Government Shutdown Appeal Win Is Cold Comfort to Contractors

February 6, 2018 Daniel Seiden

This analysis was first available to Bloomberg Government subscribers.

A 2014 appeals board decision allowing an Army lab services contractor to recover full compensation despite being shut out by the October 2013 federal government shutdown is rare and remarkable—and only cold comfort for shutdown-wary government contractors.

The parties structured the contract in such a way that the contractor Amaratek became entitled to the full monthly payment once performance began, but “there are very few contractors similarly situated” to Amaratek, said Michael R. Rizzo, partner with Pillsbury Winthrop Shaw Pittman LLP, Los Angeles.

“If the government issues a stop work order because of a shutdown, the contractor will not get paid unless it bargained for a compensation provision similar to the one the appellant had in Amaratek. We don’t see those provisions very often,” he told Bloomberg Government.

Amaratek’s win only applies to fixed-price contracts, and certain factors weigh against pursuing fixed-price contracts that address shutdown risk, such as how contractors may be drawn to developmental requirements where government needs aren’t certain and cost overruns are possible, said Stuart W. Turner, counsel with Arnold & Porter Kaye Scholer LLP, Washington.

The October 2013 shutdown lasted 16 days. The January 2018 shutdown lasted three days. Current government funding runs out after Feb. 8.

Army Received Services it Allowed

The Army exercised the second of two contract option periods which provided for 12 monthly units of service, between July 2013 and June 2014, priced at $58,947.

The Army Oct. 1, 2013, ordered Amaratek to stop work due to the shutdown.

The government said Amaratek should only be compensated for the handful of days it actually worked at the end of October 2013 when the shutdown ended, but the Armed Services Board of Contract Appeal disagreed.

Amaratek should get the full $58,947—despite working only six days—because the Army ordered service for the whole month and received all the service it allowed Amaratek to provide during that month, the board said.

Amaratek’s entitlement to the unit price for work the Army ordered wasn’t impacted by Federal Acquisition Regulation 52.242-15, which allows the government to order a work stoppage, the board concluded.

The lesson from Amaratek is that contractors impacted by shutdowns need to review the terms of their contracts to see if they have a basis for being paid for lost work, and is particularly true for service contractors paid on a monthly basis, said Kathryn Lipp, partner, and Nicole Chammas, Senior Law Clerk, with Berenzweig Leonard LLP, McLean, Va.

Getting the government to now agree to similar terms as those in Amaratek’s contract “could be difficult and drag out negotiations, increasing transaction costs on both sides,” they said.

Hedging vs. Opportunity

Contractors would probably love to hedge against shutdowns, but often these decisions are out of contractors’ hands, Turner said.

Decisions to use a “time-and-materials structure, or to have mixed services and supply delivery requirements, or other factors that would complicate the clean analysis in Amaratek are typically determined before solicitations are released and not subject to negotiation,” he said.

Turner would “advise clients to take advantage of the hedge implied by Amaratek where it is available and makes sense, but it may not be available or make sense in the context of the opportunity,” he said

“The best protection against shutdown uncertainty is working under contracts that don’t require new appropriations and maintaining good communications with the contracting officials,” he said.

No ‘Magic Wording’

The Amaratek decision isn’t entirely unique, as shown by a 1999 decision from the now defunct General Services Administration Board of Contract Appeals involving the 1995-1996 shutdown.

Raytheon could recover employee and subcontractor salary costs despite the government’s assertion that the shutdown was a sovereign act that barred recovery, the board found in Raytheon STX Corp. v. Dep’t of Commerce, GSABCA, No. 14296-COM, 10/28/99.

Raytheon’s cost-reimbursement type contract, and the contract’s representations that certain government facilities would be available for performance, implied a promise that the government would bear the increased costs if the facilities shut down, the board concluded.

There may be a variety of ways for a contract to describe the purchase of services and yield a similar result, said Chris Haile, partner with Crowell & Moring LLP, Washington.

The Amaratek decision “doesn’t rely on magic wording,” he said.

The case is Amaratek, ASBCA, Nos. 59149, 59395, 11/10/14.

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