Is changed or added work subject to contract labor rates?

[elgueromeromero]

Situation: We have a FFP MATOC with established contract labor rates. We were awarded a competitive task order where our proposed price was calculated using the established contract rates. We submitted an REA for a constructive change to the TO/contract. The Gov't agrees that there was a change and the REA is warranted; however, there is disagreement on the buildup of the labor cost. For labor on the REA, we proposed our actual labor costs incurred + profit. The Gov't is pushing back and saying that we have to use rates "at or below" our contract rates. During a discussions call, they clarified what they meant by "at or below" and said we should need to map all of the personnel used to perform the changed work to a contract labor category and corresponding rate. They then said that we should use actual costs but only if the rates are below the "contract ceiling rates". For example, if we have a burdened contract labor rate of $150/hr for Senior Engineer, but we used a Senior Engineer whose actual burdened rate is $170/hr, we can only charge the Gov't $150/hr. However, if we used a Senior Engineer whose actual rate is $130/hr, we have to use the actual rate of $130/hr. We told them that we disagree, that we'd never heard of this approach, and that it would cause us to lose money. We explained that this approach would not leave us "whole" nor would it be "equitable". We provided some case law references (Bruce Constr. Corp. v. United States and United States v. Callahan Walker Constr. Co) to support our position that equitable adjustments are supposed to make the contractor whole and should be based on costs incurred (provided those costs are reasonable). The Contracting Officer (with advice from his Office of Counsel) is sticking to his guns and saying we "can't exceed the contract labor rates." 

Question: Is changed or added work subject to contract labor rates? I didn't think it was. If it's not, is there any case law that supports this? And shouldn't an REA (where the work has already been performed) be based on costs incurred?

 

[joel hoffman]

What changes clause is in the contract? 

[elgueromeromero]

52.243-1 Alt I Changes--Fixed Price (Aug 1987) - Alternate I 
52.243-2 Alt I Changes--Cost-Reimbursement (Aug 1987) - Alternate I 
52.243-4 Changes 

52.236-2 Differing Site Conditions 
 

 

[ji20874]

1.  Are you seeking an adjustment under the Changes clause, or under the Differing Site Conditions clause?  Pick one.  You must only pick one.

2.  If the Changes clause, which one of those applies to your situation?  Pick one.  You must only pick one.

3.  Are you seeking an adjustment to the parent MATOC contract, or to the child competitively-awarded task order?  Pick one.  You must only pick one.

[elgueromeromero]

There are two parts to the REA. The first is related to differing subsurface conditions and the entitlement is being sought under the Differing Site Conditions clause. The second part of the REA is related to additional requirements imposed upon us by the Government (unrelated to the subsurface conditions issue) and the entitlement is being sought under the Changes Clause (fixed price).

[Vern Edwards]

2 hours ago, elgueromeromero said:

We submitted an REA for a constructive change to the TO/contract.

Why do you say the change was "constructive"?

[elgueromeromero]

 

1 hour ago, Vern Edwards said:

Why do you say the change was "constructive"?

To clarify, the entire REA wasn't due to a constructive change--just one part of it. Long story, but it basically comes down to a disagreement over contract requirements. The other part of the REA was not a result of a constructive change but rather differing site conditions. 

 

 

[ji20874]

1.  So you are dealing with two matters in a single REA (one under the Changes clause and one under the Differing Site Conditions clause)?  Messy, messy.  If it were me, I would deal with these separately as two matters (maybe simultaneously, but separately) -- I think conflating them will only cause you problems.  These are different matters under different contract clauses.

2.  You didn't answer this question.  For the Changes clause matter, which Changes clause applies?  Pick one:  FAR 52.243-1, -2, or -4.

3.  You didn't answer this question.  Are you seeking an adjustment to the parent MATOC contract, or to the child competitively-awarded task order?  Pick one. 

If the hourly rates in your parent MATOC contract are intended to be ceiling prices for task orders under the contract, well, then they are ceiling prices, right?  I haven't seen the contract and I don't know if your contract sets ceiling prices, and you are making sure not to reveal anything that would allow us to be helpful.  That said, it seems to me that if the changed task order work falls under the parent contract's labor categories, it seems entirely reasonable that the contract's ceiling labor rates would apply.

 

 

[elgueromeromero]

 

16 minutes ago, ji20874 said:

1.  So you are dealing with two matters in a single REA (one under the Changes clause and one under the Differing Site Conditions clause)?  Messy, messy.  If it were me, I would deal with these separately as two matters (maybe simultaneously, but separately) -- I think conflating them will only cause you problems.  These are different matters under different contract clauses.

2.  You didn't answer this question.  For the Changes clause matter, which Changes clause applies?  Pick one:  FAR 52.243-1, -2, or -4.

3.  You didn't answer this question.  Are you seeking an adjustment to the parent MATOC contract, or to the child competitively-awarded task order?  Pick one. 

If the hourly rates in your parent MATOC contract are intended to be ceiling prices for task orders under the contract, well, then they are ceiling prices, right?  I haven't seen the contract and I don't know if your contract sets ceiling prices, and you are making sure not to reveal anything that would allow us to be helpful.  That said, it seems to me that if the changed task order work falls under the parent contract's labor categories, it seems entirely reasonable that the contract's ceiling labor rates would apply.

 

 

1. Correct. REAs are usually messy anyway 🙂

2. 52.243-1

3. Adjustment to task order.

I don't see how an "equitable adjustment" could be "equitable" if it doesn't make the contractor whole. Wouldn't you say that making the contractor whole is covering their actual costs of performing the changed work? If the contract labor rates are less than the actual rates used to perform the changed work (because of inflation or because the challenges of figuring out how to complete the changed work required additional senior staff), the contractor will likely be reimbursed less than the actual cost incurred. This is not equitable and does not leave the contractor whole.

Thoughts?

[Vern Edwards]

14 hours ago, elgueromeromero said:

Question: Is changed or added work subject to contract labor rates?

Emphasis added.

The answer to that question depends on the terms of the MATOC and what you mean by "subject to."

Does the MATOC contain any clause stating that changes will be priced based on the contract rates? If so, then you must price the change at those rates. If not, then the adjustment is not limited by the contract rates, but the rates may still be a factor in pricing the adjustment. The contracting officer may want to use them as standards of cost reasonableness.

Generally, the amount of an equitable adjustment is determined by the impact on the contractor. See the Changes clause, 52.243-1, paragraph (b):

Quote

If any such change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under this contract, whether or not changed by the order, the Contracting Officer shall make an equitable adjustment in the contract price, the delivery schedule, or both, and shall modify the contract.

Emphasis added.

The standard formula for pricing an equitable adjustment is described in FAR 15.408, Table 15-2, Section III, Formats for Submissions of Line Item Summaries, Subsection B, Change Orders, Modifications, and Claims. Basically, the adjustment is the difference between what the work would have cost before the change and what it will (or did) cost after the change, plus a reasonable adjustment to profit.

If you have already performed the changed work, then you must show the CO the difference between (1) what you estimate that it would have cost to do the work before the change (not the amount you included in your original proposal) and (2) what it did cost to do the work as changed. You must show that your estimate and your actuals are reasonable.

Additionally, some agencies include a clause in their contracts that applies the FAR Part 31 contract cost principles and procedures to the pricing of adjustments. See, e.g., DFARS 252.243-7001, Pricing of Contract Modifications.

See, generally, Administration of Government Contracts, 5th ed., Chapter 9, Pricing of Adjustments; Section I.A., Price Adjustments Under Contract Clauses; Section II., Proof of Adjustment; Section IV., Overhead and Profit; and Section VI., Costs of Preparing and Financing Adjustments.

 

[ji20874]

15 hours ago, elgueromeromero said:

I don't see how an "equitable adjustment" could be "equitable" if it doesn't make the contractor whole. Wouldn't you say that making the contractor whole is covering their actual costs of performing the changed work?

Making the contractor whole is not the paramount purpose of an equitable adjustment.  That is often the outcome, but more important is arriving at a reasonable price.  

But don't worry.  If you and the contracting officer do not agree on a reasonable price, the contracting officer may unilaterally determine the price.  Then, if you do not like that outcome, you will be able to invoke the contract's Disputes clause.  But for now, your interests are probably best served by meaningful negotiations.

[Vern Edwards]

3 hours ago, ji20874 said:

Making the contractor whole is not the paramount purpose of an equitable adjustment.  That is often the outcome, but more important is arriving at a reasonable price.  

Ummm, I don't know about that. See Kellogg Brown & Root Services, Inc., 19-1 BCA P 37205, ASBCA 57530, Nov. 19. 2018:

Quote

“Equitable adjustment” is a term of art. United Launch Services, LLC, ASBCA No. 56850 et al., 16-1 BCA ¶ 36,483 at 177,764; Gen. Builders Supply Co. v. United States, 409 F.2d 246, 250 (Ct. Cl. 1969). “Equitable adjustments...are simply corrective measures utilized to keep a contractor whole.” Bruce Constr. Corp. v. United States, 324 F.2d 516, 518 (Ct. Cl. 1963).

States Roofing Corp., 08-2 BCA P 33970 ASBCA No. 55506 September 16, 2008:

Quote

The purpose of an equitable adjustment is to make the contractor whole when the government modifies the contract. See Precision Dynamics, Inc., ASBCA No. 50519, 05-2 BCA ¶ 33,071 at 163,926. 

and H.K. Ferguson Co., 57-1 BCA P 1293, ASBCA No. 2826, March 29, 1957.

Quote

As a general proposition, an equitable adjustment for a change order should make the contractor whole for his additional costs and give him a reasonable profit on the additional work.

Note the range of dates. That is long standing principle.

See United States ex re;. Patzer v. Sikorsky Aircraft Corp., United States District Court, E.D. Wisconsin.November 29, 2021, 571 F.Supp.3d 979:

Quote

Equitable adjustments are a form of corrective measure that the government undertakes to make a contractor whole when the government modifies a contract and thereby increases the contractor's cost of performance. See LB&B Assocs. Inc. v. United States, 91 Fed. Cl. 142, 154 (2010).

I can quote from many other decisions of other boards of contract appeals, the Court of Federal Claims, the Federal Circuit, and Cibinic and Nash, and Nash and Feldman, that say the same thing.

But I would say that the principle purpose of an equitable adjustment is to compensate the parties for the effects of changes on the costs of performance. The contractor is compensated for any increase, the government is compensated for any decrease. It is not about price reasonableness, as that concept is generally understood.

 

 

[ji20874]

But any imperative to make the contractor whole must be tempered -- I do not believe making the contractor whole is the paramount purpose of an equitable adjustment.  Might a contractor's reckless actions, unreasonable costs, imprudent decisions, ignoring of other contract terms, or so forth might serve as a basis for an equitable adjustment not making a contractor whole?

[joel hoffman]

“Making a contractor whole” doesn’t necessarily mean guaranteeing a profit.

There have been many instances where a contractor under estimated the cost for something that is deleted as part of a change. The credit for the deletion should relate to the marked up savings for what it would have cost the contractor to perform the work absent the change.

Nash and Cibinic et al discuss it their “Administration of Government Contracts” and “Government Contract Changes” series.

I have been lenient on insisting on a credit for profit on deleted activities/work where there would have been a loss had the work been done but for the change. 

[Vern Edwards]

12 hours ago, ji20874 said:

Might a contractor's reckless actions, unreasonable costs, imprudent decisions, ignoring of other contract terms, or so forth might serve as a basis for an equitable adjustment not making a contractor whole?

@ji20874

No, not unless the contracting officer is a fool, because:

Quote

Entitlement to an equitable adjustment requires showing liability, causation, injury in the form of actual incurred specific costs, and that the FAR allows reimbursement for those costs. See, e.g., ACE Constrs., Inc. v. United States, 70 Fed.Cl. 253, 266-289 (2006) (ruling on four different claims for equitable adjustment), aff'd, 499 F.3d 1357 (Fed. Cir. 2007); SAB Constr., Inc. v. United States, 66 Fed.Cl. 77, 84-85 (2005) (“Once the contractor has proved the government's liability for the costs of added or changed contract work, the actual cost incurred by the contractor will provide the measure of the equitable adjustment.”); (quoting George Sollitt Constr. Co. v. United States, 64 Fed. Cl. 229, 245 (2005) (additional citation omitted) ); see also Servidone Constr. Co. v. United States, 931 F.2d 860, 861 (Fed. Cir. 1991) (referring to “liability, causation, and resultant injury”).

Tolliver Group, Inc. v. U.S., 149 Fed. Cl. 520 (2018).

A contractor is not entitled to an equitable adjustment as compensation for its own incompetence. It's entitled to an equitable adjustment as compensation for things the government caused and is liable for that have increased its costs or the time it needs to perform.

ji20874, what I'm telling you is well-established in the law. It's not new and it's not controversial. I'm frankly surprised to be having this discussion with you. I suspect that I must not understand your meaning or that you have not fully expressed your thinking. What the point is that you are trying to make, I encourage you to think it through and try to restate it more definitively.

Professor Nash discussed the concept of equitable adjustment in a 2019 article, "Equitable Adjustment: Costs or Value," The Nash & Cibinic Report, August 2019, in which he quoted the ASBCA in Kellogg Brown & Root Services, Inc., ASBCA 57530, 19-1 BCA ¶ 37,205, 2018 WL 6431434, 61 GC ¶ 138(a).

Quote

The board gave the following tutorial on equitable adjustment theory:

"Equitable adjustment" is a term of art. United Launch Services, LLC, ASBCA No. 56850 et al., 16-1 BCA ¶ 36,483 at 177,764; Gen. Builders Supply Co. v. United States, 409 F.2d 246,250 (Ct. Cl. 1969). "Equitable adjustments…are simply corrective measures utilized to keep a contractor whole." Bruce Constr. Corp. v. United States, 324 F.2d 516,518 (Ct. Cl. 1963). They are "closely related to and contingent upon the altered position in which the contractor finds himself." Id.; see Sauer Inc. v. Danzig, 224 F.3d 1340, 1348-49 (Fed. Cir. 2000) (observing an equitable adjustment covers increased costs resulting from a change, or changed conditions, leading to extra work); VHC Inc. v. Peters, 179 F.3d 1363, 1366–67 (Fed. Cir. 1999) (stating "[a]n equitable adjustment makes a contractor whole after the Government modifies a contract," and "depends on actual costs incurred"). An equitable adjustment reflects "‘a particular contractor's costs,’ and not the universal, objective determination of what the cost would have been to other contractors at large." Bruce Constr., 324 F.2d at 518–19. Thus, an equitable adjustment is not based upon market prices, but reasonable incurred costs. Software Design, Inc., ASBCA Nos. 23616, 24897, 82-2 BCA ¶ 16,073 at 79,740. "This consideration of the particular contractor's actual and probable costs is tied to the overall function meant to be served by equitable adjustments," which is to keep a contractor whole. Nager Electric Co. v. United States, 442 F.2d 936, 946 (Ct. Cl. 1971). An equitable adjustment's use of actual cost data ensures that it does not produce a windfall. See Propellex Corp. v. Brownlee, 342 F.3d 1335, 1338 (Fed. Cir. 2003)."

He then went on to say:

Quote

Even folks that come into Government contracting with no experience have to learn the basic rules early in the game. And one of the most important rules is the meaning of the term "equitable adjustment." To use that term without knowing its meaning is about as close to gross incompetence as you can come. 

When the government causes the contractor to incur allowable costs that it was not originally obligated to incur, the contracting officer must "make the contractor whole" by increasing the contract price to cover those allowable costs and to provide a reasonable additional profit. That is the essential purpose of equitable adjustment.

And that is an ancient tenet of government contract law. COs who negotiate equitable adjustments must know and adhere to it.

[ji20874]

I understand, Vern.  I appreciate that your newest comment introduces the word "allowable" before costs, while earlier seemed to apply to "any" costs.  With your use of "allowable," we are in full agreement.

Here, original poster wants to be made whole for incurred hourly rates that exceed contract rates.  I am not certain that such an entitlement exists, so I do not want to agree with the original poster yet or generally assert that he or she is entitled to be made whole -- we have pointed out the ceiling rates matter and he or she hasn't addressed it.  If those are ceiling rates, it might be too bad for the original poster.

Your pretended disappointment in me is unnecessary, especially now that you belatedly introduce "allowable" as an adjective before costs.  But this belated admission clears the air on your perspective and seems to un-do your earlier reference to "any increase" in a contractor's costs.  Thank you.

[joel hoffman]

13 hours ago, ji20874 said:

But any imperative to make the contractor whole must be tempered -- I do not believe making the contractor whole is the paramount purpose of an equitable adjustment.  Might a contractor's reckless actions, unreasonable costs, imprudent decisions, ignoring of other contract terms, or so forth might serve as a basis for an equitable adjustment not making a contractor whole?

 

11 hours ago, Vern Edwards said:

No, not unless the contracting officer is a fool, because:

Vern, I read ji’s post as a general suggestion that an equitable adjustment to “make the contractor whole” isn’t intended to cure all of a contractors own self inflicted ills or miscues. Maybe I misread the post.

I was taught that leaving a contractor whole means that you leave the contractor in the same position as it laid before the action, whether that was good, not so good, in a windfall or in a loss situation.

Thus, for example in an equitable adjustment, if deleted work isn’t segregated in a separate line item, then the deletion credit should be based upon what it would have cost the contractor to perform or provide the deleted item(s) but for the change, plus applicable markups for oH, bond, profits, etc. The credit may be more or it may be less than what is included in the contract price.

The phrase “make the contractor whole” cannot simply be read literally, without some more knowledge of the background and context.

Another reason why Everyone should have access to and read “Administration of Government Contracts” and the other George Washington University government contracting series or current published editions of the those great books.

Edited September 19, 2022 by joel hoffman
I was composing my post before I saw ji’s reply to Vern.

[joel hoffman]

As for the segregable reference, that might or might not be an exception to the general rule…

As for what rates the OP should be paid for changed or added task order work, it may well depend upon the basis of pricing labor in the task order and what, if anything, the terms of the base contract provide for. We don’t know the context of the contract or the task order.

If the OP isn’t committed to the maximum rates in the contract or task order for changes, impacts or additional, in-scope work, then the DSC and Changes clauses state the basis for the equitable adjustment.

Vern laid all that out earlier.

 

Edited September 19, 2022 by joel hoffman

[Vern Edwards]

5 hours ago, ji20874 said:

Your pretended disappointment in me is unnecessary, especially now that you belatedly introduce "allowable" as an adjective before costs.  But this belated admission clears the air on your perspective and seems to un-do your earlier reference to "any increase" in a contractor's costs.  Thank you.

@ji20874I did not pretend to be disappointed in you. I expressed confusion about your ideas. What was especially confusing was your statement that:

21 hours ago, ji20874 said:

Making the contractor whole is not the paramount purpose of an equitable adjustment. That is often the outcome, but more important is arriving at a reasonable price.  

Equitable adjustment is not about price reasonableness. It's about cost compensation. I did not make a belated "admission" of anything. No "admission" was necessary. Don't try to cover what was either ignorance or poor professional communication by insulting me.

I described a complicated idea that you apparently did not know or failed to address. I did it in detail and in appropriate terms. I provided a number of references to court decisions in which the topic was extensively covered. If "allowable" was a key word for you, why didn't you use it?

I tried to be tactful in not saying that your statement about the "paramount purpose" of an equitable adjustment was misleading and in saying that I must have misunderstood you.

You like to provide terse, often information-free responses to inquiries. I like to provide extensive, detailed, and well-documented ones, and I did it in this, in two lengthy posts. It's a good thing that some of us try to actually be informative. But a person can only inform about what they know.

[Vern Edwards]

5 hours ago, joel hoffman said:

Vern, I read ji’s post as a general suggestion that an equitable adjustment to “make the contractor whole” isn’t intended to cure all of a contractors own self inflicted ills or miscues. Maybe I misread the post.

I don't know whether you misread his post or not, and I don't give a damn. Making a contractor whole means compensating it for the damage it suffered at the government's hands. It does not mean making what would have been a losing job in any case profitable.

READ THE BLEEPING CASES I CITED.

[joel hoffman]

Vern, I’m not arguing with you. I agree. 

Where an equitable adjustment also includes credits for deletions:
“It does not mean making what would have been a losing job in any case profitable.”

It also preserves original bargains made, good or bad for either party.

[Vern Edwards]

The OP said:

On 9/17/2022 at 8:14 PM, elgueromeromero said:

I don't see how an "equitable adjustment" could be "equitable" if it doesn't make the contractor whole. Wouldn't you say that making the contractor whole is covering their actual costs of performing the changed work? If the contract labor rates are less than the actual rates used to perform the changed work (because of inflation or because the challenges of figuring out how to complete the changed work required additional senior staff), the contractor will likely be reimbursed less than the actual cost incurred. This is not equitable and does not leave the contractor whole.

I answered:

On 9/18/2022 at 4:58 AM, Vern Edwards said:

The standard formula for pricing an equitable adjustment is described in FAR 15.408, Table 15-2, Section III, Formats for Submissions of Line Item Summaries, Subsection B, Change Orders, Modifications, and Claims. Basically, the adjustment is the difference between what the work would have cost before the change and what it will (or did) cost after the change, plus a reasonable adjustment to profit.

If you have already performed the changed work, then you must show the CO the difference between (1) what you estimate that it would have cost to do the work before the change (not the amount you included in your original proposal) and (2) what it did cost to do the work as changed. You must show that your estimate and your actuals are reasonable.

Additionally, some agencies include a clause in their contracts that applies the FAR Part 31 contract cost principles and procedures to the pricing of adjustments. See, e.g., DFARS 252.243-7001, Pricing of Contract Modifications.

See, generally, Administration of Government Contracts, 5th ed., Chapter 9, Pricing of Adjustments; Section I.A., Price Adjustments Under Contract Clauses; Section II., Proof of Adjustment; Section IV., Overhead and Profit; and Section VI., Costs of Preparing and Financing Adjustments.

Then you-know-who came in with this b.s.:

22 hours ago, ji20874 said:

Making the contractor whole is not the paramount purpose of an equitable adjustment.  That is often the outcome, but more important is arriving at a reasonable price.  

Bull----! In response to which I cited several cases in which boards of contract appeals, the Court of Federal Claims, and the Federal Circuit have said, over the course of decades, that making the contractor whole was the very purpose of an equitable adjustment. Making them "whole" means putting them back into the position they were in before the Change. It does not mean turning a losing job into a winner or depriving a contractor of what it's entitled to in order to negotiate what a CO thinks is a new reasonable price.

Let me remind everyone of what Prof. Nash said:

Quote

Even folks that come into Government contracting with no experience have to learn the basic rules early in the game. And one of the most important rules is the meaning of the term "equitable adjustment." To use that term without knowing its meaning is about as close to gross incompetence as you can come. 

[joel hoffman]

Vern, I agree with you. 
 

I don’t think that I contradicted you, either:

“As for what rates the OP should be paid for changed or added task order work, it may well depend upon the basis of pricing labor in the task order and what, if anything, the terms of the base contract provide for. We don’t know the context of the contract or the task order.

If the OP isn’t committed to the maximum rates in the contract or task order for changes, impacts or additional, in-scope work, then the DSC and Changes clauses state the basis for the equitable adjustment.”