The U.S. Court of Federal Claims recently overturned an agency’s decision to terminate a government contractor for default ─ finding that the government allowed a series of contract disputes, poor practices, conflicting personalities, and a lack of effective communication to cloud its termination analysis. The case serves as an important reminder that, when reviewing a termination for default, the Court gives little credence to the government’s “subjective beliefs” regarding the contractor’s ability to perform. Rather, the Court conducts an objective inquiry and scrutinizes the events, actions, and communications that led to the agency’s termination decision.
The National Guard Bureau (“Agency”) awarded a firm-fixed price construction contract in 2014 to Alutiiq Manufacturing Contractors, LLC (“AMC”) to repair asphalt roads at an Air Force base. From the outset, AMC experienced performance issues on the project: its key personnel were not staffed on the project; it had difficulty finding a qualified subcontractor; and it failed to timely submit required contract documentation. None of these deficiencies, however, would have prevented the contractor from timely completing the contract.
Nevertheless, these early performance problems engendered hostility towards the contractor among the government’s contract management personnel. The Agency issued a Letter of Concern and multiple cure notices to the contractor. In response, AMC adopted corrective measures to help move the project forward. AMC developed a new asphalt design, made personnel changes, and submitted a revised baseline schedule. It also worked with its main subcontractor to develop a recovery schedule under which AMC anticipated it could complete its work two days ahead of the original contract deadline.
At the same time the contractor was working to get the project back on schedule, however, Agency personnel were holding discussions on when and how to terminate AMC’s contract for default. Ultimately, an onsite Agency representative took a “quick glance” at AMC’s proposed recovery schedule and determined it was not viable. The Agency did not conduct a critical path analysis of the recovery schedule, but instead performed only a “cursory assessment” of the plan. The Agency terminated AMC’s contract for default shortly thereafter. AMC then challenged the Agency’s grounds for termination at the Court of Federal Claims.
The Court’s Decision
In reviewing the Agency’s termination decision, the Court applied the standard set forth in Lisbon Contractors, Inc. v. United States, 828 F.2d 759 (Fed. Cir. 1997) — under which the government must demonstrate “a reasonable belief on the part of the contracting officer that there was no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.” The Court also relied on McDonnell Douglas Corp. v. United States (McDonnell Douglas XII), 323 F.3d 1006 (Fed. Cir. 2003), which clarified that the inquiry is an objective one “focus[ing] on the events, actions, and communications leading to the default decision.” Finally, the Court looked to the factors in FAR 49.402-3(f) that must be considered by a contracting officer prior to issuing a termination for default.
The Court ultimately found the Agency’s termination decision was unreasonable because the government failed to consider a number of the FAR 49.402-3(f) factors. The first of the contracting officer’s five reasons for termination — AMC’s inability to secure an asphalt subcontractor — the Court dismissed as a “red herring,” since AMC’s eventual asphalt subcontractor said it could meet the Agency’s specifications in about a week. The Court deemed reasons two, three, and four — personnel gaps and failure to submit various project records, drawings, documents and photos — insufficient to justify the Agency’s subjective belief that AMC could not complete the project on time, particularly since AMC’s new management had greatly improved these processes since the beginning of the project.
The Agency’s determination thus turned on the belief of onsite government personnel that the project was at least 10% behind schedule. The Court noted that, under both Lisbon and McDonnell Douglas XII, the government “cannot satisfy its burden by merely showing that the contractor was behind schedule.” AMC was undoubtedly behind schedule, but the issue was “whether AMC could have met the goals of its recovery schedule in order to fulfill performance in a timely manner.” On this key point, the Court held that “the Agency’s default termination was so defective that it seems impossible that the contracting officer’s decision was based on a reasonably held belief that AMC could not finish the project.” In so holding, the Court cited the contract performance improvements that had been made by AMC; the Agency’s failure to thoroughly consider AMC’s proposed recovery schedule; and the onsite government personnel’s “history of dishonesty and hostility towards AMC throughout the course of performance.”
The Court of Federal Claim’s decision in Alutiiq Manufacturing Contractors, LLC provides several helpful, “back-to-basics” reminders for contractor and agency personnel who encounter performance problems on a government project.
- First, as a form of forfeiture, termination for default is viewed appropriately by the Court as a drastic remedy that must be fully justified by the government. The Court applies a relatively high standard of proof in such cases and will look to the FAR to determine if an agency has followed proper procedures in making its termination decision. At bottom, the government cannot support a default termination based solely on its subjective belief that a project is incurably off course.
- Second, clear communication between contractor and government personnel are integral to avoiding costly, time-consuming performance disputes ─ particularly when it comes to developing a “get well plan” on a troubled project. In the Alutiiq case, both the contractor and the government could have done a better job of communicating with their counterparts to set expectations and raise concerns. But when the contractor proposed a recovery schedule to get the project back on track, it seems the government had already decided to terminate for default and agency personnel did not take the time to objectively evaluate the contractor’s proposed path forward. That fact alone was apparently enough for the Court to rule against the government.
- Third, evidence of government bias against a contractor will always loom large in a termination for default case. Often, personal dynamics between contractor and government personnel can understandably lead some to grow frustrated with their counterparts on a government project. It is important to remember, however, that objectivity must be the hallmark of any decision to terminate for default. Therefore, government personnel should remember to focus on the facts and make every attempt to work with the contractor before taking steps to terminate for cause.