Many if not most contractors have
been smart enough to build the effects of inflation into their initial pricing
on government contracts. Some of them, however, did not get it exactly right.
And then there are those who for one reason or another did not price the risk
of extraordinary inflation. We are here to sympathize with those of you who are
being killed by inflation which you did not reasonably expect and help you
recover from of the impact of inflation and show you the way in which you can
be made whole on your contract. Our approach to making the contractor whole is
based on those very words used by the appellate court in 1963 to describe the
objective when it comes to remuneration on a contract that has been changed. In describing the process by which contractors
are compensated when there are changes, the court referring to the mechanism of
an equitable adjustment, stated:
“Equitable adjustments in this context are simply
corrective measures utilized to keep a contractor whole when the Government
modifies a contract. Since the purpose underlying such adjustments is to
safeguard the contractor against increased costs engendered by the
modification, it appears patent that the measure of damages cannot be the value
received by the Government but must be more closely related to and contingent upon
the altered position in which the contractor finds himself by reason of the
modification.” Bruce Construction
Corporation v. United States, 324 F.2d 516 (Ct. Cl. 1963).
This is not your definitive treatise on recovery
of damages for breaches of construction contracts in the private sector. That
is for another day and other authors to explore even further than has been
explored so far. Here, we address those contractors who also deal in the public
sector and who are concerned about sufficient recovery in the event of changes
and how to make contracts attractively profitable. Stated another way, some
contractors are wary of or are even leaving the public sector based on their
perception of stringent restrictions on the recovery of damages in the event of
things going wrong. And they may especially be concerned about the effects of
inflation and what to do about it because much has been written about how there
are no clauses in public contracts that protect contractors from inflation. And
that is correct except for limited assistance by DOD.
In private contracting, damages fall roughly into
three categories: direct, incidental, and consequential.
In public contracting, damage calculations are
made in the context of the changes clause which provides for what is called an
equitable adjustment. That concept was articulated in Bruce to mean that
the contractor should be made whole. The concept of making the contractor whole
has been the basis for the development of the law on the meaning of equitable
adjustment. Traditionally, equitable adjustment includes direct cost of
performing change, the indirect associated costs and profit on those costs. It
is important to note that actual costs are required although estimates of those
costs are permitted. In addition, the direct and incidental costs associated
with the change are included in an equitable adjustment But the changes clause
itself contemplates the recognition of consequential damages. The requirement
to make the contractor whole is embodied in the notion that the change may
affect the original work.
Early in the development of the law of federal
government contracts, it became evident that the concept of equitable adjustment
could well include the impact of the change on the unchanged work. Therefore,
the changes clause was amended to include the language “whether or not changed”,
meaning that increased cost could be recovered on the original work. So-called delay and disruption costs
traditionally have been included in the equitable adjustment calculation
because of this language in the changes clause permitting the impact on
unchanged work.
But when the Court of Appeals for the Federal
Circuit decided an equitable judgment was to make the contractor whole just
exactly what did that concept include? How far does it go? Making a contractor
whole includes more than just remuneration. For one thing, it's been well
recognized that the concept includes reevaluation of profit on the costs.
Profit, arguably, is correctly increased in the calculation to account for the
fact that changed work is uncertain and requires greater risk and presumably
the prospect of greater rewards. Not enough attention has been paid to the
calculation of profit. The Armed Services Board of Contract Appeals has
permitted 13% profit on changed work on a shipbuilding claim. The 10% profit
which is often used as a benchmark should be increased to at least 13%.
It is not far-fetched to suggest that the concept
of equitable adjustment as interpreted by the Court of Appeals for the Federal
Circuit should include elements that would make the contractor whole such as
those that are non-remunerative. Delay permits calculation of costs but also
implicates design and performance aspects of the contract. The effect of the
change on the unchanged or original work could well include a need to redesign
the structure or item of equipment. Likewise, the original work may well be
affected by the change to the extent that the means and methods of performance
of the contract need to be changed making them entirely different than
originally planned. Manpower may be needed to be replaced with workers with
different expertise. Certain aspects of the project may have to be demobilized
and others mobilized. So, it's not just the costs of the impact on the
unchanged work that are recoverable. The concept of making the contractor whole
could include restructuring of the project and its management.
In public contracting it's the government's job
to scrutinize the contractors’ claim carefully to be sure that the contractor
is not carrying the concept of making itself whole to the extreme. The same is
true in the private sector where the owner must scrutinize the contractor’s
damage claim. Contractors
articulate their entitlement and then throw in the kitchen on damages. Folks
often misinterpret the entitlement side to justify throwing every damage item
they can think of against the wall to see what sticks. They hold to the concept
that if you do not ask for it, you will never have a chance to get it.
It is difficult to fault the contractor for being aggressive. The concept of being made whole seems to support their position. It is possible to reprice all original work affected by the change and in the process ameliorate the effects of inflation. And the profit rate can be increased to 13%.
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