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No Bonding Requirements? Think Again, Instructs the Federal Circuit

For federal construction contractors, payment and performance bond obligations in Construction Contracts with the federal government that exceed $150,000 should, typically, come as no surprise. However, what requirements should contractors expect from a Contract that is ambiguous as to whether it is a construction contract, yet calls for construction-related services, but lacks explicit bonding requirement terms? Can bonding requirements be “read-in” to the contract? When should contractors raise such questions? This past November, the Federal Circuit addressed those questions in K-Con, Inc. v. Secretary of the Army, 908 F.3d 719 (Fed. Cir. 2018). This decision provides instrumental lessons contractors should keep in mind before submitting offers for projects that include construction-related services.

In September 2013, pursuant to solicitations issued under the General Services Administration eBuy system, the Army awarded K-Con, Inc. (K-Con) two task orders for pre-engineered metal buildings. Each contract was valued at over $150,000, and the contracting officer used the Standard Form 1449 Solicitation/Contract/Order for Commercial Items. Neither contract included express bonding requirements, nor FAR 52.228-15, which mandates payment and performance bonds in construction contracts exceeding $150,000. However, both contracts did include numerous construction-related tasks in the statement of work, required compliance with the Davis-Bacon Act, and contained CLINs that called for “construction of a new pre-fabricated metal building,” and “construct Telecom Hut D.” Therefore, it was unclear as to whether the contracts were commercial item contracts or construction contracts, and consequently, whether or not bonding requirements should have been included.

Despite this ambiguity, K-Con did not seek clarification before submitting its offers and assumed that it would not be required to obtain payment or performance bonds if awarded the contracts. However, shortly after the Army awarded the contracts to K-Con, it mandated that K-Con obtain both payment and performance bonds before it would issue a notice to proceed. It took K-Con two years to obtain the bonds, and at that time, the Army modified the contracts to compensate K-Con for the costs of the bonding fees. Several months later, K-Con submitted a request for equitable adjustment seeking compensation for its increased costs and labor incurred during the two years that it sought the bonds. The contracting officer ultimately denied the request in a final decision, and K-Con appealed to the Armed Services Board of Contract Appeals (ASBCA). Agreeing with the Army, the ASBCA found that the contracts were construction contracts in excess of $150,000, and, therefore, FAR 52. 228-15 was incorporated by operation of law. Consequently, K-Con was not entitled to additional costs associated with obtaining the payment and performance bonds.

K-Con appealed the ASBCA’s decision to the Federal Circuit, arguing that the contracts were commercial items contracts, not construction contracts, and therefore, were not required to have bonding requirements therein. It further argued that even if the contracts were construction contracts, FAR 52.228-15 should not be included by operation of law.

The first key takeaway for contractors in the K-Con decision is the Federal Circuit held that because the solicitations were patently ambiguous as to whether they were commercial items contracts or construction contracts, K-Con had an affirmative duty to inquire into this ambiguity before submitting an offer. Because it failed to do so, K-Con could not subsequently argue that its interpretation, over the Army’s, was correct. In other words, because the use of the commercial items solicitation form was facially inconsistent with the construction-related terms of the contracts, due to its failure to clarify this inconsistency, K-Con was precluded from arguing that the contracts were commercial items contracts as opposed to construction contracts. This is a keen reminder to contractors that it is imperative to seek clarification regarding ambiguous terms before submitting offers. Otherwise, contractors risk being bound by the government’s interpretation of the ambiguity and the resulting associated requirements.

The second key takeaway in K-Con is that the Federal Circuit held payment and performance bonding requirements found in FAR 52.228-15 were incorporated into the contracts by operation of law pursuant to the Christian doctrine. According to the Christian doctrine, clauses that are left out of a contract will be deemed incorporated if they are (1) mandatory, and (2) express a significant or deeply ingrained strand of public policy. The Federal Circuit found that bonding requirements are mandatory in construction contracts under both the Miller Act and the FAR. The Miller Act was first enacted in 1935, and the long legislative history thereafter consistently reflects Congress’ intent to both protect payment for subcontractors and suppliers who otherwise cannot obtain a mechanics lien on government property, as well as protect the government by ensuring contracts will be completed at no further cost if a contractor defaults. Consequently, payment and performance bonds in construction contracts are significant and deeply ingrained in public policy. Therefore, FAR 52.228-15 will be read into construction contracts where an agency otherwise fails to incorporate it.

In sum, Contractors should not assume that the absence of bonding requirements in a contract means that the contractor will not be obligated to obtain them later. K-Con is a warning that when in doubt as to what requirements a contract may or may not impose, it is essential to seek timely clarification from the agency.



This post first appeared on Federal Construction Contracting, please read the originial post: here

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No Bonding Requirements? Think Again, Instructs the Federal Circuit

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