Pricing and Negotiating Requests for Equitable Adjustments and Resolving Claims

McKenna Government Contracts,

continuing excellence at Dentons

Request for Equitable Adjustment

(REA) and Claim Pricing

January 12, 2016

• Disputes Process Overview

• Claim v. REA

• Basic Entitlement Theories

• Pricing Considerations

• Methodologies

• Application to REA/Claim Types

• Pricing Added/Deleted Work

• Overhead and Profit Issues

• Special Situations (e.g., subcontractor pricing issues)

• Recent Developments

• Best Practices for Development, Pricing, Negotiating, and Resolving

REAs and Claims

Agenda

• Request for Equitable Adjustment (REA): a “Proposal” for Additional

Compensation as a Result of Certain Circumstances or Government

Conduct

• Examples:

• Changes Clause (FAR § 52.243-1): CO “Shall Make an Equitable Adjustment”

• Differing Site Conditions (FAR § 52.236-2): “[A]n equitable adjustment shall be made” if differing

site conditions increase Contractor’s cost.

• Government Property (FAR § 52.245-1): For unsuitable government property, CO “shall consider

an equitable adjustment.”

• Suspension of Work (FAR § 52.242-14): “[A]n adjustment shall be made” for CO actions that delay

and increase the cost of performance.

• DoD Requires Contractors to Certify REAs are Submitted “In Good Faith”

and “Supporting Data are Accurate and Complete.” DFARS § 252.243-

7002

• TINA Certification may be Required if REA Valued Above $750,000, the

Contract is Non-Commercial, and Contract Price will be Modified.

REA Overview

• Contract Disputes Act (CDA), 41 U.S.C. §7101 et seq.; FAR Subpart

33.2

• Governs Disputes “Arising Under” or “Related to” a Government Contract

• Certified Claim to the CO

• A Non-Routine “Written Demand or Written Assertion”

• “Seeking, as a Matter of Right”

• “Payment of Money in a Sum Certain, the Adjustment or Interpretation of Contract Terms, or

Other Relief”

• CDA Certifications:

• FAR § 52.233-1, CDA Certification: Claims Exceeding $100,000

• Elements: Claim is made in good faith; supporting data is accurate and complete to the best of the

Contractor’s knowledge and belief; the amount requested accurately reflects the contract

adjustment for which the Contractor believes the Government is liable; the person submitting the

claim is authorized to certify the claim on the Contractor’s behalf

• Proper Certifying Official

CDA Overview

• Basic Legal Entitlement Grounds:

• Constructive Changes/Scope Changes

• Added or deleted work absent a change order

• Improper contract interpretation

• Defective specifications

• Superior government knowledge

• Interference/failure to cooperate/bad faith

• Unreasonable inspection/acceptance

• Stop Work Orders/Government Suspension of Work

• Government Delay/Acceleration

• Government Property

• Differing site condition

• Value Engineering

REA/Claims—Legal Entitlement Theories

• CDA Claims v. REAs

Contract Administration v. Prosecution of Claims

• General rule: REA costs may be allowable; Claim costs

generally unallowable

• REA Costs

• Tip Top Constr., Inc. v. Donahoe, 695 F.3d 1276 (Fed. Cir. 2012)

• Fees associated with “the realm of negotiation and genuine contract administration” are allowable,

even if negotiations fail and result in a claim

• Moshe Safdie & Assocs., Inc. v. Gen. Servs. Admin., CBCA 1849, 14-1 BCA ¶ 35,564

(Mar. 13, 2014)

• REA preparation costs are allowable

• See also Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541, 1550-51 (Fed Cir.

1995) overruled on other grounds, Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir.,

1995).

• Claim Costs

• FAR§31.205-47 disallows costs associated with both prosecution and defense of non-

fraud CDA claims

Allowability of REA Costs v. Claim Costs

• Done Last/Reviewed First

• Pricing Drives the Decision-Making Process

• Government Often Ignores Entitlement and Defends Claim with Attack on

the Amount Claimed

• Requires Coordinated Cross-Functional Team Effort

• Contractor Risks

• False Claims/Fraud

• Defective Pricing/TINA

• Disapproval of Estimating System, Possibly Others

Importance of REA/Claim Pricing

• Objective: Calculate the Increased Cost of the Changed Work

• Place Contractor in Same Profit or Loss Position as If No Change Occurred

• Fundamentally Cost-Based Pricing

• Generally broken out into four components:

• Calculation of costs directly attributable to added work

• Includes increased costs based on constructive changes

• Calculation of costs directly attributable to eliminated work

• Calculating overhead and profit for costs attributable to changed work

• Contract administration costs

• Reasonable Cost, Not Value

• No Presumption of Reasonableness

General Pricing Considerations

• FAR § 15.408, Table 15-2 III(B) Provides Guidance Relating to Change Order, Modification

and Claim Pricing

• FAR Part 31 Applies to Contract Modifications; However, Application Must Result in

“Equitable Adjustment”

• Reasonableness

• Allocability

• Conformity with Cost Accounting Standards (CAS), if applicable, GAAP and circumstances

• Consistent with terms of the Contract

• Conformity with limitations of FAR Subpart 31.2

• Contractor Burden of Proof: (1) Entitlement, (2) Causation, and (3) Amount/Quantum

• Amount: No Need for Absolute Certainty—“Reasonable Basis”:

• BPLW Architects & Engineers, Inc. v. United States, 106 Fed. Cl. 521, 544 (2012) (“The amount of

damages may be approximated, but only if a reasonable basis of computation is afforded.”) (internal

quotation marks omitted).

• Tension with fraud cases: when do a contractor’s unreasonably calculated damages

constitute a false claim?

General Pricing Considerations (Cont.)

• Forfeiture

• Claim is forfeited if claimant attempts to defraud the government with the claim.

• 28 U.S.C. § 2514. See also Daewoo Engineering and Construction Co. Ltd. v. United States, 557

F.3d 1332 (Fed. Cir. 2009) (entire claim can be forfeited when part of claim was fraudulently inflated

as a “negotiating ploy”); Horn & Associates, Inc. v. US, 123 Fed. Cl. 728 (2015) (any fraudulent

invoice submitted during contract performance may waive later claim).

• Jurisdiction

• Exclusive jurisdiction vested in Court of Federal Claims to render judgment of forfeiture. 28 U.S.C.

§ 2514.

• Board has no jurisdiction to hear the fraud case.

• Board may – but need not – dismiss a claim pending resolution of the fraud case.

• Compare KBR, Inc., ASBCA No. 57530, 13 BCA ¶ 35,243 (Feb. 20, 2013) (substantial similarity

between FCA and claim warranted dismissal of Board case without prejudice) with ERKA

Construction Co., 12-2 BCA ¶ 35,129 (Aug. 16, 2012) (fraud issues readily distinguishable from

the issues in the Board case, case can go forward).

General Pricing Considerations (Cont.)

Pricing Methodologies

• Elements of Cost Method

• Direct Labor

• Direct Materials

• ODCs (e.g., Subcontractors, Travel, IT)

• Overhead/G&A

• Profit

• FAR §15.404-4 Weighted Guidelines/Factors (Complexity, Risk, Capital Employed)

• Contract Rate

• Contract Exclusion—e.g., FAR 52.242-14, Suspension of Work

• Contract Caps/Clauses

• Actual Cost Method

• Preferred Method

• Requires Early Recognition/Establishment of Separate Job Cost Codes

• Certain Entitlement Theories Present Difficulties (e.g., interference)

• Establish Connection to Government Conduct

• Cumulative Impact of Multiple Changes

• Change Order Accounting Requirement

• FAR § 52.243-6: For changes over $100,000, CO “may require change order accounting,” which

requires the contractor to maintain separate accounts or otherwise segregate changes allocable to

the change. Applies “until the parties agree to an equitable adjustment for the charges…or the

matter is conclusively disposed of.”

• Applies when CO issues change order and may apply to constructive changes. See, e.g., Svc. Engineering Co.,

ASBCA No. 40274, 93-1 BCA ¶ 25,520 (Oct. 13, 1992).

Pricing Methodologies (Cont.)

• Estimated Cost Method

• Claims/REAs Often Require Some Type of Estimate(s)

• Actuals unavailable/lack of segregation

• Future impacts

• Methods Include:

• Buildup through studies, use of Subject Matter Experts (SMEs)

• Analogy/Actual cost of single event

• Parametric/Cost Estimating Relationship (CER)—”top-down” [e.g., number of work-stations]

• Weighted average—3 or more similar projects

• Engineering build-up

• Keys:

• Detail of analysis

• Ability to tie directly to impact

• Validity of any comparison

• Experience/Training of personnel

Pricing Methodologies (Cont.)

• Total Cost Method

• Difference Between the Bid Cost/Price and Actual Cost

• Disfavored, Because it Assumes the Entire Cost Overrun is the Government’s Fault

• Elements—Contractor Must Show:

• The impracticability of proving its actual costs

• The reasonableness of its bid

• The reasonableness of its actual costs

• A lack of responsibility for the added costs

• Modified Total Cost Method

• Total Cost Method

• Adjusted for any Deficiencies in the Contractor’s Proof in Satisfying the Requirements of

the Total Cost Method

• Jury Verdict

• Least Favored

• Requires clear proof of injury, no more reliable method for calculating damages, sufficient

evidence for a fair and reasonable approximation

• Price Adjustment Should Equal the Amount of Cost the Contractor Would

Have Incurred Had the Work Been Performed (“Would-Have-Cost” Rule)

• See, e.g., EJB Facilities Servs., ASBCA No. 57547, 13 BCA ¶ 35,399 (Aug. 28,

2013); Celesco Indust., Inc., ASBCA No. 22251, 79-1 B.C.A. ¶ 13,604 (Nov. 30,

1978).

• If contractor is in a loss position, contractor must bear loss that it would

have incurred had the change not been issued.

• See. e.g., Fox Constr. Inc., ASBCA No. 55265 et al., 08-1 BCA ¶ 33,810 (Mar.

5, 2008); S. N. Nielson Co. v. United States, 141 Ct. Cl. 793 (1958).

• On the other hand, a contractor is permitted to show that it could have

performed the work for less than its original estimate – entitled to retain

excess amount.

• See, e.g., Dan G. Trawick III Contractors, ASBCA No. 47779, 98-2 BCA ¶

29,781 (May 13, 1998); Admiral Corp., ASBCA No. 8634, 1964 B.C.A. ¶ 4161

(Mar. 24, 1964).

Pricing Deleted Work

• Exception to “Would-Have-Cost” Rule: “Severable” Deletion:

• Where separately priced item of work is deleted, adjustment measured by the

stated contract item price v. “would-have-cost”

• Government Burden

• Can deprive contractor of high profit it would have earned if it had performed

the deleted work; or save the contractor from the loss it would have incurred if it

had to perform the work

• Key test: whether deleted work is actually severable from other line items, or

whether award was made on “aggregate” basis. See EJB Facilities Servs.,

ASBCA No. 57547 (2013)

Pricing Deleted Work (Cont.)

• Contractor entitled to overhead and profit as part of an equitable

adjustment that increases performance costs

• May be limited by contract terms

• Conversely, government can reduce overhead and profit amounts on changes

that delete work

Overhead and Profit

• For changed work with minor cost increases, use of ordinary overhead

rates may be appropriate

• For changed work with significant cost increases, parties may negotiate

specific overhead rates/costs

• Treatment of overhead costs for changed work must not violate contractor’s

established accounting practices

• E.g., Contractor cannot treat site overhead as both a time cost and as a percentage add-on cost.

M.A. Mortenson Co., ASBCA No. 40750, 98-1 B.C.A. ¶ 29,658.

Overhead

• Contractor entitled to fair profit for changed work.

• Even if contractor was not going to recover profit on the unchanged work (see e.g.,

Stewart & Stevenson Srvs, Inc., ASBCA No. 43631, 97-2 B.C.A. ¶ 29,252 (Sept. 23,

1997))

• Contractor generally required to reduce profit relating to changes that reduce

costs (see e.g., Keco Indust., Inc., ASBCA No. 15131, 72-1 B.C.A. ¶ 9,262 (Dec.

3, 1971))

• If, however, the contractor is not earning any profit, there is no requirement to reduce

profit related to deleted work (see e.g., States Roofing Corp., ASBCA No. 55507, 09-1

B.C.A. ¶ 34,094 (Mar. 4, 2009))

• Amount of profit to be added or deducted as part of equitable adjustment is a

matter of negotiation

• For minor changed work, contracting parties can use profit rate in original contract (or

other reasonable amount)

• For major changed work, parties negotiate profit based on weighted factors (FAR §

15.404-4(b)(1)-(d); DFARS §§ 215.404-4(b), 215.404-71-1): work complexity, effort,

contractor risk, etc.

• Profit for changed work may be limited by special contract clauses/caps

Profit

• Changes

• Government Delay v. Concurrent Delay (e.g., FAR § 52.242-17)

• Excusable Delay v. Compensable Delay (e.g., FAR § 52.249-8)

• Excusable Delays (e.g., FAR 52.249-8): Acts of God, Acts of Government in Sovereign or Contractual Capacity,

Fires, Floods, Epidemics, Strike, Unusually Severe Weather

• Beyond Control and Without Fault of Contractor

• Subcontractors: (1) Without Sub Fault; (2) No Other Source

• Cost Elements: Idle Labor and Equipment, Rental Equipment, Loss of Efficiency

(“Measured Mile”), Escalation of Labor Costs; Performance in Later/ Costlier Time

Period, Other (e.g., Storage, Additional Bond Premium Amounts)

• Acceleration:

• Contractor Effort to Make Up for Excusable Delays

• Cost Elements: Excess Labor, Overtime Premiums, Material Cost (expediting), Adverse

Conditions, Loss of Efficiency

• Impact on Other Work

• Profit Generally Not Permitted

Special Situations—Pricing Delays

Special Situations—Pricing Delays (Cont.)

• Unabsorbed Overhead—Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶

2688 (July 29, 1960):

• Three Conditions:

• Government-caused delay

• Contractor was on “Standby” (Delay=Uncertain, Indefinite Duration)

• Accordingly, if actual overhead is allocable to the project, then Eichleay is inapplicable. See Shirley Contracting

Corp., ASBCA No. 29848, 1984 WL 582414 (Dec. 27, 1984); Excavation-Construction, Inc., ENGBCA No. 3858,

82-1 BCA ¶ 15,770 (Apr. 30, 1982).

• Contractor could not have taken on additional work

• Calculation Method:

• (Total Contract Billings / Total Company Billings) x Total Home Office Overhead During Contract =

Overhead Allocable to the Contract

• (Allocable Overhead / Days of Contract Performance) = Daily Contract Overhead

• Daily Contract Overhead x Number of Days of Delay = Unabsorbed Overhead

• Still commonly used formula.

• Nicon, Inc. v. United States, 331 F.3d 878, 888 (Fed. Cir. 2003); Tulsa Mid-W. Constr. Co., ASBCA

No. 55173, 07-2 BCA ¶ 33,646 (Aug. 2, 2007).

• Subs Typically Cannot File Claims Directly with the Government—No

Privity of Contract

• Prime must “Sponsor” sub claims to Government and there must be “line of

privity” between the subcontractor and the government

• Severin v. United States, 99 Ct. Cl. 435 (1943) (Prime cannot sue Government on behalf of a

sub unless the Prime is itself liable to the sub)

• Any Sub Claim Exceeding $100K Must Include Proper CDA Certification

Language from 41 U.S.C.§ 7103(b)(1)

• Sub REAs arising from DoD Contracts must include DFARS § 252.243-7002

certification language

• Prime should reject any deviations to certification language in sub claims/REAs

• Prime Certification of sub claims can be based on “Good Grounds,” see

Transamerica Ins. Corp. for and on behalf of Sharp Sheet Metal Works v.

United States, 973 F.2d 1572 (Fed. Cir. 1992), overruled on other grounds by

Reflectone v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995).

Special Situations—Subcontractor Claims

• Apply Prime’s Overhead and Profit to Sub Claims

• Understand and Vet Sub’s Claim/REA Pricing Method

• Pricing methodology

• Factual support

• Flow-down audit clauses to facilitate Prime’s review of sub’s financial data

• Obtain, Review, and Submit Sub Cost or Pricing Data if the REA Exceeds the

TINA Threshold ($750,000) if applicable

• Non-commercial

• Will result in modification

• Agreement on price

• Obtain Sub’s Agreement to be Bound to Result of Final Amount Determined Due

under Claim

Special Situations—Subcontractor Claims (Cont.)

• DMS Imaging, Inc. v. United States, 123 Fed. Cl. 645 (2015)

• Government liable for MRI machine leased after it was destroyed in a fire.

• Cost elements:

• Fair market value of machine

• Lease payments due after destruction of equipment

• Contractual late fees and service fees

• Attorney’s fees

• CDA interest

• SUFI Network Servs., Inc. v. United States, __ Fed. Cl. __, 2015 WL 7954529

(2015).

• COFC denied the contractor's claims for overhead and profit on the attorneys' fees previously awarded because there

was no contractual basis for the recovery.

• Contractor equitably estopped from changing the method used to calculate its attorneys' fees from the traditional

lodestar method to an approach based on the amount it was required to pay the law firm under the contingent fee

agreement.

• Though not technically a CDA case, “the parties likely would accept such a result as being typical in federal

procurement law.”

• May be persuasive in future cases.

Recent Developments

Best Practices

• Be Proactive/Start Early

• Cross-function Cooperation and Communication (Legal/Contract/Pricing)

• Identify Potential Changes and Initiate Segregation of Increased Costs

Immediately

• Assign separate cost accounting number

• Contract may require change order accounting (FAR § 52.243-6)

• Document Estimates in Sufficient Detail and Verify Bases of Estimate

• Delays: Regularly Update Schedule to Reflect Changes as They Occur

• Cost Allowability: Clearly Draw Lines between Negotiations and Contract

Administration and Certified Claims

• Manage/Avoid Broad Release Language (“known or unknown”) May Have

Unintended Consequences

• Preserve Delays, Cumulative Impact

Best Practices (Cont.)

• Scrub Carefully for Unallowables

• Anticipate DCAA Challenges to Estimates:

• Relevance/Causation/Reliability of Increased Costs Data

• Unallowables

• Reasonableness of Labor Hours

• Attorney/Accountant Fees

• Profit

• Interest on Claim

Questions?

Steven M. Masiello

Partner

Government Contracts

303.634.4355

[email protected]

Joel M. Pratt

Associate

Government Contracts

303.634.4324

[email protected]

Thank you

Dentons US LLP

1400 Wewatta Street

Suite 700

Denver, CO 80202-5548

United States

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand

Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising

quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected

to the communities where its clients want to do business, Dentons knows that understanding local cultures

is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the

world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and

global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

www.dentons.com.

© 2015 Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal advice and you should not take, or refrain from taking,

action based on its content. Please see dentons.com for Legal Notices.