Request for Equitable Adjustment - Scope & Fiscal Question

[jdm843]

Hello WIFCON! Would love some input here from any knowledgeable folks about this...  I am an Army PCO tasked with negotiating a request for equitable adjustment (REA) on a fixed price commercial contract for severable services that I recently inherited from a predecessor PCO. It's $5.6M, five year contract (base + four option years). The initial award was about two years ago--we are currently in the first option year. Shortly after award, during the base year, the Government realized it had vastly underestimated the magnitude and needed additional performance out of the contractor, and so the contract was modified (five times over the course of the first two years) to pull forward performance scope from the out years.  So now the contractor has submitted an REA for additional OH costs related to administrative burden and greater than anticipated subcontracting costs in order to meet accelerated deadlines.  The REA amount is significant, and the circumstances are much more complicated than what I'm able to provide in this forum, but, basically I've determined the REA has merit, and I'm trying to write up my merit analysis and price negotiation memo. I have a few questions I'm hoping someone can help me with.  THANKS!

1. SCOPE:  As I said, I'm inclined to determine the REA has merit, but my analysis leads me to believe that we're dealing with an out of scope change.  I say this after reviewing the Contract Attorney's Deskbook (Chapter 21), which outlines several factors to consider for scope determinations.  Ultimately, to me the cumulative effect of all the prior changes may have constituted a "cardinal change".  If that's the case, what's the change authority I'd use for the modification?  In my experience, typically out of scope changes require a J&A, and with a J&A I'd use the applicable J&A authority as my mod authority--but that doesn't make sense since this is an REA, right? I'm not going to write up a J&A for all the contract changes that ALREADY happened am I? (Seems to me the modification associated with the negotiated REA is only to equitably adjust the contract as a result of the constructive changes leading up to this point.) Often I use the changes clause 52.243-1 as my modification authority, but it's my understanding that the changes clause 52.243-1 is only good for WITHIN-SCOPE changes.  And since this is an REA and not a claim (yet, at least), using the disputes clause 52.233-1 wouldn't be correct either.  So what do I put in the SF-30?
2. FUNDS: I assume the fiscal law associated with an REA is the same as any other modification?  I.e. Within scope modifications use award year money and out of scope modifications use current year money?

Other related details:  each of the aforementioned modifications were done bilaterally.  The contractor signed each SF30 without a price proposal, but all along he was corresponding with the PCO and COR that he felt the contract scope was creeping larger and larger and as a result he was facing cost impacts he hadn't anticipated.

[Guest Vern Edwards]

10 hours ago, jdm843 said:

So what do I put in the SF-30?

The issue of what authority to cite on SF 30 is an old one that has been discussed several times at Wifcon Forum and over the course of decades in contracting offices ever since SF 30 first appeared. Tthe issue has never been resolved to the satisfaction of everyone. I'll answer this way:

The concept of equitable adjustment is most often associated with a changes clause such as FAR 52.243-1 and the other changes clauses in which that phrase appears. But the standard changes clauses are not included in standard commercial item contracts. That being the case, there is no contract clause that you could cite on SF 30 as authority for an equitable adjustment for the changes that you described. Under a commercial items contract the "authority" to make bilateral changes could be said to be FAR 52.212-4(c). Try citing 52.212-4(c) on SF 30, or "mutual agreement of the parties," or "requirement for consideration."

10 hours ago, jdm843 said:

I assume the fiscal law associated with an REA is the same as any other modification?  I.e. Within scope modifications use award year money and out of scope modifications use current year money?

That is correct.

Now, I'm curious about two things that you said:

10 hours ago, jdm843 said:

[E]ach of the aforementioned modifications were done bilaterally. 

and

10 hours ago, jdm843 said:

The contractor signed each SF30 without a price proposal... .

If the Government requested the bilateral changes, then it had to provide consideration to the contractor for each such change, rather than an equitable adjustment, which is not the same thing. Consideration is necessary in order to make the change legally binding. Ordinarily, one would expect the consideration for the changes that you described to be a price adjustment, although it could be something else. Yet you say that the contractor did not submit price proposals. I assume that means that the parties did not adjust the contract price when the changes were made.

What consideration did the Government provide for each change if not a price adjustment? Did each modification documents include a release of claims? Did the parties agree to make price adjustments, but defer them to a later time?

[jdm843]

2 hours ago, Vern Edwards said:

If the Government requested the bilateral changes, then it had to provide consideration to the contractor for each such change, rather than an equitable adjustment, which is not the same thing. Consideration is necessary in order to make the change legally binding. Ordinarily, one would expect the consideration for the changes that you described to be a price adjustment, although it could be something else. Yet you say that the contractor did not submit price proposals. I assume that means that the parties did not adjust the contract price when the changes were made.

What consideration did the Government provide for each change if not a price adjustment? Did each modification documents include a release of claims? Did the parties agree to make price adjustments, but defer them to a later time?

Thanks for your input!  

RE: Signing modifications. As I stated, the contractor never submitted any price proposal with any SF30 leading up until now, but he was regularly articulating ot the COR and PCO that he was having trouble keeping up with performance requirements under the accelerated contract scenario and that he was experiencing major cost impacts, although he could not quantify them.  At each communication, the Government team essentially denied merit to his qualitative assessment, and didn't bother entertaining anything quantitative since he couldn't provide anything costs for evaluation.  Now, after nearly two years, at the contemplation of yet another modification, he began (respectfully) threatening that was seriously considering defaulting on the contract since he was under such financial stress as a result of the increased contract requirements.  That's about when I arrived to the situation and I sat down with him to instruct him how to submit and REA and what we needed to see from him in order to negotiate an equitable adjustment.

RE: Price Adjustments.  Many of the modifications DID involve price adjustments, but the CLIN involved essentially only provides the Contractor a mechanism to reimburse about a 75% portion of direct costs, so now he's seeking an adjustment for recompense related to the remainder of his direct costs, OH, and profit.  I know, it sounds convoluted, and to a certain extent it is, but at the end of the day it is what it is.  It's a price mechanism under contract that works perfectly fine, if only the Government hadn't gone and doubled the contract magnitude and halved the performance duration over the course of five modifications...

RE: Consideration. There was nothing formally negotiated at the issuance of each modification, however there were some concessions that the COR & QA team has had to make along the way--i.e. they had to lax some performance standards & forego certain recurring deliverables so that the contractor could focus on the most important PWS elements.  However none of this is adequately documented and there are, in retrospect, various discrepancies between the Government's account of things and the contractor's.

2 hours ago, Vern Edwards said:

The concept of equitable adjustment is most often associated with a changes clause such as FAR 52.243-1 and the other changes clauses in which that phrase appears. But the standard changes clauses are not included in standard commercial item contracts. That being the case, there is no contract clause that you could cite on SF 30 as authority for an equitable adjustment for the changes that you described. Under a commercial items contract the "authority" to make bilateral changes could be said to be FAR 52.212-4(c). Try citing 52.212-4(c) on SF 30, or "mutual agreement of the parties," or "requirement for consideration."

10 hours ago, jdm843 said:

RE: Scope & Mod Authority.  I get that 52.243-1 and 52.212-4(c) are used for in-scope mods, and I'm getting the sense from our legal office that they prefer us to keep it in scope.  I just don't see how that's the case and it seems to me that somewhere along the way we breached into out-of-scope territory...  We've been instructed via agency policy not to use the term "mutual agreement of the parties" and instead cite a specific FAR authority.  

[Guest Vern Edwards]

45 minutes ago, jdm843 said:

I get that 52.243-1 and 52.212-4(c) are used for in-scope mods, and I'm getting the sense from our legal office that they prefer us to keep it in scope.  I just don't see how that's the case and it seems to me that somewhere along the way we breached into out-of-scope territory...  

Why get into that? Your predecessor handled the mods and, presumably, considered them to be within scope. The contractor did not object. Why do you want to make an issue out of it. You don't have to do that in order to make a price adjustment. My advice is to drop it. If I were your boss I'd tell you to leave it alone.

As for the rest, I don't understand how those mods were handled, but I'm not going to pursue the topic. I think you have a naive contractor who didn't know his rights. But, oh well.

[jdm843]

25 minutes ago, Vern Edwards said:

Why get into that? Your predecessor handled the mods and, presumably, considered them to be within scope. The contractor did not object. Why do you want to make an issue out of it. You don't have to do that in order to make a price adjustment. My advice is to drop it. If I were your boss I'd tell you to leave it alone.

As for the rest, I don't understand how those mods were handled. I think you have a naive contractor who didn't know his rights. But, oh well.

I understand.  The predecessor most definitely considered them within scope. And no, the contractor did not object via the SF30, but was objecting via separate correspondence.  So yes, there is definitely a certain level of naivete on the contractor's part.  I expect that if this were to go to claims, the ASBCA or CoFC would consider it all out of scope, however.  The customer agency is hesitant to fund the negotiated adjustment, so that's probably where this is headed anyway.  I suppose the scope issue is neither here nor there anyway--since he performed anyway, so he's given up his right for breach damages...  

[ji20874]

jdm843,

I recommend you stop trying to play attorney -- you said you are a PCO, so you need to play the contracting officer role.

The p[revious modifications are within scope -- they have to be, or your predecessor woldn't have signed them -- and the contractor apparently hasn't raised the issue -- so you need to drop that matter.  You also don't decide that your agency breached the contract -- that is a decision for a judge after the contractor makes such a case.

Are you really with a genuine request for equitable adjustment?  Or are you really dealing with a request to reform the contract disguised as a request for equitable adjustment?

If you are really dealing with a genuine request for equitable adjustment, what contract clause did the contractor cite as the basis for its request for equitable adjustment?

If you really dealing with a request to reform the contract disguised as a request for equitable adjustment, I recommend you reject the request.  Refer the contractor to the Disputes clause of the contract.

Look at the modifications -- do those modifications purport to be the complete bilateral agreement of the parties?  Or do the modifications reserve the right to cange price later?  The small print at the bottom of box 14 counts.

If you're ready to make the contract whole through another bilateral contract modification, and if you cannot cite mutual agreement of the parties (that is legal, by the way), Vern gives good advice -- cite FAR 52.212-4( c ).  You said this was a commercial contract, so it should include the 212.4 clause -- and because it is commercial, it should not include the 52.243-1 clause.

 

[jdm843]

1 hour ago, ji20874 said:

I recommend you stop trying to play attorney -- you said you are a PCO, so you need to play the contracting officer role.

The p[revious modifications are within scope -- they have to be, or your predecessor woldn't have signed them -- and the contractor apparently hasn't raised the issue -- so you need to drop that matter.  You also don't decide that your agency breached the contract -- that is a decision for a judge after the contractor makes such a case.

Who makes a scope determination?  Isn't that ultimately the PCO's job?  There is nothing in the file showing the PCO (or any attorney for that matter) had made any consideration as to whether the modifications were in or out of scope.  Yes, all the mods were bilaterally signed and each used either 52.212-4 or 52.243-1 (yes both clauses are in the contract and there is no apparent rationale as to why one was used over the other), which would indicate an in-scope agreement by both the PCO and the contractor, but as I mentioned the Contractor WAS complaining all along that the modifications WERE beyond the scope of the contract as initially advertised and awarded.

1 hour ago, ji20874 said:

Are you really with a genuine request for equitable adjustment?  Or are you really dealing with a request to reform the contract disguised as a request for equitable adjustment?

If you are really dealing with a genuine request for equitable adjustment, what contract clause did the contractor cite as the basis for its request for equitable adjustment?

This is a "genuine REA" without disguise. The contractor cited 252.243-7002 and provided the certification required by that clause.  Lots of other than C&P data provided too, and a mountain of narrative description of his account of things over time as well.

1 hour ago, ji20874 said:

Look at the modifications -- do those modifications purport to be the complete bilateral agreement of the parties?  Or do the modifications reserve the right to cange price later?  The small print at the bottom of box 14 counts.

Yes, all the modifications were "supplemental agreement" (SF30 box 13c).  See naivete discussion above.  I'd argue that the Government had some culpable naivete at this point as well.

1 hour ago, ji20874 said:

If you're ready to make the contract whole through another bilateral contract modification, and if you cannot cite mutual agreement of the parties (that is legal, by the way), Vern gives good advice -- cite FAR 52.212-4( c ).  You said this was a commercial contract, so it should include the 212.4 clause -- and because it is commercial, it should not include the 52.243-1 clause.

Thanks for your advice.  I've decided to drop the scope issue and utilize FAR 52.212-4(c) as the modification authority as Vern recommended.  My curiosity remains however as to whether it's really in or out of scope.  (It's a question that is purely academic, unless this thing goes to claims...).

[Don Mansfield]

2 hours ago, ji20874 said:

If you are really dealing with a genuine request for equitable adjustment, what contract clause did the contractor cite as the basis for its request for equitable adjustment?

 

33 minutes ago, jdm843 said:

This is a "genuine REA" without disguise. The contractor cited 252.243-7002 and provided the certification required by that clause.  Lots of other than C&P data provided too, and a mountain of narrative description of his account of things over time as well.

jdm843,

DFARS 252.243-7002 doesn't entitle the contractor to an equitable adjustment, it just requires that such requests contain certain information. What clause in your contract would entitle the contractor to an equitable adjustment?

[jdm843]

18 minutes ago, Don Mansfield said:

DFARS 252.243-7002 doesn't entitle the contractor to an equitable adjustment, it just requires that such requests contain certain information. What clause in your contract would entitle the contractor to an equitable adjustment?

The contractor's REA also cites 52.243-1: "IAW FAR 52.243-1 Changes, I respectfully submit a request for equitable adjustment based upon the impact of the contract changes realized since inception of the contract."

Additionally, the contract PWS has a passage that forecasts a certain magnitude of service and that "the overall total may vary +/-10% without an equitable adjustment." One of the fundamental bases of the REA is that the total varied >40% above the initial forecast.

[Guest Vern Edwards]

6 hours ago, ji20874 said:

You also don't decide that your agency breached the contract -- that is a decision for a judge after the contractor makes such a case.

But, if the contractor alleges breach in a claim, doesn't the CO have to decide whether he or she agrees when making a final decision? If the CO disagrees, then the contractor gets to appeal, and the judge decides who's right. Right? So the CO does decide.

4 hours ago, jdm843 said:

There is nothing in the file showing the PCO (or any attorney for that matter) had made any consideration as to whether the modifications were in or out of scope

I do not know of any express requirement for a CO to document the file that a prospective mod is within scope. Such documentation is not a bad idea, but the lack of such documentation does not warrant any conclusion about scope, one way or the other.

Anyway, it's the CO who signs the mod who decides, not someone coming along after the fact, unless it later becomes a claim issue that the successor CO has to decide.

[Matthew Fleharty]

7 hours ago, jdm843 said:

The contractor's REA also cites 52.243-1: "IAW FAR 52.243-1 Changes, I respectfully submit a request for equitable adjustment based upon the impact of the contract changes realized since inception of the contract."

Is FAR 52.243-1 even in your contract?  As it has already been stated, for commercial contracts, it shouldn't be.

8 hours ago, jdm843 said:

Yes, all the modifications were "supplemental agreement" (SF30 box 13c).  See naivete discussion above.  I'd argue that the Government had some culpable naivete at this point as well.

Sounds like the contractor realizes he/she made a bad deal (but a contractually binding deal with consideration nevertheless) and now he/she wants the new PCO to Monday Morning Quarterback the issue.  Have you spoken to the previous PCO and has it occurred that he/she may have known exactly what he/she was doing when the previous modifications were signed?  Even with all these letters and tertiary documentation you point to, there were multiple opportunities for this contractor to price into the contract modifications whatever consideration should have been adequate for the change and he/she failed to do so (or do so accurately) - OR they did price them in accurately and now the contractor is trying to extract even more from the new PCO...

[ji20874]

Based on what I read from the original poster, the request for equitable adjustment is really a request to reform the contract.  

Although a commercial contract, it contains 52.243-1.  Okay.  But that clause only allows for an equitable adjustment after a unilateral change order -- and there has been no unilateral change order.  All the previous changes were supplemental agreements, which the contractor was free to bargain and willingly chose to sign -- and each of those was a complete agreement on terms and price (see the small text at the bottom of block 14 of the SF-30).

Now, the contractor wants to reform the contract in the guise of a request for equitable adjustment, citing a contract clause that doesn't provide for an adjustment in these facts.

The new contracting officer feels bad, and wants to make the contractor happy.  He wonders if all those previous modifications/supplemental agreements were illegitimate, even though the contractor hasn't made or proven such an assertion.  

Based on the facts as I understand them as presented here, my recommendation is to reject the request for equitable adjustment -- the 52.243-1 requirements for an equitable adjustment do not exist.  The contractor has not made its case for an equitable adjustment, and has not made a case for reforming the contract.  After the contracting officer rejects the request for equitable adjustment, the contractor might read the 52.233-1 clause and might decide to try to use that clause to obtain the contract reformation it seeks by filing a claim.  If the contractor makes its case well, the contracting officer will have a basis for granting the desired reformation -- but if not, then the contractor can appeal.

 

 

 

 

 

[Don Mansfield]

20 hours ago, ji20874 said:

All the previous changes were supplemental agreements, which the contractor was free to bargain and willingly chose to sign -- and each of those was a complete agreement on terms and price (see the small text at the bottom of block 14 of the SF-30).

The small text on the bottom of block 14 states:

Quote

Except as provided herein, all terms and conditions of the document referenced in Item 9A or 10A, as heretofore changed, remains unchanged and in full force and effect.

Are you saying that this is a release of claims?

[ji20874]

Not a release of claims, but an agreement that all other terms (such as price) are unchanged as a result of the supplemental agreement.

[Don Mansfield]

8 minutes ago, ji20874 said:

Not a release of claims, but an agreement that all other terms (such as price) are unchanged as a result of the supplemental agreement.

So the statement at the bottom of Block 14 doesn't release the Government from liability for further equitable adjustments arising from the same change(s), correct?

[ji20874]

The statement at the bottom of Block 14 indicates that all items unchanged by the modification are unchanged by the modification, and if the modification is bilateral, that it represents the agreement of the parties.  Then, the contract continues forward on the basis of the new agreement.  Any clause remaining in the contract that allows for an equitable adjustment is still operative.

Normally, if a party to a contract wants to reserve the right to re-open something later, that party will have the reservation written into the contract.

But what do you think it means?  Remember, your answer has to result in some meaningful understanding -- you cannot interpret it in a way that removes all the meaning.

[Guest Vern Edwards]

22 hours ago, ji20874 said:

After the contracting officer rejects the request for equitable adjustment, the contractor might read the 52.233-1 clause and might decide to try to use that clause to obtain the contract reformation it seeks by filing a claim.  If the contractor makes its case well, the contracting officer will have a basis for granting the desired reformation -- but if not, then the contractor can appeal.

Any request for contract reformation would have to be based on some kind of mistake, either mutual mistake as to a basic assumption or a unilateral mistake of which the CO knew or had reason to know. See Administration of Government Contracts, 4th ed., Ch. V.

[Don Mansfield]

ji,

I think the statement means what it says--nothing more, nothing less. You wrote:

23 hours ago, ji20874 said:

All the previous changes were supplemental agreements, which the contractor was free to bargain and willingly chose to sign -- and each of those was a complete agreement on terms and price (see the small text at the bottom of block 14 of the SF-30).

What do you mean by "complete agreement"? Is that different than an "agreement"? 

If a contractor subsequently requested a further equitable adjustment for the same change, and this reservation were not written into the contract nor did the contractor sign a release of claims, what bearing does the small text at the bottom of Block 14 have on the contractor's entitlement or the Government's liability?

[Guest Vern Edwards]

Don and ji:

I'm not sure what you two are talking about, but:

I think that if a supplemental agreement changes a contract, and if the CO does not obtain an express release from the contractor, then the contractor can still seek compensation not included in the mod. Whether the contractor can get it or not potentially might depend on any number of things, such as the content of the mod and the contemporaneous expressions of the parties if the mod is not unambiguous. I don't think block 14 on SF 30 has anything to do with it the rights of the parties in that regard. All it says is that if the mod has not changed something in the contract, then that something remains unchanged.

[ji20874]

Don,

What do you think the small print means?  When you answer, remember that you have to assign some meaningful import to the text.

[Don Mansfield]

Deleted.

[Don Mansfield]

Vern,

Assuming that you meant "the CO does NOT obtain an express release from the contractor..." then I agree with you. I don't get the significance that ji is attributing to the small text in Block 14 when he wrote:

On 7/31/2016 at 0:08 PM, ji20874 said:

All the previous changes were supplemental agreements, which the contractor was free to bargain and willingly chose to sign -- and each of those was a complete agreement on terms and price (see the small text at the bottom of block 14 of the SF-30).

I tried to pin him down, but now he's doing his dodge the question thing.

ji,

I already answered your question. How about returning the favor? 

[ji20874]

Don,

Please stop trying to put words in my mouth.  By the way, I already answered the question.

Vern is right -- even with a release of claims, the contractor could still try to get more money later, and might or might not be successful depending on the totality of the facts.

A contractor should not sign a bilateral contract modification if it does not agree with its text, including the small print in block 14 of the SF-30.  Here, the contractor apparently signed a number of them, with the small print indicating that anything unchanged by the modification is unchanged as a result of the modification (the answer to your question).  When a contractor signs a bilateral contract modification, the general presumption is that the contractor agrees with its text -- that's a general presumption and it can be overcome, as Vern allows.  However, here, the original poster hasn't provided any information that would suggest a reason to overcome the general presumption.

Don't you agree that a contractor's signature on a bilateral contract modification generally indicates its agreement with the text?

 

 

[Don Mansfield]

ji,

Nothing that I've written can reasonably be construed as trying to put words in your mouth. Stop being paranoid. You have attributed some significance to the pre-printed words at the bottom of Block 14 of the SF 30 that you think makes them relevant to the discussion. I'm trying to figure out what that is. What would be so different if those words were not in the modification in jdm843's scenario?

On 7/31/2016 at 0:08 PM, ji20874 said:

All the previous changes were supplemental agreements, which the contractor was free to bargain and willingly chose to sign -- and each of those was a complete agreement on terms and price (see the small text at the bottom of block 14 of the SF-30).

You didn't answer these questions:

2 hours ago, Don Mansfield said:

What do you mean by "complete agreement"? Is that different than an "agreement"? 

If a contractor subsequently requested a further equitable adjustment for the same change, and this reservation were not written into the contract nor did the contractor sign a release of claims, what bearing does the small text at the bottom of Block 14 have on the contractor's entitlement or the Government's liability?

 

[joel hoffman]

19 minutes ago, ji20874 said:

Don,

Please stop trying to put words in my mouth.  By the way, I already answered the question.

Vern is right -- even with a release of claims, the contractor could still try to get more money later, and might or might not be successful depending on the totality of the facts.

A contractor should not sign a bilateral contract modification if it does not agree with its text, including the small print in block 14 of the SF-30.  Here, the contractor apparently signed a number of them, with the small print indicating that anything unchanged by the modification is unchanged as a result of the modification (the answer to your question).  When a contractor signs a bilateral contract modification, the general presumption is that the contractor agrees with its text -- that's a general presumption and it can be overcome, as Vern allows.  However, here, the original poster hasn't provided any information that would suggest a reason to overcome the general presumption.

Don't you agree that a contractor's signature on a bilateral contract modification generally indicates its agreement with the text?

 

 

I agree with Don. In addition,  the standard language in block 14 doesn't bar a contractor from entitlement to an equitable adjustment due to impacts of the change under certain circumstances. There doesn't appear to be evidence of full accord and satisfaction that the modification has considered the general and specific concerns about the impacts that the contractor mentioned orally and in writing several times. See, for example, an article at the following URL concerning release clauses  or the lack thereof, lack of closure during negotiations ( where there even any negotiations here?). With historical case law development  

http://www.long-intl.com/articles/Long_Intl_Reservation_of_Rights_to_Make_a_Cumulative_Impact_Claim.pdf