Government Caused Delay - Contractor Inflates its Equitable Adjustment Proposal

A contractor for the Department of Veterans Affairs filed an appeal with the Civilian Board of Contract Appeals (CBCA) for additional costs incurred as a result of extending the contract by five days because of altered and added work.

The amount of the claim was only $5,633 and included indirect costs that the contractor tried to claim as direct and some other items that were largely unsupported. The Government calculated that the contractor was only due $603, an amount the CBCA ultimately awarded the contractor.

 The contract stated that overhead and fee percentages include field and office supervisors and assistants. The contractor claimed costs for such individuals as direct costs. The contractor also claimed cost for a portable toilet that it could not support and cost for a forklift and fuel which it was unable to demonstrate a direct relationship to the work required by the contract.

The CBCA was rather critical of the contractor's approach.

The contractor's broad-brush approach, and failure to point to specific tasks or related dollars, results in an unsupported position. Impacted work may, not must, result in a change in value. Not all remaining work is necessarily impacted by a change order because non-change order work perhaps is performed as originally scheduled, or is performed earlier or later with no change in value or cost to the contractor

Contract auditors are guided to ensure that costs included in equitable adjustment claims have a strong nexus to the event giving rise to the equitable adjustment proposal or claim. It is the auditors concern that some contractors use the equitable adjustment process to "get healthy" by including costs that bear no relationship to the delay or disruption. This particular claim fell well short of the threshold for an audit so it had to have been some woke person in the contract administration department that figured out what was going on.

You can read the entire CBCA decision here.

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.

Government Uses Wrong "Standard" to Measure Damages

In 2013, the Department of Transportation awarded a contract to reconstruct 10 miles of highway and install utility conduits for six of those mile in a National Park. The contract included the "Differing Site Conditions" clause (see FAR 52.236-2).

When the contractor began work on the utility trench, it encountered what it considered to be a differing site condition. While attempting to excavate the utility trench, it encountered numerous large boulders which significantly slowed down work on the project. According to the contractor, the unusual size and concentration of the obstructions were unanticipated at the time of the bid. The Government did not agree that the unexpected boulders constituted a differing site condition.

Ultimately, contractor filed an equitable adjustment proposal for an additional $81 thousand for what it considered to be extra work associated with the unanticipated boulders. The contracting officer denied the claim on the basis that the unexpected boulders did not constitute a differing site condition. The contractor appealed the final decision to the Civilian Board of Contract Appeals (CBCA).

During discovery, it was learned that the contractor's actual cost was less than its anticipated cost for the utility trench work. Upon learning this, the Government moved to dismiss the appeal, arguing that even if a differing site condition was encountered, the contractor is not entitled to recover because it failed to demonstrate that it experienced an increase in costs due to "alleged" differing site conditions. The Government asserted that the contractor must show that it experienced an increase in cost due to the physical conditions of the site and that the contractors actual costs were less than either its bid amount or its anticipated cost for the work.

The contractor countered that the appropriate way to measure damages is the additional costs incurred due to the differing site condition, not whether the project was still profitable despite encountering the condition. The contractor maintained that it is entitled to recover the additional costs directly attributable to the differing site condition regardless of whether those costs increaced the originally estimated cost of the project. Moreover, the contractor argued that its ability to perform for less than its bid price for the project and obtain a profit is not a basis to deny it the right to claim compensation for damages associated with the differing site condition.

The CBCA agreed with the contractor. It stated that the appropriate measure of damages for a differing site condition is the additional cost incurred by the contractor as a result of the differing site condition. More specifically, the equitable adjustment for a differing site condition is the difference between what it cost it to do the work and what it would have cost if the unforeseen conditions had not been encountered. The CBCA specifically ruled that the Government was using the wrong standard to measure damages.

You can read the full text of the CBCA decision here.

Fixed Price means "Fixed Price" - Contractor Assumes Risks

The U.S. Court of Federal Claims published a decision earlier this week involving a equitable adjustment claim for increased costs under a fixed price contract.

The entire decision can be found here.

The contract called for Agility Defense and Government Services (Agility) to dispose of surplus property received from the military services as troops were departing from Iraq, Afghanistan, and Kuwait. Agility sought   $6.9 million in labor costs it incurred to process property in excess of anticipated quantities.

Under the contract, Agility was responsible for disposing all property received at designated locations regardless of quantity. There was a lot of risk in this contract because if quantities were significantly higher than expected, as they turned out to be, the chances of exceeding the firm-fixed-price were great. Mitigating this risk somewhat, was the contract provision that Agility could keep the proceeds of the sale of scrap material. Thus, if contract quantities were higher than expected, theoretically the contractor's revenue from the sale of scrap would also be higher.

Bottom line, the Court found that the Government's estimated quantities provided to prospective offerors were based on accurate historical data. Even though these estimates proved to be low in comparison to the actual quantities encountered during contract performance, the Government was not negligent in furnishing the historical data. "To be sure, Agility assumed a higher than normal risk in agreeing to a contract of this type, but that was a choice it voluntarily made. In a firm-fixed-price contract like this one, the contractor assumes the risk of controlling its costs of performance, unless it can show that the Government's estimates of quantities were negligent in some respect. The evidence does not support Agility's attempt to shift the risk to the Government and therefore Agility's claimes are denied"

Agility based its claim on three theories. First, the Government did not disclose its "superior knowledge" about scrap estimates and troop movements. Second, the historical data provided to the offerors was negligent. And third, the Government estimates were not reasonable accurate. The court denied each of these theories and denied Agility's claim for an equitable adjustment.

Contracting Officers' Decisions Must be Timely

How long does a contracting officer have before making a decision on a claim? Sixty days or a good reason why it should take longer. But the extension must be a definite date and "reasonable". A recent Board case illustrates this principle.

Brad West and Associates (Brad West) filed a request for equitable adjustment (REA) with the Department of Transportation (DOT) in June 2013. DOT granted some of Brad West's  claim but denied other portions. In February 2014, Brad West submitted a certified claim to DOT for $1.375 million. According to the Contract Disputes Act (CDA), a contracting officer has only 60 days to issue a decision or to notify the contractor of the time within which a decision will be issued. This time period is not limitless. The CDA imposes the requirement that the decision be issued within a reasonable time, taking into account such factors as the size and complexity of the claim and the adequacy of the information provided by the contract in support of the claim. In this case, the contracting officer advised Brad West in March 2014 (roughly two weeks after the claim was submitted) that it "anticipated" issuing a contracting officer's decision by December 2014, about 10 months after Brad West submitted its claim.

In May 2014, Brad West filed an appeal from the failure of a contracting officer to issue a decision on its claim ("deemed denial"). In June 2014, the Board (Civilian Board of Contract Appeals) directed DOT to issue a decision within 30 days or advise the Board as to why such a decision could not be issued.

DOT tried to rationalize its actions. DOT maintained that (i) the claim was complex, representing over half of the original contract price, (ii) the contracting officer was very busy, and (iii) the contracting officer needed more time to review the claim because of no prior involvement in the claim.

The Board thought that DOT's excuses were nonsense. It was not a new claim. Over six months prior to the claim submission, DOT had reviewed Brad West's REA. Thus it was familiar with the claim. Secondly, the idea that DOT was too busy was unpersuasive. And thirdly, the statute requires a decision be provided in a reasonable time and if DOT was too busing, it should have assigned other personnel to the review. Finally, the Board found that DOT's "anticipated" date was indefinite and not in accord with the intent of the statute to provide a date certain when the decision will be issued.

Entitlement vs Quantum

Entitlement and Quantum sound like a couple of prize fighters or characters out of an Avengers movie. But they're not. Entitlement and Quantum relate to claims against the Government (or claims against any party for that matter, but this is a Government contracting blog, after all).

If you ever submit a request for equitable adjustment (REA) or a claim under the Contract Disputes Act, there are two things you have to prove. First you have to convince the Government that you are entitled to compensation or damages and secondly, if you are entitled, you need to come to some meeting of the minds as to how much the damages. These concepts are called "entitlement" and "quantum".

Entitlement relates to whether the contract has been impaired by Government action or inaction and therefore has a right to monetary adjustment. Entitlement is a legal question.

Quantum, on the other hand is the amount of the monetary adjustment, assuming that the contractor's assertion of entitlement is proven valid.

REAs and claims are almost always going to be audited. The contract auditor is responsible for quantum issues and is discouraged from opining about entitlement issues. In reviewing quantum, the auditor will typically evaluate:

• Whether the amount proposed or claimed was incurred or estimated.
• Whether the contractor has source documents that establish that it incurred the costs at issue.
• Whether the costs submitted have been correctly allocated or charged to the contract or claim.
• Whether the costs submitted are allowable, pursuant to FAR 31.205 costs principles and contract terms.

Auditors, while performing the above audit steps, may gain some insight into entitlement issues as they go about their work evaluating quantum. Meaningful observations regarding the question of the contractor's entitlement to recover delay damages will be reported.

Contractors who feel that they have a claim against the Government over some contract issue almost always come out better when they have legal assistance. Legal assistance is expensive but sometimes you get what you pay for. By relying on professional expertise, contractors can get back to doing what they are good at - managing contracts.