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Seeker

Deliberate breach of contract?

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Instead of asking me question after question, strung out over hours or days, as you are sometimes inclined to do, tell me what you're thinking. I won't answer another question until you do.

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nevermind

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Seeker said ""Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" The short answer for the first questioni is that it depends. "Wrong" is a relative term based on the ethical, legal or moral standard that applies to the decision. As we cannot tell based on the question, the answer cannot be determined.

As far as the second question, it also depends upon who is deciding what is or is not reasonable, and introduces another variable, ie "circumstances". What is reasonable for seeker and company may not be reasonable for the Contracting Officer. One or both judgements may or may not be acceptable to the judges and reviewing officials that may be involved at different stages of the termination process. How they are impacted by an undefined variable, the circumstances, makes an answer virtually impossible without further information

The only way to resolve the questions is to: a. know what ethical, legal or moral system applies to the question and b. know who it is that will determine reasonable and what the circumstances are.

We can hazard guesses and have "philosophical" discussions, but in the real world, that does not equal a small hill of dried beans. Perhaps my and others advice to "ask the KO" is an attempt to actually try to answer the question in a reasonably accurate manner, as opposed to winging a guess at what seeker is looking for.

But, as this is defined as a philosophical question, my answer is simply this: Using my personal ethics, morals and understanding of the law; it is not wrong to default on a contract to save jobs. With that, I believe it IS legally objectionable, so seeker and company should expect and accept the price for making a morally correct decision. As far as whether or not the government "should" see the action as reasonable, I personally would say a qualified yes IF the contractor made an attempt to mitigate the impact on the government and was honest and open with the government AND the circumstances warranted such a determination.

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This discussion is also very similar to a situation I was involved in as an intern/GS-5 and 7 trainee working for senior contract specialist and a CO.

A company proposed a very low price to receive a contract for a large share of production of munitions. Competition was restricted to a pool of national defense suppliers so each company essentially received a contract award. However the companies with the most favorable prices received larger contracts for greater quantities of production.

The contractor based the exceptionally low price on using new technology to make production faster and more efficient. However once they began to set up for production, the new technology wasn't available to them even with the priority rating of the contract. They proceeded with performance in any event while hoping to still acquire the new technology. After several months, the contractor realized that full performance of the contract would bankrupt them.

They first met with the CO and the CO's management seeking a no cost cancellation without success. They sought assistance from their Congressional representatives. Working with the agency, they applied for relief under PL 85-804 (FAR 50.1) but the affected government agencies would not support the claim that the company was essential to the national defense. The issue was escalated to the highest level of DoD but kept being pushed back to the agency and CO like a hot potato.

The contract was then terminated for default and the contractor was later assessed the excess costs for re-procurement. This forced the contractor into Chapter 11 bankruptcy. Ultimately the contractor survived financially and was acquired a few years ago by one the huge defense contractors.

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If the ultimate goal can be distilled to how to get out of the contract and avoid an adverse past performance evaluation, without getting into ethics and morality, perhaps it would be possible to assign or sell the contract to another business or create a joint venture ? essentially no longer be the prime contractor. It may be that no other company or joint venture partner would ever want the contract, but you don?t know - what is bad for one company may be good for another, or the deal can be sweetened in any number of ways. Keep the government out of the equation. The government just needs to sign the novation agreement after the deal has been cut.

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Instead of asking me question after question, strung out over hours or days, as you are sometimes inclined to do, tell me what you're thinking. I won't answer another question until you do.

I don't have a problem with the concept of efficient breach nor do I think that a contractor has necessarily acted unethically if they choose such a course of action. However, I'm having a hard time imagining a situation in which a breach would not justify an adverse performance evaluation.

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I don't have a problem with the concept of efficient breach nor do I think that a contractor has necessarily acted unethically if they choose such a course of action. However, I'm having a hard time imagining a situation in which a breach would not justify an adverse performance evaluation.

According to the DOD CPARS CONTRACTOR PERFORMANCE ASSESSMENT REPORTING SYSTEM (CPARS) POLICY GUIDE (FEB 2009), these are the ratings that may be given a contractor for its performance:

Dark Blue/ Exceptional

Performance meets contractual requirements and exceeds many to the Government?s benefit. The contractual performance of the element or sub-element being assessed was accomplished with few minor problems for which corrective actions taken by the contractor was highly effective.

To justify an Exceptional rating, identify multiple significant events and state how they were of benefit to the Government. A singular benefit, however, could be of such magnitude that it alone constitutes an Exceptional rating. Also, there should have been NO significant weaknesses identified.

Purple/Very Good

Performance meets contractual requirements and exceeds some to the Government?s benefit. The contractual performance of the element or sub-element being assessed was accomplished with some minor problems for which corrective actions taken by the contractor was effective.

To justify a Very Good rating, identify a significant event and state how it was a benefit to the Government. There should have been no significant weaknesses identified.

Green/ Satisfactory

Performance meets contractual requirements. The contractual performance of the element or sub-element contains some minor problems for which corrective actions taken by the contractor appear or were satisfactory.

To justify a Satisfactory rating, there should have been only minor problems, or major problems the contractor recovered from without impact to the contract. There should have been NO significant weaknesses identified. Per DOD policy, a fundamental principle of assigning ratings is that contractors will not be assessed a rating lower than Satisfactory solely for not performing beyond the requirements of the contract.

Yellow/ Marginal

Performance does not meet some contractual requirements. The contractual performance of the element or sub-element being assessed reflects a serious problem for which the contractor has not yet identified corrective actions. The contractor?s proposed actions appear only marginally effective or were not fully implemented.

To justify Marginal performance, identify a significant event in each category that the contractor had trouble overcoming and state how it impacted the Government. A Marginal rating should be supported by referencing the management tool that notified the contractor of the contractual deficiency (e.g., management, quality, safety, or environmental deficiency report or letter).

Red/ Unsatisfactory

Performance does not meet most contractual requirements and recovery is not likely in a timely manner. The contractual performance of the element or sub-element contains a serious problem(s) for which the contractor?s corrective actions appear or were ineffective.

To justify an Unsatisfactory rating, identify multiple significant events in each category that the contractor had trouble overcoming and state how it impacted the Government. A singular problem, however, could be of such serious magnitude that it alone constitutes an unsatisfactory rating.

An Unsatisfactory rating should be supported by referencing the management tools used to notify the contractor of the contractual deficiencies (e.g., management, quality, safety, or environmental deficiency reports, or letters).

NOTE 1: Plus or minus signs may be used to indicate an improving (+) or worsening (-) trend insufficient to change the assessment status.

NOTE 2: N/A (not applicable) should be used if the ratings are not going to be applied to a particular area for evaluation

Perhaps there should be ratings: Orpiment/Marginal with mitigating circumstances and Salmon/Unsatisfactory with mitigating circumstances.

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Maybe add to the (+) and (-) qualifiers: a (^) for true ethical and moral behavior and a ($) for attempts to rationalize behavior as ethical and moral, or outright unethical and immoral behavior

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Why should the contractor get a rating of unsatisfactory or marginal, by whatever fish or mineral denominated?

Isn't the point of efficient breach that the government was entirely made whole by the contractor's compensation? If the government uses the past performance system to determine whether it should contract with one vendor rather than another, why label a contractor who has not caused the government any loss whatsoever, whom other government agencies take no risk in contracting with in the future?

Perhaps some kind of neutral rating would be more appropriate.

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Why should the contractor get a rating of unsatisfactory or marginal, by whatever fish or mineral denominated?

Isn't the point of efficient breach that the government was entirely made whole by the contractor's compensation? If the government uses the past performance system to determine whether it should contract with one vendor rather than another, why label a contractor who has not caused the government any loss whatsoever, whom other government agencies take no risk in contracting with in the future?

Perhaps some kind of neutral rating would be more appropriate.

At the risk of coming in late to the party, I would say, contractor100, that the government likely did not get what it needed. You say "entirely made whole by the contractor's compensation" but that is not the entirety of the situation. Originally the government needed an item or service, and now receipt of that item or service will be delayed. Sure, the taxpayers aren't out of pocket any extra cash, but what about the fulfillment of the need?

I concur that the final performance evaluation should take into account that the contractor didn't provide what had been contracted for -- perhaps for good and sufficient and efficient causes. But still.

Just tryin' to help ....

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Perhaps there should be ratings: Orpiment/Marginal with mitigating circumstances and Salmon/Unsatisfactory with mitigating circumstances.
Perhaps some kind of neutral rating would be more appropriate.

Regardless, applying a rating less than satisfactory is the kiss of death. Even with narrative describing mitigating circumstances, what source selection official would pick that source? It would take a proposal with extraordinary merit to offset such a past performance rating.

Even a neutal rating, and I'm not sure neutral would even be appropriate, keeps most proposals from being considered for award. I get to see a few acquisitions conducted plus I read about quite a few ones in GAO decisions, and the instances where the selected source has a neutral rating are very few.

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Here 2 help:

The premise of the theory of efficient breach is that the promisee is fully compensated, isn't it? Per Judge Posner:

"After being fully compensated for his loss the promisee would be no worse off than if the contract had been performed, while the promisor would be better off by $8,000. "

That is, a breach is efficient (and arguably should not be discouraged by law or regulation or giving a Ktr a bad performance reference) when:

(Bnefit to promisor by breaching) minus (full compensation to promisee) > zero

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I, too, am late to the party. To Seeker's question, I believe it would not necessarily be wrong to walk away from the contract under the circumstances described and that the Government should recognize a deliberate breach as a reasonable course of conduct under certain circumstances. A contractor always has the power to breach a contract. Whether that power should be exercised in a particular case depends on the harm that would be inflicted by either breaching or performing.

I suspect, though, that in the current climate a reasoned discussion of this in a particular case is unlikely. What would be more likely is that an IG/auditor/qui tam plaintiff or some such person would paint it as some windfall to the contractor. And, someone would point to FAR 9.406-2(B)(1)(i), which makes "[w]illful failure to perform in accordance with the terms of one or more contracts" a basis for debarment and commence a debarment proceeding. A "deliberate breach," of course, would be a "[w]illful failure to perform."

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Of course, I am somewhat thick. However, if Seeker's firm "walked away" from one of my contracts, we would have to reprocure and endure the delay of reprocuring whatever Seeker had promised to perform or provide. Then we'd have to go to the extra trouble, expense and effort of having to obtain reimbursement and to apply those funds to the proper accounts to cover my added costs (difficult), my customer's delay costs (very difficult) and the additional procurement costs, (less difficult but labor intensive).

Why would I want to rate Seeker's performance as though I'd be interested in hiring him again? Why would I want to rate the firm's performance in a manner that could be used as a recommendation to other government contracting officials to hire Seeker's firm?

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Guest carl r culham

Joel - So are you saying, for instance, that one intentional breach of a contract, a breach that is done under truthful and honest disclosure that supports that it is in fact based on sound rationale, is the dagger that would prevent you from contracting with the firm ever again?

While I understand the above is not part of the general scenario that Seeker provided in posing the initial question, Seeker did say "What if completing the contract would cause the contractor to take a loss so great as to require it to fire workers, but the excess cost of re-procurement and other damages to the Government would be slight and significantly less than the cost of finishing the job?" Taken as facts this information suggests something less complicated than your recent post explores.

With the above noted my response to your "Why" is offered by the following less than exacting examples. One is that a firm could survive being listed on the Excluded Parties List to be used in future procurements. A further example is that I personally have purchased Chrysler products after the company?s poor performance in the 1980's and it appears that folks will buy GMC products after the last couple of years of poor performance.

Award of a future contract to a contractor that has intentionally breached a current contract will depend on all the facts. Facts that must be represented by an honest performance rating. The familiar "It depends" that is found in many threads in this forum is the likely real answer to your "Why".

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Joel - So are you saying, for instance, that one intentional breach of a contract, a breach that is done under truthful and honest disclosure that supports that it is in fact based on sound rationale, is the dagger that would prevent you from contracting with the firm ever again?

Carl, I didn't say that. Besides, the past performance ratings are only used for certain time periods, which vary according to the contract type (service or supply, construction, etc.).

While I understand the above is not part of the general scenario that Seeker provided in posing the initial question, Seeker did say "What if completing the contract would cause the contractor to take a loss so great as to require it to fire workers, but the excess cost of re-procurement and other damages to the Government would be slight and significantly less than the cost of finishing the job?" Taken as facts this information suggests something less complicated than your recent post explores.

Carl, Seeker's second of four (Seeker asked FOUR, not "two" - questions) asked "If a contractor would come out better by breaching the contract and then making the Government whole by paying damages, would it be wrong for the contractor to deliberately walk away from the contract? " I suggested that it would be much better not to "walk away from the contract" but to help find someone to take it over or to subcontract it in order to minimize the impacts to both Seeker and the Government. Seeker rejected that scenario, as they know what they are going to do and know their business better than us (obviously). If Seeker "walks away from the contract", we would have to figure out how to get the service performed or the product that Seeker contracted to provide. We would have to terminate for default, reprocure, then go back to Seeker for reimbursement of delay costs, our labor costs, the excess costs to finish the contract, if any, etc. It is sometimes very difficult and usually time consuming to reimburse the various cost accounts or appropriations that the various government impact costs are charged to. It is technically "wrong" to breach a contract. I'm not inclined to rate a firm neutrally or favorably, if they "walk away from a contract", leaving us to incur the above outlined efforts, delays, impact time/costs. The firm apparently created its own problem, then decides not to help minimize the time and cost impacts to the buyer. The performance rating is used by contracting offices looking for firms willing and hopefully capable of performing related work during the next several years.

With the above noted my response to your "Why" is offered by the following less than exacting examples. One is that a firm could survive being listed on the Excluded Parties List to be used in future procurements. A further example is that I personally have purchased Chrysler products after the company?s poor performance in the 1980's and it appears that folks will buy GMC products after the last couple of years of poor performance.

Award of a future contract to a contractor that has intentionally breached a current contract will depend on all the facts. Facts that must be represented by an honest performance rating. The familiar "It depends" that is found in many threads in this forum is the likely real answer to your "Why".

Carl, Seeker's fourth question asked "Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" While I agree that there can be factors that have to be weighed in order to decide whether or not to breach one's contract responsibilities, the firm can certainly help everyone by cooperating in getting the job finished and we might well reflect that in the performance rating accompanying comments. I've been involved in several TFD's, the reprocurements and the settlements. The defaulting firm and/or bonding company has either made things easier or tougher on both us and them.

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Joel focuses, quite rightly, I think, on the administrative nuisance of a default and reprocurement. In effect, he is saying that there is no way to make the government whole through payment of damages. A contractor who walks away will inconvenience the bureaucracy, and money damages won't fix that or earn forgiveness.

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Guest carl r culham

Joel - Thanks for the response. As the one that first responded in this thread regarding the connection to a performance rating I agree with you completely that the performance rating should not be neutral or favorable. I do not like the idea of adding an additional rating category either. My post #11 of this thread intended to pass this along but missed the mark a little. I support an adverse rating that is truthful and represents why there was a breach and leave it to future CO's considering the firm for a contract to determine whether they believe the rating of "Red" to be adverse to future contracts or not.

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Interesting paper pertinent to this thread: "Why Breach of Contract May Not Be Immoral Given the Incompleteness of Contracts," by S. Shavell, Harvard Law School, March 1, 2009.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1372170

I had a long answer written then accidentally hit the tab button - dang it - wiped it out.

I'm not a lawyer. But I think that the premise of the article - incomplete contracts - might be really discussing risk allocation. My background is primarily in design and construction contracting, so my perspective might be different than someone in manufacturing, sales or services. However, there is pretty well developed risk allocation in construction contracting to allocate many risks to the party - theoretically - best qualified to manage it. The contractors often add some type of risk factor or contingencies and they look for weaknesses in the specs to hope to make up for later in changes. They also buy various types of hazard and risk insurance.

I also thought that the example the author used to justify his position was kind of weak, albeit from my perspective. As a boy, I used to shovel and snowblow walks and driveways in Minnesota (my Alabamian wife calls it "Minnesnowta"). If my dad's snowblower was stolen - after killing me - he would have filed an insurance claim, I suppose or would have made me pay it back, if I didn't perish from the beating. OK - OK - I admit that my customers would probably have excused me from performance because they could easily find another kid to take over! But I didnt have a written contract, either.

But - so could the contractor in the lawyer's example in the article. They could have gotten somebody to cover their contractual obligation, plus they would probably have insurance on their equipment, unless they were careless or ignorant. If they were intending to stay in business, then they would have bought another snowblower.

So, where would one draw the line on leaving out some contingency in a construction contract, as an excuse to breach, where there are many shared risks and many allocated risks? I suppose you draw the line when it becomes too risky to continue. Then the bonding company wipes out what assets you have left after the default...

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Sure wish I could get a full copy of that paper, as all I could get from the link was the abstract.

Turn on your "cookies", refresh the screen and a "download" button will magically appear on the upper bar...

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Thanks Joel, unfortunately the network adminstrators here have locked out any changes to the internet options, so I cannot turn on the "accept cookies" feature. I'll download it at home later tonight on my home computer.

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To all of you who keep advising me to talk to the KO, I don't mean to be rude, but we don't need your advice. Our situation is under control. We know what we want to do and we're doing it. We're fully qualified to do that and don't need your help. We know our business and our customer better than you do. I simply asked two philosophical questions. "Would it be wrong for the contractor to opt for default in order to save the workers' jobs? Should the Government recognize deliberate breach to be a reasonable course of conduct in some circumstances?" I was interested in opinions about those two questions because of a chat with our lawyer over coffee. Maybe I wasn't clear. But I can see that this is the wrong place to come to discuss matters of philosophy. I won't try it again.

I appreciate those of you who have responded in the spirit of my inquiry. Thanks.

I think the "right" or "wrong" lies in the eyes of the beholder. It sounds like it is the "right" thing to do for the contractor, and I'm sure it is the "right" thing to do for the contractor's employees who would otherwise be laid off." But the Government may look at it as the "wrong" thing - particularly depending on how it was done. Walking off a job with no warning, with no discussion about alternative solutions, etc., would be more "wrong" to the Government, in my opinion, than walking off the job after trying to work out alternative solutions with the Government. One of the big problems with contractor default is that even if the Government is made financially whole, there is no way for excess reprocurement costs to cover the ill will such a default creates towards the contracting agency by their customers, especially if the customers are external to the agency. If, for example, I'm doing a construction project in a judge's chambers and the default causes him to be out of his chambers for an extra 6 months, he's going to be VERY mad, and obtaining financial compensation for the default won't help that at all.

That being said, in most cases I don't think contract breach is an ethical issue. For example, if you have an early cancellation fee on a cell phone contract of $200, but switching to a new carrier will save you $300 over the period remaining on your current contract, I seriously doubt anyone on this board (I would hope) would consider cancelling the contract unethical. Now some may argue that is not contract breach, because the specific cancellation cost is already built into the contract, but contractual remedies are already built into our federal contracts.

So, yes, I could see deliberate breach of contract being reasonable in some circumstances, but the specifics of the circumstances and how the breach was done would be the key issues for me in determining whether a breach was "reasonable."

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