Legal Cost to Defend Against Third-Party Lawsuits

Bechtel National operates a nuclear waste treatment plant in the state of Washington. In 2010 and 2012, two former Bechtel employees filed lawsuit against the company, alleging, among other things, sexual and racial harassment and discrimination. Bechtel and the former employees settled the lawsuits out of court. Bechtel then sought reimbursement of its litigation costs under its contract with the Energy Department.

Are those costs allowable, or not?

The Energy Department didn't think so. Although the Department provisionally approved the reimbursement at first, after further consideration, it disallowed the costs. After the contracting officer issued a final decision upholding the disallowance, Bechtel appealed to the U.S. Court of Federal Claims alleging breach of contract.

In 2010, Bechtel notified Energy of potential litigation arising out of its work at the Hanford site. The Energy Department informed Bechtel in writing that it was authorized to proceed with defense of the case but that authorization was not a determination of the allowability of costs - that determination would be made at a later date pursuant to relevant statutes, regulations, terms of the contract and other considerations.

A few months later, a former employee filed a lawsuit against Bechtel arising out of her termination. The employee alleged that she had been subjected to a hostile work environment and racial and sexual harassment. Additionally, she alleged that Bechtel transferred and ultimately terminated her employment in retaliation for the actions she took to report and stop the alleged harassment. Finally, she asserted that Bechtel had engaged in disparate treatment and took adverse employment actions against her on the basis of her sex and race. Ultimately, the parties settled out of court.

A couple of years later, a second discrimination lawsuit was filed against Bechtel by another former employee. This employee alleged that Bechtel discriminated and retaliated  against him on the basis of race and disability.

Bechtel requested the Energy Department to reimburse it for defending those suits. It asked for $500 thousand and the Energy Department reimbursed those costs on a provisional basis.

The Energy Department moves slowly. Four years later, in 2016, the contracting officer disallowed the costs. The contracting officer determined that the costs incurred by Bechtel in defending the lawsuits were unallowable. He found that the plaintiff's claim had more than very little likelihood of success on the merits and therefore unallowable.

In short, the costs at issue which were incurred as a result of violations of the contract's anti-discrimination provision were not allowable under the terms of specific contract clauses. Accordingly the Court of Claims ruled that the Government is entitled to judgment as a matter of law as to Bechtel's claim that the Energy Department violated the contract by disallowing the costs it incurred to defend and pay for the settlement of the two discrimination complaints.

You can read the entire decision here.

Contracting Officer's Alleged Misconduct Cost a Contractor $21 Million

L3 Technologies' Communication Systems-West Division (CSW) filed a suit against the Defense Contract Management Agency (DCMA) last month for $21 million alleging that DCMA's Divisional Administrative Contracting Officer (DACO) inappropriately directed the contractor to discontinue proposing its Material Adjustment Factor (MAF) on all proposals to the Government.

This case is about a DCMA DACO's unreasonable and improper administration of CSW's Government contracts and the "far-reaching harm" caused by that "maladministration". For more than two years, the DACO prohibited CSW from including otherwise allowable costs in its proposals for Government contracts. CSW, the complain alleges, had no viable choice but to accede to the DACO's directive because the DACO is the Government official with exclusive responsibility for determining CSW's compliance with Cost Accounting Standards (CAS), establishing final indirect cost rates and billing rates, and determining the adequacy of its accounting system and other contractor business systems (including estimating systems).

The MAF (Material Adjustment Factor) is a composite factor to propose material-related costs not included in any other bid element. It consists of four components: scrap, vendor rework, consumables, and residual material. From 1998 through 2006, CSW included the MAF factor in its negotiated Forward Pricing Rate Agreements (FPRAs). During those years, DCAA (Defense Contract Audit Agency) audited the factor numerous times and took no exception. During negotiations for a 2007-2011 FPRA, the Government and CSW could not come to agreement on one of the components of the MAF, residual materials. And so, the DACO excluded the MAF from the FPRA with the understanding that it would be included as an addendum to the FPRA when the parties resolved the residual material component.

In 2011, notwithstanding that the amount in dispute represented only a small part of the MAF and affected only certain contracts, the DACO directed CSW to discontinue proposing the MAF on all proposals until further notification. At no point prior to that did the DACO provide CSW written notice of any pontential noncompliances stemming from the use of the MAF nor did the DACO make any effort to reach a satisfactory settlement through discussions with CSW before peremptorily directing CSW to discontinue proposing the MAF. This action violated both FAR 30.605 and FAR 42.801.

The DACO compounded "her blunderbuss approach to the MAF with her erratic and unpredictable actions regarding the status of CSW's estimating system". The DACO disapproved the estimating system, then changed "disapproved" to "inadequate" and threatened CSW that it it proposed the MAF, she would consider the system to have a significant deficiency.

Because of the DACO's improper actions, CSW was unable to propose allocable, allowable, and reasonable costs totaling $21 million, the amount of the lawsuit.

Material Breach of Contract - Government Doesn't Have to Pay

Laguna Construction Company was awarded a government contract in 2003 to perform work in Iraq. After the work was completed, Laguna sought reimbursement of past costs, a portion of which the government refused to pay. Laguna sued the government for these costs at the Armed Services Board of Contract Appeals (ASBCA). The government alleged that it was not liable because Laguna had committed a prior material breach by accepting subcontractor kickbacks, thereby excusing the government’s nonperformance. The ASBCA granted the government’s motion for summary judgment on this ground, and declined to consider the merits of Laguna’s motion. Laguna then appealed to the U.S. Court of Appeals for the Federal Circuit. The Court of Appeals agreed with the ASBCA that Laguna committed the first material breach by violating the contract’s Allowable Cost and Payment clause and affirmed the ASBCA's ruling.

So what is this "prior material breach" all about and why does that give a right to the Government to withhold payment for work performed? Or, does it? We need to dig a little deeper to understand these decisions.

In February 2009, DCAA (Defense Contract Audit Agency) began an audit of Laguna's 2006 incurred cost submission. A couple of years later, DCAA disapproved about $18 million in subcontract cost, primarily because Laguna could satisfy the auditors that the subcontract prices were fair and reasonable for the services provided. In 2012, DCAA held up fourteen vouchers totaling $3 million. Laguna appealed to the ASBCA after the contracting officer failed to issue a decision.

A year before DCAA began its audit, the Government began investigating allegations that Laguna's employees were engaged in kickback schemes with its subcontractors. One Laguna project manager pleaded guilty to conspiracy to pay or receive kickbacks. He worked with subcontractors to inflate billings and personally profited from the difference. Later, a federal grand jury issued criminal indictments against three principal officers of Laguna - also for accepting kickbacks. They eventually pleaded guilty as well.

After the guilty pleas, the Government amended its answer to the ASBCA to include the affirmative defense of fraud. The Government maintained that it was not liable for Laguna's claim because Laguna breached the contract when its principal officers and employees solicited and accepted kickbacks for awarding subcontracts which constituted fraud against the United States.

Laguna argued that the Government was not authorized to withhold funds where it has accepted the subcontractor prices as reasonable during contract performance. The Government argued that Laguna's claim be denied because Laguna committed the first material breach of contract by the fraud of its employees.

According to the ASBCA and Court of Appeals,  Laguna committed the first material breach under the contract which provided the government with a legal excuse for not paying Laguna's invoices. Laguna breached the duty of good faith and fair dealing because its employees criminal acts in engaging in a kickback scheme were imputed to Laguna.

The Board found that the breaches were material because kickbacks are fraudulent. The fact that the Government has not proven that kickbacks were paid under ever voucher does not render the fraud any less material.

You can read the entire decision here.

Court of Claims Overturns GAO Late Proposal Decision

Back in 2014, Federal Acquisition Services Team, LLC (FAST) submitted a proposal to the Air Force that was ultimately rejected as undeliverable by the agency's server for exceeding the applicable size limitation (20mb). FAS appealed the Air Force's decision not to consider its proposal but the GAO (Comptroller General or CG) denied the protest on the grounds that it is the offeror's responsibility to deliver its proposal to the proper place at the proper time. Moreover, the CG didn't want to consider arguments that there was a systematic failure of the Air Force's systems even though FAST cited one additional company whose proposal was similarly rejected. You can read the entire GAO bid protest decision here.

That was not the end of the story. FAST appealed the CG decision to the U.S. Court of Federal Claims. Ultimately, the CoFC overturned the CG decision based on its findings that the CG decision was based on incomplete facts. Based on evidence provided to the CG by the Air Force, there were two other examples where a bidder's proposals were rejected as too large. Those two bidders were able to submit smaller file sizes prior to the cut-off date.

However, after the CG decision, the Air Force determined that there were seven other bidder rejections, none of which were rejected based on file size. That changed everything and it appeared that there was a systemic problem with the Government's email systems.

The CoFC granted injunctive relief to FAST ordering that

...the United States ... its Contracting Officer, its other officers, agents, servnats, employees, and representatives, and all persons acting in concert and participating with them respecting the procurement under Solicitation No. .... are hereby PERMANENTLY RESTRAINED AND ENJOINED from making an award under Solicitation No. ... unless the proposal sent by (FAST) ... is accepted and evaluated on the same terms as other proposals already accepted.

That doesn't mean FAST will ultimately be awarded the contract - it only means that the company now has a fair shot at the competition.

You can read the entire Court of Federal Claims decision here.