Contractor Drowns in Red Ink from Mistake Armed Services Board of Contract Appeals (ASBCA) Cannot Save From Termination for DefaultAuthor:  Cheryl Adams, Esq.

If you are a contractor bidding on a government contract, you must be certain you understand all the details of the work to be performed, you must get your bid pricing right, and you must make sure you have the financial ability to perform.   LKJ Crabbe (Crabbe), a HUBZone small business, found itself “drowning in red ink” from losses on a government contract for custodial services at Fort Polk, Louisiana.

Despite repeated cries for help, the Army’s simply terminated for cause, per FAR 52.249-8, DEFAULT (FIXED-PRICE SUPPLY AND SERVICE) (APR 1984)  The ABSCA could not save it on appeal.   See LKJ Crabbe Inc., ASBCA 60331 (Oct. 29, 2018)

As the contract progressed, Crabbe found itself losing money and only getting in deeper. In the course of seeking relief, Crabbe admitted that, “[We] realize the major contributing factor to the losses that we have sustained thus far were due to not understanding the level of service that would be required to perform to specifications during the course of the contract…”

The Army heard anticipatory repudiation:  an unequivocable statement that Crabbe could not perform.  Army terminated the contract for cause.  Crabbe responded by appealing the Contracting Officer termination for default to ASBCA, and lost.

The problem is how the law works.  ASBCA was sympathetic to Crabbe’s plight, but had to be hard-nosed about applying the law.  It upheld the termination for cause.

“We do not doubt appellant’s sincere desire to work with the Army to make changes to the contract to allow it to continue performance, but the Army is under no obligation to make changes to the contract to address appellant’s financial inability to continue performance. A contractor ordinarily is responsible to provide sufficient financial resources for the performance of the contract; its financial incapacity is not a legitimate excuse for its failure to perform…[case citations omitted].”

Crabbe offered various theories upon which a termination for default might be overturned, to no avail.  The court found none of them to be material, where the “… appellant’s losses on the contract fundamentally were the result of faulty pricing throughout the contract.”

Alleging “mistake in bid” did not work.  “To prevail on its mistake in bid theory, appellant must prove that … the CO knew or show have known of the mistake at the time the bid was accepted.”  Because of the method the Army used for price analysis on the bids, ASBCA found “there is no way that the government should have known appellant’s price was too low.”

The lesson learned is to make sure you understand what it will cost you to fully perform all terms of the contract before you bid.  Termination for default is an ugly experience.  If you bid so low that you cannot finish performing the contract, you could be left drowning in your own red ink.

For a free and confidential consultation with a government contracts attorney Cheryl Adams, call Watson & Associates, LLC on 1-800-601-5518 or 720-941-7200.