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Inspection, acceptance, and warranty.

IAW Transformed!

The Department of Defense (DoD) issued a final rule on quality assurance as part of the Defense Federal Acquisition Regulation Supplement (DFARS) transformation. (1) The final rule updates requirements for warranties and contract quality assurance; removes unnecessary text on technical requirements matters, responsibilities of contract administration offices, and material inspection and receiving reports; and moves guidance on the preparation of quality assurance instructions, quality inspection approval stamps and quality evaluation data to the Procedures, Guidance, and Information supplement. (2)

Audit of Quality Assurance

The DoD Inspector General (IG) published a report on the adequacy of contract surveillance for service contracts. (3) The DoD IG concluded that the government "could not be assure[d] that it received the best value when contracting for services," (4) particularly in the area of cost-reimbursement and time-and-materials contracts.

The DoD IG reviewed service contracts due to the 'impressive growth' of DoD contracts in this area. In Fiscal Year (FY) 2004, fifty-five percent of DoD spending for goods and services was for service contracts. (5) The report noted that the cost of services alone increased one hundred and six percent between FY 1998 and FY 2004. (6)

The report reviewed twenty-three contracts, valued at $ 670.4 million. (7) Eighty-seven percent of the contracts did not have adequate quality assurance surveillance plans. (8) The report noted four different incorrect rationales by agencies for not preparing a quality assurance plan as required by the Federal Acquisition Regulation (FAR). (9) The DoD IG lauded three contracts for its detailed quality assurance surveillance plan. (10)

Fifty-two percent of the audited contracts contained insufficient reviews of contract vouchers. (11) The report cited, as an example, reviews by technical monitors who were focused more on analyzing performance than scrubbing costs while looking at the vouchers. (12) The report praised four U.S. Army Corps of Engineers Iraqi Captured Enemy Ammunition contracts in Iraq in which program officials conducted a comprehensive review of all contractor vouchers while in a war zone. (13)

Fifty-seven percent of the contracts contained vouchers for provisional payments that were approved by non-Defense Contract Audit Agency (DCAA) officials. (14) Only twenty-two percent used performance-based contracting standards. (15) Forty-three percent of the contracts did not have adequately documented past performance records. (16)

The DoD partially concurred with the DoD IG's recommendation for officials to coordinate with DCAA for all service contracts, indicating that this coordination should be only when required by the complexity of the contract. (17) The DoD also partially concurred with the IG's recommendation to coordinate with DCAA for voucher reviews, stating that guidance will be forthcoming. (18) Finally, the DoD partially concurred with the last recommendation to clearly define roles and responsibilities in section G of contracts, stating that such detail should only be in contracts where deviation from the standard requirements is necessary. (19)

"In the Process" Is Not a Plan

In Marine Industries NW, (20) the Government Accountability Office (GAO) denied a protest of an offeror who failed to submit a brief description of the company's quality assurance plan for certifying completed work rendering the offer technically unacceptable. (21) The Navy's Fleet and Industrial Supply Center in Puget Sound issued a Request for Proposals for up to four fixed price, indefinite-delivery / indefinite-quantity contracts for repair services on Navy vessels. (22) Marine Industries submitted an offer which stated that it was "in the process of implementing a Quality Assurance Plan." (23) Because the Navy felt that such an implementation could take years and asking for more detail would constitute discussions, the Navy eliminated Marine Industries from the competition. (24)

The GAO agreed with the Navy that Marine Industries' offer contained no information which would lead the Navy to assume that Marine Industries had a quality assurance plan in place, as the company alleged in its protest. (25) The GAO also dismissed Marine's argument that past performance submission, which showed prior quality performance, should have established the existence of the company's quality assurance plan. (26)

Strict Compliance Flushed Down the Drain

In Bath Iron Works Corp., (27) the Armed Services Board of Contract Appeals (ASBCA) awarded a contractor damages to recover its costs in replacing damaged piping despite the Navy's Insurance clause. (28) The dispute involved a fixed-price incentive fee contract to construct six DDG 51 Class Guided Missile Destroyers, including the DDG 90 involved in the dispute. (29) The Insurance clause in question excluded coverage "for the inspection, repair, replacement, or renewal of any defects themselves in the vessel ... due to ... defective workmanship." (30)

On 6 September 2002, the supervisor of operating engineers for Bath Iron Works flushed the DDG 90's fuel oil and transfer piping with "tidal" Keenebec River water without notice to the Navy and without knowledge that river or salt water could damage stainless steel. (31) In order to repair the resulting damage, Bath Iron Works spent $388,966 in material costs and 16,893 in labor hours, which the ASBCA found to be reasonable. (32) The contacting officer denied Bath Iron Works' claim, finding that the knowing deviation from the contract's requirements to flush the piping with either fuel or fresh water precluded payment of the claim. (33)

Bath Iron Works argued that the insurance clause incorporated an "all risks" clause which shielded claims for damage from any fortuitous events causing vessel damage during construction. This clause, based on the Navy's past practices, would allow payment for the claim as long as the damage results from a number of causes, only one of which is an excluded risk. (34) The government argued that the Insurance clause was on point because the damage was deliberate and that strict compliance excluded any entitlement for the costs incurred by Bath Iron Works. (35)

The ASBCA found that the Insurance clause excluded damage for defective work, but would allow payment for repairing or replacing the resulting damage from a casualty or disastrous occurrence. (36) The board found that the damage was the result of an accident, and could not fall into the rubric of "defective workmanship." (37) In addition, the board found that the Navy in the past had allowed recovery for loss or damage resulting from defective work or negligent actions. (38) Also, as Bath Iron Works argued, risk insurance law would allow coverage for a casualty with more than one cause, other than the excluded risk of defective workmanship in this case. (39) The board found that strict compliance was not applicable since the Navy deviated from the contract by allowing a fresh water flush and had allowed Bath Iron Works to use a fresh water flush on DDGs under several contracts between 1998 and 2002. (40)

The ASBCA awarded Bath Iron Works $1,130,314.05 for the costs of the repair less the amount used for the "defects themselves," or re-performance of the test flush with the proper water; some undocumented attorney's fees; and the Insurance clause deductible. (41)

(1) Defense Federal Acquisition Regulation Supplement; Quality Assurance. 71 Fed. Reg. 27,646 (May 12, 2006) (to be codified at 48 C.F.R. pts. 246).

(2) Id.


(4) Id. at i.

(5) Id. at 1.

(6) The DoD spent $61.9 billion in 1993 and $ 230.7 billion in 2004. Id.

(7) Id.

(8) Id. at 4. Six of these contracts had surveillance plans but were not adequately documented as required by the FAR. Id. at 11.

(9) Id. at 19. The rationales included "not required at contact award," "not required for commercials services," "not conducive to time-and-materials," and "not required for non-performance-based contracts." Id.

(10) Id. at 12. The contracts were in the Electronic Systems Center at Hanscom Air Force Base, Massachusetts; the Aeronautical Systems Center, Wright-Patterson Air Force Base, Ohio; and the Naval Air Systems Command, Patuxent River, Maryland. Id.

(11) Id. at 4. The DoD IG noted cursory or nonexistent voucher reviews for contracts in which either DCAA was provisionally approving interim vouchers or approved direct billing for the contractors. Id. at 13.

(12) The contract in question was from the Defense Information Technology Contracting Organization. Id. at 14.

(13) Id. at 16.

(14) Id. at 4. Under DFARS 242.803(b), DCAA has the assigned responsibility for receiving and approving interim vouchers for provisional payment. Id. at 17.

(15) Id.

(16) Id.

(17) Id. at 26.

(18) Id. at 27.

(19) Id. at 28.

(20) Comp. Gen. B-297207, Dec. 2, 2005, 2005 CPD [paragraph] 217.

(21) Id. at 2.

(22) Id. at 1.

(23) Id. at 2.

(24) Id.

(25) Marine Industries contended that the language used in the offer should have led the Navy to assume that the company was updating an existing quality assurance plan. Id. at 3.

(26) Id.

(27) ASBCA 54544, 06-1 BCA [paragraph] 33,158.


(29) Bath Iron Works Corp., 06-1 BCA [paragraph] 33,158 at 164,296.

(30) Id. at 164,305.

(31) Id. at 164,299.

(32) Id. at 164,301.

(33) Id. at 164,300.

(34) Id. at 164,305. The flushing procedure, modified by a Departmental Operating Instruction, deviated from the original specification which mandated the use of flushing fuel, rather than water. Id. at 164,298. In addition, other exacerbating causes were design flaws of the piping, and the use of a level transfer facility instead of inclined which allowed the water to stay in the destroyer. Id. at 164,303.

(35) Id.

(36) Id. at 164,305.

(37) The board noted that "(i)t is a fair inference that ... (the Bath Iron Works employee) did not design or plan the corrosion damage." Id. at 164,306.

(38) Id.

(39) Id.

(40) Id.

(41) Id. at 164,308.
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Article Details
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Author:Kantner, Andrew S.
Publication:Army Lawyer
Date:Jan 1, 2007
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