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Final Payments on IDIQ Construction Contracts


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Suppose you have a FFP IDIQ contract for construction that contains the clause at FAR 52.232-5, Payments Under Fixed-Price Construction Contracts. Paragraph (h) of the clause states as follows:

Final payment. The Government shall pay the amount due the Contractor under this contract after?

(1) Completion and acceptance of all work;

(2) Presentation of a properly executed voucher; and

(3) Presentation of release of all claims against the Government arising by virtue of this contract, other than claims, in stated amounts, that the Contractor has specifically excepted from the operation of the release. A release may also be required of the assignee if the Contractor?s claim to amounts payable under this contract has been assigned under the Assignment of Claims Act of 1940 (31 U.S.C. 3727 and 41 U.S.C. 15).

Could this be interpreted to withhold final payment on all task orders issued under the IDIQ until all work under the IDIQ has been completed and accepted?

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Guest Vern Edwards

Don:

Unless you know of some case interpreting the clause, I say that the interpretation would depend on whether the orders are severable. I think that if the orders are severable, each standing on its own, then the clause would apply to each separately, but if the orders are merely part of a larger undertaking, then the clause would apply to them jointly. I think everything depends upon the intent of the parties and, if that cannot be established, on the conduct of the parties and the relative reasonableness of any conflicting interpretations.

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Don

All of the IDIQ FFPs I've done had the Task Order treated as individual orders (and payment terms); each Task Order issued in response to a Task Order proposal under that IDIQ, which clearly defines how payment is made.

Agree with Vern's point that it may be possible, in example, an IDIQ FFP to construct a building and each Task Order being issued is to perform individual functions to complete that building (although and odd choice of a IDIQ FFP contract to complete such a task but?).

I believe it could be interpreted as withholding final payment on all Task Orders in certain circumstances but I have a hard time believing this would come as a surprise to either the party (especially the Contractor).

I'd love to hear how you came up with this one.

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Vern,

I couldn't find any cases that interpreted the clause in the context of IDIQ contracts. Note that the clause uses "contract", which is defined broadly enough to include both IDIQ contracts and the task and delivery orders issued under them. As such, I would expect that some agencies withhold until completion and acceptance of all work under the IDIQ.

FAR Fetched,

I expect that most agencies probably do release withholding after completion and acceptance of individual task orders, but I'm not convinced that this is the only correct interpretation of the clause. I was reading the FAR Councils' response to a public comment it received about the payment clause for fixed-price architect-engineer contracts, which said:

12. Fee withholding should be different for task orders under indefinite-delivery/indefinite-quantity (IDIQ) contracts.

Four respondents commented that IDIQ contracts should be treated differently. One respondent noted that some small A-E firms believe that the current regulation may not be consistent with IDIQ contracting practices. This comment is supported by four other comments received on this same point. One respondent claimed that retainage for individual task orders under an IDIQ contract is, at times, currently held until the entire IDIQ contract is complete.

Response: Retainage should be related to the contractor's performance on the individual task or delivery order and, in order to be compliant with the requirements of FAR 52.232-10, the contractor must be paid any unpaid balance upon satisfactory completion of the work under that contract, whether it is a task or delivery order or a stand-alone contract. However, this is a matter of educating contracting officers rather than changing policy; the policy is correct, but its execution needs improving. 75 FR 13424

Apparently, the FAR Councils believe that, for fixed-price A&E contracts, it's incorrect to withhold amounts due under task orders until the entire IDIQ contract is complete, that COs that don't know this are uneducated, and that the clause adequately communicates this policy, despite receiving five public comments about this issue. (I'm not sure if this is the policy for withholding under other payment clauses--I'm assuming that it is). This caused me to start looking at some other payment clauses to see if they could be interpreted to withhold amounts due on individual task orders until all work under the IDIQ contract was completed and accepted. I'm having a hard time accepting that such an interpretation would be incorrect.

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Good stuff Don.

Question: Knowing this ambiguity exists, would simply writing payment terms in each Task Order proposal be sufficient or could those payment terms be superseded by FAR 52.232-5?

If the payment terms in a Task Order proposal could be superseded by the FAR 52.232-5, what additional steps should be taken to avoid such a radical interpretation?

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Good stuff Don.

Question: Knowing this ambiguity exists, would simply writing payment terms in each Task Order proposal be sufficient or could those payment terms be superseded by FAR 52.232-5?

If the payment terms of the task order were in conflict with FAR 52.232-5, then by operation of FAR 52.216-18 (Ordering) FAR 52.232-5 would control.

If the payment terms in a Task Order proposal could be superseded by the FAR 52.232-5, what additional steps should be taken to avoid such a radical interpretation?

I can only think of two. You can ask for an interpretation of the clause when the solicitation is open. If the contract is already awarded, and this becomes an issue in controversy, a contractor could submit a nonmonetary claim requesting an interpretation of the clause.

Also, I don't think that such an interpretation would be so radical. If the comments received by the FAR Council (see my last post) are any indication, there are agencies that do this.

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Guest Vern Edwards

What this shows is the importance of having a good CO,one who is aware of the possibility of conflicting interpretations and takes measures to make sure the parties share a common understanding of how the government intends to implement the clause -- on a whole contract basis or an order-by-order basis.

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Don,

I think a CO should also look at 32.103 ? Progress Payments Under Construction Contracts in which it states:

?Retainage should not be used as a substitute for good contract management, and the contracting officer should not withhold funds without cause.?

The section goes on to say:

?Upon completion of all contract requirements, retained amounts shall be paid promptly.?

My question would be, what would the government gain by not paying the contractor after they have satisfied the requirements of the task order. I believe it would do nothing more than irritate the contractor.

This being construction, would the contractor also have to maintain their bond?

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Darby8001,

My question would be, what would the government gain by not paying the contractor after they have satisfied the requirements of the task order.

Perhaps a CO would withhold because the contractor performed poorly and they want to get better performance on future task orders. The reason for the withholding is beside the point. Assume that there is a good reason. Does the clause give the CO the right to withhold until all work under the IDIQ contract is completed and accepted?

This being construction, would the contractor also have to maintain their bond?

Why wouldn't they? FAR 52.228-16 requires performance and payment bonds in the amount of the contract minimum for IDIQ contracts. It doesn't require bonds for each task order.

(a) Definitions. As used in this clause?

?Original contract price? means the award price of the contract; or, for requirements contracts, the price payable for the estimated total quantity; or, for indefinite-quantity contracts, the price payable for the specified minimum quantity. Original contract price does not include the price of any options, except those options exercised at the time of contract award.

(B) Amount of required bonds. Unless the resulting contract price is $150,000 or less, the successful offeror shall furnish performance and payment bonds to the Contracting Officer as follows:

(1) Performance bonds (Standard Form 25). The penal amount of performance bonds at the time of contract award shall be 100 percent of the original contract price.

(2) Payment Bonds (Standard Form 25A). The penal amount of payment bonds at the time of contract award shall be 100 percent of the original contract price.

(3) Additional bond protection.

(i) The Government may require additional performance and payment bond protection if the contract price is increased. The increase in protection generally will equal 100 percent of the increase in contract price.

(ii) The Government may secure the additional protection by directing the Contractor to increase the penal amount of the existing bond or to obtain an additional bond.

[...]

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Perhaps a CO would withhold because the contractor performed poorly and they want to get better performance on future task orders. The reason for the withholding is beside the point. Assume that there is a good reason. Does the clause give the CO the right to withhold until all work under the IDIQ contract is completed and accepted?

Prior to accepting a project as complete it would generally be inspected right? If there was something that did not conform then the clause 52.246-12 Inspection of Construction would come into play.

? (f) The Contractor shall, without charge, replace or correct work found by the Government not to conform to contract requirements, unless in the public interest the Government consents to accept the work with an appropriate adjustment in contract price. The Contractor shall promptly segregate and remove rejected material from the premises.

(g) If the Contractor does not promptly replace or correct rejected work, the Government may --

(1) By contract or otherwise, replace or correct the work and charge the cost to the Contractor; or

(2) Terminate for default the Contractor?s right to proceed?

If the government accepted and still felt the performance was lacking, and in your example lacking enough to withhold monies, then why issue the contractor any additional task orders? That?s like complaining about how mean your girlfriend is to you but you keep going on dates with her.

Why wouldn't they? FAR 52.228-16 requires performance and payment bonds in the amount of the contract minimum for IDIQ contracts. It doesn't require bonds for each task order.

In construction the clause would be 52.228-15 I think you accidently used 16. While it doesn?t specifically require a bond for each order you would generally require the additional protection for task orders.

?(3) Additional bond protection.

(i) The Government may require additional performance and payment bond protection if the contract price is increased. The increase in protection generally will equal 100 percent of the increase in contract price.?

It would be silly to hold a bond on a $5k minimum guarantee and not on the $10M task order.

Moving on, in Admin of Gov Contracts they discuss the legal effect of final payment: Pg 1203

?Final payment is of ultimate importance to both the contractor and the government, since it may have far-reaching legal effects on each party?s ability to pursue claims against the other.?

I don?t have a WestLaw account but my old GWU Construction Contracting book provides a reference GSBCA 6757, 86-2 BCA 18,810 in which they state:

?withholding in excess of amount needed to correct defective work unreasonable?

In our discussion I believe if we choose to accept the project regardless of the quality of performance and we are not withholding with the purpose to correct defective work, then we should pay the contractor.

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Darby8001,

Is it fair to say, then, that you interpret the word contract in FAR 52.232-5(h) to mean "task order" and not "whole IDIQ contract" when used in an IDIQ contract? Here's what that paragraph says:

(h) Final payment. The Government shall pay the amount due the Contractor under this contract after?

(1) Completion and acceptance of all work;

(2) Presentation of a properly executed voucher; and

(3) Presentation of release of all claims against the Government arising by virtue of this contract, other than claims, in stated amounts, that the Contractor has specifically excepted from the operation of the release. A release may also be required of the assignee if the Contractor?s claim to amounts payable under this contract has been assigned under the Assignment of Claims Act of 1940 (31 U.S.C. 3727 and 41 U.S.C. 15).

If your answer is yes, shouldn't the word contract be interpreted the same way in other clauses in an IDIQ contract? Assume the definition of contract is the one at FAR 2.101 in all cases.

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Guest Vern Edwards

If the contract includes the definitions clause, FAR 52.202-1, then the word "contract" in clauses must be interpreted in accordance with FAR 2.101, unless the contract includes agreement to use some other definition.

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Is it fair to say, then, that you interpret the word contract in FAR 52.232-5(h) to mean "task order" and not "whole IDIQ contract" when used in an IDIQ contract? Here's what that paragraph says:

For the sake of argument I would say yes, the clause means task order in question when it says contract. The definition of contract @ 2.101(emphasis added) is:

??Contract? means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them. It includes all types of commitments that obligate the Government to an expenditure of appropriated funds and that, except as otherwise authorized, are in writing. In addition to bilateral instruments, contracts include (but are not limited to) awards and notices of awards; job orders or task letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; and bilateral contract modifications. Contracts do not include grants and cooperative agreements covered by 31 U.S.C.6301, et seq. For discussion of various types of contracts, see Part 16.?

If we were getting to this level of detail I would say the funds themselves are obligated by the task order and not the actual IDIQ contract. Even the minimum would be supplied via a task order. In this case I could argue that referring to the task order as the ?contract? is actually more correct.

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Guest Vern Edwards

There is no question that under an IDIQ contract, except for the minimum, funds are obligated by the issuance of task orders. The minimum is obligated by the award of the IDIQ contract.

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Guest Vern Edwards

Don,

On Monday, you quoted a response by the FAR councils to a comment on a proposed rule, at 75 FR 13424, as follows:

Fee withholding should be different for task orders under indefinite-delivery/indefinite-quantity (IDIQ) contracts.

Four respondents commented that IDIQ contracts should be treated differently. One respondent noted that some small A-E firms believe that the current regulation may not be consistent with IDIQ contracting practices. This comment is supported by four other comments received on this same point. One respondent claimed that retainage for individual task orders under an IDIQ contract is, at times, currently held until the entire IDIQ contract is complete.

Response: Retainage should be related to the contractor's performance on the individual task or delivery order and, in order to be compliant with the requirements of FAR 52.232-10, the contractor must be paid any unpaid balance upon satisfactory completion of the work under that contract, whether it is a task or delivery order or a stand-alone contract. However, this is a matter of educating contracting officers rather than changing policy; the policy is correct, but its execution needs improving.

You then made this point about the comment/response:

Apparently, the FAR Councils believe that, for fixed-price A&E contracts, it's incorrect to withhold amounts due under task orders until the entire IDIQ contract is complete, that COs that don't know this are uneducated, and that the clause adequately communicates this policy, despite receiving five public comments about this issue. (I'm not sure if this is the policy for withholding under other payment clauses--I'm assuming that it is). This caused me to start looking at some other payment clauses to see if they could be interpreted to withhold amounts due on individual task orders until all work under the IDIQ contract was completed and accepted. I'm having a hard time accepting that such an interpretation would be incorrect.

I think you are trying to use a Socratic dialogue with Darby8001 to disprove the FAR councils' contentions by reductio ad absurdum argument. No problem, except that it takes forever in this format.

It is pointless to criticize the FAR councils. Everybody knows that they do a generally poor job of regulation writing. The best proof of that is the absurd definition of subcontract in FAR 12.001 and 15.401, which one writer has described as "bizarre." See Johnson, "Identifying Subcontractors Under TINA and Access to Records," Public Contract Law Journal, Summer 2003. I agree with the point that you are trying to make, but the managers of the FAR councils are not open to revelations of the gaps and inconsistencies in their work product. Logical demonstration will do no good. They are impervious to logic.

I don't mean to hijack your thread, but I think you have a very good point and I would rather see you make it yourself fully than take a week to do it through Socratic give and take. But maybe I don't understand what you are trying to do.

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Darby8001,

What about my second question?

I believe Vern already hit that one on the head. The term ?contract? should be interpreted as defined by FAR 2.101.

My point in this whole exercise is that hold final payment until the completion of the complete IDIQ contract is not technically incorrect, but it doesn?t seem to have a valid reason.

As I stated before, the only thing you would accomplish is aggravating you contractor. Imagine if your IDIQ had a $500M ceiling. And your contractor received $100M in orders over a 5 year span. If you held 1% that would result in $1M in withholding. Keep in mind that the contractor still has to pay its bills (i.e. equipment, overhead, subs). So in essence you are withholding a portion contractors profit for potentially 5 years, interest free. I believe if the contractor filed a claim for the final payment, they would win (although I don?t have anything to back that statement).

So is there really a good reason for the withholding if the work is complete and accepted?

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Why wouldn't they? FAR 52.228-[15] requires performance and payment bonds in the amount of the contract minimum for IDIQ contracts. It doesn't require bonds for each task order.

Don, regardless of what FAR clause 52.228-15 (I assume you meant "52.228-15", not "52.228-16"), may or may not require, for contracts performed within the U.S., the Miller Act generally requires (28.102-1 -- General.):

"(a)...performance and payment bonds for any construction contract exceeding $150,000, except that this requirement may be waived--

(1) By the contracting officer for as much of the work as is to be performed in a foreign country upon finding that it is impracticable for the contractor to furnish such bond; or

(2) As otherwise authorized by the Miller Act or other law."

Don,

1) How do you think a KO should handle bonding for task orders on a construction ID/IQ contract? Does the clause 52.228-15 pertain to individual task orders? See below example.

2) Would issuance of a task order increase the "contract price" for purposes of the aforementioned clause.?

3) If so, if the government requires a bond for a task order, would the contractor have to maintain the bond in the amount of the task order until the entire ID/IQ contract is closed, even after fully completing the task order?

For the above questions, please assume an example: The minimum ID/IQ contract obligation was $100k.

Task Order number 1 is issued for $5,000,000 with a requirement to provide bonds.

After completing task order 1, government issues task order 2 for $4,000,000 with a requirement to provide bonds.

By the way, regardless of what the Payment clause allows a KO to do, there are other policies and procedures which would discourage holding retainage on completed task orders. There are separate internal DoD requirements and policy for administering construction contracts and for managing appropriations. These policies stress timely and promp fiscal closeout of a project or "contract", so that the funding is not maintained as "construction in progress" status and for various other reasons. It would seldom be appropriate, in my opinion, to keep task orders open by withholding retainage until the entire ID/IQ contract is over. In addition, for MILCON, each separate project will have its own appropriation. Even for O&M funded task orders, funding may involve different fiscal years. We can't usually mix these funds for our use.

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Vern,

I'm writing something for my blog and I wanted to try out an argument. I'll publish it soon.

So is there really a good reason for the withholding if the work is complete and accepted?

Maybe not. I don't know. For the sake of argument, I wanted you to assume that there was. No need to discuss any further.

joel,

I did mean FAR 52.228-15. After re-reading the clause, I think it can be read to require bonds for the IDIQ minimum and each task order under the IDIQ.

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Vern,

I'm writing something for my blog and I wanted to try out an argument. I'll publish it soon.

joel,

I did mean FAR 52.228-15. After re-reading the clause, I think it can be read to require bonds for the IDIQ minimum and each task order under the IDIQ.

Don, a point that I want to make is that the FAR and its supplements don't always provide enough detailed procedures and guidance in either the prescription language or the clauses to properly administer contracts. Many interpretations and applications of clauses result from Caselaw that isnt always fully discussed or addressed in the acquisition regulations. A Contracting Officer or specialist needs much more information that the quoted text of a clause to properly use it.

Examples from this thread alone include :

1) The intracacies of bonding. The FAR as well as the clause only scratch the surface. Bonding isnt insurance. It is procured through sureties, which require some type of assets to back up the bonding. because the contractor must indemnify the surety against losses. Bid Bonds and open performane/payment bonds tie-up tie up a firn's bonding capacity. Bonding companies constantly request status information from our offices, which they use to track payments, performance and progress, etc. The clause doesnt specifically mention bonding for individual construction task orders. Bonding is generally required by the Miller Act to protect the government as well as laborers, suppliers and subcontractors. Those unpaid entities can't place a lien on Federal property like in private property or local government jurisdictions'. Requiring a contractor to keep bonds open on completed task orders would quickly erode a firm's bonding capacity. Refusing to release retainage on completed task orders might well also affect bonding.

2) There are government policies and procedures, separate from FAR and the Payment coverage in the clauses which are intended to require (at least in DoD) the government program offices to fiscally closeout contracts as soon as possible after acceptance and physical completion, because the funding is classified as Construction in Progress or "CIP". Excessive CIP is highly undesirable. The finance and accounting regulations are much more detailed than FAR or clauses.

Another area where FAR is sparse on guidance is variations in estimated quantities of unit priced items. Paragraph 11.702 is woefully inadequate for construction contracts and misleading. Application of the VEQ clause for construction contracts is generally based upon caselaw for overruns and mostly various local expertise and specific circumstances for underruns. And many people seem to think thatt the VEQ clause at 52.211-18 is where the contract authorizes a variation between actual and estimated unit-priced quantities. It doesnt. The mechanism for measuring and paying for unit-priced items should be described in notes to the CLIN schedule or in a measurement and payment specification. The VEQ clause addresses adjustments to unit-prices and/or the contract time when the actual work involves quantities outside of a range of 85-115% of the estimated quantity.

There are other similar areas.

EDIT: Don Mansfield's 10 March 2011 BLOG entry provides other examples of instances where one must possess some knowledge beyond a strict reading of clauses or FAR.

The FAR would be at least a foot thick if it were intended to be the only reference or instructions for Contracting officials.

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