Interview transcript

Terry Gerton We’re going to talk about this case, Siemens Government Technologies. But before we dive into the case and the court’s decision, walk us through the basic premise here, which is about energy savings performance contracts. How do they work?

Zach Prince Sure, so the government, you know, it has a lot of facilities around the country and around the world. Many of those facilities are a little dated, let’s put it nicely, where they waste huge amounts of energy just because the infrastructure is built decades and decades and decades ago. So as part of a way to try to modernize and save energy, they’ve developed two different mechanisms that are the real workhorses of modernizing in this regard. There are what we’re dealing with here, which are energy savings performance contracts, and then their utility energy savings contracts, or UESCs. This is more of the former, not the latter, but those are really the two mechanisms. So the way that these work is there’s an IDIQ that will be held by a number of energy savings companies. Here Siemens is one of them. The interested agency will go out and ask for quotes to put together a preliminary audit, or a preliminary assessment rather, which is really a high level review of the federal facility and suggestion of ways that the government can save money and the cost of doing it. This always has to be not just cost neutral, but has to have an actual savings to the government. And that savings is passed on then to the contractor. The preliminary assessment is itself an expensive process, but it’s not nearly as expensive as the next part of this, which is if the government is interested in the preliminary assessment, they’ll ask for an investment grade audit or IGA, which is part of the task order award for the work itself. That can be millions of dollars. I mean, it takes tons of engineering time and real work from the contractor. And work that sometimes doesn’t always get compensated if there’s no ultimate award.

Terry Gerton So it sounds like there are a lot of ways that these projects could get derailed. What specifically went wrong in the Siemens case?

Zach Prince Well, it’s hard to tell reading just from the court’s decision, but it appeared that DLA, which was administering this large project at the Goodfellow Air Force Base in San Angelo, Texas, changed some requirements after that they had already received the first round of the investment grade audit from Siemens. They seemingly changed a ton of the assumptions that were used by Siemens to calculate the actual cost savings. And, as Siemens put it, required a full scale investment grade audit to be conducted again with a number of iterations that ended up costing somewhere north of $2 million.

Terry Gerton That change in assumptions is interesting, because as I read the case, it was almost two years from the initial request to Siemens’ submission of their audit. And so many things could have changed. Does that make these kinds of projects a risky proposition?

Zach Prince They make them complicated. And the agency really needs to be focused on getting these projects done, getting the investment grade audit to be based on facts, not things that could rapidly change, which is I think what happened here, so that they understand what they’re getting or what they might be getting and can execute the project.

Terry Gerton So Siemens brought the case in the Court of Federal Claims. What was their argument?

Zach Prince So as sort of the background to this, the IGA often is not compensated when there’s not a task order and companies know that this is a risk that they’re taking. The preliminary assessment is almost never compensated unless there’s a task order. So they know it’s a risk, but this is an unusual case because of how many iterations they went through with DLA just to then have the project totally canceled with nothing. So, they brought some pretty interesting challenges here. They frame this as a bid protest, primarily, as well as a breach of contract. So there was a contract, this IDIQ, with a task order for the preliminary assessment. That’s where they brought a contract claim under. They said the government breached its obligations to administer a task order for the work itself under that IDIQ, so that’s a contract dispute. They also said this was an improper administration of a task order award process where the government breached implied obligations to proceed in good faith and breached a variety of other statutes that really weren’t discussed in the case. But they framed it as both contract disputes and a bid protest.

Terry Gerton Speaking with Zach Prince, he’s a partner at Haynes Boone. How did the government respond to those allegations?

Zach Prince Well, the government just asked for the whole thing to be dismissed, which it often does. The bid protest issues are the ones that they really focused on and I thought were of particular interest for this case because it was really a novel approach to try to get compensation by Siemens. The government argued that there can’t be a bid protest here under the court’s bid protest jurisdiction because of what’s known as the FASA task order bar. It is, there is some limit to the jurisdiction of the Court of Federal Claims to hear disputes, bid protest disputes involving task orders. They either have no jurisdiction anywhere to have such bid protests or they have to go to GAO. But that limit has been hotly disputed and the subject of several Federal Circuit decisions and the government lost that claim here.

Terry Gerton And what else did the court have to say about Siemen’s creativity?

Zach Prince The court was more focused on the government’s attempt to trap Siemens by saying that either, if there’s a contract, an express contract, then they can’t bring an implied in fact contract, which is one of their arguments they had brought as a bid protest, essentially. But also the government said there is no express contract that gives rise to relief. So as the court put it, it’s heads, I win, tails you lose-type argument the government’s trying to make and it wasn’t going to pass muster here at least. The government might ultimately prevail, but this is a very preliminary stage and the court was not willing to dismiss here.

Terry Gerton So as you look at this case, what lessons do you draw for agencies and contractors around these kinds of projects?

Zach Prince Yeah, it’s really tricky and I’ve dealt with several of these contracts before. The contracting agencies often just don’t have money to fund the preliminary assessment and maybe don’t money to fund the investment grade audit either, hoping, everybody’s hoping together, that it will ultimately turn into a task order for the work. And these task orders might be massive, $50, $100+ million. We’re talking about multi-year projects for modernizing large, large facilities. But you can’t just proceed on hope. It always makes me as outside counsel nervous, but you as a government contractor or as a government agency, you have to have a good relationship with your contracted counterparts. And those relationships can really carry the day to get folks compensated when they otherwise might not have. You find money at the end of a fiscal year and you come up with some mods and make the contractor whole because you know you have to do business with them again. And you appreciate the fairness of it. On the contractor side, you have to recognize that there is risk here. And if you’re not gonna get an actual written commitment from the government, and not just the government of course, the authorized person from the government, to fund one of these projects, you might be left holding the bag. So they can be lucrative projects for sure, but there is risks. And, as always, the government has to proceed in good faith, which is Siemens’ primary argument here is, the government just kept shifting around requirements, ignoring the fact that it was going to cost millions to do that, and then tried to leave Siemens with nothing. But you have to proceed with these projects with eyes wide open.

Terry Gerton You mentioned risk there, especially for the bidders, but it seems like there’s risk for all the parties and it’s not always clear that the potential revenue down the line will offset some of that risk. Is there a better way to structure these kinds of projects that would help everybody in the long run?

Zach Prince That’s a great question. And I’m not just stalling because it’s really complicated and I don’t know the right answer. This is a really interesting mechanism to fund these types of projects. And the government likes it because they’re not really left paying for anything. If they save money and those savings pay the contractor ultimately, and even in the utility version of these types contracts where it’s structured a bit differently, it’s still not coming out of present appropriations generally. It is a savings that the government’s getting ultimately on its energy bills, and that’s being passed on to pay for the project. That’s a great way to do business. If the government doesn’t have to actually pay for anything, they’re not subject to ongoing appropriation problems, and they still can get what they need, that’s fantastic. The problem is just at the outset of these projects, there are all sorts of complications that really need to be considered carefully by all parties.

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Interview transcript

Terry Gerton We’ve got the new National Defense Authorization Act. It’s signed into law and there’s a lot in it as we’ve talked on other episodes, 3,000 plus pages. But we’re going to drill in on a particular part today, section 1826. Talk to us about why you think that provision is so important.

Dan Ramish So Terry, this provision, 1826, is titled “Exemptions for Non-Traditional Defense Contractors,” and it includes three important exemptions on defense contracts for companies that qualify as non-traditional defense contractors. Those companies will be exempt from the FAR Part 31 cost principles, certified cost repricing data requirements under the Truth in Negotiations Act, and then contractor business systems requirements. And there are provisions that allow for the head of contracting activity or their delegate to waive exemptions or modify or partially apply them, but those are unlikely to be used that much because there’s a requirement to notify Congress when they use that authority. And notably these exemptions don’t apply to civilian agency contracts, only defense agency contracts. There are some questions about how that’ll be implemented, But this provision is very important because it’s very broad in scope. Non-traditional defense contractors are defined as any contractors that aren’t currently performing a CAS-covered contract, a contract covered by the Cost Accounting Standards, and that haven’t performed a CAS-covered contract in the last year. This is a large percentage of the defense industrial base. It includes all small businesses because contracts and subcontracts with small businesses are exempt. Broader than that, George Mason’s Baroni Center for Government Contracting estimated earlier this year that only 7.5 Percent of the Defense Industrial Base could not qualify as a non-traditional defense contractor. So this is very broad in scope of coverage for Defense Industrial base companies.

Terry Gerton And the exclusion is actually going to increase with other provisions in the NDA a correct.

Dan Ramish Yes, so there are also threshold increases under the cost accounting standards. There is an increase on the individual contracts that are subject to CAS. It used to be that there was a trigger contract mechanism and some contracts as low in value as $2.5 million would be covered. Now, the new threshold for individual contracts will be $35 million and then there’s a second threshold for full CAS coverage which includes all of the cost accounting standards, and that increased from $50 million to $100 million. So the number of companies that are subject to full CAS coverage will be even lower after these threshold increases go through.

Terry Gerton So pretty clearly, if you’re working in the defense contracting space, you’re going to need to read these provisions in close detail. But let’s take the three exemptions that you talked about and kind of walk through them one at a time. Let’s first talk about the cost principles. What are they and when do they apply?

Dan Ramish So the contract cost principles that are in FAR Part 31 govern the costs that the government will pay under cost reimbursement contracts and other flexibly priced contracts. And the government also looks to the cost principles when they’re negotiating fixed price contracts when cost analysis is required, although for fixed price contracts, the cost principles aren’t binding on the contractor. So really we’re talking about cost reimbursements contracts primarily, and the government in cost reimbursable contract agrees to pay the contractor based on the contractor’s actual incurred costs, typically with an added fee, rather than based on fixed prices. And the government uses cost type contracts when there are significant risks of uncertainty in contract performance, when they can’t define what’s going to be needed under the contract with sufficient certainty. And the Government assumes the risk of cost increases or overruns and in contrast to fixed price contract where the contractor bears the cost risk. But in these scenarios, the government uses the cost principles to tell the contractor what contract costs it will or will not cover. And so as part of this, there are various unallowable costs that the government says as a matter of policy, they won’t pay for. So the most famous of these is alcoholic beverages. Alcohol has been an unallowed cost since 1986. Other common examples are lobbying and political activity expenses or entertainment costs like sports or concert tickets. There are other types of costs like legal costs or compensation costs that aren’t strictly prohibited but have kind of complicated rules for how to recover the costs and when the costs are allowable. So these are complicated rules and challenging to follow. They require complex policies and procedures and training on the part of contractors to make sure that they aren’t charging the government costs that they are allowed to. So being relieved of this burden is significant.

Terry Gerton Sounds like contractors might be wiping their brow here, but are there other pieces of the cost rules that folks should be concerned about?

Dan Ramish Well, so one important caveat to this cost principles exemption is that there are statutory provisions addressing allowability of certain costs, like alcohol, for example. And so it’s unlikely that the Department of Defense will be able to just wipe the slate clean. They’ll need to establish new and presumably vastly streamlined rules that balance the other statutory constraints. It’ll have to be shorter than the about 75 pages of rules that make up the cost principles.

Terry Gerton Dan Ramish is a partner at Haynes Boone. Dan, we’ll continue on this topic here. The next piece up is certified cost or pricing data.

Dan Ramish Yes, so certified cost or pricing data is a requirement that originates in the Truthful Cost or Pricing Data Act, which is popularly and formally referred to as the Truth in Negotiations Act or TINA. And when the government is buying products or services from a contractor and there isn’t enough competition or commercial market forces for the contracting officer to determine that the price is fair and reasonable, the contracting officers is required to request certified cost of pricing data. So, survey cost pricing data includes all facts that prudent buyers and sellers would reasonably expect to affect price negotiations. So, it’s kind of intended to address those non-competitive scenarios to put the government negotiator on equal footing. The common types of cost pricing data could include anything from vendor quotes to internal data about business prospects or operation costs or information about management decisions that could affect costs. And the contractor is required to identify and provide the cost of pricing data to the government and certify that the data are current, accurate and complete. And as with the cost principles, failure to comply with the current, accurate, complete requirement in certifying certified cost of price data could create liability, liability for defective pricing, or potentially fraud liability under certain circumstances. So this presents risk as well and requires policies and procedures to ensure that the appropriate data is collected and provided to the government and updated appropriately during negotiations.

Terry Gerton The third set of exemptions are from the DoD business systems rules. Tell us more about that.

Dan Ramish DoD business systems rules are another fairly extensive area requiring defense contractors to maintain adequate business systems for accounting, earned value management, estimating material management, property management, and purchasing. And if the Department of Defense determines that a contractor’s business systems have material weaknesses, the government can withhold substantial amounts from contract payments. So this is another area where each these systems requires complex compliance apparatus. And with the withholding risk, this is an important area for contractors who are subject to it and its requirements are prescriptive and burdensome on contractors and so another area where this will provide significant relief.

Terry Gerton You mentioned at the beginning that there’s the potential that the Secretary of Defense can waive these exemptions. Waving exemptions seems like a double negative. It means holding people accountable to the original standards, right? So what would be the circumstances that would warrant a waiver?

Dan Ramish So the language talking about this, you know, there’s a requirement for congressional notice and it gives kind of a sense of where there might be circumstances for a waiver. If a waiver is issued, then the Secretary of Defense is required to provide congressional defense committees a notice of the waiver. And that notice is required include a discussion of efforts made to adapt the acquisition approach for the product or service with respect to which such waiver was granted. So, I think there’s an understanding that there will be circumstances where it’s excessively challenging, for example, the government to have assurances that it’s obtaining fair and reasonable prices or where there are concerns about the types of costs that it is covering. And so there is this kind of escape valve. But the fact that the Secretary of Defense has to notify Congress when they do it will be a significant deterrent for reusing this. So it’s unlikely that this waiver authority will undermine the broader effects of the rule.

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