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Renewed Pressure to Definitize Letter Contracts

Earlier this week, the GAO issued a report to members of the House and Senate Appropriations Committees regarding the Air Force’s compliance with definitization and reporting requirements associated with the use of undefinitized contract actions (“UCAs”).  UCAs, which commonly take the form of letter contracts, allow contractors to begin performance and seek payment before all contract terms, specifications, and prices are settled.  This relatively flexible contract vehicle helps ensure that contract negotiations do not interfere with the Government’s ability to secure contractor performance in support of urgent needs.  The use of UCAs accounted for six percent of contract obligations by the Department of Defense (“DOD”) during fiscal years 2010 to 2014, with the Air Force obligating $14 billion (excluding Foreign Military Sales) on UCAs during that same period.

Although the Air Force commonly relies on this contracting action, especially in the context of aircraft- and space-related acquisitions, the GAO identified areas for improvement.  First, the GAO found that none of the nine UCAs that it reviewed were definitized by the earlier of 180 days of award or the day when obligated funds equal more than 50 percent of the not-to-exceed price, as required by DFARS 217.7404-3(a).  Second, the GAO found that the Air Force’s semiannual report regarding its use of UCAs did not include all of the agency’s UCAs, as required by DFARS 217-7405.  Because the Air Force took corrective action during the course of the GAO audit, the GAO did not issue any recommendations.  However, this report signals an increased interest in the DOD’s use of UCAs, especially the requirement to definitize them within the time limits imposed by the DFARS.

Increased pressure to agree more quickly on contract terms, specifications, and prices could provide some benefit to both contractors and the DOD.  Specifically, quicker definitization may allow the contractor to allocate resources and make business decisions more accurately knowing that it has been awarded a final contract.  In addition, operating under a final contract, rather than a UCA, reduces an agency’s risk by removing the possibility that performance under a UCA may end before the agency’s needs are satisfied.  However, there may be significant drawbacks to increased pressure to definitize UCAs more quickly.  Such pressure may disincentivize the use of UCAs—delaying performance in support of urgent needs, or encourage parties to shortchange discussions of important contract terms in order to meet a definitization deadline—leading to potential disputes or changes during performance.  Neither result is desirable for the contractor or the Government.

Although the GAO’s report to Congress cites to UCAs issued by the Air Force that lasted almost two years, contractors should generally not expect to perform under this contract action for more than 180 days, especially in light of the potential increased pressure on the DOD to definitize UCAs more quickly.  As a result, contractors that foresee lengthy negotiations over particular contract terms, specifications, or prices should consider whether resolution should be reached on such issues before beginning performance under a UCA.  Further, when allocating resources and establishing performance timelines, contractors should account for the increased pressure to limit performance under UCAs to the time period prescribed by the DFARS.  In short, although UCAs serve a valuable purpose for contractors and the DOD, contractors agreeing to perform under these contract actions should remain cognizant of their potential drawbacks.

© 2020 Covington & Burling LLPNational Law Review, Volume V, Number 142

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About this Author

Scott Freling, Government Contracts Lawyer,  Covington Law Firm
Partner

Scott Freling divides his practice between working with civilian and defense contractors on traditional government contracts matters and representing buyers and sellers, including a number of private equity firms, in complex M&A deals involving a government contractor.

Mr. Freling represents contractors at all stages of the procurement process and in their dealings with federal, state, and local government customers. In addition, he counsels clients on compliance matters and risk mitigation strategies, including obtaining SAFETY Act liability protection for...

202-662-5244
Alexander Hastings, Litigation and e-discovery lawyer, Covington
Associate

Alex Hastings advises clients across a broad range of government contracting issues, including advising clients in transactional matters involving government contractors and assisting defense contractors and pharmaceutical companies in securing and performing government contracts.

Mr. Hastings also advises clients concerning best practices in e-discovery. He assists in investigations and litigations that involve complex e-discovery issues and has represented clients in matters involving the U.S. Department of Justice, Securities and Exchange Commission and the United States International Trade Commission.

202-662-5026