A CONTRACTOR’S GUIDE TO…
PRESENTED BY:
CARES Act
In one of its first major responses to the
pandemic, the Government initiated the
Coronavirus Aid, Relief, and Economic Security
Act (“CARES Act”), which was signed by President
Trump on March 27, 2020. The Cares Act
provides some guidance on and public policy
considerations for how a government agency
might respond to its contractors and what
assistance may be available to them.
OTHER KEY DOCUMENTS
March 20, 2020, Office of Management and Budget, MEMORANDUM TO
THE HEADS OF EXECUTIVE DEPARTMENT AND AGENCIES, SUBJECT:
Managing Federal Contract Performance Issues Associated with the
Novel Coronavirus (COVID-19)
March 30, 2020, Office of the Under Secretary of Defense
Memorandum, SUBJECT: Managing Defense Contracts Impacts of the
Novel Coronavirus
April 8, 2020, Office of the Under Secretary of Defense Memorandum,
SUBJECT: Class Deviation – CARES Act Section 3610 Implementation
POTENTIAL AREAS OF RECOVERY UNDER THE CARES ACT AND
RELATED GOVERNMENT GUIDANCE
Changes (FAR 52.243-1 or 52.243-2)
Contractor directed to perform additional or out-of-scope work
Others include:
Contract Terms and Conditions for Commercial Items (FAR 52.212-4)
Excusable Delays (FAR 52.249-14)
Stop work orders (FAR 52.242-15)
“The Contracting Officer shall make an equitable adjustment in the delivery schedule
or contract price, or both, and the contract shall be modified, in writing, accordingly
…”
Other Common Theories of Recovery
Suspension due to bid protest (FAR 52.233-3)
Same as FAR 52.242-15
Revision to technical data (FAR 52.227-21)
“The Contractor may submit a request for an equitable adjustment to the terms and
conditions of this contract for any revisions to technical data made pursuant to this
paragraph.”
Differing site condition (FAR 52.236-2)
“If the conditions do materially so differ and cause an increase or decrease in the
Contractor’s cost of, or the time required for, performing any part of the work under
this contract, whether or not changed as a result of the conditions, an equitable
adjustment shall be made under this clause and the contract modified in writing
accordingly.”
Failure to include Service Contract Act wage determination (FAR 22.1015)
“The contracting officer shall equitably adjust the contract price to reflect any
changed cost of performance resulting from incorporating a wage determination or
revision.”
Claims vs. Requests for Equitable Adjustment (REA)
Claims
▪ 4-prong certification if claim is over
$100K
▪ Must request CO decision
▪ Must state sum certain
▪ Costs of preparation are
unallowable
▪ CDA interest starts to accrue when
CO receives claim
▪ CO decision may be appealed by
contractor.
REAs
▪ 2-prong certification if claim is over
$150K (DOD agency)
▪ Request negotiation
▪ Contain statement of basis for
compensation and pricing logic
▪ Costs of preparation are allowable
contract administration costs
▪ Does not trigger CDA interest
▪ If CO issues a decision, it is
ordinarily not a final decision that
may be appealed, but may be
converted to a CDA claim
Request for Equitable Adjustment (REA)
FAR 52.243-1, Changes – Fixed-Price
Unilateral changes – authorizes the contracting officer to make changes
within general scope of contract
Drawings, designs, or specifications
Method of shipment or packing
Place of delivery
Right to equitable adjustment
“(b) If any such change causes an increase or decrease in the cost of, or the time required for,
performance of any part of the work under this contract, whether or not changed by the order,
the Contracting Officer shall make an equitable adjustment in the contract price, the delivery
schedule, or both, and shall modify the contract.”
Must assert right to adjustment within 30 days of written order
REA is matter of contract administration
Based on FAR clause/order
Generally entitlement to some amount not in dispute
Costs preparing REA are allowable whereas costs of pursuing or defending a
claim are expressly unallowable
Interest based on the guidance of the Contract Disputes Act accrues under a claim
whereas interest does not accrue under a REA
Claims
Definition of a “claim”
A “claim” is “a written demand or written assertion by one of the contracting
parties, seeking, as a matter of right, the payment of money in a sum certain, the
adjustment or interpretation of contract terms, or other relief arising under or
relating to a contract.” FAR 2.101
Note that a claim seeking payment in excess of $100,000 must be certified to
qualify as a “claim.”
What is not a claim?
Routine requests for payment (invoices, vouchers, etc.)
Request for Equitable Adjustment (REA) (can be converted into a claim)
Claims
Who can be a claimant?
Normally, only parties to the contract (the prime contractor and the
government)
Subcontractors, sureties, financial institutions, and others may not bring
claims
While a subcontractor cannot file a claim directly with the government, a
prime contractor can sponsor claims on behalf of its subcontractors
Claims
What must a claim include:
The demand or assertion must be in writing
Seeking as a matter of right:
Payment of money in a sum certain
Adjustment or interpretation of contract terms
Other relief arising under or relating to the contract
Has been submitted to the contracting officer for a decision
Contain explicit request for the contracting officer’s final decision,
although implicit requests may prove sufficient
Contain CDA Certification (language in 41 U.S.C. § 7103(b))
After Submission of a Claim
After submitting a claim while awaiting a COFD (and after!), a contractor still
has a continuing duty to perform, pending resolution of a dispute
If work stops, the contractor risks termination for default
Best practice is for the contractor to continue performance under protest and seek
a declaratory judgment that it is entitled to suspend performance
Statute of Limitations for Filing a Claim under the CDA
Statute of limitations
A contractor must submit a proper claim to the contracting officer within
six years of accrual
“Accrual” Analysis
“Accrual of a claim means the date when all events that fix the alleged liability of
either the government or the contractor and permit assertion of the claim, were
known or should have been known. For liability to be fixed, some injury must have
occurred. However, monetary damages need not have been incurred.” (FAR 33.201)
Analysis turns on what facts are objectively and reasonably knowable, not what a
party subjectively understood
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What Constitutes a Sum Certain?
A claim states a “sum certain” if the government can determine the amount
of the claim using a simple mathematical formula
Best practice is to expressly demand payment of a specific amount
Claims based on estimates are acceptable if the contractor identifies what
part of the claim relies on estimates and explains how the contractor arrived
at those estimates using actual cost data
Generally, best practice is to exercise caution when using estimates to avoid a
government counterclaim for fraud or misrepresentation
Under the enlarged claim doctrine, a BCA or the COFC may exercise
jurisdiction over a dispute that involves a sum in excess of that presented to
the contracting officer for a final decision if:
The increase is based on the same set of operative facts previously presented to
the contracting officer; and
The contractor neither knew nor reasonably should have known, at the time when
the claim was presented, of the factors justifying an increase in the amount of the
claim.
Effect of a Change Order
Subject to LOC / LOF clauses and ceiling price of T&M contract,
contractor is obligated to perform changed work
If there is a change in the cost of performance or time required
to perform as a result of a Change Order, contract is to be
equitably adjusted
Adjustment may be additive or deductive
Adjustment covers total impact of Change Order, not just
impact on changed work
Pricing of Change Orders
Except for construction contracts, contractor must assert right
to adjustment within 30 days of receipt of Change Order and
before final payment
Change order accounting (FAR 52.243-6)
Pricing of adjustments clauses in agency supplements makes
cost principles applicable to change orders
Change Order Accounting Procedures.
FAR 43.203
The contracting officer should advise offerors of the possible
need to revise their accounting procedures.
The following direct costs normally are segregable and
accountable:
Non-recurring costs (e.g., engineering costs and costs of obsolete
or re-performed work).
Costs of added distinct work caused by the change order (e.g.,
new subcontract work, new prototypes or new retrofit or backfit
kits).
Cost of recurring work (e.g., labor and material costs).
Importance of REA and Claim Pricing
Done last and reviewed first
Pricing drives the decision-making process
Government often ignores entitlement and defends claim with attack on
quantum
Requires coordinated cross-functional team effort
Contractor risks
False Claims, fraud
Defective pricing under TCPD/TINA
Disapproval of estimating system and possibly others
A Swing and a Miss: Recent Decisions Where
Contractors Failed to Prove Entitlement
Sang Kash Co., ASBCA No. 62148 (March 9, 2020)
Claim dismissed where contractor did not first submit it to the contracting officer
for final decision.
FAR 2.101 defines “claim,” in relevant part, as “a written demand or written
assertion by one of the contracting parties seeing, as a matter of right, the
payment of a sum certain.”
NVS Techs., Inc. v. Dept’ Homeland Security, CBCA No. 4775 (March 5, 2020)
Board denied a claim for bad faith termination for convenience.
Contractor failed to present evidence to overcome presumption that government
officials act conscientiously in discharging their duties.
Korea Eng’g Consultants Corp., ASBCA No. 61724 (Feb. 24, 2020)
Appeal alleging breach of contract denied where contractor failed to meet its
burden of proof.
Generally, government not liable for damages resulting from action of third
parties.
18
Recent Decisions Regarding Quantification
And Proof Of Damages
King Aerospace, ASBCA No. 60933 (Apr. 15, 2019)
Appeal sustained, but Board took contractor to task for its quantum analysis.
Board noted that contractor’s quantum case “paints with too broad a brush.”
“It is not the case that King ‘could not have contemporaneously identified and
quantified every discrete impact of each of the many thousands of deficient
aircraft conditions and parts through change order accounting’ or could not have
‘after the fact, waded through the hundreds of thousands of aircraft records.’”
(quoting contractor’s brief).
“Rather than identify specific deficiencies and cost them directly, King estimates
that the aircraft and inventory conditions are responsible for most of its El Paso
labor costs above its average labor costs during a ‘measured mile’ that was
unaffected by those conditions. That estimate is unconvincing.” (citations omitted)
Where to Start From a Cost Perspective
Objective is to calculate the increased cost of the changed work
Contractor should be in the same profit or loss position as if no change occurred
Generally broken out into four components:
Calculating costs directly attributed to added work
Calculating costs directly attributable to eliminated work
Calculating overhead and profit for costs attributable to changed work
Contract administration costs
20
Where to Start From a Cost Perspective
FAR 15.408, Table 15-2(III)(B), provides the format for change orders,
modifications, and claims
Recently increased $2 million in 2018 NDAA
Seven components:
Cost elements (materials, services, direct labor, indirects, other costs)
Estimated costs of all work deleted
Cost of deleted work already performed
Net cost to be deleted
Estimate for cost of work added by the change
Net cost of change
References--documentation supporting specific cost elements
21
Where to Start From a Cost Perspective
FAR Part 31, Contract Cost Principles and Procedures, applies to
modifications, but its application must result in an “equitable adjustment”
FAR 31.201-2, allowability requirements:
Reasonableness – No presumption of reasonableness
Allocability
CAS (if applicable), GAAP as appropriate
Terms of the contract
FAR Subpart 31.2 limitations
22
Where to Start From a Cost Perspective
Consistent Accounting Practices
By Cost Element
CASB DS-1 (if applicable)
Estimated and/or Actuals. Actuals are preferred over estimates
Consistent to policies
23
Impact by Cost Element
Direct Labor
• Added Work
• Larger Crews
• Overtime
• Idle Time or
Layoffs
• Detection or
Correcting of
Problem
• Discussions with
Government
• Coordination with
Subcontractors
• Loss of Efficiency &
Learning
• Impact on Labor
Rates
Materials,
Subcontracts &
ODCs
• Material Prices
• Pricing Inventory
• Scrap, Spoilage,
Rework, Obsolete
Materials, etc.
• Storage
• Market Conditions
• Supplier Terms
Indirect Costs
• Consistency with
Current Accounting
Practices
• Application of
Forecasted Rates
due to Timing of
Scope
• Shifting of work
between years
• Corporate
Allocations
• Change in Sales
• Impact on Other
Costs
Profit
• Not Precluded
• But Not for
Suspension of
Work or
Government Delay
• Generally
Consistent with
Proposal and
Company practices
24
Impact on Profit
Not precluded
But not for Suspension of Work or Government Delay
Consistent with Proposal and Company practices
Weighted Guidelines
o Not required for a Contractor but a good tool to identify the Government’s position
Historical Data
Policy
25
Pricing Methodologies: Actual Cost Method
Actual cost data is the preferred method for proving costs
Requires early recognition and establishment of separate job cost codes
Best evidence available under the circumstances
Key point: establish connection to government conduct
Cumulative impact of multiple changes
FAR 52.243-6, Change Order Accounting
▪ Permits CO to order the accumulation of actual costs
▪ Contractor must indicate in its proposal which proposed costs are actual and which are
estimates
Pricing Methodologies: Estimated Cost Method
REAs/claims often require some type of estimates
▪ Cost of deleted work
▪ Actuals are unavailable for added work
▪ Lack of segregation
▪ Future impacts
Good faith estimates are preferred when actual costs are not available
Support: detailed substantiating data or reasonably verifiable cost experience
Methods include:
▪ Buildup through studies, use of subject matter experts (SMEs)
▪ Analogy/actual cost of single event
▪ Parametric/cost estimating relationship
▪ Engineering build-up
Pricing Methodologies: Total Cost Method
Difference between the bid cost/price and actual cost
Disfavored; assumes entire cost overrun is government’s fault
▪ Fails to identify specific extra costs caused by changes, differing site conditions, or delays
Four factors the contractor must show:
▪ Impracticality of proving actual costs
▪ Contractor’s bid was realistic
▪ Reasonableness of its actual costs
▪ Lack of responsibility for added costs
Pricing Methodologies: Modified Total Cost Method
Contractor may adjust the total cost method to account for other factors
Two elements of the total cost method computation are adjusted:
▪ Original costs in the contract price
▪ Total costs of performance
Goal of adjustments: eliminate amounts for which the government is not responsible
May occur in situations where the bid was not realistic or there were other causes for
the extra costs
Pricing Methodologies: Discrete Cost Build
Provides for direct quantification of any increased costs
Ties increased costs to contract changes (i.e., claim elements)
Most precise method; generally preferred
Often used for termination settlement proposals
Pricing Methodologies
Audit Process
Audits should be expected on substantial claims and terminations
REAs are often audited prior to negotiations
Post-completion audits typically occur prior to close-out on contracts with multiple,
major change orders
Expect the auditor to find something – be prepared
Proper documentation to support the claimed costs is key
Review supporting documentation prior to the audit and identify any potential gaps - leave no
surprises for your company to the audit itself
Organize the support documentation and make available to the auditor
Make sure your company is leading the narrative of the audit
Best Practices for Claim Package
Well-supported claims can achieve quicker and more favorable settlements.
Provide a narrative that tells your story and justifies each claim element
Include all records to substantiate claim elements For example:
Accounting/Job cost records
Timekeeping or Equipment Usage records
Narrative – Entitlement and Quantum
Keep claim and support materials in digestible pieces/easy to understand
Be conscious of organizational impact: Technical, Accounting, Legal
Claim elements should be credible to avoid additional scrutiny and slowing the process
Submissions should be easy to understand
Remember preparation costs may be directly recoverable depending on the vehicle
May consider separating your claim into two where you know CO agrees with only certain
pieces
Ensure the cost workbook is realistic and well organized
Best practice is to start with the proposal and work from there
Charts and attachments
Dealing with the auditors
It’s a negotiation
33
Sources of Supporting Documentation
Accounting Records
Engineering Log Books
Time Records
Travel Records
Visitor Logs
Meeting Documentation
Correspondence
Program Status Reports
Activity Reports
34
Maximizing Your Recovery: Best Practices
Be proactive, and start early.
Document, document, document
Know your contract.
▪ Need to be able to recognize that a change has been made to the contract
▪ Provide government with timely notice of the change
Identify potential changes, and segregate increased cost immediately.
▪ Use a unique project code to separately accumulate these increased costs.
▪ Project may require change order accounting.
Leverage cross-functional cooperation and communication (i.e. engagement of
contractor’s legal, contracts, and pricing teams)
Support estimates with sufficient levels of detail; any bases of estimate used to
calculate costs should be documented and verified.
Maximizing Your Recovery: Best Practices
Regularly update contract schedules to reflect changes as they occur, especially in the
case of any performance delays.
Be cognizant of cost allowability under certified claims and REAs:
▪ Negotiations/contract administration costs should be segregated from claim costs.
▪ Costs should be scrubbed for unallowable costs.
Manage/avoid broad release language (“known or unknown”) due to unintended
consequences.
Anticipate DCAA challenges to estimates used and prepare justifications for use of such
estimate for items like:
▪ Relevance, causation, reliability of increased costs data
▪ Unallowable costs
▪ Labor hour reasonableness
▪ Attorney, accountant, and consultant fees
▪ Profit
▪ Interest on claim
