IMA Potomac ChapterGWSCPAs Current Issues in Government Contracting 2005 - PowerPoint PPT Presentation

Title: IMA Potomac ChapterGWSCPAs Current Issues in Government Contracting 2005


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IMA Potomac Chapter/GWSCPAsCurrent Issues in
Government Contracting 2005

• Terminations and
• Requests for Equitable Adjustment
• Presented by Sam Davidson, Principal
• GaffeyAssociates, PLC
• Government Contract Services Group

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(No Transcript)
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Agenda

• Requests for Equitable Adjustment (REA)
• Purpose of the REA
• Applicable Contract Clauses
• Types of Contract Changes
• Types of Contract Delays
• Notification Requirements
• But For Principle
• Types of Cost Considered in REAs
• Claims Tips

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Purpose of the REA

• Fairly compensate the contractor for the
  Governments intentional or unintentional change
  or modification of a contract
• Not a vehicle to increase contractors profit or
  reduce contractors loss for reasons unrelated to
  the change
• Burden of proof lies with the contractor
• Must show
• Need for the adjustment (HARM)
• Reasonableness of the amount requested (QUANTUM)
• Contractual coverage (ENTITLEMENT)
• REMEMBER Task Orders are individual contracts!

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Applicable Contract Clauses

• Look for these clauses in your contracts
• FAR 52.243-1, Changes-Fixed-Price
• FAR 52.243-2, Changes-Cost-Reimbursement
• FAR 52.243-3, Changes-Time-and-Materials or
  Labor-Hours
• FAR 52.243-4, Changes
• FAR 52.243-5, Changes and Changed Conditions
• FAR 52.243-7, Notification of Changes
• and
• FAR 52.236-2, Differing Site Conditions
• FAR 52.237-3, Continuity of Service
• FAR 52.242-14, Suspension of Work
• FAR 52.242-15, Stop Work Order
• FAR 52.242-16, Stop Work Order-Facilities
• FAR 52.242-17, Government Delay of Work

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Types of Contract Changes

• Express or Formal Change
• Initiated by the Government
• Recognizes that there is a value received
• Regards it as a normal pricing action
• Constructive Change
• Initiated by the contractor
• Government may be unaware of the change and see
  no value-added
• Priced after the fact

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Common Causes of Constructive Changes

• Differing/unreasonable interpretations of the
  contract requirements
• Inclusion of conflicting clauses in the contract
• Acts of over inspection/ higher standard of
  performance
• Defective specifications
• Failure to disclose superior knowledge
• Late or unusable GFP/GFM/GFI

• Increased documentation requirements
• Failure to cooperate
• Failure to order all requirements
• Late exercise of options
• Variance in estimated quantities
• Untimely notice to proceed
• Differing site conditions

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Types of Contract Delays

• Excusable delays
• Include labor strikes (tried to prevent or
  mitigate), weather (unusual for the place and
  time it occurred), sovereign acts of the
  government, subcontractor or supplier delays
  (beyond the control of and not the fault of the
  contractor), floods, fire, epidemic, embargo,
  financial difficulties caused by acts of the
  government, and unavailability of materials.
• Do not entitle the contractor to recover cost(s)
  of the delay
• Do allow for an extension or adjustment to
  contract schedule
• Compensable delays
• Allows for the recovery of the cost(s) of delay
• Allows for the extension or a adjustment of
  contract schedule

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Recovery for Delays

• If delays of unreasonable duration (variable and
  subjective)
• Are the fault of the Government
• If there are no concurrent delays of the
  contractor (Government must prove)
• If you planned on completing the contract earlier
  even if prior to the contractual completion date
  (burden of proof is on the contractor)

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Notification Requirements

• Notification requirements are contained in the
  FAR clauses
• Required to preserve the right to an equitable
  adjustment
• Government has generally taken the position that
  no recovery is allowable unless the contractor
  has complied with the notification requirements
• Courts have taken a broader view with the
  Government having to prove that it was harmed due
  to the delay in contractor notification

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Notification Requirements

• Clauses Impacted
• FAR 52.243-1, Changes-Fixed Price
• FAR 52.243-2, Changes-Cost Reimbursement
• FAR 52.243-3, Changes-Time and Material or Labor
  Hour

• Requirements
• Contractor has thirty (30) days from the date of
  receipt of the written order to assert its right
  to an equitable adjustment
• Notice does not have to be in writing
• With approval of the contracting officer
  notification can be given after the thirty (30)
  days and prior to the final payment on the
  contract

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Notification Requirements

• Clauses Impacted
• FAR 52.243-4, Changes

• Requirement
• Express or formal change
• Contractor has thirty (30) days from the date of
  receipt of the written order to assert its right
  to an equitable adjustment
• Constructive change
• Contractor must give the contracting officer
  written notice including
• Date, circumstances, and source of the order to
  change
• That the contractor regards the order as a change
  order

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Notification Requirements

• Clauses Impacted
• FAR 52.243-4, Changes (Continued)

• Requirement
• Except where defective specifications are
  involved no adjustment will be made for any costs
  incurred more than twenty (20) days before the
  contractor gives notice of a constructive change
• After giving notice of a constructive change the
  contractor has thirty (30) days to assert its
  right to an adjustment
• No adjustment will be allowed if asserted after
  final payment

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Notification Requirements

• Clauses Impacted
• FAR 52.243-5, Changes and Changed Conditions
  (Applies to Construction Contracts)

• Requirement
• Contractor is to promptly notify the contracting
  officer, in writing, of subsurface or latent
  physical conditions differing materially from
  those disclosed in the contract, or previously
  unknown unusual physical conditions at the site,
  prior to proceeding with the work
• Contracting officer must receive written notice
  or waive the requirement to make an equitable
  adjustment

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Notification Requirements

• Clauses Impacted
• FAR 52.243-7, Notification of Changes
• (Primarily used in negotiated RD or supply
  contracts for major weapon systems or principal
  subsystems. Not to be used if the contract
  amount is expected to be less than 1,000,000,
  unless changes are anticipated)

• Requirement
• Written notification required
• Time period to be negotiated
• Contractor must give the contracting officer
  detailed written notice concerning the
  circumstances and effect of the change

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REA Cost Considerations

• Adjustments to direct labor
• Changes in scope
• Delays and disruptions
• Labor rates inflation or deflations due to
  changes in period of performance
• Labor class utilization of different labor
  categories due to availability
• Labor hour efficiency impact on planned
  efficiency due to labor categories or labor force
  utilized

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REA Cost Considerations

• Adjustments to direct material
• Changes in scope
• Delays and disruptions
• Prices inflation or deflations due to changes
  in period of performance
• Changes in vendors loss or availability of
  planned vendors due to time
• Loss of efficiency increase in the actual
  consumption of materials due to work force
  efficiency (e.g., scrap, shrinkage, etc.)

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REA Cost Considerations

• Indirect cost reclassification
• Supported by the fair compensation principle at
  FAR 49.201(a)
• Costs must be incurred specifically as a result
  of the change
• Costs must be removed from the indirect cost pool
  to eliminate double recovery
• Unabsorbed/mis-allocated indirect expenses
• Request to recoup indirect overhead costs
  allocated to other programs
• Eichleay formula daily overhead times number of
  days delayed
• Extended program/contract support
• Idle or excess facilities
• Idle or excess capacity

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REA Cost Considerations

• Personnel costs
• Severance
• Re-hiring costs
• Re-training costs
• Increased warranty/guarantee risks
• Material storage costs
• Settlement expenses
• Costs generated in the preparation, submission
  and resolution of an REA prior to a claim arising
  under the Contracts Disputes Act
• Profit (not anticipatory or lost profits)

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Claim Tips

• Educate employees on claims and the recognition
  of changed conditions everybodys job
• Identify changes early on get a jump on
  notification and cost collection
• Document (e.g., correspondence, emails, meeting
  notes, telephone conversation notes, source of
  cost data, etc.)
• Segregate costs
• Review indirect costs (e.g., depreciation,
  support costs, etc.)
• If you dont ask you wont get!
• Get help! Its recoverable!

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Agenda

• Contract Terminations
• Types of Contract Terminations
• Methods of Termination Settlement
• Interaction of the REA with the Termination
• Impact on Non-Terminated Work
• Types of Settlement Costs
• Termination Tips

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Types of Contract Terminations

• Termination for Default
• Actual or anticipated failure to perform
• Issuance of a show cause or cure notice
• Ten days (or longer period) to cure the failure
• No recovery of costs on undelivered work
• Repayment of applicable advance or progress
  payments
• Liable for administrative costs of repurchase,
  liquidated damages and repurchase price
  differential

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Types of Contract Terminations

• Termination for Convenience
• Recover costs incurred on undelivered work
• Recover administrative costs associated with the
  termination
• Recover the impact on costs of un-terminated items

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Basis of Terminations

• Sovereign right established to protect the
  publics interest
• Supported by the courts even in the absence of
  the clause in the contract (Christian Doctrine)
• Administrative decision and is not subject to
  appeal (although default terminations can be
  reversed)
• Compensate the contractor fairly
• For work done
• For preparations made for the terminated portion
  of the contract
• Reasonable allowance for profit
• Adjusted for anticipated losses
• Settlement proposal must be filed within one year
  of effective date of termination (extensions
  available)
• Must be in proper format on proper forms

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Methods of Termination Settlement

• No Cost Settlement
• Permitted under certain conditions by FAR
  49.109-4
• No cost incurred under the terminated portion of
  the contract
• Contractor/Subcontractor willing to waive
  incurred costs
• No credits/amounts due to the prime under the
  subcontract
• Fixed Price Contract Short Form
• Low value settlements of less than 10,000
• Termination Contracting Officer (TCO) can forbid
  its use
• Cannot split terminations to get below the
  threshold
• Similar to the Inventory Settlement Basis

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Methods of Termination Settlement

• Inventory Basis
• Separately itemizes costs
• Termination inventory
• Initial costs
• Cost of terminating
• Settlement expenses
• Settlements with lower tier subcontractors
• Allowances for profit
• Amount reduced for
• Un-liquidated advances and progress payments
• Disposals and other credits
• Anticipated contract losses
• Government preferred method

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Methods of Termination Settlement

• Total Cost Basis
• Itemizes all costs incurred up to the termination
  date
• Adds adjustment for profit or loss
• Deducts
• Price for the items completed and delivered prior
  to the termination
• Un-liquidated advances and progress payments
• Disposals and credits
• Usually only authorized for complete terminations
• Production has not started
• Accounting system cannot establish unit costs for
  work-in-process
• Contract does not specify unit prices

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Methods of Termination Settlement

• Percentage of Completion Basis
• Rarely used hard to define, subjective
• Establish percentage of completion that is
  applied to the total contract price
• Subtract any prior adjustments
• Makes no adjustment for anticipated losses since
  contract price not actual cost is used

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Inventory vs. Total Cost Basis

• Inventory basis places risk on the contractor
• Limits recovery to items residual as a result of
  the termination
• Contractor has the burden to prove
• Claimed costs were incurred
• Costs are allocable to the terminated work

• Total cost basis places risk on the Government
• Recovery equals difference between the costs
  incurred and what had been paid
• Subcontract settlement costs are a pass through

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Cost-Type Contract Termination

• Subcontractor proposes all costs incurred
• During contract performance
• As a result of the termination
• As settlement expenses
• Lower tier subcontractor settlements
• Deduct previous payments
• Adjust for fee based on contract
• Voucher out all costs (last day of sixth month
  following termination
• Settle by negotiation
• Voucher out and then settle remaining portion by
  negotiation

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Loss Factor Adjustment

• If the contract is determined to have been in a
  loss situation cost recovery is reduced
• Total contract price divided by the cost incurred
  plus estimate to complete loss factor
• ETC is contractor responsibility must be good
• Calculation must include all
• Outstanding REAs
• Definitized contract adjustments or modifications
• Undefinitized contract adjustments or
  modifications

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Termination Cost Considerations

• Termination inventory
• Purchased after contract award unless advance
  agreement
• Not in excess of reasonable time-phased
  requirements
• Shipped prior to termination
• Should not be incurred prior to first article
  testing
• Re-workable material, not scrap
• Special tooling and special test equipment
• Loss of useful value
• Reclassification of indirect costs to direct

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Termination Cost Considerations

• Pre-contract costs
• Can include
• Bid and proposal costs
• Costs of contract performance
• Plant alterations and rearrangement costs
• Recruitment and hiring costs
• Directly pursuant to contract negotiations
• In anticipation of contract award
• Required to meet proposed delivery schedule

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Termination Cost Considerations

• Initial/preparatory costs
• Starting load costs
• Excessive spoilage or scrap due to inexperienced
  labor
• Idle time
• Subnormal production time due to testing and
  changing production methods
• Training
• Loss of efficiencies
• Preparatory costs
• Plant alteration and rearrangement
• Management and personnel organization (employment
  advertising, recruiting, interviewing, hiring,
  relocating, etc.)
• Training costs

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Termination Cost Considerations

• Initial/preparatory costs
• Starting load costs
• Excessive spoilage or scrap due to inexperienced
  labor
• Idle time
• Subnormal production time due to testing and
  changing production methods
• Training
• Loss of efficiencies
• Preparatory costs
• Plant alteration and rearrangement
• Management and personnel organization (employment
  advertising, recruiting, interviewing, hiring,
  relocating, etc.)
• Training costs

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Termination Cost Considerations

• Severance costs
• Leased facilities
• Idle capacity (unused capacity in partially used
  facility)
• Idle facility (completely unused facility or any
  portion thereof
• Plant conversion costs
• Settlement costs (costs generated in the
  preparation, submission and resolution of an
  termination settlement proposal)
• Profit

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Termination Tips

• Prepare REAs on terminated portion of the
  contract loss factor mitigation
• Prepare REAs on the un-terminated portion of the
  contract re-price
• Segregate contract costs and settlement costs
• Include subcontractor termination settlement in
  your own
• If you dont ask you wont get!
• Get help! Its recoverable!

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Contact Information

• Sam Davidson, Principal
• Government Contract Services Group
• Gaffey Associates, Plc
• 7918 Jones Branch Drive, Suite 750
• McLean, VA 22102
• 703-748-5816 (w)
• 703-303-2701 (c)
• samuel.davidson_at_gaffeycpa.com
• www.gaffeycpa.com