Among the many subjects to receive President-elect Trump’s attention in advance of his swearing in on January 20 are venerable defense contractors and their performance of major systems contracts. The Boeing Company (Boeing) and Lockheed Martin (Lockheed) have both felt the “heat of the tweet” – Boeing for the projected cost of the next generation of presidential aircraft and Lockheed for its F35 Joint Strike Fighter. The pointed attention has led some to question the authority of a president to alter existing contractual relations or to impact the award of future contracts. Can a president require contractors to lower prices on existing contracts or direct that future awards not be made to companies that fail to adopt practices the president favors, e.g., retaining jobs in the United States? A president always has the bully pulpit to pressure high-profile government contractors to “voluntarily” take actions to their detriment and in favor of the government, but what legal tools or contractual remedies are available if a president forces a particular outcome?
The legal obligations of the United States to its contractors, with some exceptions, is little different from the obligations of a buyer in a private contract. The courts long ago established that the United States as buyer must “turn square corners” when dealing with its contractors. Maxima Corp. v. United States, 847 F.2d 1549 (Fed. Cir. 1988). There also exists in every government contract a duty of good faith and fair dealing. See John Cibinic, Jr., James F. Nagle, Ralph C. Nash, Jr., Administration of Government Contracts 296-314 (4th ed. 2006). Aspects of government contracts that make them different from commercial contracts, e.g., socio-economic provisions that promote specific government policies, do not alter the basic and implied duties of a buyer to a seller. The written contract captures the exchange of promises of the parties and embodies all express and implied duties and remedies for their breach.
With this as background, could the new president require that Boeing or Lockheed, for example, unilaterally reduce the prices for their aircraft or face adverse consequences? First, authority to bind the U.S. Government to contracts, or amendments to contracts, is housed in authorized contracting officers. See FAR 1.602-1. Contracting officer authority is delegated from agency heads to government employees considering their experience in government contracting and administration, their education or special training in business administration, law, accounting, engineering, or related fields, their knowledge of acquisition policies and procedures, and their completion of acquisition training courses. FAR 1.603-2. Once authority is delegated, contracting officers are to act independently while ensuring that contractors receive impartial, fair and equitable treatment. See Schlesinger v. United States, 390 F.2d 702 (Ct. Cl. 1968); see also FAR 1.602-1. While contracting officers can and should look to others for advice, including to higher-ups, see FAR 1.602-2(c) (“Contracting officers shall . . . [r]equest and consider the advice of specialists in audit, law, engineering, information security, transportation, and other fields as appropriate”), the decision of a contracting officer must remain that of the contracting officer.
This is not to suggest that contracting officers are immune to pressure from government officials in influential positions, including the president. However, contracting officers are bound to apply the law when awarding and administering contracts. See FAR 1.602-1(b) (“No contract shall be entered into unless the contracting officer ensures that all requirements of law, executive orders, regulations, and all other applicable procedures, including clearances and approvals, have been met”); FAR 1.602-2 (“Contracting officers are responsible for . . . ensuring compliance with the terms of the contract”). Contracting officers are allowed wide latitude to exercise business judgment which might provide an avenue for a contracting officer to accommodate certain presidential desires but the contracting officer must nonetheless operate within the constraints of the law and the terms of any existing contract. Id.
The classic tool the government has when it finds an existing contract no longer in its interest is the termination for convenience. See FAR 52.249-2(a) (fixed price contracts); 52.249-6(a)(1) (cost reimbursement contracts). What constitutes the government’s “interest” is very broad. Surely, a contracting officer could find it in the government’s interest to terminate a contract for a major system that the contracting officer deemed, perhaps because of encouragement from the top of the executive branch, to be too expensive. However, a termination for convenience is not cost free to the government. Contractors terminated for convenience are entitled to recover their cost incurred to the date of the termination, profit or fee on that cost, and termination settlement expenses. FAR 52.249-2(g); 52.249-6(h). In addition, the termination of any contract where there is a continuing requirement is a drastic action. The government would need to begin a new procurement to satisfy the requirement, conduct the procurement pursuant to law, including obtaining full and open competition unless an exception existed, and begin a program all over again. Practically, the government is unlikely to take this path because it would be costly and delay ultimate delivery of the system. Thus a contractor willing to endure the public approbation of being identified with “fraud, waste and abuse” likely can survive simply because the consequences of terminating a contract are so drastic.
An even more drastic government approach would be for the government to terminate an unpopular contract for default. This would absolve the government of all monetary obligations for the termination. This may sound exceedingly extreme, but the history of the longest-running and largest termination for default in the Department of Defense’s history, the Navy’s A-12 aircraft, shows that an over-budget contract that became politically unpopular can meet such a fate.
For new contracts, the government has the ability to set requirements and select the awardee. Could the government establish a requirement that all companies who ship jobs overseas are excluded from government contracting? Or more subtly, could a bias against such companies infect the selection process?
The out-going Obama Administration in its latter stages liberally used the president’s Executive Order power to implement socio-economic policies for government contractors. Typically, these policies were ones likely to face opposition in the Republican-controlled Congress. Using the president’s power over contracting, President Obama issued Executive Orders that led to new requirements on paid sick leave, fair pay and safe workplaces, and LGBT rights. There seems no reason that the Trump Administration might not attempt this same path to limit awards to contractors who do not fit the Administration’s view of “Making America Great Again.”
Such an attempt might run into problems, however. The Obama Administration’s Executive Orders affirmatively imposed new social requirements on contractors where those requirements were not prohibited by law or regulation. A Trump Administration Executive Order prohibiting contract awards to companies who move jobs overseas, for example, might run squarely into the Competition in Contracting Act’s (CICA) mandate for “full and open competition.” Although CICA contains exceptions to full and open competition, promoting US jobs by discouraging offshoring is not one of them (although awards to inverted domestic corporations are prohibited by statute and regulation, see FAR 9.108-2).
Finally, bias in source selection for new contracts is difficult to detect. Every selection official, indeed every human, has biases, but as a matter of law, those biases cannot lead to an award inconsistent with solicitation selection criteria. See FAR 15.303(b)(4). Unwarranted bias in the procurement process is controlled through the bid protest, a review by a third-party to determine whether a selection authority acted arbitrarily, capriciously, or abusively, or not in conformance with law. See FAR part 33. A source selection authority influenced by desires of a new president that were not included in a solicitation could be brought to task through the bid protest process.
The new Administration is not without power to influence government contracting and contractors through the bully pulpit. From a purely legal standpoint, however, the Administration’s powers are circumscribed by the remedies available to contractors and challenges that prospective offerors can bring through the bid protest process. We shall see how the Trump Administration proceeds and report further if there are any developments.