Government contracts often mandate use of a sole-source subcontractor—that is, they require the contractor to obtain a supply from a specific manufacturer or to use a certain subcontractor for the project. In this case, the contract required the contractor to hire a manufacturer’s representative to oversee the project. The contractor claimed manufacturer’s representative caused delay, and because the contract mandated the representative, the representative was really an agent of the government, so the government was responsible for the delay. The board, however, reasoned that contractors are ultimately responsible for subcontractors. A sole-source subcontractor requirement does not shift responsibility over the subcontractor to the government.
Appeal of Metro Machine dba General Dynamics NASSCO-Norfolk, ASBCA No. 62221
Background
Metro Machine dba General Dynamics NASSCO-Norfolk had an IDIQ contract with the Navy for the maintenance and overhaul of warships. The Navy awarded Metro a delivery order for the overhaul of a guided missile destroyer.
The order required Metro to repair a small crane on the destroyer. Metro subcontracted with another company Advanced Integrated Technologies (AIT) for work on the crane. The order required a technical representative from the crane’s original manufacturer to oversee the work. Thus, AIT subcontracted with the manufacturer to inspect its work on the crane.
But AIT removed the crane, refurbished, and reinstalled parts of it without much supervision from the manufacturer’s representative. When AIT powered up the reinstalled console, contrary to the advice of the manufacturer’s representative, it ended up frying the console’s motherboard.
Metro told AIT to stop working on the contract and directly hired the manufacturer to finish work on the crane. But Metro continued to have problems with the crane’s brakes and hydraulic hoses. Metro eventually completed work on the crane 14 days over schedule.
Due to the delay, the Navy assessed liquidated damages at the contractual rate of $32,000 per day. Metro filed a claim challenging the assessment of damages. The Navy denied the claim, and Metro appealed to the ASBCA.
Legal Analysis
The Navy Was Not Responsible for the Manufacturer
Metro argued that the Navy was responsible for the delay in repairing the crane. Metro alleged that the delays were caused by problems with the manufacturer’s representative. Moreover, Metro contended, the contract required Metro to use the manufacturer as essentially a sole-source subcontractor to oversee the project. Thus, Metro reasoned, the manufacturer was essentially an agent for the Navy and any problems caused by the manufacturer were the Navy’s responsibility.
But the board reasoned that contractors are responsible for the work of subcontractors. And this is so even when the contract requires a contractor to use a certain subcontractor. In the case of a sole-source subcontractor, the government is not in privity with the subcontractor and has no control over them. When the government directs use of a sole-source subcontractor, it represents only that the requirement of the contract can be met by using that subcontractor; it does not represent that the subcontractor’s performance will be flawless. If there is deficient subcontractor performance. The contractor’s recourse is against the subcontractor itself, not the government.
Delay Was AIT’s Fault, Not the Manufacturer’s
The board further noted that even if the government were responsible for the performance of the sole-source subcontractor, the fact remained that the manufacturer in this case had not caused the delay. Metro’s own internal documents showed that most of the problems with the crane were caused by AIT.
Liquidated Damages Were Reasonable
Metro also complained that the liquidated damages—$32,000 a day—were unreasonably high given that the Navy had 99% of this ship during the delay caused by the crane issues. The board reasoned that liquidated damages are reasonable so long as the amount stipulated for is not disproportionate to the loss. Here the point of a guided missile destroyer is to project American sea power. The value of the projection of power in a single destroyer is immeasurable. That value is lost when the destroyer is docked for crane repairs. In light of this, the board did not think the $32,000 a day was unreasonable.
Metro is represented by MIchael J. Gardner and Christopher M. O/Brien of Greenberg Traurig LLP. The government is represented by Craig D. Jensen and Philip S. Lazarus of the Navy.
