What's Wrong With This Picture?

[Don Mansfield]

Bob posted an excerpt of a recent contract award announcement that I found remarkable. Here it is:

"The Pennsylvania State University Applied Research Laboratory, State College, Pa., is being awarded an estimated $415,045,425 cost-plus-fixed-fee indefinite-delivery/indefinite-quantity task order contract to provide up to 2,060,076 staff hours for research, development, engineering, and test and evaluation in the areas of guidance, navigation and control of undersea systems; advanced thermal propulsion concepts and systems for undersea vehicles; advanced propulsors and other fluid machinery for marine systems; materials and manufacturing technology; atmosphere and defense communications systems; and other related technologies. The contract includes an option for an additional five years, which, if exercised, would bring the total cumulative value of the contract to $853,275,100 and the cumulative staff hours to 3,935,759. No funds are obligated nor guaranteed by the award of this contract; funds will be obligated on individual task orders."

The announcement contains a clear indication of a violation of law. See if you can find it.

[Navy_Contracting_4]

Bob posted an excerpt of a recent contract award announcement that I found remarkable. Here it is:

"The Pennsylvania State University Applied Research Laboratory, State College, Pa., is being awarded an estimated $415,045,425 cost-plus-fixed-fee indefinite-delivery/indefinite-quantity task order contract to provide up to 2,060,076 staff hours for research, development, engineering, and test and evaluation in the areas of guidance, navigation and control of undersea systems; advanced thermal propulsion concepts and systems for undersea vehicles; advanced propulsors and other fluid machinery for marine systems; materials and manufacturing technology; atmosphere and defense communications systems; and other related technologies. The contract includes an option for an additional five years, which, if exercised, would bring the total cumulative value of the contract to $853,275,100 and the cumulative staff hours to 3,935,759. No funds are obligated nor guaranteed by the award of this contract; funds will be obligated on individual task orders."

The announcement contains a clear indication of a violation of law. See if you can find it.

Are you thinking of the failure to record an obligation of funds to cover the guaranted minimum, as required by FAR 16.504(a)(1)?

[Guest Vern Edwards]

What guaranteed minimum?

[civ_1102]

What guaranteed minimum?

exactly!

[Don Mansfield]

You found it. They call it an IDIQ contract, but then end with:

No funds are obligated nor guaranteed by the award of this contract; funds will be obligated on individual task orders.

We've got a couple of possibilities:

1. It is an IDIQ contract that contains a minimum that they didn't report. In this case, they failed to record an obligation for the amount of the obligation created by the contract (the minimum)--a violation of the Recording statute; or

2. The "IDIQ contract" does not guarantee a minimum as required by FAR 16.504(a)(1), in which case the arrangement would lack consideration.

Either way, something's wrong.

[Guest Vern Edwards]

What if the parties agree to a minimum of $100? Would that violate FAR 16.504(a)(2)?

Also, assuming that no approval was obtained, does the six-year contract period -- basic and option -- violate FAR 17.204(e)?

[Navy_Contracting_4]

What if the parties agree to a minimum of $100? Would that violate FAR 16.504(a)(2)?

Also, assuming that no approval was obtained, does the six-year contract period -- basic and option -- violate FAR 17.204(e)?

While there's no definitive guidance I know of regarding the amount of the guaranteed minimum, I have to think that on a contract worth potentially $850 million, $100 would be considered a "nominal quantity."

What makes you think the inclusion of "an option for an additional five years" results in a six-year contract? It looks to me more like a ten-year contract. And what makes you think no approval was obtained?

[Don Mansfield]

Vern,

The contract was awarded by the Navy, which has the authority to award task order contracts with ordering periods up to ten years pursuant to DFARS 217.204(e)(i).

[Guest Vern Edwards]

While there's no definitive guidance I know of regarding the amount of the guaranteed minimum, I have to think that on a contract worth potentially $850 million, $100 would be considered a "nominal quantity."

Why do you think that? Do you think the issue of whether consideration is nominal turns on proportion? What happened to "a penny or a peppercorn"?

What makes you think the inclusion of "an option for an additional five years" results in a six-year contract? It looks to me more like a ten-year contract. And what makes you think no approval was obtained?

I don't think the notice said that the base period was for five years, so I assumed it is a one year base with a five-year option. It doesn't matter for my purpose in asking the question. If you like, we can assume that it's a base of five and an option for five for a total of ten. My question stands. And I didn't say that I think that no approval was obtained. I said "assuming," which, again, works for my purpose in asking the question.

[Guest Vern Edwards]

Don:

The contract is for RDT&E services, and the five year limit on base + options does not apply to R&D contracts. See FAR 17.200( c). I wanted to see if people are remembering to read the Scope section first. Remember? Hmmmm?

In any case, they didn't award a contract with an ordering period of ten years, like they should have. They awarded one with a base of who knows how many years plus an option for five additional years. As you have often pointed out, there is no need for extension options in an IDIQ contract.

[Don Mansfield]

Do you think the issue of whether consideration is nominal turns on proportion? What happened to "a penny or a peppercorn"?

That's a good point. The cases that I've read on "nominal amount" discuss the amount of the minimum guarantee compared to the contract maximum. However, I've never read a case where the basis of deciding that a minimum guarantee was nominal was that it was too small compared to the contract maximum.

[Don Mansfield]

Don:

The contract is for RDT&E services, and the five year limit on base + options does not apply to R&D contracts. See FAR 17.200( c). I wanted to see if people are remembering to read the Scope section first. Remember? Hmmmm?

Damn, I got "Scoped." I even use FAR 17.200( c ) to demonstrate to students how one can get scoped. This is a bad day.

[Navy_Contracting_4]

Why do you think that? Do you think the issue of whether consideration is nominal turns on proportion? What happened to "a penny or a peppercorn"?

Isn't "a penny or a peppercorn" an example of a "nominal" consideration being determined legally sufficient for certain purposes? I would think a requirement for "more than a nominal" amount wouldn't be satisfied by merely "a penny or a peppercorn," but I'm not an attorney, so who knows? Do you know the basis on which an amount will be considered "more than nominal"?

[Guest Vern Edwards]

I have no idea. I know of only one case in which the minimum was found to be merely nominal -- an old Navy case. I thought that you would know since you thought that $100 would be considered nominal. To me, it's not nominal if it is enough to get the contractor to sign the contract.

[Navy_Contracting_4]

Here's a definition of "nominal" I found in the Oxford English Dictionary - "Not substantial; very small in relation to an expected or required amount; token." As I said, I'm not aware of anything definitive on this. I was merely expressing my opinion, but in my opinion, many (if not most) IDIQ contracts these days are awarded with only nominal amounts for the guaranteed minimum. Who's going to challenge them?

[Guest Vern Edwards]

Oh, it's been challenged. See CW Government Travel, Inc., B-295530, 2005 CPD ¶ 59; Aalco Forwarding, Inc., B-277241, 98-1 CPD ¶ 87; and Sea-Land Service, Inc., B-278404, 98-1 CPD ¶ 47. None of those challenges were successful. The cases are worth reading for their illustrations of the GAO's analysis of the problem.

Nominal as used in nominal consideration is a term of art, so looking in the OED is not helpful. Here is the definition of nominal consideration from Black's Law Dictionary (9th ed. 2007):

Consideration that is so insignificant as to bear no relationship to the value of what is being exchanged (e.g., $10 for a piece of real estate. Such consideration can be valid, since courts do not ordinarily examine the adequacy of consideration (although they do often inquire into such issues as fraud and duress). -- Also termed peppercorn.

That definition is especially useful for its lengthy quotation from the Restatement (Second) of Contracts § 87, which I have not included in this post.

[Navy_Contracting_4]

To me, it's not nominal if it is enough to get the contractor to sign the contract.

I'd venture a guess that the GAO may agree with you on that. I guess "a penny or a peppercorn" may not be dead yet.

Thanks for the citations and the reference to Black's.

[Penny Policy]

It's lacking the minimum guarantee.

[Guest Vern Edwards]

You're late. See Post #3.

[Retreadfed]

I have no idea. I know of only one case in which the minimum was found to be merely nominal -- an old Navy case. I thought that you would know since you thought that $100 would be considered nominal. To me, it's not nominal if it is enough to get the contractor to sign the contract.

Interesting that in Don's original post, no consideration was sufficient to get the contractor to sign. That is not the first time I have seen that happen.

[Navy_Contracting_4]

Interesting that in Don's original post, no consideration was sufficient to get the contractor to sign. That is not the first time I have seen that happen.

Don's original post didn't say no consideration was given; it said the announcement contained an "indication." The announcement said "No funds are obligated nor guaranteed by the award of this contract; funds will be obligated on individual task orders." It's interesting because I'm told that despite that statement, the contract did include a guaranteed minimum number of hours to be ordered, and the minimum was met by issuance, concurrent with award of the contract, of the first task order. So the fact is that consideration was given and the contract did include a guaranteed minimum.

[Guest Vern Edwards]

The Court of Federal Claims has ruled that when the parties enter into an IDIQ contract that contains the proper IDIQ clauses but fails to state a minimum, the court would not throw the contract out but would supply the minimum on its own. See Howell v. U.S., 51 Fed. Cl. 516 (2002)

Stated another way, consideration in the form of a bargained-for exchange is simply evidence that the promisee's expectation of performance is reasonable, and not disingenuous reliance on the words of a non-serious and unwilling promisor. This is consistent with the views of other commentators who have argued persuasively that consideration serves an evidentiary function, that is, it demonstrates the parties' mutual intent to be bound and that a promise was actually made. Id. (citing Oliver W. Holmes, Jr., The Common Law253–59 (1881)). Thus, if consideration serves primarily an evidentiary function, an indefinite-quantity contract should not be declared unenforceable for lack a minimum quantity term where sufficient alternative evidence is presented to demonstrate that the parties have otherwise made a bargained-for exchange of promises and intended to be bound.

The court found evidence that the parties had intended to be bound and applied the common law principle that the court could insert the missing term. it decided that $1,000 would be an adequate minimum. Interesting case. Still good law.

[Don Mansfield]

Don's original post didn't say no consideration was given; it said the announcement contained an "indication." The announcement said "No funds are obligated nor guaranteed by the award of this contract; funds will be obligated on individual task orders." It's interesting because I'm told that despite that statement, the contract did include a guaranteed minimum number of hours to be ordered, and the minimum was met by issuance, concurrent with award of the contract, of the first task order. So the fact is that consideration was given and the contract did include a guaranteed minimum.

If the contract did include a guaranteed minimum, then the statement "No funds are obligated nor guaranteed by the award of this contract" is inaccurate. An obligation would have been created for the amount of the guaranteed minimum upon award of the contract.

[Navy_Contracting_4]

If the contract did include a guaranteed minimum, then the statement "No funds are obligated nor guaranteed by the award of this contract" is inaccurate. An obligation would have been created for the amount of the guaranteed minimum upon award of the contract.

Don - I can't argue with the logic of your statement, but does it make sense to separately obligate funds on the contract for the minimum, when funds are concurrently being obligated on a task order for much more than the minimum?

[Guest Vern Edwards]

Sigh. How many times over the years have we discussed the issue of how an obligation should be recorded on an IDIQ contract? In any case, no, it does not make sense to record the obligation on the basic contract document if an order is being issue that is valued in excess of the minimum concurrent with the award and the obligation is recorded on the order.