Understanding the Clause
Pricing the Change
Accord & Satisfaction
To discuss a specific matter involving:
• Formal changes;
• Constructive changes like;
Changes in acceptance criteria,
Differences in interpretation,
Protest after Award,
Stop Work Order,
Delinquent customer furnished property,
Delinquent customer furnished information,
Unsuitability of furnished material or information, or
Differeing Site Condition;
• Delays, disruptions, performance inefficiency or unabsorbed overhead;
• Quantification of damages;
• Preparing Request for Equitable Adjustment (REA) proposals,
contact us and speak with one of our expert government contract consultants.
Managing Requests for Equitable Adjustment (REA) for
Constructive Contract Changes and Claims in
Federal Government Contracts
(Last updated Jul 2019)
It is often said that no plan survives first contact with the enemy. Remarkably this adage is often true for that stack of paperwork known as a government contract.
Contract changes, particularly for constructive changes, can happen for a variety of reasons like a Protest after Award, Differing Site Condition, the delinquent delivery of government furnished property or information, or the unsuitability of whatever government property or information was furnished by the government. The change could be caused by a delay caused by the government’s failure to provide permits or give the notice to proceed in a timely manner or some other event that causes work to stop.
The causes are many and they are common. There are even provisions that enable the government to change the work itself and they often are to accommodate a change in the government’s actual needs or performance standards. Changes can even be made in contracts covering work as predictable as commercial items.
The prospect for contract changes is so likely that not only does every government contract already contains provisions governing these situations they are required clauses for every government contract. The effect of having all these clauses in a government contract is twofold.
First, the existence of these clauses and the solutions they contemplate, ensures that contract performance can continue without breaching the contract should the government determine that its actual needs are now different. As a result, the government can get what it needs in an efficient and economic process.
Second, contractors need not build in provisions for these kinds of unknowns into their contract prices. Instead, they can submit their leanest and most competitive price for just the work described, since, as will be described later, the government assumes the risks should these unknowns actually occur. Thus, it not what is often parroted in the news media that the contractor’s price includes all of these contingencies. In fact, many times the so called overruns for which contractors are often disparaged in the news media are caused by the very things covered by these clauses and for whose risk the government has assumed.
In a period of constrained budgets this element has considerable appeal for both parties. The government benefits when it receives the leanest possible price from the contractor, which means procurement dollars can go further. The contractor benefits when it can offer its most competitive price and improve its chance for winning the award.
While there is an upside to having all these clauses in the contract there is a downside, too. The downside is that work does not stop while the resolution of these changed conditions is resolved. To the contrary, the contractor is required to do the changed work and then, essentially, argue about it later. If not expressly articulated in the changes clause itself, this fact is clearly articulated in the contract’s disputes clause that says, “The contractor shall proceed diligently with the performance of this contract pending final resolution of any request for relief, claim . . . “
Remarkably there is a downside for the government, too, in all of this. The government’s downside is that until it resolves the issue with the contractor it has considerable liability. Furthermore, the liability can only be contained by resolution and settlement. All to often, liability only worsens with time. Thus, there is actually a considerable incentive for the government to move quickly and diligently toward resolution. In fact, the government's policy as articulated in FAR 33.204 to resolve all matters at the Contracting Officer's level and prior to the submission of a claim. Unfortunately, however, that does not happen in many cases. Instead, despite the promises made to contractors and the policies articulated in various regulations, the government often delays resolution, even to the point of forcing the contractor to file a claim before taking any action, in hopes of avoiding accountability altogether. This kind of shortsighted thinking often has devastating results, however, and results in squandered resources and failed programs.
Thus, the challenge in federal procurement is not to avoid contract changes. Rather, success or failure for both government and contractor alike often turns on how quickly one can recognize a changed condition, match the condition to the proper clause governing the condition, understand the process for settling the change under the correct clause and then managing the resolution process. This skill is particularly important when contracts are terminated for convenience, since a contractor's recovery on the terminated contract could be needlessly reduced if the contract price has not been properly adjusted to match the actual scope of work performed.
While the importance of good and effective change management is important for both government and contractor, there is a significant payoff for contractors. Since the work will be performed, every dollar recovered goes essentially to the bottom line and the payoff for effective change management is immense. After all, in the normal course of business a contractor would likely have to win and perform contracts for ten times the amount of any change dollars recovered to have the same effect on the bottom line. For contractors, therefore, settling changes represent a considerable sales opportunity.
In the following sections, key facets of the change management and resolution process are discussed. Specifically, the following sections examine the authority to make changes, the workings of the clauses, common issues, pricing guidelines, resolution requirements, subcontract considerations, accord and satisfaction, and settlement expenses.
Perhaps the first and most important thing to realize about managing contract changes in government contracts is that federal employees have only actual authority. Furthermore, the only one with the authority to make changes to the contract is a contracting officer, unless they have made some kind of delegation of limited authority to someone else like a technical representative.
Not all contracting officers are created equally, either. Some could have monetary limits to their contracting authority. Thus, the first step in change management is to confirm that the person ordering the change not only has change order authority but that the change they are ordering is within the scope of their authority.
Any contracting authority held by a government employee will be formalized in writing. For contacting officers their authority will be formalized in their standard form 1402. If a contractor has any concerns about a contracting officer’s authority they can ask to see the contracting officer’s 1402.
If others, like a technical representative, have contracting authority that delegation will also be formalized in writing, although it may be in the form of a letter from the contracting officer. If contractors have concerns about the authority of any other person they should confirm this authority by requesting a copy of the written delegation.
Confirming a person’s change authority is very important for contractors, since government employees without the proper authority cannot bind the government. Thus, if contractors perform changed work at the request or order of persons without the requisite authority they may not get paid.
Believe it or not contractors can find themselves in situations where after the work is performed that the government claims the order came from a person without contracting authority. Remarkably, such a situation is actually quite common and not always by accident. Sometimes a technical person may try to threaten or even sucker the contractor into doing changed work that they know they have no authority to order. In addition, contractors could encounter a situation after performing changed work for a contracting officer with a seemingly adequate warrant that there is a secret limitation to the warrant that was not revealed to the contractor.
In the case of the hidden warrant limitation, the contractor may have a considerable climb and may have to go beyond the trial court if found in such a situation but they should prevail in the end. There is considerable federal common law that is favorable to contractors on just this point. The entire purpose of the standard form 1402 and its underlying system is to provide notice to the contractor of a contracting officers limitations. If that process is subverted with secret files hidden from the contractor, that process is not likely to prevail.
In the case of the unauthorized person, there are likely still options to the contractor in that case as well. If the orders of the unauthorized person have been ratified by the contracting officer then the contractor can still get relief. In essence, if the contracting officer was aware of the unauthorized orders being given by the unauthorized person and did not take steps to correct the situation then the contracting officer may have ratified the orders and the government still liable for the changed condition.
As indicated above there are all kinds of clauses in a government contracts that are designed to handle different kinds of changed condition. Despite that there are many different types of change related clauses, they all have four fundamental structural similarities. Those structural similarities are the scope, written order, notice, and the contract adjustment. Understanding these elements is instrumental in understanding the workings of each clause and matching the proper clause to the changed event in order to properly resolve the changed condition. Each of these elements is discussed in the sections that follow.
General Scope of work Most of the various change related clauses in a government contracts like the Protest After Award, Government Property, and Differing Site Condition clauses are designed to address the specific kinds of events that are reflected in their names.
This is not the case for all of the various clauses that address changed condition, however. Indeed, there is one clause that is used more generally to manage changed conditions. This clause is the contract’s changes clause, of which there are different versions depending on the type of contract at issue, like fixed prices, cost reimbursement, construction, etc. Regardless of the contract type, the scope element of these different clauses limits any change to being within the general scope of the contract, which for supply contracts is the
- Drawing, designs and specifications,
- Method of shipment or packing or
- Place of delivery.
For a services type contract the general scope of the contract is limited to:
- Description of the services,
- Time of performance, or
- Place of performance.
There are several important aspects to the scope provision of the general changes clauses. First is that any changes are limited to the general scope of the contract. One attribute that is obviously missing from the articulated scope element of the general Changes clause is the ability to change the contract quantity either up or down.
Even though changes in quantity are not included in the list, the general changes clause has been used to make changes in quantity but it cannot be used to circumvent the competitive process and extend a contractor’s work to things that would more properly be part of a separate contract. Thus, while contracting officers can use the changes clause to make minor increases in quantity, they should not use it to make large increases that are better handled by a new procurement.
If the ordered change is for a reduction in quantity that issue is more properly resolved through the termination for convenience clause of the contract as a partial termination. Although resolving reductions in quantity are better resolved through the termination clause, there have been a lot of decisions in Federal Common law where the termination clause was not used. In some cases, the reduction was resolved simply by reducing the contract value by the separately priced item, at least in cases when the reduction was for the complete removal of a separately priced item from the contract. This has only been used when the item was a segregable item, however. Just because the item is separately priced does not mean that it is a segregable item.
In some cases, the method of handling a deletion by simply reducing contract value by the removing the separately priced item has had unexpected consequences such as when the pricing of the removed item was not closely linked to its effort, perhaps as a result of unbalanced bidding. In those cases, the results have been punitive when the pricing for the item far exceed the actual effort saved by the reduction.
Just because such an approach has been used does not mean it was correct. In resolving their contract changes contractors will need to understand this kind of nuance and how to handle it. (see Terminations for Convenience of Federal Government Contracts)
Although deletions are arguably not really within in the scope of the general changes clauses, additions likely will be. Unlike the case of deletions where there is an alternative contract clause for handling the issue, there is not an alternative clause for handing additions. Thus, additions will most likely be handled by the general Changes clause. Even increases in quantity that are beyond the original scope of the contract will most likely be resolved by the general Changes clause.
There are no hard and fast rules to determine what is or is not within the general scope of the contract. This would seem to be a factual determination to be made on a case by case basis, although the more significant the change the more likely it will fall outside the general scope of the contract.
The Written Order The second common structural element found in the various Changes clause is the written order. Typically, the order can be given unilaterally by the Contracting Officer to the contractor and this right is made clear in the clause itself such as in the general changes clause.
All of the various contract Changes clause require the Contracting Officer to formalize changes to the contract in writing. In most cases in these clauses, it is the written order that brings about the change. The Protest After Award clause, the Delay of Work clause, the general Changes clause and other all require the Contracting Officer to make changes to the contract in writing. The one exception, of sorts, to this is the differing site condition clause.
While even under the Differing site condition clause the Contracting Officer is required to make the change to the contract reflecting the changed condition, the written order comes after the differing site condition is confirmed. In the other cases like the Protest after Award, Delay of Work and the general Changes clause, the order comes first.
The government property clause actually has both conditions. In one case the government may increase or decrease the amount of property furnished by the government. In other cases, if the property furnished by government is not suitable for its intended the purpose the Contracting Officer shall modify the contract once the validity of the contractor’s request is confirmed.
In all of these cases where the contract is actually modified, these are known as formal changes. Unfortunately, not all changes to the contract are promptly formalized. Indeed, in many cases the formal confirmation that a change has actually occurred never happens; yet, under the disputes clause the contractor is required to continue performance of the contract including the changed condition.
Fortunately, Federal common law has evolved such that for any of the various Changes clauses to operate all that is required is for the CO to order the contractor, orally or in writing, to perform work that was not part of the contractually required effort. To interpret the clause otherwise would be senseless if the CO was not inclined to issue the written modification; yet, the contractor was required to continue performance under the contract's dispute clause. When changes are made to the contract without formally modifying the contract, these are known as "constructive" changes.
While most contract changes will be formally modified, many are not. Thus, a large amount of contract administration related to managing contract changes is related to constructive changes.
Constructive changes frequently happen in a variety of situations like those where the government delivery of property or information is delinquent or where the property or information is not in a suitable form. Another can be where the government is late in providing notice to proceed such as when they have to obtain permits or clearances before the contractor can begin work.
Another common situation when constructive changes occur is with differing site conditions where the different condition exists but the Contracting Officer is slow to issue the formal modification. Another common situation is where the plans and specifications supplied by the government are defective because of conflicts, errors, omissions, or even impracticability.
Yet another common situation is when the government applies higher standards when accepting the contractor’s work than what is required under the contract. Similarly but different, is when the government performs incompetent inspection and rejects work that is actually compliant with the contract’s requirements.
A final situation where constructive changes occur is when the government has a different interpretation of the contract’s requirements. In many of these types of cases, the government’s interpretation is based on an undisclosed intention. In other words, the government had a specific intent but did not clearly manifest its intent in the plain language of the contract documents.
There are many situations in which constructive change can occur. The above examples are not intended to be an exhaustive list but simply one containing common instances of constructive changes.
Notice The third common structural element found in the various Changes clause is the duty for the contractor to provide either notice of the changed condition, such as with the Differing Site condition clause, or its right to a contract adjustment such as with the protest after award, Stop work order or the general changes clause.
Typically, the various clauses require the contractor to "assert its right" to an adjustment within 30 days from the receipt of the written order. In the case of constructive changes where no written order has been issued, the 30 day limitation is arguably inoperative until the written order is issued.
Notwithstanding the 30 day notice provision, the clauses typically permit the CO to consider the contractor's claim any time prior to final payment. As a result, a contractor's claim is considered timely so long as it is filed prior to final payment. (For other timing considerations see the section below on the Disputes Process)
Although a contractor’s claim is typically timely if submitted any time prior to final payment, a contractor's failure to submit its claim within the stated notice period may not be without some penalty. Since the purpose for the notice provision was to ensure timely resolution of the events while they were freshly in the minds of the parties concerned, a contractor can be subject to higher burdens of proof when the claim is not timely filed. Consequently, the government can raise a defense to a contractor's claim by claiming that it was prejudiced in its defense of the claim by the contractor's late submission. If the government should raise such a defense, however, it bears the burden of proof to show that it was prejudiced by the contractor’s untimely notice.
It should be noted that once a CO has reviewed a contractor's claim, the government has constructively waived the notice requirement and accepted the contractor's claim as timely even if submitted after final payment. Therefore, if the CO wishes to enforce the notice provision it must reject any submission prior to accepting it.
For a contractor to assert its right to an equitable adjustment does not mean that the contractor has to submit its claim or REA within that timeframe. Rather, the contractor simply must notify the CO that it considers the work to be a change for which the contractor will be submitting a Request for Equitable Adjustment (REA). As indicated above, the contractor can submit its REA any time prior to final payment.
The Adjustment The fourth and final common structural element found in the various Changes clauses is the adjustment. Most of the various changes clauses requires the CO to make an equitable adjustment to the contract price, if the work is changed. The fact that these clauses require an equitable adjustment is significant, since the term equitable adjustment has special meaning in government contracting. The term has been interpreted to include a provision for profit. Thus, an equitable adjustment is for both costs and profit, at least for non-commercial items.
In commercial item contracts, the pricing is not typically cost based. Rather, pricing in commercial item contracts is determined from the contractor’s commercial pricing practices plus or minus the costs of the minor modifications to the item needed to meet the government’s requirements. If the government’s modifications are so significant that the item is no longer a commercial item for the contractor then the pricing methodology could become cost based and the term equitable adjustment mean cost plus profit like with non-commercial item changes.
While the term equitable adjustment appears in most contract changes clauses, a relatively few contract clauses such as the Government Delay of Work or the Suspension of Work clauses simply require the CO to make an adjustment to the contract price. Accordingly, these other clauses would require only a reimbursement of the contractor's costs without a provision for profit.
Since most of the various changes clause entitle the contractor to an equitable adjustment, a dispute often occurs about whether a particular event is governed by the clauses promising only a price adjustment or one of the clauses promising an equitable adjustment. Fortunately, the clauses promising only a price adjustment are self eliminating and apply only if the event cannot be covered by one of the other clauses. For example, if the changed event can be covered by the stop work order clause then that would prevail over the government delay of work or the suspension of work clauses.
The focus of the adjustment is not limited to the issue of whether profit is included. In fact, there are several issues about the adjustment. First, the objective of the priced change is focused on the changed condition. In other words, the adjustment for the changed work should not disturb the profit or loss position of the unchanged work had the change never occurred. The objective of not altering the contractor’s profit or loss position on the unchanged work is a key factor against adjustment methods like the total cost method, which simply subtracts a contract’s price or contractor’s bid from the contractor’s total incurred costs. Since the adjustment is not supposed to alter a contractor’s position on the unchanged work, one can conclude that an equitable adjustment is simply a corrective measure designed to keep contractors whole when the buyer modifies the contract.
Second since an equitable adjustment is a corrective measure designed to keep contractors whole when the buyer modifies the contract, the measure of damages for the contractor is the increased costs experienced by the contractor as a result of the change. Consequently, the reasonableness of a cost incurred is not limited to the value received by the buyer for the work performed nor the amount that would have been incurred by another contractor.
Remarkably, the value based issue is one that is frequently part of the adjustment issue, particularly when design issues are involved or other kinds of problem solving. As long as the contractor’s efforts were allowable, as that term is defined in the cost principles, the adjustment value should include a contractor’s total cost of the change no matter how many failed attempts he might have made at solving the problem or developing the design. A key element in this respect is the allowability issue and that the costs claimed must have been caused by or incurred as a result of the changed condition.
The three goals discussed above about the nature of the adjustment like the provision for profit of any price adjustment, not disturbing the profit or loss position on the unchanged work, and the corrective effect of the adjustment are simply the foundations on which the pricing is based. The particulars of the pricing can also be quite complex but those kinds of details are discussed in a separate section below.
In addition, to the pricing quantification issues there is one last element that can be part of the adjustment. This final element is any adjustment to the performance or delivery schedule, which should also be part of any adjustment as a result of any additional time needed to perform the contract.
Pricing a government contract change can be an elaborate exercise, since a contract change is essentially a sole source type of procurement. As such, it typically will be formalized using the negotiation procedures of FAR Part 15. Of course, the FAR Part 15 procedures can branch into other specialized methods like commercial item procedures, and even prices set by law or regulation. In addition, when the priced change exceeds the threshold for cost or pricing data, those requirements can also be involved unless the change is covered by one of the many exemptions to cost or pricing data.
As indicated previously, the pricing methodology for contract changes will be cost based, at least for non-commercial item contracts or contracts for items whose prices are not set by law or regulation. When costs are a basis for pricing, the FAR Part 31 Cost Principles and Procedures will be used. There may even be a clause in the contract that clearly expresses that fact.
Pricing changes in accordance with the FAR 31 cost principles can involve a multitude of considerations such as the fifty-two specifically identified cost elements described in FAR 31.205 and the various other considerations to costs allowability and allocability described in FAR 31.201, 31.202, and 31.203, which can even include requirements of the Cost Accounting Standards (CAS). In fact, sometimes the entire dispute has been designed from its inception to drag contractors into the cost principles so that the provision for unallowable costs trim the government’s obligation and where contractors could fall victim to their arcane requirements.
Even a commercial item contract could get sucked into the FAR Part 31 Cost Principles and Procedures when the government adopts scorched earth tactics and requires proof of every element of the claim including that a commercial item price even exists. If a commercial item price or value does not exist, then the normal interpretation of equitable adjustment that is costs plus profit will likely carry the day, including the associated FAR Part 31 cost principles, especially after the contractor has had to perform the work anyway in accordance with the disputes clause. Such a prospect could be easier than one might imagine when the government has awarded a commercial item contract for something that might not really fit the requirements for such a contract.
For contractors that are not accustom to cost type contract pricing procedures, quantifying a contract change can be an elaborate effort even before getting into some of the complex causation issues associated with things like inefficiencies caused by accelerations or resulting from things like lost learning and worksite crowding, and performance delays. Many contractors accustom to performing fixed priced contracting may not even have some of the essential components of this process like a cost structure for allocating both direct and indirect costs to final cost objectives. Thus, contractors without a FAR Part 31 compliant cost structure will need to develop one in order to properly quantify their changed condition and defend their proposed price.
Even contractors that have established cost structures and are familiar with that kind of process could find their cost structures unsuitable for properly quantifying the changed condition. Fortunately, in those cases contractors can deviate from their normal cost allocation procedures, including contractors whose contracts are CAS covered, assuming the cost was incurred for unlike circumstance or dissimilar situation.
In addition, it is not uncommon for government representatives, like the auditors, to distort or misrepresent the requirements of these arcane rules. Thus, contractors must be highly proficient with the meaning and actual requirements of the provisions.
Consequently, pricing changes is not necessarily a simple matter. In addition to thoroughly understanding the arcane rules, pricing changes can require complex models in order to accurately reflect the reality of the changed condition. In the process, these models can require substantial and sturdy justifications supporting the assumptions, methods, and the allowable basis for including each cost treatment claimed.
Because of the complexities that can arise with contract changes, contractors are fortunate that the pricing is not required to be performed with great precision. All that is required is that the contractor be compensated fairly. The fact that the amount cannot be determined with great precision is not a defense against the contractor's price adjustment, either. Indeed, the one who invites contract changes bears the risk that those changes cannot be priced precisely.
Of course, the so called fairness doctrine is not a magic shield behind which contractors can hide without any other justification and consideration. Typically, the fairness issue is a defense that contractors can use against the Government’s claims that the methodology is not precise enough even though the government has suggested no better methodology. The fairness doctrine can also be used when the government does have a proposed methodology but its preference is clearly based on its more favorable result and not that it actually produces a more compliant and accurate result.
Contractors should just expect to encounter a precision complaint in every contract change negotiation. It can occur in a lot of situations but some of the more common are indirect cost allocation issues, in general, and contract delay issues.
The general indirect cost allocation issues involve whether cost pools and allocation bases are properly conceived and matched. The government would rather smooth the allocation so that costs properly allocable to the changed effort are being allocated to unchanged work or even to other contract efforts. Of course, for contractors, the issue is ensuring that the cost of changed work is properly allocated to changed work, particularly since the government has promised to pay for the costs of its change.
The issue of whether a cost pool is properly conceived and matched to its base can include challenges to cost pool components, which for contractors with a diverse business can contain numerous cost components that the government will want to characterize is unallowable despite there is nothing unallowable about them. As to the allocation bases, the government often prefers either bases that are throwbacks to practices used decades ago and no longer the best indicators or single component bases that have only a chance causal or beneficial relationship to the cost pool instead of a multifactor base that can have stronger causal beneficial relationships in such circumstances. Of course, once again, the government’s quantification objective is all too often to minimize its liability and not compensate the contractor fairly for the costs of the changed work, as it promised in its contract.
In the case of delay cost issues, they are themselves a kind of indirect cost allocation issue, since at stake in a delay situation is the allocation of a contractor’s fixed costs that are not allocated properly under the contractor’s normal allocation methods. The allocation problem is caused when the delay extends contract performance while diminishing the base used for allocating the contractor’s fixed costs that continue even during the delay period. For that reason, contractors must develop appropriate surrogates for performing the allocation process. Although over the years there have been many accepted surrogates for performing the allocation, the current accepted method, at least for prime contractors, is known as the Eichleay formula. This method utilizes contract billings as the surrogate base for allocating fixed costs between contracts.
In the event that the government actually accepts a provision for unabsorbed overhead resulting from a delay, they typically then want to offset this amount with any recovered overhead allocations from related changes even though such offsets are unnecessary. Essentially, the mechanics of the currently required methodology for calculating unabsorbed overhead already include elements that make this process unnecessary if done correctly. Despite the challenges, delay claims are worth pursuing, since delay damages can often dwarf all other aspects of the contractor's changes claim, especially in highly engineered manufactured products where fixed cost investments are substantial..
A contractor's challenges for pricing a contract delay are not limited to the issues mentioned above. Whatever direct costs are claimed will be challenged, too. They will be challenged as actual costs of the changed work and not something unrelated to the changed work, like the unchanged work. Then, even if they are related to the changed work, the allowability of the costs may still be challenged on the theory that they are unreasonable and some other less expensive methodology should have been used.
In essence, there simply is no shortage of the hurdles contractors can face when settling the price of the change, despite what the government may have promised in its contract. Indeed, the complex rules associated with the quantification multiply the number of targets at which the government can aim and use to minimize a contractor’s entitlement. As a result, contractors should not underestimate the skill and resources that could be needed just for the quantification element of their change proposal no matter if it is a constructive or even formal change.
Essentially, there are two types of contract changes—formal and constructive. The nature of these two different types of changes and their associated proposals will be vastly different. If the change is formal and there is a written order the remaining issue is often just the price or quantification. When the change is constructive and there is no written order then the proposal will be much more complex and involve all of the elements for settling a changed condition.
There are essentially three issues that must be addressed when settling a contract change. Those parts are liability, causation and quantification. As indicated above, settling a constructive change will involve proof and agreement on all three portions, while a formal change can often just involve the quantification element.
In both cases, formal and constructive, contractors tend to focus on the quantification element and frequently do not give much thought or effort to the liability and causation elements. In many cases, a contractor’s experience with contract issues is limited to the negotiation and settlement process for new work where the buyer’s decision making is more focused on selecting a vendor to do a scope of work at a reasonable price. Thus, the negotiation process for new contracts is more about contractor selection than it is on proving that the work performed was changed work that is not covered in the original scope of work and then determining a reasonable price in accordance with some complex and arcane regulatory requirements.
Even when contractors have experience settling contract changes, those experiences are often with formal changes, where again, the unsettled issue may only be price. In addition, in these types of situations the pricing issues may not be that contentious, if it is one of those situations where work will not start until change is formalized. Consequently, when it comes to settling constructive changes, contractors can easily find themselves in unfamiliar territory and completely unprepared for the rigors of that effort, especially in those situations where the government is taking a scorched earth approach.
Even when the contractor thinks it is capable of addressing all three areas of the contract settlement process, they still can find themselves unprepared for the rigors of the process. Settling is not only about being conversant in the process and with the issues but memorializing the arguments and justifications in written form. The written form tends to be necessary for several reasons.
The first reason that the written form is so important is that the government side of the negotiation table is typically comprised of many members with different interests like technical, audit, finance, contracts and legal. Since all of these members can have input to the final decision, they all need access to the contractor’s logic, justifications, and support. The written proposal format provides this capability.
The second reason that for many years it has been well known the vast forces that are managing the government’s operational process. These forces include internal management and quality assurance, internal agency auditors and inspectors, outside auditors and inspectors like the General Accountability Office, and even specially focused reviews initiated by Congress. As a result, there is often tremendous pressure on everyone at the government’s negotiation table to not only have made the correct decision but to have that decision properly and sufficiently documented to sustain all of these various oversight interests. The written support not only provides the documentation but provides a means to accumulate and document the evaluations and results from all of the government’s other team members. Quantification schedules simply are not sufficient by themselves to resolve all of the issues for settling a contract change.
The third reason is that the change proposal is not simply a bill to the contractor. Rather, it is the basis on which to begin discussions. Thus, it is essentially a sales document that describes, justifies, and supports the three elements to settling a contract change that are liability, causation, and quantum. Each of those elements is discussed in the sections that follow
The liability portion establishes that the contractor is entitled to a contract adjustment. The mere fact that the contractor incurred more costs than expected, for example, is not proof that there actually was a contract change. In fact, whether or not a change occurred and if the contractor is entitled to a contract adjustment is completely separate from the cost issue.
The proof of the liability portion is usually a two step process. The first step is to demonstrate that the contractor actually performed work that was not part of the original scope of work. Sometimes this can be an elaborate comparison and contrast of the original scope of work and how it is different from the changed scope of work or at least why the changed work was not part of the original scope of work.
The second part is to identify the contract clause governing the changed work and promising a contract adjustment for the particular type of changed work performed and the nature of the contract adjustment.
With formal changes the government has, in essence, recognized that the changed condition exists. As a result, all that remains to be determined are the causation and quantification phases, although most often it is just the quantification element since in many types of changes the causation portion may be obvious.
As an example, if the issue is one of increased quantity there likely is not going to be any dispute about there having been a change. Things can become more complicated, however, if the issue involves a specification, since the issue could easily be whether or not there actually exists a changed condition. After all, if the specification document itself has not changed what is the basis for a changed condition?
The initial part of the liability discussion explains what is different about the work, why it is different, and what widely accepted authorities, such as treatises, articles, regulatory guides, federal common law decisions, etc., support claimed liability issue. The second part of the liability discussion would identify what contract clause actually provides for a contract adjustment for that type of changed condition and the type of adjustment is promised.
The second element for a quantum claim is causation. This portion essentially establishes the consequence of the change. So, it examines not only what was different about the changed work but what those differences actually required the contractor to do that was different from the original scope of work. In essence, this portion examines and documents what the changed condition required the contractor to perform both in terms of quantity, type, and timing.
This element will exist for both formal and constructive changes, too. It will become more important and a more significant part of the contractor's proposal effort when the causation issues are more complicated like with schedule impacts, work force or capacity constraints, and unusual economic conditions, as well as when distinguishing between the contractor's profit/loss position on the unchanged work is a significant part of the calculus.
Understanding causation is not only an important and essential part of the claim process, it also facilitates the quantification process, since a lot of the basic inputs are determined. Once causation is completely understood it is easy to add the cost factors to the various input factors that are developed during the causation analysis.
Even if there is a formal change where the order is given but the consequence is unpriced, the causation element may not be settled. So, the extent to which causation become more important can again depend on the type of change. Again, a change in quantity may not provide that much of a causation question. For constructive changes the causation question is likely going to be a much more significant part of the settlement process.
As with other parts of the proposal the causation element should be explained and supported with authoritative sources. After all, sometimes particular techniques to prove or establish causation are required. So, the use of those particular techniques would be explained and justified along with the mechanics of the processes.
The third element of a quantum claim is the amount of the additional costs incurred by the contractor plus a provision for profit. Both formal and constructive changes will provide some kind of calculation of the additional costs and claimed profit. Typically the quantification will follow the formats suggested in Table 15-2 that is at the end of FAR 15.4
One would think that this kind of effort would be minimal for situations where the changed work was completed and all the costs incurred. In such a situation, one would think it is a simple matter of summing the costs incurred and presenting a total. In cases where the change represents the contractor’s normal work and the costs are accurately captured in the contractor’s normal accounting system then things could be just that simple. In many cases, though, that is not the case. The changed work is not the contractor’s “normal” work if it is very contract specific and not, essentially, the repetitive manufacturing of widgets. For example, every construction project is different. Similarly, custom services for a particular customer location could be quite unique as well. Even when the items involve seemingly repetitive units like missiles or aircraft, those manufacturing runs are often small volume, the manufacturing complex, the components specialized and often hard to get, and the lead times can be long. Furthermore, their designs are so highly engineered and performance parameters so tightly optimized that changes to such items can have significant consequences effecting the entire end item.
While in some cases quantifying a change might be quite simple, regrettably in many others that is not the case. Furthermore, all too often after the costs are incurred the arguments begin about the decisions that were made to incur those costs and whether they are allowable and whether they actually are costs related to the changed work versus the unchanged work. In fact, all too often the government’s review and evaluation of the contractor’s claimed costs becomes a search for a basis on which liability can be minimized or altogether avoided.
When the situations involve changes for whose costs are hard to quantify, either because of data accumulation limits within the contractor’s accounting systems or complex quantification issue such as with impact inefficiencies and delay issue, the need for support beyond just the calculation mechanics increase significantly. In addition to the quantification mechanics there is often a need to both explain the quantification concepts and demonstrate that they are justified and commonly accepted.
Even the description of the mechanics can involve more than the simple summation of the amounts. Other subjects can include how and why those mechanics comply with various FAR 31 cost principles. The additional subjects can include timing and periodicity, exclusion of unallowable costs, cost structure allocations, offsets for reclassified indirect costs to direct, the calculation of rates and factors, source and development of standards, specialized formulas, etc.
Although the proposal should address the issues of liability, causation and quantum, that is not necessarily the format in which it should be presented. While there is not required format, some consideration should be given to the various stakeholders, on both sides, that will be reviewing and reading the proposal. The below sections are a recommended format.
Executive Summary – this should be a summary of the entire proposal package. So, it will briefly highlight the significant factual background, the nature of the changed condition and the amount claimed. This is not argument and likely is confined to one to four pages.
Factual Background – this section describes the nature of the change and all of the various components related to it such as the direction to make the change, the contractor’s notice that the direction or event was a change, the consequence of the change and what it caused the contractor to do, including the types of costs without necessarily providing the calculation of the costs. Included with this story are the timing and dates when all these events happen and identification of specific documents evidencing and supporting the description.
This is not the place for argument about responsibility or entitlement. Rather this is simply a factual recitation of the events that can form the baseline for all subsequent discussion and analysis. While the intended audience for this section is anybody interested, the most likely consumer will be the government’s technical analysts who will be confirming both the facts and the claims made about the effect of the claimed directions on the contractor.
Analysis of Relevant Terms & Conditions – this section reviews the significant contract requirements that are relevant to the changed condition. It would include the specific clauses under which relief is being sought such as the general changes clause or some other applicable clause. It could include particular sections of a specification that are relevant to the change or perhaps a schedule item or description that is relevant for differentiating the changed from the unchanged work.
Besides the identification of the relevant requirements there could be discussion about the significance of the requirement to the changed condition and perhaps how the provisions of the requirement have been interpreted such as the significance of the term equitable adjustment or the notification provisions or even the kinds of costs that would be recognized, limited or excluded.
Any discussions of significance should be supported with authoritative references to treatises, guidebooks, case law or regulatory interpretations. If citing regulatory interpretations avoid simply repeating FAR passages. Rather, things like working group interpretations are acceptable. Even things like DCAM explanations or DCAA audit interpretations could be useful but restating FAR passages is not helpful if it is something the government is already familiar.
Identification of Changed Conditions and Basis for Entitlement – this section identifies the specific changes that are being claimed and then brings together the factual background with the analysis of the contract requirements to argue in support of the changed condition and the contractor’s entitlements. Thus, for each change identified the section should reflect on the underpinning of the factual background, argue for why these are changes to the contract for which the contractor is entitled additional compensation and or other adjustment like the contract schedule.
Quantification – This section provides explanation quantification approaches and theories along with supporting calculations. In many respects this can simply a recitation of the calculation with necessary explanations, including explanation of approaches and theories and how they have both fit the particular change situation and have been employed.
The dynamics between primes and their subs or even between subs at different tiers can be different than those between the prime and the government. One of the first dynamic differences involves the workings of the various changes clauses.
The relationship between a subcontractor and its prime or upper tier subcontractor will generally be governed by commercial law. One of the areas where this could make a difference is with the authority issues. Commercial law would recognize more than just actual authority if that were ever an issue. Of course, contractors have to confirm that there are no authority limitations expressed in the contract.
Besides the authority issue, government contracts can place some unusual twists in the standard rules government commercial contracts. One of those twists involves the interpretation of the various Changes clauses.
To government contractors the language of the various Changes clauses is known to have special meaning, especially if what has been included in the subcontract is a flowdown of one of the clauses from the Federal Acquisition Regulations. In such cases, state and federal courts have not hesitated to adopt the Federal common law interpretations of these clauses, since where the parties to a contract adopt a standard and oft-construed clause, it is only logical that their intent is also to adopt the interpretation that accompanies it. Thus, in many instances the workings of the Changes clause will be identical to its workings between the government and prime contractor.
Despite the above, there are several issues that can affect how the FAR changes clauses could work in a commercial environment
First, there are two ways the flowdown can occur. One way is incorporation of the clause by reference and the other is reproduction of the entire text. Typically, it does not make any difference if the clause was flowed down by reference or reproduced in full text, although sometimes one party will claim that since the clause was reproduced in full text and not flowdown by reference that it is not the FAR clause. Nevertheless, even if the reproduction of the full text does not identify it as or even mention the FAR clause citations, the clause will usually be given its federal common law interpretation, if the wording is the same as the FAR version.
If there are issues with the flowdown of the FAR clauses, it typically involves the tailoring or even lack thereof. In other words, the FAR version involves the relationship between the government and the prime contractor. Some tailoring of the clauses is needed for the relationship to properly reflect that of two commercial entities. Frequently, if there is a problem it is with this tailoring or the lack thereof. If the prime or upper tier subcontractor try simply incorporating their contracts by reference without proper tailoring there can be significant problems that result. Furthermore, global tailoring provisions that simply replace the term government with contractor and the term contractor with subcontractor are often problematic.
Second, things can start to become more complicated when contractors start providing their own language for the changes clause. Often the differences they devise are intended to limit recovery of their vendors or restrict the timing in which their vendors can submit a claim. All too often though, these kinds of changes cause contractors a lot of problems, especially when their contracts with their vendors get out of alignment with the contract they have with their customer and expose them to commercial common law damages that cannot be passed to their customers.
Third, even if the sub’s customer has flowed down a useful version of the FAR changes clause, what other clauses have also been flowed down? For example, has the sub’s customer made it clear under what cost principles the change is to be quantified?
Fourth, regardless of whether a subcontractor’s changes clause will be interpreted under Federal Common law or under the applicable standard commercial common law, subcontractors may still have options at their disposal that primes may not have against the government. One such example is when a sub’s customer does not seem to be considering their adjustment proposal in a serious manner and there is concern whether the sub’s customer will actually honor their contractual commitments. In that case, the sub may be able to request adequate assurances under the Uniform Commercial Code, if it applies.
Another example when subcontractors may be able to employ methods against their commercial customers that primes cannot employ against the government involves delay claims. The current state of federal common law restricts prime contractors to the use of the Eichleay formula for quantifying unabsorbed overhead. A subcontractor following applicable commercial law may be able to use other methods for pricing their unabsorbed overhead.
Despite that for government contracts the changes process is a deliberate design feature, the contention that can sometimes accompany it is distasteful for many contractors at every tier. It should not be, though. It is just business. In fact, within the contract the customer promised to pay the sub if any of these changes were made in the same way they promised to pay a submitted invoice. In reality, changes are just another sales opportunity. Thus, submitting a change proposal and negotiating a resolution need not have any kind of adverse effect, although often times they involve a bet the company kind of situation.
What subcontractor’s and even their customers often fail to realize is that if the changed condition is meritorious, there really is no reason or justification for resisting the subcontractor’s claim or being adversarial about its resolution. The reality is that if the change is a government directed change, the entire issue, including the subcontractor’s claim is the responsibility of the government and should be paid for by the government, just as it promised. In such cases, the focus of the process should be on getting the government to honor its contractual obligations, which can often take a lot of effort. In fact, often times to get the government to do their job contractors have to guide them through the process. In those cases, any efforts that the sub can make to faciltate acceptance of the sub's claim upstream will facilitate settlement of its claim with its own customer. After all, there really is no incentive for the sub's customer to resist settling the claim other than its duties to ensure that the sub's claim is actually meritorious. In fact, the sub's customer can usually markup the sub's claim for overheads and profit and even make money on the sub's claim if it is meritorious.
From a subcontractor’s perspective the process of settling a claim can be quite elaborate. If a subcontractor is lucky the prime recognizes the issue and has had its own impacts or claims from other subcontractors. If the prime has had its own impacts or claims from other subcontractors the prime may already be involved with the government and having discussions on the issue. Subcontractors need to realize that sometimes objections being raised by their customer are the exact ones being raised by the government to the prime. Consequently, subcontractors need to just view these as other objections that need to be overcome like with any other kind of sales opportunity. It can take great skill resolving these things. The government is often very suspicious of claim situations. Even when it is clearly the result of their own doing their suspicions can extend to every element of the claim.
Settling changes, can be quite tedious as a result of all the objections that one must typically overcome. In some of those cases both the first tier subcontractor and the prime think it more palatable if the subcontractor proceed directly against the government. Ordinarily, since the subcontractor has no privity of contract with the government, this is not practically. In many subcontracts, however, a provision has been included that permits the subcontractor to proceed directly against the government. Essentially, what happens is the prime contractor sponsors the subcontractor’s claim and agrees to let the subcontractor essentially step into the shoes of the prime and proceed against the government directly.
While this has a certain appeal, especially when the prime has not been directly affected by the change other than the effect on its subcontractor, there are traps. One of the more common traps is that the prime will propose sponsoring the subcontractor’s claim if the subcontractor agrees that the prime is not liable to the subcontractor. Unfortunately, such a tactic kills the sponsorship, however. For it to be a valid sponsorship the prime must remain liable to the subcontractor. If the prime is not liable to the subcontractor then the government is not liable to the prime. After all, the subcontractor is essentially stepping into the shoes of the prime.
When strategizing their claims, a final thing that subcontractors should consider is that in many large procurement situations sub's customer can have a flexibly priced contract like a cost reimbursement or even a fixed priced incentive type contract. In the case when the sub's customer has a cost reimbursement contract the customer simply has no downside for recognizing and settling the sub's claim if it is meritorious. Even when the customer has a fixed priced incentive contract, there are typically cost sharing provisions such that the customer is only partially at risk for settling a sub's meritorious claim.
The costs incurred by a contractor to prepare and settle its price adjustment proposal can be significant, especially with constructive changes where all three elements of a quantum claim must be proven. The issues are often so technical that significant expertise across the entire solution spectrum is required. The legal liability issues frequently involve concepts that are beyond an obvious performance issue. Furthermore, they can be complicated with common law interpretations to the contract terms that are not obvious but well established nonetheless. In addition, the quantification issues can be arcane and require sophisticated mathematical proofs. Even understanding the changed work and how it is different from the unchanged work can require world class, state of the art engineering expertise.
While the costs of the technical expertise to resolve a price adjustment proposal can be considerable, that is not all, however. The complexity of the procurement rules and regulations also means that the parties must go great distances before they can meet in the middle. This usually means that the contractor must shoulder a greater burden if the matter is to be resolved without wasteful litigation. Typically the issue can be resolved if the government is educated and shown that the contractor’s price adjustment is actually meritorious. Unfortunately, these costs are often higher than they needed to be because the government customer is often doing their best to not just challenge the veracity of the claim but avoid all responsibility through whatever means necessary or how absurd the challenge. In fact, a common tactic is to delay settlement until the changed work is completely performed and the contractor is cash starved in order to force a deal that is pennies on the dollar. Of course, that is if they even recognize that both parties to the contract have duties and obligations. All too often, the government perspective is that only contractors have duties and obligations or that this was part of the risk the contractor assumed when it signed the contract. Clearly, the effort that a contractor might have to expend educating government personnel about government contracts can be quite significant.
As with almost every other element of the contractor's price adjustment, one can expect that the government's primary resource for evaluating the contractor's proposal, a government auditor, will question the costs and often based on totally absurd, erroneous, and unfounded opinions that are designed to generate questioned cost statistics to promote their own careers or to simply to set the government’s starting negotiation position at zero. With respect to settlement expenses, the common argument advanced to deny a contractor its due is that the costs are unallowable under the cost principle at FAR 31.205-47(f)(1) under the theory that they are a claim against the government.
Such an argument is not only erroneous it is also illustrative of the tactics often used by the government when settling contract price adjustments. Specifically, the government ignores its contract management obligations when it then forces contractors to compel the government to honor it obligations and perform its duties. Then the government raises all kinds of absurd objections to excuse its poor performance and deny responsibility. Finally, when its resistance efforts completely fail, the government claims the increased costs that it forced the contractor to incur are unallowable. With respect to contractor costs in general and settlement costs in particular, such a claim is utter nonsense.
For example, a contractor’s invoice is a claim. Taking the government’s typical but erroneous logic, that preparing a claim is unallowable, to its natural conclusion would mean that a contractor’s administrative costs of preparing an invoice would be unallowable, too, but that is not what the cost principle covers just as it does not apply to a contractor’s effort in preparing and supporting its REA. Rather, the cost principle applies to the “prosecution” of a claim or appeal against the government, which is an entirely different kind effort.
There is considerable history involving the issue of claims and whether a contractor’s REA, for example, is a "claim". Clearly, prior to a contractor's REA submission achieving "claim" status the contractor's costs of preparing, submitting and negotiating its price adjustment are not covered by the cost principle at FAR 31.205-47. Thus, the contractor's settlement costs would be allowable.
Once the contractor's proposal achieves claim status the allowability of its subsequently incurred settlement expenses becomes more complicated and less obvious. Unfortunately, as part of its standard efforts to avoid accountability for its actions and honoring its contractual obligations, the government frequently does not consider the contractor's proposal until it has achieved claim status despite the policy stated at FAR 33.204 that, "The Government’s policy is to try to resolve all contractual issues in controversy by mutual agreement at the contracting officer’s level."
There are many reasons why the status of "claim" is important and most have nothing to do with cost allowability issues. Rather, the significance of "claim" status is more typically related to the payment of late payment interest or resolution before an administrative board or judicial forum. The cost principle at FAR 31.205-47(f) involving costs of legal and other proceedings makes only the "costs" of "prosecuting" a claim unallowable and not something more general such as pursuing a claim or something more narrow like preparing or submitting a claim.
The term "prosecuting" a claim is significant since, in a legal context, it has a narrow meaning related to proceedings such as those before an administrative forum like an arbitration panel or a Board of Contract Appeals or a judicial forum like the Court of Federal Claims, the Court of Appeals or a Federal District Court. Thus, arguably the cost principle applies to the costs of appealing a Contracting Officer's final decision to an administrative board or judicial forum. In other words, it applies to the costs of "prosecuting" a claim that are unallowable and not to the costs of administering a contract. As a result, the costs of contract administration, which would include preparation, submission and settlement of a price adjustment proposal under a contract clause as part of contract administration and prior to the appeal of a final decision to an administrative or judicial forum, are allowable.
The above logic is not based solely on that portion of the legal and other proceedings cost principle. Indeed, it is supported elsewhere in the legal and other proceeding cost principle such as the definition of "costs" which means costs "incurred before, during, and after commencement of a judicial or administrative proceeding". Thus, the determining criteria to cost allowability is not whether the price adjustment is a "claim" but how the resolution of a disputed claim is being pursued.
Despite a controversial history where all kinds of decisions have been rendered, the interpretation in more recent times, since the mid 1990s, of whether a contractor's settlement costs are allowable has turned on exactly that--how the resolution of a disputed claim is being pursued. In other words, is it being pursued in hopes of settlement as part of contract negotiation or is it being pursued to by-pass the contract administration process and prepare for resolution of the issue before a judicial forum or administrative board. In case of the former, the costs are allowable? In the case of the latter, the costs are unallowable.
Thus, it makes no difference if the claim is certified and a contracting officer's final decision requested, which is all too often required before the government gives a contractor’s price adjustment proposal any consideration. It also makes no difference if the settlement effort actually fails. Instead, what matters is how the effort was being pursued and whether it was pursued for settlement as part of contract administration or if it was pursued for resolution before a judicial or administrative forum. (For further information about the disputes process see the section below on the Disputes Process).
Under the Changes clause the government has a duty to equitably adjust the contract price when it modifies the work to be performed by the contractor. This duty is discharged through performance when a modification has been negotiated for those costs or when the contractor executes a release.
The negotiation of a modification or execution of a release is not unbounded, however. The extent to which both of these documents discharges the government's duty is generally narrowly construed and limited only to those items specifically covered or subject of the negotiation. Thus, a contractor that negotiates a change but fails to recognize the impact of that change on future performance is not necessarily precluded from further recovery.
All too often prior to settling a contractor’s price proposal for constructive changes there could have been settlements formalized on other changes. In some cases, these other changes may have even come after the constructive change forming the basis of the current price adjustment proposal. In such cases, it is not unusual for party defending the change to raise the existence of these prior definitized changes and any releases that they may have included as a defense against having to act on the undefinitized change claiming that any adjustments were released in prior formal modifications. Typically, such claims will not succeed, however, because the undefinitized work was not the basis, discussed or considered when the prior release was executed.
The significance of accord and satisfaction is important for other reasons, as well. All too often the government delays resolution of a changed condition in hopes that it will diminish or go away entirely and that once the changed work is completed the contractor will be so cash strapped that it will settle for pennies on the dollar.
Unsurprisingly, both of these tactics fail more often than they succeed. In addition, the government’s liability often increases for a variety of reasons like a contractor’s settlement costs continue to increase, higher actual costs replace lower cost projections, the quantification techniques of the contractor’s quantification model improve, and possibly economic factors like overhead rates, price escalation, and cost of money factors rise with time and turn against the government.
Indeed, the government’s liability can only be contained through resolution and settlement of the issue. The government is better advised to move promptly and settle a claim early when a contractor’s negotiation posture could be more favorable to the government.
Every government contract contains the Disputes clause at FAR 52.233-1 or equivalent. Most notably this clause requires contractors to proceed with the work and argue about it later, whenever disputes about the contract occur. Even when the government has arguably breached the contract, the contractor is most likely required to continue performance and argue about it later.
Understanding the disputes process and how it fits within the change management process has become an essential part of a contractor’s calculus for several reasons. First, the government is seldom willing to honor all the promises it makes to contractors, particularly when the situation involves paying for the constructive changes that the government made to the contract. In fact, in many situations these days, Contracting Officers will not even take the time to consider an adjustment proposal unless they are under pressure of the interest clock, time limitations and other requirements that are statutorily imposed by the disputes process. Thus, when preparing and submitting an adjustment proposal, contractors should include the disputes process within their claim management calculus.
Second, the disputes process is governed by the Contract Disputes Act (CDA) which is integrated in the government contract through the Disputes clause at FAR 52.233-1 or equivalent. The clause not only requires contractors to continue with the work and argue about it later, it also advises contractors on the process for adjudicating disputes and the prerequisites for entering that process.
The requirements of the CDA are separate from the provisions of the various clauses like the changes clause that were explained previously. As a result, despite what promises are made in the contract’s clauses themselves, like the changes clauses, a contractor’s ability to actually collect on those promises could be lost if the adjustment proposals are not also presented to the Contracting Officer within the time and manner required by the CDA. Thus, the CDA requirements are in addition to whatever might be required under the other clauses or contracting procedures like FAR 15.
When the contractor is preparing its adjustment proposal, there are three things that the contactor needs to consider so that it can escalate its proposal into the disputes process in the event that negotiations fail. First, while as discussed previously a contractor’s adjustment proposal under the enabling clauses is generally timely submitted any time prior to final payment, the CDA has a six year statute of limitations. Thus, the contractor has six years in which to present its adjustment proposal to the Contracting Officer. Once the six year limitation has lapsed a contractor can no longer use the disputes process to compel the government to honor its promises.
The six year limitation begins once the claim has accrued. A claim accrues when the events giving rise to the liability were known or should have been known. In some situations the determination of the accrual date can be complicated. There are numerous cases where the accrual date was determined to be much sooner than the contractor had calculated as a result of the “should have known” criteria.
Second, a contractor’s adjustment proposal over $100,000 must be certified. The CDA requires some specific certification language that says,
I certify that the claim is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes the Government is liable; and that I am duly authorized to certify the claim on behalf of the Contractor.
The certification must be executed by someone having authority to bind the contractor with respect to the claim.
Third, the contractor needs a Contracting Officer’s final decision if it needs to compel performance of the government’s promise. For contractor claims of $100,000 or less, the Contracting Officer has 60 days to render a final decision after submission of the proposal and the contractor’s request for a Contracting Officer’s final decision. Failure by the Contracting Officer to render a decision within that time can be deemed a denial and an appeal made to one of the two designated forae.
For contractor claims that are over $100,000, the Contracting Officer has 60 days in which to render a decision or provide a firm date when the decision will be rendered. Failure by the Contracting Officer to render a decision within that time can also be deemed a denial and an appeal made to one of the two designated forae.
Once the final decision is rendered, and if the final decision is disappointing, the contractor has two paths from which to choose to appeal a Contracting Officer’s decision. The contractor has 90 days to appeal that decision to an administrative board like the Armed Services Board of Contract Appeals or the Civilian Board of Contract Appeals or 1 year to appeal the decision to the Court of Federal Claims.
In the field of federal government contracts changes occur in a wide variety of circumstances. Sometimes they occur when there are unexpected requirements, or where conditions were different than expected. Similarly, changes can be necessary to correct errors in the original scope of work.
Unfortunately, the situations when changes occur are not always so accidental. Indeed, sometimes they are the result of government acts that were designed to obscure known conditions in order to entice contractors into a problem that the government needs solved, that it cannot afford, or wants to induce more favorable pricing from a contractor.
Regardless of the reason, the contractor is required to do the work and essentially argue about it later. Thus, contractors will incur additional costs as a result of a change. The only question is how much revenue will they be able to collect in compensation. From such a perspective every dollar recovered by a claim has a corresponding effect on the company's bottom line. Thus, when one considers how many contracts it takes to have a corresponding effect on the bottom line, it becomes clear why the pursuit of claims is so important and so worthwhile. In the average business, a contractor would have to win contracts ten times the size of the claim to have the same bottom line effect on the company.
The task ahead is not as easy as one might expect. Recognizing changes is not always easy in the slow boil of contract performance. Seemingly small and insignificant changes frequently have colossal consequences that lack visible indicators. So, while many changes are as routine as clock work there are those that will require substantial prowess. Furthermore, collecting the revenue can often require substantial effort, especially for constructive changes. In addition, there is often considerable resistance by government personnel to recognize that a change has even occurred and agree to its consequence. Their primary evasion weapon involves the imposition of arcane accounting rules about whose actual workings and requirements they often distort and misrepresent.
The previously mentioned payback analysis is dependent on sound quantification, however. So, managing changes is not simply a liability analysis. Recognizing liability without adequately recognizing its financial consequence is not helpful. Also, litigation techniques are not suited for successful settlement. Indeed, settlement is a sales opportunity and sales techniques designed to overcome objections are what is needed.
While the gauntlet constructed by the government is significant, there are ways for successfully running it. if the government's resistance is to be overcome without wasteful litigation. This usually means that the contractor must shoulder a greater burden to prove liability, causation and quantum and do it in a way that not only leads to the right decision but ensures that the decision is sufficiently documented and supported. Thus, overcoming the government's objections often means that the contractor must do both his own job in identifying and quantifying the change as well as assisting the government representative in performing theirs.
Subcontractors can face similar obstacles from their customers, although subcontractors can often have better tools for resolving a changed condition than their prime customer. In either case there are skillful solutions available without having to resort to full blown, wasteful litigation.
Lawyers and litigators often dismiss such an approach and discourage it while characterizing it as simply free discovery. Of course, the litigator's preference is to litigate but that approach has numerous drawbacks. The most obvious is that the costs of litigating, as discussed above, are not recoverable under the cost principle at FAR 31.205-47(f) while contract administration costs and settlement negotiations, even after the REA is elevated to a claim and a request for a Contracting Officer's final decision requested, are allowable. Second, cloaking the facts in shadow can often keep contractor's from accurately assessing their situation and making a good business decision. Third, non-merit based tactics like hiding the ball can often boomerang with colossal consequences. Thus, there are many positive reasons for adopting a disciplined and well considered approach to preparing and submitting an adjustment proposal.
While some find the submission of a request for equitable adjustment and pursuit of claims to be objectionable, they are a design feature of the government contracting machinery. For many companies to survive these highly competitive times, they will have to adopt a strategy that recognizes the role of claims because to do otherwise will be to forgo life as a government contractor. It simply is commonplace for the government to use every means conceivable to satisfy its requirements, including schemes deliberately designed and orchestrated to avoid payment of goods and services that are clearly promised in their contracts.
When confronted with a contract change or a poorly performing contract, the Atlanta Georgia office of Celestial Defense provides three important expert consultant services to government contractors in general, defense contractors in particular and even the government, if desired. Those services involve expert knowledge of:
- The procedures applicable to the identification of compensable changes (including constructive changes where the customer may even be denying that a change to the contract exists), preparation, quantification, submission and negotiation of a request for equitable adjustment when contracts are changed including direct cost issues as well as more arcane issues like delays and disruptions;
- Assessment of DCAA or other outside audit findings related to request for equitable adjustments; and
- Review and settlement of subcontractor request for equitable adjustments.
To discuss a specific matter involving:
• Formal changes;
• Constructive changes like excessive inspection, changes in acceptance criteria, defective specifications, differences in interpretation;
• Delays, disruptions, performance inefficiency or unabsorbed overhead;
• Quantification of damages;
• Preparing Request for Equitable Adjustment (REA)
contact us and speak with one of our government contract consultants.