McCarter & English, LLPwww.mccarter.com

Requests for Equitable Adjustments (REAs) and Certified Claims for Government Contractors

Cara A. Wulf, McCarter & English LLPAaron Raddock, BDO

NCMA Boston March Workshop 2020

June 2, 2020

AgendaREA and Claims Process Overview

Entitlement considerations, best practices and certifications

Pricing considerations and methodologies

REA and Claims Process Overview

REA Process Overview At its core, any REA begins with the terms of the contract

– The government reserves rights to unilaterally take certain actions, and agrees that it will pay the contractor fair/equitable compensation and/or make other changes to terms and conditions to keep the contractor whole

– The government reserves rights via standard contract clauses (e.g.):

- Changes – Fixed Price, FAR 52.243-1- Changes – Cost Reimbursement, FAR 52.243-2- Changes and Changed Conditions, FAR 52.243-5- Differing Site Conditions, FAR 52.236-2- Suspension of Work, FAR 52.242-14- Government Property, FAR 52.245-1

– The government action or order can be formal/written and the order can be constructive

– Contractors generally must perform, subject to an REA and/or claim under the disputes clause

REA Process Overview (continued)Notification Obligations

– Formal change: within 30 days of receipt of written change order (though typically not strictly construed, unless government is prejudiced)

- Gazpromneft-Aero Kyrgyzstan LLC v. United States, 132 Fed. Cl. 202 (2017) (rejecting a contractor request for equitable adjustment under FAR 52.229-6(j) for failure to provide prompt notice that prejudiced the government)

– Note the potential applicability of FAR 52.243-7

- May shorten the notice period and increase the amount and type of information that must be submitted

Best practices for dealing with orders from individuals other than the contracting officer

– Look to the written notice criteria in FAR 52.243-4(b) & FAR 52.243-7

– Ensure that the notice includes all the material facts with respect to the direction and seek written confirmation from the contracting officer as to how to proceed

- See North Am. Landscaping, Constr. and Dredge, Co., Inc., ASBCA No. 60235, 2018 WL 4016632 (Aug. 9, 2018)

Contents of an REA Approach REAs with the end game in mind but the goal is a

negotiated settlement

REA Outline– Executive summary

– Factual background

– Grounds for entitlement

– Quantum/Relief requested (can be quite complicated)

Relief requested

– Schedule (time to complete work)

– Contract price/fee adjustment

– REA preparation costs are generally recoverable/allowable as a matter of contract administration (internal company costs and legal fees)

What is a “Claim”?FAR 2.101: Claim means a written demand or written

assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. However, a written demand or written assertion by the contractor seeking the payment of money exceeding $100,000 is not a claim under 41 U.S.C. chapter 71, Contract Disputes, until certified as required by the statute. A voucher, invoice, or other routine request for payment that is not in dispute when submitted is not a claim. The submission may be converted to a claim, by written notice to the contracting officer as provided in 33.206(a), if it is disputed either as to liability or amount or is not acted upon in a reasonable time.

How do I know if I have a claim?

FAR 33.201: “Accrual of a claim” - the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be fixed, some injury must have occurred. However, monetary damages need not have been incurred

Is an REA a claim?

Disputes Process – Anatomy of a Claim

FAR 33.206 – Initiation of a Claim

Contractor claims shall be submitted:

– In writing

–To the Contracting Officer for a decision

–Within 6 years after accrual of a claim

Contracting Officer shall:

– Issue a written decision on any Government claim initiated against a contractor within 6 years after accrual of the claim

Disputes Process – Anatomy of a ClaimFAR 33.207 – Contractor Certification

Contractor must provide certification in this provision when submitting any claim exceeding $100,000

– “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.”

Ensure that certification is executed by a person authorized to bind the contractor with respect to the claim

Disputes Process – Anatomy of a ClaimFAR 33.208 – Interest on Claims

Government shall pay interest on a contractor’s claim on the amount found due and unpaid from the date that:

– The CO receives the claim; or

– Payment would otherwise be due, if that date is later, until the date of payment

Simple interest at Treasury Rate applicable to the period during which the contracting officer receives the claim

– And then at the rate applicable for each 6-month period during pendency of the claim

Allowability of REA and Claim CostsGeneral rule: REA costs may be allowable; claim

prosecution costs are unallowable

REA costs: consultant costs and legal fees incurred in connection with negotiations relating to an REA are allowable as contract administration costs, even if negotiations eventually fail

– FAR 31.205-33, Professional and Consultant Service Costs

- Costs incurred in connection with the work performance of a contract or

- Costs incurred in connection with administration of a contract

- Generally allowable if also reasonable and otherwise allowable

– See Yates-Desbuild JV v. U.S. Dep't of State, CBCA No. 3350 et al., 17-1 BCA ¶ 36,870 (Sept. 19, 2017) (citing Tip Top Construction, Inc. v. Donahoe, 695 F.3d 1276, 1281 (Fed. Cir. 2012))

Allowability of REA and Claim Costs (continued)

Claim costs: FAR 31.205-47, Costs Related to Legal and Other Proceedings

–Costs include legal services by both in-house and outside counsel, services of accountants/consultants, costs of employees

–Costs “are unallowable if incurred in connection with . . . prosecution of claim or appeals against the Federal Government.” FAR 31.205-47(f)(1)

REA Entitlement Theories/Issues

Some common entitlement theories– Formal change, but inability to reach agreement on value– Differing site conditions– Government caused delay– Stop work ordersCommon constructive changes

– Contract misinterpretation by government– Defective specifications– Governmental interference/failure to cooperate– Failure to disclose vital information (superior knowledge)– Constructive accelerationSix-year statute of limitations on claims

Claim or REA?Serve essentially the same purpose, but are different in key

ways– Government is “on the clock” to respond to a claim– Claims require “sum certain” and certification– A claim triggers the disputes procedure

Consider the relationship with the Contracting OfficerRemember: a contractor’s REA can constitute a “claim” for

purposes of the Contract Disputes ActHejran Hejrat Co. Ltd. v. U.S. Army Corps of Engineers, 930

F.3d 1354 (Fed. Cir. 2019)– No magic words– However, be mindful of CDA requirements

Comparison of REAs and CDA Claims Certification REAs

– DoD agency: two-prong certification if over $150,000

– Request negotiation

– Contain statement of basis for compensation and pricing logic

– Costs of preparation are allowable contract administration costs

– CDA interest does not start to run

– If CO issues a decision, it is ordinarily not a final decision that may be appealed, but may be converted to a CDA claim

CDA Claims

– Four-prong certification if over $100,000

– Must request CO decision

– Must state sum certain

– Costs of preparation are unallowable

– CDA interest starts to run when CO received claims

– CO decision may be appealed

Best Practices Be proactive and start early

Cross-function cooperation and communication (legal + contracts + pricing)

Identify potential changes and segregate increased costs immediately

– Assign separate cost accounting number

– Contract may require change order accounting

Document estimates in sufficient detail; verify bases of estimate

Delays: regularly update schedule to reflect changes as they occur

Cost allowability: separate negotiations/contract administration costs from claim costs

Manage/avoid broad release language (“known or unknown”) due to unintended consequences

Best Practices (continued)Scrub costs for unallowables

Anticipate DCAA challenges to estimates

–Relevance, causation, reliability of increased costs data

–Unallowables

–Labor hour reasonableness

–Attorney, accountant, and consultant fees

–Profit

– Interest on claim

REAs and COVID-19

OMB Memorandum M-20-18, “Managing Federal Contract Performance IssuesAssociated With The Novel Coronavirus(COVID-19)” Issued March 20, 2020, provides key guidance on maintaining

continued contract performance (while respecting the need to protect the safety of the contracting community)

When considering contractor REAs to receive compensation for increased costs associated with measures taken to protect employees and fight the spread of COVID-19, agencies are to:

– Consider each REA on a case-by-case basis

– Take into account whether the requested costs would be allowable and reasonable to protect the health and safety of contract employees as part of the performance of the contract.

OMB Memorandum M-20-18, “Managing Federal Contract Performance IssuesAssociated With The Novel Coronavirus(COVID-19)” (continued)Consistent with FAR 31.201-3, the reasonableness of such costs will be measured by whether:

– The contractor acted as a “prudent” business

– Took actions consistent with the Centers for Disease Control (CDC) guidelines

– Discussed the actions with the CO or CO technical representative

Contractors should collect, segregate and track all appropriate costs and impacts

CARES Act Section 3610DFARS 231.205-79, CARES Act Section 3610

Implementation, permits the reimbursement of certain leave-related costs incurred by contractors in accordance with §3610 of the CARES Act

Cost principle applies only to:

– “Affected” contractors;

– With employees or subcontractors who cannot perform work on a Government-owned, Government-leased, contractor-owned, or contractor-leased facility or at any other place of performance specifically identified in the contract for performance, due to closures or other restrictions (including federal, state and local orders having the effect of law); and

– With employees who are “unable to telework because their job duties cannot be performed remotely during the public health emergency declared on Jan. 31, 2020, for Coronavirus (COVID–19).”

CARES Act Section 3610 (continued)Contractors’ ability to recover § 3610 costs will be highly

contract-specific and will require careful recordkeeping and clear communication with the cognizant CO

Contractor requests made in relation to this deviation will be considered on a case-by-case basis. At a minimum, DoD will consider:

– Impacts realized from COVID-19, Defense Industrial Base telework or remote work efforts,

– Availability of funds for reimbursement,

– Applicable laws and regulations, and

– Any relief the contractor has secured or may secure through the CARES Act and/or other laws enacted in response to this national emergency.

CARES Act Section 3610 (continued) –Draft Implementation Guidance DoD Checklist for Submission of Section 3610

Reimbursement Requests

– If a contractor submits a request for Section 3610 reimbursement at the corporate office level, contracting officers will need to determine the extent to which the data specified in the checklist must be included with the request for Section 3610 reimbursement

– Potentially significant documentation requirements for each affected contract/order

– Paycheck Protection Program, Section 1102 of the CARES Act

- If contractor meets requirements for loan forgiveness, the loan forgiveness amount must be excluded from any request for reimbursement under Section 3610

CARES Act Section 3610 (continued) –Draft Implementation Guidance Instructions for the DoD Checklist for Contractor Requests

for Reimbursement on FAR-Based Contracts

Overarching Themes– The authority provided by Section 3610 is a permissive authority and the

contracting officer is not required to reimburse any or all of the requested paid leave costs;

– Any reimbursement under Section 3610 is subject to the availability of funds;

– The contracting officer has sole discretion to make decisions on a contractor’s affected status and the amount of any Section 3610 reimbursement;

– Contractors must not be reimbursed (or otherwise paid) twice for the same costs;

CARES Act Section 3610 (continued) –Draft Implementation Guidance

– The contracting officer has the right to determine the amount reimbursed under Section 3610 and at what level (e.g., contract, division, segment, company, corporate) the costs will be reimbursed;

– Contractors must segregate COVID-19 Paid Leave costs in their books and records;

– Contractors may not request, and shall not receive, Section 3610 reimbursement for any hours related to employees a contractor has furloughed or laid off; such hours must be excluded from any request for Section 3610 reimbursement;

– Paid leave reimbursement under Section 3610 excludes any profit or fees; and

– Contracting officers shall document any COVID-19 Paid Leave reimbursement decisions in a memorandum for record (MFR). A template that contracting officers may use to complete the MFR will be provided separately, but this template should be tailored to the specific circumstances and is not a substitute for a contracting officer’s independent thought or reasoned judgement.

Industry input due 5/22/20 – final guidance should be forthcoming

Pricing Considerations

Importance of REA and Claim Pricing

Done last and reviewed first

Pricing drives the decision-making process

Government often ignores entitlement and defends claim with attack on quantum

Requires coordinated cross-functional team effort

Contractor risks

–False Claims, fraud

–Defective pricing under TCPD/TINA

–Disapproval of estimating system and possibly others

General Pricing ConsiderationsObjective: calculate the increased cost of the changed

work– Contractor should be in the same profit or loss position as if no

change occurred

Generally broken out into four components: – Calculating costs directly attributed to added work

– Calculating costs directly attributable to eliminated work

– Calculating overhead and profit for costs attributable to changed work

– Contract administration costs

No presumption of reasonableness

General Pricing Considerations (continued)

FAR 15.408, Table 15-2(III)(B), provides the format for change orders, modifications, and claims

Seven components: – Cost elements (materials, services, direct labor, indirects, other

costs)

– Estimated costs of all work deleted

– Cost of deleted work already performed

– Net cost to be deleted

– Estimate for cost of work added by the change

– Net cost of change

– References--documentation supporting specific cost elements

General Pricing Considerations (continued)

FAR Part 31, Contract Cost Principles and Procedures, applies to modifications, but its application must result in an “equitable adjustment”

FAR 31.201-2, allowability requirements:

–Reasonableness

–Allocability

–CAS (if applicable), GAAP as appropriate

–Terms of the contract

–FAR Subpart 31.2 limitations

Pricing Considerations

Methodologies

Pricing Methodologies: Actual Cost MethodActual cost data is the preferred method for proving

costsRequires early recognition and establishment of

separate job cost codesBest evidence available under the circumstancesKey point: establish connection to government conductCumulative impact of multiple changesFAR 52.243-6, Change Order Accounting

– Permits CO to order the accumulation of actual costs– Contractor must indicate in its proposal which

proposed costs are actual and which are estimates

Pricing Methodologies: Estimated Cost Method

REAs/claims often require some type of estimates– Cost of deleted work– Actuals are unavailable for added work– Lack of segregation– Future impactsGood faith estimates are preferred when actual costs are

not availableSupport: detailed substantiating data or reasonably

verifiable cost experienceMethods include:

– Buildup through studies, use of subject matter experts (SMEs)– Analogy/actual cost of single event– Parametric/cost estimating relationship– Engineering build-up

Pricing Methodologies: Total Cost MethodDifference between the bid cost/price and actual cost

Disfavored; assumes entire cost overrun is government’s fault– Fails to identify specific extra costs caused by changes,

differing site conditions, or delays

Four factors the contractor must show: – Impracticality of proving actual costs

– Contractor’s bid was realistic

– Reasonableness of its actual costs

– Lack of responsibility for added costs

Pricing Methodologies: Modified Total Cost Method Contractor may adjust the total cost method to account

for other factors

Two elements of the total cost method computation are adjusted:

– Original costs in the contract price

– Total costs of performance

Goal of adjustments: eliminate amounts for which the government is not responsible

May occur in situations where the bid was not realistic or there were other causes for the extra costs

Claims Pricing: Discrete Cost Build

Provides for direct quantification of any increased costs

Ties increased costs to contract changes (i.e., claim elements)

Most precise method; generally preferred

Often used for termination settlement proposals

Claims Pricing: Methodologies

Pricing Methodologies: Jury Verdict Not a method of proof, but a means of resolving disputed facts

where incomplete evidence has been submitted or where a board or court is not persuaded by either party’s evidence

Conditions for use: – Clear proof of injury exists

– No more reliable method of computing damages

– Evidence is sufficient for a court/board to make a fair and reasonable approximation of the damages

Potential outcomes– “Round” seemingly “reasonable” number

– Awarding an amount based on the government estimate

– Awarding a percentage of the total extra costs incurred

Audit ProcessAudits should be expected on substantial claims and terminationsREAs are often audited prior to negotiationsPost-completion audits typically occur prior to close-out on

contracts with multiple, major change ordersExpect the auditor to find something – be preparedProper documentation to support the claimed costs are key

– Review supporting documentation prior to the audit and identify any potential gaps - leave no surprises for your company to the audit itself

– Organize the support documentation and make available to the auditor– Make sure your company is leading the narrative of the audit

Best Practices for Claim PackageWell-supported claims can achieve quicker and more favorable settlements.

Provide a narrative that tells your story and justifies each claim element

Include all records to substantiate claim elements For example:

– Accounting/Job cost records

– Timekeeping or Equipment Usage records

– Narrative

– Keep claim and support materials in digestible pieces/easy to understand

Claim elements should be credible to avoid additional scrutiny and slow the process

Submissions should be easy to understand

Remember preparation costs may be directly recoverable depending on the vehicle

May consider separating your claim in two where you know CO agrees with only certain pieces

Questions?

Cara A. Wulf

Associate

McCarter & English LLP

(202) 753-3401; cwulf@mccarter.com

Aaron Raddock, CPA, CFE, CFCM

National Leader, Government Contracts

BDO USA, LLP

(703)-336-1693; araddock@bdo.com