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Article by J. Kent Holland – ConstructionRisk Counsel, PLLC

In an important decision clarifying that attorneys fees incurred by a contractor in preparing and negotiating a change order or Request for Equitable Adjustment (REA) are allowable to be directly charged to the contract, the U.S. Court of Appeals for the Federal Circuit, in Tip Top Construction, Inc. v. Donahoe, 695 F.3d 1276 (2012), held that the Government Contracting Officer and Board of Contract Appeals were wrong when they found that because the attorneys fees were incurred after construction work itself had been completed they “had nothing to do with performance of the changed work or genuine contract administration.”  In reversing that decision, the Court of Appeals held that where consultant fees and legal fees are incurred “for the genuine purpose of materially furthering the negotiation process” they are allowable as “genuine contract administration costs.”  Only when negotiations finally ended and the Contractor submitted a formal “claim” under the Contracts Disputes Act did the incurrence of attorneys fees cease to be contract administration costs.

In this decision, the court reiterated its seminal decision in the case of Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995), and quoted it as follows:

“In classifying a particular cost as either a contract administration cost or a cost incidental to the prosecution of a claim, contracting officers, the Board, and courts should examine the objective reason why the Contractor incurred the cost.  If a contractor incurred the cost for the genuine purpose of materially furthering the negotiation process, such cost should normally be a contract administration cost allowable under FAR 31.205-33, even if the negotiation eventually fails and a CDA claim is later submitted.  On the other hand, if a contractor’s underlying purpose for incurring a cost is to promote the prosecution of a CDA claim against the Government, then such cost is unallowable under FAR 31.205-33.”

The Government argued that the holding in the Bill Strong decision was no longer applicable in light of a subsequent court decision in the case of Reflectone, Inc. v. Dalton (Fed. Cir. 1995) that overruled the Bill Strong decision on the question of when a claim arises for purposes of the Contract Disputes Act (CDA).  In putting to rest that argument once and for all, the court emphatically stated: “The discussion in Bill Strong regarding whether a particular cost should be classified as either a contract administration cost or a cost incidental to the prosecution of a claim, however, remains good law.”

In the Tip Top case, the dispute involved an REA resulting from a change under the Contractor’s contract with the U.S. Postal Service to renovate a postal facility.  The Postal Service had initially approved certain refrigeration equipment but then rejected it due to the type of refrigerant used by that equipment.  The Contractor had already ordered equipment from its supplier and it incurred penalties and additional cost to substitute the different system.  The Postal Service agreed to a change order to pay most of the additional costs of the equipment but refused to pay consulting fees and legal fees incurred by the Contractor in preparing and negotiating the REA.

After obtaining advice from its Government counsel, the Postal Service advised that if a contractor hires a consultant to do their cost estimating or assist with negotiating the change order, their cost is “considered an overhead charge and is not a billable cost.”  This decision was appealed by the Contractor initially to the Board of Contract Appeals, which affirmed the Postal Service’s holding that the work by the consultant and outside counsel “had nothing to do with performance of the changed work or genuine contract administration and were solely directed at trying to convince the contracting officer to accept [contractor’s] figure for the change and maximizing [contractor’s] monetary recovery.”

The Board also reviewed the invoices, time sheets, and declarations of the consultant and attorney and stated they were of “dubious value.”   The main reason for the Contracting Officer’s adverse decision concerning the allowability of the fees was the CO’s erroneous conclusion that “the work performed by the third-party consultant was performed after completion of the contract work and was thus not incurred in connection with the actual performance of the work.”

In reversing the CO and the Board decision, the Court of Appeals found that the documentation of fees was adequate and most importantly concluded that regardless of whether the fees of consultants and attorneys are incurred during actual performance of the contract work, they are allowable as direct contract administration costs so long as they are incurred before a contractor submits an actual “claim” under the Contract Disputes Act.

Comment: Anyone involved in submitting REAs on federal government projects may have encountered resistance from Contracting Officers when a contractor seeks to recover legal fees as “contract administration costs” to be paid by the Government as part of the REA. This new decision in Tip Top Construction reaffirms that contractors are correct when they seek reimbursement of attorneys fees incurred in preparing and negotiating changes, even if settlement is not accomplished and a “claim” is later filed under the “disputes” clause of the contract. These are properly included as contract administration costs and allowable under the contract “changes” clause.  It is only after the changes process has been exhausted and the REA negotiation has failed and a “claim” is submitted by the Contractor under the “disputes” clause of the contract that the Contracts Disputes Act kicks in and the legal fees, therefore, become unallowable.  That has been the correct way to interpret the law and regulations ever since the court’s 1995 Bill Strong decision, and this Tip Top Construction decision now can be cited by contractors to end any argument to the contrary by the Government.

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In the balance of this article, I am reproducing a short memorandum I prepared for a Contracting Officer in a recent matter (with names and details removed).  Based on the new decision in Tip Top Construction, I would revise this memo to include a discussion of Tip Top.

Sample Brief to Obtain Legal and Consulting Fees as “Contract Administration” Costs

Contractor submitted a Request for Equitable Adjustment (REA) to the Government under the “changes” clause of the Federal Acquisition Regulation (FAR 52.243-4), and not as a “claim” under FAR 52.233-1 – Disputes.  It is important to note that the REA does not ask for a final Contracting Officer decision but instead states “Contractor hereby transmits an REA and requests that the Contracting Officer issue an equitable adjustment accordingly.”  The certification of the REA by Contractor followed the requirements for REAs rather than the standard certification under the FAR that is required for submitting a “claim.”

[Details of describing Counsel’s services are presented in a paragraph here but removed from this sample memo]

Costs incidental to contract administration, including legal fees and consultants fees, are allowable costs when incurred by the government contractor to analyze requests for equitable adjustment (REAs) by subcontractors, to prepare REAs for submittal to the contracting officer, and to prepare for and participate in negotiations with the contracting officer.  The seminal case is Bill Strong Enterprises, Inc v. John Shannon, 49 F.3d 1541 (1995), which held that contract administration costs, including legal and consulting costs, are “presumptively allowable” so long as they are reasonable.  As explained by the court, “In classifying a particular cost as either a contract administration cost or a cost incidental to the prosecution of a claim, contracting officers, the Board, and courts should examine the objective reason why the contractor incurred the cost (citation omitted).  If the contractor incurred the cost for the genuine purpose of materially furthering the negotiation process, such cost should normally be a contract administration cost allowable under FAR 31.205-33, even if negotiation eventually fails and a [Contracts Disputes Act] CDA claim is later submitted.”

The posture of Contractor and the government in the instant matter where the parties have been going back and forth with correspondence and requests for additional information, as well as participating in negotiation sessions, is quite similar to that addressed by the court in the Bill Strong case, where the court described the process as follows:

The contractor and the CO labor to settle the problem and avoid litigation.  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.  This negotiation process often involves requests for information by the CO or government auditors or both, and, inevitably, the exchange of information involves costs for the contractor.  These costs are contract administration costs, which should be allowable since this negotiation process benefits the Government, regardless of whether a settlement is finally reached or whether litigation eventually occurs because the availability of the process increases the likelihood of settlement without litigation.

The Bill Strong decision has been followed by the Armed Services Board of Contract Appeals in numerous decisions.  In the appeal of States Roofing Corp., 10-1 BCA 34360 (2010), for example, the Board reversed a CO decision that had disallowed legal fees incurred by a contractor for its outside counsel to assist it in preparing an REA.  The Government had argued that the legal fees were not allowable as contract administration costs because they were incurred “after contract performance” at a time when the costs were already in dispute.  In rejecting that as a legitimate basis for disallowance, and finding the claimed legal fees “should be classified as contract administration costs,” the Board stated the following:

[The Government] contends that these matters were not in furtherance of contract administration because the parapet wall issue was already in dispute and the other cost proposals were not submitted until after contract performance.  This is virtually the same argument raised by the government and rejected by the Board in Advanced Engineering & Planning Corp, 03-1 BCA 32,157, aff’d, Johnson v. Advanced Engineering & Planning Corp., 292 F. Supp. 2d 846 (E.D. Va. 2003).  We have no cause to revisit either the argument or our decision rejecting it.

The favorable Advanced Engineering decision cited above is particularly instructive in that the contractor in that case certified its REA in accordance with DFARS 252.243-7002, the same as done by Contractor in this current matter.  As explained by the Board, the DFARS certification format made the legal fees even less susceptible to being deemed “claim” preparation costs since ongoing communication and negotiation of the change request was anticipated.  Indeed, that is what the Contractor expected in this current matter and that is what is, in fact, happening with numerous written requests for additional information from the CO, with numerous responses from the Contractor providing more information, and ultimately participating in negotiations with the Contracting Officer to be followed by additional submittals of more information and further negotiation.

Another Board decision allowing legal fees as contract administration costs is Reidhead Brothers Lumber Mill, 01-2 BCA 31486 (2001).  Again citing the precedent of the Bill Strong decision, the Board stated that “FAR section 31.205-33(a) defines professional and consultant services to include services acquired to enhance legal positions, and generally under paragraph (b) allows the recovery of these expenses….”   The Board then stated that the legal fees incurred by the Contractor in preparing a payment request or REA were recoverable “but not for the preparation of the notice of appeal, which would amount to prosecution of a claim against the Government.”

There are at least another dozen decisions by the Armed Services Board of Contract Appeals finding in favor of a contractor’s entitlement to recover legal and consulting fees incurred in preparing an REA.

Legal and consulting costs incurred by Contractor are allowable “contract administration costs” because Contractor incurred the legal and consulting fees for the purpose of reviewing and analyzing the good ground basis of its subcontractor REAs – including requesting and reviewing additional explanation and documentation from the subcontractor, and where these services facilitated the presentation of REAs to the government and further communication with the government to answer questions and provide documentation requested by the CO, that ultimately led to fruitful discussions and negotiations with the CO.  As stated in American Mechanical, Inc., 03-1 BCA 32,134 (2003), “costs incurred for the ‘genuine purpose of materially furthering the negotiation process’ should normally be viewed as contract administration costs, even if the negotiation ultimately fails and a claim is filed.”

For the reasons explained herein, the fees invoiced by the law firm and other professional consultants on behalf of the Contractor, are allowable as “contract administration” costs.

 

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 14, No. 12 (Dec 2012 Special Issue).

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