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.