What K-Con Decision Means for Bonding Requirements in Federal Construction Contracts
Miller & Martin PLLC Blog | November 15, 2018
Author: Neil Wilcove
On November 5, 2018, in K-Con, Inc. v. Secretary of the Army, --- F.3d --- (2018) (2018 WL 5780251), the United States Court of Appeals for the Federal Circuit affirmed the Armed Services Board of Contract Appeals decision which found that performance and payment bonding requirements were incorporated into federal construction contracts by operation of law at the time the contract was awarded under the Christian doctrine, whether or not the construction contract explicitly incorporated bonding requirements in accordance with FARs.
In K-Con, the Army awarded two contracts for pre-engineered metal buildings to K-Con, but the notice to proceed on the two contracts was delayed two years. As a result of the delay, K-Con sought an equitable adjustment to the contracts based solely on the Army’s decision to add the requirement that K-Con procure performance and payment bonds. Neither contract expressly required performance and payment bonds. The contracting officer denied the claim for equitable adjustment. The Armed Services Board of Contract Appeals affirmed the contracting officer’s decision. The appeal to the Federal Circuit ensued.
In affirming the Board’s decision, the Federal Circuit came to two conclusions. First, there was a question as to whether the two contracts were construction contracts (which would have required bonds). Because there was an ambiguity as to whether the contracts were construction in nature (which required bonds) or commercial (do not require bonds), it was incumbent on the K-Con to raise the ambiguity at the time of contracting and since K-Con did not raise the issue, K-Con was not permitted to raise the issue on appeal. Therefore, contracting officer’s decision that the contracts were for construction in nature was affirmed.
Second, under the Christian Doctrine, "a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal administrative regulations.” In order to incorporate a clause into a contract under the Christian Doctrine, the Court must generally find (1) that the clause is mandatory, and (2) that it expresses a significant or deeply ingrained strand of public procurement policy. In so finding, the Federal Circuit opined that federal law requires performance and payment bonds for construction contracts worth more than $150,000. See 40 U.S.C. § 3131 (b) and FAR 28.102-1 and FAR 52.228-15. Further, as to the second prong of the inquiry, the Court noted that contractors cannot lien federal projects and since “Congress has long sought to protect subcontractors and suppliers and to ensure that the Government receives full performance at the agreed-upon cost” all the way back to 1894, there is no question that the second prong was met.
In sum, there are two lessons to learn from this case. First, all federal construction contracts valued at more than $150,000 require performance and payment bonds by operation of law. It does not matter whether the contract explicitly requires bonds. Second, it is important that if there are any ambiguities in the contract, raise the issue immediately or lose the chance to do so at a later date.
If you have any questions, do not hesitate to contact Miller & Martin Attorney Neil Wilcove.