Insights by: Craig Stetson, Partner and Merle DeLancey Jr., Partner with Blank Rome.
It is hard to describe the manner in which the United States is withdrawing from Afghanistan. At this point, the safety and security of Americans and those who provided critical assistance to U.S. operations in Afghanistan are at the forefront of everyone’s thoughts. However, contractors in Afghanistan must confront the repercussions of shutting down operations in Afghanistan or dealing with significant changes in contract performance requirements. Translated—this means ensuring fair compensation for terminated or changed contracts.
This blog post focuses on the contract administration aspects that contractors should be thinking of now to prepare for and mitigate downstream and currently unknown risks. Below is a list of issues for contractors supporting operations in Afghanistan to consider.
One potential scenario is a termination for convenience (complete or partial) of the contract. The government has wide discretion to unilaterally terminate contracts, or may, preceding a formal termination for convenience, direct a contractor to temporarily suspend or stop work. Termination for convenience actions are governed by FAR 52.249-2 (fixed-price) or FAR 52.249-6 (cost reimbursement). Suspension and stop-work situations are governed by FAR 52.242-14 and 52.242-15, respectively.
Regardless of the mechanism used, contractors forced to temporarily or permanently stop performance will face immediate challenges and unanticipated responsibilities. Below are key steps contractors should take in response.
- Stop work as instructed. Notify affected employees and direct them how to capture time going forward as the settlement process evolves.
- Notify all subcontractors and vendors and instruct them to do the same.
- Establish discrete cost accounting charge numbers to accumulate applicable costs. Initiate cost mitigation efforts and maintain related documentation of efforts to do same for future demonstration to the government.
- Identify situations and root causes giving rise to incurrence of unforeseen costs due to government-directed action—for example, increased site and personnel safety, transportation, evacuation, employee severance, etc.
- Protect and preserve to the extent possible all contractor- and government-owned equipment and property. Identify alternatives to dispose of or abandon in place property based on the logistics and circumstances at the site.
Contractors terminated or directed to stop work may be entitled to seek applicable financial relief pursuant to the FAR clauses referenced above. These government actions, simply due to the circumstances surrounding the current and developing environment in Afghanistan, likely will cause a variety of unforeseen and extraordinary situations directly impacting contractors’ ability to effectively manage and/or settle their existing contracts and recover costs incurred arising from these government actions.
Contractors should be proactive and consider now the possibility of termination or stop work situations; what the potential implications may be; and actions to take to address or mitigate associated compliance, performance, and cost risks.
Some affected contracts may not be terminated but will continue under changed circumstances. For example, some contract requirements may include continued performance remotely, outside of Afghanistan, or a contract involving the management of government-owned property in Afghanistan may be transitioned to services securing such property in another country and/or transporting the equipment to the United States or another location. Contractors must consider whether the foregoing would involve a compensable change under one of the FAR 52.243 Changes clauses or DFAR 252.217-7003.
Given the rapidly and constantly evolving environment in Afghanistan, contractors are not likely to receive a Change Order reflecting a contracting officer’s unilateral change of contract requirements. More likely, a contractor will need to timely notify its contracting officer of a constructive change to its contract performance requirements. A constructive change occurs when a contracting officer’s action or omission has the same effect as a formal Change Order.
Regardless of whether considered a change or constructive change, unless extended, a contractor must assert its right to a cost or price adjustment within 30 days of receipt of a change order or other notice from its contracting officer. Notwithstanding the change, unlike in the commercial world, a contractor must continue performance.
In addition, contractors should:
- Confirm that the change direction comes from its contracting officer. Only contracting officers hold a warrant and are able to modify the terms or conditions of a government contract.
- Consider funding issues—namely, that the cost of the change will not result in the cost of performance exceeding the applicable FAR or DFAR Limitation of Funds clause.
- Become familiar with what constitutes a change. Changes to performance requirements are relatively easy to identify but schedule changes (i.e., delay, disruption, accelerated delivery) and unforeseeable constructive changes—such as increased costs involved with delivery because supply lines are constrained or a different mode of transportation is required—are more subtle. When in doubt as to whether a change has occurred, a contractor should assert its rights for a contract adjustment within 30 days. Such assertion can always be withdrawn but missing the deadline could be fatal to recovery.
Our next post will address cost management, documentation, and government audit aspects that contractors should be thinking of now to prepare for and mitigate downstream and currently unknown risks.
Merle DeLancey Jr. is a partner with Blank Rome LLP where his practice focuses on a wide variety of government procurement law. He represents clients contracting with federal and state governments, with an emphasis in the healthcare industry. Merle has experience in a broad spectrum of government contracting
Craig Stetson is a partner with Capital Edge Consulting where he focuses on assisting contractors interpret and apply the accounting and regulatory compliance requirements associated with federal government contracts. Craig routinely deals with a wide range of compliance matters related to accounting, pricing, contract administration, business systems, financial reporting and interpreting the requirements of the Federal Acquisition Regulation (“FAR”) and Cost Accounting Standards (“CAS”). Craig frequently speaks and writes on a wide variety of government contracting compliance matters, regulatory updates and current events.
Capital Edge Consulting is a professional services company comprised of adept problem solvers who deliver tangible results to address today’s most complex U.S. government contracting challenges. Capital Edge helps clients address the challenging regulatory, contractual, and compliance requirements of U.S. federal contracts and we have experience working with a wide variety of industries that provide goods or services to the federal government including industries such as biotech and healthcare, nuclear energy, education, information technology, non-profit, professional services, defense, and software.