In the recent ASBCA case Appeal of SupplyCore, Inc., ASBCA No. 58676, the government successfully defended against a claim for post-termination labor costs, where the contractor argued that the government had violated the duty of good faith and fair dealing with regard to the timing of the Army’s decision to not exercise a contract option.
In 2008, the Army had awarded SupplyCore a one year fixed price contract for warehouse management at Camp Ali Al Salem in Kuwait. The contract contained 4 one year options. The options were to be extended on written notice to SupplyCore within 30 days, so long as the Army had provided a (nonbinding) written notice of intent to extend at least 60 days before the contract expired. The contract also required SupplyCore to comply with local labor laws pursuant to DFARS 252.222-7002. At the time the contract was entered in 2008, Kuwaiti labor laws required only a 15-day notice of termination of employment. However, in 2010, that changed to a 90-day notice.
After initially extending the contract for the first three options, the Army gave notice of intent to exercise the fourth option 60 days prior to contract expiration. Subsequent to the notice, the Army decided due to a reduction in activity at the base, it was more cost-effective to staff the warehouse with soldiers. Consequently, 9 days after sending the intent to extend letter to SupplyCore, the Army informed SupplyCore that the contract would not be extended.
Supplycore then filed a claim for $145,634.80 from the Army for labor costs required to be paid for the 39 days after contract expiration that SupplyCore was responsible to pay under Kuwaiti labor laws (90-day notice of termination to employees, less 51-day notice provide by Army prior to end of contract). When the Army denied the claim, SupplyCore filed its appeal, asserting in part breach of the duty of good faith for failing to give a 90-day notice. On the Army’s Summary Judgment Motion, the Board found that the only reasonable assumption on the part of SupplyCore was that the contract was set to expire, and it was unreasonable to presume 90 days prior, or even 60 days prior with the written notice, that the contract would continue.
SupplyCore also argued that it could not possibly give employees notice prior to the 60-day letter. However, the Board also rejected this argument, stating SupplyCore could still have given employees a 90-day notice without a formal position on extension from the government, and that any risk the contract would not be extended fell on SupplyCore because it was a fixed price contract.
The takeaway from this is twofold: To the extent possible, as part of the bid and proposal process a Contractor will want be aware of the risk of wind-up costs that may run past termination of a contract. Also, in execution of a contract, compliance with local labor laws may run independently of the contract terms, and require a contractor to make staffing decisions to minimize risk of cost overruns.