COST REASONABLENESS

In pricing an equitable adjustment, costs must be reasonable.  They may be estimated, if actual costs are unavailable.  See our discussion on the use of estimates.  The FAR used to state that incurred costs are presumed to be reasonable.  However, that was changed to place the burden on the contractor to prove reasonableness.  So what rules apply?

The case law says an equitable adjustment involves the contractor which experiences the change and the effect of the change on that contractor, not some other contractor who might have been able to perform the work for a lower cost.  So, the equitable adjustment requires the use of the contractor's actual costs, provided they are "reasonable" under the FAR test.  The fact that the contractor may not be as efficient as some other contractor is immaterial.  The government chose to deal with the particular contractor involved with the change.   

The contractor does have the burden of proving reasonableness of the costs.  However, evidence that the costs were incurred in the course of following normal business practices has been held to be sufficient.  Submitting accounting records stating that costs were incurred has been held to satisfy the requirement.  Bath Iron Works Corp., ASBCA No. 54544, 06-1 BCA para. 33158.  However, the burden is on the contractor to satisfy FAR 31.201-3, which states the test for reasonableness.  The test boils down to whether a reasonable prudent business person would have incurred the costs.   

 

The basic purpose of the equitable adjustment is "to keep the contractor whole when the government modifies the contract."  Bruce Constr. Corp. v. United States, 324 F.2d 516 (Ct. Cl. 1963).  Making the contractor whole requires that the government to make whole the contractor it chose to deal with when it made changes. 

 

bill@spriggsconsultingservices.com             bill@spriggslawgroup.com