Legal Insights: Claim Pitfalls
Winter 2011

This two-part series of articles discusses how contractors should pursue claims against the federal government. In the last issue of the Pulse, the first part examined the preparation of a successful claim. This second part concerns claim pitfalls.

Contractors planning to pursue a claim under the Contract Disputes Act against the federal government need to be aware of a variety of pitfalls that can render their claim dead on arrival.  The government has available to it many defenses that will lead to the denial of a claim before the merits of the claim are even considered.  The primary pitfalls include the following.

Inadvertent Release of Claim
Potential claims can be forfeited by a contractor executing a release in exchange for final payment.  Typically contractors are required to sign a release of all claims arising under the contract at the time final payment is tendered.  If a claim or potential claim is pending, the contractor must insist on language in the release preserving the right to pursue that claim.  Otherwise if a contractor accepts final payment in exchange for a release of further liability on the part of the government, any claim under the contract will likely be released as well.  

The inadvertent release of a claim does not happen only in connection with final payment.  The same problem can arise when the government offers a bilateral contract modification incorporating a release.  If the claim arises from that modification, the modification must include language preserving the contractor’s right to pursue its claim.

Certification
Contract claims above a certain minimum threshold must be certified.  The purpose of certification is to provide an accurate appraisal of the contractor’s damages and thus encourage settlement.  Certification also serves to discourage improper submissions by holding contractors liable for fraudulent claims.  An uncertified claim is not valid.  The Court of Federal Claims and the Board of Contract Appeals do not have jurisdiction over uncertified claims.  

Fortunately, a defective certification is not the same as an uncertified claim.  A defective certification can be corrected prior to the entry of final judgment or a decision.  In certifying a claim, a contractor must ensure that the appropriate person executes the certification.  The certifying individual has to be duly authorized to certify and must have knowledge of the basis of the claim, including knowledge of the accuracy and completeness of the supporting data.  A certifier does not, however, need to have first hand involvement in the events giving rise to the claim but may base his or her knowledge on a review of company records. 

Sum Certain
Claims must seek 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 the contract. A sum certain is not stated where the amount of the claim is described as “in excess of,” “no less than,” “at a minimum,” or “approximately.” On the other hand, a claim for a sum certain plus an estimated continuing per month cost that is readily calculable is valid. A sum certain does not have to include a detailed breakdown of costs.

Contract Changes
A contractor asserting a claim arising from a contract change (which most claims do) must ensure that it has preserved a claim for contract changes. Virtually every contract includes a changes clause. While the form of the clause can vary depending on the nature of the contract, they basically require that a contractor must first give notice of an asserted right to compensation for the change. These clauses typically provide that after a change is ordered by the contracting officer, the contractor has a certain period of time (usually 30 days) within which it must assert its right to an equitable adjustment if the change order causes an increase in the contractor’s cost of performance or time required for performance.

Notice provisions in changes clauses generally also apply to constructive changes as well. A contractor should give notice of any increase in cost or time of performance after it receives any written or oral order from the contracting officer that causes such a change.

The required contents of a notice will vary depending on the particular changes clause involved, but notice should generally include the identity of the individual requesting the change, the nature of the change and a description of the additional work required by the change. The notice should also request confirmation of the authority of the government representative directing the change.

Contractors who fail to provide notice of a contract change are not necessarily out of luck. There are exceptions to the notice requirement. These exceptions include situations where (i) the responsible government officials are aware, or should be aware, of the facts giving rise to the claim, (ii) the government has actual knowledge of the facts underlying the contractor’s claim and the government cannot sustain its burden to establish it was prejudiced by the absence of formal notice, or (iii) the contracting officer decides the contracting officer’s claim.

False Claims
What is worse than a denied claim? How about a claim that is not only denied but also leads to civil or criminal liability on the part of the contractor? Recent years have seen a renewed emphasis by the government on oversight of contractors. The False Claims Act is a primary tool for exercising control over perceived contracting excesses. If a contractor is unable to support any part of its claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor, it shall be liable to the government for an amount equal to such unsupported part of the claim in addition to all costs to the government attributable to the costs of reviewing that part of the claim. The government may assert a false claim up to six years after the misrepresentation.

What is most difficult about false claims is that they often encompass conduct which people ordinarily do not consider fraudulent. For example, false claims can arise from a failure to fully investigate. The contractor may prepare a claim based on interviews with less than all of the key personnel or a review of less than all of the key documents.

A contractor should never submit a claim as a bargaining chip. A contractor might add to a set of claims submitted to a contracting officer a claim the contractor intends to abandon later on as a negotiating tool. If it is determined that the contractor did not have reason to believe that this added claim was legitimate, a false claim can ensue despite the validity of other claims submitted at the same time by the contractor. In connection with this scenario, contractors should beware of signing settlement agreements reciting that payment by the government reflects the amount to which the contractor is legally entitled. If the contractor originally sought an amount greater than is reflected in the settlement agreement, the settlement agreement should refer to the settlement amount as a compromise figure.

Another false claim scenario is where a claim is based on estimates. When actual account records are not readily acceptable, a contractor may be tempted to estimate cost figures. If a later government audit reveals that these estimates are overstated, however, a false claim may be asserted.

Avoiding the Pitfalls
Contract claims are difficult enough on the merits. When the procedural defenses available to the government are considered, successfully pursuing a contract claim can look to be a daunting task. Contractors intent on prosecuting a claim must identify the basis of the claim early and then have available to them a checklist of each of the requirements of a valid claim. Only after each item on the checklist is satisfied should the claim proceed. Contractors should never pursue a claim without knowing the legal requirements defining the right to bring that claim.

Authors

Related Attorneys