The Basics of Undefinitized Contractual Actions (UCAs)

FCAThe federal contracting process is famous for its exacting approach to competitive procurement, which safeguards taxpayer funds and principles of fairness.  This emphasis on process, however, can slow the wheels of the acquisition machine.  The rapid spread of COVID-19, however, has required the government to use available tools to accelerate cash flow to contractors and the procurement of supplies and services.  Notably, both the U.S. Navy and the U.S. Air Force expressed renewed interest in accelerating contract awards and in the use of Undefinitized Contractual Actions (UCAs) when appropriate.

What Are UCAs?

UCAs, sometimes called “letter contracts” (see FAR 16.603-1), are used to create contracts with the government when one or more elements of a contract cannot be agreed upon, and there is an urgent need to begin production.  These elements can includes terms, conditions, or even price; however, the UCA must include a schedule that sets forth when any open terms of the UCA are to be definitized.  FAR 16.603-2; DFARS 217.7401, 217.7404-3.  Aspirationally, the parties will mutually agree to all contract terms within the time set by the definitization schedule; if, however, the parties fail to agree, the may unilaterally definitize the contract’s terms—including whatever price the Government deems reasonable—subject to the schedule and internal Government approvals set forth in regulation.  This can pose significant risks to the contractor because the government retains substantial leverage and can unilaterally definitize if negotiations fail.  And because UCAs are created due to urgent needs, the pace of the contract can shorten the timeline for negotiation.  Although a UCA is required to include a schedule for definitization, that schedule may in practice be merely aspirational; the GAO and the Department of Defense (DoD) have been critical of some agencies for allowing UCAs to exceed established definitization timeframes.

UCAs are meant to be rare, and the DFARS permits the use of UCAs “only when (1) the negotiation of a definitive contract action is not possible in sufficient time to meet the Government’s requirements; and (2) the Government’s interest demands that the contractor be given a binding commitment so that contract performance can begin immediately.”  DFARS 217.7403 (emphasis added).  In litigation, UCAs are treated as any other contract award and can be challenged at the GAO on the same grounds.  See, e.g., Fisher Sand & Gravel Co., B-417496, July 26, 2019, 2019 CPD ¶ 280 (challenging the award of an undefinitized fixed-price design-build contract).

Updated Definitization Requirements

Last year, MoFo published an article about upcoming regulatory changes to UCAs.  On August 9, 2019, these changes went into effect.  The deadline for definitization is now no later than 180 days after the contractor submits a qualifying proposal.  Previously, the deadline was 180 days from the issuance of the action.  This “deadline” continues to be subject to extensions, but DoD contracting officers can no longer extend this 180‑day deadline by more than 90 days without a written determination from high-level authorities.  10 U.S.C. § 2326(g); DFARS 217.7404-3.  The requirement remains unchanged that definitization occur by the date that the amount of funds obligated under the contract exceeds 50 percent of the “do not exceed” price.  UCAs involving foreign military sales ordinarily now require authorization from the head of the contracting activity and definitization within 180 days of submission of a qualifying proposal.  The definition of “qualifying proposals,” however, remains subjective.  According to the DFARS, a qualifying proposal is a proposal that contains sufficient information for the DoD to meaningfully analyze and audit it.  DFARS 217.7401.  More conditions have been imposed on unilateral definitization of contracts over $50 million: a unilateral definitization cannot be made prior to the end of the 180-day period described above or the date that the amount of funds expended is over 50 percent of the overall not-to-exceed price.  48 C.F.R. § 217.7404(b).

Regardless of contract price, if price is undefinitized and the final price is negotiated after a “substantial portion” of performance, the agency head must ensure that the profit allowed on the UCA reflects the possible reduced cost risk as to costs during performance and reduced cost risk during the remainder of the contract.  However, if the contracting officer (CO) definitizes more than 180 days after a contractor submits a qualifying proposal, the agency head must ensure that the profit reflects the cost risk of the contractor that existed on the date that the contractor submitted the proposal.  48 C.F.R. § 217.7404–6.  To unilaterally definitize a contract, the head of the contracting activity, without delegation, must approve the definitization in writing, a copy of the approval must be delivered to the contractor, and 30 days must elapse before the CO may, despite contractor objections, unilaterally definitize terms, specifications, or price.

The regulatory landscape of UCAs continues to evolve in response to COVID-19.  On April 3, 2020, the Undersecretary of Defense for Acquisition and Sustainment issued a class deviation for UCAs in response to the epidemic.  The class deviation provides two exemptions to UCAs that are determined by the head of the contracting agency (HCA) to be related to the COVID-19 national emergency.  First, the HCA may waive the rule that limits obligations to 75 percent of the “not to exceed” price before definitization for these UCAs.  Second, the HCA is allowed to waive the requirement that these UCAs include a definitization schedule providing for agreement on terms, specifications, and price within 180 days after a qualifying proposal is received.  These limitations are found in DFARS 217.7404(a)(1)(i) (foreign military sales contracts), 27.7404-3(a) (definitization schedules), and 217.7404-4(a) (providing that no more than 50 percent of the NTE may be obligated prior to definitization).  This guidance is effective until rescinded.

As the federal government tackles COVID-19, contractors should review the opportunities and potential pitfalls of rapid procurement vehicles like UCAs.  Because price is often an undefinitized term, contractors must be certain of their risk tolerance and have a good understanding of how far apart the parties are on price before entering into a UCA.  Contractors should fully consider the risk that undefinitized elements of a UCA could be resolved unfavorably, and litigation may become necessary.  Contractors must also contemplate life under an undefinitized contract.  For example, how might performance and schedule be affected by undefinitized terms?  Regulatory changes advantage contractors who promptly deliver qualifying proposals before substantial performance, and help curb the profit concerns that UCAs have sometimes raised.  These changes should give heart to contractors willing to step forward in a crisis.