Insights by: Craig Stetson, Partner and Merle DeLancey Jr., Partner with Blank Rome.
Our Part 1 post addressed contract administration related to changes to or a termination of a contract arising from the government’s withdrawal from Afghanistan.
This post focuses on the cost management, documentation, and government audit aspects that contractors should be focused on to prepare for and mitigate downstream and currently unknown risks
Responding to a change or termination will likely involve submitting a request for payment or compensation. The label placed on a contractor’s request for payment depends on whether its contract has been terminated or has experienced a “change.” The type of request for payment also can vary depending on the type of contract involved (i.e., cost reimbursement, fixed price, or labor hour).
In response to a “change,” a contractor can request an equitable adjustment (“REA”) or request a contracting officer’s final decision by filing a claim (depending on the amount at issue, a certified claim). Other “changes” may require only a contract modification, such as extending a delivery schedule, if there is no need for monetary compensation. While contractors normally are eager to be paid for changes, the Contract Disputes Act allows a contractor to file a claim within six years of the date when a claim accrues (See FAR 33.201 “the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known”).
Different rules apply in the context of termination. While similar to REAs and claims, there are some important differences when seeking compensation as part of a full or partial contract termination. First, a contractor is required to use certain standard government forms when submitting a termination settlement proposal and the correct forms depend on the type of contract involved. See e.g., FAR 49.602-1. Second, a prime contractor must submit its “final” termination settlement proposal to the government within one year of the effective date of the termination. The “effective date of termination” is the date on which the notice of termination requires the contractor to stop performance. FAR 49.206-1(a) (note: FAR 52.249-2(c) requires complete inventory schedules to be submitted within 120 days of the effective date of termination if a termination proposal uses an inventory basis). Third, if faced with a partial termination, a contractor will likely be required to submit a termination settlement proposal for the portion of work being terminated and a request for equitable adjustment for the work that will continue.
Regardless of how a request for compensation is labeled, contractors should prepare such requests assuming they will be audited. This means having accurate and contemporaneous records supporting the amounts sought.
Adequate preparation, presentation, and support of REAs, claims, or termination settlement proposals generally requires a heightened level of diligence to achieve a successful outcome. First, a contractor should focus on its bases for entitlement for compensation. Entitlement arguments vary depending on whether there has been a change or termination. With respect to a change, a contractor must be able to persuasively demonstrate there was a change to the contract for which compensation is due. Second, the quantum (cost impact) element needs to be calculated. This should logically follow the entitlement arguments. Ideally, the entire REA, claim, or termination settlement proposal should be constructed on a discrete item basis rather than a total cost basis. While modified total cost is an acceptable method of recovery, this approach generally requires a contractor to identify and quantify actions for which the contractor is responsible and deduct these amounts from the total reimbursement sought.
Contractors should fully understand and utilize best practices when preparing an REA, claim, or settlement proposal to enhance the probability of government acceptance and financial recovery. Two critical aspects of the process are communication and documentation.
Early and continuous communication with the government contracting officer is critical. There should be no surprises to the government upon receipt of a contractor’s REA, claim, or termination settlement proposal. Communication with the contracting officer should occur, for example, to notify the government of:
- Unique or non-recurring cost elements
- Challenges or impossibilities of performance
- Requests for guidance or direction
- Supply chain difficulties
- Timing and scheduling expectations
- Access to records or documentation
Documentation is equally, if not more, important to successfully navigating the government audit process. The audit process is often performed by a different party than the contracting officer (i.e., the Defense Contract Audit Agency), and may lag the submission of a proposal by several months. Government and contractor personnel come and go, contractors change information systems, records get lost or otherwise disappear, etc., thereby reinforcing the need for contractors to develop and preserve all supporting documentation in the event it needs to be provided at some point downstream. Frequent forms of documentation that should be maintained include:
- Communication with the government
- Internal decisions regarding treatment of costs and efforts to mitigate
- Agreements or mutual understandings
- All calculations and bases of estimate supporting claimed costs
- Supply chain settlements and submission for government ratification
It is hard to ponder government contract compensation when so many lives remain in harm’s way. Nevertheless, we hope the above information provides a useful guide for contractor’s facing a change or termination due to the Afghanistan withdrawal.
Merle DeLancey Jr. is a partner with Blank Rome LLP where his practice focuses on a wide variety of government procurement law. He represents clients contracting with federal and state governments, with an emphasis in the healthcare industry. Merle has experience in a broad spectrum of government contracting
Craig Stetson is a partner with Capital Edge Consulting where he focuses on assisting contractors interpret and apply the accounting and regulatory compliance requirements associated with federal government contracts. Craig routinely deals with a wide range of compliance matters related to accounting, pricing, contract administration, business systems, financial reporting and interpreting the requirements of the Federal Acquisition Regulation (“FAR”) and Cost Accounting Standards (“CAS”). Craig frequently speaks and writes on a wide variety of government contracting compliance matters, regulatory updates and current events.
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