Wednesday, May 11, 2016

Contractor Cannot Allocate Risks to the Government on FFP Contracts

In 2005, the Navy issued a solicitation for base operating support services at its Diego Garcia support facility. The scope of work included information technology, refuse collection, and recycling, to name a few of the varied services contemplated in the solicitation. The solicitation identified two categories of fuel under the contract. The first category was to be provided by the Navy at no cost and could be used for most of the services required by contract. The second category applied to all contractor base support vehicles and equipment. This fuel was also provided by the Navy but the contractors had to pay for that fuel at the prevailing DOD rate at the time of purchase. This arrangement was to encourage reductions in fuel usage - reductions which, if achieved, would increase the contractor's award fee pool each year.

A company named DG21 submitted a bid. Within its bid, was an estimate of contractor furnished fuel it expected to consume, The estimate was significantly lower than the amount reflected in the solicitation. DG21's proposal included a provision that if fuel rates varied from historical rates by more than 10 percent, it would seek an equitable adjustment.

The Navy responded that historical fuel usage information and rates were provided for informational purposes only and clarified that the contractor assumes the full risk of consumption and/or rate changes. The Navy told DG21 to price its proposal accordingly.

DG21 did not adjust its fuel cost estimates, reasoning that while fuel prices fluctuate dramatically from year-to-year, fuel costs, in total should decrease as a result of its energy efficiency programs. DG21 also removed the provision from its proposal indicating that it would seek an equitable adjustment if fuel prices changes by more than 10 percent. DG21 was ultimately awarded the contract.

During contract performance, fuel prices rose dramatically, reaching a maximum of more than double the historical rated indicated in the solicitation. In 2011, DG21 requested an equitable adjustment to account for the unexpected increase in fuel costs.asserting that the change in fuel price was a "change" to the contract under the FAR 52.243-4 Changes clause. The contracting officer denied the request, noting again that historical fuel rates had been provided for information purposes only. DG21 appealed the contracting officer's determination to the ASBCA (Armed Services Board of Contract Appeals). The ASBCA denied the appeal for several reasons, the first being that the Changes clause did not apply to this situation since the contract language anticipated fluctuations in the market. DG21 was not happy with the ASBCA decision so it appealed to the U.S Court of Appeals.

The Appeals Court affirmed the ASBCA decision. The Court agreed with the Navy that the contract did not allocate the risk of market fluctuations in fuel prices to the Navy. The contract specifically states that DG21 would purchase fuel at the prevailing DoD rate at the time of purchase. By referencing the prevailing DoD rate at the time of purchase rather than a specific price, the contract conveyed  that the price for fuel could vary as the prevailing DoD rate varies. Accordingly, a variable fuel price was a specific part of the contract. The Appeals Court concluded:
Consistent with the general rule that the essence of a firm fixed-price contract is that the contractor, not the government, assumes the risk of unexpected costs, the prevailing DoD rate provision also allocates the risk of fluctuating fuel prices to DG21

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