Default and Dispute - Research Paper Example

 Default and Dispute Abstract This study will try to throw some light on various issues of termination. The study will try to analyze various issues regarding government contract. Termination of default and termination of consequence are two important legal procedures practiced in USA. The study will discuss remedy option available for government on breach of contract. The report will try to highlight some key issues regarding re-procurement strategy of government. Later part of the study will focus on dispute processes of contract dispute act. Acquisition planning and cost containment strategies of government are two important aspect of the study. Finally the study will try to recommend some useful strategies to increase the efficiency of procurement process of government. Table of Contents Table of Contents 2 Termination for Default 3 Bases for a Termination for Default 3 Example 4 Termination for Default versus Termination for Convenience 4 Consequences 4 Remedies 5 Government’s Remedy 6 Excess Cost of Re-Procurement 6 Liquidated Damages 6 Contract Dispute Act 7 Acquisition Planning 7 Cost Containment 8 Recommendations 8 References 10 Termination for Default Termination for default can be described as practice of contractual right of prime contractor or the government to terminate the agreement or contract partially or as a whole for the reason of contractor’s failure to perform contractual obligations (in actual or anticipatory). Termination for default causes loss for underperforming contractor in the following way. 1- The contractor will not be able to get reimbursement for undelivered work and they need to repay for any further advancement required in the undelivered product, 2- The contractor is liable to prime contractor to pay extra cost incurred due to terminated contract. Termination of default is a harsh monetary penalty in real practice. Every contractors need to take possible steps to avoid such predicament (James, 1963). Bases for a Termination for Default The Federal Acquisition Regulation has described various bases for termination for default. The bases can be summarized in the following manner. 1- Contractor fails to perform or deliver the work within given time frame, 2- contractor fails to show acceptable performance to accomplish the work. As a result of poor performance the contractor fails to progress in the work, 3- government can show debarment notice to contractor, 4- government can repudiate the contract anticipating future loss that would caused by poor performance of contractor. 4- Contractor fails to perform any of the contractual provisions. Example Termination for Default is categorized as government specific technical term contracting term described in 49.4 of the FAR. When a supplier fails to supply product within the predetermined time frame the government can terminate contract for default. Suppose a supplier did a contractual agreement with the government to supply 60 units of product after 1 month but managed to deliver only 40 units within given time frame. Government has the right to perform termination of default due to failure of the contractor. Termination for Default versus Termination for Convenience Consequences In case of termination for default, prime contractor is not liable for the cost incurred on undelivered work and contractor is liable to pay advance payments made by government. The government has the right to claim manufacturing materials and completed supplies after termination of contract. Contracting officer shall acquire finished material under the default clause on behalf of government. Government is liable to pay contract price of finished supplies to contractor. Payment amount is decided by contracting officer after adjustment with contractor (Acquisition, n.d.). In termination for convenience, government may terminate the contract in whole or in part at any time by giving minimum thirty days notice to contractor. The contractor will be paid due payment for completed work by the prime contractor. Government faces problems to exercise termination for convenience in broader spectrum due to risk factors (huge amount of investment or technical complexities of project). Government has the opportunity to use termination for convenience on small projects with low risk factors. According to FAR 52.249 2, government is liable to pay cost of completed work [cost incurred for finished work + cost incurred on preparatory work + profit margin on completed work] to contractor. Government uses termination for convenience to maintain the efficiency of work in terms of speed, accuracy and quality. Remedies In termination for default, government is required to give ten days notice under the clause at 52.249-6 to contractor. Cost reimbursement facility for contractor is also covered under the clause at 52.249-6. Cost reimbursement contract has no provision to compensate repurchase cost. Contracting officer has the right to use tripartite contract (including government, defaulting contractor and surety) to perform residual right of contractor. In termination of convenience, the contractor has the opportunity to negotiate with prime contractor about reimbursement of loss. The amount of loss incurred to contractor due to termination can be reimbursed under the clause 49.206-2(a). The settlement between government and contractor can be recorded in terms of loss of inventory and non liquidated credit. Government’s Remedy Excess Cost of Re-Procurement Government needs to show the similarity between re-procured items and items used during process of termination to cover the cost of re-procurement. The government needs to show that the claimed cost was actually incurred. They can compensate the loss by bidding more orders to other contractors. The government needs to show that they acted accordingly to reduce cost caused by default of contractor (Daubert Chemical Co., ASBCA No. 46752, 94-2 BCA : 26,741, in that case government acted properly to minimize the cost). Government can claim common-law damages along with re-procurement cost (Hideca Trading Inc., ASBCA No. 24161, 87-3 BCA : 20,040, in that case government exercised the right to procure common law damages). The government can claim administrative cost in terms of cost associated with re-procurement effort (Birken Manufacturing Co., ASBCA No. 32590, 90-2 BCA : 22,845). Liquidated Damages The government is entitled to claim actual damages on termination of contract. It is difficult for government to calculate actual loss. For this reason they use an alternative method called liquidation of damages to compensate losses. Provision for liquidated damages can be used in the following manner. 1- The amount for compensating the monetary loss was forecasted and fixed by the government at the initial stage of contract. 2- It is very difficult to calculate exact amount of damage caused by default of contractor. Liquidation is done with the intention to compensate the damage caused by default. Contract Dispute Act Contract Disputes Act was passed in the year 1978. The act works as legal tool against government and contractor can file claim against prime contractor. The contract dispute act emphasizes on responsibilities of each contracting parties. First step of dispute process involves submission of claim to contracting officer (further consideration is done by contracting officer). Definition of claim is not defined by the contract dispute act. Claim submission to contracting officer is reviewed by board of contract appeals or claim court of USA. Claim over $ 0.1 million needs to be certified in order to be enacted as valid. Then government takes the action to compensate the loss of contractor with the help of contracting officer. Acquisition Planning Acquisition planning of government can be subdivided into two parts. 1- Fixed price planning (government do the negotiation with the contractor for a fixed price. In this case contractor bears the risk of future price hike. Cost of raw material might increase in future but the contractor is liable to supply the product on predetermined price. 2- Cost Reimbursement Contract (The contract is supported by FAR Subpart 16.3. Contractor sends request for proposal to government in the initial stage of contract. Government pays the performance cost to contractor. Prime contractor bears the risk associated with the contract). Government selects contractor after sealed bidding process. Government invites application from contractors for completion of particular project. Acquisition process valued under $3,000 is known as micro purchase. Contractor selection for government depends on certain criterion (past performance of the contractor, financial strength of the contractor, price offered by the contractor). Cost Containment The government uses different budgeting strategy for cost containment. They have set threshold for acquisition process. $3,000 to $100k has been set as a threshold for simplified acquisition process. Government spends up to $5.5M for commercial purchases. Prime contractor uses bidding process to select contractor (mainly used for micro purchase and simplified threshold acquisition). Government prefers to rely on single contractor (with good past performances) for high value acquisition process. Cost benefit analysis is done on every request for proposal of various contractors. Government selects the request for proposal having positive value in terms of cost benefit analysis (Farber, 2008). Recommendations Government needs to develop a strategic plan for procurement process. Penalty amount on defaulter should not be greater than compensation amount. The government requires giving importance on fixed price planning during acquisition phase. Success in procurement process is directly linked with the acquisition planning. Government should use cost benefit analysis to select suitable contractor (cost benefit analysis technique should be used as a guideline to measure the performance of contractor). Government can integrate administrative charges with re-procurement cost to decrease the loss amount. Price negotiation memorandum is required for every contract between government and contractor. Government has the opportunity to design price negotiation memorandum in a flexible way to decrease initial risk factors (huge capital investment). Prime contractor should use activity based costing to measure the loss incurred due to default of contractor. Activity based costing will help government to decide suitable procurement strategy. Termination of default is a harsh penalty for sub contractors. Sub contractors are the important parts for any contract between government and contractors. Sub contractors are the suppliers of raw material for contractor. Procurement process of government should not hurt the interest of any sub contractor. Government needs to maintain good business relationship with sub contractors. Prime contractor might acquire raw materials directly from subcontract. Acquisition process through subcontractor will help government to create pressure on contractors. References Acquisition. (No Date). Termination for Default. Retrieved from https://www.acquisition.gov/far/html/Subpart%2049_4.html. Farber, D.A. (2008). Rethinking Cost‐Benefit Analysis. Retrieved from http://ccrm.berkeley.edu/pdfs_papers/2.09/Rethinking_CBA_Revesz_Review_1%5B1%5D.pdf. James, E.P. (1963). Termination for Default and for Convenience of the Government. Retrieved from http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=2799&context=bclr. Read More