Saturday, September 22, 2012


The Court of Appeals for the Federal Circuit (CAFC) has just ruled that the government must not only pay the contract administration costs of preparing a request for equitable adjustment (REA) under the changes clause, it also must pay reasonable costs, including attorneys' fees, of negotiating a settlement even if negotiation eventually fails and a Contract Disputes Act (CDA) claim is later submitted.

The government argued that the negotiation costs were not recoverable because the contractor was just trying to "maximize monetary recovery."  As such, the costs were not true costs of contract administration.  The Postal Services Board agreed and so found.  On appeal, the CAFC reversed and remanded, directing the Board to grant the contractor's appeal in its entirety.  The CAFC went on to say "this means" the contract is entitled to recover its costs, attorney fees, plus interest under the CDA.

The CAFC had been to this dance before.  In a 1995 case called Bill Strong Enterprises, the CAFC had held that REA preparation and negotiation costs were allowable as contract administration costs.  In examining the issue again, the court defined the issue as whether the costs are classified as general contract administration costs or claim preparation costs.  The former are allowable and the latter, not.  (The CAFC, for all practical purposes, is the highest court to hear procurement cases.  The U.S. Supreme Court very rarely gets involved.)

The CAFC said:
Although there is sometimes an air of adversity in the relationship between the CO and the contractor,their efforts to resolve their differences amicably reflect a mutual desire to achieve a result acceptable to both.
The CAFC went on to opine that the courts should examine the objective reason why the contractor incurred the cost.  If a contractor incurred the cost to further negotiation, the cost is allowable.  If, however, the contractor's underlying purpose is "to promote the prosecution of a CDA claim" then the cost is unallowable.  And the court made clear the allowability rule prevails even if negotiation eventually fails and a CDA claim is later submitted.

So, this is as reminder that REA preparation and negotiation costs are recoverable. The bright line distinction is when the contractor converts the REA to a CDA claim. From that date forward, claim costs are not recoverable under FAR 31.205-33.  

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