A recent case from the Court of Federal Claims provides us instruction on the factors that the government should consider in determining whether to terminate a construction contract for default. This case provides a detailed analysis of what the Contracting Officer’s decision making process should consist of, so this blog will be longer than usual.

The case arose out of an apron repair contract issued by the United States Department of Defense, National Guard Bureau (“Agency”). In Alutiiq Manufacturing Contractors, LLC v. United States, 15-881C (June 27, 2019), the contractor encountered performance problems during the early stages of the contract, including a failure to properly staff the project, a failure to provide a specification-compliant hot mix asphalt plan, and a failure to timely submit a proper CQC plan and other routine project documents. In response, the Agency issued a letter of concern and initial cure notice.

The contractor responded by expressing its intent to meet the contract terms. Thereafter, the contractor took several steps to correct the performance defects identified in the cure notice, including changing project personnel, developing an acceptable hot mix asphalt plan, submitting an acceptable CQC plan, and submitting a revised baseline schedule, which the Agency approved.

Notwithstanding the foregoing, the Agency submitted a Revised Cure Notice reiterating concerns about the contractor’s compliance with the contract, specifically noting as areas of concern the asphalt subcontract, lingering personnel issues, and incomplete and out-of-date project records. The Agency stated that, based on estimates of onsite government personnel, the contractor was at least 10% behind schedule.

The contractor responded to this letter of concern by advising the Agency that it had contracted with an asphalt subcontractor, was changing out additional members of its project staff, and was updating its project document submissions to the government. The contractor further advised the Agency that unsuitable soil was encountered while excavating, and also noted a number of changes, which created scheduling difficulties. Nonetheless, the contractor informed the Agency that its scheduling issues were under control and promised to provide the Agency with a “three-week look ahead” on a weekly basis. Thereafter, the contractor developed and submitted a recovery schedule that showed its plan to recover lost time by working on weekends and shortening some work durations. The recovery schedule showed contract completion occurring two days prior to the contract completion date.

However, before the contractor could deliver the recovery schedule to the Agency, the Agency had initiated steps to terminate the contractor for default, i.e., preparation of a memorandum for record for termination for default. Three days later, a conference call was held where an Agency representative provided “technical input” regarding the recovery schedule’s “logic and reasonableness.” The assessment consisted of a one-page, thirteen-point list, characterized as a “quick glance” analysis; no critical path analysis was performed then or at any point prior to the termination for default.

The termination for default was issued ostensibly in accordance with FAR 52.249-10, Default (Fixed Price Construction). Three primary grounds were raised to support the default: (1) failure to “prosecute the construction project with the diligence that will ensure its completion within the time specified in the contract,” (2) failure to “provide adequate assurances that [the contractor] would complete the construction within the time specified in the contract,” and (3) failure to adhere to contractual provisions relating to adequacy of supervisory personnel.

The contractor brought a lawsuit in the court of claims seeking to convert the termination for default into a termination for convenience. Following a trial, the court concluded that the Agency did not possess adequate grounds to terminate the contractor for default, and converted the termination for default into a termination for convenience.

In reaching this conclusion, the court relied on the earlier decision Lisbon Contractors, Inc. v United States, 828 F.2d 759 (Fed. Circ. 1997). The court held that in the earlier case the Federal Circuit Court had ruled that in assessing an agency’s decision to terminate a contractor for default, the government must demonstrate a “reasonable belief on the part of the Contracting Officer that there was no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.” The court then referenced a subsequent case, McDonnell Douglas Corp. v United States, 323 F.3d 1006 (Fed. Cir. 2003) as providing additional guidance. Specifically, the court in McDonnell Douglas ruled that a termination for default must be based on “tangible, direct evidence reflecting the impairment of timely completion,” and that “a court’s review of default justification does not turn on the Contracting Officer’s subjective beliefs, but rather requires an objective inquiry.” The Federal Circuit Court directed the court to “focus on the events, actions, and communications leading to the default decision in ascertaining whether the Contracting Officer had a reasonable belief that there was no reasonable likelihood of timely completion.” Among the factors to be considered were:

"a comparison of the percentage of work completed and the amount of time remaining under the contract, the contractor’s failure to meet progress milestones, problems with the subcontractors and suppliers, the contractor’s financial situation, as well as a contractor’s performance history, and other pertinent circumstances surrounding the [contracting officer’s] decision."

The court went on to note that it was required to ascertain “the actual performance that the contract requires and the amount of time remaining for performance.” Part of this analysis involves establishing whether the Contracting Officer had determined “the entire effort required under the contract and the time left to complete the contract.” Absent such analysis, it would be “difficult, if not impossible, for [the contracting officer] to resolve whether there was no reasonable likelihood that the contractor could perform the entire contract effort within the time remaining for contract performance.”

Finally, the court noted that while FAR 52.249-10 empowers the government to terminate a contract, it also allows a contractor to avoid termination if such delay “arises from unforeseeable causes beyond the control” of the contractor, so long as the contractor “notifies the Contracting Officer in writing of the causes within ten days of the cause of such delay.” The court points out FAR 49.402-3 governs the process for and considerations involved in an agency issuing a termination for default. Such regulation lists seven factors for the Contracting Officer to consider before issuing a termination for default:

(1) The terms of the contract and applicable laws and regulations; (2) the specific failure of the contractor and the excuses for the failure; (3) the availability of the supplies or services from other sources; (4) the urgency of the need for the supplies or services and the period of time required to obtain them from other sources, as compared with the time delivery could be obtained from the delinquent contractor; (5) the degree of essentiality of the contractor in the government acquisition program and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts; (6) the effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments; and (7) any other pertinent facts and circumstances.

Turning to the facts of the case, the court said it seemed clear that the Agency’s default termination was improper. The court pointed out that the government cannot “satisfy its burden by merely showing that the contractor was behind schedule.” Rather, the court asks whether there was a “reasonable belief on the part of the contracting officer that there was no reasonable likelihood that the contractor could perform the entire contract within the time remaining for contract performance.” In analyzing whether this standard was met, the court asks whether the government entity conformed to FAR regulations in making that determination.

The court noted that in this case, the Administrative Contracting Officer had limited involvement in project operations. Consequently, the court looked to the Agency representative who supplied the analysis upon which the termination was based. The court stated that the representative failed to consider the FAR factors, noting that the Agency’s analysis excluded any discussion of excusable delay or of the “urgency of the need” of the work and the “period of time required” for “other sources” to complete performance. Furthermore, the Agency failed to consider whether the contractor would complete the contract “at least as soon as and probably much sooner than a successor contractor could have performed the unfinished work.” Furthermore, the court noted the Agency’s analysis ignored “any other pertinent facts and circumstances,” such as the improvement in performance after the personnel changes and the problems with the asphalt specifications. Rather than analyzing each factor laid out in the FAR, the Agency only considered the first two factors, “the terms of the contract and applicable laws and regulations” and “the specific failures of the contractor” in its termination analysis.

The court also found that the decision to terminate had been made well before the date of termination, and that decision had been made without serious consideration of the contractor’s recovery schedule, even though the Agency had that schedule for over three weeks when it issued the termination for default letter.

Finally, the court found the Agency representative who effectively made the decision for the Agency Contracting Officer had a demonstrated hostility toward the contractor and a history of dishonesty. In the court’s opinion, this undercut the Contracting Officer’s ability to form an independent and reasonable belief regarding the contractor’s ability to complete the contract on time.

Consequently, the court found that even if it agreed with the Agency’s assertion that the contractor was incurably behind schedule, that would not be enough to satisfy the requirements of a termination for default as set out in Lisbon. Rather, the Agency’s default termination was so defective that it seems impossible that the Contracting Officer’s decision was based on a reasonably held belief that the contractor could not finish the project.

The teaching lesson from this decision is that in responding to a notice to cure, a contractor should make sure it raises all points favorable to it listed in FAR 49-402-3. Those factors include excuses for failure and the time it would take for the government to bring on a replacement contractor, as opposed to allowing the tardy contractor to finish performance.

If you have any questions concerning this case or default terminations in general, please don’t hesitate to contact us.