In November of last year, I prepared a blog article about a specific clause that started appearing in firm-fixed-price contracts with various agencies which allowed them to reduce the price paid to the contractor based upon any absence, regardless of how short or the reason for the absence. Since that time, we have been assisting more and more clients in situations where the government is demanding discounts or refunds on firm-fixed-price contracts. Given this fact I believe it would be helpful to discuss the current state of the law, particularly with regard to firm-fixed-price service contracts.

Given the firm-fixed-price contracts are generally understood to have both firm and fixed prices, many contractors understandably believe that so long as the government customer receives quality service and is happy with the product, that the government is required to pay the full price on the contract. Indeed, many contractors use this understanding to justify the lowest possible price because they believe the risk of not being paid the full amount is very low. This understanding inures to the benefit of the government as they receive low-cost bids for high-end services. However, there are numerous legal avenues for the government to avoid paying the full price on the contract. First, if the firm fixed price contract specifies a specific number of hours during some particular period, say 160 hours a month (common given that it is simply 1920 divided by 12 – one full-time employee with vacations and holidays), the government generally has the right to a discount if the contractor fails to provide the full 160 hours that month. Another example could be where the government has put in the specification that they are paying a certain amount for a certain number of FTEs (say 10). Thus, if one of your employees leaves and there is no provision in the contract for how long you have to replace the person, you may have to provide the government a discount for the full amount of time where that FTE position went unfilled. 

This is even true where you are providing the full level of services. Take for example a situation where the contract calls for 2 FTEs to paint a room and do it in a day. Let’s say you create a new type of paint brush that allows a single painter to paint a room twice as efficiently and at a fraction of the cost. The general understanding is that for a firm fixed price contract that sort of efficiency inures to the contractor’s benefit and if they can do the same work for less cost then the contract is entitled to capture that extra profit. However, generally speaking, the law currently would say that if the contract actually requires 2 FTEs, whether it be in the CLINs or SOW/PWS, etc., the government is not paying for simply the painting of the room within the time specified, it is paying for two human beings to do the painting. Thus, if you do the job flawlessly but do it with one person instead of two, the government could demand a 50% reduction in the price paid on the contract. It comes down to the factual question of what specifically does the contract require? If it just says you have to paint the room and is silent on the number of personnel or hours, then you are free to take advantage of efficiencies. However, if the contract contemplates a certain number of required personnel or hours, it is very risky to fail to meet those expectations, regardless of the quality of work or happiness of the customer. Obviously, the painting example is very basic and would likely never occur, but it properly displays the issue – it does not necessarily matter how good the work is or whether the contractor is providing the real substance of the contract if the work is technically “nonconforming” because of some arbitrary hourly or personnel requirements.

This can be especially problematic for cleared contracts as replacing individuals is not an easy task and actually requires involvement and cooperation by government personnel. Many times you have to register the employee and wait for other government employees not associated with the contract in any way to process the correct paperwork. Only then can you bring the new employee onto the contract. Meanwhile, any delays could, if the contract is silent on the treatment of employees “in process” for clearances, cost the contractor a reduction in the contract price for every day an employee is off the job. This is another reason why it is important for contracts to not only provide some reasonable period to replace employees, but also provides for whether or not employees being processed for clearances count as being on the job or not. Without such a provision the general rule is that the contractor bears all responsibility for failing to have personnel in place. That said, if the government is failing to cooperate or is actively blocking your performance, you can bring a claim for breach of the duty to cooperate and not hinder performance, but asserting those rights can be costly and time-consuming. All the while the government is likely refusing to partially pay the undisputed portions of invoices and is simply rejecting your invoices and holding your money hostage in order to gain more leverage in negotiations, or try to make you waive and release the government of any liability in order to get paid.

As with any issue, the facts are very important, specifically the express clauses in the contract, but given that these issues appear to be occurring more and more often, it is critical that contractors understand that firm-fixed-price service contracts are usually hardly firm, or fixed. Indeed, in most cases the fixed price is more of a ceiling than a floor where the government had wide latitude to discount the price where a specific number of hours or personnel are required. Therefore, seller beware and make sure you understand exactly what the contract requires before you bid.

About the author: Cy Alba is a partner with PilieroMazza and is a member of the Government Contracts and Small Business Programs Groups. He may be reached at [email protected].