No guarantees

Commentary: Even under requirements contracts, courts will not let vendors recover lost profits

Pop quiz: Your contracts manager speeds into your office with a copy of an agency solicitation seeking offers on a sizable opportunity. The agency estimates it will require $3 million of goods and services per year for the next five years. The thought of all that money sends a shiver up your spine. The adrenaline surges through your body. You unconsciously begin a little soft-shoe number.

Your contracts manager, however, pulls you back to Earth by telling you the contract will require a significant upfront financial investment, which will be recouped only if the agency's estimate of its requirements is accurate.

What do you do?

Your answer may depend on whether the agency seeks a requirements contract, under which it will buy all of its requirements from the awardee, or an indefinite-delivery, indefinite-quantity (IDIQ) contract, under which it will buy more than a predetermined minimum from the awardee.

The government's incentive to prepare an accurate estimate in the two situations is markedly different, as illustrated by two recent U.S. Court of Appeals Federal Circuit decisions.

Last month, in Rumsfeld v. Applied Companies Inc., the Federal Circuit held that an agency's failure to use reasonable care in computing its estimated needs constituted a breach of the resulting contract. Recognizing the relevance of the government's estimate to an offeror, the court found the agency liable for monetary damages. According to the court, it would have decided the same way whether or not the misrepresentation was deliberate.

Not long ago, however, the Federal Circuit issued a much different decision in Barram v. Travel Centre. The case involved a negligently prepared estimate in the context of an IDIQ contract. Notwithstanding the government's apparent bad faith, the court concluded that the government had met its contractual obligations when it bought $100 (the predetermined contractual minimum) in goods from the contractor.

From a contractor's perspective, the rationale for excusing the government's negligence under an IDIQ contract (as in Travel Centre) and holding the government accountable under a requirements contract (as in Applied Companies) is not readily apparent. One is as damaging as the other. Nonetheless, the dichotomy exists and contractors should be wary of it.

Contractors also should be wary that, even in the requirements contract scenario, the Federal Circuit will not permit the recovery of lost profits, even though this typically is the key ingredient to making a misled contractor whole.

The recovery of lost profits also is the key to creating an incentive for the government to avoid such contractual breaches in the future. Contractors certainly have incentives to avoid such breaches. (Can you say, "Defective pricing, audits, investigations, False Claims Act?") There is no reason not to similarly "incentivize" the government.

Aronie is an attorney with Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C., and co-author of "Multiple Award Schedule Contracting." He can be reached at aronijo@ffhsj.com.

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