In the first of a four-part webinar series, attorneys from Venable and consultants from BDO addressed the ways in which government contractors can initiate Requests for Equitable Adjustments (REAs) and/or claims with their government customers. With the COVID-19 pandemic impacting all areas of business, the Coronavirus Aid, Relief, and Economic Security (CARES) Act contains guidance on how government personnel can assist contractors on issues that arise during contract performance related to COVID. Additionally, various agencies have issued their own memoranda on how those agencies are responding to contractor needs and performance issues during this pandemic. These memos provide guidance on how government personnel should address performance delays or situations related to changes in performance, the health and safety of contractors, and paid leave costs and considerations, and offer guidance on ensuring traceability for reimbursed costs to contractors.
How is guidance on contractor claims evolving?
There has been a slight shift in rhetoric since the implementation of the CARES Act and the issuance of the original Office of Management and Budget (OMB) guidance – more recent memos contain language that encourages broader thinking and recommends greater care in filing for assistance for government contractors and across other industries. This recent guidance recommends solid documentation for decisions, with an eye to preparing for audits that will be coming in the years ahead.
Understanding the depth and scope of a contract is key to maximizing recovery. Various clauses will need to be analyzed on a case-by-case basis to determine which of them will put a contractor in the best position for recovery. In the past, courts and boards have viewed quarantine restrictions as excusable delays; however, the existence of an epidemic or the presence of a quarantine doesn't automatically mean performance will be excused in the absence of showing causation or lack of negligence by contractor. Delays will need to be documented as tied to the pandemic, as opposed to any fault of the contracting company.
Contractors should be looking ahead to defending claims when audits arise, and guidance points to understanding weaknesses in any claim and being prepared to explain or defend them. Best practices to implement now for defending claims and maximizing recovery in the future may include:
- Solid and traceable documentation using contemporaneous documents
- Consistent narrative across all filings and appeals
- Proactive and complete communications with customer
- Having a strategy for responding to pushback on claims
- Strictly adhering to deadlines
- Understanding all components of any contract
How can requests for equitable adjustments and claims assist government contractors in weathering the COVID-19 pandemic?
To recover damages incurred by a change in work – like that felt across all businesses in response to the COVID-19 pandemic – or to adjust monetary or timeline expectations, government contractors should consider filing a Request for Equitable Adjustment (REA) and, if necessary, a claim. It is preferable to work out issues through the REA process, with the option to convert unresolved REAs into a claim if suitable resolution isn't met. Healthy and well-established relationships with government clients help open conversations in advance of these filings. While an REA is a less adversarial approach in general, if a government contractor has a difficult relationship with the government client, cutting straight to a claim may be a better option.
Claims can become fairly complex, which can cause confusion for contractors. For example, parties to a claim can include only the prime contractor or the government client. Generally, subcontractors and others cannot be party to a claim without sponsorship by the prime contractor. While a claim is under way, the contractor still has a duty to perform on the contract or risk termination for default.
In determining an REA or a claim amount to compensate the government contractor in a complete way, consideration should be given to:
- Costs directly attributed to the change in work
- Costs associated with items eliminated as a result of a change (reductions)
- Indirect costs
- Contract administration costs
Costs must be reasonable, allocable, and/or allowable under the Federal Acquisition Regulation (FAR). Disregarding these principles can result in the denial of a claim, while consistent accounting principles can help streamline the process. In analyzing cost elements, impact can be measured using direct labor adjustments, changes in materials, and applied indirect costs. In many REA or claim situations, profit can also be included on work performed and additional costs incurred associated with a change.
Methodologies for calculating an REA or claim include:
- Actual costs, which are always preferred over forecasted or estimated costs
- Estimated cost methods, if needed, using good faith estimates, studies, subject matter experts, etc.
- Total cost method, not favored by the courts because it does not segregate increased costs incurred that should not be borne by the customer
- Modified total cost method, which acknowledges contractor responsibility in some areas
- Discrete cost build, the direct quantification of incurred costs supported with back-up
The Contract Disputes Act of 1978 (CDA) dictates the timing of claims, with the statute of limitations for both contractor and government claims being six years from date of accrual, defined in the FAR. Claims must contain a "sum certain," a monetary figure calculated by a simple mathematical formula resulting in a specific amount of payment tied to a claim. It is possible to request an estimate of costs for reimbursement if that estimate can be backed up, but this approach may lead to an accusation of fraud or misrepresentation.
A formal change order can put the government client on notice that a contractor has anticipated or actual changes to their expenditure of time and/or money. Time changes can include no-cost extensions to work, while monetary changes will need to take into account contract clauses and payment ceilings. Additionally, cost-reimbursable contracts require different accounting and bookkeeping, and a different level of rigor to account for damages, which may be tricky for contractors not typically engaged in these types of contracts. Any adjustments to pricing considerations require coordinated effort when a claim is being made and need to be honest and straightforward to withstand scrutiny.
What are key considerations arising from recent contract appeal decisions?
An analysis of recent contract appeals reveals that decisions made against contractors followed several key themes, including:
- Failure to submit a claim to the contracting officer for a final decision
- "Bad faith" allegations against government clients for contract termination, which did not hold up because government clients are always presumed to have acted in good faith in the execution of their duties. This becomes a difficult burden of proof for contractors
- Allegations that third-party actions interfered with the delivery of contract terms, for which a government client cannot be held responsible in the absence of specific contract terms
- Neglecting to conduct diligence needed to track and record work to quantify damages; no proof of damages was shown, so causation was not established
As contractors consider their best practices to mitigate claims, or as REAs and claims are being filed, using the information provided by the boards and courts in recent decisions can offer guidance for defensibility.