Column: Claims and Requests for Equitable Adjustment - a primer

The Contract Disputes Act of 1978 provides a process for a contractor and the government to resolve disputes that arise from the performance of a government contract.

Contract issues such as changes (either formal or constructive), government-caused delays and disruptions, differing site conditions, and contract terminations (full or partial) can give rise to a possible claim situation.

However, the Federal Acquisition Regulation provides very little guidance for the contractor on how to handle this process. This article is meant to provide a working overview of the Requests for Equitable Adjustments (REAs) and Claims processes and how to increase your chances of timely and successful resolution.

REAs vs. Claims

The best way to distinguish between an REA and a Claim is to think of an REA as a proposal from which the parties will negotiate, whereas a Claim is a formal demand for payment. The objective of both however, should be to make the contractor whole as a result of the disputed issue.

When a contractor encounters a situation that gives rise to a contract dispute, they should prepare a proposal detailing why they are entitled to additional compensation (entitlement portion) and a cost proposal setting forth the amount of compensation sought (quantum portion). It is not a requirement that it be in writing, though it is highly recommended.

This initial proposal is considered the REA. It becomes the basis from which the government possibly can negotiate a settlement to the dispute. If the negotiations to settle the matter fail, the contractor then would pursue a more formal process known as a Claim.

In order to price out the REA, the contractor should utilize the actual cost method. This involves identifying the actual costs incurred (direct, allocated indirect, and a profit component).

Best Practices: Handling REAs

Even though an REA is not considered a formal claim, the contractor should treat it as if the issue is going to be litigated. In this regard, the write-up detailing the contractor’s entitlement should clearly describe the issue and why the government is liable to the contractor.

Consideration should be given to engage counsel to assist with this write-up. The REA process can actually take years to be resolved. The more effort the contractor puts into the initial REA, the higher the likelihood is of resolving the matter quickly.

A binder should be prepared with supporting documentation for each element of cost being sought. The more detail provided in this binder, the better. Depending on the dollar amounts involved, the cost proposal may be audited by the government. Unsupported costs included in the proposal likely will be denied and will also slow up the resolution process. If the contractor does not have the expertise or resources in-house, they should consider hiring experienced consultants to handle the REA.

The costs being sought in the REA should be segregated within the accounting system, including costs of preparing and negotiating the REA.

Internal costs incurred throughout the REA process, as well as external costs (legal, consulting, etc.) are allowable as costs and should be included in the REA.

However, the burden of proof as to the costs incurred remains with the contractor. Failure to show audit evidence for the incurrence of the costs (i.e. timesheets, vendor invoices) could lead to disallowance of these otherwise allowable costs.

When pricing out your REA, it is better to seek supportable costs and not be too aggressive in the amounts to be recovered. Attempts to unreasonably profit from the situation will only serve to delay the process.

Converting an REA to a Claim

If the REA process does not bring successful resolution, the contractor can then submit a formal claim. This requires the contractor to certify that the claim is made in good faith and the supporting data is current and complete.

In addition, the contractor must certify that the amount requested accurately reflects the contract adjustment for which the contractor believes the government is liable.

From this point forward, any costs being incurred associated with the Claim, both internal and external, are no longer compensable under the Claim. Finally, interest now begins to accrue for the contractor for any amounts it is awarded.

All claims must be presented to the Contract Officer who will render a final decision on the matter. If the contractor does not receive adequate resolution, they can appeal the decision to either the applicable Board of Contract Appeals or the U.S. Court of Federal Claims.

Conclusion

Being involved in a contract dispute matter is a very complex process for which the FAR provides very little guidance. Retaining legal counsel and consultants to aid an inexperienced contractor can significantly improve the chances of timely resolution as well as ensure that every dollar the contractor is entitled to is recovered.

Michael Smigocki, CPA, CVA is the Senior Managing Director of Federal Strategies Group, LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. He can be reached via email at MikeS@FedStrat.com.

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Column: Claims and Requests for Equitable Adjustment - a primer

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