This two-part series of articles discusses how contractors should pursue claims against the federal government. This first part examines the preparation of a successful claim. The second part, which will appear in the next issue of the Pulse, is about claim pitfalls.
Claims arising under contracts with the federal government are governed by the Contract Disputes Act. 41 U.S.C. §§ 601 to 613. The CDA provides that a claim is to be submitted in writing to the contracting officer within six years after it accrues. Claims of more than $100,000 must also be certified.
After a certified claim is received by the contracting officer, he or she has 60 days either to issue a decision or inform the contractor of the time within which the decision will be made. The contracting officer’s decision must be in writing and shall state the reasons for the decision.
A contractor whose claim is denied has the option of appealing the claim to the cognizant board of contract appeals within 90 days of receipt of the decision or seeking judicial review by the U.S. Court of Federal Claims within 12 months. Any further appeals from either of these forums go to the U.S. Court of Appeals for the Federal Circuit.
Successful claims usually are the product of early identification, proper pricing and the use of outside professionals.
Early Identification of Claim
A contractor first encountering circumstances that may give rise to a contract claim needs to identify early the grounds for the claim and possible cost impacts. This means that the contractor should immediately gather data supporting the claim and document the available facts. Contemporaneously created documents are far more persuasive than documents created after the fact.
At the same time, the contractor must put the contracting officer on notice of a possible claim. This is important because Changes clauses incorporated into federal contracts require prompt notice, usually within 30 days of the grounds for a claim being discovered. Failure to provide such notice may result in denial of the claim. Immediate notice also gives the contracting officer the opportunity to cure or minimize the impact of a potential claim. Finally, early notice might strengthen the contractor’s relationship with the government by keeping contracting officials informed as the claim develops and thus eliminating unpleasant surprises down the road.
Proper Pricing of Claim
Two basic pricing methods are utilized in contract claims. The most common and most commonly accepted technique is direct calculation. Costs resulting from actions or inactions of the government that cause a change in the contract work or delay performance are calculated based on actual cost evidence.
The other pricing approach is some variant of the total cost method. This technique is used when no other means of fixing the amount of the claim are available. The cost of the work as originally bid or proposed is subtracted from the total costs incurred on the contract. The difference is said to be the cost impact of changes in contract performance. This method is almost universally disfavored because it assumes the original bid or proposal cost was reasonable and that the contractor efficiently managed the changes.
To recover costs on a contract claim, they must be allowable. FAR 31.201-2. An allowable cost is first of all, reasonable. A cost is deemed reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. No presumption of reasonableness is assigned to any cost simply because it was incurred by the contractor. FAR 31.201-3.
An allowable cost must also be allocable to a government contract. Allocable costs (1) are incurred specifically for the contract, (2) benefit both the contract and other work and can be distributed to them in reasonable proportion to the benefits received, or (3) are necessary to the overall operation of the business, although a direct relationship to any particular cost or objective cannot be shown. FAR 31.201-4.
Allowable costs must further comply with any applicable Cost Accounting Standards or generally accepted accounting principles and practices, along with the terms of the contract. Finally, allowable costs must satisfy the requirements for specific types of costs laid out in FAR Subpart 31.2.
Use of Outside Professionals
A successful claim is usually supported by the work of outside professionals. Frequently, this will be a lawyer. Many times an accountant is also involved in the claim preparation process. As needed, other experts can be utilized. Although outside professionals cost money, it is important to remember that a successful claim is cheaper than a successful appeal. Not all claims require outside assistance. An in-house legal or accounting staff may be sufficient. Moreover, small claims may not be cost effective if the expense of outside help is added in. One rule of thumb in deciding if a claim is significant enough to merit outside help is whether the contractor is willing to appeal the claim if it is denied by the contracting officer.
If so, then the contractor should attempt to avoid the cost of appeal by putting together as persuasive a claim as possible when first submitted to the contracting officer.
Generally speaking, a claim utilizing the expertise of outside professionals will be better grounded in legal and cost accounting principles. The claim will also benefit from an outsider’s perspective. Often contractors are too close to the events at issue to give them an objective look. Similarly, use of outside professionals may minimize the contractor’s exposure to liability under the False Claims Act. Many claim scenarios that might seem innocent on the surface can subject a contractor to government allegations of fraud. A lawyer familiar with such scenarios may help the contractor avoid inadvertently becoming the subject of a fraud case.
Contract claims are often denied. A contractor maximizes its chances of a successful claim, however, if it exercises foresight, attention to pricing and is willing to utilize outside expertise. Contractors who treat the claim process proactively from the outset are better equipped to avoid the pain of a denied claim and the expense of a subsequent appeal.