Unauthorized Commitments,
Ratification, and Constructive Changes
A discussion of the key questions to consider, lessons learned, and best practices
associated with unauthorized commitments, ratification, and constructive changes.
B Y G R E G ORY A . GA R R E TT and S HAW H. COHE
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Contract Management | April 2012
Contract Management | April 2012
31
Unauthorized Commitments, Ratification, and Constructive Changes
In U.S. federal government
contracts, only the authorized
and warranted contracting
officer may enter into, modify,
and/or terminate contracts. An
“unauthorized commitment” is an
agreement that is not binding
solely because the government
representative who made it
lacked the authority to
enter into that agreement
on behalf of the
government.1
Often, unauthorized commitments are made
by the government’s contracting officer’s
technical representative (COTR), program
managers, financial managers, government
property managers, inspectors, auditors, or
other government representatives.
On most occasions, unauthorized commitments are made with the best of intentions
by government representatives, but not
with the appropriate funding and/or authority to bind the government. Unauthorized
commitments may result in additional
value-added work for the government and
are often considered constructive changes.
However, there are and have been many
instances over the years when government
representatives have inappropriately and/
or illegally authorized contract changes/
upscopes for their personal financial benefit.
“Ratification” is the act of approving an
unauthorized commitment by an official
who has the authority to do so. This article
provides a discussion of the key questions to
consider, lessons learned, and best practices
associated with unauthorized commitments,
ratification, and constructive changes.
32
Contract Management | April 2012
Unauthorized
Commitments
and Ratification—
Questions to Consider
1. What are some examples of
unauthorized commitments?
Answers:
ƒƒ
The COTR tells a contractor to perform
work that is not authorized in the
contract and the contractor performs
said work.
ƒƒ
The program manager directs the contractor to perform work not required
in the contract and the contractor
performs the work.
ƒƒ
The contracting officer exceeds his or
her authority; i.e., orders work beyond
Unauthorized Commitments, Ratification, and Constructive Changes
the scope of the contract and/or
directs work that is not appropriately
funded and the contractor performs
the work.
cedures may not be used in a manner
that encourages such commitments
being made by government personnel.
ƒƒ
ƒƒ
The financial manager directs or
improperly authorizes a contractor to
perform work and the contractor does
said work.
2. What actions should the U.S. government take if it believes an unauthorized
commitment has been made?
ƒƒ
Answers:
ƒƒ
Direct the contractor(s) to stop performance or delivery immediately.
ƒƒ
Determine if supplies/services have
been provided to and accepted by the
government.
ƒƒ
Challenge questionable actions and
investigate what has occurred.
ƒƒ
Engage legal counsel for advice as
needed.
ƒƒ
Consider/begin ratification process.
3. How can an unauthorized commitment
be remedied?
Subject to the limitations in FAR
1.603(c), the head of the contracting
activity—unless a higher level official is
designated by the agency—may ratify
an unauthorized commitment.
The ratification authority in FAR
1.603(b)(2) may be delegated in accordance with agency procedures,
but in no case shall the authority be
delegated below the level of chief of
the contracting office.
ƒƒ
Agencies should process unauthorized
commitments using the ratification authority of this subsection instead of referring such actions to the Government
Accountability Office for resolution.2
Unauthorized commitments that
would involve claims subject to resolution under the Contract Disputes Act of
1978 should be processed in accordance with FAR Subpart 33.2, “Disputes
and Appeals.”
5. What FAR limitations exist in regards
to ratification?
Answer:
The authority of FAR 1.603(b)(2) may be
exercised only when:
ƒƒ
4. What are the Federal Acquisition Regulation (FAR) ratification requirements?
Agencies should take positive action to
preclude, to the maximum extent possible, the need for ratification actions.
Although procedures are provided in
FAR 1.603 for use in those cases where
the ratification of an unauthorized
commitment is necessary, these pro-
Supplies or services have been provided to
and accepted by the government, or the
government otherwise has obtained or
will obtain a benefit resulting from performance of the unauthorized commitment;
ƒƒ
The ratifying official has the authority to
enter into a contractual commitment;
ƒƒ
The resulting contract would otherwise
have been proper if made by an appropriate contracting officer;
Answers:
ƒƒ
The contracting officer recommends
payment and legal counsel concurs in
the recommendation, unless agency
procedures expressly do not require
such concurrence;
ƒƒ
Funds are available and were available
at the time the unauthorized commitment was made; and
ƒƒ
The ratification is in accordance with
any other limitations prescribed under
agency procedures.
6. What are non-ratifiable commitments?
Answer:
ƒƒ
Answer:
Through a formal process known as “ratification.” Ratification is basically a legal and
regulatory process that validates or not the
government’s actions as legal and within
the constraints of fiscal fund policy or not.
ƒƒ
Cases that are not ratifiable may be subject
to resolution as recommended by the
Government Accountability Office under
its claim procedure3 or as authorized by
FAR Subpart 50.1. Legal advice should be
obtained in these cases.
7. Can a government employee be held
financially accountable and required
to pay for an illegal, unauthorized
commitment?
Answer:
Yes, U.S. government employees/military
personnel can be held personally liable.
This situation is most often seen when the
action taken by the government employee/
military personnel was an illegal action.
Illegal actions cannot be ratified.
8. What are the government contracting
officer’s authorities and responsibilities?
Answer:
The government contracting officer’s
authorities and responsibilities are outlined
in FAR 1.602, “Contracting Officers”:
1.602-1 Authority
a.
ƒƒ
The contracting officer reviewing the
unauthorized commitment determines
the price to be fair and reasonable;
Contracting officers have authority to enter into, administer, or
terminate contracts and make related determinations and findings.
Contract Management | April 2012
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Unauthorized Commitments, Ratification, and Constructive Changes
Contracting officers may bind the
Answer:
government only to the extent of
the authority delegated to them.
Contracting officers shall receive
from the appointing authority
(see 1.603-1) clear instructions
in writing regarding the limits
When one is accused of making an unauthorized commitment, he or she should submit all records and documents and provide a
complete, written, signed statement of the
facts, including:
of their authority. Information
ƒƒ
Why normal acquisition procedures
weren’t followed,
personnel.
ƒƒ
Why and how the vendor was selected,
No contract shall be entered into
ƒƒ
A list of other sources considered, and
ƒƒ
A description of the work or products.
on the limits of the contracting
officers’ authority shall be readily
unless the contracting officer ensures that all requirements of law,
executive orders, regulations, and
all other applicable procedures,
including clearances and approvals, have been met.
10. What actions can government
personnel take to mitigate the potential
of unauthorized commitments?
1.602-2 Responsibilities
Answer:
Contracting officers are responsible for
Government personnel can mitigate the
potential of unauthorized commitments
by educating/informing all of the parties
involved in the contract as to who is authorized and not authorized to direct contract
changes. Government personnel should
also ensure that COTRs, project managers, headquarters policy, and others use a
standard disclaimer when communicating
with a government contractor so they do
not interpret any of your verbal or written
statements as direction to change/modify
the contract requirements.
ensuring performance of all necessary
actions for effective contracting, ensuring compliance with the terms of the
contract, and safeguarding the interests
of the United States in its contractual
relationships. In order to perform these
responsibilities, contracting officers
should be allowed wide latitude to
exercise business judgment. Contracting
officers shall—
a.
Ensure that the requirements of
2. Who is responsible for recognizing a
constructive change?
Answer:
available to the public and agency
b.
as a formal written change order under the
Changes clause. In government contract law,
the concept of constructive changes is well
established. (FAR 43.104 and the “Notification of Changes” clause (52.243-7) both
recognize this concept.)
Board decisions have recognized that an
informal requirement for performance of
additional work, for example, is substantially equivalent to a formal requirement
and must be governed by similar principles.
The significance of recognizing constructive
changes as a responsibility of the government representative, and its effect on
the contractor, should be recognized and
understood by both parties so that they
may be able to identify conduct and actions
that may be interpreted as constructive
change orders.
3. What FAR clause addresses
constructive changes?
Answer:
A revision to the Changes clause for construction contracts in 1968 included a provision expressly designed to address constructive changes, and was the first standard
clause to do so.
1.602-1(b) have been met, and
that sufficient funds are available
for obligation;
b.
Ensure that contractors receive
Constructive Changes—
Questions to Consider
1. What is a constructive change?
impartial, fair, and equitable
c.
treatment; and
Answer:
Request and consider the advice
A “constructive change” is sometimes called
a “change by implication” and occurs when
the government, by its actions, changes
the contract without specifically adhering to the requirements of the “Changes”
clause. A “constructive change order” has
been defined as a verbal or written act or
omission by the contracting officer or other
authorized government official that is of
such a nature that it has the same effect
of specialists in audit, law, engineering, information security,
transportation, and other fields
as appropriate.
9. What actions must the person who
made the unauthorized commitment
typically do?
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Contract Management | April 2012
The present FAR provision states that written or verbal orders—including directions,
instructions, interpretations, or determinations by the contracting officer—that cause
a change within the general scope of the
contract will be treated as changes under
the Changes clause.
As a prerequisite to the consideration of
a claim based on a constructive change,
however, the contractor must notify the
contracting officer that he or she considers
such an order to be one directing a change
in the work to be performed.
4. Can erroneous interpretations lead to
constructive changes?
Unauthorized Commitments, Ratification, and Constructive Changes
Answer:
Answer:
Some changes to the specifications are
inadvertent. Erroneous interpretations of
contract requirements by the contracting
officer (or his or her representative) may
lead to actions that constitute constructive
changes. For example, the government’s
insistence that the contractor comply
with the misinterpretation has the effect
of changing the specification. Such an
interpretation of the contract language by
Constructive changes increase the burden
on the contractor and are compensable.
In contrast, where the specification is
misinterpreted by the contractor, there is no
entitlement to compensation for additional
costs incurred in performing any extra work
required to meet the standard established
by the contract. One notable exception occurs where the contractor’s interpretation
is reasonable under the circumstances, es-
the contracting officer may be construed as
a change if it calls for something more than
the contract requires.
pecially where the contractor’s mistake was
apparent to the government at the time of
contract formation.
Similarly, the insistence by an inspector that
the contractor perform to a higher standard
of quality than that provided by the contract
specifications has been held to be a change.
The inspector was considered to have been
authorized to act as a representative of the
contracting officer.
6. Can the government’s substitution of
materials cause a constructive change?
5. Can the contractor be compensated for
constructive changes?
Answer:
Such changes are generally authorized by
the Changes clause, and are compensable if
they cause the contractor to incur additional cost. Similarly, where the contractor
proposes a deviation in either materials or
procedures, approval by an authorized government representative is a change under
the Changes clause.
7. Can defective government specifications lead to a constructive change?
Answer:
Defective specifications may lead to a determination of constructive change. There is an
implied warranty that if the government’s
specifications are followed, the item produced will meet the contract requirements.
Specifications may be considered defective
because of simple error, inadequate detail,
practical impossibility of performance, or a
combination of these. A constructive change
may be found if the defect causes the contractor to incur additional cost.
Since only the contracting officer or his or
her authorized representative has authority to issue change orders, the government
may be able to avoid many constructive
Contract Management | April 2012
35
Unauthorized Commitments, Ratification, and Constructive Changes
changes if these individuals are alert to the
implications of their actions.
8. How are constructive changes
usually settled?
Answer:
Constructive changes are usually settled
through a request for equitable adjustment to the contract price. If the parties
cannot agree to the price for the constructive change, a dispute may arise and the
contracting officer, upon request by the
contractor, will issue a formal decision from
which the contractor can make an appeal.
All constructive changes should be presented to the contracting officer prior to
final payment under the contract. There are
many cases that hold that final payment
bars any claims for constructive changes.
These cases usually cite authority that
prevailed before the Contract Disputes Act
of 1978.
Since the Contract Disputes Act has broadened the contracting officer’s authority
Contract Management | April 2012
10. If the government prevents a contractor from proceeding in the most efficient
manner, is that a constructive change?
Answer:
Where the government prevents a contractor from proceeding in the most efficient
manner, there is a constructive change to
the contract that entitles the contractor to
additional compensation.6
9. What legal precedent has been
established for constructive changes?
Answer:
It is well established that when a government contractor performs work beyond that
required by the contract without a formal
change order, and such work was informally
ordered by the government or is caused by
government fault, a constructive change
has occurred, thereby entitling the contractor to an equitable adjustment.4 The appropriate formula for pricing such an equitable
adjustment is the difference between what
it would have reasonably cost to perform
the work as originally required and what
Figure 1.
36
it reasonably costs to perform the work as
changed.5
so that the contracting officer can now
render decisions on any dispute arising
under the contract, there is no need to
consider a constructive change as a matter
falling under the Changes clause. It was the
Changes clause language that created the
final payment bar. Now one can argue that
a constructive change is really a breach of
contract claim, and as such can be brought
even after final payment.
Managing Contract
Changes: Lessons
Learned and Best
Practices
1. Educate/Inform the parties that
contract change management starts with
knowing what is within the scope of the
contract and what is out-of-scope of the
contract. (See FIGURE 1 below.)
2. Establish a contract change
management board.
A Contract−What Is It? A Mutual Agreement On:
Who?
Obligations
Work Breakdown Structure/
Responsibility Assessment
Matrix
What?
Technical Work
to be Performed
Statement of Work/
Performance Work
Statement
When?
Delivery
Requirements
Schedule
How?
Administrative
Requirements
Terms & Conditions
How
Much?
Price
Price & Payments
Source: www.gmc2.org/constructive-changes.html
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Unauthorized Commitments, Ratification, and Constructive Changes
A “contract change management board” is
a small group of company senior leaders
who review and approve all changes prior to
implementation.
ƒƒ
ƒƒ
Delaying review and approval of data
submittals; and
3. Develop a contract change
management process.
ƒƒ
Failure to disclose superior knowledge.
While a company wants to maintain a high
level of customer satisfaction, companies
must take every reasonable step to ensure
that their contracts accurately describe
the obligations and are modified promptly
to reflect changes to obligations that are
over and above the contract. This allows
the company to receive full payment for
contract changes. A disciplined system of
“best practices” must be in place to identify,
assess, give notice, and request contract
coverage for customer-caused impacts upon
a company’s contract performance.
4. Implement proven pricing strategies.
Proven pricing strategies must be integrated
with change definitions and schedule impacts to ensure cost recovery and appropriate profit/fee is realized on the additional
work performed.
5. Understand the sources of
contract changes.
Constructive changes come from a multitude of areas that require documentation
and knowledge of contractual change
remedies involving customer actions or inactions that have the effect of changing the
terms of the contract.
The following are customer actions or inactions that can change the terms of the contract and can be construed to be “changes”:
ƒƒ
Acceleration;
ƒƒ
Defective specifications;
ƒƒ
Late or defective customer-furnished
property or data;
Failure to cooperate;
6. Ensure authorized personnel
empowered to direct contract changes
are formally appointed in writing and
stated in the contract.
7. Confirm all directions to change
contract requirements before
implementing changes.
8. Ensure all U.S. government personnel
having contact with a contractor recognize the limitations on their authority.
9. Recognize that the U.S. courts
may hold silence on the part of the
government contracting officer as
acceptance of the change.
10. Seek the advice of specialized experts
(accountants, lawyers, engineers, etc.)
as needed to properly manage contract
changes.
tional educator, highly respected consultant,
highly decorated former U.S. Air Force officer,
and the recipient of numerous national and
international business awards.
SHAW H. COHE, CAPTAIN, U.S. NAVY (RET.)
is the chief executive officer and partner at
AST LLC. He is a highly experienced acquisition professional and has earned the U.S.
Department of Defense Level III certifications in contract management and program
management.
Send comments about this article to
cm@ncmahq.org.
Endnotes
1.
See FAR 1.602-3(a).
2.
See FAR 1.502-3(d).
3.
See GAO Policy and Procedures Manual for Guidance of Federal Agencies, Title 4, Chapter 2.
4.
See American Line Builders Inc. v. United States,
26 Cl Ct. 1155, 1179 (1992).
5.
Ibid. See also American Asphalt Inc., ASBCA No.
44160, 95-2 BCA 27,614 (1995); and Celesco
Indus Inc., ASBCA No. 22251, 79-1 BCA 13,604
(1978).
6.
See Yarno & Assoc., ASBCA No. 10257, 67-1 BCA
6,312 (1967); and Mech-Con Corp., GSBCA No.
1373, 65-1 BCA 54,574.
Summary
Unfortunately, unauthorized commitments,
ratification, and constructive changes
are all too common in U.S. government
contracts and subcontracts. This article has
provided a timely and highly relevant discussion of the salient points of unauthorized
commitments, the ratification of unauthorized commitments, the sources of constructive changes, and their remedies via a question and answer approach. In addition, we
provided 10 proven best practices to assist
both government agencies and government
contractors to more effectively manage
contract and subcontract changes. CM
About the Authors
GREGORY A. GARRETT, CPCM, NCMA
ƒƒ
Unreasonable inspections, rejections,
or rework;
Fellow, C.P.M., PMP, is the chief operating
officer and partner at AST LLC. He is a bestselling and award-winning author, interna-
Contract Management | April 2012
39