In the upcoming years of diminishing procurement budgets, there inevitably will be increased pressure on contractors by government program and technical personnel to achieve performance exceeding contract requirements. This happens even in the best of times, but we know from history that this pressure increases when budgets will not accommodate what the government users really want.
In turn, this means company counsel need to be active in educating their technical and program personnel about that very unique clause in government contracts – the Changes clause – that allows the government to modify the goods or services the contractor proposed (and budgeted) and that the government accepted, while also obligating the government to pay for that change and to extend the schedule. All too often, company personnel will focus on the first part of this equation – the government’s right to make the change – without knowing how to assure that the company is properly compensated both in money and in time for the additional work driven by this “constructive change.”
To be clear, a constructive change is one in which the contracting officer has not directly ordered in writing a change in performance, but rather government personnel have pushed their company counterparts to “improve” or “enhance” the performance of products or systems that are being developed. Frequently, company personnel agree to the change, either because they believe, mistakenly, that they are required to do so, or because they “want to keep the customer satisfied” on an important “must win program.” Whatever the motivation, the inadvertent and unnecessary consequence of accepting these changes is to increase the risk of cost overruns, schedule slips, and performance failures.
This issue is particularly acute – and the greatest pressure for changes occurs – early in a program, when company personnel are working hard to develop relationships with their government colleagues and to finalize designs. This is the time when it is most crucial to educate your employees about this subject, because even small changes early in a program can have dramatic consequences later.
The key audience for your educational campaign is mid- to high-level program, engineering, and technical personnel. They are the ones who will engage daily with their government counterparts; and they are the ones who can drift into agreeing to seemingly minor changes that can end up having substantial adverse effects on budget, schedule, and performance. Moreover, they often are the least knowledgeable or interested in what the contract, as a whole, actually requires.
The point of this education is not to teach people how to prepare requests for equitable adjustments or to file claims. It is, instead, to teach them how to avoid them. This is done by getting the program, engineering, and technical personnel to appreciate that each contract was proposed a certain a way, with specific and unique assumptions about the technology and performance, the work breakdown structure, the schedule, the staffing, and the costs; and to recognize that agreeing to perform any work that deviates from these assumptions (no matter how much engineering sense it might make) will, in most cases, shift greater – and unpriced – risk to the company, thereby increasing the likelihood of losing money and compromising the schedule.
Program, engineering, and technical personnel also typically have no real appreciation for the government’s and the company’s respective rights and obligations under the Changes clause, or with respect to the government’s obligation to provide direction and not hinder performance, or about the implied warranty of design specifications, or total systems responsibility clauses, government furnished property obligations, contract interpretation principles, constructive acceleration, and the like. Typically, if they think of these things at all, they believe (incorrectly) that the company bears all the burdens and obligations. Hence, they tend to take on additional responsibility they are not required to. They also tend not to know how to react in a business-like way when their counterparts in the government pressure them into making changes. Company counsel need to teach them the appropriate responses, which are relatively simple. In the main, they comprise (1) alerting the government that what it is seeking is different from what the contract requires; (2) informing the government contracting officer that this activity has occurred; and (2) inviting a business-like discussion about what the anticipated costs and schedule consequence of the change will be, all before proceeding with the change.
Usurping Management’s Discretion
This lack of appreciation is typically compounded by impressions people have about customer relationships – and that everyone in this business has heard – once there is a problem in a program. For example: “It was early in the program, and we didn’t want to be uncooperative.” “We were just trying to keep the customer satisfied.” “We just don’t file claims.” Although there may well be legitimate business reasons to take each or all of those positions and not to seek written direction from the government or not to request an equitable adjustment, this assumes that management knew about the change and exercised its discretion to “invest” in the program. Unfortunately, that assumption is often false. If engineers, program, and technical people have not been educated about the government’s responsibilities under the Changes clause, they may not recognize the constructive change when it happens, and the issue will never get to management. Without this opportunity, management’s discretion disappears, because company personnel already will have embarked on the change. Training people in these things is always an eye-opener for them, and they appreciate it. So will your shareholders.
This training is a substantial opportunity for companies to save money and avoid damaging the long-term rapport with the customer by avoiding schedule slips, cost overruns, and technical difficulties that are truly detrimental to customer relationships and to the bottom line.
Your companies invest considerable resources in ethics and compliance programs. You educate your employees about the unique risks of doing business with the government, thereby allowing the company to identify potentially problematic circumstances early and to address them.
Those are smart risk-reduction measures that are necessary for all government contractors. Devoting similar resources to educating your personnel about the Changes clause, how to recognize and address changes, and how to raise constructive changes within management is just as much – and perhaps even more – of a risk-reduction approach. Everyone should consider investing more in educating employees about this unique aspect of government contracts in order to reduce the very real risks posed by constructive changes.