EQUITABLE ADJUSTMENTS

GET WHAT YOU ARE OWED

By R. Chris Puffer

The equitable adjustment process can be very frustrating. Even when the Government acknowledges liability, it often disagrees with the contractor’s assessment of extra costs or time and offers significantly less than the amount requested.

This issue describes the various approaches to getting all that you are owed in your next equitable adjustment. Additionally, it provides practical tips that will help increase the likelihood of a favorable settlement. In our next issue, we will cover the "total cost" and "modified total cost" methods of proving how much you are owed.

When trying to obtain equitable adjustments associated with Government-caused changes, it is important to remember that the amount of the adjustment (the "quantum"), whether it is for money or contract time, is not the first thing the contractor should establish Initially, a contractor must establish (1) liability on the part of the Government and (2) the causal link between the Government’s conduct and the contractor’s injury. Frequently, the Government’s hesitancy to agree on quantum is because it either doesn’t completely agree on the liability issue or it is not convinced that it’s conduct actually caused the type of additional expense asserted by the contractor.

Do an Impact Analysis

The causation issue is often a major problem area for contractors, particularly when they are concerned about maintaining a good customer relationship. Contractors will often minimize the impact of Government changes and then later find themselves "upside down," where the revenues received are less than their costs of performance. Consequently, contractors should perform a careful impact analysis of the true cost of a change, both from a direct cost and indirect cost standpoint. When a contractor understands the true impact, it can make an informed business decision about whether to push for an adjustment.

Segregate Actual Costs If Possible

The method preferred by contracting officers, auditors and judges to prove the amount of an equitable adjustment is the actual cost method, in which the contractor provides specific documentation of the actual, and reasonable, expenses caused by the Government’s conduct. In many contracts, the Government includes the "Change Order Accounting" clause, which requires that a contractor segregate the costs of performing the changed work. While this clause contains no penalty for not complying, the failure of a contractor to do so when it reasonably could have segregated cost only serves to complicate and delay settlement. Moreover, actual segregated cost records eliminate most of the objections that can be raised by a Government auditor, which will permit the contracting officer to proceed with a quicker resolution.

In a recent case, Doninger Metal Products v. U.S., 50 Fed. Cl. 110 (Fed. Cl., Jul. 31, 2001), a contractor, described by its president as a "ma and pa type," attempted to prove actual costs using summaries where the source documents were not available. Under the circumstances, the court refused to accept its summaries as adequate proof of actual costs. Consequently, the contractor’s equitable adjustment was limited to the much lower amount calculated by the contracting officer.

Estimates Have to be Fully Supported

When actual costs are difficult to establish, a contractor must resort to an estimating method that quantifies all labor, material and indirect costs. Even though courts have consistently permitted estimates ("equitable adjustments do not have to be established with absolute exactness or mathematical precision"), they do nonetheless have to provide a reasonable basis for computation.

When using estimates, contractors must overcome the tendency to say, "they’re just estimates" and not be diligent in their preparation. In fact, contractors should use as much rigor in preparing estimates as they would in compiling and reporting actual costs. All supporting documents, the factual basis of all assumptions and the logic of the computation must be clearly laid out. If the estimate is not completely supported, the Government’s auditor will probably write a negative audit report or, at a minimum, significantly discount the amount requested. Such a report will seriously hamper the ability of the contracting officer to settle the matter (even if he or she agrees that the contractor is entitled to an adjustment). Without a settlement, a contractor will be forced to resort to litigation.

If a contractor proceeds with litigation and presents its estimate to a judge, the judge may make an award using a "jury verdict" approach, which is simply the result of the judge weighing the parties’ conflicting views as to the validity of the contractor’s estimates. However, it is important to remember that, even though judges can use the "jury verdict" approach, a contractor should not be lulled into believing that its standard of proof is somehow less or that it "will always get something." In fact, judges will only resort to using jury verdicts when (1) there is clear proof that an injury occurred, (2) there is no more reliable method for computing the amount of the adjustment and (3) the evidence is sufficient for the judge to make a fair and reasonable approximation of the damages.

In conclusion, a contractor should take great care in preparing and submitting a request for an equitable adjustment, whether it is based on actual costs or estimates of cost. The amount negotiated with the contracting officer or awarded by a judge will be directly related to the soundness of the approach the contractor uses.