possible.  In fact, any delay in filing a bid protest with the federal court may result in the claim being denied.

Does PennDOT Know We Have a Public Private Partnership Act?

The Pennsylvania Department of Transportation recently released its first ever “Transportation Performance Report, a detailed rating of the state’s efforts in safety, mobility, system preservation and accountability, with the results underscoring the need for additional transportation investment.”

According to the report “In the categories of system capacity enhancements, local bridge conditions, pavement reconstruction and transit infrastructure, the state’s performance is rated as “low” due to limited resources and magnitude of need.”  A point that PennDot Secretary Barry Schoch underscored “we still have significant needs that we can’t address with the resources we have.”

Is PennDot aware that last year Pennsylvania passed a public private partnership act for this very reason?  You would think that this report would serve as a perfect platform for PennDot to promote the new P3 and get private industry interested in investing in infrastructure project.

How to Count Material Suppliers Towards DBE Goals

(Note:  My DBE related blog post are always among the most read.  When I recently asked folks for help coming up with a future blog post topic, DBE “regular dealer” issues was a near unanimous response.)

Under the Department of Transportation (“DOT”) DBE regulations, contractors can only count the value of the work actually performed by a DBE towards the contractor’s DBE goals.  This is usually not a problem when the DBE is performing actual construction of a component of the improvement.   However, a problem arises when using DBE material suppliers to meet DBE contracting goals.

Under DOT DBE regulations, contractors can count 60% of the value of supplies and materials purchased from a DBE supplier only if that DBE supplier is a regular dealer.  The regulations define “regular dealers” as:  “a firm that owns, operates, or maintains a store, warehouse, or other establishment in which the materials, supplies, articles or equipment of the general character described by the specifications and required under the contract are bought, kept in stock, and regularly sold or leased to the public in the usual course of business.”

However, this definition that appears in the DOT DBE regulations, which are binding legal regulations, leaves open several questions.  Must a DBE regular dealer physically have the item in stock in order for its value to be counted?  Can a DBE regular dealer “drop ship” specialty products?

In 2011, the DOT Office of General Counsel attempted to answer these and other related questions concerning DBE “regular dealers”  when it published a “Q&A” that attempted to address these issues. The DOT periodically publishes Q&A’s concerning questions and issues that are raised by the public.  Although they are not legally binding regulations, they do represent the represent DOT’s institutional position.

In short, the DOT’s Q&A on regular dealers suggests that there are very few circumstances, except for being out of stock, where a contractor can be given credit for the value of materials that a DBE supplier must order for the contractor.  Moreover, the DOT ruled out drop shipments as being counted towards DBE goals.

Why is this important?  First, it impacts you bid and subjects your bid to attack from both the contracting agency and a disgruntled bidder.  While an agency cannot reject your bid per se  for failing to meet stated DBE goals, it can reject it if you cannot demonstrate your “good-faith” efforts – as defined in the regulations – to meet the stated goal.  Furthermore, if you have used DBE suppliers to meet the stated goal and your are the low bidder, a disgruntled bidder could challenge your bid on the grounds that your DBE goals fail because they rely upon DBE suppliers who are not regular dealers in the products required by the specifications.

Second, the DOT is pressuring state agencies to more closely monitor compliance with the DBE supplier counting requirements and DOT investigations concerning DBE fraud and compliance are on the rise.  In fact, late last year PennDot revised its rules for counting DBE suppliers to be consistent with DOT guidance offered in its Q&A.

Do Not Include This Your Next Bid

The DOT Inspector General reports  Luis Rodriquez is charged with making false statements in his bid for a maritime security contract by:

indicated that his company could provide a private army of 3,000 men; however, his company did not have any employees, executive officers, or personnel.

This begs the question: even if the company did have employees, executive officers, and personnel wouldn’t there still be the small problem of a raising the 3,000 man army?