In the Appeal of Vertex Construction & Engineering, ASBCA No. 58988, decided last month, the Armed Services Board of Contract Appeals (“ASBCA”) exercised a “harsh” remedy in declaring Appellant’s contract void ab initio because Appellant, a local Afghani firm, submitted a fraudulent licensing certificate for a master electrician with its proposal. Appellant had appealed its termination for default, arguing that it did not make knowing misrepresentations to the government and that Appellant, too, was misled by its subcontractor. Appellant argued further that the solicitation required the government to verify the certificate in question, and Appellant should not be blamed for the government’s failure in this regard.
In rejecting both of these arguments and granting judgment for the government, the ASBCA focused on two fundamental rules that prime contractors may easily miss when relying on subcontractor-provided information and reminded contractors that failure to observe these rules can have significant consequences. First, a prime contractor will not be allowed to shift blame to its subcontractors for false proposal representations, where the prime blindly relied on a subcontractor’s representations. Second, these rules apply even when the government states in the solicitation that it will verify credentials. Here the ASBCA made it clear that a contractor cannot use the government’s failure to verify credentials as a defense to fraud, since the verification requirement “was for the benefit of the government, not [Appellant].” Overall, while the Vertex case serves as a case study in the pitfalls of prime contractor ignorance concerning its subcontractors, a number of Appellant’s failures are not so unusual and may not be obvious to prime contractors that find it entirely reasonable to rely on their subcontractors when preparing proposals.
The solicitation in Vertex called for the disassembly and reassembly of 44 re-locatable buildings at U.S. Army facilities in Kabul, Afghanistan. Offerors were required to submit with their proposals “a current and active U.S. State Certified Electrical License for their proposed certified” master electrician. Following award to Appellant, the contracting officer discovered that the license identified in Appellant’s proposal was long-expired and was for a journeyman, rather than a master electrician. The contracting officer also determined that Appellant had merely purchased the certificate from a subcontractor and did not have any direct knowledge regarding the credentials or experience of the proposed “master electrician.” The contracting officer then terminated the contract for default, which led to the instant appeal.
Appellant first argued that it “subcontracted the master electrician to [subcontractor] and the contract stated that [subcontractor] will provide the master electrician certificate . . . .” Appellant asserted that it should not be blamed for any misrepresentations regarding the master electrician because it “had an agreement with legal entity [sic] in Afghanistan about the electrician” and it “trusted” the subcontractor. Appellant asserted that it was not in a good position to verify the authenticity of the master electrician certificate because Appellant “was a local company and did not have access to ‘U.S. certificate issuing authorities.’” The ASBCA rejected this defense out of hand, noting that Appellant admitted “it had done nothing to determine the authenticity of the certificate.”
Appellant then pointed to a solicitation provision requiring the government to review and verify the proposed electrician’s license during proposal evaluations, which the government had failed to do. The ASBCA found “unpersuasive” the “argument that bids can present misinformation, and the burden is on the government to ferret it out . . . .” As the ASBCA noted, it repeatedly has held that “pre-award surveys are conducted for the government’s benefit and even if they are inadequately performed, they do not confer rights upon contractors.”
Based on the foregoing, the ASBCA held that Appellant had obtained the contract award through a material misrepresentation, which rendered the contract void ab initio as “tainted by fraud.” The ASBCA described this remedy as a “harsh penalty” but necessary to “guarantee the integrity of the federal contracting process . . . .”
On a basic level, Vertex clarifies that the government’s failure to conduct required pre-award inspections and verifications does not excuse a contractor’s own duty to verify information submitted in its proposal. In other words, the proposed prime contractor can take no comfort from the fact that a pre-award survey of its subcontractor was announced in the solicitation. The prime contractor must take reasonable steps to validate the accuracy of subcontractor-provided information used in its proposal and to be relied upon in performance of a resulting contract. Moreover, Vertex serves as a reminder that U.S. government contractors who use fraudulent information to obtain public contract awards, even by way of negligence or carelessness, risk dire consequences. Termination of the contracts for default may be the least of their concerns, given the government’s arsenal of other enforcement mechanisms – such as suspension/ debarment from federal contracting and investigation under the False Claims Act. Companies that seek to do business with the U.S. government should read Vertex as a reminder of the high level of rigor associated with U.S. government contracting, the importance of accuracy in proposals, and the material consequences of non-compliance. This message is particularly salient for commercial companies and foreign companies that may be accustomed to less exacting standards of due diligence, and even experienced prime contractors pressed for time in preparing proposals and accustomed to relying on their subcontractors.
