Pre-contract starts are risky

Most federal contracting experts divide the business into two spheres: contract formation and contract administration. A government official might serve as a procurement contracting officer or an administrative contracting officer, but seldom will one person do both jobs.

Similarly, in a private company, a person might work in marketing and proposal development or on the performance of particular contracts, but typically not both.

This two-world view minimizes the importance of another phase typically referred to as "early start-up" — the period between the proposal and when a contract commences.

In some cases, the agency's goals and deadlines cannot be met without an early start-up. But a decision to begin work before a contract is formally awarded can entail substantial risk to the contractor.

The Federal Acquisition Regulation states that a company may not recover costs from the government that it incurs before the starting date of a contract unless those costs:

Are incurred "pursuant to the negotiation of the contract and in anticipation of the contract award." Are necessary to comply with the proposed contract schedule. Would be allowable if incurred subsequent to contract award. The third test is the easiest to apply. A cost that is unallowable when incurred after contract award is unallowable when incurred prior to award. The second test is also relatively easy to apply. According to the Armed Services Board of Contract Appeals (ASBCA) in the case of Radant Technologies Inc., a contractor does not have to prove that it was absolutely necessary to incur costs prior to actual commencement of the contract. All that is required "is that the contractor reasonably believed, at the time of the incurrence of the costs, that the pre-contract work was necessary and undertook it in good faith."

The first test presents problems. Until recently, this was not an issue because the requirement was interpreted broadly. For example, in the case of AT&T Technologies Inc., the ASBCA ruled that the phrase "pursuant to the negotiation" does not require the contractor to discuss the need to incur costs before the contract is awarded. Rather, the test is met as long as the costs were incurred after submitting the proposals and prior to contract awards.

Last year, however, the Court of Federal Claims took a different view in the case of Integrated Logistics Support Systems International v. United States. The court said a cost should not be incurred after negotiating a contract unless the company clearly informs the contracting officer "of the extent and costs of the proposed work before the contractor proceeds."

Moreover, according to the court, the contracting officer must have the opportunity to reject the expenditure. "An expenditure is not made "pursuant to the negotiation' when the contractor decides unilaterally what work is required, performs the work, and then submits an invoice," the judgment stated.

This new case has interjected significantly more risk into a company's decision to incur pre-contract costs. Although cumbersome, any contractor confronted with this issue should carefully consider its options before proceeding.

Peckinpaugh is corporate counsel for DynCorp in Reston, Va. This column represents his personal views.

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