On Sept. 30, 2008, the Federal Transit Administration (“FTA”) issued FTA Circular 4220.1F, entitled “Third Party Contracting Guidance” (“Final Circular”), which becomes effective Nov. 1, 2008. The purpose of FTA’s Final Circular is to provide guidance for FTA grant recipients (i.e., state and local government agencies and private entities) regarding compliance with federal requirements that affect procurements using federal funds from FTA grants. A variety of statutes and regulations impose federal requirements. This Final Circular, which FTA considers to be its official guidance regarding compliance with these requirements, contains significantly more information and guidance than was available in the previous circular issued by the FTA in 2003. FTA’s shift to a comprehensive circular became necessary, at least in part, to incorporate the new procurement provisions of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (“SAFETEA-LU”), Pub. L. No. 109-59 (Aug. 10, 2005), passed in 2005.
Given the complexity of the Final Circular, and given the potential adverse consequences of noncompliance with federal requirements regarding third-party contracting (e.g., loss or return of funding), FTA grant recipients—state and local government agencies, private transportation firms, construction firms, civil engineering firms, and others whose businesses depend upon FTA grants—have a vital interest in making sure they understand this FTA guidance.
The Final Circular is organized into Chapters I through VII, and four Appendices. The following discussion sets forth a chapter-by-chapter analysis of the Final Circular. In addition, FTA grant recipients can use, and should be familiar with, the FTA’s “Master Agreement,” available at http://www.fta.dot.gov/documents/13-Master.doc, and which serves as an additional guide to most, but not all, federal requirements with which recipients must comply.
Chapter I – Role of the FTA
Chapter I includes definitions applicable to third-party contracting and describes FTA’s role in third-party procurements. The Final Circular explains that FTA will rely on recipients to self-certify that their procurement processes comply with federal requirements. For this reason it is important for grant recipients, and in some cases current or potential third-party contractors, to be well-counseled on FTA’s Final Circular providing guidance for complying with these federal requirements. It is also important for grant recipients and third-party contractors to be prepared to utilize the protest and litigation procedures outlined in the Final Circular (and discussed below) in the event that recipients’ compliance with federal requirements is called into question, or a third-party contractor’s ability to compete for a particular contract is impeded by a grant recipient’s failure to abide by these requirements.
FTA has added a number of terms to the third-party procurement lexicon, including “cardinal change,” “change order,” “constructive change,” “force account,” “full and open competition,” “joint procurement,” “project labor agreement (PLA),” “public transportation,” “state or local purchasing contract,” “unsolicited proposal,” and “value engineering.” In addition, the Final Circular has substituted the term “recipient” for the term “grantee” to include both recipients of federal grants and recipients of cooperative agreements within the Final Circular’s scope. The Final Circular further applies to “Non-Governmental Recipients,” which include public and private institutions of higher education, public or private hospitals, and any other quasi-public and private nonprofit organization that must comply with the Common Grant Rules at 49 C.F.R. Part 19.
It is also worth noting that FTA provides a number of resources to help grant recipients comply with federal third-party contracting requirements in addition to the Final Circular, including a best practices manual, a telephone helpline, and a website with answers to frequently asked questions.1
Chapter II – Applicability
FTA included Chapter II of the Final Circular in response to comments that demonstrated many recipients do not understand the applicability of FTA’s third-party grant procedures. Consistent with the policy of the Office of Management and Budget (“OMB”), FTA governmental sub-recipients of states may use state procurement procedures, but non-governmental recipients of states must use the procurement procedures of the Common Grant Rule for non-governmental recipients.
Where a project is being funded both with FTA grant monies and funding from another federal agency, then both agencies’ law and regulations would apply to the project, and the recipient would need to take actions that meet the requirements of all participating agencies. The Final Circular applies to procurements that involve over-the-road bus accessibility programs, but not other programs under which over-the-road buses are acquired with FTA funds.
Under the Final Circular, any recipients required to have a disadvantaged business enterprises (“DBE”) program under 49 C.F.R. Part 26, may not structure their operations expenditures or other expenditures in a manner that removes an unreasonable proportion of contracts that could have been performed by DBEs from its DBE program. FTA recipients are not subject to FTA requirements for acquisitions that recipients can demonstrate conclusively have been financed entirely without FTA assistance. This is a deviation from FTA’s prior position that “one dollar taints all,” a policy in which FTA required a recipient to apply FTA requirements to all of a recipient’s operations contracts, including those contracts financed entirely without federal assistance. However, FTA admonishes that it does not have the power to exempt a recipient from other non-FTA federal requirements, regardless of whether or not the contract or acquisition has been financed with federal assistance.
In certain complicated financial transactions involving FTA-assisted property, recipients enlist the services of “arrangers” or facilitators who are experts in structuring such transactions. FTA explained that it expects that when such arrangers are compensated with proceeds derived from the use of FTA-assisted property, the arranger should be selected using competitive procedures. The Final Circular and FTA laws found at 49 U.S.C. Chapter 53 apply to third-party procurements financed by FTA funds. DOT regulations, Uniform Administrative Requirements, and Grants and Cooperative Agreements to State and Local Governments, 49 C.F.R. Part 18, apply to governmental recipients. DOT regulations, Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations, 49 C.F.R. Part 19, apply to non-governmental entities. The Federal Acquisition Regulation (“FAR”) does not apply to federally assisted procurements, except that FAR cost principles apply to grants and cooperative agreements with private for-profit entities.
The Final Circular notes that, in the case of a conflict between state and local laws, FTA might find it necessary to terminate a project if no resolution is available. However, FTA is willing to work with recipients in seeking and implementing equitable resolutions. FTA noted that it makes every effort to avoid the need to terminate federal assistance because of conflicting laws. FTA noted that when such situations have occurred, they have been resolved by efforts by the recipients to persuade the relevant state legislatures to amend the conflicting law. FTA warned, however, that it has no power to abrogate federal laws or other federal requirements.
Chapter III – Recipient’s Responsibilities
Each recipient must maintain written standards of conduct governing the conduct of its employees engaged in the award and administration of contracts. These standards must address both personal conflicts of interest and gifts, and provide for penalties, sanctions, or other disciplinary actions for violations of such standards.
In addition, recipients must maintain a contract administration system that is sufficient to ensure that they, and their contractors, remain in compliance with applicable federal, state, and local regulations. If a recipient lacks qualified personnel within its organization to undertake procurement tasks, such as drafting specifications, evaluating contracts, or performing internal audits for the recipient, FTA expects the recipient to acquire the necessary services from outside sources.
Non-governmental recipients must maintain written procurement procedures. In addition, the Common Grant Rule for governmental recipients requires written procurement procedures as a condition of self-certification. The procurement procedures are expected to address the following items:
Solicitations – Solicitations must contain clear and accurate descriptions of the technical requirements for the products or services being acquired. In competitive procurements, the descriptions and specifications of products or services being acquired must not contain features that unduly restrict competition, or that use exclusionary or discriminatory specifications.
Descriptions of products or services may include statements regarding their qualitative nature, such as descriptions of minimum essential characteristics or standards they must meet. However, detailed product specifications should be avoided if possible. Recipients should focus their descriptions on pure performance specifications, i.e., functions to be performed or performance required, to the extent possible. When it is impractical or uneconomical to write a clear and accurate description of the technical requirements of the property or services to be acquired, a “brand name or equal” description may be used to define the performance or other salient characteristics of the property or services sought.
Necessity – Recipients should develop written statements regarding their need for the property or services sought.
Lease Versus Purchase – Recipients must weigh the costs and benefits of leasing options versus purchasing options, and choose the option most economical and practical.
Metric Usage – Recipients must maintain policies regarding the acceptance, to the extent practicable and economically feasible, of products and services dimensioned in the metric system of measurement.
Environmental and Energy Efficiency Preferences – Recipients must maintain policies expressing a preference, to the extent practicable and economically feasible, for products and services that conserve natural resources, protect the environment, and are energy efficient.
Procurement Methods – Recipients must adopt written policies regarding what procurement methods may be used.
Legal Restrictions – Recipients must adopt written policies regarding any federal, state, or local restrictions on the recipients’ acquisitions.
Third-Party Contract Provisions – Recipients must adopt written policies regarding the specific third-party contract provisions required for each third-party contract, including requirements that each third-party contractor extend those provisions to its subcontractors to the extent required.
Sources – Recipients must adopt written policies regarding the availability and use of various sources of property and services.
Resolution of Third-Party Contracting Issues – Recipients must adopt written policies setting forth procedures to resolve third-party contracting issues.
In addition to the above, all third-party contracts must include provisions adequate to form a “sound and complete” agreement. The Final Circular warns that recipients must take special care when using industry-developed contracts that may be provided by a bidder or offeror. FTA took pains to mention in the Final Circular that it does not prohibit the use of industry-developed forms; only that recipients should exercise caution before using them.
The Final Circular imposes a number of recordkeeping requirements with which recipients must comply. The Common Grant Rules require the recipient to prepare and maintain adequate and readily accessible project performance and financial records covering procurement transactions, as well as other aspects of project implementation.
The Final Circular notes that the Common Grant Rules require recipients to maintain, and make available to FTA, written records detailing the history of each third-party procurement, including: (1) procurement method; (2) contract type; (3) contractor selection; (4) cost or price; and (5) reasonable documentation.
In addition, the Final Circular notes that 49 U.S.C. § 5325(g) provides FTA and DOT officials, the Comptroller General, or any of their representatives, access to and the right to examine and inspect all records, documents, and papers, including contracts, related to any FTA project financed with federal assistance.
The Final Circular allows that recipients may make use of technology or electronic commerce systems, so long as such systems have the capacity to ensure compliance with all of the recipients’ regulatory obligations. The Final Circular expressly permits the use of electronic bidding or reverse auction procedures for procurements of less than $100,000, and permits the use of electronic bidding or reverse auction procedures for procurements of more than $100,000 when permitted under state or local law.
The final point addressed in Chapter III is that recipients may be required to retain outside auditors to conduct audits required under the Single Audit Act of 1984, 31 U.S.C. § 7501, et seq. The Final Circular further notifies recipients that government audit agencies may audit their third-party contracts.
Chapter IV – Recipient’s Property & Services Needs
Recipients must adopt adequate procedures for determining the type and amount of property and services they need to acquire. These written procedures must address the following items:
The property and services to be acquired must be eligible under federal law. For example, FTA prohibits the use of capital assistance for the recipients’ operations expenses. If FTA assistance will be used to finance the cost of property or services, the property or services must be within the scope of the project for which the recipient received the grant.
The Common Grant Rules require recipients to avoid the purchase of property and services they do not need. In connection with this requirement, recipients must not acquire unnecessary reserves, especially in the acquisition of vehicle fleets. In addition, recipients may not acquire with the intention of later assigning products or services to another party – though a recipient may assign contract authority to other parties where it overstated its needs because of changed circumstances or an honest mistake. In addition, the general prohibition on assignments does not preclude parties from engaging in joint procurements, or utilizing state or local purchasing schedules.
Recipients should consider whether to consolidate procurements or “break out” procurements to obtain a more economical purchase. In particular, recipients must be aware of their obligations to create opportunities for DBE firms, and whether the sizes of their procurements are consistent with these obligations.
The recipients’ contracts may include options to ensure the future availability of property or services, so long as the recipient is able to justify them as needed for its public transportation or project purposes.
Lease Versus Purchase
To obtain the best value, the recipient should review lease versus purchase alternatives, and, if necessary, obtain an analysis to determine the more economical alternative.
Again, recipients must tailor their procurement specifications in such a way as to avoid making them exclusionary, discriminatory, unreasonably restrictive, or otherwise in violation of federal laws or regulations. Bid protests are often filed based on restrictive specifications issues.
In addition to the items mentioned above, recipients must adhere to all other applicable federal laws and regulations. The Final Circular lists numerous legal requirements that recipients must observe, such as requiring contractor “responsibility,” avoiding the use of suspended or debarred contractors, completing proper lobbying disclosures for contracts of more than $100,000, ensuring that contractors do not discriminate on the basis of race, sex, gender, age, or disability, and many more regulations. Should a recipient doubt whether its contractors comply with all of these legal requirements, it is advisable to consult a legal expert regarding the representations and due diligence necessary to ensure that the recipient does not contract with an unqualified vendor.
Chapter V – Sources
There are a number of “sources” from which recipients might acquire property and services. The Final Circular discusses eight sources in particular, some that the Final Circular’s third-party contracting guidance applies to and some that it does not apply to.
One source that the Final Circular guidance clearly does not apply to is a recipient’s force account work. “Force account” refers to the recipient’s own labor forces and equipment. The reason for differentiating force account work from third-party contracting is that force accounts are a grants management issue, not a procurement issue. In other words, the use of force account labor is a project management function, rather than a procurement and contract administration function.
The Final Circular discusses shared use among both governmental and non-governmental recipients. For governmental recipients, it notes that the Common Grant Rule encourages these recipients and subrecipients to enter into agreements for shared-use of property and services. For non-governmental recipients, it notes that these recipients are encouraged to consider shared-use if economical and feasible.
Joint procurements are encouraged by FTA and the Common Grant Rules. “Joint procurement” is where two or more purchasers agree from the outset to use a single solicitation document and enter into a single contract with a vendor for delivery of property or services in a fixed quantity, even if expressed as a total minimum and total maximum. This method of contracting for goods and services is encouraged because it enables recipients to procure betting pricing through larger purchases.
Notwithstanding the fact that this method of contracting is encouraged, recipients participating in the joint procurement still must be sure to comply with all applicable FTA and federal requirements, and include all required clauses and certifications in the joint solicitation and contract documents.
State or Local Governments Purchasing Schedules or Purchasing Contracts
Federal assistance can be used in the implementation of state or local government purchasing schedules or purchasing contracts. A state or local government purchasing schedule is an arrangement that a state or local government has established with several or many vendors, in which those vendors agree to provide essentially an option to the state or local government, and its subordinate government entities, to acquire specific property or services in the future at established prices. Simplified, this arrangement has two parts: (1) establishing the schedule; and (2) acquiring property and services from the schedules. FTA does not provide federal assistance to a state or local government for the first part when it is establishing its schedule, but it does provide federal assistance for the second part after the schedule is established and a recipient acquires property or services from that schedule.
The Final Circular notes that the Common Grant Rule for governmental recipients encourages recipients and subrecipients to enter into state and local intergovernmental agreements for procurements of property and services. Notwithstanding this encouragement, recipients that seek to use FTA assistance to acquire property or services from this type of purchasing schedule must ensure all federal requirements, required clauses, and certifications (including Buy America requirements) are properly followed and included. To do so, recipients are expected to use competition by seeking bids from three or more vendors listed on the schedule, and then determine whether the property or services as offered would comply with the federal requirements, including Buy America standards and others. Whatever procedure the parties use, requirements applicable to FTA procurement cannot be waived. Federal Excess and Surplus Property
The Common Grant Rule for govern
mental recipients encourages recipients to use federal excess and surplus property managed by the General Services Administration (“GSA”) when feasible and economical, rather than procuring new property. The GSA Federal Property Management Regulations govern the eligibility of recipients and subrecipients, as well as others, to acquire supplies and services through GSA’s personal property utilization and disposal programs.
Federal Supply Schedules
Only recipients specifically authorized by federal law may use a GSA Federal Supply Schedule. federal laws authorize State and Local Governments (including institutions of higher education) to use Federal Supply Schedules in two circumstances: (1) to acquire information technology (IT); and (2) to purchase products and services to facilitate recovery from a major disaster. Reference to, and analysis of, the Final Circular and other federal authority is necessary when attempting to determine whether or not a certain entity falls under the broad definition of a “State and Local Government,” and whether either of these circumstances applies.
Assuming Federal Supply Schedules can be used to acquire property or services, recipients must ensure that all federal requirements, required clauses, and certifications (including Buy America requirements) are properly followed and included. To do so, recipients are expected to use competition by seeking bids from three or more vendors listed on the GSA schedule and seek proposals; and then determine whether the property or services as offered would comply with the federal requirements, including Buy America standards and others.
FTA permits recipients to use existing contract rights to acquire property or services in certain circumstances. One example is the option contract. The Final Circular notes that options are permissible when recipients ensure that the terms and conditions of the option sought to be exercised are substantially similar to the terms of the condition of the option as stated in the original contract. Recipients, however, may not exercise an option unless they have determined that the option price is better than prices available in the market, or that when they intend to exercise the option, the option is more advantageous.
In the context of options, the Final Circular describes two types of actions that constitute sole source awards: (1) where the option was not evaluated as part of the original contract award and was exercised after contract award; and (2) where the option was exercised after the recipient negotiated a lower or higher price, unless that price can be reasonably determined from the terms of the original contract, or that price results from federal actions that can be reliably measured. FTA assistance may be used to support a sole source award only if that award can be justified under FTA’s third-party contract standards for sole source awards.
Another example of a circumstance in which recipients can use existing contract rights to acquire property or services is the assignment of contract rights. Recipients may assign their contract rights to other recipients if the original contract contains appropriate assignment provisions. This process is sometimes referred to as “piggybacking.” FTA does not encourage this practice, although it does recognize that it may be appropriate where a recipient has inadvertently acquired contract rights in excess of its needs, especially since FTA expects recipients to limit procurements to the amount of property and services that are required to meet their reasonably expected needs. Even if a contract allows for assignment, the Final Circular describes the specific conditions that must exist before recipients may obtain contractual rights through assignment. Recipients or contractors should carefully examine whether these conditions are satisfied before assigning contract rights.
While the Final Circular highlights two circumstances where recipients may use existing contract rights to acquire property or services—the option contract and the assignment of contract rights—it also highlights two circumstances where federal assistance may not be used in the context of existing contracts. The first is the improper expansion of a contract. The second is where there is a “cardinal change,” which means a major deviation from the original purpose of the work or intended method of achievement, or a revision of the contract work so extensive, significant, or cumulative that, in effect, the contractor is required to perform very different work from that described in the original contract. Recognizing a cardinal change can be difficult, and FTA’s Best Practices Procurement Manual provides additional guidance.
The Open Market
Recipients will probably acquire most of the property and services needed through procurements in the open market. The proper procedures for conducting and administering such procurements is addressed in detail Chapter VI of the Final Circular, and is discussed below.
Chapter VI – Procedural Guidance for Open Market Procurements
Much of this Chapter retains provisions substantially similar to FTA’s prior Circular 4220.1E, with some exceptions. What is most important to note is that the Common Grant Rules require recipients to use third-party procurement procedures that provide “full and open competition.” Compliance with the solicitation procedures described in this Chapter will fulfill this “full and open competition” requirement. These solicitation procedures are very detailed and they include a number of specifically delineated prohibitions.
The Final Circular spells out a number of different possible procurement methods:
- Small Purchases??
- Sealed Bids (Formal Advertising)??
- Competitive Proposals (Request for Proposals)??
- Two-Step Procurement Procedures??
- Architectural Engineering (A&E) Services and Other Services??
- Other Than Full and Open Competition??
While most of these methods were identified and discussed in FTA’s prior Circular 4220.1E, the discussion of these methods in the Final Circular is more extensive. Thus, careful analysis of the differences between the prior Circular 4220.1E and the Final Circular regarding procurement methods is advised when any of these procurement methods is used. Moreover, regardless of the method used, there must be compliance with state and local law, as well as with federal requirements, so it is important to be cognizant of these laws and requirements. Further complicating matters is the fact that federal restrictions vary based on the type of procurement method used.
In addition to ensuring compliance with the Final Circular’s procurement methods outlined in the Final Circular, recipients must undertake a cost and price analysis in connection with every procurement action, including contract modifications. The method and degree of analysis depends on the facts and circumstances surrounding each procurement. Further, beyond the guidance provided in the Final Circular, recipients should also be guided in preparing a cost or price analysis by a handful of other resources including: (1) FTA’s Best Practices Procurement Manual, Chapter 5; (2) The National Transit Institute Course, “Cost or Price Analysis and Risk Assessment”; (3) Pricing Guide for FTA Grantees, FTA webste: http://www.fta.dot.gov/documents/Helpline_Price_Guide.doc; (4) FAR Part 31, Contract Cost Principles and Procedures; and (5) Defense Contract Audit Agency Manual.
This Chapter of the Final Circular also addresses the evaluation of bids and proposals, and the awarding of contracts. With respect to evaluating bids or proposals submitted, FTA expects recipients to consider all evaluation factors specified in their solicitation documents, and evaluate bids or offers only on the evaluation factors included in those solicitation documents. Recipients may not modify their evaluation factors after bids or proposals have been submitted without re-opening the solicitation.
With respect to contract awards, the Final Circular references the enabling legislation that authorizes recipients to award a contract to other than the lowest bidder if the award furthers an objective consistent with the purpose of the legislation. The Final Circular further references the SAFETEA-LU amendment that requires FTA-assisted contract awards be made only to “responsible” contractors possessing the ability, willingness, and integrity to perform successfully under the terms and conditions of the contract. Responsibility is a procurement issue that is determined by recipients after receiving bids or proposals, and before making the contract award. The Final Circular sets forth a list of 10 criteria, beyond the general criteria that the contractor is qualified and eligible to receive the contract award under applicable laws and regulations, to use in determining whether a contractor is a “responsible contractor.”
Chapter VII – Protests, Changes and Modifications, Disputes, Claims, Litigation, and Settlements
Chapter VII of the Final Circular consolidates FTA guidance pertaining to third-party procurement protests with guidance pertaining to disagreements that may emerge during the course of third-party procurement. The Final Circular continues to place the onus on grant recipients to be responsible for resolution of all contractual and administrative issues arising from their third-party procurements. FTA notes that neither FTA nor the Common Grant Rules relieves recipients of responsibility to perform under their contracts to resolve disagreements that may arise in the course of contract formation or contract administration.
Further, as noted in the Final Circular, FTA maintains its position that it will not substitute its judgment for that of a recipient or subrecipient unless the matter is primarily a federal concern. Unlike in the prior Circular 4220.1E, FTA in the Final Circular has included examples of “Federal concerns,” explaining that these include, but are not limited to, situations “where a special Federal interest is declared because of program management concerns, possible mismanagement, impropriety, waste, or fraud.” FTA also can become involved in the recipient’s administrative decisions when a recipient’s protest decision is appealed to the FTA, or when the recipient seeks to use FTA assistance to support the costs of settlements or other resolutions of protests, disputes, claims, or litigation.
Recipients are charged with the initial responsibility to resolve protests of third-party contract awards. As in FTA’s prior Circular 4220.1E, the Final Circular requires recipients to have appropriate written protest procedures in place. Further, FTA continues to require recipients to notify it when they receive a third-party contract protest and to keep FTA informed about the status of the protest.
There are some differences between prior Circular 4220.1E and the Final Circular in the types of protests that recipients must inform FTA about. Previously, recipients were required to disclose information to FTA about protests in “all instances.” Now, recipients are expected to report any current or prospective third-party contract protest involving more than $100,000, and any protests involving controversial or highly publicized matters irrespective of amount. FTA also expects recipients to notify the FTA Regional Administrator for the region administering a regional project, or the FTA Associate Administrator for the program office administering a headquarters project directly, when the recipient denies a bid protest, especially when an appeal is likely to occur. FTA also encourages recipients to keep their FTA project manager informed about protests with which they are involved.
FTA has clarified the types of information that recipients should provide to FTA about protests. Further, FTA has made clear that it expects recipients to disclose information about any third-party procurement protest to FTA upon request.
Under the Final Circular, FTA has added a section that was not previously a part of its guidance, which describes FTA’s practice to review only those protests of an “interested party,” which must be an actual or prospective bidder or offeror with a direct economic interest in the third-party contract award. A subcontractor, generally, does not qualify as an “interested party.” The Final Circular lists various other entities that either qualify or do not qualify as an “interested party” that may file a protest with the FTA.
There are also nuanced differences between FTA’s prior Circular 4220.1E and the Final Circular with respect to the extent of FTA’s review of protests. Previously, FTA’s position was that it would limit its review to: (1) a recipient’s failure to have or follow its protest procedures, or its failure to review a complaint or protest; or (2) violations of federal laws or regulations. Now, FTA has stated that it will not consider every appeal filed by a protestor of an FTA recipient’s protest merely because a federal law or regulation may be involved. Instead, FTA will exercise discretionary jurisdiction over those appeals involving issues important to FTA’s overall public transportation program. The Final Circular points out, however, that if FTA declines jurisdiction over a protest, that does not mean FTA approves of or agrees with the recipient’s decision, or that FTA has determined the contract is eligible for federal participation. FTA’s determination means only that FTA does not consider the issues presented to be sufficiently important to its overall program to require review.2
Changes and Modifications
The Final Circular makes known that a recipient is responsible for issuing, evaluating and making necessary decisions involving any change to its third-party contracts, and any change orders or modifications it may issue. The recipient is also responsible for evaluating and making the necessary decisions involving any claim of a constructive change.
The Final Circular sets forth the procedures with which recipients must comply in making these determinations, which include keeping cost justifications supporting each change and getting approval from the recipient’s authorized official before issuing a change. Also, the cost of the change must be allowable, allocable, within the scope of the grant or cooperative agreement, and reasonable for the completion of the project scope.
Because FTA itself does not participate in the recipient’s decisions involving change orders, constructive changes, or modifications, it is important for a recipient to be thoroughly familiar with the FTA’s guidance on changes and modifications in other Chapters in the Final Circular, as well as with the discussion on changes and modifications in FTA’s Best Practices Procurement Manual. It is also important for a recipient to maintain supporting documentation of its decision because FTA has the right to review this documentation as necessary to determine the extent of FTA assistance that may be used to support those costs.
Disputes are treated much like protests under the Final Circular in that recipients are charged with the responsibility for evaluating and resolving third-party contract disputes. FTA generally does not become involved in negotiating the resolution of a recipient’s disputes. However, FTA may review the reasonableness of a negotiated settlement to determine the extent of its participation in the costs of the settlement. Thus, if recipients intend to request FTA’s permission to use federal assistance to support payments to a third-party contractor to settle a dispute, or even if a recipient intends to request federal assistance for that purpose, the recipient must report any dispute involving more than $100,000, and any dispute involving controversial or highly publicized matters irrespective of amount. FTA also encourages recipients to keep their FTA project manager informed about disputes with which they are involved.
The Final Circular provides further guidance to recipients with respect to documentation that must be maintained to support settlement of a dispute. FTA expects recipients to include in their project files adequate documentation of the facts, events, negotiations, applicable laws and a legal evaluation of the likelihood of success in any potential litigation involving a dispute, as may be needed to justify FTA’s concurrence in any compromise or settlement, should FTA’s concurrence become necessary. FTA requires recipients to include this adequate documentation in their files whether or not FTA actually seeks access to them. In addition to providing guidance on the documentation that should be maintained relative to a settlement, FTA encourages recipients to conduct an audit to help demonstrate that any settlement costs are necessary, reasonable, adequately documented, and appropriate for FTA support.3
Claims and Litigation
Recipients’ obligations regarding claims and litigation are similar to their obligations regarding protests and disputes. FTA’s interpretation of Common Grant Rules under the Final Circular is that recipients are expected to resolve third-party contract claims and litigation resulting from a contractor’s violation, default, or breach of its third-party contracts with recipients. This does not include claims against the contractor made by third-parties. Recipients are also responsible for resolving any claims and litigation contractors may present against them.
Because of FTA’s financial interest in the settlement of third-party contract claims and litigation, FTA expects recipients to provide FTA with a list of claims and litigation involving third-party contracts and potential third-party contracts that exceed $100,000 and any that involve controversial or highly publicized matters irrespective of amount. FTA also encourages recipients to keep their FTA project manager informed about claims and litigation with which they are involved.
In resolving third-party contract claims, FTA expects recipients to take reasonable measures to pursue their rights and remedies available under law, including settlement, particularly if failure to do so would jeopardize the federal interest in the project, or cause recipients to seek additional federal assistance.
While the responsibility for resolving claims and litigation resides with recipients, FTA nevertheless retains the right to a share of any net proceeds recovered through a third-party contract claim or litigation, in proportion to the amount FTA has committed to the project, unless FTA permits other uses of the proceeds recovered. Further, for third-party contracts that include a liquidated damages provision, FTA expects recipients to credit any liquidated damages recovered to the project, unless FTA permits other uses of the liquidated damages. For example, in certain circumstances it may be reasonable for recipients to exchange some or all liquidated damages that may be owed to recipients for additional property or services.4
FTA Participation in Settlements, Arbitration Awards, and Court Awards
FTA recognizes that, at times, settlements of claims and litigation may require recipients to relinquish certain rights. However, recipients are expected to agree to settlements with terms that can be justified as “reasonable.” For example, in certain situations, an agreement by a contractor to provide extra property or services in lieu of payments or reduced payments for damages, including liquidated damages, may be reasonable.
When recipients incur costs because of binding arbitration or a court decision, FTA expects recipients to secure FTA review and its written concurrence in a proposed or final settlement involving a dispute, claim, or litigation before using federal assistance to support its costs for any settlement that exceeds $100,000, when the approved project lacks sufficient funds to cover the settlement costs, or when a special federal interest or federal concern is declared because of program management concerns, possible mismanagement, impropriety, waste, or fraud.
FTA grant funds may be used to fund a settlement to the extent there are funds remaining for the activity that is the subject of the dispute, claim, or litigation. FTA may provide a pro-rated share of eligible costs resulting from protests, disputes, claims, litigation, or settlements that were not caused by recipient mismanagement and were not attributable to the contractor, and were otherwise properly incurred. However, recipient negligence, or error, usually renders recipients ineligible for FTA participation.5
The Final Circular provides a number of examples of situations that might be caused by recipient negligence or error, including:
- Rights-of-Way. Failure to ensure clear access to all needed rights-of-way prior to award of the construction contract.
- Utility Agreements. Failure to execute all required utility agreements in time to assure uninterrupted construction progress.
- Planning and Scheduling. Failure to undertake comprehensive project planning and scheduling to achieve proper coordination among contractors.
- Subsurface Conditions.?Failure to inform potential contractors of all available geo-technical information on subsurface conditions.
- Materials Compatibility.?Failure to ensure that all materials provided by the recipient are compatible with contractor project facilities or equipment, or both, and are available when needed.
- Pre-Construction Surveys and Engineering. Failure to complete all pre-construction surveys and engineering prior to issuing the contractor a Notice to Proceed.
- Public Authority Approvals. Failure to complete the necessary approvals and agreements from all other public authorities affected by the project before contract award.
- Drawing Approvals. Failure by the recipient to approve and provide all design and shop drawings to the contractor promptly as needed.
The Final Circular makes clear that this list is not exclusive and that there may be other situations that may be caused by recipient negligence or error.
Given all of the complexities of the Final Circular, compared with FTA’s prior Circular 4220.1E, FTA has included among its appendices a chapter-by-chapter checklist that encompasses references to each of the specific sections of the Final Circular. While this will likely prove useful in helping to analyze the applicability of this FTA guideline, a thorough and detailed analysis of the Final Circular, as well as other FTA guidance (e.g., FTA’s Master Agreement, FTA’s Best Practices Procurement Manual), will almost always be necessary to ensure compliance with federal third-party contracting requirements.
The Final Circular is a comprehensive repository of the requirements imposed by federal statutes and regulations with which recipients of FTA grant funds must comply. Changes introduced in the Final Circular, and summarized above, will affect the myriad recipients of FTA grants, which must comply with the Final Circular’s requirements, and parties whose businesses rely on contracts made possible by FTA funds. Accordingly, all such parties should ensure that they are well-counseled and knowledgeable with regard to the final circular. The attorneys of Reed Smith’s Global Regulatory Enforcement group are actively monitoring developments in FTA procurement law, and are poised to assist recipients and their vendors in ensuring that their procurement activities adhere to federal law.