2. 2 Breakout Session # 410 JAMES H. GILL, Technical Advisor, Space & Missile Systems Center, USAF Date April 16, 2008 Time 13:30 – 14:30 Working At Risk

3. 3 Agenda Definition History Current Policy Issues to Discuss Examples Way Ahead

4. 4 Definition What is “At Risk” in Air Force/Space Contracting Terminology & Why is it important? –Funding not available, usually due to lack of appropriated funds for contract overrun –Important because it impacts ability of Programs to perform on schedule and within cost

5. 5 Definition Incrementally Funded Contract –FY Funds will not support the contract/program spend plan requiring a Notification by the Contractor as to a funds run-out date Once Notice is Received – CO may –Add additional funding –Request slow-down of expenditure by Contractor (ReBaseline) –Terminate Contract

6. 6 History Contractors were sent notice that they were prohibited from working at risk under CP contracts during period of 1970’s-90’s Gradual evolution in legal advice until “encouragement” terminology was articulated –Contractor could work at risk with no government participation –Government could hold meetings, but must read disclaimer prior to sessions –Government could offer information with a disclaimer

7. 7 History Current policy is somewhat complicated –May “allow” work without acceptance of products –May not provide direction or give advice to contractor –May never “Encourage” What does this mean?

8. 8 Current Policy (FAR) Two variations, Incrementally Funded Contracts –Limitation of Funds (LOF) Provision (Cost Contracts) Language says after funds run-out Contractor “May” Request Termination –Limitation of Government Obligation (LOGO) (Fixed Price Contracts) Upon learning that the contract will receive no further funds, the contracting officer shall promptly give the contractor written notice of the Government’s decision and terminate for the convenience of the Government

9. 9 Current Policy Limitation of Government Obligation (LOGO) 232.704-70 Incrementally funded fixed-price contracts. (a) Upon receipt of the contractor’s notice under paragraph (c) of the clause at 252.232-7007, Limitation of Government’s Obligation, the contracting officer shall promptly provide written notice to the contractor that the Government is— (1) Allotting additional funds for continued performance and increasing the Government’s limitation of obligation in a specified amount;

10. 10 LOGO (cont) (2) Terminating the contract; or (3) Considering whether to allot additional funds; and (i) The contractor is entitled by the contract terms to stop work when the Government’s limitation of obligation is reached; and (ii) Any costs expended beyond the Government’s limitation of obligation are at the contractor’s risk.

11. 11 Current Policy LOGO (cont)) Upon learning that the contract will receive no further funds, the contracting officer shall promptly give the contractor written notice of the Government’s decision and terminate for the convenience of the Government

12. 12 Current Policy Limitation of Funds (LOF) If, after notification, additional funds are not allotted by the end of the period specified in the Schedule or another agreed-upon date, upon the Contractor’s written request the Contracting Officer will terminate this contract on that date in accordance with the provisions of the Termination clause of this contract. If the Contractor estimates that the funds available will allow it to continue to discharge its obligations beyond that date, it may specify a later date in its request, and the Contracting Officer may terminate this contract on that later date.

13. 13 Current Policy –No Encouragement of Performance at Risk – By any Government Representative (DCMAO, Program Office, Customer etc.) –ADA Issue –Encouragement Not Well Defined –No Use of Term Liability Funds –Ultimately Fact Based

14. 14 Issues Why would a Contractor perform at risk? One – Fear of Termination, loss of Program Two – Implications of Restructure –Loss of Schedule –Significant Growth of Cost –Past performance consequences Three – Truly does not believe “risk” to be real Totally Contractor’s Call – May be recognized by Award Fee Official

15. 15 Issues Three Basic Situations One – Fiscal Year Issue, No Funds Appropriated by Congress Two – Overrun by Contractor on Cost/Plus R&D Contract Three – Funding Turbulence Impacting LOF Runout

16. 16 Issues FISCAL YEAR ISSUE –Annual Appropriation by Congress Inevitably Late –How Long can Government Expect Contract Performance Without Budget? Some years Continuing Resolution Some years No Budget –Run out Date Projections Should be Initiated in Aug/Sep Should Program Office Terminate if no Budget Received?

17. 17 Examples Overrun by Contractor on R&D Cost type contract –LOF notification - run out in September –Termination not requested by Contractor Program Impact to cost & schedule caused by fiscal year delay –Contractor may want to continue performance to program baseline “at risk” Can Contracting Officer “allow” this? Can Contracting Officer “prohibit” this? Does time or magnitude of risk factor into the decision?

18. 18 Examples Overrun by Contractor on R&D Cost type contract –LOF notification - run out in June –Termination may be requested by Contractor May be significant Program Impact to cost & schedule caused by fiscal year delay –Contractor may want to continue performance to program baseline “at risk” Can Contracting Officer “allow” this? Can Contracting Officer “prohibit” this?

19. 19 Examples Sudden tax on Program causes shortfall in availability of funds – Government Driven Shortfall –LOF notification run out not changed –Termination not requested by Contractor Program Impact to cost & schedule caused by fiscal year delay –Contractor may want to continue performance to program baseline “at risk” Can Contracting Officer “request” contractor to go at risk? Can Contracting Officer “allow” this? Should Contracting Officer “prohibit” this? Should cause of shortfall factor into the decision?

20. 20 Way Ahead Dfficulty faced by Program Offices –Nature of Program (risk) dictates cost type contract By Definition – Difficult to project annual and total program costs Re-baselining is prohibitively expensive, shortfall in one year does not translate into added cost in next –Difficult to project exact run-out date or termination liability requirements –When funding does show up, Program damage may be loss of technical capability, schedule impact, or large cost growth

21. 21 Way Ahead Potential Solution –A solution would be to add a special contract provision to contract modifying the LOF language Language would declare that funds expended by the Contractor while “at risk” under the LOF provision would not be subject to any REA or claim if funds do not get appropriated –This approach would force contractor to acknowledge nature of risk –Never provide encouragement – Don’t wink and nod that the contractor will get paid as soon as congress passes a budget

22. 22 Way Ahead Conundrum faced by Program Offices –Criticism for “bad management” when shortfalls occur is always aimed at Program Office –Better synergism/communication between Congress and DOD would help mitigate the damage

23. 23 Way Ahead Recent (Mar 08) SAF/AQ Policy Memo, Subject:Contractors Performing at Risk –References DOD IG Audit –In General continued interaction can violate the ADA (31 U.S.C. 1341) –Lists Examples of Conduct that is prohibited Extending deadline for ceasing performance to give Govt. time to secure funding

24. 24 Way Ahead Representations that Govt. would ultimately provide funding Specific direction for Contractor to continue performance CO authorization of mod for continued performance Any other Govt./contractor interactions that facilitate or result in the contractor’s expenditure of resources under the contract

25. 25 Way Ahead Govt./contractor meetings or exchanges discussing contract performance status Govt. allowance of contractor personnel onto Govt. facilities to perform contract work Govt. acceptance of a contract deliverable

26. 26 Way Ahead What does this mean? –Pre-contract Costs? –Early Effective Date?

27. 27 QUESTIONS/COMMENTS?