COFC Rejects Agency’s Basis for Default Termination

The Court of Federal Claims recently reversed an agency’s default termination of a contractor that had experienced numerous performance issues and delays. The agency claimed that performance was “incurably behind schedule,” despite the contractor’s proposed recovery schedule. The court held that the agency lacked a reasonable belief that the contract could not be timely completed.

Alutiiq Manufacturing Contractors, LLC v. United States, 143 Fed. Cl. 689 (2019), involved the National Guard Bureau’s firm-fixed price construction contract for repair of the Main Apron Access and Alert Pavements at Buckley Air Force Base in Aurora, Colorado. The contract, awarded to Alutiiq Manufacturing Contractors, LLC in May 2014, expressly incorporated FAR 52.249-10, Default (Fixed Price Construction), and FAR 52.236-6, Superintendence by the Contractor.

There were some hiccups during performance. Alutiiq “repeatedly failed to satisfy some of its contractual requirements.” It experienced personnel gaps and subcontracting difficulties and failed to submit a Contractor Quality Control Plan and other routine documents to the agency.

The agency issued an Initial Cure Notice on March 24, 2015, identifying these performance issues. The Notice said that Alutiiq’s failure to meet contractual requirements had “endanger[ed] performance of the contract” and warned that Alutiiq had 10 days to cure its “lack of compliance with the subject contract’s requirements,” or it would risk termination for default.

Alutiiq responded immediately with its intentions and plans to fix the issues. It also took several steps to correct the defects in the following weeks, such as submitting a revised baseline schedule and a Contractor Quality Control Plan. Both were approved by the Bureau.

But the Bureau sent a Revised Cure Notice on May 1, reiterating Alutiiq’s lack of compliance with the contract requirements. The Revised Cure Notice highlighted the “lingering personnel issues,” the “incomplete and out of date” records and drawings submitted by the contractor, subcontracting issues, and problems with the contractor’s document uploads. And the “onsite government personnel” estimated that performance was still “at least 10% behind schedule.”

Alutiiq responded that it would do “everything in [its] power” to correct the issues, and it detailed the steps it was taking to address each deficiency. On May 15, Alutiiq submitted a recovery schedule that offered to compensate for the delays and to complete performance two days before the projected completion date. But after a “quick glance” at the recovery schedule, the agency initiated its termination for default on that same day.

Alutiiq filed suit at the Court of Federal Claims, pursuant to the Contract Disputes Act. It alleged that the agency did not have adequate grounds for a default termination.

The court’s legal standard for reviewing a default termination required a “reasonable belief on the part of the contracting officer that there was no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.” In addition, a “review of default justification does not turn on the contracting officer’s subjective beliefs, but rather requires an objective inquiry” and “tangible, direct evidence reflecting the impairment of timely completion.”

The court also relied on the required procedures and factors set forth in FAR 49.402-3 for termination for default. It explained:

In analyzing whether the contracting officer possessed a “reasonable belief” that there was no likelihood of timely completion when he issued the termination for default, the Court asks, in part, whether the Agency conformed to FAR regulations in making that determination. If the Agency terminated [Alutiiq] prior to analyzing its performance and recovery schedule, rather than following guidelines set out in the FAR, then the Agency’s decision was not reasonable.

The court held that the agency’s termination for default did not pass muster under the legal standard and the FAR. The court acknowledged that Alutiiq was behind schedule. But it also pointed out several steps Alutiiq had taken and the progress Alutiiq had already made.

The parties’ disagreement as to whether the recovery schedule goals could have been met did not affect the court’s analysis. The court refused to make findings on whether Alutiiq could have timely completed the contract. The agency’s assertion that the contractor “was incurably behind schedule,” even if accepted as true, did not satisfy the agency’s burden.

According to the court, the agency failed to consider the recovery schedule and, instead, relied on the assertions of an official with a “history of dishonesty and hostility towards [Alutiiq] throughout the course of performance.” The court said that the “default termination was so defective that it seems impossible that the contracting officer’s decision was based on a reasonably held belief that [the contractor] could not finish the project.” Based on the totality of the circumstances, the court concluded that the default termination was wrongful and converted it to a termination for convenience of the government. The agency’s appeal of this decision is currently pending.

Alutiiq provides an important message for contractors experiencing performance delays and complications. Those contractors should make sure to have a plan in place to get performance back on track and should thoroughly communicate the plan to the agency. The agency has a duty to consider it, a duty which the Court of Federal Claims will enforce in accordance with the the termination for default provisions of the FAR and the applicable legal standards. A termination for default based on an agency’s subjective beliefs, especially in the presence of any evidence of bias within the agency, might not pass muster.