Indefinite Delivery/Indefinite Quantity Contracting Practices (2015)

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11 chapter two LEGAL AND CONTRACTUAL ISSUES ASSOCIATED WITH INDEFINITE DELIVERY/INDEFINITE QUANTITY CONTRACTING INTRODUCTION The legal and contractual issues associated with IDIQ con- tracts are in many ways no different than those faced in a typical construction or DB contract. They generally fall into one of these four categories: 1. Protest of award 2. Breach of contract after award 3. Changes to the contract 4. Contract administration issues, such as insurance, pay- ments, quality, etc. The major difference is that IDIQ contracting involves a series of individual contracts, and each of these contracts could generate a dispute. As discussed in chapter one, these mini-contracts have many different names, including job order, task order, and work order. For purposes of this report, the term “work order” will be used to maintain consistent terminology. It can be noted that federal IDIQs appear to be generally called task orders. Additionally, federal competi- tive IDIQ contracts are usually termed Multiple Award Task Order Contracts (MATOC). It was found that the predomi- nance of IDIQ case law exists in the federal sector. The other major difference is that most IDIQ contracts con- tain language extending the term of the contract without com- petition for several years. As such, contractors develop their proposals with a risk profile that is fundamentally different from a single standalone contract (Farris 2002). For instance, the typical IDIQ will be structured with a guaranteed minimum amount of work beyond which the agency is not obligated to pay. These contracts also are capped with a not-to-exceed amount over which the government may not pay. Federal IDIQs have evolved to have very low guaranteed minimum amounts ($5,000 to $20,000) and very high not-to-exceed amounts that sometimes exceed $1 billion. Therefore, competing contractors must structure their price proposals accordingly. In most cases, they are provided with an expected annual ordering amount around which they will price fixed costs such as mobilization, home office overheads, and the like. Federal IDIQ Peculiarities The federal IDIQ structure creates a situation where the contractor will be led to distribute its fixed costs over the expected annual workload but is at risk that the agency can stop issuing work orders as soon as it meets its minimum, leaving it in a position of not being able to recover the overhead costs to initiate the project and mobilize to per- form the first task order. In the federal sector this is further complicated by the inclusion of the FAR’s Termination for Convenience clause, which literally permits the govern- ment to cancel the contract without ordering the minimum amount. To understand the dynamics of this environment the following hypothetical example is provided. A construc- tion contractor wins a federal IDIQ with a base of two years and three one-year options to extend. The contract has a guaranteed minimum of $5,000, a not-to-exceed value of $5 million, and an expected annual work load of $1 million. Thus, the contractor has an expectation of an annual revenue stream of $1 million, but could legally be given no work during the base period save the $5,000 minimum. Indeed, the federal agency could terminate the contract for conve- nience and avoid even paying the minimum. Certainly, this is the worst possible case scenario and will occur rarely, and when it does there is usually good cause for the termina- tion from the government’s perspective. It is important to note that the FAR termination clause is not required by state laws, although many states have this in their standard form templates as a matter of course. States are also required to have a Termination for Convenience clause if federal fund- ing is involved. IDIQ and Contractor Performance The final contractual difference between IDIQ and single- project contracts is a subtle incentive for the contractor to execute each work order in a manner that is satisfactory to the agency. Because of the work order structure and guaran- teed minimum, the agency can literally cease issuing work orders to a contractor whose performance is not satisfactory, creating a constructive termination of the agreement and leaving the contractor with no effective recourse. Many state DOTs use the first work order to satisfy the guaranteed minimum and, as a result, they are able to “test drive” a given contractor, using the work order as an opportunity to evaluate its performance. If the performance proves to be unsatisfactory, the agency is not “stuck” in a

12 contractual relationship where it must resort to some form of legal action to terminate. In IDIQ, the agency merely ceases to issue work orders to that particular contractor; an advan- tage to the agency and one with which IDIQ contractors are well aware. The second incentive feature in IDIQ is the option to extend the contract without further competition. One author found that “a contractor’s greatest incentive is the promise of future work” (Strang 2002). One IDIQ contractor found that its company viewed IDIQs as an attractive revenue stream to fill in the fluctuations within the typical construction market (Centennial Contractors 2004). The contractor also valued IDIQs as a mechanism to keep its most efficient employees on staff, because if the contractor had a run of bad fortune bidding normal projects it could reassign its top staff to the IDIQ for a certain period while continuing to seek new major construction projects. INDEFINITE DELIVERY/INDEFINITE QUANTITY CASE LAW ANALYSIS IDIQ is relatively new to highway construction and, as such, very little information was found in the record at the state level. The federal government has been using IDIQ for more than three decades and hence the legal literature was rich with information relevant to this synthesis. A Westlaw (West- law 2014) search on the term “IDIQ” turned up only federal cases, as was also the case when there was a search of Lexis/ Nexis (Lexis/Nexis 2014). Therefore, the material reported in this chapter comes from a formal content analysis on 76 federal IDIQ cases. To provide some insight into the use of design IDIQs and, even though this is not the focus of this synthesis, this content analysis includes four federal design IDIQ cases (A/E in FAR nomenclature). One state-level case that involved FDOT was found; however, it was not an IDIQ contract and was dropped. Tables 4 and 5 present summaries of all non-design and design professional IDIQ legal case Agency No. Cases Agency No. Cases Agency No. Cases Dept. of Treasury 2 National Aeronautics and Space Administration 3 Central Intelligence Agency 1 Dept. of Veterans Affairs 5 U.S. Coast Guard 1 District of Columbia Child and Family Services Agency 1 Environmental Protection Agency 1 U.S. Army Director of Public Works 7 Dept. of Human Services 1 Federal Emergency Management Agency 1 U.S. Army Corps of Engineers 6 Defense Intelligence Agency 1 Federal Aviation Administration 1 U.S. Air Force 6 Defense Information Systems Agency 1 General Services Administration 6 U.S. Marine Corps 1 Dept. of Housing and Urban Development 1 Joint Contracting Command for Iraq and Afghanistan 1 U.S. Naval Facilities Engineering Command 14 U.S. Marshals Service 1 City of Pontiac 1 Other agencies 9 TABLE 4 SUMMARY OF LEGAL CASE LAW EXAMPLES—NON-DESIGN IDIQs Case Legal Basis Issue Agency Decision/Court Exelis Systems v. U.S. Award FatallyFlawed Agency evaluation of proposed staffing plan flawed Department of State (DOS) Partially Sustained– Partially Denied/ Comptroller General IMS Engineers— Architects, P.C. v. U.S. Breach of Contract Termination for convenience without exercising final 2 year options U.S. Army Corps of Engineers (USACE) Denied/ Armed Services Board of Contract Appeals Lucent Technologies World Services v. U.S. Award Fatally Flawed Agency determined conflict of interest U.S. Army Director of Public Works (DPW) Denied/ Comptroller General McKissack-URS Partners v. U.S. Award Fatally Flawed Agency failed to debrief before phase 2 proposals were due Department of Labor (DOL) Denied/ Comptroller General TABLE 5 SUMMARY OF LEGAL CASE LAW EXAMPLES—DESIGN IDIQs

13 law examples, respectively, analyzed in this synthesis report. More detailed information and a further analysis of these case examples is contained in Appendix C. SUMMARY This chapter found that the federal government’s experience employing IDIQ contracts has resulted in a defensible con- tract form and associated procurement and administration pro- cesses as evidenced by the finding that the majority of IDIQ protests and claims are settled in favor of the agency. Thus, the federal form can furnish a starting point from which a DOT can tailor it to the state’s statutes. Concerns found in the literature regarding increased pro- test risk resulting from potential restriction of competition were proved to be unfounded because only five of 76 protests were based on a violation of the Competition in Contracting Act (CICA). In addition, all five claims were denied. There- fore, the full and open competition that occurs in the pre- award phase appears to be viewed by industry as sufficient.