Government Inspection and Deductive Claims in Fixed-Price Service Contracts

The federal government monitors the performance of contractors through inspections to ensure contract requirements are being met. The Federal Acquisition Regulations (FAR) include several inspection clauses permitting the Government to inspect contractor performance. On fixed-price contracts for services, the Government has the right to inspect and test all services under the contract for the duration of the contract. While the Government does not have any formal obligations to perform such inspections, it may choose to do so pursuant to the specific conditions outlined in the contract and at any time and place as practical under the contract.

In contracts for services exceeding the simplified acquisition threshold, FAR 46.304 requires contracting officers to insert the inspection of services fixed-price clause at FAR 52.246-4. Under the clause, contractors must maintain an acceptable system of inspection and complete records of all inspections conducted during contract performance. If the government chooses to perform inspections or tests on contractor premises, contractors must provide reasonable facilities and assistance accommodating the inspection at no additional cost to the government. Of course, disputes may and often do arise regarding what constitutes reasonable assistance and the extent to which the government may expect such assistance.

Should contractors not meet the standards of performance required under the inspection, the Government has the right to demand that the contractor perform the inspected services again to conform with its contractual obligations under the same terms as the original contract. Notably, if the contractor is unable to cure the performance defects through re-performance, the government may require that the contractor take necessary actions to ensure future performance under the contract conforms with the contractual requirements. In such situations, the Government may additionally reduce the contract price to reflect the reduced value of the services delivered under the fixed-price contract.

In certain situations, the contractor may not pass the Government inspection but nevertheless perform the required services under the contract. For instance, under a fixed-price services contract requiring a minimum staffing level, the contractor may fail to meet the minimum staffing-level requirement, but otherwise deliver the required services or deliverables under the contract. In ASBCA No. 62442, such a situation formed the basis for a contractual dispute under a firm-fixed-price U.S. Army contract for security support services in Iraq and Afghanistan. In that 2022 matter, the Contractor delivered the required total hours of security guard services but utilized fewer security guards than the minimum required under the contract. The Government sought to reduce the amount due to the Contractor under the fixed-price contract by invoking the inspection of services fixed-price clause at FAR 52.246-4(e).

In denying the Government summary judgment, the Armed Services Board of Contract Appeals (ASBCA) indicated that in addition to showing that the Contractor breached the contract by not meeting the minimum staffing level requirement, the Government would also need to show that the substituted performance was less valuable than the work required by the contract. In other words, the Government would have to show that it received a decreased value in services than what it originally bargained for. The Government argued that by requiring fewer security guards to perform their duties for longer hours, the Contractor delivered lower quality security guard services than originally contemplated under the contract. The ASBCA agreed that the Government’s argument was a reasonable one. However, since the standard of review for summary judgments requires the Board to resolve any factual questions in favor of the non-moving party, the ASBCA refused to find that a security guard’s performance was reduced when providing longer service hours than initially outlined under the contract.

While different inspection procedures are applicable depending on the contract type, contractors performing on fixed-price services contracts should be aware that failure to promptly re-perform services when they fail to meet the Government’s required standards during an inspection may lead to a default termination. In an alternative but nevertheless expensive scenario, the Government may perform the services at issue and charge the contractor any costs it incurs in performance. To avoid such contract outcomes, contractors should always be prepared for Government inspections on their fixed-price service contracts by maintaining a rigorous compliance regime, allowing them to quickly identify and resolve any performance shortcomings as and when they arise.

This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLCClient Portal or Contact Us to determine how the law would apply in a specific situation.