To Settle or Dispute?

[Vern Edwards]

Two questions:

Suppose that a contracting officer receives a demand for a $40,000 price increase under a $500,000 contract based on an assertion that the government breached the contract during performance. The CO does not think that the government breached. The agency's lawyer says it's a close question and that success before the board of contract appeals or the Court of Federal Claims is not certain, but is possible. Nevertheless, it's the CO's call. 

The contractor refuses to settle for less than $40,000 and demands a final decision.

Suppose further that the CO has been told by a reliable person that the average board case costs the government $50,000 to litigate before a board, more if the appeal went to the Court o Federal Claims. (The boards of contract appeals issued 960 appeal decisions in calendar year 2023.)

First question: Would it be appropriate for the CO to consider settling rather than denying the claim on the ground that settlement at $40,000 would be a better deal for the taxpayers than litigating, even if the government might win? In other words, would the cost of litigation be a valid CO consideration?

Second question: Would it be within the CO's authority to settle on that ground?

[C Culham]

I think Yes to both questions.

[formerfed]

I agree.  Yes to both

[Don Mansfield]

7 hours ago, Vern Edwards said:

Suppose further that the CO has been told by a reliable person that the average board case costs the government $50,000 to litigate before a board, more if the appeal went to the Court o Federal Claims.

Is this $50,000 in additional costs? Or is it for time spent by Government employees who get paid either way? 

[Vern Edwards]

12 hours ago, Don Mansfield said:

Is this $50,000 in additional costs? Or is it for time spent by Government employees who get paid either way? 

It would be the cost of time spent by government employees on litigation that would otherwise have been spent for other purposes. Let's call it a cost diversion, rather than additional costs.

[joel hoffman]

20 hours ago, Vern Edwards said:

The CO does not think that the government breached.

Before answering the first question, on what basis for this (hypothetical?) situation does the KO “think” this?

And has the the KO determined that the impact is $40,000, as claimed?

[C Culham]

I can not help myself as this reaches into my vivid memories when I was a Contracting Officer.   My "I think" response to the questions is bolstered by the memories and I offer this.

I think that a CO in such a situation has, or at least I hope so, invovled others most especially legal counsel (a reliable person?) for advice and counsel.  What I may think as a CO as just is not always looked at the same by others within the bureaucratic world.

The memories....

Almost the exact situation but involving hundres of thousands of dollars where pursuant to the advice of the Judge Advocate Generals office the difference of $50,000 was settled on after I as the CO walked out of negotiations (mediation if you will) after the issuance of a final CO decision.  Walked out only to have the JAG attorney follow me and have a strong conversation about a deal rather than going to court over a $50,000 difference.   At issue, I as the CO had evidence, I thought strong  evidence, that the contractor in submitting a certified claim had misrepresented factual cost information.   A matter that the JAG office was not willing to pursue as in the end the amount was not "large enough" to warrant efforts of litigation on the claim and misrepresentation.

And...

A contractor who, as discovered by a state agency, was cooking the books on their state accident insurance payments.  Essentially almost all of the effort was related to contracts awarded by one Federal agency. And those contracts were negotiated contracts.  As much as I hate to say it think 8(a).   Upon discovery the matter was also referred to the US Department of Justice with a specific and detailed response from them that while criminal intent was present (with regard state law but Federal laws of fraud related to contracting matters and 8(a) regulations) the dollar amount (calculated at a low 7 figures) was not large enough for their office to consider handling and left it in the states hands. To my knowledge the state through criminal charges never recouped the money as their abilities to extradite from a foriegn country were nil without the assistance of the Feds.

Two events in my career that opened my eyes how money is valued when it comes to bureaucratic processes. 

 

[Vern Edwards]

2 hours ago, joel hoffman said:

Before answering the first question, on what basis for this (hypothetical?) situation does the KO “think” this?

@joel hoffman I interpret your question to be: Why does the CO think the government did not breach?

Here's the case:

• The CO has rejected the contractor's first delivery as nonconforming. The contractor asserts that the rejection was improper, that its delivery did conform to the specification, and that the demand for corrective action was a change.
• The contractor went on record, but complied with the CO's demand for corrective action, and now seeks an equitable adjustment of $40,000 pursuant to the Changes clause.
• The agency attorney says that the specification might be ambiguous, that the board of contract appeals might decide that the demand for corrective action was, in fact, a change, and might remand the case to the parties in order to determine quantum.
• The CO thinks the specification is clear and unambiguous and that the demand for corrective action was not a change.

Does that answer your question?

 

[Don Mansfield]

22 hours ago, Vern Edwards said:

The agency's lawyer says it's a close question and that success before the board of contract appeals or the Court of Federal Claims is not certain, but is possible.

Assuming the agency has other lawyers, what would they say if asked for their opinions?

[Vern Edwards]

Just now, Don Mansfield said:

Assuming the agency has other lawyers, what would they say if asked for their opinions?

The same as the first lawyer. "The board might find the spec to be ambiguous."

[joel hoffman]

2 hours ago, Vern Edwards said:

@joel hoffman I interpret your question to be: Why does the CO think the government did not breach?

Here's the case:

• The CO has rejected the contractor's first delivery as nonconforming. The contractor asserts that the rejection was improper, that its delivery did conform to the specification, and that the demand for corrective action was a change.
• The contractor went on record, but complied with the CO's demand for corrective action, and now seeks an equitable adjustment of $40,000 pursuant to the Changes clause.
• The agency attorney says that the specification might be ambiguous, that the board of contract appeals might decide that the demand for corrective action was, in fact, a change, and might remand the case to the parties in order to determine quantum.
• The CO thinks the specification is clear and unambiguous and that the demand for corrective action was not a change.

Does that answer your question?

 

Pretty much. Thanks! 
appears that the KO hasn’t made a convincing case to its lawyer.

[formerfed]

Sometimes contracting and technical people are so close to an issue, they don’t see faults and issues.  I would ask other technical people for their opinions.   But if the contractor interpreted the specification a certain way, it’s logical that the court might see the ambiguity.  Going with the lawyers position makes sense.

[Vern Edwards]

On 6/28/2024 at 9:27 AM, Vern Edwards said:

First question: Would it be appropriate for the CO to consider settling rather than denying the claim on the ground that settlement at $40,000 would be a better deal for the taxpayers than litigating, even if the government might win? In other words, would the cost of litigation be a valid CO consideration?

Second question: Would it be within the CO's authority to settle on that ground?

Those were my questions. Yes or No would work as answers. Yes or No with comments or explanations are welcome.

[joel hoffman]

If the government thinks that its case for no ambiguity is weak, I’d say it is appropriate to settle the dispute.

The KO has the authority to settle the dispute. 

[Vern Edwards]

6 hours ago, joel hoffman said:

The KO has the authority to settle the dispute. 

@joel hoffman

Does that mean that the CO has authority to pay a claim on the grounds that (1) the contractor is likely to appeal a final decision that denies the validity of the claim or the amount sought, (2) the outcome of litigation is uncertain, and (3) paying is likely to be less costly than litigating?

[joel hoffman]

55 minutes ago, Vern Edwards said:

@joel hoffman

Does that mean that the CO has authority to pay a claim on the grounds that (1) the contractor is likely to appeal a final decision that denies the validity of the claim or the amount sought, (2) the outcome of litigation is uncertain, and (3) paying is likely to be less costly than litigating?

Ahh. I didn’t answer your specific questions.

I dont know. I do know that my KO’s would occasionally settle for somewhat more than our bargaining position in some cases in order to close the matter rather than have to significantly extend the life and cost of our offices in Saudi Arabia to litigate. We could have possibly ended up paying much more in settlement cost, plus interest.

This was at the end of the USACE Saudi Arabia Assistance Program back in 1987

Our cost to the Saudi Government was more than ten million dollars per month to maintain the remaining USACE staff and our offices and support contracts.

The Saudis paid all costs for the Assistance Program, including the Corps of Engineers’ direct and indirect costs.

Edited June 30 by joel hoffman

[Don Mansfield]

On 6/28/2024 at 7:30 PM, Vern Edwards said:

It would be the cost of time spent by government employees on litigation that would otherwise have been spent for other purposes. Let's call it a cost diversion, rather than additional costs.

Ok, so "yes" to your question.

As a taxpayer, I would want to know what else would be done with the $50,000 in resources. If they were being used to defend against a $4 million claim, then I'm ok settling the $40,000 claim. However, if the $50,000 were to be used to pay employees whose job it was to defend against claims and there were no other claims to defend against, then I'd want the money to be used to defend against the $40,000 claim. 

[joel hoffman]

2 hours ago, Don Mansfield said:

Ok, so "yes" to your question.

As a taxpayer, I would want to know what else would be done with the $50,000 in resources. If they were being used to defend against a $4 million claim, then I'm ok settling the $40,000 claim. However, if the $50,000 were to be used to pay employees whose job it was to defend against claims and there were no other claims to defend against, then I'd want the money to be used to defend against the $40,000 claim. 

I generally agree with Don here. Even if there are some other claims to defend, the $40,000 claim would likely, at least in my organizations, be handled by employees whose normal duties include or are dedicated to resolving or defending claims.

Edit:

It also can send signals to contractors that the government might not defend against claims in based on the cost or resources required to do so.

It also may affect the morale of employees involved in administering contracts.

It also depends upon the specific circumstances. We don’t specifically know the strength of the KO’s thinking concerning interpretation of the contract requirement.

I do know that I occasionally had to convince some our organization’s legal counsel that a case is much stronger than they initially thought. Even Steve Feldman.

So, yes - my personal opinion is based upon my experience in handling and resolving controversies, REA’s and claims at the working level and at the higher level.

[Retreadfed]

Don and Joel, how does FAR 33.204 factor in to your answers?

[joel hoffman]

15 minutes ago, Retreadfed said:

Don and Joel, how does FAR 33.204 factor in to your answers?

Specifically? The contractor here has demanded a final decision. It’s a claim.

I agree with 33.204, including the use of arbitration when appropriate. We also had procedures in place to try to resolve controversies prior to a contractor elevating it to a claim.

[Vern Edwards]

All,

I appreciate your responses.

What I've been wondering is whether the government is engaging in too much litigation.

I've been reading a lot of solicitations, and many of them are badly written. The government likes to award "without discussions," which means that the parties get little chance to talk things over before contract award, clear things up, and reach a true meeting of the minds.

When conflicts arise, contractors may face unreasonable CORs. The CO may be located far away and unengaged. Disagreements arise and then comes an REA that leads to a claim or the disagreement goes directly to a claim.

I think COs may feel compelled to deny the claim, to "support" the COR and "fight for the taxpayer," which results in litigation. We don't really know the cost of all that litigation (almost a thousand board decisions per year).

Litigation increases the total annual cost of supplies, services, and construction. I think there is every reason to believe that much of that litigation is wasteful, even when the government wins.

That's why I wonder whether it might be cheaper in the long run to settle and pay rather than litigate, even if the CO thinks they're right. I wonder if the CO should consider the costs of litigation before denying an REA or a claim.

Is the CO obligated in some way to issue a final decision, deny a claim, and fight when he or she thinks they are right? Are they obligated to fight even if they think the fight would cost more than it's worth? Should COs weigh and balance the likely cost of litigation against the cost of settling when making a decision? Should they back off a final decision that they made if the contractor decides to appeal and the litigation would cost more than the settlement.

There are people wondering if FAR should make a clearer policy statement about that in order to give COs some support. Something like: COs should [or may] weigh the cost of litigation against the cost of settlement before making a final decision to deny a request for equitable adjustment or a claim.

Again, I appreciate your responses.

Vern

[Don Mansfield]

2 hours ago, Retreadfed said:

Don and Joel, how does FAR 33.204 factor in to your answers?

It doesn't. The way I interpreted Vern's scenario, the contractor would not be interested in ADR. In real life, ADR should be considered. 

[formerfed]

Vern,

Two thoughts I had earlier that contribute to the litigious environment but didn’t post. One is many CORs have other duties and don’t devote sufficient time to contract monitoring.  When conflicts arise, CORs don’t admit they weren't diligent  They are quick to point their finger at the contractor and are defensive.   The second is many COs just don’t want to compromise and settle.  Some, particularly those with years of experience, want to fight the contractor to show their toughness.  Others shun the responsibility of deciding a claim and want to be told or directed by a board or a mediator on settlement.

In order to make a change, either FAR coverage or strong policy by OMB needs issued.  

[joel hoffman]

Vern, I didn’t mention it but in the various Corps of Engineer Districts (and the Division) that I worked for, we had personnel in the Construction Division at District or Division level assigned to make an independent review, evaluation and assessment of contractor claims, REAs and disagreements from  the assigned Contract Admin Office and/or the KO.

It depended upon who the action was for. We would generally involve and coordinate with Office of Counsel and the KO.

We were supposed to review each situation from a neutral viewpoint. For issues short of dispute status that had merit or partial merit, we would so advise the field office. If the field office couldn’t resolve it, we would become involved in the negotiation with the contractor.

If a pre-claim issue was elevated to us that had no merit, we could advise the contractor.  That would sometimes  resolve the issue.

All claims were routed through our Construction Claims section for evaluation and coordination with Legal and the KO. If the claims had no merit, merit or partial merit, we would advise the KO in order to prepare a KO decision and/or for us to negotiate, as appropriate.

There's more to it than I described but an important aspect is an independent review of issues at lower levels. 

[Retreadfed]

13 hours ago, Vern Edwards said:

I think COs may feel compelled to deny the claim, to "support" the COR and "fight for the taxpayer," which results in litigation.

I agree with the general thrust of your thesis.  However, while there may be problems caused by COs supporting CORs, in my experience there are more problems with contracting officers kow towing to DCAA.  I don't know how many times I have heard contracting officers say that once DCAA has taken a position on something, the CO cannot go against DCAA.  This causes needless litigation.