Client Alert: June 1998: Government Contracts: Do The Rewards Justify The Risks?

If you are planning to participate, or advising a would-be participant, in the multiple award, task-and-delivery order process, you simply must consider the full potential expense before providing the government with your best and final offer.

The government has used variable quantity contracts for years. Task-and-delivery order contracting predates modern procurement reform, including the Clinger-Cohen Act of 1996 and the Federal Acquisition Streamlining Act of 1994. FASA did infuse the task-and-delivery order process with more flexible commercial practices. As a result, many changes were made to the Federal Acquisition Regulation (FAR).

FASA served to encourage contracting officers to experiment with various types of contracting methods involving IDIQ attributes in order to obtain the best value for the government. See FAR §1.102(d). FASA also established a preference for multiple awards of IDIQ contracts, which was meant to encourage agencies to take continuous advantage of the benefits of competition after contract award. FAR §16.504(c) now provides as follows:

Unlike a definite quantity contract, an IDIQ contract obligates the government to buy only a stated minimum of goods or services. The stated minimum ensures that a sufficient consideration is paid to bind the contractor to fill any additional orders that the government may place. The contract may also contain a stated maximum. Together, the guaranteed minimum and maximum clauses are designed to protect the contractor from being required to perform at uneconomical levels or beyond its capacity.

"Fair Opportunity" Unfair?

While FASA did not require competition at the task and delivery order stage, it did require that each multiple award recipient (master awardee) must be provided a "fair opportunity" to be considered for each order placed under the master award in excess of $2,500. FAR § 16.505(b)(1). The extent of that "fair opportunity" rests with the discretion of the contracting officer.

Finally, in an IDIQ contract, prices are often not pre-established. Accordingly, although contractors may offer a price package at the master award stage, they may be required to resubmit price proposals prior to the government issuing task orders under the master award. (As discussed further below, failure to submit such pricing proposals is often considered a failure to meet a contract requirement and may be grounds for default.) Task order pricing allows the government to take advantage of on-the-spot pricing and also permits the contractor to tailor a unique package to each agency's procurement needs under the master award.

As a result of these several changes, use of multiple award IDIQ contracts is growing, variations on variable quantity contracts are increasing and competition among master awardees for task orders is expanding. But as future contractors prepare their proposals for multiple award IDIQ contracts, they should first familiarize themselves with the details of this unique government program. In particular, they should closely analyze the costs of participating in this potentially expensive process.

Perhaps the most important concern for a would-be government contractor is the arbitrary nature of task and delivery order contracting results. It is often difficult to estimate the amount of government business that any one awardee will receive from the master award. It is also difficult to balance expected task orders against the costs the agency may impose in providing for "fair opportunity" i.e., seeking rigorous competition among the awardees at the task order stage.

Pricing Proposals Costly

After the master award is won, there is the burden of continued participation. Consider the following scenario:

Both the government and industry need an answer to this question. Responding in part to this problem, the Office of Federal Procurement Policy (OFPP) offered a tip in its July 1997 "Best Practices for Multiple Award Task and Delivery Order Contracting" (See www.arnet.gov). The OFPP concluded that one way to make the award process more cost-effective would be to award fewer contracts at the master award stage, thus increasing the likelihood that each master awardee will get a share of the ultimate government business under the contract.

As one alternative, the OFPP suggested that agencies consider providing master awardees who are unable to perform on a given task order the opportunity to provide a "no-bid" response. The awardee in the lawn mower scenario would thus be able to focus its attention on profitable agency business elsewhere. The OFPP also recommended that agencies be mindful of the costs that contractors will incur to provide proposals (either oral or written) in response to requirements for "task or delivery orders."

The use of smaller award groups has not yet solved the problem, as many procurements continue to be awarded to a half dozen or more competitors. Further, the OFPP's no-bid suggestion has received only limited acceptance. Contracts have contained provisions permitting contractors to submit a no-bid response, but only to a non-mandatory proposal. (A non-mandatory proposal usually involves a non-federal ordering agency, such as a qualifying state or local agency.)

Nonetheless, the OFPP's streamlined approach to ordering makes sense. Contractors should insist on an appropriate provision limiting the mandatory requirement to submit price proposals. To coerce competition when a contractor finds it is not cost-effective to compete forces an awardee to needlessly prepare, argue and present a losing proposal, whereas a no-bid response will save money for the contractor and the government since the government would not waste resources evaluating a proposal that it will undoubtedly reject.

Under the OFPP approach, competition could continue so long as two or more master awardees continued to vie for the task order. In the event of fewer than two competitors, the government could consider reopening competition beyond the master awardees or adjusting its task order request to elicit fewer no-bid responses.

A second alternative is for the government to allow a master awardee to withdraw from the task order process altogether. This contractor would be required to provide notice to the government of its intent to withdraw. The government could either incorporate a cancellation provision similar to that used by the Federal Supply Schedule (FSS) program or negotiate a no-cost termination for convenience with the awardee.

Cancellation. While a multiple award IDIQ contract provides for a limited number of multiple awardees, the FSS program (also referred to as the multiple award schedule) is open to an unlimited number of awardees. Additionally, solicitations are standing or open, meaning that a would-be contractor can get on the schedule at any time. Because of these and other unique features, the FSS program is believed to be generally less costly to administer. Accordingly, the government is willing to let a contractor get off the schedule when that contractor is confronted with internal problems that make it impossible to compete or when that contractor cannot meet the spot pricing provided by its competitors.

FSS contractors may exercise the cancellation provision for any reason at all. The current IT solicitation, for example, has the following flexible clause:

It is difficult to gauge the government's response to a contractor's attempt at negotiating such a clause in a multiple award IDIQ contract. The contractor should remind the government that practically the only damages the government may be looking at are incidental administrative costs of taking the unwilling participant off the list of master award holders. In exchange for this relatively small price, the government will no longer have to invest the manpower in evaluating the unwilling participant's future proposals and will thereby be able to award a task order faster and cheaper. And with this greater security, the contractors will not have to add the cost of business risk to its projected cost of performance.

In the multiple IDIQ scenario, however, it seems fundamentally unfair to hold the supplier to a contract that it cannot afford to perform and for which the government has other available suppliers. Clearly, the government needs to be more flexible in the manner in which it forces "fair opportunity" upon the unwilling awardee.

Damages for default in the lawn mower scenario appear even more unfair. First, the government would be unable to prove any traditional damages, such as excess reprocurement costs, in that it can cover for the contractor's absence using other master awardees.

Second, competition at the task order stage is not mandatory. The requirements of the Competition in Contracting Act are met at the master award stage so long as "participation in the program has been open to all responsible sources; and (ii) orders and contracts under such program result in the lowest overall cost alternative to meet the needs of the United States." 10 U.S.C. §2302 (2)(C) (1994); see also FAR §6.001(d) & (e). Accordingly, there is no legal justification to require reprocurement if there remain master awardees ready to perform.

Third, the whole purpose of utilizing the multiple award process is to ensure that there is more than one contractor who can perform the job that is not unique or highly specialized. FAR §16.504(c).

Accordingly, when the preventative measures outlined above fail and a contractor is confronted with a no-win situation, the government should encourage the contractor to propose a no-cost (or minimal cost) termination for convenience. Both the contractor and the government would come out ahead.

As the world of multiple award IDIQ contracting grows increasingly competitive, the practical problems become more apparent. For now, the government still insists that each master awardee continue to submit price proposals even when that awardee can no longer effectively compete. Until the government changes its ways, contractors should make sure that every proposed offer reflects the true cost of doing task-and-delivery order business.