Wednesday, June 20, 2012


The retiring CEO of Lockheed Martin, Robert Stevens, warned yesterday that contract claims are coming as a result of sequestration.  Lockheed Martin has some 40,000 suppliers, he said. "My sense is, those 40,000 suppliers will say [sequestration] is a business disruption and we will provide a claim to you for the adverse cost impact for the disruption in that business."  Stevens was quoted in an article in Federal News Radio today, written by Jason Miller.

Stevens went on to say that when Lockheed Martin and its suppliers do not produce at the planned rate, the capital investment they have made does not get amortized as planned.  He expressed the result as driving up unit costs for which contractors would seek "equitable adjustment" to their contracts.  Equitable adjustments are claims in the making.

We written often about government threatened shutdowns can create claims.  But, in the past, we've not heard the CEO of a major government supplier sound the warning.  My guess is that Mr. Stevens is particularly insightful or he is a good listener (to his lawyers).

One of the type of claims to which Mr. Stevens may be referring is called unabsorbed overhead.  A contractor plans to amortize its overhead in a certain fashion over certain contracts as written.  Then the offending contract is changed through a government act or omission.  The contractor often has recovered overhead, G & A and profit based on its inability to recover these costs and their attendant profit as planned.  Contractors may well be entitled to compensation in the form of unabsorbed overhead, and perhaps other types of costs, as a result of sequestration.

The government has an absolute defense called the "sovereign act" defense which immunizes the government when the legislation merely has an incidental and not intentional impact on individual contracts.  You be the judge as to whether that will work.  Sequestration apparently was designed to produce the very impact on contracts Mr. Stevens predicts.  Under that interpretation, the defense will not work.

More on this as the countdown to sequestration continues.

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1 comment:

  1. I suspect the "sovereign act" defense will be invoked in the case of claims for unabsorbed overhead for planned work that does not materialze. I anticipate, however, a multitude of (partial) terminations for convenience to effect the reductions mandated by sequestration. Many services contract options will be exercised or annual contracts or orders awarded in October or November only to have funding reduced in January. I do NOT believe the sovereign act defense can be used to deny the resulting termination claims.