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.

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

Posted on December 30, 2016December 30, 2016 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.

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, 2016February 18, 2016 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.

REQUESTS FOR EQUITABLE ADJUSTMENT AND CONSTRUCTIVE CHANGES IN FEDERAL CONSTRUCTION PROJECTS

Posted on October 29, 2014October 29, 2014 by Edward Garber

Federal government construction contracts contain a changes clause. The changes clause in fixed-price federal construction contracts is contained in F.A.R. 52.243-4 (set forth at the bottom of this posting). This changes clause allows the government, through the contracting officer, to direct changes to the construction contract. It also allows the prime contractor to request an equitable adjustment to its contract price associated with either a directed / formal change or a constructive change.

Formal / directed changes issued to the prime contractor by the government are easy to comprehend. These typically are less likely to lead to a dispute because the government acknowledges increased costs are owed to the prime contractor through its issuance of a formal change order / directive.

A constructive change, on the other hand, oftentimes is what leads to a dispute if the government does not agree that it caused the contractor to incur increased costs to perform the contract. The United States Court of Federal Claims in CEMS, Inc. v. U.S., 59 Fed.Cl. 168 (Fed.Cl. 2003) contains a good discussion as to what constitutes a constructive change:

“A constructive change generally arises where the Government, without more, expressly or impliedly orders the contractor to perform work that is not specified in the contract documents. The constructive change doctrine provides recovery for contractors as the rationale for constructive changes involves the objective of persuading a contractor to continue to work pending resolution of any dispute involving the work at issue.

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There are two basic components to the constructive change doctrine-the change component and the order/fault component. The change component describes work outside of the scope of the contract, while the order/fault component describes the reason that the contractor performed the work.

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A constructive change issue arises for work if the Government either expressly or impliedly ordered the work outside the scope of the contract, or if the Government otherwise caused the contractor to incur additional work….In any event, the Government must have directed the contractor to perform the additional work. The work must not have been volunteered.”

CEMS, supra, at 203 (internal quotations and citations omitted).

It is the constructive change that typically leads to what is referred to as a request for equitable adjustment or REA. An equitable adjustment compensates a prime contractor for the increased costs it incurs in performing the contract, whether due to additional work or delays caused by the government. Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1243-44 (10^th Cir. 1999). “Some equitable adjustments are for work added by formal change orders….Other equitable adjustments result from ‘constructive changes,’ which occur when the government does something to increase the contractor’s costs without issuing a formal change order.” Id at 1244.

For a prime contractor to receive an equitable adjustment under the changes clause, it bears the burden of proving liability, causation, and injury. P.R. Burke Corp. v. U.S., 58 Fed.Cl. 549, 556 (Fed.Cl. 2003). The prime contractor must “prove that the government somehow delayed, accelerated, augmented, or complicated the work, and thereby caused the contractor to incur specific additional costs.” Morrison Knudsen Corp., 175 F.3d at 1244. Stated differently, “[b]efore an equitable adjustment will be granted, plaintiffs [prime contractor] are required to demonstrate that: (1) increased costs arose from conditions materially different from what the contract documents indicated and that such conditions were reasonably unforeseeable based on all information available to the contractor; and (2) the changes in the requirements caused the increased costs.” Sipco Services & Marine, Inc. v. U.S., 41 Fed.Cl. 196, 224 (Fed.Cl. 1998).

As a prime contractor, if you experience a constructive change (increased costs to perform your work), notify the government and request an equitable adjustment to the contract. If you volunteer to do additional work than you may be impacting your ability to request an equitable adjustment for a constructive change. It is all about knowing and understanding your rights under the contract so that, among other things, you can preserve your right to seek additional compensation / an equitable adjustment to your contract price.

52.243-4 Changes (JUN 2007)

(a) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes-

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished property or services; or

(4) Directing acceleration in the performance of the work.

(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order.

(c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.

(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

(e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above.

(f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.