Business Issues: Dealing With Contract Changes By Wayne Clark, CPA Federal Strategies Group LLC When program and contract changes occur, contracts that are poorly written and administered increase the likelihood of contract disputes, request for an equitable adjustments (REA) and claims. When government actions or inactions cause a contract to change, the contractor’s recourse is found in FAR 52.243, “Changes.” This process is relatively straightforward, as the contract is modified using a change order. A contractor has 30 days (can request an extension) to submit an REA for any additional costs plus a reasonable profit. Other contract changes, however, are not as straightforward and frequently lead to disputes. For example, a constructive change occurs when the contractor is responsive to the government’s requests, but delivers more than was contemplated at the time the contract was awarded. The contractor may prepare an REA to recover the additional costs incurred to produce the additional deliverables prior to the end of the contract. Disputes: process of seeking additional compensation The courts have defined the disputes process. The contractor and contracting officer must follow the Contracts Dispute Act (CDA), which is incorporated in FAR 33.2. This section requires the parties to try to negotiate a settlement using the REA process. If the REA process fails, then the contractor files a more formal written submission—a claim. All claims in excess of $100,000 must be certified by the contractor. A falsely certified claim puts the contractor at risk for paying monetary damages to the government. Upon receipt of a claim, the contracting officer must accept it or defend the decision to reject the claim (partially or fully) in writing. Some contracting officers will defer a decision on the claim until more information is received from the contractor or the claim is audited by the Defense Contract Audit Agency (DCAA). As a last resort, the contractor can pursue the claim in the United States Court of Federal Claims. The contractor is required to continue performance on the contract during the resolution process. Failure to perform on the contract is grounds for a default termination (FAR 32.213). The standards for calculating additional compensation The courts have narrowed the calculation methods available to a contractor. The preferred method is the Modified Total Cost method. This method, when applied to a fixed price contract, converts the contract into a cost reimbursable contract for purposes of calculating the equitable adjustment. This method requires the contractor to identify the additional direct costs incurred in its accounting system and to burden the costs using the contractor’s indirect rate methodology. The courts have ruled that contractors who cannot prove the impracticability of keeping records of actual costs are at risk for having the claim dismissed or greatly reduced. Managing the process and minimizing contractor risk The first step is to write technical and cost proposals that includes the contractor’s assumptions. These documents frequently support a REA or claim by documenting that the costs claimed were not included in the original bid based on the contractor’s understanding of the contract requirements. Project managers need to be trained to identify possible change situations and alert the accounting department. The accounting department then segregates and tracks these additional direct costs within the accounting system. The accounting data, including indirect cost allocations, is then available to support any future REA or claim submissions. Conclusion The government contracting landscape is likely to continue to change under the Obama administration. Contractors will likely face increased financial risks as budgets are squeezed and contracts modified. Contractors who understand the contract disputes and claims processes are better prepared to manage and address these risks while maximizing profitability.