A common problem under the Contract Disputes Act of 1978 (CDA) when the subcontractor engages in subcontract with the General Contractor seeking pass through rights in the event of a claim against the federal government.
Pass through contract claims and rights in federal construction projects and service contracts can become a nightmare for subcontractors when the claims are not properly handled by either the prime contractor or the government.
An argument can be made that small businesses that have passed through rights with the prime suffer a great deal because it has no rights under the Contract Disputes Act of 1978.
The only choices they have been:
- Do not sign a paid-if-paid clause or
- Hope that nothing goes wrong.
Realistically, these are not practical options for a new small business that needs subcontracting work. The remaining logical approach is for subcontractors to understand the rules under the Contract Disputes Act of 1978 when it comes to pass through rights.
What is the Contract Disputes Act of 1978?
Congress enacted the Contract Disputes Act of 1978 41 USC 601-613 to provide “a fair, balanced, and comprehensive judicial system of legal and administrative remedies in resolving government contract claims.” See Winter v. FloorPro, Inc., 570 F.3d 1367, 1369 (Fed. Cir. 2009) (citing Contract Disputes Act of 1978, S. Rep. No. 95-1118, at 1 (1978), as reprinted in 1978 U.S.C.C.A.N. 5235, 5235).
The CDA provides that a contractor can, upon receiving a final adverse decision from a contracting officer, either appeal the contracting officer’s final decision to an agency board of contract appeals or file a Contract Disputes claim against the government in the U.S. Court of Federal Claims under 41 U.S.C. § 7104.7.
Services Contracts and Federal Construction Contracts
The CDA only applies to contractors that are parties to the contract. When you are a subcontractor on a federal construction or involved in services contract, even with a pass through contract claims agreement, the courts repeatedly have held that, as a general matter, subcontractors lack privity of contract with the federal government and thus cannot bring a claim.
The process starts with the general contractor submitting a claim against the government on the subcontractor’s behalf. Often in government construction contracts, the subcontractor presumes that the prime understands the requirements of the Contract Disputes Act. This is not always true. Therefore, federal government subcontractors seeking to protect their contract rights must do so early.
- Have an attorney that is experienced in federal contracts review the claim before the general contractor submits.
- If the contracting officer’s final decision denies the claim, the prime contractor should work with the sub’s attorney to prepare for an appeal.
In a Contract Disputes Act appeal to the Board of Contract Appeals or U.S. Court of Federal Claims, it is not valid to argue that pass through government contract claims rights from the prime contractor or entitlement to proceeds from a pass-through claim somehow avoids the privity of contract restriction.
Absent privity of contract, your pass through rights contract rights against the federal government under the Contract Disputes Act of 1978, can only be brought if the prime contractor brings the suit on your behalf as a pass through or sponsored claim. See E.R. Mitchell, 175 F.3d at 1373-74; see also Harper/Neilson-Dillingham, Builders, Inc. v. United States, 81 Fed. Cl. 667, 675 (2008).
You can only bring a CDA suit of this nature when the prime contractor has reimbursed its subcontractor for the latter’s damages or remains liable for such reimbursement in the future. If the main contractor somehow waives its rights to a government contract claim, the subcontractor may be out of luck.
The Contract Disputes Act of 1978 is supposed to resolve all controversies and issues by mutual agreement at the contracting officer’s level. However, this is not always the case. Contractors often find themselves in costly litigation when dealing with pass through agreements. The CDA is supposed to prevent this.
A common mistake made by subcontractors with pass through agreement rights is that they sometimes ask the agency to resolve a dispute with the prime contractor. See also CDA Statute of Limitations in government contract claims.
- It is the prime that must pursue the pass-through rights under the Contract Disputes Act of 1978.
- This occurs if you have a subcontract that provides for this obligation.
Has The General Contractor Submitted a Compliant Claim Under the Contract Disputes Act of 1978? Under the Contract Disputes Act of 1978, a claim is defined as a “written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract.”
- The contractor must submit the claim (which could include your pass through contract claim and rights), in writing, to the contracting officer within six years after the claim accrual.
Negotiate Subcontracts With Contract Pass Through Language: This is a common problem. Large primes should develop a good subcontract that in essence protects the pass through contract rights of subcontractors – typically small businesses.
A one-sided contract pass through language that in essence dumps the small business losses does not get the prime very far in the procurement community. On the other hand, subcontractors should negotiate contracts with contract pass through language. Failure to accomplish this important task can produce fatal results. See additional information about the Severin Doctrine.
40 USC 3133 Miller Act Remedies in Construction Claims Disputes: Sometimes in a construction claim or a pass through agreement dispute, the subcontractor’s only remedy may be to file a Miller Act lawsuit in the proper United States district court against the prime contractor.
As compared to the Contract Disputes Act of 1978, the Miller Act, 40 USC 3133(b), provides a subcontractor with the right to bring a civil suit against the prime contractor in the appropriate district court for unpaid labor or materials. 40 USC 3133 (b )(1 ), (3). A particular statute of limitations requires such a suit to be brought within one year after the last of the labor was performed or material was supplied. See 40 USC 3133(b)(4).
Subcontractors Beware Of Pass Through Cost in Contract Claims
As stated earlier, subcontractors with pass through cost in contract claims agreements with government prime contractors can be at a significant disadvantage when applying the Contract Disputes Act of 1978.
- You may want to negotiate better terms for subcontractor pass through rights in your agreement, or
- Have a government contract claims and disputes attorney to discuss the paid-if-paid clause in the subcontract before you sign it. The CDA is very tricky. Subcontractors beware.
For help with legal issues about federal general contractors and subcontractor pass through rights under the Contract Disputes Act of 1978, call our government contracts attorneys for a FREE INITIAL CONSULTATION. Call 1-866-601-5518.