Wednesday, December 14, 2016

Partial Termination Allows Equitable Adjustment on Remaining Work for Unrecovered Fixed Costs

The Army awarded a fixed-price contract to the Missouri Department of Social Services (MDSS) to operate 18 dining facilities at Fort Leonard Wood, MO. Two years into the contract, the Army issued a partial termination for convenience removing six dining facilities from the contract. After the partial termination, the Army and MDSS were unable to agree on a price for the remaining 12 dining facilities so MDSS submitted a claim for the increased costs of performing the remaining contract work.

The contracting officer denied the claim saying that it should be deferred in order to ensure that there was no duplication of costs between the equitable adjustment proposal and a termination settlement proposal. MDSS appealed the contracting officer's final decision to the ASBCA (Armed Services Board of Contract Appeals).

The ASBCA found that the partial contract termination increased MDSS's cost to perform the remaining work. The Board noted that while MDSS's fixed costs remained the same, its production hours decreased from 1.3 million hours to 980 thousand hours. Therefore, MDSS was entitled to an increase in its price per hour in an amount equal to its unrecovered (or unrecoverable) fixed costs.

The Army argued that just because actual requirements did not meet estimated requirements, does not entitle MDSS to an equitable adjustment. The Board ruled that the Army's position missed the point. The Board noted that the Army and MDSS had entered into a different contract than the one that existed after the partial termination. The original contract contemplated 50 percent more dining facilities and 300 thousand more production hours that the post-termination contract.

The ASBCA sustained MDSS's appeal on entitlement and remanded it back to the parties for a quick resolution on quantum.

You can read the entire published ASBCA decision here.

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