Recently, in what apparently is a case of first impression, the U.S. Civilian Board of Contract Appeals (the Board) in Singleton Enterprises v. Department of Transportation awarded contract damages to the Federal Highway Administration (the Government) for a prime contractor’s failure to self-perform at least 50% of the contract work. While this decision does not have precedential effect (which means it is not binding on the Board in subsequent cases), it is nonetheless noteworthy because this case likely will be looked to for guidance in future cases involving the imposition of damages for breach of self-performance requirements. These re-quirements are common in Federal procurements, and the agencies administering Federal contracts are in-creasingly insistent on enforcement of the requirement. The stated rationale is to assure the general contractor’s "adequate interest and supervision of the work."
The contract, which was a firm fixed price contract awarded to the prime contractor for a base price of $634,241.40, contained a provision requiring the prime contractor to self-perform work equivalent to at least 50% of the project work. The Board concluded that the prime contractor breached the contract by failing to meet this self-performance requirement and then turned its attention to the Government’s proposed calculation of damages, which the Government calculated to be $22,538.17. The Government essentially calculated its damages by removing from the prime contract amount the premium (i.e., the difference between the total price of the subcontractor’s work and the total contract price) that the Government was paying to have the prime contractor perform the subject work.
At the outset of its examination of the Government’s proposed damages calculation, the Board stated:
The imposition of damages for failure to meet the 50% threshold is a matter of first impres-sion for this Board. No cases that have been brought to our attention are directly on point, either as to the propriety of assessing damages for this particular breach or how to calculate those damages. That said, after consideration, we find that the Government, as any contract-ing party, has a right to the benefit of its bar-gain and, thus, the right to recover damages due to a breach. There is no provision in this con-tract which prohibits the Government from seeking damages for the breach in issue or which provides a specific remedy for this type of breach.
The Board found that under these circumstances an assessment of damages was warranted and that the method of calculation used by the Government was reasonable and appropriate.
In this particular case, the damages were relatively inconsequential given the size of the contract. However, the damages calculation for breach of the self-perform-ance requirement could be quite substantial, depending on the size of the contract, the nature of the dispute, and the actual percentage of work completed by the contrac-tor. For example, the VA clause on this issue imposes a penalty of 15% on the amount of the work which was not properly self-performed. Where the self-performance shortfall is, say, $40,000,000 (as it may be on a large hospital job), the penalty is obviously substantial.
It should also be noted that failure to satisfy self-performance requirements can potentially open a con-tractor up to liability under the False Claims Act if the contractor falsely certifies the percentage of work that it is self-performing. Keep in mind that each and every time a contractor submits a payment application to the Federal Government directly, it is certifying compliance with the terms and conditions of the contract. Moreover, it is likely that the Government will latch on to the Board’s decision in investigating whether self-perform-ance requirements have been met and then use breaches of self-performance provisions as an offset against legitimate claims by contractors.