Contract Management needs to ensure they set aside enough time and read the contract before they sign it. We understand there are deadlines to meet, but you don’t want to get caught up skimming the contract because it is too lengthy, thinking you know all the clauses by heart, or ignoring legal jargon because you don’t understand it.
FAR 2.101 defines a contract as “a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them.” When you sign a contract you are indicating that you understand and agree to all the terms and conditions.
The development of the information that forms the basis of the contract is really a team effort. The proposal team develops the proposal based on the solicitation, statement of work, provisions, clauses and terms and conditions. The contracts group reviews the contract to ensure it meets the CLIN structure, payment terms, there are no conflicts, contains the appropriate clauses and terms and conditions, and signs the contract. The accounting department will manage the post award side, prepare a contract brief, and invoice in accordance with other contract terms.
Most contractors have a proposal review process in place depending on dollar amount and complexity of proposal to ensure compliance with the solicitation and statement of work.
Listed below are some real-life contract issues that could have been fixed prior to signing a contract.
Service Contracting Act
FAR Clause 52.222-42 Statement of Equivalent Rates for Federal Hires was included in the solicitation and contract. The contractor wasn’t aware they had service employees they had to pay a minimum monetary wage and fringe benefits as specified in the wage determination schedule, resulting in the contract being underpriced. The contractor did not have a process in place to handle the issuance of new wage determinations during contract performance, causing additional losses on the contract.
Proper Flowdowns for the Type of Contract/Subcontract
Many contractors use the kitchen sink method and flowdown all clauses in the prime contract to subcontractors with a statement that the clauses are self-deleting. Contractors should review the clauses and cross out the ones that are not applicable before the contract is signed. Important to note, DFARS 252.244-7000 Subcontracts for Commercial Products or Commercial Services was revised on November 17, 2023. The Government and prime contractor can only include FAR/DFARS clauses in commercial contracts/subcontracts when it is specified in the clause. We believe this will become part of future contractor purchasing system reviews by DCMA.
Options Priced or Unpriced
A contractor had a line item to sell units at a set unit price. There was an additional CLIN with an option that was marked as unpriced in the signed contract. When the contract was near completion, the customer wanted to purchase additional units but was unable to exercise the option because it was unpriced. During the original award of the contract it was intended that the option were to be priced. However, the contracting officer forgot to include the option pricing. The Option should have been priced in the contract and the FAR 52.217-7 Option for Increased Quantity-Separately Priced Line Item clause included.
Payment Structure
Contractors can encounter delays in payments under performance-based payments if the events or milestones and the criteria for measurement are not clear. It is important to ensure the milestone and criteria can be easily identified and verified to expedite payment.
Incentive Contracts
Incentive fee contracts require a calculation at contract closeout. While there is a standard formula in the FAR, some contracting officers include their own methodology in the contract. Ensure you understand the incentive fee calculation before signing the contract, so you aren’t trying to figure it out three years later when you closeout the contract.
Some of these areas should be addressed in the pricing of the proposal while others are part of the contract language. The person signing the contract has one last chance to correct any ambiguities, conflicts or errors. Signing a contract legally binds your company to the clauses outlined in the agreement. There are many court cases where failure to read a contract is not a defense.
Takeaway
Develop a contract review process or a checklist. Contractors should have pre-proposal meetings involving the estimators, contracts, and any other personnel impacted by the contract requirements (e.g., accounting, compliance, purchasing, etc.) to ensure they understand the requirements of the contract, flowdowns and terms and conditions, and have the necessary processes is in place. However, at the end of the day, it comes down to the individual signing the contract. It is a best practice to have a second set of eyes such as legal or a contract specialist. The final review of a contract is the last chance to identify and update any changes before signature.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s requirements and understand the requirements placed on the contractor by a new contract. We can assist with pricing proposals, contract and subcontract administration, and compliance training through webinars or in person training. We would be happy to be part of your team.
Lynne is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to Commercial Item Determinations and support, Cost Accounting Standards, DFARS Business System Audits, Proposals, and Incurred Cost. Prior to joining Redstone Government Consulting, Lynne served in several capacities with DCAA and DCMA for over 35 years. Professional Experience Lynne began her career working with DCAA in the Honeywell Resident Office, Clearwater, FL in 1984. Lynne’s experience included various positions which involved conducting or reviewing forward proposals or rate audits, financial capability audits, progress payments, accounting and estimating systems, cost accounting standards, claims and disclosure statement reviews. She is an expert in FAR, DFARS, CAS and testified as an expert witness. Lynne assisted in drafting the commercial item guidance for DCAA Headquarters. Lynne was assigned as a Regional Technical Specialist where she provided guidance to 20 field offices on highly complex or technical issues relative to forward pricing, financial capability or progress payment issues. As an Assistant for Quality, she was involved in reviewing and ensuring audit reports were in compliance with policy and GAGAS as well as made NASBA certified presentations to the staff including but not limited to billing reviews, CAS, unallowable cost and progress payments. To enhance her experience in government contracting, Lynne accepted a position with DCMA in 2015 as part of the newly organized DCMA Cadre of Experts in the Commercial Item Group. This included performing reviews of prime contractor’s assertions and/or commercial item determinations as well as performing price analyses. Lynne was a project lead and later became a lead analyst where she engaged with the buying commands on requests and reviewed price analysis reviews performed by a team of 5 analysts. She also assisted the DCMA CPSR team relative to commercial items and co-instructed the Commercial Item Training presented to DCMA. Education Lynne earned a Bachelor of Science Degree in Accounting from the University of Central Florida. Certifications State of Florida Certified Public Accountant State of Alabama Certified Public Accountant Defense Acquisition Workforce Improvement Act (DAWIA) Level III- Auditing DAWIA Level III – Contracting