(Editor’s Note. Key 1998 decisions related to cost and pricing issues have recently been reported by Marshall Doke and Neil Cannon of the law firm of Gardere & Wynne, LLP in the January 1999 issue of Briefing Papers and Robert Korroch of the US Coast Guard Office of Procurement Law in the Public Contract Law Journal. We have reported on these decisions when they were issued in the GCA REPORT or GCA DIGEST. In spite of the risk of repetition, we believe the emphasis of these cases by legal practitioners underlies their significance to our readers.)

A case confirmed that contractors cannot recover overruns on cost type contracts containing the Limitation of Cost clause (FAR 52.232-20) when the contractor reasonably knows or should know there would be an overrun. The Limitation of Costs clause (1) requires the contractor to notify the CO in writing when it has reason to believe it will incur a cost overrun (2) provides the government is not obligated to reimburse overruns unless such notice is given and (3) the contractor need not incur the costs unless the government expressly accepts the increased costs. The contractor sought recovery of an overrun by its subcontractor by arguing that the provisional indirect rates in effect at the time the contract was entered into did not become final until after DCAA conducted an audit after contract completion. The contractor claimed the overrun was not forseeable until it received the DCAA audit. Both the ASBCA and subsequent appeals court rejected the contractor’s assertion ruling that though the clause forgives a contractor’s failure to provide notice if additional costs are unforseeable, the contractor has the burden of proving unforseeability. Since the audited rates were basically the same as those on the subcontractors books, the subcontractor knew or should have known the actual indirect costs it was incurring exceeded the provisional rates (Titan Corp. v. West, 129 F.3d 1479).

A case that earlier ruled the government was required to pay a contractor $25.9 million because of actions taken by the Department of Justice based upon negligent audits by DCAA was overturned by a higher court on the grounds that DCAA was immune from the suit because of the "discretionary function" exemption to the Federal Tort Claims Act. The exemption basically prevents suing the government from harmful actions based on DCAA audit conclusions, no matter how negligent they were, because DCAA opinions are merely advisory (General Dynamics Corp. v. US, 139 F.3d 1280).

At some point a request for an equitable adjustment to a contract price is considered contract administration and most costs associated with helping resolve the matter are allowable and no interest on the amount is payable by the government. At another point, which has been the issue of numerous, changing litigations and is still not entirely clear, the REA becomes a claim in accordance with the Contract Disputes Act and costs associated with it become unallowable under FAR 31.205-47, Cost related to legal and other proceedings, because they are associated with the prosecution of a CDA claim and the interest clock starts ticking. The following is a significant case in this continuing issue. Following a rejection from the CO of its request for an equitable adjustment for an unanticipated asbestos removal, the contractor submitted a CDA claim. When the CO criticized the claim for being hard to analyze, the contractor hired a consultant to help clarify the matter. The consultant assisted with the claims presented to the CO and the contractor submitted new claims based on the consultant's work. The Court disallowed the consultant's costs ruling they were connected with prosecution of a claim. In the aftermath of a key decision, (Reflectone, Inc. v. Dalton) that no longer required the existence of a dispute for a REA to become a claim, the court explained that the key issue of applying FAR 31.205-47 is not timing of the consultant’s work but its function. In spite of the fact that the new claims were submitted after the consultants work was completed, the negotiations that occurred after the contractor’s submission of its claims were part of the contractor’s prosecution of the claims and hence the consultant’s fees were unallowable (Plano Builders Corp., v. U.S. 40 Fed. Cl. 635).

A contractor is entitled to recover the costs of unsuccessfully defending a wrongful discharge suit. A contractor fired three employees from a cost type contract. The terminated employees alleged the contractor discharged them for refusing to participate in a fraud and a civil jury found in their favor assessing damages against the contractor. Noting that the jury verdict did not include any findings of either illegal or intended illegal actions to defraud the government, the Board held terminating employees for unsatisfactory performance or misconduct on a government contract was necessary for proper performance of that contract and the costs of defending legal actions brought by properly terminated employees are an allowable cost of performance (Northrup worldwide Aircraft Servs., Inc. ASBCA 45216).

The Court held that a contractor could not recover from the government the costs of severance payments made to employees after a fixed price contract expired because the costs were not abnormal or mass severance payments under FAR 31.205-6(g). Because contract expiration is forseeable and expected, absent extraordinary circumstances, an abnormal or mass severance does not exist when a contract expires and the contractor is not entitled to costs it did not originally provide for in its fixed price (ITT Federal Servs. Corp. v. Widnall, 16 FPD).

In its claim for an equitable adjustment, the contractor included profit on unabsorbed overhead (i.e. fixed overhead it could not recoup since the direct costs it usually applied its indirect cost rate to were not incurred). The government argued that profit on unabsorbed overhead was not allowable because it constitutes "anticipatory" profit on work not performed and hence amounts to an illegal cost-plus percentage contract. The appeals board rejected the government’s position holding that under established principles of law, profit is allowable on equitable adjustment claims including unabsorbed overhead unless a contract expressly prohibits it (Rex Sys., Inc., ASBCA 49065).

Based upon a reconsideration of an earlier decision, an appeals board denied a contractor’s claim for jobsite overhead costs but on different grounds from its prior opinion. The contractor calculated its jobsite overhead costs resulting from a contract change in two ways. First, for changes that did not extend the time of contract performance or cause an actual increase in jobsite overhead costs, the contractor claimed its jobsite overhead by applying a set percentage of the direct costs of the change. Second, for changes that extended the time of contract performance, the contractor calculated its jobsite overhead on a per diem basis. The earlier decision rejected the first method asserting reimbursement of change orders should be based on an increase in costs and the contractor failed to establish there was an actual increase in its fixed overhead costs. In its reconsideration, the board reversed its earlier rationale for rejecting the overhead claim even though it still held it to be unallowable because calculating jobsite overhead claims using two separate methods depending on whether contract performance was or was not delayed violated the requirement of FAR 31.203 to use one distribution base for allocating a given indirect cost pool (M.A. Mortenson Co., ASBCA 40750).

In a contract to repair three boilers, the contractor temporarily installed a boiler because it was running behind schedule. The boiler was owned by the contractor and was fully depreciated. An appeals board said the contractor was entitled to be compensated and left the amount to be resolved by the parties. The contractor asserted it was entitled to $4,500 per month, the amount it could have collected from someone else had the government not needed it. The appeals court cited 31.205-11(l) that disallowed depreciation or rental costs on fully depreciated property unless a "reasonable charge" for using the property is agreed to. Since no such agreement was made the court ruled the opportunity cost was not sufficient proof of the rental charge and in the absence of further proof agreed with the government for the disallowance (Union Boiler Works, Inc. v Caldera). (Editor’s Note. Commentators have suggested contractors seek an advance agreement for a reasonable charge or rent the equipment from a third party even though the second approach is risky if the government denies the change in contract price. Other commentators have stated though they understand the refusal of the court to calculate a use charge in the absence of adequate evidence to determine a price, they decry the fact that a contractor has no remedy if the CO refuses to negotiate a use charge).

A subcontractor’s January 1986 proposal included a G&A expense rate of 45% which was not questioned by a March 1986 DCAA preaward audit. The subcontractor regularly provided worksheets to DCAA containing actual year-to-date G&A expense rates during the year in support of numerous other audits. The subcontractor’s certified incurred cost submission that was effective as of December 1986, the date agreement on price with the prime contractor was reached, identified a significantly lower G&A rate and the government sought a contract price reduction for defective pricing because of the actual lower G&A expense. Though DCAA denied it, the board ruled the auditor did see the subcontractor’s accounting worksheets during the 14 audits conducted through November 1986 and hence ruled the government failed to prove the subcontractor’s actual G&A expense rates were not disclosed to the government (Martin Marietta Corp., ASBCA 48223). (Editor’s Note. The authors made two interesting observations on this case. An important point that was not discussed in the opinion was that the subcontractor’s disclosure of actual rates to DCAA occurred after the DCAA completed its preaward audit. In the past, DCAA had taken the position that after completion of its preaward audit it was no longer the CO’s "designated representative" to receive cost or pricing data. This position cannot be maintained in view of the board decision. Also, the case emphasizes the importance of documenting data provided to DCAA and other government representatives. Though DCAA denied it had seen the current G&A expense rates, the subcontractor was able to provide sufficient evidence from its documentation that made it more credible.)

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