11.2 Claims, Grievances and Disputes with Contractors (6/99)
§ 7.l. of FTA Circular 4220.1E states:
Reviews of protests by FTA will be limited to: (1) a grantee’s failure to have or follow its protest procedures, or its failure to review a complaint or protest; or (2) violations of Federal law or regulation. 2
An appeal to FTA must be received by the cognizant FTA regional or Headquarters Office within five (5) working days of the date the protester learned or should have learned of an adverse decision by the grantee or other basis of appeal to FTA. 3
You can adopt protest procedures that will provide an outlet for supplier concerns that cannot be informally resolved. These procedures will help you resolve these concerns on a schedule that minimizes the ultimate cost to your agency. Consider including the procedures or key requirements of the procedures in your solicitations. If you adopt and adhere to these procedures, FTA's involvement will be very limited.
A protest is a potential bidder's or contractor's remedy for correcting a perceived wrong in the procurement process. A protest must be accepted and reviewed with the understanding that the integrity of the procurement process as well as the procurement office may be at stake.
If an offeror does not have a satisfactory means of resolving his/her disagreement with you, his/her efforts to obtain satisfaction, including the possibility of litigation, may substantially interfere with the procurement process and be costly to the agency. One aspect of the protest process is an acknowledgment that public procurement officials are making major public decisions, can conceivably err on occasion, and that there should be some process short of litigation to remedy such an error. The success of this process enables FTA to discharge its responsibility while seldom becoming directly involved in a procurement dispute.
There are three basic types of protests, based on the time in the procurement cycle when they occur.
- A pre-bid or solicitation phase protest is received prior to the bid opening or proposal due date.
- A pre-award protest is a protest against making an award and is received after receipt of proposals or bids, but before award of a contract.
- A post-award protest is a protest received after award of a contract.
Content of Procedures - To ensure that protests are received and processed effectively, all grantees must have adequate written bid protest procedures. It is recommended that these procedures be included or referenced in the solicitation document. If they are referenced, information must be included on how a copy of the procedures may be acquired by any interested party. When the procedures are requested, they should be provided immediately. The written procedures typically address the following elements:
- Difference in procedures for pre-bid, pre-award and post-award protests;
- Specific deadlines (in working days) for filing a protest filing a request for reconsideration and for the grantee's response to a protest;
- Specific contents of a protest (name of protester, solicitation/contract number or description, statement of grounds for protest);
- Location where protests are to be filed;
- Statement that the grantee will respond, in detail, to each substantive issue raised in the protest,
- Identification of the responsible official who has the authority to make the final determination;
- Statement that the grantee's determination will be final;
- Statement that FTA will only entertain a protest that alleges the grantee failed to follow their protest procedures and that such a protest must be filed in accordance with the Circular; and
- Allowance for request for reconsideration (if data becomes available that was not previously known, or there has been an error of law or regulation).
Effect on Pending Actions - One of the concerns that may arise in administering a protest is the effect on the award or contract. The decision to open a bid or to award a contract prior to resolution of a protest rests with you. However, should the grounds for the protest be found valid by FTA, FTA may choose not to participate in the contract. You must weigh this risk against the cost to the agency for terminating the contract or providing alternative funding.
FTA Circular 4220.1E paragraph 7.k reads as follows:
k. Responsibility for Settlement of Contract Issues/Disputes. Grantees alone will be responsible in accordance with good administrative practice and sound business judgment for the settlement of all contractual and administrative issues arising out of procurements. These issues include, but are not limited to, source evaluation, protests, disputes, and claims. These standards do not relieve the grantee of any contractual responsibility under its contracts.
FTA will not substitute its judgment for that of the grantee or subgrantee, unless the matter is primarily a Federal concern. Violations of the law will be referred to the local, State, or Federal authority having proper jurisdiction.
The FTA Master Agreement MA(12), 10-1-05, Section 44-Disputes, Breaches, Defaults, or Other Litigation states that FTA has a vested interest in the settlement of any dispute, breach, default, or litigation involving the Project. Accordingly:
FTA Circular 4220.1E paragraph 7.k gives grantees the authority to settle protests, claims and disputes with their third-party contractors. The Circular stipulates "FTA will not substitute its judgment for that of the grantee or subgrantee, unless the matter is primarily a Federal concern." The types of situations that constitute a Federal concern are discussed below in the paragraph entitled FTA Review and Concurrence.
Notification of FTA - The FTA Master Agreement MA(12), Section 44a, requires grantees to notify FTA of any current or prospective major dispute, breach, default, or litigation pertaining to the Project. And if the Recipient seeks to name the Federal Government as a party to the litigation for any reason, the Recipient must inform the FTA before doing so.
FTA Circular 5010.1C, Chapter I, Section 7b(1)(d) requires grantees to notify FTA of any current or prospective litigation or major disputed claim in excess of $100,000 relating to any third party contract. This Circular also requires grantees to provide a list of all outstanding claims exceeding $100,000 and a list of all claims settled during the reporting period as part of each quarterly progress report. A brief description and reasons for each claim should accompany this list.
FTA Review and Concurrence - The FTA Master Agreement MA(12), Section 44d, states that FTA reserves the right to concur in any compromise or settlement of any claim involving the Project and the grantee. FTA Circular 5010.1C, Chapter I, Section 7b(4), FTA Review and Concurrence, requires grantees to secure FTA review and concurrence in a proposed claim settlement before using Federal funds in the following instances:
- When the negotiated settlement exceeds $100,000. This would include any situation when the grantee is waiving liquidated damages in an amount over $100,000. The Government has a vested interest in the recovery of liquidated damages, and the general rule is that liquidated damages may not be waived. However, grantees may "set-off" the liquidated damages against some other valid claim of the contractor, but FTA concurrence is necessary in any "set-off" action.
- When insufficient funds remain in the approved grant to cover the settlement. The Government cannot be obligated to pay the grantee an amount that would exceed the funds obligated on the grant. To do so would be a violation of the Anti-Deficiency Act.
- Where a special Federal interest is declared because of program management concerns, possible mismanagement, impropriety, waste or fraud. FTA could notify the grantee that it wishes to review and concur in any particular claim/dispute settlement based on the criteria stated here in Section 7b(4). Even more broadly, FTA may initiate a review of grantee claims under a particular grant whenever it deems a review to be necessary -- 5010.1C, Section 7b(5).
- The requirement for FTA concurrence also applies to any settlement arrived at by arbitration, mediation, etc. Grantees must advise their contractors that any decisions reached through arbitration must be reviewed and approved by FTA. The reason for this is that an arbitrator may require the grantee to pay for something that is ineligible for funding (unallowable cost) under the terms of the grant. The arbitrator may also require the grantee to pay its contractor an amount that would cause the funding limit of the grant to be exceeded, thus violating the Anti-Deficiency Act.
- There are certain situations that grantees must seek to avoid because they may result in the grantee being liable to its contractor but unable to recover from FTA. These circumstances may give rise to a FTA review, through its Project Management Offices and other oversight reviews, before FTA will participate in the cost of settling the claim/dispute. If grantees encounter any of these situations, and they believe the claim to be legitimate, they should be prepared to support a challenge by FTA. If the grantee's claim records substantiate that reasonable and prudent measures were taken to prevent or offset the causes underlying the claim, FTA may participate in the negotiated cost [( FTA Circular 5010.1C, Section 7b(3)]. The types of situations in question are those where the grantee has failed to:
- obtain clear access to all needed right-of-way prior to award of the construction contract;
- execute all required utility agreements in time to assume uninterrupted construction progress;
- undertake comprehensive project planning and scheduling to achieve proper coordination among contractors;
- inform potential contractors of all available geo-technical information on subsurface conditions;
- assure that all grantee-furnished materials are compatible with contractor project facilities and/or equipment and available when needed;
- complete all pre-construction survey and engineering prior to issuing the contractor a Notice to Proceed;
- obtain the necessary approvals and agreements from all other public authorities affected by the project prior to contract award;
- assure that all design and shop drawings are promptly approved and made available to the contractor as needed.
Freedom of Information Act - Grantees are cautioned that the written materials furnished to FTA with notifications of disputed claims or relating to proposed settlements of claims and disputes, are subject to release to the public under the Freedom of Information Act (FOIA). Therefore, when the dispute is still in the evaluation/negotiation stage, and a settlement has not yet been reached, a prudent approach would be for grantees to include in their quarterly written reports to FTA only information that, if released, would not prejudice the grantee's negotiation or settlement strategy.
Steps to be Taken Prior to Negotiations - When a claim and/or grievance is initiated by one of the parties, the grantee should take the following steps:
- Request from the contractor a written detailed position on each separate claim setting forth the amount and rationale for the contractor's position on each item.
- List all the counterclaims by the grantee, setting forth the amount and rationale for the grantee's position on each item.
- Perform a price, cost, technical and legal analysis, as required, for each claim and/or grievance presented by the parties. See BPPM Section 5.2 Cost and Price Analysis. A technical analysis to determine the validity of the claims and/or grievances, and to determine the rebuttals to those claims and grievances. The legal analysis is to consider all the factors available after the price, cost, and technical reviews have been completed to determine the contractor's, the grantee's and the Government's (FTA) legal position. Each review should be performed by persons qualified to make the particular review/analysis.
- The grantee should then establish its best position assuming it prevails on all of its claims and the other party loses all of its claims before a court or arbitration panel. This is considered the grantee's "best" position.
- The grantee should then determine the contractor's best position, assuming the contractor prevails on all its claims before a court or Arbitration panel. This is the grantee's "worst" position.
- The grantee should then establish a "realistic" position, based on the grantee's best judgment as to each item in issue, by attempting to anticipate the outcome of a determination by a court or arbitration panel. The "realistic" position should result from consideration of all the arguments and facts gathered through the analysis above.
- Each claim or grievance item should be considered and handled separately in the grantee's preparation for negotiations with the contractor.
- If liquidated damages are involved in the claim/grievance settlement, the Government has a vested interest in the liquidated damages and will need a complete analysis of how the liquidated damages amount was determined. Once assessed, liquidated damages may not be waived by the grantee, without prior FTA concurrence. However, a valid setoff against some other contract claims or tradeoff for other contractual deliverables may be appropriate with FTA approval. Liquidated damages are considered assessed when a written notification is sent to the contractor.
Sections 22.214.171.124 Delays, and 126.96.36.199 Acceleration, should be carefully reviewed for guidance when settling claims involving delays, or claims where the contractor alleges "constructive acceleration" on the part of the grantee. Where, for example, there are concurrent delays (those caused by both parties), and it is impossible to apportion or separate the delays as to how much is due to the actions of the separate parties, then liquidated damages cannot be enforced. On the other hand, if the delays can be apportioned as to contractor-caused, grantee-caused, and "excusable" per the contract terms, then the grantee can enforce liquidated damages to the extent of the contractor-caused delays (but not for the grantee-caused delays or for "excusable" delays). The end product of your negotiations with the Contractor on the issue of delays and liquidated damages would be a contract modification extending the delivery date for "excusable delays" as defined by the contract terms, as well as for delays for which the grantee is responsible (changes, constructive changes, etc.). The delivery date would not be extended for delays that were caused by the Contractor. The newly established delivery date would then become the date used to assess liquidated damages.
- If there is an arbitration clause in the third party contract, FTA must be notified before the matter is submitted to arbitration. FTA must concur in any arbitration award before it becomes final and Federal funds are released.
Negotiations - Negotiations should be on an item-by-item basis with written arguments for each side. The grantee should aggressively pursue all claims and counterclaims as well as defend against all claims and counterclaims of the contractor. The final position arrived at through the negotiations should be set forth and justified in writing.
If diligent efforts to settle the claims and/or disputes on an item-by-item basis have failed to resolve all the items, then a determination can be made regarding the feasibility of a total cost or other type settlement. If the determination is made by the parties to go to a total cost or other type settlement, the grantee should write a detailed explanation of how the parties arrived at the conclusion that the total cost or other type settlement was the best way to proceed. In addition, the grantee should provide a complete explanation of how the final settlement figure was reached, and how each item in the claim/dispute was considered.
Finally, the grantee should not accept a contractor's claim for its cost without having conducted an appropriate review/analysis. If the grantee is unable to verify the cost prior to accepting it, the grantee should conditionally accept it subject to later audit verification.
When FTA Concurrence Is Required - Should FTA request to review the proposed settlement before it is implemented between the grantee and its contractor, the grantee should send to the FTA Regional Office a detailed summary of the settlement, and include as backup the negotiation memorandum and all the pre-negotiation analyses, described above, that led up to the negotiations. In addition, the grantee should provide a written opinion of counsel explaining why the proposed settlement is fair and reasonable, consistent with State law, and in the best interests of the grantee and the Government.
Engaging Outside Counsel - If it becomes necessary for the grantee to engage outside counsel to handle the settlement negotiations or, if necessary, to litigate or arbitrate the case, the grantee must, if grant funds are requested to cover the legal costs, obtain FTA's concurrence in advance. Grantees must demonstrate to FTA that their own legal resources are inadequate to handle the issues at hand, whether because of the nature of the claim, the training and experience of its personnel, or the potential drain on the grantee's staff resources. Outside counsel must be selected through a competitive process that may range from being very informal to very formal. Note that a qualifications-based selection procedure, such as is permitted for A-E procurements, is not permitted for legal services; cost/price proposals must be requested and evaluated as part of the selection process. The fee arrangement with outside counsel cannot be based upon a contingency or percentage of recovery methodology.
Avoiding Disputes Through Proper Documentation - "Documentation of significant events as they occur in the form of correspondence, daily diary entries, inspector's daily reports, photographs, memoranda of telephone conversations and meetings, etc., creates a project record that is absolutely essential in evaluating claims reaching litigation. Absolute attention to documentation is vital in both discouraging submittals of invalid claims and properly analyzing any claims filed." 4
Daily logs - The daily reports/logs of the grantee's inspector may be the most important source for claim research and defense. Inspectors and field engineers must be trained to spot change/claim situations and they must be instructed on what to include in their reports, both on a routine basis and when they sense a real or potential problem. The daily reports should track the construction progress against the approved schedule (CPM Schedule). The daily reports should also track the equipment on site as well as the utilization of equipment. These inspector reports must be monitored carefully by the inspector's supervisor to maintain high quality.
Documentation of meetings and telephone conversations - In order to avoid misunderstandings regarding agreements reached during meetings and telephone conversations with the Contractor and/or between grantee personnel, it is critical to prepare minutes of the meetings and distribute them to all of the attendees. All important telephone conversations should be recorded on a Telephone Call Record, noting the pertinent issues discussed, how the issues were resolved, who is responsible for taking the required action, etc. The other party to the call should always be sent a copy of the completed Telephone Call Record.
Photographs - Frequently, photographs are a valuable form of documentation in a claim situation. The grantee's resident engineer must make an adequate photographic record of the progress of the contract. The photographs must be dated, properly identified, annotated as to who took the photograph and the weather conditions at the time, and filed. Photographs should cover the following items:
- Progress of the work
- Unusual construction techniques
- Accidents or damages
- Unsafe or hazardous working conditions
- Reinforcing steel prior to concrete placement
- Work completed prior to being covered
- Areas or activities where claims and/or changes are anticipated.
The construction contract itself should contain provisions requiring the contractor to provide monthly progress photographs. The grantee's resident engineer must participate in the choosing of locations, angles, and subjects in order to maximize the usefulness of the photographs for progress records.
Alternative Dispute Resolution- The FTA Master Agreement MA(12), Section 44e, encourages grantees to use alternative dispute resolution procedures, as may be appropriate. The alternatives to litigation that are most commonly used are arbitration and mediation. Grantees are advised to be cautious in their decisions to use arbitration. In cases that are complex, arbitration may not be preferable over litigation because arbitrators frequently have limitations on the amount of time they can devote to any individual case. As a result, if the case is complex and time-consuming, it may be necessary to change arbitrators during the proceedings, and this may be very disruptive to the parties and their case. Arbitration may be more advisable for disputes that are not complex and do not involve a great deal of facts that must be determined in order to settle the claim. Grantees are advised to think the case through carefully before deciding not to litigate.Click here to return to the top of the document.
Chapter Footnotes1 - Prior versions of the Circular contained the language in this paragraph related to "disclos[ing] information regarding protests to FTA." FTA noted that this provision allowed for widely differing interpretations but found itself bound by the Common Grant Rule. FTA believes this provision requires grantees to, at a minimum, informally notify their FTA regional offices when they receive a protest related to a contract required to comply with the Circular and to similarly keep their regional offices apprised of the status of those protests. Regional offices may require grantees to forward copies of particular protests or all protests for information or review purposes at any time.
2 - This paragraph has been aligned with the Common Grant Rule and practice by adding "violations of Federal law or regulation" to the basis of FTA protest jurisdiction. FTA will continue to limit its review of grantee protest decisions and will read this Common Grant Rule provision in conjunction with the provisions that express its intent to avoid substituting FTA’s judgment for those of its grantees. FTA will not consider each and every appeal of grantees’ protest decisions simply because a federal law or regulation may be involved. Instead, FTA will exercise discretionary jurisdiction over those cases deemed to involve issues important to the overall third party contracting program.
3 - Additionally, we have noted that requiring an appeal to be filed within five days of "the violation" yet also requiring protestors to extinguish their local remedies before filing with FTA led to some confusion. FTA has attempted to clarify this standard by starting the protestor’s clock when it receives actual or constructive notice of an adverse decision or that a grantee failed to have or follow its procedures or review a complaint.
4 - MARTA Resident Engineer's Manual, Section 5.17 Contractor Claims.