WHEN A REQUEST FOR EQUITABLE ADJUSTMENT SHOULD BE TREATED AS A CLAIM UNDER THE CONTRACT DISPUTES ACT

Posted on July 24, 2022July 24, 2022 by Edward Garber

In federal contracting, contractors are sometimes torn about submitting a request for equitable adjustment (known as an “REA” under 48 C.F.R. 252.243-7002) or submitting a formal claim under the Contract Disputes Act (41 U.S.C. s. 7103), the latter requiring a final decision by the contracting officer and starts the clock with respect to interest and preserving rights. It is also sometimes not easy for the contracting officer receiving an REA to determine whether the REA is actually a claim under the Contract Disputes Act requiring more immediate action. This recent take by the United States Court of Appeals for the Federal Circuit hits the nail on the head:

We recognize that contracting officers will sometimes face the difficult challenge of determining whether a request for equitable adjustment is also a claim. Contractors must choose between submitting a claim—which starts the interest clock but requires the contracting officer to issue a final decision within 60 days—and submitting a mere request for equitable adjustment—which does not start the interest clock but gives the contractor more time to negotiate a settlement and possibly avoid hefty legal fees. The overlap between these two types of documents might create room for gamesmanship. For example, a contractor could submit a document that is a claim—starting the interest clock—but appears to be a mere request for equitable adjustment—causing the contracting officer to not issue a final decision within the 60-day deadline and allowing interest to accrue for months or years. But the government has tools to address this challenge: The contracting officer can communicate to the contractor that she is going to treat the document as a claim and issue a final decision within 60 days. Or the government can explicitly require the contractor to propose settlement terms and attempt to settle disputes before submitting a claim to the contracting officer for a final decision.

Zafer Construction Company v. U.S., 2022 WL 2793596, *5 (Fed.Cir. 2022).

Zafer Construction Company involved a design-build contractor on a federal project that submitted an REA for delays and changes caused by the government. Notably, both REAs and formal claims under the Contract Disputes Act (that are more than $100,000) require contractor certifications; however, the certification of a formal claim is a more robust certification than a certification of an REA. In Zafer, the design-build contractor certified its claim with the more robust certification per the Contract Disputes Act (41 U.S.C. s. 7103).

After many years of the contractor trying to negotiate a resolution to its REA, it asked the government to convert the REA to a formal claim. The contracting officer determined the formal claim was time-barred because much of it occurred more than six years before the contractor made its request to convert the REA into a claim.

The contractor sued the government in the Court of Federal Claims. Unfortunately, the Court of Federal Claims found that the claim was time-barred. Even though the contractor submitted an REA, an REA is not a formal claim under the Contract Disputes Act. The contractor appealed to the United States Court of Appeals for the Federal Circuit.

A claim in federal contracting is no different than a claim in private contracting: “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 this contract.” Zafer, supra, at *1 quoting 48 C.F.R. 42-233-1(c).

Under the Contract Disputes Act, claims of more than $100,000 must include a specific “good faith” certification. See 41 U.S.C. s. 7103. Also, “a contractor must show that ‘what the contractor desires by its submissions is a final decision’ from the contracting officer determining whether the contractor is entitled to the claimed amount.” Zafer, supra, at *2 (citation omitted). The contractor’s request for a final decision can be explicit or implicit. Id. In other words, no magic words necessarily need to be used and “a request for equitable adjustment can constitute a claim.” Id.

The contractor argued its initial REA satisfied the requirements of a formal claim under the Contract Disputes Act because “the document at length discusses [contractor’s] request for money owed, showing that [contractor] intended for the contracting officer to make a decision regarding entitlement.” Zafer, supra, at *2. The government disagreed stating the contractor clearly intended to only negotiate its REA and not receive a final decision.

The United States Court of Appeals, however, found that the contractor’s subjective intent is of no moment. “The determination focuses on whether, objectively, the document’s content and the context surrounding the document’s submission put the contracting officer on notice that the document is a claim requesting a final decision.” Zafer, supra, at *2. Through this objective approach in reviewing the REA submission, the United States Court of Appeals held it implicitly requested a final decision and, therefore, satisfied the formal claim requirements under the Contract Disputes Act.

If you are a federal contractor, it is important to understand the difference between submitting an REA and submitting a formal claim to ensure your rights are preserved moving forward.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

UNDERSTAND THE DISPUTE RESOLUTION PROVISION YOU ARE AGREEING TO

Posted on August 29, 2021August 29, 2021 by Edward Garber

When negotiating a contract, do not overlook the dispute resolution provision. It is one of the more important provisions in your construction contract. This provision will come into play and have ramifications if there is a dispute, which is certainly not uncommon on a construction project.

In dispute resolution provisions in subcontracts on federal projects, it is not unusual for that provision to include language that requires the subcontractor to STAY any dispute that concerns actions or inactions of the owner pending the resolution of any dispute between the owner and prime contractor relating to that action or inaction. A provision to this effect should be included for the benefit of the prime contractor. For instance, the provision may say the subcontractor agrees to stay any such claim against the prime contractor or prime contractor’s surety pending the outcome of any pass-through claim (or otherwise) submitted under the Contract Disputes Act.

For example, in U.S.A. f/u/b/o Ballard Marine Construction, LLC v. Nova Group, Inc., 2021 WL 3174799 (W.D. Wash. 2021), a prime contractor hired a subcontractor to perform a scope of work at a naval shipyard. A differing site condition was encountered and the subcontractor was directed to continue performance and track its costs. The subcontractor completed its work and submitted its approximate $13 Million claim from the prime contractor and its Miller Act payment bond surety. The prime contractor and surety refused to pay until the resolution of the pass-through differing site conditions claim to the federal government. The prime contractor had submitted a claim under the Contract Disputes Act to the federal government. The subcontractor was not interested in waiting until the resolution of the Contract Disputes Act claim and filed suit against the prime contractor and Miller Act payment bond surety. The prime contractor and surety moved to stay pending the outcome of the Contract Dispute Acts claim. The trial court agreed with the prime contractor explaining, “It is not fruitful to require [the prime contractor] to fend off [the subcontractor’s] claim against it, and the [Miller Act] sureties [the prime contractor] agreed to indemnify, while simultaneously advancing [the subcontractor’s] claim for additional payment from the government through the ongoing CDA process. [The subcontractor] agreed to such a dispute resolution procedure, and it does not claim that the increased costs were [the prime contractor’s] fault.” Nova Group, supra, at *8.

A subcontractor with such a provision is still required to timely perfect and preserve its rights by timely filing a lawsuit against the Miller Act payment bond surety. However, the subcontractor is now beholden to the Contract Dispute Act procedure which requires an initial decision by the contracting officer and, then, certain appeal rights. This is not what the subcontractor wanted because it elongates any potential resolution. However, this is what the subcontractor agreed to in the dispute resolution provision and benefits the prime contractor so that it does not have to fight the fight on two fronts, particularly when it is supporting the pass-through claim under the Contract Disputes Act claim process.

Remember, the dispute resolution provision in your contract is important and should not be overlooked; the provision has ramifications as shown in the above case!

CERTIFYING CLAIM UNDER CONTRACT DISPUTES ACT

Posted on January 24, 2020January 24, 2020 by Edward Garber

Under the Contract Disputes Act (41 USC 7101 en seq.), when a contractor submits a claim to the government in excess of $100,000, the claim MUST contain a certification of good faith, as follows:

For claims of more than $100,000 made by a contractor, the contractor shall certify that–

(A) the claim is made in good faith;

(B) the supporting data are accurate and complete to the best of the contractor’s knowledge and belief;

(C) the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal Government is liable; and

(D) the certifier is authorized to certify the claim on behalf of the contractor.

41 U.S.C. 7103(b)(1). See also 48 C.F.R. s. 33.207(c) as to the wording of the certification.

The contracting officer is not required to render a final decision on the claim within 60 days if, during this time period, he/she notifies the contractor of the reasons why the certification is defective. 41 U.S.C. 7103(b)(3). Importantly, the contracting officer’s failure to render a decision within 60 days is deemed an appealable denial.

However, “[a] defect in the certification of a claim does not deprive a court or an agency board of jurisdiction over the claim. Prior to the entry of a final judgment by a court or a decision by an agency board, the court or agency board shall require a defective certification to be corrected.” Id.

This is important. In a recent decision out of the Federal Circuit, DAI Global, LLC v. Administrator of the United States Agency for International Development, 945 F.3d 1196 (Fed. Cir. 2019), a government contractor submitted a claim to the government with a defective certification. The contracting officer waited 70 days (not the required 60 days) before notifying the contractor that the claims did not contain the required certification. The contractor (smartly interpreting the contracting officer’s untimely notification as a denial of the claim) appealed to the Civilian Board of Contract Appeals. The Board dismissed the contractor’s claims for lack of jurisdiction claiming the contractor failed to certify the claims and the contractor’s errors in preparing the certification were not correctible. The contractor appealed to the United States Court of Appeals, Federal Circuit.

First, the appellate court held that the Contract Disputes Act states that a defect in the certification does NOT deprive a board over jurisdiction. Whether the defect is technical in nature or not is of no moment since a board is not deprived of jurisdiction if there is any defect in the certification.

Second, the appellate court held that that the contracting officer failed to timely notify the contractor of the defective certification. It was required to either issue a final decision on the claim or notify the contractor of the defective certification within 60 days. “Because the contracting officer failed to issue a decision within the statutory period [60 days], [the contractor’s] claim was deemed denied and became appealable to the Board.” DAI Global, LLC, supra.

It is always good practice to work with counsel when preparing or submitting a claim. Here, the contractor had good counsel as counsel treated the contracting officer’s untimely notification to the contractor of a defective certification as an appealable denial of the claim.

DOES YOUR REQUEST FOR EQUITABLE ADJUSTMENT (REA) COMPLY WITH THE CONTRACT DISPUTES ACT?

Posted on December 30, 2016November 8, 2024 by Edward Garber

Under a federal construction contract, a contractor MUST comply with the Contract Disputes Act and request a final decision from the contracting officer in order for the United States Court of Federal Claims to have jurisdiction over the claim. This means that in most instances a request for an equitable adjustment (REA) will not meet the requirements of the Contract Disputes Act, meaning the Court of Federal Claims will not have jurisdiction to resolve a disputed REA. This is an important distinction for contractors that work on federal construction projects that submit requests for equitable adjustments and best articulated by the Court of Federal Claims:

Under the CDA [Contract Disputes Act], the Court only has subject matter jurisdiction over a contract action against the Government if the action is filed within twelve months after receipt of a contracting officer’s final decision on the claim. Therefore, both a contractor’s claim and the contracting officer’s final decision on that claim are jurisdictional requirements. Logically, there can be no contracting officer’s final decision on a claim if the contractor has not requested such a decision from the contracting officer. A request for a contracting officer’s final decision need not be explicitly labeled as such. For example, an REA under certain circumstances can be construed as a request for a contracting officer’s final decision. However, a request for a contracting officer’s final decision must, at minimum, be a written demand that includes (1) adequate notice of the basis and amount of a claim and (2) a request for a final decision.

Zafer Taahut Insaat ve Ticaret, A.S. v. United States, 2016 WL 7176723, *3 (Fed.Cl. 2016) (internal quotations and citations omitted).

In Zafer Taahut Insaat ve Ticaret, a contractor submitted an REA for unanticipated costs in incurred on a foreign construction project. In the REA, the contractor simply asked the government to review and evaluate the REA at the earliest convenience. The REA was not sent directly to the contracting officer. The government did not pay the REA and the contractor filed suit in the Court of Federal Claims. The government moved to dismiss the lawsuit based on the contractor’s failure to comply with the Contract Disputes Act. The Court granted the motion to dismiss because (1) the REA was not sent directly to the contracting officer and (2) the REA did not request the contracting officer issue a final decision under the Contract Disputes Act. Hence, the Court did not have jurisdiction to resolve the claim.

SUBCONTRACTOR PASS-THROUGH CLAIMS AND THE CONTRACT DISPUTES ACT

Posted on April 26, 2016November 8, 2024 by Edward Garber

A prime contractor submitting a subcontractor’s pass-through claim MUST still comply with the certification requirements in the Contract Disputes Act. And, the prime contractor cannot sponsor a pass-through claim unless it remains liable to the subcontractor for the claim, a doctrine known as the Severin doctrine based on the decision Severin v. U.S., 99 Ct.Cl. 435 (Ct.Cl. 1943). These are important concepts for a prime contractor and subcontractor to understand and appreciate on federal projects.

Certification of Pass-Through Claims

For claims of more that $100,000 (including subcontractor pass-through claims) submitted to the federal government, the contractor must certify:

(A) the claim is made in good faith;

(B) the supporting data are accurate and complete to the best of the contractor’s knowledge and belief;

(C) the amount requested accurately reflects the contract adjustment for which the contractor believes the Federal Government is liable; and

(D) the certifier is authorized to certify the claim on behalf of the contractor.

40 U.S.C. s. 7103(b).

The certification of the claim is defective if it does not include these four elements (set forth in (A) through (D) above).

However, if the certification is defective, this can be cured prior to final judgment by a court or a final decision by a federal agency. See M.K. Ferguson Co. v. U.S., 2016 WL 1551650 (Fed.Cl. April 14, 2016). On the other hand, a failure to certify (versus a defective certification) cannot be cured meaning the contractor has not submitted a proper claim under the Contract Disputes Act. Id.

Severin Doctrine

According to the Severin doctrine, “a prime contractor may not sponsor a pass-through claim unless it remains liable to its subcontractor on the underlying claim.” M.K. Ferguson, supra, at *13. If the federal government is relying on the Severin doctrine:

(1) the burden is on the government to prove that the prime contractor is no longer liable to its subcontractor on the pass-through claim; and

(2) the Severin doctrine generally requires an ‘iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub.

Id. at *14 quoting E.R. Mitchell Constr. Co. v. Danzig, 175 F.3d 1369, 1370-71 (Fed.Cir. 1999)

SUBCONTRACTORS MAY (LIKELY) BE REQUIRED TO STAY THEIR MILLER ACT PAYMENT BOND CLAIMS PENDING THE OUTCOME OF THE CONTRACT DISPUTES ACT RESOLUTION PROCESS

Posted on February 18, 2016November 8, 2024 by Edward Garber

If you are a subcontractor on federal construction projects, the opinion by the District Court of Alaska in U.S. f/u/b/o Brice Environmental Services Corp. v. Bhate Environmental Associates, Inc., 2016 WL 544406 (D.Alaska 2016), provides an interesting or not-so-interesting outlook on subcontractors that participate (perhaps by choice) in the request for equitable adjustment (REA) and Contract Disputes Act dispute resolution process. (See this article for more on this outlook that creates a conflict between a subcontractor’s Miller Act payment bond rights and a prime contractor’s participation in the Contract Disputes Act dispute resolution process.)

In this matter, a soil remediation subcontractor submitted an REA to the prime contractor for approximately $3 Million associated with the prime contractor’s standby and additional work directives. The subcontractor claimed that most of the REA was unrelated to issues caused by the owner, but rather, caused by the prime contractor. The subcontractor and prime contractor agreed to a mutual termination of the subcontractor and the subcontractor reduced its REA to approximately $1.1 Million (to include only incurred costs versus anticipated costs). The prime contractor then submitted a change order request to the federal government. The subcontractor shortly thereafter sued the prime contractor and its Miller Act payment bond surety.

The prime contractor and its Miller Act payment bond surety moved to stay the lawsuit pending the completion a Contract Disputes Act resolution and, if required, completion of arbitration thereafter. The subcontractor did not oppose staying its Miller Act payment bond claim pending arbitration with the prime contractor, but opposed staying the case pending the resolution of the prime contractor’s Contract Disputes Act claim. However, the subcontractor acknowledged that claims attributable to the federal government are passed through to the government and that the subcontractor shall not maintain any proceeding against the prime contractor with respect to government-related (owner) claims until resolution of Contract Dispute Act claims. Moreover, the subcontract provided for the completion of the Contract Disputes Act resolution process between the prime contractor and federal government before the subcontractor could maintain any proceeding against the prime contractor in connection with any omission, default, or act by the federal government.

Here, the subcontractor could not establish that the federal government’s acts did not contribute to its claims against the prime contractor; and, the prime contractor submitted a change order to the federal government that included the subcontractor’s costs supporting its position that the federal government’s acts were connected to the subcontractor’s claim. Nonetheless, the subcontractor argued it would be unfair if it had to bear the brunt of waiting for the resolution of any Contract Disputes Act claim between the prime contractor and federal government before the subcontractor could pursue its claim against the prime contractor. The Court dismissed this argument and stayed the action pending the outcome of the Contract Disputes Act resolution process between the prime contractor and federal government expounding:

The economic strain of awaiting resolution of the CDA procedures between Defendant Bhate [prime contractor] and AFCEC [federal government] is, while burdensome, still a reasonably foreseeable event under the Subcontract. Furthermore, denying the Motion to Stay and allowing this matter to proceed would bifurcate the matter, creating parallel proceedings involving many of the same facts and witnesses. Additionally, it could potentially force Defendants [prime contractor and surety] to take inconsistent positions in the simultaneous proceedings, supporting Plaintiff’s claims against AFCEC while defending against them in the arbitration between the parties. An order staying this matter is supported not only by the contract, but also the promotion of judicial economy and efficiency.

Bhate Environmental Associates, supra, at *4.

This is undoubtedly a harsh ruling for a subcontractor that is now forced to wait a potentially long time while the prime contractor participates in the Contract Disputes Act resolution process. While harsh, the subcontractor agreed to bear this risk in its subcontract. And, from the Court’s rationale, even if the subcontractor did not bear this risk, the Court still found that staying the subcontractor’s claims promoted judicial economy since it prevented the prime contractor from dealing with simultaneous disputes (one with the subcontractor and another with the federal government) and taking inconsistent positions.

From the prime contractor’s perspective, this language that requires the subcontractor to bear this risk and stay any dispute pending the outcome of the Contract Disputes Act resolution process is extremely important language (based on the precise reasoning by the Court quoted above).

From the subcontractor’s perspective, this reinforces the notion that it is imperative for parties to appreciate the risks they are agreeing to in their contracts, particularly as it relates to the resolution of disputes. Also, this reinforces the risk that a subcontractor performing federal construction work may have to bear irrespective of the subcontract.

Although the subcontractor is now in a wait-and-see mode while the Contract Disputes Act process runs its course, the subcontractor was smart by perfecting its Miller Act payment bond rights by timely filing suit. Even though the prime contractor’s Contract Disputes Act resolution process may take some time, the prime contractor and its payment bond surety will ultimately have to deal with this dispute if the outcome of its Contract Disputes Act claim does not fully resolve the subcontractor’s claim to the subcontractor’s satisfaction.

ILLUSTRATION OF HOW BANKRUPTCY CAN IMPACT CONTRACTOR – SUBCONTRACTOR DISPUTE

Posted on August 7, 2015November 8, 2024 by Edward Garber

The case of Ground Improvement Techniques, Inc. v. U.S., 2015 WL 4603693 (Fed.Cir. 2015) is an interesting case that highlights the impact of a contractor filing for bankruptcy during a construction dispute.

In this case, a subcontractor was terminated for default on a federal project. The subcontractor sued the prime contractor for wrongful termination and during the course of the litigation filed for Chapter 11 bankruptcy. Once the subcontractor filed for bankruptcy, its claims against the prime contractor became an asset of the bankruptcy estate. The subcontractor’s Reorganization Plan in the bankruptcy stated it will assign its rights and claims in its litigation against the prime contractor to certain secured creditors. The subcontractor’s secured creditors then continued the litigation against the prime contractor, obtained a judgment, but then the prime contractor filed for bankruptcy. During the administration of the prime contractor’s bankruptcy estate, the subcontractor was ordered to submit a certified claim in the name of the prime contractor to the contracting officer (per the Contract Disputes Act). The subcontractor received no response (to its pass-through claim) and filed a lawsuit against the federal government in its name.

There were two issues raised in this action against the federal government.

First, the subcontractor was no longer the real party interest that possessed claims relating to the project by virtue of its bankruptcy. Such rights and claims had been assigned to its secured creditors that became the real parties in interest. When the subcontractor filed for bankruptcy, its assets, inclusive of its claims, became part of the bankruptcy estate. The subcontractor’s Reorganization Plan stated it will assign such rights and claims to its secured creditors; thus, the Reorganization Plan clearly transferred the subcontractor’s claims to its secured creditors meaning the subcontractor no longer owned the very claims it asserted against the federal government.

Second, and unrelated to the bankruptcy, the subcontractor could not sue the federal government because it was not in privity of contract with the government. “Because a subcontractor ordinarily lacks privity with the government, the Court of Federal Claims generally lacks jurisdiction over claims brought by a subcontractor against the government….” Ground Improvement Techniques, supra, at *7.

CONFLICT BETWEEN A SUBCONTRACTOR’S MILLER ACT PAYMENT BOND CLAIM AND A PRIME CONTRACTOR’S CONTRACT DISPUTES ACT CLAIM

Posted on March 21, 2015November 8, 2024 by Edward Garber

The recent opinion in U.S. f/u/b/o Marenalley Construction, LLC v. Zurich American Insurance Co., 2015 WL 1137053 (E.D.Pa. 2015) is a great example as to what could happen when a prime contractor submits a Contract Disputes Act claim to the federal government that includes subcontractor amounts and then a subcontractor simultaneously pursues the same amounts from the prime contractor’s Miller Act payment bond surety. The question becomes should the subcontractor’s lawsuit against the Miller Act payment surety be dismissed or stayed pending the outcome of the resolution of the prime contractor’s Contract Disputes Act claim. The ruling in this case held that the subcontractor’s Miller Act claim could proceed, and would not be dismissed or stayed, pending the outcome of the prime contractor’s Contract Disputes Act claim. This was a great ruling for the subcontractor and obviously puts the prime contractor in an uncomfortable position, to say the least, since it becomes hard to dispute a subcontractor’s claim when the merits of that claim have been packaged (or passed through) to the federal government in a certified Contract Disputes Act claim.

In this case, both the prime contractor and subcontractor agreed that the United States Department of Veterans Affairs (VA) caused additional work that increased the cost of the work. As a result, the prime contractor submitted a Contract Disputes Act claim to the VA that included claims and amounts from subcontractors. While the prime contractor’s claim was pending with the VA, a subcontractor sued the prime contractor’s Miller Act payment bond surety. This was a subcontractor that also had its claims and amounts packaged (or passed through) to the VA in the prime contractor’s Contract Disputes Act claim.

The prime contractor argued that the subcontractor’s Miller Act payment bond claim should be dismissed or stayed pending the resolution of the Contract Disputes Act claim. In particular, the prime contractor argued that because the subcontract incorporated a dispute resolution clause (that incorporated the requirements of the Contract Disputes Act), the subcontractor was required to exhaust this administrative process before proceeding with a Miller Act payment bond claim.

Dismissal of Miller Act Payment Bond Claim?

The ruling to deny the prime contractor and surety’s motion to dismiss the Miller Act payment bond claim was an easy decision. To begin with, a Miller Act payment bond claim needs to be instituted within a year from the subcontractor’s last furnishing so if the court dismissed the claim it would potentially be depriving the subcontractor of its rights under the law without any certainty as to if the subcontractor re-filed the lawsuit it would be within the statute of limitations or the statute of limitations would otherwise be tolled. And, pursuant to the Miller Act, a subcontractor cannot contractually agree to waive its Miller Act rights before the subcontractor performed any work. A waiver of Miller Act payment bond rights is only enforceable if the waiver is: 1) in writing, 2) signed by the party waiving its payment bond rights, and 3) “executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.” See 40 U.S.C. s. 3133.

Stay of Miller Act Payment Bond Claim?

The real determination was whether the subcontractor’s Miller Act payment bond lawsuit should be stayed until the completion of the prime contractor’s dispute resolution with the VA. The court held No!:

“The Miller Act entitles Marenalley [subcontractor] to bring suit ninety days after the completion of its work…not when and if Nason [prime contractor] recovers from the VA. Conditioning Marenalley’s right to recover from the [Miller Act] Payment Bond on the completion of Nason’s CDA [Contract Disputes Act] process would be inconsistent with the terms of the Miller Act.

***

Nason and Zurich [surety] protest that they will be prejudiced in the absence of a stay due to the costs of dual litigation and the risk of inconsistent decisions. The Court is not overly troubled by these arguments. Ordinarily the fact that a prime contractor has a claim for the same amount pending under the disputes clause of the [incorporated] prime contract, does not affect Miller Act cases.

***

The CDA process will determine the VA’s liability to Nason. The VA, however, has no jurisdiction over the amount that Nason must pay Marenalley and no interest in how that amount is determined. Thus, a stay would subject Marenalley to a substantial, indefinite delay as Nason’s claim passes through the administrative process and court review, only to be left at the end of that process to begin again here to litigate its rights against Nason.”

Marenalley, supra, at *6 (internal citations and quotations omitted).

How Does a Prime Contractor Account for this Risk?

So, based on this ruling, how does a prime contractor account for this business risk? And, this is a business risk because there may be value to a subcontractor to pursue the Miller Act payment bond claim rather than wait an indefinite period of time for the Contract Disputes Act process to resolve itself and then hope that the prime contractor pays the subcontractor the portion of the subcontractor’s claim that was passed through to the federal government.

Well, there is authority that would entitle the prime contractor to a stay of a subcontractor’s Miller Act payment bond lawsuit. But, this authority is predicated on language in the subcontract that any action filed by the subcontractor will be stayed pending the exhaustion of administrative remedies.

For example, in U.S. f/u/b/o Trans Coastal Roofing Co. v. David Boland, Inc., 922 F.Supp. 597, 598 (S.D.Fla. 1996), the subcontract contained the following language:

“[s]ubcontractor shall first pursue and fully exhaust [the procedures set forth in the standard disputes clause of the primary contract] before commencing any other action against Contractor for any claims it may have arising out of its performance of the Work herein.”

***

“[Contractor shall] prosecute all claims submitted by Subcontractor under the contractual remedial procedure of the Prime Contract on behalf of and to the extent required by the Subcontractor.”

***

“[Subcontractor] agree[d] to stay an action or claim against [the prime contractor’s Miller Act bond] pending the complete and final resolution of the Prime Contract’s contractual remedial procedure.”

Because the subcontractor failed to exhaust its administrative remedies, the court dismissed the subcontractor’s Miller Act payment bond claim. Importantly, this case was decided before there were amendments to the Miller Act that now prevents a subcontractor from waiving a Miller Act payment bond claim prior to performing work. Thus, if this case were decided today, the court likely would have stayed the Miller Act payment bond claim instead of dismissing it unless, of course, it was clear that the statute of limitations for pursuing a Miller Act payment bond claim would be tolled pending the exhaustion of the administrative remedies.

Similarly, in U.S. v. Dick/Morganti, 2007 WL 3231717 (N.D.Cal. 2007), the prime contractor and surety moved to stay a subcontractor’s payment bond claim based on the following subcontract language:

“If the Owner [GSA] and the Contractor [Dick/Morganti], pursuant to the General Contract or by agreement, submit any dispute, controversy, or claim between them to arbitration or some other dispute resolution procedure specified in the General Contract and such a matter involves or relates to a dispute, controversy, or claim between the Contractor and the Subcontractor, Subcontractor agrees …to stay any action filed by the Subcontractor until the dispute resolution and appeals process between the Contractor and the Owner is exhausted.”

The prime contractor argued it “intended” to submit a claim to the federal government [GSA] that will include the subcontractor’s amounts and, as such, the provision should operate to stay the subcontractor’s Miller Act payment bond claim. The court agreed provided that the prime contractor did actually submit the claim.

Thus, a prime contractor should absolutely incorporate language in a subcontract consistent with the language in these decisions that reflects that any action filed by the subcontractor, including an action against the prime contractor’s Miller Act payment bond surety, will be stayed pending the complete resolution of any dispute resolution between the prime contractor and federal government that involves or includes the claims and amounts sought by the subcontractor.

And a subcontractor, even if this language is included in the subcontract, should still move forward and timely file any Miller Act payment bond lawsuit.

SUBMITTING A “CLAIM” UNDER THE CONTRACT DISPUTES ACT

Posted on November 6, 2014November 8, 2024 by Edward Garber

The case of Delaware Cornerstone Builders, Inc. v. U.S., 117 Fed.Cl. 539 (Fed.Cl. 2014) exemplifies what happens if a federal government contractor fails to properly submit a claim in accordance with the Contract Disputes Act (41 U.S.C. s. 7101 en seq.). As reflected below, the failure of the contractor to comply with the Contract Disputes Act will strip the United States Court of Federal Claims of jurisdiction to resolve the contractor’s claim with the federal government.

In this case, the contractor disputed the scope of the government’s punchlist. The contractor sent a letter to the contracting officer that included a good faith certification requesting payment in the amount of $143,390.39 pursuant to its resubmitted payment application #14. The contracting officer denied the payment request stating that the amount exceeded the value of punchlist work. Due to the delay in the contractor completing the punchlist items, the government advised that it would hire another contractor to complete the items and deduct the costs from the contractor’s contract balance. However, the government did not hire the replacement contractor. Years later the contract was still not closed out. The contractor was still trying to get paid its contract balance and was communicating with the government’s legal counsel. The government’s counsel advised the contractor to submit a formal claim (per the Contract Disputes Act), but the contractor failed to do so. Instead, the contractor filed a lawsuit in the Court of Federal Claims for $200,760.39. The government moved to dismiss the complaint based on the contractor’s failure to comply with the Contract Disputes Act prior to filing the lawsuit. The Court of Federal Claims agreed:

The CDA [Contract Disputes Act] permits a contractor to appeal the final decision of a contracting officer to this Court within 12 months of receiving the decision on a claim. A contractor may also seek review in this Court if the contracting officer fails to respond to a contractor’s claim within 60 days, as provided in the CDA. As such, the predicate for jurisdiction under the CDA is an appeal of either a contracting officer’s final decision on a claim or a deemed denial of a claim.

***

The CDA does not define the term “claim,” but the Federal Acquisition Regulation (“FAR”) [in F.A.R. 2.101] defines a claim as 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 from or relating to the contract. Thus, the elements of a claim are: (i) a written demand, (ii) seeking, as a matter of right, (iii) the payment of money in a sum certain. Additionally, all claims requesting relief greater than $100,000 must be certified by the contractor.

***

An action brought before the Court of Federal Claims under the CDA must be based on the same claim previously presented to and denied by the contracting officer.

Delaware Cornerstone Builders, supra, at 545-47 (internal quotations and citations omitted).

While the contractor arguably submitted a certified claim for the $143,390.39 per its resubmitted payment application #14, this amount was different than the $200,760.39 it was seeking in its Complaint. Thus, the amount it was seeking was not based on the same potential claim denied by the contracting officer which was a condition precedent to the contractor filing a lawsuit against the government in the Court of Federal Claims.

If a prime contractor wants to pursue a claim against the federal government, it needs to properly prepare and submit that claim pursuant to the Contract Disputes Act. Notably, this is also memorialized in the disputes clause in F.A.R. 52.233-1 that is likely incorporated into the prime contract.

HOME OFFICE OVERHEAD (EICHLEAY) AND GOVERNMENT-CAUSED STANDBY

Posted on August 3, 2014November 8, 2024 by Edward Garber

JMR Construction Corp. v. United States, 2014 WL 3418445 (Fed.Cl. 2014) is a good federal government contracting case discussing a prime contractor’s challenging burden to support unabsorbed home office overhead damages caused by a government-caused delay. The United States Court of Federal Claims described unabsorbed home office overhead damages and the required elements (under the Eichleay methodology) for a prime contractor to prove these damages:

The term “home office overhead” refers to the general administration costs of running a business, such as accounting and payroll services, general insurance, salaries of upper-level management, heat, electricity, taxes, and depreciation. These are indirect costs, expended for the benefit of the whole business, [and thus] by their nature cannot be attributed or charged to any particular contract.

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Contractors typically recoup these indirect costs by allocating them to individual contracts in proportion to those contracts’ direct costs. But, in the event of a government-caused delay or suspension of work, the stream of direct costs against which to assess a percentage [of home office overhead] is decreased. The resulting shortfall is termed unabsorbed home office overhead.

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The Circuit has held that the so-called Eichleay formula is the sole method through which contractors are able to recover unabsorbed home office overhead. The Eichleay formula requires that contractors satisfy several strict prerequisites. First, the contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay. Second, the contractor must show that it incurred additional overhead expenses, either because the contract’s performance period was extended or because the contractor would have finished prior to the un-extended performance period’s close. Third, the contractor must establish that it was required to remain on standby for the duration of the delay. [Standby does not require the prime contractor to prove that it was completely idle but that its work was significantly slowed such that it was performing minor tasks.]

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In order to establish standby, contractors must demonstrate three things. First, the contractor must show that the government caused delay was not only substantial but was of an indefinite duration. Second, the contractor must demonstrate that, during the delay, it was required to return to work at full speed and immediately [once the suspension period is over. If the prime contractor is given a reasonable period of time to remobilize after the suspension is lifted, it will not be able to satisfy this requirement]. Third, the contractor must show a suspension of most if not all of the contract work. If the contracting officer has issued a written stop work order proving these elements the contractor can utilize that order to provide direct evidence of standby. Otherwise, these elements can be proven through indirect evidence.

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If the contractor can make a prima facie showing of the standby elements, the burden of production shifts to the government to show either that it was not impractical for the contractor to obtain replacement work during the delay, or that the contractor’s inability to obtain or perform replacement work was caused by a factor other than the government’s delay.

JMR Construction, supra, at *5-7 (internal quotations and citations omitted); see also P.J. Dick, Inc. v. Principi, 324 F.3d 1364 (Fed.Cir. 2003) (finding that contractor could not support claim for unabsorbed home office overhead as it could not support it was on standby).

The Federal Circuit Court of Appeals summarized these requirements by the following questions:

In short, a court evaluating a contractor’s claim for Eichleay damages should ask the following questions: (1) was there a government-caused delay that was not concurrent with another delay caused by some other source; (2) did the contractor demonstrate that it incurred additional overhead…; (3) did the government CO [contracting officer] issue a suspension or other order expressly putting the contractor on standby; (4) if not, can the contractor prove there was a delay of indefinite duration during which it could not bill substantial amounts of work on the contract and at the end of which it was required to be able to return to work on the contract at full speed and immediately; (5) can the government satisfy its burden of production showing that it was not impractical for the contractor to take on replacement work (i.e., a new contract) and thereby mitigate its damages; and (6) if the government meets its burden of production, can the contractor satisfy its burden of persuasion that it was impractical for it to obtain sufficient replacement work. Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages.

P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1373 (Fed.Cir. 2003).

In JMR Construction, the prime contractor was hired to build an aircraft maintenance facility. The prime contractor sued the government pursuant to the Contract Disputes Act for government-caused delays. The period of delay the prime contractor was seeking to recover damages for was January 16, 2009 (day after the government occupied the facility) through September 4, 2009 (completion).

The government took occupancy of the facility on January 15, 2009. The prime contractor continued to perform work after this date, although its workforce slowed down. On February 3, 2009, the prime contractor demobilized its jobsite trailer and was finishing the balance of its work including the manufacturing and installation of a permanent power converter and the installation of ceiling lights in one of the rooms. Temporary stopgap measures had been implemented to address these electrical issues that likely allowed the government to utilize the facility.

The government moved for summary judgment as to the prime contractor’s entitlement to unabsorbed home office overhead damages. The Court broke the prime contractor’s unabsorbed home office overhead claim into two discrete periods: (1) January 16, 2009 (day after the government took occupancy) to February 3, 2009 (when the contractor demobilized jobsite trailer) and (2) February 4, 2009 to September 4, 2009 (period when the permanent power and room lighting were being installed). Because the contracting officer never issued a standby notice, the prime contractor had the burden to prove by indirect evidence the factors (referenced above) supporting its entitlement to unabsorbed home office overhead.

First Period: 1/16/09-2/3/09

The Court did not grant summary judgment during this period because there was a disputed issue of fact as to materiality of the work the prime contractor was performing during this time period. The prime contractor contended the work it was performing was minor whereas the government contended the work was material. If the work is deemed material (or more than just minor tasks) the prime contractor’s unabsorbed home office overhead claim will fail since it was never on standby or suspended. If it was minor, the prime contractor would still need to prove the elements of standby. Although the Court declined to grant summary judgment based on this disputed factual issue, it seems from the Court’s ruling during the second time period (below) that the prime contractor will have difficulty proving the elements of standby.

Second Period: 2/4/09-9/4/09

The Court granted summary judgment on the prime contractor’s claim for unabsorbed home office overhead during this period because the prime contractor could NOT prove the elements of standby. In particular, the prime contractor could not prove it was required to resume work at full speed and immediately once the “suspension period” was over. The prime contractor did not appear to maintain any personnel or equipment on site during this period that eliminated any argument that it was required to return to work with any degree of urgency once the suspension was lifted. The prime contractor also utilized a subcontractor to perform the incomplete electrical work, and the use of subcontractors can limit a prime contractor’s ability to prove standby since it was only monitoring the work and not actually required to return to work at all. And last, temporary stopgap measures were implemented relating to the lighting that negated the time sensitivity of the remaining work meaning there was no urgency for the contractor to resume work immediately.

Finally, even assuming the prime contractor could support its entitlement to unabsorbed home office overhead, the Court did not go into any discussion regarding the Eichleay formula–the specific formula utilized to determine the allocable unabsorbed home office overhead associated with a government-caused delay. The objective of the Eichleay formula is to obtain a daily rate for the home office overhead allocated to the specific contract and multiply the daily rate by the number of delay days to determine the contractor’s unabsorbed home office overhead caused by the government’s delay.