Government Inspections 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 Regulation (FAR) includes several inspection clauses permitting the government to inspect contractor performance. On fixed-price service contracts, the government has the right to inspect and test all services provided for the duration of the contract. While the government has no formal obligations to perform such inspections, it may choose to do so pursuant to the specific conditions outlined in the contract at any time and place as practical. 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, along with a complete record of all inspections conducted during contract performance.

If the government chooses to perform inspections on contractor premises, the contractor 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 during an inspection. In case the contractor does not meet the standards of performance required under the inspection, the government has the right to demand that the contractor perform the 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 the contractor to take necessary actions to ensure future performance under the contract conforms with the contract 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 compared to 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 judgment requires the adjudicative forum 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 may be applicable depending on the specific type of contract, contractors performing on fixed-price services contracts should always be prepared for government inspections. Similarly, contractors should also be prepared to reperform any services that fail to meet the required inspection standards. Contractors should be mindful that a failure to promptly re-perform services in such situations may result in a default termination. In an alternative but equally expensive scenario, the government may perform the services at issue and charge the contractor any costs it incurs in performance. To avoid such undesirable contract outcomes, contractors should implement rigorous compliance procedures to adequately monitor and maintain performance standards under fixed-price service contracts. Such a compliance regime can enable contractors to identify and resolve any performance shortcomings in an efficient and timely manner while avoiding deductive claims.

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 PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.

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Government Inspections and Deductive Claims in Fixed-Price Service Contracts

TILLIT LAW Federal Contract Claims Insights