GSA Court Case Could Negatively Impact All Future Defense Contracting

The Department of Defense (DoD) has been making serious efforts to take advantage of advances in private sector logistics to improve the way that defense goods are warehoused, organized, and distributed. A major part of this effort has centered on consolidating disparate transportation activities into large multi-year contracts that can reduce costs and improve efficiency. One of the most innovative of these is the Defense Freight Transportation Services (DFTS) contract.

Awarded in 2016 by the U.S. Transportation Command (TRANSCOM) to a team led by Crowley Logistics (a subsidiary of Crowley Maritime Corp.), DFTS consolidates and coordinates the activities of thousands of individuals and firms involved in moving defense goods throughout the U.S. and Canada. To date, DFTS has proven to be successful, evidenced by TRANSCOM’s decision to exercise multiple option years. DFTS has improved the efficiency of the transportation system while managing costs and enhancing returns to many of the participants, often small businesses, within the national logistics and transportation network.

But this successful contract could be undermined if the General Services Administration (GSA) wins a pending court case. This case, brought by Crowley, seeks to determine who has the ultimate authority to evaluate the activities of contractors, the agency or department that oversees the contract, or the GSA. While the law would appear to be on the side of the private company, this may not be enough to ensure a reasonable outcome.

For decades, DoD managed the nationwide transportation of defense goods, whether from vendors to facilities or between installations on a transactional basis. Responsibility for contracting for transportation services was in the hands of local transportation officers, who often had limited visibility into the transportation network and limited means for pursuing the most efficient option for moving goods. As a result, the transportation network has been plagued by high costs, delays in moving goods, and a lack of predictability.

The DFTS contract is the product of several attempts by TRANSCOM to use the resources and talent of large private sector logistics providers to improve management and transportation of defense goods. These private companies have many decades of experience in moving goods throughout the U.S. They also have the trained personnel and the tools to successfully manage what is a disaggregated business environment and fluid demand for transportation services. The DFTS contract also reflects lessons learned about how government contracting officers should interact with private contractors, including visibility of pricing, a three-tier pricing strategy based on response times, and the tracking of key performance indicators at both enterprise and individual site levels.

Several years ago, GSA began to audit the DFTS contract. But the agency went far beyond just providing TRANSCOM with the results of these audits. GSA took on a role normally reserved for contracting officers, which is judging whether Crowley was performing appropriately on the contract and if it was charging proper prices. GSA claimed that it had the authority not just to review contracts entered into by other parts of the federal government, but to judge the private contractor’s performance, and levy fines on them if in GSA’s opinion they were violating the terms of the contract. In essence, the GSA decided it could substitute its judgement for that of the contracting officer.

Repeatedly and without input from the TRANSCOM contracting officer, GSA has determined that Crowley overcharged for freight services. But rather than take its evidence to TRANSCOM, the other party to the DFTS contract, GSA inserted itself in the process and levied fines on Crowley.

GSA asserted that it had jurisdiction to act with respect to the DFTS contract, based on the 1940 Transportation Act’s amendments to the Interstate Commerce Act (ICA). Crowley disagrees, insisting that the 1978 Contracts Dispute Act (CDA), not the ICA, is the relevant statute. The Transportation Act gives GSA the authority to audit limited types of simple transportation bills, while the CDA gives the procuring agency’s (in this case TRANSCOM) contracting officers the authority to make final and binding decisions regarding the interpretation of a contract’s terms, the evaluation of a contractor’s performance under those terms, and the final amount of payment owed. GSA’s actions also conflict with the Disputes Clause in Federal Acquisition Regulation-based contracts. GSA is not only asserting the right of oversight but the ability to impose fines and take fines out of payments made to the DFTS contract by the government, despite the issue of proper jurisdiction being in dispute on both legal and technical grounds. The district court judge observed that the situation facing Crowley was nothing short of Kafkaesque.

Even more alarming for anyone interested in or involved with defense department contracting, GSA is seeking to overturn the long-established legal principle that only the parties to a contract may determine how it will be executed. Generally, when there is a dispute between the parties regarding any aspect of the contract, they can seek legal redress.

But TRANSCOM has repeatedly taken issue with GSA’s actions and judgement of the contractor’s performance on DFTS. TRANSCOM has consistently challenged GSA’s decisions, each time siding with Crowley. This reflects the fact that GSA staff are not logistics experts. Nor do they seem to understand the challenges faced by TRANSCOM on a daily basis to ensure that critical defense goods are delivered on a timely basis, particularly in a crisis.

GSA’s case, which is now before a D.C. District Court judge, is about much more than over $40 million in fines that the office has levied on Crowley. It could have a significant impact on the future of defense contracting not only in the transportation sector but across all defense department contracts. It is generally recognized that doing business with the Pentagon is challenging at the best of times, involving unique regulations and accounting practices. Moreover, contracts can be cancelled at the convenience of the government. GSA’s behavior with respect to the DFTS contract could add an additional complicating factor into a private firm’s decision on both how to respond to a contracting officer’s requests or even whether to pursue a government contract in the first place.

If GSA wins its case, companies in the defense space will have to worry not only about meeting the needs of the contracting officer, but also about being second-guessed by GSA or penalized for responding to the contracting officer’s legitimate requests. This could lead to a flurry of court cases in the best of circumstances. At worst, it could compromise national security, should companies take a more self- protective stance and adhere strictly to the letter of a contract as interpreted by GSA.

An earlier version of this article appeared in RealClearDefense.