Morrison Foerster’s Government Contracts Insights provides our in-depth analysis of developments and trends impacting government contracting. Through Insights, our attorneys offer a real-time assessment of the statutory, regulatory, legal, and business-related developments and trends that are shaping the industry. We also examine a full array of non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Morrison Foerster’s nationally recognized Government Contracts and Public Procurement practice represents the world’s leading companies in the aerospace and defense, intelligence, cybersecurity, information technology, financial and professional services, education, healthcare, infrastructure, and logistics support sectors. We are enlisted to address our clients’ most complex and important legal issues. Our work includes contract and subcontract negotiation and other transactional matters, business and regulatory compliance counseling, internal investigations, bid protests, and a wide array of enforcement and litigation matters. Our clients range from Fortune 50 companies to small and medium-sized companies just entering the public sector. We advise both U.S. and non-U.S. companies involved in municipal, state, federal, and non-U.S. procurement matters.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Tina is Co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She represents a wide variety of government contractors including information technology, defense, biotechnology, and pharmaceutical companies, with a focus on general contract counseling and compliance, particularly concerning intellectual property, and cybersecurity matters and federal grant funding.Tina counsels contractors on compliance with federal, state and local acquisition and ethics regulations and with the evolving myriad of requirements pertaining to data security and cybersecurity. She has been involved with numerous internal investigations and compliance reviews, and with mandatory and voluntary disclosures to agencies, and litigation of False Claims Act matters.Tina routinely advises clients concerning:<ul><li>Prime-subcontractor relationships</li><li>Sources of supply and country of origin requirements</li><li>Price reductions and price reporting issues</li><li>Organizational conflicts of interest</li><li>Safeguarding of intellectual property and other proprietary interests</li><li>Licensing and data rights issues</li><li>Handling of classified materials and controlled unclassified information</li><li>Agency suspension and debarment proceedings</li></ul>She also assists clients with due diligence and other activities related to the acquisition of government contracting concerns, and with the drafting and negotiation of teaming agreements, subcontracts, licensing agreements, and cooperative research and development agreements. She also assists clients applying for federal grants (including SBIR and STTR agreements), and those who seek to obtain other transactional authority agreements, as well as those competing for state and local government work.Tina’s litigation experience includes government contracts claims litigation in federal courts and before boards of contract appeals, bid protests before the Government Accountability Office and the Court of Federal Claims, and complex disputes in federal courts, including civil fraud and False Claims Act litigation and reverse Freedom of Information Act litigation.Prior to joining Morrison Foerster, Tina worked at another large national firm and as a trial attorney in the Office of the General Counsel of the Navy, Navy Litigation Office.<h4>Representative Experience</h4><ul><li>Negotiation of largest CHIPS Act federal funding agreement between multinational semiconductor corporation and U.S. Department of Commerce.</li><li>Negotiated prime contract and major subcontracts related to the Department of Energy’s next generation supercomputer program, including extensive IP rights negotiations and negotiation of associated patent rights waivers.</li><li>Negotiated series of other transaction authority agreements with DARPA and associated subcontracts with more than a dozen research universities on behalf of a firm biotech client, including complex IP rights allocations and material transfer agreements.</li><li>Assist clients with FedRAMP authorization process and with development of license agreements for software products sold to federal, state and local government agencies.</li><li>Cyber incident response counseling to some of the largest companies and organizations impacted by security incidents.</li><li>Advises clients on Bayh-Dole reporting of inventions and IP strategies for contracts and grants.</li><li>Conducts due diligence for major government contract mergers and acquisitions.</li></ul>

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Tina is co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She counsels a wide variety of government contractors on compliance with federal acquisition and ethics regulations. She drafts and negotiates contracts on their behalf and has been involved with numerous internal investigations and compliance reviews, and with bid protest, contract claims, and False Claims Act litigation. She also advises on M&A transactions involving government contractors.

Tina D. Reynolds

Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office.Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters. He has represented both protesters and awardees in scores of protests before the Government Accountability Office, the Court of Federal Claims, and procuring agencies, in acquisitions ranging from small business procurements to multibillion-dollar contracts of global significance. His representative protest matters span the aerospace sector, the Intelligence Community, base operations and logistics, healthcare, nuclear and environmental work, and information technology and software acquisitions. His protests have included both classified and unclassified programs. In addition to prevailing in published decisions, Jim has also secured favorable corrective action on behalf of clients in a wide variety of protests that were resolved without a published decision.Jim’s work also focuses on disputes over cost allowability and compliance with the Cost Accounting Standards, and he has appeared before the Armed Services and Civilian Boards of Contract Appeals, in size and status protests before Small Business Administration (SBA) area offices, and appeals before the SBA Office of Hearings and Appeals. Jim regularly counsels clients on contract interpretation, organizational conflicts of interest, and small business compliance.Jim graduated with high honors from the George Washington University Law School, where he focused his studies on federal procurement law, was a member of the Law Review, and interned with the General Services Administration’s suspension and debarment office. Jim also holds a degree in theology magna cum laude from the Pontifical Gregorian University in Rome and a bachelor’s degree in classical languages and literature summa cum laude from the University of Kentucky, where he graduated Phi Beta Kappa.

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Jim maintains an active practice in bid protests before the Government Accountability Office and contracting agencies and counsels clients in contract disputes and compliance obligations.

Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office. Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters.

James Tucker

<div style="margin-bottom: 15px;" class="videoWrapper"><iframe class="sticky-video" title="Meet Alex Ward, Government Contracts Practice Co-Chair" src="https://www.youtube-nocookie.com/embed/TkliwdSlTaQ?rel=0" frameborder="0" allow="autoplay; encrypted-media" allowfullscreen="1" title="iframe"></iframe></div>J. Alex Ward is co-chair of Morrison Foerster’s Government Contracts and Public Procurement group. His practice covers a full range of government contracts matters, including investigations, bid protests, claims, general litigation, corporate transactions, and counseling. Alex strives in all matters is to provide his clients the highest level of efficient and effective representation.Alex represents contractors in internal and external investigations, disclosures to the government, and qui tam litigation, with great success in reducing or eliminating his clients’ exposure through active engagement with the government. His work in this area includes obtaining numerous declinations and dismissals of False Claims Act cases in their earliest stages, sparing his clients the cost, risk, and exposure of litigation.He has also served as lead counsel in dozens of bid protests involving military and civilian agency procurements of a wide range of products and services, including all manner of pre- and post-award protests in the GAO, the U.S. Court of Federal Claims, and state tribunals, as well as appeals to the U.S. Court of Appeals for the Federal Circuit and size protest appeals before the SBA’s Office of Hearings and Appeals.Alex handles all aspects of the claims process, from the initial assessment and drafting of requests for equitable adjustment through litigation in the Boards of Contract Appeals and the Court of Federal Claims. Alex’s practice also covers the full gamut of other controversies confronting government contractors, including prime-sub, teaming partner, employer-employee, competitor, and indemnification disputes. His litigation work also includes a wide variety of pro bono engagements, in which he has represented both individual and institutional clients in matters ranging from immigration and criminal defense to sustainable procurement and protection of the environment.Prior to joining the firm, Alex served in the U.S. Army as a commissioned officer and an Assistant to the General Counsel of the Army responsible for civil works and international matters, and as a clerk for judges on the U.S. Courts of Appeals for the Armed Forces and the D.C. Circuit. He is a member of the Boards of the Morrison & Foerster Foundation and the Chesapeake Bay Foundation and of Law360’s Government Contracts Editorial Board.

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Alex is co-chair of Morrison Foerster’s Government Contracts and Public Procurement practice. His practice covers a full range of government contracts matters, including bid protests, claims, investigations, corporate transactions, and counseling.

J. Alex Ward

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Morrison Foerster’s Government Contracts Insights blog provides an in-depth analysis of news, developments, and trends impacting government contracting and procurement. Through Insights, attorneys from our nationally recognized Government Contracts and Public Procurement practice will offer a real-time assessment of the statutory, regulatory, legal, and business-related developments that are shaping the industry. This blog will also examine a full array of U.S. and non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Read about our <a href="http://govcon.mofo.com/editors/">Authors</a>.Never miss a post. Subscribe to get real-time updates.

Brad is a partner in Morrison Foerster’s Litigation Department, Managing Partner of the Austin office, and Chair of the firm’s Israel practice. He is the former Co-Chair of the firm’s Global Litigation Practice and the Government Contracts + Public Procurement Practice.

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The Tortured Regulations Department: SBA’s New Rule and Its Effect on Investments

Bid Protest Spotlight: Standing, Relationships, Responsibility

House’s Passage of the SAMOSA Act Signals Policy Shift Towards Government-Wide Enterprise Software Licensing

New DFARS Regulation on Small Business Affiliate Past Performance

Bid Protest Spotlight: Unclear Criteria, Data Rights, Conflicts

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On January 29, 2024, the Biden administration issued a <a href="https://www.federalregister.gov/documents/2024/01/30/2024-01343/office-of-federal-procurement-policy-federal-acquisition-regulation-pay-equity-and-transparency-in" target="_blank">Proposed Rule</a> that would prohibit federal contractors from seeking and considering compensation history when making employment decisions and require contractors to disclose compensation being offered in job postings. If implemented, the requirements will apply broadly to all federal contracts and subcontracts that are principally performed in the United States and cover all jobs that work on or in connection with a covered contract. Covered applicants and employees can submit complaints of alleged violations to the applicable contracting agency to “take action as appropriate,” and those agencies must forward to the Office of Federal Contract Compliance Programs (OFCCP) any such complaints that also allege discrimination.Read the full <a href="https://www.mofo.com/resources/insights/240131-proposed-rule-seeks-to-mandate-pay-transparency" target="_blank">client alert</a>.

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Co-Chair, Global Employment and Labor Practice

Andrew co-chairs the firm’s Global Employment and Labor Group. He represents companies on a broad range of labor and employment litigation and counseling matters, successfully defending clients in number complex matters before federal and state courts and administrative agencies.

Andrew R. Turnbull

Andrew Turnbull represents companies on a broad range of labor and employment litigation and counseling matters. He has successfully defended clients in complex employment litigation before federal and state courts and administrative agencies. A primary focus of his practice involves helping companies navigate the unique employment issues that arise when doing business with the federal government, including advising on all aspects of OFCCP compliance, creating and implementing affirmative action plans, defending OFCCP audits and onsite investigations, conducting mock pay equity audits, drafting and developing business ethics policies and programs, and complying with the Service Contract Act, E-Verify, and the Drug Free Workplace Act.

Andrew Turnbull

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Keniece Gray is an associate in the Litigation Department of Morrison Foerster’s Washington, D.C. office.

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On January 29, 2024, the Biden administration issued a Proposed Rule that would prohibit federal contractors from seeking and considering compensation history when making employment decisions and require contractors to disclose compensation being offered in job postings.

Proposed Rule Seeks to Mandate Pay Transparency and Ban Using Salary History for Federal Contractors

In Innovative Technologies, Inc., ASBCA No. 6186, 62185, the Armed Services Board of Contract Appeals (“ASBCA” or the “Board”) held that, despite the federal government’s failure to include or incorporate the McNamara-O’Hara Service Contract Act (“SCA”) FAR Clause 52.222-41 (the “SCA Clause”) in the contract, the contractor was required to comply with the SCA and not entitled to an equitable adjustment for all costs it incurred from a $1.5 million settlement with the U.S. Department of Labor (“DOL”) for its noncompliance. This case serves as an important reminder for contractors to be vigilant in determining whether their services contracts are covered by the SCA, even if the agency fails to include or reference the SCA Clause. Factual BackgroundIn 2006, the Defense Media Agency (“DMA”) awarded the contractor a firm-fixed price contract for performance of engineering services in the United States. The DMA contracting officer did not include or incorporate in the contract or any subsequent task orders the SCA Clause, but the surrounding circumstances indicated that the SCA might apply to the contract, including incorporation of DOL wage determinations (“WDs”) in the contract; an attachment with “Contractor Labor Categories” for offerors to propose “Fully Burdened/Escalated Rates”; the predecessor contract containing the SCA Clause; and the solicitation questions and answers for the predecessor contract describing how WDs would be issued and prices adjusted for those new WDs. Here, the contractor’s price proposal was not clear whether it intended to comply with the SCA, but it also had passing references suggesting that the contract might be subject to the SCA. The contractor proceeded to perform almost the entire contract from 2006 to 2013, without the contractor or DMA appearing to acknowledge the contact was subject to the SCA or seeking to incorporate new WDs into the contract. In May 2013, the DOL notified the contractor it was investigating several potential labor violations and required DMA to modify the contract to add the SCA Clause and applicable WDs. In October 2013, the DOL issued a determination, finding the contractor failed to pay workers appropriate prevailing wages and fringe benefits in compliance with the SCA, including misclassifying workers, paying at lower labor categories, and failing to keep records as required by the SCA. After initially disputing the violations, the contractor ultimately entered a settlement agreement with the DOL, agreeing to pay roughly $1.53 million in back wages to impacted workers, retroactive to the date of the initial 2006 contract award.In January 2017, the contractor submitted to DMA a request for equitable adjustment (“REA”) under FAR 22.1015 and other equitable adjustment language in earlier contract modifications, seeking repayment of the $1.5 million DOL settlement, plus another $850,000 in “applicable burdens.” The contractor argued that it was entitled to an equitable adjustment because DMA’s failure to include the SCA Clause resulted in its noncompliance and led to the $1.5 million DOL settlement. The DMA mostly denied the contractor’s claim, but it subsequently issued an equitable adjustment for $568,000. The contractor then appealed the decision to the Board for the amount it initially sought. The Board’s HoldingOn review, the Board held that: (1) the SCA clearly applied despite the lack of FAR clause; and (2) most of the claim did not fit the criteria to receive an equitable adjustment under FAR 22.1015 or other equitable adjustment provisions. <ul><li dir="ltr">Compliance with the SCA was Required Despite Omission of the SCA Clause: The Board found that the contract was subject to the SCA despite the DMA failing to reference or incorporate the SCA Clause into the contract. The Board noted “[t]he contract was patently for the furnishing of services in the United States through the use of service employees, so it was governed by the Service Contract Act.” The Board found that the SCA Clause could apply by operation of the law, reasoning that the “DMA’s omission of the SCA [C]lause and other administrative lapses, however negligent, did not alter the fundamental nature of the contract, nor the applicability of the SCA.” The Board also rejected the contractor’s argument that DMA’s inattention to the SCA requirements should factor into the contractor’s noncompliance. Instead, the Board highlighted the fact that the contract mentioned the SCA in other clauses and included WDs at time of award. </li><li dir="ltr">The Claim Did Not Fit the Criteria for an REA: The Board noted that REAs are required for increased labor costs when: (1) the agency has failed to include or omitted WDs; (2) the contractor’s labor rates do not meet or exceed the rates in the applicable WDs; and (3) the DOL requires the contractors to fix the errors or omissions. Here, however, the Board found that the contractor “d[id] not contend, or offer any evidence, that it would have proposed different contract labor rates, or acted differently in any other way, if the SCA [C]lause had been incorporated into the solicitation.” In fact, many of the contractor’s wages were already higher than the applicable WDs. The Board also noted that the remedies for FAR 22.1015 are “limited to costs caused by a government wage determination mistake and this FAR provision is not a free pass for contractors to obtain compensation for unrelated labor problems of their own making.” Here, the Board found that the contractor was entitled to an REA for a small portion of the backpay related to the missing applicable WDs, but the contractor was not entitled to an REA for the majority of DOL’s settlement because it was based upon labor violations unrelated to omission of applicable WDs, i.e., misclassification, nonpayment of overtime, and insufficient fringes violations. The Board also found that the equitable adjustment language in the contract modifications between DMA and the contractor mirrored the language in FAR 22.1015, so the contractor was limited to the same remedies as under FAR 22.1015.</li></ul>Practical TakeawaysThis case underscores the importance of contractors determining before contract performance whether their services contracts are covered by the SCA. Even if the agency fails to include or reference the SCA Clause in the contract, as here, contractors will not likely be relieved of their obligations to comply with the SCA for service contracts that fit the criteria for SCA coverage. The SCA also carries significant remedies for noncompliance, including significant back wages, suspension or termination of federal contracts, or mandatory debarment of the contractor from being able to contract with the federal government. Even where the DOL does not seek contract remedies or debarment, contractors can find themselves without recourse for an equitable adjustment under FAR 22.1015 or otherwise for any costs incurred relating to SCA noncompliance.Prudent contractors should closely review (with counsel) any service contracts for SCA coverage before contract performance, even if the contract does not include or reference the SCA Clause, WDs, or have other indicia of SCA coverage. If it is unclear whether the SCA may apply to a services contract, contractors should consider all surrounding circumstances and materials, including whether the predecessor contract was subject to the SCA, whether the solicitation includes any references to the SCA, WDs, or service workers, and whether the employees performing services on the contract are non-exempt employees that could be subject to the SCA. Contractors might also consider submitting questions and answers to the agency to clarify the agency’s position in addition to conducting their own independent review.

Missing SCA Clause Did Not Excuse Noncompliance or Allow for Full Equitable Adjustment

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Nicole Giles is an associate in the Government Contracts practice in Morrison Foerster’s Washington, D.C. office.

Nicole Giles

Nicole E. Giles

Missing SCA Clause Did Not Excuse Noncompliance or Allow for Full Equitable Adjustment

In Innovative Technologies, Inc., ASBCA No. 6186, 62185, the Armed Services Board of Contract Appeals (“ASBCA” or the “Board”) held that, despite the federal government’s failure to include or incorporate the McNamara-O’Hara Service Contract Act (“SCA”) FAR Clause 52.222-41 (the “SCA Clause”) in the contract, the contractor was required to comply with the SCA and not entitled to an equitable adjustment for all costs it incurred from a $1.5 million settlement with the U.S. Department of Labor (“DOL”) for its noncompliance.

Contractors face potential payment uncertainty as a result of the current congressional inability to agree to increase the federal government’s debt ceiling. The government reached the official debt limit months ago, on January 19, 2023. Yet by all appearances it continues to operate “as normal.” The appearance of normalcy is due to the government’s considerable cash reserves and its use of certain “extraordinary measures” (such as not paying into trust funds). Without further borrowing, however, the cash reserves will shrink, eventually forcing the government to make hard choices. That day may now come as soon as June 1, 2023.Should political brinkmanship around raising the debt ceiling reach beyond the “X” day, the government may need to determine who gets paid and who gets furloughed. Government contractors may find themselves in line after higher-priority spending obligations, such as interest rate payments to U.S. bond holders, military salaries, civil servants’ pay, unemployment benefits, Social Security checks, Medicare benefits, federal law enforcement expenses, and funding for the courts. Contractors should therefore take stock now of their plans to weather the possible financial shortfalls.Treasury Control of PaymentsThe United States has faced a similar situation in the past. In the run up to the 2011 debt limit crisis, the Federal Reserve and Treasury developed a plan to prioritize payments if the government was unable to pay all of its obligations. The <a href="https://www.federalreserve.gov/monetarypolicy/files/fomc20110801confcall.pdf" target="_blank">transcript</a> of a conference call between the Federal Open Market Committee and the Board of Governors of the Federal Reserve System indicates that such a plan had “evolved fairly substantially in the past week or two” prior to resolution of the 2011 impasse and only been finalized the night before. The plan, which was never implemented, applied three principles. First, principal and interest payments on Treasury securities would be made on time. Second, other payments may be delayed. Third, any payments made would be settled.Although the plan was formalized in a special operating circular, that circular was never issued, prepared only as a contingency if a deal wasn’t struck. In September 2021, Treasury Secretary Janet Yellen’s team rejected the idea of prioritized payments under the 2011 plan. That position, however, may represent the practicalities of preventing panic, political push-back, and pre-emptive litigation by not revealing the Treasury’s plans prematurely. If no deal is struck before the extraordinary measures are exhausted, the Treasury may well revert to the 2011 gameplan as a means to mitigate the financial fallout.Agency Control of Remaining FundsAgencies might similarly reassess their financial priorities and seek to conserve funds by limiting less-necessary expenses if no compromise is reached. Understanding the approach agencies may take requires a quick review of agency spending mechanisms. Once Congress appropriates funds, OMB apportions those funds into Treasury accounts. When the existing apportionment is “no longer appropriate or applicable because. . . unforeseen events have occurred,” agencies may request the reapportionment of funds per OMB Circular A-11. Agencies may not obligate funds without an OMB-approved apportionment, due to the strictures of the Anti-deficiency Act. Thus, if a timely Congressional agreement is not reached, agencies may seek to quickly reapportion their funds based on projected needs and priorities. To ensure sufficient funds to pay for the most vital and immediate expenditures, including those for salaries of military personnel, agencies are likely to rebalance their Treasury Appropriation Fund Symbols (TAFS) accounts. If agencies shift unobligated funds out of procurement-related TAFS, then, despite adequate congressional appropriations, the Anti-deficiency Act would prohibit agencies from issuing new obligations (such as awarding new contracts or orders) in excess of the amount remaining in the appropriate TAFS account.In planning for the worst, government contractors should consider two separate scenarios as they review their existing contract portfolio and pipeline. The first scenario is where the agency acts to conserve cash flow (e.g., by suspending award of future contract actions, not raising the limitation-of-funds ceiling on specific programs, or issuing stop-work orders). The second scenario is where an agency forges ahead without adequate funds to cover all of its contractual obligations. Below we outline considerations for each scenario.Scenario I: The agency acts to conserve cashThis scenario is similar in effect to prior government shutdowns where budgets are not timely enacted. Agencies may choose not to obligate new funds unless the work is essential to sustaining the agency’s mission. This may mean halting new solicitations and pending proposal reviews, not awarding new contracts or task orders, and refusing to raise limitation-of-funds ceilings, exercise options, or issue contract extensions.  Importantly, where funds are not yet obligated, contractors must avoid acting as a volunteer; the government has no obligation to cover unfunded activities.As an initial step, contractors may seek guidance from the Contracts and Acquisition functions at each agency where they hold an active contract or have a pending proposal. In particular, contractors might ask about agency plans for contract performance if the debt ceiling is not raised, and specifically whether agency personnel, facilities, and equipment will be available. Finally, contractors can work cooperatively with the agencies to mitigate performance disruptions.The following are practical steps contractors may take to prepare should a midnight solution for the borrowing debate not be found:<ol><li>Identify solicitations with source selection decisions scheduled during the fourth quarter of the fiscal year and anticipate delays in contract awards.</li><li>Identify contracts with options due in the fourth quarter and review the terms for the government's option exercise. The failure of the government to exercise an option in strict accordance with its terms could entitle the contractor to reprice the option.</li><li>Identify contracts that rely on incremental funding and determine whether it may become necessary to notify the Contracting Officer and then stop work to avoid incurring costs beyond the amount obligated. Under the Limitation of Funds clause (which often is tailored for use in large fixed-price contracts), the government is not required to reimburse a contractor for costs incurred beyond the amount obligated. If the obligated funds are insufficient to cover a contractor’s ongoing performance and termination liability, the contractor is required to “take a vacation” until funds become available.</li><li>Identify cost-type contracts that approach the Limitation of Costs clause ceiling and decide whether to stop work. The government is not required to reimburse a contractor for costs beyond the stated ceiling, and the contractor should not expect the government to increase the contract ceiling during a cash crisis. Any performance beyond the ceiling is as a volunteer.</li><li>Where funds are obligated, agencies may act to stop the bleed from particular funding accounts. Agencies may issue stop work orders on less essential contracts to conserve cash for more essential work. Where agencies issue stop-work orders, the contractor must stop work. If affected, be sure to keep accurate records of any disruption you encounter.</li></ol>Scenario II: The agency forges ahead despite funding shortfallsSomewhat trickier is where agencies choose to press ahead, despite a lack of cash. A contracting officer may elect not to issue stop work orders, and either permit or require the work to continue, even in the absence of funds. If this happens, the contractor must choose between observing its legal right to halt performance or satisfying the customer at its own risk.Arguably, if the government fails to pay properly submitted invoices in the absence of a dispute, the contractor may refuse further performance on a theory of material breach. As recently as 2013, the ASBCA has—at least in dicta—recognized the general proposition that a material breach by the government, in not paying when or as required, excuses a contractor’s obligation to perform.  The justification to discontinue performance is well established where the government’s failure to make payments renders a contractor financially incapable of proceeding with the work. Even where continued performance remains possible, the government’s antecedent breach in failing properly to pay the contractor may justify the contractor’s abandonment of the contract and shield it from default.[1]Whether or not they elect to continue work despite interrupted payments, government contractors should keep track of all delays, disruption, or work-around accommodations they are forced to endure as a result of government personnel, facilities, or equipment being unavailable or late. In doing so, government contractors will be better prepared to seek reimbursement for the added costs caused by these constructive changes once things get back to normal.ConclusionUltimately, no one knows what will occur should the government prove unable to pay its bills.  The U.S. government has never defaulted and hopefully never will. In any scenario, contractors may prepare for the uncertainty ahead by accumulating sufficient cash in hand to continue core operations and pay their own bills. Contacting preferred financial institutions to ensure adequate access to credit in the event of a default may prove equally important by providing a financial lifeline. Having a plan in place on how best to weather the brewing storm promotes internal confidence. Finally, working with industry groups to express the importance of a timely resolution may motivate members of Congress to find common ground and avoid the storm all together.[1] Whether this principle remains good law in all circumstances is an open question, particularly where a contract includes the Alternate I version of the Disputes clause at FAR 52.233-1.

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Kevin is former Co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. 

Kevin Mullen

Kevin is former co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. He has broad experience in numerous facets of government contracts matters including agency procurements, subcontracting, teaming and joint venture relationships, contract performance issues, intellectual property, compliance matters, due diligence for mergers and acquisitions, and procurement fraud matters.

Kevin P. Mullen

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Markus Speidel is an associate in Morrison & Foerster’s Government Contracts & Public Procurement group, in Washington, D.C. Markus assists clients across a wide range of contract matters, including contract claims and disputes, bid protests, compliance counseling, and investigations.

Markus Gerhard Speidel

Markus Speidel

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The Debt Ceiling and Its Potential Implications for Government Contractors

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Contractors face potential payment uncertainty as a result of the current congressional inability to agree to increase the federal government’s debt ceiling. The government reached the official debt limit months ago, on January 19, 2023.  Yet by all appearances it continues to operate “as normal.”  The appearance of normalcy is due to the government’s considerable cash reserves and its use of certain “extraordinary measures” (such as not paying into trust funds).

Contractors face potential payment uncertainty as a result of the current congressional inability to agree to increase the federal government’s debt ceiling. The government reached the official debt limit months ago, on January 19, 2023.  Yet by all appearances it continues to operate “as normal.” The appearance of normalcy is due to the government’s considerable cash reserves and its use of certain “extraordinary measures” (such as not paying into trust funds).

The Debt Ceiling and Its Potential Implications for Government Contractors

On August 18, 2022, OFCCP issued a revised Directive 2022-01 (the “Revised Directive”) clarifying that contractors will not be required to provide any privileged pay analysis conducted for purposes of compliance with 41 C.F.R. § 60-2.17(b)(3). Although OFCCP’s clarification is welcome news for contractors, the Revised Directive states that contractors will still need to be able to prove the analysis was done under privilege to withhold it from OFCCP and, if withheld on privilege grounds, OFCCP will require contractors to provide various types of additional documentation and information to confirm they conducted a 2.17(b)(3) analysis.Read our <a href="https://www.mofo.com/resources/insights/220825-ofccps-revised-directive-softens?utm_medium=social&utm_source=LinkedIn-Gaggle">client alert</a>.

OFCCP’s Revised Directive Softens on Seeking Privileged Pay Analysis

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OFCCP’s Revised Directive Softens on Seeking Privileged Pay Analysis

OFCCP Signals Return to More Aggressive and Less Transparent Audits

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On August 18, 2022, OFCCP issued a revised Directive 2022-01 (the “Revised Directive”) clarifying that contractors will not be required to provide any privileged pay analysis conducted for purposes of compliance with 41 C.F.R. § 60-2.17(b)(3). 

On July 15, 2022, the U.S. Department of Labor (DoL) published a 160-page <a href="https://www.federalregister.gov/documents/2022/07/15/2022-14967/nondisplacement-of-qualified-workers-under-service-contracts">Notice of Proposed Rulemaking (NPRM)</a> to implement <a href="https://www.federalregister.gov/documents/2021/11/23/2021-25715/nondisplacement-of-qualified-workers-under-service-contracts">Executive Order (EO) 14055</a>, “Nondisplacement of Qualified Workers Under Service Contracts,” seeking to once again require successor contractors to give a right of first refusal of employment to certain employees of predecessor contractors. EO 14055 was the latest development in the long history of the Nondisplacement of Qualified Workers rule, which, as we previously <a href="https://govcon.mofo.com/topics/in-a-long-anticipated-move-the-trump-administration-revokes-executive-order-13495-giving-service-contractors-more-flexibility-when-hiring-predecessor-contractor-employees_01.html">discussed</a>, the prior Trump Administration had revoked to provide successor contractors with more flexibility when staffing. The Biden Administration, however, believes that the proposed nondisplacement rule will lead to less disruption in services due to a carryover workforce as well as a more experienced, well-trained workforce providing such services. Regardless of the political dynamics, contractors should take note of the new requirements in the NPRM and how it might impact their operations. Interested parties and stakeholders can submit comments to DoL on the NPRM on or before August 15, 2022. The DoL has not yet slated a timeframe for when the rule might become final.Covered ContractsThe NPRM seeks to cover any successor contract, contract-like instrument, or subcontract (at any tier) covered by the Service Contract Act of 1965 (SCA) that is over the simplified acquisition threshold, which is currently $250,000. EO 14055 applies to any contracts with an executive department or agency, including an independent establishment subject to the Federal Property and Administrative Services Act. Under the NPRM, when a covered service contract expires and the government awards a follow-on contract for the same or similar services, the contracting officer must include the contract clause in Appendix A of the NPRM in the successor’s prime contract. Once the prime contract meets the coverage thresholds, each subcontractor at any tier must comply with EO 14055, even if the value of the subcontract is under the simplified acquisition threshold.The NPRM also says that a covered contractor or subcontractor has an “affirmative obligation” to ensure its contract contains the clause if it should have been included, including notifying the contracting officer as soon as possible if the clause was not incorporated.Covered EmployeesThe first right of refusal would need to be provided to all “service employees” covered by the SCA. The SCA applies to all employees engaged in the performance of an SCA contract that are not exempt under a bona fide executive, administrative, or professional exemption under the Fair Labor Standards Act (FLSA). Significantly, “service employees” can include independent contractors that work on an SCA contract that would not otherwise be exempt under the FLSA. The NPRM excludes employees who were hired to work under both an SCA contract and one or more nonfederal service contracts as part of a single job, provided that the employees were not deployed in a manner that was designed to avoid the purposes of EO 14055.Location RequirementsUnder the NPRM, prior to the solicitation being issued for a covered contract, agencies must consider whether the location of the predecessor contract is reasonably necessary to ensure economical and efficient provision of services. If the agency determines that the same locality or localities are reasonably necessary, then it must include a requirement or preference in the solicitation for the services to be performed at the same locality or localities. Alternatively, an agency must include a statement regarding their location continuity analysis should they determine that a location preference is not warranted. This then allows affected workers or their collective bargaining representative to request reconsideration of the determination. If the successor contract will be performed in a new locality, the successor contractor is not responsible for paying the relocation costs of predecessor employees who accept a job offer with the successor contractor.Right of First RefusalIf implemented as proposed, the NPRM will require covered successor contractors to give the incumbent employees a bona fide offer of employment for positions for which they are qualified, if those same employees would otherwise be terminated as a result of the award or expiration of the predecessor contract. Successors must presume that predecessor employees will be terminated as a result of the award, unless they can demonstrate a reasonable belief otherwise based upon “reliable information provided by a knowledgeable source.” Successor contractors are free to determine the number of employees necessary for efficient performance of the contract and may elect to employ more or fewer employees than the predecessor contractor. Covered successor contractors, however, cannot have any job openings for non-predecessor candidates without first making an offer of employment to the covered predecessor employees. In order for the successor contractor to make these offers, the NPRM contemplates that predecessor contractors will be required to submit to the contracting officer during the last month of contract performance a list of the names of all service employees working under the contract and its subcontractors as well as the anniversary dates for each covered service employee. This list must be provided to the contracting officer no fewer than 10 business days before the earlier of the completion of the contract or the predecessors work on the contract. The contracting officer must provide the list to the successor contractor. The contracting officer must also provide the list to employees or their representatives if requested by them.Requirements for OfferThe successor must make a written offer of employment in language that the employee can understand and provide at least 10 business days for employees to consider it. The offer will generally be presumed to be a bona fide offer if it is for the same position or one for which the employee is qualified. Successor contractors, however, can offer different positions with different terms and conditions of employment, including pay or benefits, as long as the different employment terms and conditions are not offered to discourage employees from accepting offers. If the successor has or will have employees in the same or similar occupational classification who work entirely remotely during the course of the contract, the successor must offer the predecessor employee in that same classification the option to work remotely under “reasonably similar terms and conditions.”The successor contractor’s obligation to offer a right of first refusal exists even if it has not been provided a list of the predecessor’s employees and even if the list does not contain the names of all persons employed during the final month of contract performance. In addition, a successor may have an obligation to provide an offer to a predecessor employee not on the list if there is reliable evidence that the employee worked for the predecessor during the last month of contract performance. Such reliable evidence, according to the NPRM, could include any evidence showing an employee’s assertion of an assignment to work on the predecessor contract during the predecessor’s last month of performance, coupled with contracting agency staff verification or a paycheck stub identifying the work location and dates worked.Under the NPRM, covered successor contractors do not have to make job offers to predecessor employees whom the successor reasonably believes, based on reliable evidence of the particular employee’s past performance, there would be just cause to discharge. In addition, successors may use employment screening processes (i.e., drug tests, background checks, security clearance checks, and similar pre-employment screening mechanisms) when such processes are provided for by the contracting agency, are conditions of the service contract, and are consistent with the EO 14055. Successors may not use an employment screening process by itself to conclude that an employee is unqualified because they have not yet completed that screening process.Recordkeeping ObligationsContractors will be required to maintain copies of certain records for three years to verify compliance with this rule, including documents (such as written offer letters of employment) and records showing the basis for any exclusions or exceptions being claimed.Waiver of RequirementsThe NPRM also specifies that, before a solicitation is issued, a contracting agency can waive some, or all, of the requirements of EO 14055 for a prime contract if the senior procurement executive issues a written determination (with facts and supporting reasoning) that at least one of the following circumstances exists with respect to a contract: (1) adhering to the requirements would not advance the U.S. government’s interests in achieving economy and efficiency in federal procurement; (2) based on a market analysis, adhering to the requirements would substantially reduce the number of potential bidders, frustrating a full and open competition that cannot be reasonably tailored to the agency’s needs; or (3) adhering to the requirements would otherwise be inconsistent with statutes, regulations, Executive Orders, or Presidential Memoranda.EnforcementThe NPRM provides specific procedures for DoL to investigate and enforce complaints about potential violations of EO 14055.  Predecessor contractor employees, or their representatives, who believe the successor contractor has violated EO 14055, may file a complaint with the DoL Wage and Hour Division within 120 days from the first date of contract performance. DoL may investigate potential violations, whether through a complaint initiated by a predecessor employee or their representative, or on their own initiative. Upon conclusion of the investigation, DoL will issue a written determination of whether a violation has occurred. The decision can be challenged in certain instances at DoL, or an interested party can request a hearing before an administrative law judge within 20 calendar days of the determination.The NPRM also identifies sanctions and remedies that can be imposed by DoL for noncompliance. For example, violating contractors can: (1) be required to employ each affected person and pay back lost wages; (2) have government funds withheld; or (3) face up to a three-year debarment.The prime contractor is responsible for the compliance of any subcontractor or lower tier subcontractor. In the event of any violations, the prime contractor and any subcontractor(s) responsible will be jointly and severally liable for any unpaid wages and prejudgment and post‑judgment interest and may be subject to debarment, as appropriate.Next StepsDoL estimates that 449,200 contractors and over 1.4 million workers could potentially be affected by this rulemaking. Service contractors who expect to bid on or take over a predecessor service contract should continue to monitor the NPRM and the final rule for EO 14055 and determine how the final rule might impact their solicitation process or procedures for onboarding a predecessor’s covered workers. Stay tuned as we continue to follow the latest developments on EO 14055.

EO 14055 Proposed Rules Require Successor Contractors to Once Again Offer First Right of Refusal to Predecessor Workers

EO 14055 Proposed Rules Require Successor Contractors to Once Again Offer First Right of Refusal to Predecessor Workers

On July 15, 2022, the U.S. Department of Labor (DoL) published a 160-page Notice of Proposed Rulemaking (NPRM) to implement Executive Order (EO) 14055, “Nondisplacement of Qualified Workers Under Service Contracts,” seeking to once again require successor contractors to give a right of first refusal of employment to certain employees of predecessor contractors. 

Earlier this week, the U.S. Small Business Administration (SBA) issued a <a target="_blank" href="https://www.govinfo.gov/content/pkg/FR-2022-06-06/pdf/2022-12131.pdf">Final Rule</a> adopting changes to how a concern calculates its number of employees for eligibility purposes in all of SBA’s programs, as well as how a concern calculates average annual receipts for SBA’s Business Loan, Disaster Loan, Small Business Investment Company (SBIC), and Surety Bond Guarantee (SBG) Programs.Previously, SBA’s regulations required concerns, when calculating their size in terms of employees, to average the number of employees in each of their pay periods for the preceding completed 12 calendar months. Effective January 1, 2022, the 2021 National Defense Authorization Act (NDAA) changed the calculation period to an average over the previous 24 calendar months, but only for employee size standards associated with manufacturing North American Industry Classification System (NAICS) codes. SBA’s Final Rule, however, provides that the 24-month period shall be used for all employee-based size standards, not just those relating to manufacturing NAICS codes. This change will be effective July 6, 2022, with no transition period to allow concerns to choose between 12 or 24 months to ease into the new calculation. In other words, starting next month, concerns must calculate employee-based size using the average number of employees over the preceding 24 months. SBA explained that, given the drop in employees during COVID-19 pandemic, most concerns would see lower employee counts over the previous 24 months than the previous 12 months, anyway, and therefore, no transition period is necessary.The Final Rule also changes the period for calculating average annual receipts for purposes of determining size associated with receipts-based size standards for eligibility in the Business Loan, Disaster Loan, Small Business Investment Company (SBIC), and SBG Programs. Currently, the Business Loan, Disaster Loan, and SBIC Programs require concerns to use an average over the previous three fiscal years, whereas, as of January 2022, the SBG Program required concerns to use an average over the previous five fiscal years. The Final Rule, however, provides that concerns may now use either a three or a five-year average for these programs. Many may recall that when SBA implemented the change to use a five-year average instead of three for eligibility purposes in the Government Contracting Program in January 2020, it allowed concerns to choose between three or five years until January 2022, at which time all concerns were required to use only the five-year average. SBA is not providing a similar transition for the Business Loan, Disaster Loan, SBIC, and SBG Programs, though. Instead, SBA intends to make the choice to use three or five years a permanent option for concerns in these programs. Thus, a difference in how to calculate size for receipts-based size standards between SBA’s Government Contracts Program and its other programs will remain.Companies participating in any of these programs should be aware of this change, which will be effective in just a few short weeks, to ensure they are calculating their size correctly.