Occasionally contracts need to be modified partway through the project to either reduce or increase the scope of work, which then alters the project's cost. Typically, the contractor and Contracting Officer (CO) agree on the compensation modification. However, this is not always the case. When an agreement cannot be reached between the two parties, the CO can unilaterally modify the contract and the subsequent compensation amount. If the contractor disagrees with the compensation modification, they can submit a timely Request for Equitable Adjustment (REA) to the CO seeking appropriate reimbursement for the additional work.
Although the contractor submits an REA or even multiple REAs, the CO is not required to agree with the requested amount. If this happens, the contractor can appeal the claim to the Civilian Board of Contract Appeals (CBCA) and hire an expert witness to calculate the company losses. In general, the calculated losses will be higher than what the CO is willing to give the contractor. The CBCA will undoubtedly give the contractor at least something higher than what the CO is offering. Right? Maybe not.
In the below appeal, SRM Group, Inc. (SRM) discovered there is more to an REA and an appeal than merely numbers.
SRM Group, Inc. CBCA Appeals No. 5194, 5938
Decision issued March 11, 2021
On June 28, 2012, the Department of Homeland Security (DHS) awarded a firm-fixed-price, multi-year contract to SRM, an 8(a) certified small, disadvantaged business. Under this contract, DHS agreed to pay SRM a total contract award of $36.6 million. Per the contract, SRM provided housing management services, including custodial services, basic maintenance, and desk clerk services at eight dormitory-style apartment buildings and public areas in other facilities at a DHS law enforcement training center located in Glynco, Georgia. In addition, the contract incorporated Federal Acquisition Regulation (FAR) contract clauses FAR 52.243-1 and FAR 52.212-4.
Due to a significant decline in use, the government and SRM negotiated a contract modification removing two of the eight dormitories from the contract on July 15, 2013. This modification decreased the contract by $1.7 million. In early December 2013, DHS notified SRM that it wanted to add those two dormitories back to the contract. SRM submitted its price, and the parties negotiated. Although SRM believes the parties reached a tentative verbal agreement on pricing, the parties never formalized that agreement in writing. Eventually, a new CO unilaterally modified the contract, adding the two buildings back and paying SRM a little less than $750,000 for the additional work.
On September 4, 2014, SRM submitted a certified REA for $2.6 million for the additional work. However, the REA did not contain any supporting documentation. The CO replied, stating the review process would be initiated after all supporting documentation, including a complete breakout of all costs, materials, supplies, and labor was supplied by SRM. After receiving supporting data, the CO determined that SRM should receive a total of $1.1 million and denied the rest of the claim. After further negotiations with the CO, SRM reduced its offer to approximately $1.9 million. On February 4, 2016, SRM appealed to the CBCA seeking the original $2.6 million. This temporarily put the first appeal on hold while SRM and the government negotiated again. On September 21, 2017, new counsel representing SRM presented an amended claim in the total amount of $6.1 million. The CO did not reply to this new claim, and the new SRM counsel filed a second appeal to the CBCA. At the request of both parties, the CBCA consolidated the appeals.
SRM and DHS retained experts to calculate the actual cost of adding the two buildings back into the contract. The SRM expert initially estimated damages at close to $5.7 million, which he then reduced to $4 million, $3.9 million, and finally $2.2 million in a series of rebuttal reports to the government's expert witness. Some of SRM's reports did not include any written narrative explaining the changed calculations but, instead, contained many pages of uninterpreted calculations.
At some point, SRM replaced its first expert with a second expert who calculated its losses at approximately $3.4 million. The second expert testified at a hearing before the CBCA explained his calculation methods and answered the CBCA's various questions. However, when asked to explain costs presented in SRM's REAs and claims, the second expert stated he was not involved, nor could he explain why or how SRM had initially calculated its losses as reaching only around $2.6 million and $1.9 million. Furthermore, the second expert could not explain how or why the first expert had submitted calculations of approximately $5.7 million, $4 million, $3.9 million, and $2.2 million.
The government's pricing expert and a credible witness pointed out various discrepancies with SRM's conduct over the past six years. The DHS expert focused on inconsistencies in the SRM expert reports, testifying that the reports did not provide adequate support nor comply with applicable FAR requirements. Additionally, none of the SRM experts had conducted any audits and relied only on SRM's representations. Also, SRM provided no support for some significant cost categories. The DHS expert also disagreed with the SRM expert's methodology, noting the expert did not examine actual costs or look at the impact of the cost. After comparing the true prices before the change and the actual costs after the change, the DHS expert concluded the additional two buildings increased the costs by approximately $800,000.
In its analysis, CBCA found SRM's second expert provided full, complete, and adequate calculations in his report and testimony. However, the CBCA stated that the fact SRM submitted five expert reports but failed to present testimony or explain the differences in calculations was problematic. Many of these reports were improperly prepared, lacked any explanation, and/or contradicted each other. CBCA was left to wonder why and how SRM had submitted reports ranging anywhere from $2.2 million to $5.7 million. Instead of trying to parse out SRM's contradictory reports, CBCA relied on the government expert's single, uniform, and consistent analysis.
The CBCA agreed with the government, denied SRM's claim, and found that "SRM has not established that it is entitled to anything beyond what DHS has already paid."
Submitting an REA is simply not a matter of crafting a persuasive legal argument for why a contractor is entitled to additional money. REA requirements include providing certified cost or pricing data, along with facts supporting the data, in accordance with FAR 15.403-4 and other information, such as direct labor and indirect rates, in accordance with FAR 215.403-5. Without this detailed information, a contractor can risk winning a hollow victory of being told they are entitled to additional compensation but not the amount requested. This ruling by the CBCA illustrates that merely throwing a wide variety of disjointed, contradictory, and sometimes unexplained sets of calculations during an appeal is not sufficient to prove that a contractor is entitled to an equitable adjustment.
If you have questions about how to craft and present your REA to the government, including how to compile a set of solid calculations that will substantiate your entitlement to additional funds, contact us. Whitcomb, Selinsky, PC has a team of experienced attorneys ready to help.