With more than $750 billion in annual purchases of goods and services, the state and local government markets offer tremendous opportunities for government contractors. At the same time, the lack of uniform rules, regulations or contract terms and conditions at the state and local level can present unique challenges for firms that venture into this vast marketplace – particularly firms that are more familiar with the relatively uniform contracting practices within the highly regulated federal market.
There have been efforts to address the lack of uniform rules and regulations in the state market, particularly within the last several years. During the past year, for example, the ABA Section of Public Contract Law completed a two-year project to update the ABA Model Procurement Code (“MPC”), a set of model rules designed to provide a common framework for state and local procurements. To date, however, the original MPC has been adopted by only 20 states, and the revisions are currently awaiting approval within the ABA. In addition, individual states such as California and Michigan undertook efforts during this past year to develop more commercially reasonable contract terms and conditions in certain areas such as IT and consulting.
Despite these efforts, significant issues remain for firms that do business with state and local government. The following is a list of some of the more common issues that government contractors should be aware of when considering doing business in the state and local marketplace, and when negotiating contract terms and conditions.
Indemnification
All too often, state and local entities insist on broad indemnity clauses that require the contractor to provide a “hold harmless” guarantee against any and all claims or losses that arise out of the performance of the contract. In addition to imposing liability for such claims or losses – regardless of the contractor’s underlying responsibility for the claim – such clauses may also require the contractor to assume liability for any attorney’s fees and associated costs. If included in a contract, such clauses can significantly alter the balance of risk between the state and the contractor. Indeed, the risk transfer ultimately may lead to an increase in the contractor’s liability to the state, or even to third parties, should the contract go awry.
Limitation of Liability
At the same time that they insist on broad indemnity clauses, state and local entities often resist efforts to include a limitation of liability provision, as is typically found in commercial contracts. Thus, contractors may be pushed in negotiations to forego the typical protections afforded by a limitation of liability clause, i.e., a cap on the parties’ liability for direct damages, and a waiver of the parties’ right to claim consequential or indirect damages.
Again, the elimination of standard limitation of liability provisions significantly alters the balance of risks – as illustrated by the recent (and extreme) example of the company that was sued by the State of Mississippi for breach of its contract to design and implement a computer system for the State’s tax authority. In that case, the State sought a staggering $1 billion in damages – including nearly $235 million in direct and consequential damages, plus an additional $750 million in punitive damages – even though the original contract was valued at only $11 million.
Intellectual Property Rights
On the federal level, ownership of intellectual property – including “data rights” – is governed by a fairly well-established (if somewhat arcane) set of contract clauses and regulations. Once again, practice on the state level is, by contrast, less well-settled. Thus, where the contract involves the delivery or development of intellectual property, contractors need to be more alert to ownership issues when negotiating contract terms and conditions.
Certifications and Disclosures
Although federal agencies have in recent years moved toward eliminating onerous certification requirements, many state and local agencies have yet to move in that direction. Interestingly, a number of states require contractors to complete certifications regarding their activities in certain foreign countries such as Northern Ireland and Burma – a practice that was declared unconstitutional by the U.S. Court of Appeals for the First Circuit in June 1999 (in reviewing Massachusetts’ Burma law).
This issue will be decided by the Supreme Court during the upcoming term. Regardless of the outcome of that case, however, states still require contractors to complete a whole host of certifications and disclosures regarding, for example, debarment and suspension; non-discrimination; drug-free workplace; lobbying disclosures; and disclosure of all investigations, claims and litigation pending against the contractor or its employees.
Negotiability of Terms and Conditions
Finally, there is wide disparity between and among state and local entities regarding the negotiability of terms and conditions. In some instances, the state will make clear in its request for proposals that its standard terms and conditions are not negotiable, and must be accepted in their entirety as a condition of award. in other cases, the state may allow offerors to take exception to its standard terms and conditions, but may also reserve the right to reject any proposal that contains a significant exception. Whatever the case, it is imperative to fully understand the terms and conditions before investing time and resources in preparing and submitting a proposal.