Contract Clauses for Commercial Items

HOST: JOHN CARPENTER:
Welcome to another in our series of podcasts on government contracting topics. My name is John Carpenter, and I'm joined today by John Ford, a senior consultant in our group. Today we want to talk for a few minutes about contracts for commercial items, the kinds of clauses a contractor should expect to find, and clauses that do not belong.

GUEST: JOHN FORD:
For background, for the last 25 years the government has had a preference for acquisition of commercial items. In the 1990s a study was done on premiums the government was paying for using government-unique procurement procedures and particular specifications. The study showed DOD was paying a 19% premium on contracts using government-unique requirements instead of commercially available items and contracting techniques.

GUEST: JOHN FORD:
The preference for commercial items was contained in FASA. When FASA was passed, instead of using the regular rule-making process of the FAR Council, the government established FASA implementation teams to implement various sections of FASA, and I was on the commercial item FASA implementation team. I got in on this from the ground floor and have had an interest since that time.

GUEST: JOHN FORD:
There are FAR provisions on this. The policy for clauses to be included in contracts for commercial items is: to the maximum extent practicable, contracts for commercial items should include only those clauses that implement provisions of law, regulation, or executive order, or that are determined to be consistent with customary commercial practice.

GUEST: JOHN FORD:
This tells contracting officers the government’s policy is not to include all the FAR clauses in Part 52 that would normally be included in a fixed-price contract, but to be guided by the principle of selecting only clauses necessary to implement law or executive order or those consistent with customary commercial practices.

GUEST: JOHN FORD:
The FAR has tried to make life easier for contracting officers regarding the “consistent with customary commercial practice” determination by using FAR 52.212-4, which contains paragraphs covering topics such as assignment of claims, inspection, and disputes. FAR 52.212-4 includes terms and conditions generally consistent with customary commercial practices, so contracting officers do not have to guess what that means.

GUEST: JOHN FORD:
Where FAR 52.212-4 is used, some of the terms and conditions within FAR 52.212-4 can be tailored—that is, negotiated between the contractor and the government. Nothing in the FAR gives the government a unilateral right to change these clauses and force the contractor to accept them. Of course, contractors can decline the deal if they do not accept the clauses.

GUEST: JOHN FORD:
Some paragraphs in FAR 52.212-4 implement statutes and therefore cannot be tailored. Paragraphs that do not implement statutes can be tailored. One of the most significant paragraphs from contractors’ perspective is the changes paragraph in FAR 52.212-4.

GUEST: JOHN FORD:
Contractors are used to standard changes clauses in non-commercial contracts where the government has a unilateral right to order changes in certain parts of the contract, such as specifications or the description of services, and the contractor is bound to comply with those orders that are within the general scope of the contract, subject to equitable adjustment for repricing.

GUEST: JOHN FORD:
Under FAR 52.212-4, paragraph (c), the changes paragraph does not give the government a unilateral right to make a change in the contract. All changes to the contract must be negotiated and mutually agreed to between the contractor and the government.

GUEST: JOHN FORD:
That raises the issue of constructive changes. Under standard changes clauses, there is a well-defined concept of a constructive change where the government’s acts or omissions, before or after award, have an impact on the contractor. For example, defective specifications can be a pre-award act by the government that constitutes a constructive change.

GUEST: JOHN FORD:
The concept of a constructive change arose because the government could order changes, and the law created a legal fiction that considers done that which is required to be done. As a result, boards and courts recognized constructive changes entitling contractors to equitable adjustment under the changes clause.

GUEST: JOHN FORD:
The concept is not entirely clear under the changes paragraph as currently written in FAR 52.212-4. In my view, constructive change does apply to contracts for commercial items. For example, we had a client responding to an RFP for commercial items where part of the work was to attend certain meetings with the government. The RFP did not describe a schedule of meetings.

GUEST: JOHN FORD:
At the Q&A session for the RFP, contractors asked about how many meetings and how frequent, and the government said the schedule was to be determined. In the contractor’s final proposal revision, the contractor identified pricing assumptions, including that the meetings described in the RFP would be held once a month. The contracting officer confirmed with the program office that this was a valid assumption, and the contractor priced based on monthly meetings.

GUEST: JOHN FORD:
This was a follow-on contract where the predecessor contract was held by a different contractor. Under the predecessor contract, those meetings had been held weekly, and the government knew they were weekly but did not tell the new contractor. After award, the government required the contractor to attend weekly meetings, and the contractor’s cost for attending meetings on the firm-fixed-price contract increased by 400 percent.

GUEST: JOHN FORD:
In that case, the contract was later terminated, we filed a claim for constructive change, and in settlement negotiations we obtained the constructive change amount we requested because of those meetings. So I believe the concept of constructive change still applies to commercial item contracts.

GUEST: JOHN FORD:
For clauses that implement provisions of law or executive order, contracting officers use FAR 52.212-5, selecting from a list of clauses that implement statutes or regulations and determining which are applicable to the acquisition. If a clause is not checked off in FAR 52.212-5, the contractor does not have to comply with it; only the checked clauses apply.

GUEST: JOHN FORD:
However, contracting officers often check many boxes, and we frequently find clauses included that probably do not belong. Contractors should push back on contracting officers when clauses are not applicable to the type of contract or when monetary thresholds or performance periods make clauses inapplicable.

GUEST: JOHN FORD:
We recently had an example where the contracting officer included the wrong version of FAR 52.212-5 in the contract, which contained clauses that were no longer applicable after regulatory changes. In that case, the contracting officer needed to replace the clause with the correct version that reflected current statutes, regulations, and executive orders.

GUEST: JOHN FORD:
Agencies do have authority to add additional clauses necessary to carry out the purpose of the contract, such as option clauses for an IDIQ commercial item contract and ordering clauses. Those are appropriate.

GUEST: JOHN FORD:
Where we see problems is agencies including FAR 52.212-4 while also including FAR clauses that apply to firm-fixed-price supply contracts—standard changes, inspection, termination for convenience, default, and similar clauses—that are effectively superseded by paragraphs in FAR 52.212-4.

GUEST: JOHN FORD:
If you see an RFP that has extraneous clauses duplicative of paragraphs in FAR 52.212-4, you must push back on the agency to get those clauses eliminated. Otherwise you create internal conflicts between clauses—for example, a standard changes clause giving the government a unilateral right to issue changes versus FAR 52.212-4 paragraph (c) requiring mutual agreement. You cannot have both without inherent conflict.

GUEST: JOHN FORD:
Standard rules of contract interpretation require all terms to be given reasonable meaning so no part of the contract is read out. Self-deleting clauses do not apply, and built-in conflicts are likely to lead to later disputes, legal fees, and added costs for the contractor.

GUEST: JOHN FORD:
Another clause that gives me heartburn and does not seem consistent with standard commercial practices is the subcontractors clause, FAR 52.244-2. In the commercial marketplace, a buyer generally does not have the right to tell a seller who to subcontract to. Consent-to-subcontract clauses often do not make sense and are generally worthless in a firm-fixed-price commercial item contract.

GUEST: JOHN FORD:
We also cannot forget subcontract flow-down clauses. FAR 52.244-6 lists the only clauses required to be in subcontracts for commercial items. A prime can include other clauses necessary to carry out the contract, such as an ordering clause or option clause for an IDIQ subcontract.

GUEST: JOHN FORD:
However, when a prime contract is not for commercial items, many prime contractors simply copy all prime contract clauses into subcontracts. If you are a subcontractor providing commercial items, look at FAR 52.244-6 and the only clauses required in your subcontract, and push back on the prime when they include clauses like Allowable Cost and Payment or Cost Accounting Standards that do not fit.

HOST: JOHN CARPENTER:
That reinforces, once again, the need to read everything coming your way and to push back when clauses that do not belong are included. There is an old rule about contracting—you always say it: RTFC, read the full contract.

GUEST: JOHN FORD:
Read the full contract.

HOST: JOHN CARPENTER:
Thank you very much. We will look forward to having you back on a future podcast.

GUEST: JOHN FORD:
My pleasure.