Does the USG have to reimburse the Contractor

[LM_ABITWT]

I have a cost reimbursement contract that is significantly overspent. We continued working at risk and submitted a REA proposal which the USG denied, stating our costs were not fair and reasonable.

If my company can prove that these costs were incurred in support of the contract, what grounds would the USG have to deny these costs? The overspending originated from having to pay the workforce more than we originally proposed. If we can demonstrate that those amounts (higher salaries) were actually paid to the employees, shouldn't we have a fairly strong case to be reimbursed?

[Guest Vern Edwards]

If your incurred costs exceeded the "limitation of cost" or the "limitation of funds" that should have been stated in the contract (in FAR clause 52.232-20 or 52.232-22), then the government is not obligated to pay the excess costs, even if you can show that you actually paid the higher wages to your employees, unless you can show that it expressly authorized you to exceed the limit or you can prove some valid basis for asking for an upward adjustment to the contract estimated cost. The mere fact that you paid higher wages to your employees is not enough.

Why did you "have to" pay the higher wages? Was it due to a government-issued wage determination?

Did the CO tell you that the government would not pay the excess because the excess was "not fair and reasonable"? Did the CO use those words: "fair and reasonable"?

[LM_ABITWT]

In order to staff the program it was determined that we needed to increase our hourly rates. So we exhausted our funds prior to the PoP end date.

Yes, the CO used those words in the letter to us. Unfortunately, the letter was provided several months after the fact and we worked at risk to avoid a work stoppage and continued to support the customer's mission. And we submitted a proposal for the difference, but the USG has stated that they won't pay because our increased costs are deemed not fair or reasonable. However, we did not pay our personnel more than we needed to. We negotiated with everyone we recruited/hired, but our originally proposed rates were not sufficient.

[ji20874]

LM_ABITWT,

Did you follow the procedures of the Limitation of Funds or Limitation of Cost clause of your contract?

Would you think it reasonable for the contracting officer to record your difficulty in accurately forecasting/proposing costs as a negative entry in a CPARS evaluation?

You wrote, "The overspending originated from having to pay the workforce more than we originally proposed." Would it be true to say the overspending originated by the company's own decision to continue performance even after incurring costs in excess of the funds alloted to the contract? You wrote, "...we worked at risk..." Are you trying to shift your risk to your contracting partner?

These may seem like hard questions, but they are honest questions. Why should the American taxpayer pay your company's costs if you made a decision to work at risk and you did not follow the terms of the contract and you did not accurately forecast your costs?

[LM_ABITWT]

ji, I agree with you about the negative CPAR entry. No doubt we had our share of challenges controlling costs and we expect the next CPAR to reflect that. You're also correct that we (my company) took on the risk of continuing to work even after our funds had been fully exhausted. However, we came to that decision based on the assumption that both the contractor and the USG were acting in good faith to resolve this matter. We did comply with the two clauses you referenced. The USG asked us to submit a revised proposal to demonstrate how much more funding would be necessary to complete the job and run the program until the end of the PoP.

The decision to work at risk was to avoid a disruption in service (to the USG) where they received a direct benefit from our continued service. That is what we are asking them to reimburse us for. This is a CR contract. My company is not profiting at all from this effort. We simply want to be reimbursed for all of the costs incurred. The CO's response citing that our costs are not fair or reasonable does not make sense to me since they are actuals and we incurred those costs in direct support of the USG's mission. Again, a service was clearly provided and a beneift received by the USG. Why would the CO not see it the same way and simply reimburse us our costs?

Thanks.

[wvanpup]

LM_ABITWT,

Your posting, to me, raises two questions.

1. Can the CO deny your costs under the Limitation of Cost or Limitation of Funds clause, and you worked "at risk?" There is a line of cases holding (as a gross generalization) that these costs cannot be denied if the contracting officer knew you were incurring costs beyond the funds alotted to the contract and encouraged you to continue performance (such as, perhaps, by requesting a proposal for additional performance without telling you to stop incurring costs).

2. Are the costs considered unreasonable because of the rate or because they were incurred in excess of the Limitation of Cost clause or Limitation of Funds clause? If the former, which seems likely from your post, is the contracting officer willing to pay the originally proposed rate (which I expect was paid for the bulk of the labor and was considered reasonable) or some other higher rate that is considered reasonable, or is the contracting officer denying everything (if so, what is the reason for denying everything)?

[Guest Vern Edwards]

wvanpup:

Please cite one of those cases in the line of cases. Preferably, the most recent one.

[wvanpup]

I wrote, and was asked for a citation of authority to support: "There is a line of cases holding (as a gross generalization) that these costs cannot be denied if the contracting officer knew you were incurring costs beyond the funds alotted to the contract and encouraged you to continue performance (such as, perhaps, by requesting a proposal for additional performance without telling you to stop incurring costs)."

The "gross generalization" I referred to is, essentially, equitable estopple. The principle was applied in American Electronic Laboratories, Inc., v. United States, 774 F.2d 1110, October 7, 1985. As stated in LexisNexis Headnotes to the case:

OUTCOME: The court reversed and remanded, holding that defendant's agents induced plaintiff to continue performing a contract for which they knew funds were not available and that defendant was equitably estopped from denying payment for cost overruns duly reported by plaintiff.

Under the scope of review provided by the Contract Disputes Act of 1978, 41 U.S.C. § 609( (1982), the Armed Services Board of Contract Review's (ASBCA's) conclusions of law are not final and are thus freely reviewable, while the ASCBA's findings of fact are final and appellate review is limited to a determination whether those findings are arbitrary, capricious, based on less than substantial evidence, or rendered in bad faith.

Four elements must be present to establish an equitable estoppel: (1) the party to be estopped must know the facts, i.e., the government must know of the overrun; (2) the government must intend that the conduct alleged to have induced continued performance will be acted on, or the contractor must have a right to believe the conduct in question was intended to induce continued performance; (3) the contractor must not be aware of the true facts, i.e., that no implied funding of the overrun was intended; and (4) the contractor must rely on the government's conduct to its detriment.

The research I did some time ago indicated that the Limitation of Cost clause was (virtually?) always enforced, usually because the contractor did not provide the required notice and the Government was therefore not aware of the overrun, or because the contractor did not establish the facts supporting equitable estoppel. See, e.g., the following from Northrop Grumman Corp. v. U.S., 42 Fed. Cl. 1, September 24, 1998.

None of plaintiff's evidence, however, suggests that it could prove inducement, as the case law has given meaning to the concept. See. e.g., Advanced Materials, 108 F.3d at 312 (finding that statements regarding potential willingness to fund overrun insufficient to constitute inducement or as basis for detrimental reliance); Ebasco Servs., Inc. v. United States, 37 Fed.Cl. 370, 381–82 (1997) (holding that contractor's decision to continue performance was voluntary and not induced by actions or statements of representatives, particularly in light of contracting officer's consistent indications that funding limit would be enforced). In the case at bar, plaintiff made no showing that the Government intended to create an objective expectation of an intent to provide further funding. Cf. American Electronic Labs., 774 F.2d at 1115 (holding that Government “consistently induced [plaintiff] to continue its performance by making representations that [it] would fund the overrun”). Mr. Glinka's declaration is dispositive because it offers nothing more than mere assertions and conclusory statements regarding alleged inducement, which renders it insufficient to raise a genuine issue of material fact. See Matsushita Elec., 475 U.S. at 586 n. 11, 106 S.Ct. 1348; Barmag Barmer, 731 F.2d at 836. Because defendant has shown an absence of evidence on at least one element of equitable estoppel *10 for which plaintiff bears the burden of proof, the court grants defendant's motion for summary judgment on Count Six.

Will the principle apply here? I do not know, because there is insufficient evidence concerning the notice that was provided and the Government's actions in response to whatever notice may have been provided.

[Guest Vern Edwards]

I'm curious about the CO's use of "fair and reasonable". The proper reason for refusing reimbursement on grounds of the LOC or LOF clause would be that it is "unallowable on the basis of a contract term". "Fair and reasonable" might suggest the contractor is entitled to something, but not as much as it asked for.

[here_2_help]

For those interested, The Boeing Company recently ran afoul of the LOC/LOF clauses at the ASBCA.

http://www.asbca.mil/Decisions/2013/57409%20The%20Boeing%20Company%2012.3.13%20PUBLISHED.pdf

As I parse the decision, Boeing proposed a cost growth REA but continued to work past the funding limits while the proposal was being considered. Eventually the Task Order was TforC'd and Boeing was not able to recover incurred costs in excess of the amounts funded.

Hope this helps.