The Environmental Protection Agency entered into a one year with five year option level-of-effort (LOE) cost reimbursement contract where the contract said the government “will order 119,000 direct labor hours (dlh)” for the base period.  A modification of the contract after the base period changed the language to “the government’s best estimate of level of effort…will be as follows” where the base period and option period listed the 119,000 dlh.   The contract also stated if the contractor provided less than 90 percent of the LOE specified an equitable downward adjustment of the fixed fee would be made.  In fact, the largest number of dhs ordered in any period was 69,000 and the difference between the total fixed fees in the contract and total fees paid due to the lower dlh was $1.5 million.  Sanford claimed the EPA knew or should have known that its dlh estimates were “grossly inflated” and impossible to achieve and claimed a breach of contract due to the EPA’s failure to (1) order the specified number of hours and (2) renegotiate the fixed fee based on a realistic estimate of the level of effort.

Though the contract is neither a requirements nor indefinite delivery/indefinite quantity contract it is still covered by case law covering these types of contracts where the contract specifies quantities the parties agree to and a grossly overestimated estimate has the effect, intended or not, to entice a contractor to offer lower prices than it otherwise would since greater quantities mean lower unit prices.  Whereas boards have held the government ought to be held liable for negligently prepared estimates under requirements and ID/IQ contracts, the same should apply to LOE contracts.

Though the Board ruled Sanford was entitled to damages it did not accept its proposal that it should be compensated midway between the fee it would have earned if all the estimated hours had been ordered  and the lesser fee based on hours actually worked because this would represent “anticipatory profit damages” that Rumsfeld v. Allied Companies had prohibited.  Rather the proper methodology for computing the damages should be an equitable adjustments in the price of the units delivered (Sanford Cohen & Associates Inc., IBCA, No. 42329/00).  

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