For Once, the Federal Circuit Takes Practical Positions on Contract Claims

Federal Circuit decisions issued in March take a refreshingly practical approach to current issues about just what is, or is not, a “claim” under the Contract Disputes Act. We applaud the Court for this practical approach, one that brings some sense to matters previously pursued without thought to the consequences for contract administration.

On March 2, 1995, in Bill Strong Enterprises, Inc. v. Shannon, the Federal Circuit held that outside legal and consultant costs incurred in preparing and negotiating Requests for Equitable Adjustment (REA’s), before the “dispute” phase, may not be treated as unallowable claim prosecution costs, and instead may be recovered as contract administration costs. The essence of Bill Strong is recognition that the only costs unallowable as “claim” prosecution costs are those costs incurred in pursuing a Contract Disputes Act “claim.” Since case law holds that a claim cannot arise under the Contract Disputes Act until three requirements are met (there must be a sum certain presented, there must be a request for a final decision, and the parties must have a “dispute,” i.e., have reached an impasse), the lack of any of these elements means that no claim is being pursued, and instead the contractor is merely incurring allowable contract administration costs. Although Bill Strong interprets the 1987 version of the FAR cost principles, the current cost principles allow the same result under FAR 31.205-33 and 31.205-47.

Bill Strong arose from an Army fixed-price construction contract for renovation of base housing. The contractor claimed nearly $1 million in additional costs because the Army released the houses to the contractor out-of-sequence and caused delay. In response to a DCAA audit request, the contractor hired a consultant to prepare an REA for delay and disruption. The consultant’s contract specifically stated that the REA preparation was “undertaken with no view toward litigation . . . [but was limited] to the pursuit of an administrative remedy.”

Although the REA settled the delay and disruption issues, the parties specifically excepted the consultant’s costs. These the contracting officer denied because they were incurred after completion of the contract work, and thus could not be allowable costs of contract administration. On appeal to the Armed Services Board of Contract Appeals, a 3-2 majority held the consultant’s costs to be unallowable because they were considered as incurred for prosecution of a “claim” under FAR 31.205-33(d), even though the REA was expressly not a Contract Disputes Act claim under FAR 33.201.

The Federal Circuit reversed the ASBCA, holding that “claim” had the same meaning in the 1987 version of FAR 31.205-33(d) as in FAR 33.201 concerning Contract Disputes Act claims, because the 1987 version of FAR 31.205-33(d) had an added reference to FAR 33.201 immediately after the words “claims or appeals against the Government.” (This is also true of the current FAR.) Thus, if an REA was not a disputed “claim” under FAR 33.201, it was not a “claim against the Government” under FAR 31.205-33(d).

The Court recognized the difficulty in distinguishing preparation and negotiation from claim prosecution, but decided the issue on a common-sense basis, holding:

In the practical environment of government contracts, the contractor and the C.O. usually enter a negotiation stage after the parties recognize a problem regarding the contract. The contractor and the C.O. labor to settle the problem and avoid litigation. Although there is sometimes an air of adversity in the relationship between the C.O. and the contractor, their efforts to resolve their differences amicably reflect a mutual desire to achieve a result acceptable to both. This negotiation process often involves requests for information by the C.O. or government auditors or both, and, inevitably, this exchange of information involves costs for the contractor. These costs are contract administration costs, which should be allowable since this negotiation process benefits the Government, regardless of whether a settlement is finally reached or whether litigation eventually occurs because the availability of the process increases the likelihood of settlement without litigation. See 48 C.F.R. 33.204 (1987) (“It is the Government’s policy to try to resolve all contractual issues by mutual agreement at the Contracting Officer’s level, without litigation.”) Additionally, contractors would have a greater incentive to negotiate rather than litigate if these costs of contract administration were recoverable. See 7 Nash & Cibinic Report, supra, ¶ 48, at 134-35.

The Court went on to hold that the costs were allowable as contract administration costs, even though they were incurred after completion of the contract work.

In a March 7, 1995 decision, H.L. Smith, Inc. v. Dalton, the Federal Circuit expressly holds that “invoices, detailed cost breakdowns and other supporting financial documentation need not accompany a CDA claim as a jurisdictional prerequisite.” The Court holds that to submit a “claim,” the contractor must satisfy only the definition in FAR 33.201, i.e., (1) the contractor must submit a demand in writing to the contracting officer, (2) the contractor must submit the demand as a matter of right, and (3) the demand must seek a sum certain. Claims over $50,000 must be also certified. However, it is significant that the Court does not mention the certification requirement, that “the supporting data are accurate and complete. . . .” A submission to the contracting officer that gives adequate notice of the basis and amount of the dispute is a claim, even though the contracting officer may need additional supporting financial data.

Bill Strong and H.L. Smith are practical solutions to a constant problem concerning claims-the balance between an agency’s right to proof of a right to recovery and to costs, and the contractor’s right to obtain a decision and payment for its claim. The Contract Disputes Act sought to achieve the proper balance by requiring certification of claims, granting payment of interest from the date of claim submission to encourage negotiation, and allowing contractors to take “deemed denial” appeals to end inordinate delay in claims consideration. H.L. Smith counsels the obvious-that it is better to document a claim and to provide sufficient cost data. Bill Strong encourages doing so by making claim preparation and submission costs recoverable before the “dispute” stage is reached. H.L. Smith maintains the balance struck in the Contract Disputes Act by continuing the running of interest during consideration of the claim and submittal of additional supporting data after the parties are in dispute. Reacting to ill-advised litigation strategies by Government counsel, the Federal Circuit’s decisions on contract claims have become increasingly technical, and they result in uncertainties and unnecessary delays in claims processing and litigation. Perhaps Bill Strong and H.L. Smith mark the beginning of a more practical approach.

Dan Donohue

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