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Celestial Defense of Atlanta Georgia is a highly skilled and experienced preparer of Equitable Adjustment proposals and settling contract changes without litigation. Let us help you prepare and settle your REA for:

Undefinitized formal changes; or
Constructive changes involving:

  • Defective specifications,
  • Improper or excessive inspection,
  • Different acceptance criteria,
  • Differences in requirements interpretation,
  • Impracticable contract or specification requirements,
  • Inefficiencies from work-site crowding or excessive overtime,
  • Performance delays due to:
    • Impacts from any of the above,
    • Stop-Work-Orders,
    • Delinquent customer furnished property or information,
    • Unsuitability of customer furnished property,
    • Delinquent permits or notices-to-proceed,
  • as well as many others

To discuss a specific issue and the prospect for submitting a REA for additional compensation, speak with one of our government contract consultants at 770-777-2090 or .

Managing Requests for Equitable Adjustment (REA) for Constructive Contract Changes in Federal Government Contracts
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by: Gregory L. Fordham

It is often said that no plan survives first contact with the enemy. Remarkably this adage is often true for that stack of paperwork known as a government contract.

Contract changes, particularly for constructive changes, can happen for a variety of reasons like a protest after award, differing site condition, a defective specification, an interpretational difference in contract requirements, government inspection of the contractor's work exceeding the contract's specified acceptance requirements, the delinquent delivery of government furnished property or information, or the unsuitability of whatever government property or information was furnished by the government. There are even expressed contract provisions that enable the government to change the work itself, and they often are changed, to accommodate the government’s actual needs or performance standards. Changes can even be made in contracts covering work as predictable as commercial items. In short, the causes are many and they are common. The prospect for contract changes is so likely that not only does every government contract already contain provisions governing these situations they are required clauses for every government contract.

The existence of these clauses ensures that contract performance can continue without the government breaching the contract should the actual work performed be different than the deal originally reached by the parties. Also, over the years the government has learned that it is better to promise additional compensation for these changes should they occur instead of devising a contract that already includes the consequence of any changes in the contract price. Indeed, when the government includes contract provisions recognizing the prospect for changes and those clauses include a provision to adjust the contract price as a result of the changed condition, the government can get what it needs in an efficient and economic manner and at the contractor's leanest and most competitive price for exactly the solicited scope of work. The contractor need not include the potential for changed conditions in its price and the government only has to pay for changed conditions if they actually occur.

Thus, the challenge in federal procurement is not to avoid contract changes. Rather, success or failure for both government and contractor alike often turns on how quickly one can recognize a changed condition, match the condition to the proper clause governing the condition, understand the process for settling the change under the correct clause, quantifying the change in accordance with the proper methods like the FAR Part 31 cost principles and Cost Accounting Standards (CAS) and then managing the resolution process. For a contractor, the importance of having good change management skills is especially significant once one realizes that the federal government contract is designed so that in the event of disputes the contractor has to continue performing the work, including changed work, and then argue about it later. As a result, the contractor will incur the cost of whatever changed condition it encounters. The only question is whether the contractor will receive any revenue for the changed work it performs. Those people, including government people, that think the award of a government contract means the contractor must do whatever the government requires are only half correct, since the government contract also has provisions to compensate the contractor for the consequence of any changed work performed by the contractor.

While having good and effective change management is important for both government and contractor, there is a significant payoff for contractors for having this capability. Since the changed work will be performed by the contractor, the costs will be incurred and the only question is whether there will be any revenue. When a contractor is able to recover some revenue for the change, every dollar that it recovers goes essentially to the bottom line. As a result, a contractor's payoff for effective change management is immense. After all, in the normal course of business a contractor would likely have to win and perform contracts that are about ten times the amount of any change dollars recovered to have the same effect on the bottom line. For contractors, therefore, settling changes represent a considerable sales opportunity. Knowing how to prepare, submit, and settle a Request for Equitable Adjustment (REA) proposal is the way in which those opportunities are performed.

Despite the significance of contract changes and their potential impact on a contractor's bottom line, contractors tend to mismanage these opportunities by making some very rookie mistakes. Their first mistake is that they approach these kinds of opportunities as if they were just another new business opportunity and focus on developing a price for the change. The problem with simply focusing on quantifying the change is that in many situations the contractor also needs to prove its entitlement to a price adjustment along with the amount claimed. In other words, settling a contract change price adjustment is often a lot more stringent than just developing a price for new work. As a result, contractors underestimate the effort that will be required to resolve the issue during the negotiation phase.

The second mistake that contractors, and a lot of the professionals they hire to help them, tend to make when trying to settle contract changes is that they do not quantify the change as required by the contract. Instead, they use a variety of poorly conceived approaches. For example, they may use the same kinds of estimates and allocation ratios that they use for prospective pricing situations for new work even though the settlement of changed conditions is often being performed after the fact or at least after considerable actual costs have been incurred. Another is that they include costs that they have actually incurred but are expressly unallowable under the FAR Part 31 Cost Principles. An all too frequent example is interest on whatever money they had to borrow to finance the change. Another is they use inadequate estimating techniques, that while appealing, are poorly conceived and reasoned because they do not accurately reflect the condition being quantified. Once these kinds of quantification techniques are reviewed/audited by the government they will just be dismissed as unsupported costs. In essence, contractors simply do not realize just how important it is that their quantifications comply with the FAR Part 31 cost principles and procedures. While contractors may make all kinds of fair and reasonable arguments to justify what they have done, what they fail to realize is that "fair and reasonable" has already been defined in the contract as quantifications complying with things like the FAR Part 31 cost principles and Cost Accounting Standards when applicable. These kinds of poorly conceived quantifications are particularly common for contractors that are not experienced performing cost based work. These kinds of contractors may not even have a cost structure for accumulating, allocating, and recovering costs as contemplated in federal contracting. Remarkably, even contractors that are experienced with cost justified pricing methods often have inadequate cost structures for quantifying the consequence of their changed conditions and the skills to make whatever adjustments would be necessary to properly quantify the changed condition. Situations involving things like delays, disruptions and inefficiencies, and even customer furnished material are some of the most common sitations where contractors with existing cost structures and even staffs experienced with cost based work often lack the skills to properly quantify a changed condition but there are many others as well. As a result, the recoveries for both kinds of contractors, even if achieved during the negotiation process, are often significantly less than what they actually are due.

The third shortcoming for many contractors when trying to settle an REA is their weakness in marshaling the facts and supporting their proposal after it is submitted. All too often contractors are simply not prepared for the resistance that they are going to encounter from the government, whether the government's objections are valid or not. If the contractor has done a poor job quantifying its REA and simply tried to develop an inflated number with the idea that they can meet in the middle, it simply is not hard for the government to defeat such quantifications as either non-compliant with contractual and regulatory requirements or as unsupported costs. Furthermore, in such a situation it is hard for the contractor to marshal any facts or support the amounts claimed because they were not well conceived in the first place. In the event that the contractor has devised a well conceived proposal it still is not unusual for the government to allege the costs are unallowable or unsupported under some kind of twisted interpretation of the regulations that only they recognize. In that case, the problem for contractors is that they often are not that well versed in the actual requirements as established not only in wording of the contract terms and/or the regulations themselves but under various other authoritative sources like treatises, agency guidance, working groups, federal common law case decisions, etc. This lack of knowledge hinders their ability to rebut and overcome the government's absurdly erroneous objections.

After making the kinds of mistakes mentioned above, the fourth mistake that contractors often make is they move to appeal the government's findings and position expecting a better outcome. It is like they have a very cavalier view of how this process works. It is as if they think they are going to put a proposal forward and the government is just going to pay it. Of course, their concern about the process and the need to appeal, even with their own shortcomings, only increases when the government proffers some of its absurd positions and distortions about the contract requirement and the regulations. Essentially, contractors are often very naive about the treatment they are going to get. They do not realize that there is often a certain kind of dance that goes with settling these things. In addition, they not only do not understand how to do the dance but they think, mistakenly, that appealing the matter to a judicial forum will improve things. The reality, though, is if the contractor has not done a good job when preparing and submitting their proposal, appealing to a judicial forum does not make things any better, since appealing takes a lot of time and the degree of scrutiny, resistance and related costs go up quite considerably.

FAR 33.204 says, "The Government’s policy is to try to resolve all contractual issues in controversy by mutual agreement at the contracting officer’s level." When contractors make the above mistakes they not only waste the opportunity that they have to negotiate a resolution they do so at great cost. Once the negotiated settlement process is exhausted the next settlement resolution process is through litigation. That process can take years before the contractor ever receives any revenue for the increased costs that it incurred. Consequently, there is the time element of money cost. Next, the litigation process is expensive. So, there are considerable additional procedural costs that the contractor must incur that would not have been necessary had the negotiated settlement process been successful. In addition, the litigation process is not only expensive there is no means for the contractor to recover those costs. By contrast, a contractor's negotiation settlement costs are recoverable even if the effort is unsuccessful. Clearly, there is a considerable downside for contractors when they do not know how to do the "dance" and mismanage the change management process. Unfortunately for contractors, all too often they do not know the "dance" and often mismanage this opportunity, nonetheless.

There are a lot of reasons that contractors make the above mistakes. Sometimes it is a lack of skill and expertise both internally and with some of the external sources they choose. Other times it is financially motivated by the desire to find the most profitable and economical solution and not waste excessive funds on a gold plated solution. Still other times it is more of a knee jerk reaction that if the government is unreasonable then the contractor will not waste any more time and just litigate even though if the contractor had invested the same kind of seriousness into its initial REA preparation and settlement negotiations that they will have to invest in litigation they could have negotiated a settlement.

In light of the above shortcomings and the importance of good change management, the following sections discuss key facets of the change management and resolution process. Specifically, the following sections examine the authority to make changes, the workings of the clauses, common issues, pricing guidelines, resolution requirements, subcontract considerations, accord and satisfaction, and settlement expenses.


Perhaps the first and most important thing to realize about managing contract changes in government contracts is that federal employees have only actual authority. Furthermore, the only one with the authority to make changes to the contract is a contracting officer, unless they have made some kind of delegation of limited authority to someone else like a technical representative.

Not all contracting officers are created equally, either. Some could have monetary limits to their contracting authority. Thus, the first step in change management is to confirm that the person ordering the change not only has change order authority but that the change they are ordering is within the scope of their authority.

Any contracting authority held by a government employee will be formalized in writing. For contacting officers their authority will be formalized in their standard form 1402. If a contractor has any concerns about a contracting officer’s authority they can ask to see the contracting officer’s 1402.

If others, like a technical representative, have contracting authority that delegation will also be formalized in writing, although it may be in the form of a letter from the contracting officer. If contractors have concerns about the authority of any other person they should confirm this authority by requesting a copy of the written delegation.

Confirming a person’s change authority is very important for contractors, since government employees without the proper authority cannot bind the government. Thus, if contractors perform changed work at the request or order of persons without the requisite authority they may not get paid.

Believe it or not contractors can find themselves in situations where after the work is performed that the government claims the order came from a person without contracting authority. Remarkably, such a situation is actually quite common and not always by accident. Sometimes a technical person may try to threaten or even sucker the contractor into doing changed work that they know they have no authority to order. In addition, contractors could encounter a situation after performing changed work for a contracting officer with a seemingly adequate warrant that there is a secret limitation to the warrant that was not revealed to the contractor.

In the case of the hidden warrant limitation, the contractor may have a considerable climb and may have to go beyond the trial court if found in such a situation but they should prevail in the end. There is considerable federal common law that is favorable to contractors on just this point. The entire purpose of the standard form 1402 and its underlying system is to provide notice to the contractor of a contracting officers limitations. If that process is subverted with secret files hidden from the contractor, that process is not likely to prevail.

In the case of the unauthorized person, there are likely still options to the contractor in that case as well. If the orders of the unauthorized person have been ratified by the contracting officer then the contractor can still get relief. In essence, if the contracting officer was aware of the unauthorized orders being given by the unauthorized person and did not take steps to correct the situation then the contracting officer may have ratified the orders and the government still liable for the changed condition.

Understanding the Clause

As indicated above there are all kinds of clauses in a government contracts that are designed to handle different kinds of changed condition. Despite that there are many different types of change related clauses, they all have four fundamental structural similarities. Those structural similarities are the scope, written order, notice, and the contract adjustment. Understanding these elements is instrumental in understanding the workings of each clause and matching the proper clause to the changed event in order to properly resolve the changed condition. Each of these elements is discussed in the sections that follow.

General Scope of work Most of the various change related clauses in a government contracts like the Protest After Award, Government Property, and Differing Site Condition clauses are designed to address the specific kinds of events that are reflected in their names.

This is not the case for all of the various clauses that address changed condition, however. Indeed, there is one clause that is used more generally to manage changed conditions. This clause is the contract’s changes clause, of which there are different versions depending on the type of contract at issue, like fixed prices, cost reimbursement, construction, etc. Regardless of the contract type, the scope element of these different clauses limits any change to being within the general scope of the contract, which for supply contracts is the

  • Drawing, designs and specifications,
  • Method of shipment or packing or
  • Place of delivery.

For a services type contract the general scope of the contract is limited to:

  • Description of the services,
  • Time of performance, or
  • Place of performance.

There are several important aspects to the scope provision of the general changes clauses. First is that any changes are limited to the general scope of the contract. One attribute that is obviously missing from the articulated scope element of the general Changes clause is the ability to change the contract quantity either up or down.

Even though changes in quantity are not included in the list, the general changes clause has been used to make changes in quantity but it cannot be used to circumvent the competitive process and extend a contractor’s work to things that would more properly be part of a separate contract. Thus, while contracting officers can use the changes clause to make minor increases in quantity, they should not use it to make large increases that are better handled by a new procurement.

If the ordered change is for a reduction in quantity that issue is more properly resolved through the termination for convenience clause of the contract as a partial termination. Although resolving reductions in quantity are better resolved through the termination clause, there have been a lot of decisions in Federal Common law where the termination clause was not used. In some cases, the reduction was resolved simply by reducing the contract value by the separately priced item, at least in cases when the reduction was for the complete removal of a separately priced item from the contract. This has only been used when the item was a segregable item, however. Just because the item is separately priced does not mean that it is a segregable item.

In some cases, the method of handling a deletion by simply reducing contract value by the removing the separately priced item has had unexpected consequences such as when the pricing of the removed item was not closely linked to its effort, perhaps as a result of unbalanced bidding. In those cases, the results have been punitive when the pricing for the item far exceed the actual effort saved by the reduction.

Just because such an approach has been used does not mean it was correct. In resolving their contract changes contractors will need to understand this kind of nuance and how to handle it. (see Terminations for Convenience of Federal Government Contracts)

Although deletions are arguably not really within in the scope of the general changes clauses, additions likely will be. Unlike the case of deletions where there is an alternative contract clause for handling the issue, there is not an alternative clause for handing additions. Thus, additions will most likely be handled by the general Changes clause. Even increases in quantity that are beyond the original scope of the contract will most likely be resolved by the general Changes clause.

There are no hard and fast rules to determine what is or is not within the general scope of the contract. This would seem to be a factual determination to be made on a case by case basis, although the more significant the change the more likely it will fall outside the general scope of the contract.

The Written Order The second common structural element found in the various Changes clause is the written order. Typically, the order can be given unilaterally by the Contracting Officer to the contractor and this right is made clear in the clause itself such as in the general changes clause.

All of the various contract Changes clause require the Contracting Officer to formalize changes to the contract in writing. In most cases in these clauses, it is the written order that brings about the change. The Protest After Award clause, the Delay of Work clause, the general Changes clause and other all require the Contracting Officer to make changes to the contract in writing. The one exception, of sorts, to this is the differing site condition clause.

While even under the Differing site condition clause the Contracting Officer is required to make the change to the contract reflecting the changed condition, the written order comes after the differing site condition is confirmed. In the other cases like the Protest after Award, Delay of Work and the general Changes clause, the order comes first.

The government property clause actually has both conditions. In one case the government may increase or decrease the amount of property furnished by the government. In other cases, if the property furnished by government is not suitable for its intended the purpose the Contracting Officer shall modify the contract once the validity of the contractor’s request is confirmed.

In all of these cases where the contract is actually modified, these are known as formal changes. Unfortunately, not all changes to the contract are promptly formalized. Indeed, in many cases the formal confirmation that a change has actually occurred never happens; yet, under the disputes clause the contractor is required to continue performance of the contract including the changed condition.

Fortunately, Federal common law has evolved such that for any of the various Changes clauses to operate all that is required is for the CO to order the contractor, orally or in writing, to perform work that was not part of the contractually required effort. To interpret the clause otherwise would be senseless if the CO was not inclined to issue the written modification; yet, the contractor was required to continue performance under the contract's dispute clause. When changes are made to the contract without formally modifying the contract, these are known as "constructive" changes.

While most contract changes will be formally modified, many are not. Thus, a large amount of contract administration related to managing contract changes is related to constructive changes.

Constructive changes frequently happen in a variety of situations like those where the government delivery of property or information is delinquent or where the property or information is not in a suitable form. Another can be where the government is late in providing notice to proceed such as when they have to obtain permits or clearances before the contractor can begin work.

Another common situation when constructive changes occur is with differing site conditions where the different condition exists but the Contracting Officer is slow to issue the formal modification. Another common situation is where the plans and specifications supplied by the government are defective because of conflicts, errors, omissions, or even impracticability.

Yet another common situation is when the government applies higher standards when accepting the contractor’s work than what is required under the contract. Similarly but different, is when the government performs incompetent inspection and rejects work that is actually compliant with the contract’s requirements.

A final example where constructive changes occur is when the government has a different interpretation of the contract’s requirements. In many of these types of cases, the government’s interpretation is based on an undisclosed intention. In other words, the government had a specific intent but did not clearly manifest its intent in the plain language of the contract documents.

There are many situations in which constructive change can occur. The above examples are not intended to be an exhaustive list but simply one containing common instances of constructive changes.

Notice The third common structural element found in the various Changes clause is the duty for the contractor to provide either notice of the changed condition, such as with the Differing Site condition clause, or its right to a contract adjustment such as with the protest after award, Stop work order or the general changes clause.

Typically, the various clauses require the contractor to "assert its right" to an adjustment within 30 days from the receipt of the written order. In the case of constructive changes where no written order has been issued, the 30 day limitation is arguably inoperative until the written order is issued.

Notwithstanding the 30 day notice provision, the clauses typically permit the CO to consider the contractor's claim any time prior to final payment. As a result, a contractor's claim is considered timely so long as it is filed prior to final payment. (For other timing considerations see the section below on the Disputes Process)

Although a contractor’s claim is typically timely if submitted any time prior to final payment, a contractor's failure to submit its claim within the stated notice period may not be without some penalty. Since the purpose for the notice provision was to ensure timely resolution of the events while they were freshly in the minds of the parties concerned, a contractor can be subject to higher burdens of proof when the claim is not timely filed. Consequently, the government can raise a defense to a contractor's claim by claiming that it was prejudiced in its defense of the claim by the contractor's late submission. If the government should raise such a defense, however, it bears the burden of proof to show that it was prejudiced by the contractor’s untimely notice.

It should be noted that once a CO has reviewed a contractor's claim, the government has constructively waived the notice requirement and accepted the contractor's claim as timely even if submitted after final payment. Therefore, if the CO wishes to enforce the notice provision it must reject any submission prior to accepting it.

For a contractor to assert its right to an equitable adjustment does not mean that the contractor has to submit its claim or REA within that time-frame. Rather, the contractor simply must notify the CO that it considers the work to be a change for which the contractor will be submitting a Request for Equitable Adjustment (REA). As indicated above, the contractor can submit its REA any time prior to final payment.

The Adjustment The fourth and final common structural element found in the various Changes clauses is the adjustment. Most of the various changes clauses requires the CO to make an equitable adjustment to the contract price, if the work is changed. The fact that these clauses require an equitable adjustment is significant, since the term equitable adjustment has special meaning in government contracting. The term has been interpreted to include a provision for profit. Thus, an equitable adjustment is for both costs and profit, at least for non-commercial items.

While the term equitable adjustment appears in most contract changes clauses, a relatively few contract clauses such as the Government Delay of Work or the Suspension of Work clauses simply require the CO to make an adjustment to the contract price. Accordingly, these other clauses would require only a reimbursement of the contractor's costs without a provision for profit.

Since most of the various changes clauses entitle the contractor to an equitable adjustment, a dispute often occurs about whether a particular event is governed by the clauses promising only a price adjustment or one of the clauses promising an equitable adjustment. Fortunately, the clauses promising only a price adjustment are self eliminating and apply only if the event cannot be covered by one of the other clauses. For example, if the changed event can be covered by the stop work order clause then that would prevail over the government delay of work or the suspension of work clauses.

The focus of the adjustment is not limited to the issue of whether profit is included. In fact, there are several issues about the adjustment. First, the objective of the priced change is focused on the changed condition. In other words, the adjustment for the changed work should not disturb the profit or loss position of the unchanged work had the change never occurred. The objective of not altering the contractor’s profit or loss position on the unchanged work is a key factor against adjustment methods like the total cost method, which simply subtracts a contract’s price or contractor’s bid from the contractor’s total incurred costs. Since the adjustment is not supposed to alter a contractor’s position on the unchanged work, one can conclude that an equitable adjustment is simply a corrective measure designed to keep contractors whole when the buyer modifies the contract.

Second since an equitable adjustment is a corrective measure designed to keep contractors whole when the buyer modifies the contract, the measure of damages for the contractor is the increased costs experienced by the contractor as a result of the change. Of course, since the FAR Part 31 cost principles will be used the amount of a contractor's recoverable increased costs is its allowable costs. While it is often said that the amount of the contractor's recoverable costs must be reasonable, it will be the reasonable requirement imposed by the FAR Part 31 cost principles. Thus, the reasonableness of a cost incurred is not limited to the value received by the buyer for the work performed nor the amount that would have been incurred by another contractor. Nonetheless, the government will typically raises these kinds of objections as a means to avoid the consequence of its promises.

Remarkably, the value based issue is one that is frequently part of the adjustment issue, particularly when design issues are involved or other kinds of problem solving. As long as the contractor’s efforts were allowable, as that term is defined in the cost principles, the adjustment value should include a contractor’s total cost of the change no matter how many failed attempts he might have made at solving the problem or developing the design. A key element in this respect is the allowability issue and that the costs claimed must have been caused by or incurred as a result of the changed condition. A contractor must really understand the allowability issue as prescribed by the regulations. Often times the regulation's actual requirements are not very intuitive and the government and its auditors use the counter-intuitive nature of the regulatory wording as a means to diminish a contractor's recovery.

The three goals discussed above about the nature of the adjustment like the provision for profit of any price adjustment, not disturbing the profit or loss position on the unchanged work, and the corrective effect of the adjustment are simply the foundations on which the pricing is based. The particulars of the pricing can also be quite complex but those kinds of details are discussed in a separate section below.

Contractors are fortunate that it is not required that the adjustment be performed with great precision. All that is required is that the contractor be compensated fairly. The fact that the amount cannot be determined with great precision is not a defense against the contractor's price adjustment, either. Indeed, the one who invites contract changes bears the risk that those changes cannot be priced precisely.

Of course, the so called fairness doctrine is not a magic shield behind which contractors can hide without any other justification and consideration. Typically, the fairness issue is a defense that contractors can use against the Government’s claims that the methodology is not precise enough even though the government has suggested no better methodology. The fairness doctrine can also be used when the government does have a proposed methodology but its preference is clearly based on its more favorable result and not that it actually produces a more compliant and accurate result.

For commercial item contracts, the pricing is not typically cost based. Rather, pricing in commercial item contracts is based on the contractor’s commercial pricing practices plus or minus the costs of the minor modifications to the item needed to meet the government’s requirements. If the government’s modifications are so significant that the item is no longer a commercial item for the contractor then the pricing methodology could become cost based and the term equitable adjustment mean cost plus profit like with non-commercial item changes. Similarly, if the contractor does not have a commercial item price even though the contract is identified as a commercial item contract, the basis for the adjustment will be costs plus profit, if the adjustment type is an equitable adjustment. Such a prospect could be easier than one might imagine when the government has awarded a commercial item contract for something that might not really fit the requirements for such a contract simply to save itself the added work of awarding a non-commercial item. Thus, even a commercial item contract could get sucked into the FAR Part 31 Cost Principles and Procedures when the government adopts scorched earth tactics and requires proof of every element of the claim including that a commercial item price even exists.

In addition, to the pricing quantification issues there is one last element that can be part of the adjustment. This final element is any adjustment to the performance or delivery schedule, which should also be part of any adjustment as a result of any additional time needed to perform the contract.

Preparing the Request for Equitable Adjustment (REA) Constructive Change Proposal

Essentially, there are two types of contract changes—formal and constructive. The nature of these two different types of changes and their associated proposals will be vastly different. If the change is formal, there is a written contract modification. In that case, the remaining issue is often just the price or quantification. When the change is constructive and there is no written contract modification, although there may still be a written order for the contractor to perform the changed work, the proposal will be much more complex and involve all of the elements required for settling a changed condition.

In both cases, formal and constructive, contractors tend to focus on the quantification element and frequently do not give much thought or effort to the liability and causation elements. In many cases, a contractor’s experience with contract issues is limited to the negotiation and settlement process for new work where the buyer’s decision making is more focused on selecting a vendor to do a scope of work at a reasonable price. Thus, the negotiation process for new contracts is more about contractor selection than it is on proving that the work performed was changed work that is not covered in the original scope of work and then determining a reasonable price in accordance with some complex and arcane regulatory requirements.

Even when contractors have experience settling contract changes, those experiences are often with formal changes, where again, the unsettled issue may only be price. In addition, in these types of situations the pricing issues may not be that contentious, if it is one of those situations where work will not start until change is formalized. Consequently, when it comes to settling constructive changes, contractors can easily find themselves in unfamiliar territory and completely unprepared for the rigors of that effort, especially in those situations where the government is taking a scorched earth approach for denying any kind of adjustment.

Three Key Issues to be Addressed

There are essentially three issues that must be addressed when settling a contract change. Those parts are liability, causation, and quantification. As indicated above, settling a constructive change will involve proof and agreement on all three portions, while a formal change can often just involve the quantification element.


The liability portion establishes that the contractor is entitled to a contract adjustment. The mere fact that the contractor incurred more costs than expected, for example, is not proof that there actually was a contract change. In fact, whether or not a change occurred and if the contractor is entitled to a contract adjustment is completely separate from the cost issue.

The proof of the liability portion is usually a two step process. The first step is to demonstrate that the contractor received some kind of order and then actually performed ordered work that was not part of the original scope of work. Sometimes this can be an elaborate comparison and contrast of the original scope of work and how it is different from the changed scope of work or at least why the changed work was not part of the original scope of work.

The second part is to identify the contract clause governing the changed work that promises a contract adjustment for the particular type of changed work performed and the nature of the contract adjustment.

With formal changes the government has, in essence, recognized that the changed condition exists. As a result, all that remains to be determined are the causation and quantification phases, although most often it is just the quantification element since in many types of changes the causation portion may be obvious.

As an example, if the issue is one of increased quantity there likely is not going to be any dispute about there having been a change. Things can become more complicated, however, if the issue involves a specification, since the issue could easily be whether or not there actually exists a changed condition. After all, if the specification document itself has not changed what is the basis for a changed condition?

The initial part of the liability discussion explains what is different about the work, why it is different, and what widely accepted authorities, such as treatises, articles, regulatory guides, federal common law decisions, etc., support claimed liability issue. The second part of the liability discussion would identify what contract clause actually provides for a contract adjustment for that type of changed condition and the type of adjustment is promised.


The second element for a quantum claim is causation. This portion essentially establishes the consequence of the change. So, it examines not only what was different about the changed work but what those differences actually required the contractor to do that was different from the original scope of work. In essence, this portion examines and documents what the changed condition required the contractor to perform both in terms of quantity, type, and timing.

This element will exist for both formal and constructive changes, too. It will become more important and a more significant part of the contractor's proposal effort when the causation issues are more complicated like with schedule impacts, work force or capacity constraints, and unusual economic conditions, as well as when distinguishing between the contractor's profit/loss position on the unchanged work is a significant part of the calculus.

Understanding causation is not only an important and essential part of the claim process, it also facilitates the quantification process, since a lot of the basic inputs are determined. Once causation is completely understood it is easy to add the cost factors to the various input factors that are developed during the causation analysis.

Even if there is a formal change where the order is given but the consequence is unpriced, the causation element may not be settled. So, the extent to which causation become more important can again depend on the type of change. Again, a change in quantity may not provide that much of a causation question. For constructive changes the causation question is likely going to be a much more significant part of the settlement process.

As with other parts of the proposal the causation element should be explained and supported with authoritative sources. After all, sometimes particular techniques to prove or establish causation are required. So, the use of those particular techniques would be explained and justified along with the mechanics of the processes.


The third element of a quantum claim is the amount of the additional costs incurred by the contractor as a result of the change.  The fact that the contractor has incurred more costs than originally estimated for contract performance is neither relevant nor dispositive to the changed condition issue.  Indeed, the sole consideration for the quantification is how much more was incurred as a result of the changed condition.  Unfortunately for many contractors, they fail to focus on this narrow issue and their quantifications fall short or even totally fail as a result. 

While the preceding two aspects, liability and causation, are essential to the overall success of the contractor's price adjustment, the quantification is probably the most important. After all, if the issue did not somehow involve money, no one would likely care about either the liability or the causation elements.  Similarly, while winning on the liability and causation issues are essential, if the quantification falls short and fails to deliver a satisfying financial result, it is just losing another way.  Consequently, the quantification is a significant element of the overall success of contract change management.

The pricing methods for contract changes in federal contracting essentially make the price adjustment a cost reimbursement exercise.  For contractors that are not accustom to cost type contract pricing procedures, quantifying a contract change can be an elaborate effort even before getting into some of the more complex quantification issues associated with delays and disruptions like lost learning, work site crowding, and overtime inefficiency.  Many contractors accustom to performing fixed priced contracting may not even have some of the essential components of this process like a cost structure suitable for allocating both direct and indirect costs to final cost objectives. Thus, contractors without a FAR Part 31 compliant cost structure will need to develop one in order to properly quantify their changed condition and defend their proposed price.  Even contractors that have established cost structures and are familiar with that kind of process could find their cost structures unsuitable for properly quantifying costs at the level of detail necessary to capture the changed condition. Fortunately, in those cases contractors can deviate from their normal cost allocation procedures, including contractors whose contracts are CAS covered, assuming the cost was incurred for unlike circumstance or dissimilar situation, which is often the case for changed conditions.

Federal contracting is somewhat unique in that it employs full cost absorption.  Furthermore, the full cost absorption is not limited to the contractor’s local contracting activity.  Indeed, the government’s full cost absorption methods can extend throughout the entire organization provided that the contractor wants to make the effort to develop methods for allocating those costs.  Of course, the regulations include guidelines and procedures for how those allocations should be performed.  So, once again, the contractor must be knowledgeable of those guidelines and procedures and then use them in order to avoid simply having its cost allocations deemed unsupported costs.

The full cost absorption methods envisioned by the regulations are not just a breadth kind of issue.  Indeed, all costs should be allocated to final cost objectives.  Often contractors underestimate the extent to which the full cost absorption methods should be applied.  As a result, contractors undervalue their contract changes as a result of allocation “leakages” both in terms of organizational breadth and the funneling of all costs to final cost objectives.

As a result of the full cost absorption philosophy used in federal contracting, the largest portion of a contract adjustment is comprised of indirect costs.  There are a lot of concepts articulated in the regulations governing the allocation of indirect costs.  It is an area that can require considerable expertise to devise and support, since they are more concepts whose actual requirements have been determined over the decades in common law decisions.

A contractor's challenges for pricing a contract change are not limited to the indirect cost issues mentioned above. Whatever direct costs are claimed will be challenged, too. They will be challenged as actual costs of the changed work and not something unrelated to the changed work, like the unchanged work. Then, even if they are related to the changed work, the allowability of the costs may still be challenged on the theory that they are unreasonable and some other less expensive methodology should have been used. In essence, there simply is no shortage of the hurdles contractors can face when settling the price of the change, despite what the government may have promised in its contract. Indeed, the complex rules associated with the quantification multiply the number of targets at which the government can aim and then use to minimize a contractor’s entitlement. As a result, contractors should not underestimate the skill and resources that could be needed just for the quantification element of their change proposal no matter if it is a constructive or even a formal change. Consequently, pricing changes is not necessarily a simple matter. In addition to thoroughly understanding the arcane rules, pricing changes can require complex models in order to accurately reflect the reality of the changed condition. In the process, these models can require substantial and sturdy justifications supporting the assumptions, methods, and the allowable basis for including each cost treatment claimed. Contractors whose claim quantifications rely on unsupported amounts and allocations are simply surrendering what could otherwise have been an undisputed part of their recovery.

One would think that quantifying a changed condition would be minimal for situations where the changed work was completed and all the costs incurred. In such a situation, one would think it is a simple matter of summing the costs incurred and presenting a total. In cases where the change represents the contractor’s normal work and the costs are accurately captured in the contractor’s normal accounting system then things could be just that simple. In many cases, though, that is not the case. The changed work is not the contractor’s “normal” work if it is very contract specific and not, essentially, the repetitive manufacturing of widgets. For example, every construction project is different. Similarly, custom services for a particular customer location could be quite unique as well. Even when the items involve seemingly repetitive units like missiles or aircraft, those manufacturing runs are often small volume, the manufacturing complex, the components specialized and often hard to get, and the lead times can be long. Furthermore, their designs are so highly engineered and performance parameters so tightly optimized that changes to such items can have significant consequences effecting the entire end item.

While in some cases quantifying a change might be quite simple, regrettably in many others that is not the case. Furthermore, all too often after the costs are incurred the arguments begin about the decisions that were made to incur those costs and whether they are allowable and whether they actually are costs related to the changed work versus the unchanged work. In fact, all too often the government’s review and evaluation of the contractor’s claimed costs becomes a search for a basis on which liability can be minimized or altogether avoided.

When the situations involve changes for whose costs are hard to quantify, either because of data accumulation limits within the contractor’s accounting systems or complex quantification issue such as with impact inefficiencies and delay issue, the need for support beyond just the calculation mechanics increase significantly. In addition to the quantification mechanics there is often a need to both explain the quantification concepts and demonstrate that they are justified and commonly accepted. Even the description of the mechanics can involve more than the simple summation of the amounts. Other subjects can include how and why those mechanics comply with various FAR Part 31 cost principles. Even more additional subjects can include timing and periodicity, exclusion of unallowable costs, cost structure allocations, offsets for reclassified indirect costs to direct, the calculation of rates and factors, source and development of standards, specialized formulas, etc.

As if all of this were not enough for the contractor to overcome, it is not uncommon for government representatives, like the auditors, to distort or misrepresent the requirements of these arcane rules. Thus, contractors must be highly proficient with the meaning and actual requirements of the provisions to avoid being duped. Perhaps even most important is that contractors need to remain mentally tough, since adverse audit opinions are sometimes simply a means for the government to start negotiations at zero or even less than zero in order to literally beat the lowest possible price from the contractor. In the end, however, it is just the dance when dealing with the world's largest customer.  Clearly, the quantification element is far from simple bean counting as many of the unskilled and unwitting would have one believe.

REA Proposal Sections & Format

Even when the contractor thinks it is capable of addressing all three areas of the contract settlement process, they still can find themselves unprepared for the rigors of the process. Settling is not only about being conversant in the process and with the issues but memorializing the arguments and justifications in written form. The written form tends to be necessary for several reasons.

The first reason that the written form is so important is that the government side of the negotiation table is typically comprised of many members with different interests like technical, audit, finance, contracts and legal. Since all of these members can have input to the final decision, they all need access to the contractor’s logic, justifications, and support. The written proposal format provides this capability.

The second reason is that for many years it has been well known that there are vast forces managing the government’s operational process. These forces include internal management and quality assurance, internal agency auditors and inspectors, outside auditors and inspectors like the General Accountability Office, and even specially focused reviews initiated by Congress. As a result, there is often tremendous pressure on everyone at the government’s negotiation table to not only have made the correct decision but to have that decision properly and sufficiently documented to sustain all of these various oversight interests. The written support not only provides the documentation but provides a means to accumulate and document the evaluations and results from all of the government’s other team members. Quantification schedules simply are not sufficient by themselves to disclose the immense amount of information needed by these various groups or resolve all of the issues for settling a contract change.

The third reason is that the change proposal is not simply a bill to the government for the work performed by the contractor. Rather, it is the basis on which to begin discussions. Thus, it is essentially a sales document that describes, justifies, and supports the three elements to settling a contract change that are liability, causation, and quantum. Each of those elements is discussed in the sections that follow.

Although the proposal should address the issues of liability, causation and quantum, that is not necessarily the format in which it should be presented. While there is not a required format fr preparing an REA, some consideration should be given to the various stakeholders, on both sides, that will be reviewing and reading the proposal. The below sections are a recommended format.

Executive Summary – This section should provide a summary of the entire proposal package. So, it will briefly highlight the significant factual background, the nature of the changed condition and the amount claimed. This is not argument and likely is confined to one to four pages.

Factual Background – This section describes the nature of the change and all of the various components related to it such as the direction to make the change, the contractor’s notice that the direction or event was a change, the consequence of the change and what it caused the contractor to do, including the types of costs without necessarily providing the calculation of the costs. Included with this story are the timing and dates when all these events happen and identification of specific documents evidencing and supporting the description.

This is not the place for argument about responsibility or entitlement. Rather this is simply a factual recitation of the events that can form the baseline for all subsequent discussion and analysis. While the intended audience for this section is anybody interested, the most likely consumer will be the government’s technical analysts who will be confirming both the facts and the claims made about the effect of the claimed directions on the contractor.

Analysis of Relevant Terms & Conditions – This section reviews the significant contract requirements that are relevant to the changed condition. It would include the specific clauses under which relief is being sought such as the general changes clause or some other applicable clause. It could include particular sections of a specification that are relevant to the change or perhaps a schedule item or description that is relevant for differentiating the changed from the unchanged work.

Besides the identification of the relevant requirements there could be discussion about the significance of the requirement to the changed condition and perhaps how the provisions of the requirement have been interpreted such as the significance of the term equitable adjustment or the notification provisions or even the kinds of costs that would be recognized, limited or excluded.

Any discussions of significance should be supported with authoritative references to treatises, guidebooks, case law or regulatory interpretations. If citing regulatory interpretations avoid simply repeating FAR passages. Rather, things like working group interpretations are acceptable. Even things like DCAM explanations or DCAA audit interpretations could be useful but restating FAR passages is not helpful if it is something the government is already familiar.

Identification of Changed Conditions and Basis for Entitlement – This section identifies the specific changes that are being claimed and then brings together the factual background with the analysis of the contract requirements to argue in support of the changed condition and the contractor’s entitlements. Thus, for each change identified the section should reflect on the underpinning of the factual background, argue for why these are changes to the contract for which the contractor is entitled additional compensation and or other adjustment like the contract schedule.

Quantification – This section provides explanation of the quantification approaches and theories along with supporting calculations. In many respects this can simply be a recitation of the calculation with necessary explanations, including explanation of approaches and theories and how they have both fit the particular change situation and have been employed. This section then references to attached schedules where the actual calculations are performed. Typically the quantification provided in the attached schedules will follow the formats suggested in Table 15-2 that is at the end of FAR 15.4.

Subcontract Considerations

Most likely the basis for the sub's claim is something originating with the government customer.  As a result, whatever claim the subcontractor has against the prime the prime can usually markup and pass through to the government.  Thus, if the sub’s claim is meritorious there is no incentive for the prime to deny the sub’s claim and the sub should recognize this when developing their strategy and making their go-no-go decision.  The key is that the sub's claim must be meritorious. Also, just as with prime’s claim against the government, the sub's challenge can be providing the support and documentation necessary to prove that the claim is meritorious.  Once that happens the prime will likely start working with the government and trying to get buy-off on the sub's claim.  After all, the prime would rather get compensation plus markups for whatever it ultimately has to pay to the sub because in the end the prime's liability to the sub is not effected by whatever liability the government may have to the prime. Sub's need to have this reality clearly fixed in their head--the sub only has privity of contract with the prime and whatever beef the sub has with prime is really just between them. All the rest of the considerations, like pass through claims and the prime's ultimate ability to recover from the government are simply ways to make the prime's obligation to the sub more palatable; otherwise, they really are not relevant.

Settling a sub's claim without wasteful litigation can be even more challenging than settling a prime’s claim, since for the most optimum solution of resolving the sub's claim, the sub first has to convince the prime that the claim is meritorious and then it has to help the prime to convince the government that its claim is meritorious.  Although the prime is not  likely going to telegraph what they are doing, the sub can often tell when the prime is engaged with the government during the settlement process.  For example, they may notice that their interactions have been elevated from the prime's buyers and purchasing personnel to its contracts personnel.  Also, the questions being asked and the support being requested by the prime from the sub can also signal that the prime is now engaged with government. 

Since the prime can typically pass along the sub’s claim with markups, the sub should not concern itself about ruining a good customer relationship.  Just keep things calm and business like.  Prepare a proper claim that reflects the terms of the contract and then simply express its expectation that the prime will honor its contract just as the sub has done, although the sub might have to remind them of that many times.

In some cases the prime could even have a more flexibly priced contract than the sub.  For example, while the sub may have a fixed priced contract, the prime may have a cost reimbursement contract or an incentive contract with cost sharing provisions. In these types of situations even if the prime is not able to get complete buy-in by the government it is still going to be able to recover whatever it settles with the sub.  So subs should not sell their claim short and talk themselves out of getting everything to which they are entitled under their contract.  It is just business.  Be a good businessman.

At a more micro level, the dynamics between primes and their subs or even between subs at different tiers can be different than those between the prime and the government. One of the first dynamic differences involves the workings of the various changes clauses.

The relationship between a subcontractor and its prime or upper tier subcontractor will generally be governed by commercial law. One of the areas where this could make a difference is with the authority issues. Commercial law would recognize more than just actual authority if that were ever an issue. Of course, contractors have to confirm that there are no authority limitations expressed in the contract.

Besides the authority issue, government contracts can place some unusual twists in the standard rules governing commercial contracts. One of those twists involves the interpretation of the various Changes clauses.

To government contractors the language of the various Changes clauses is known to have special meaning, especially if what has been included in the subcontract is a flow-down of one of the clauses from the Federal Acquisition Regulations. In such cases, state and federal courts have not hesitated to adopt the Federal common law interpretations of these clauses, since where the parties to a contract adopt a standard and oft-construed clause, it is only logical that their intent is also to adopt the interpretation that accompanies it. Thus, in many instances the workings of the Changes clause will be identical to its workings between the government and prime contractor.

Despite the above, there are several issues that can affect how the FAR changes clauses could work in a commercial environment

First, there are two ways the flow-down can occur. One way is incorporation of the clause by reference and the other is reproduction of the entire text. Typically, it does not make any difference if the clause was flowed down by reference or reproduced in full text, although sometimes one party will claim that since the clause was reproduced in full text and not flow-down by reference that it is not the FAR clause. Nevertheless, even if the reproduction of the full text does not identify it as or even mention the FAR clause citations, the clause will usually be given its federal common law interpretation, if the wording is the same as the FAR version.

If there are issues with the flow-down of the FAR clauses, it typically involves the tailoring or even lack thereof. In other words, the FAR version involves the relationship between the government and the prime contractor. Some tailoring of the clauses is needed for the relationship to properly reflect that of two commercial entities. Frequently, if there is a problem it is with this tailoring or the lack thereof. If the prime or upper tier subcontractor try simply incorporating their contracts by reference without proper tailoring there can be significant problems that result. Furthermore, global tailoring provisions that simply replace the term government with contractor and the term contractor with subcontractor are often problematic.

Second, things can start to become more complicated when contractors start providing their own language for the changes clause. Often the differences they devise are intended to limit recovery of their vendors or restrict the timing in which their vendors can submit a claim. All too often though, these kinds of changes cause contractors a lot of problems, especially when their contracts with their vendors get out of alignment with the contract they have with their customer and expose them to commercial common law damages that cannot be passed to their customers.

Third, even if the sub’s customer has flowed down a useful version of the FAR changes clause, what other clauses have also been flowed down? For example, has the sub’s customer made it clear under what cost principles the change is to be quantified?

Fourth, regardless of whether a subcontractor’s changes clause will be interpreted under Federal Common law or under the applicable standard commercial common law, subcontractors may still have options at their disposal that primes may not have against the government. One such example is when a sub’s customer does not seem to be considering their adjustment proposal in a serious manner and there is concern whether the sub’s customer will actually honor their contractual commitments. In that case, the sub may be able to request adequate assurances under the Uniform Commercial Code, if it applies.

Another example when subcontractors may be able to employ methods against their commercial customers that primes cannot employ against the government involves delay claims. The current state of federal common law restricts prime contractors to the use of the Eichleay formula for quantifying unabsorbed overhead. A subcontractor following applicable commercial law may be able to use other methods for pricing their unabsorbed overhead.

Despite that for government contracts the changes process is a deliberate design feature, the contention that can sometimes accompany it is distasteful for many contractors at every tier. It should not be, though. It is just business. In fact, within the contract the customer promised to pay the sub if any of these changes were made in the same way they promised to pay a submitted invoice. In reality, changes are just another sales opportunity. Thus, submitting a change proposal and negotiating a resolution need not have any kind of adverse effect, although often times they involve a bet the company kind of situation.

What subcontractor’s and even their customers often fail to realize is that if the changed condition is meritorious, there really is no reason or justification for resisting the subcontractor’s claim or being adversarial about its resolution. The reality is that if the change is a government directed change, the entire issue, including the subcontractor’s claim is the responsibility of the government and should be paid for by the government, just as it promised. In such cases, the focus of the process should be on getting the government to honor its contractual obligations, which can often take a lot of effort. In fact, often times to get the government to do their job contractors have to guide them through the process. In those cases, any efforts that the sub can make to facilitate acceptance of the sub's claim upstream will facilitate settlement of its claim with its own customer. After all, there really is no incentive for the sub's customer to resist settling the claim other than its duties to ensure that the sub's claim is actually meritorious. In fact, the sub's customer can usually markup the sub's claim for overheads and profit and even make money on the sub's claim if it is meritorious.

From a subcontractor’s perspective the process of settling a claim can be quite elaborate. If a subcontractor is lucky the prime recognizes the issue and has had its own impacts or claims from other subcontractors. If the prime has had its own impacts or claims from other subcontractors the prime may already be involved with the government and having discussions on the issue. Subcontractors need to realize that sometimes objections being raised by their customer are the exact ones being raised by the government to the prime. Consequently, subcontractors need to just view these as other objections that need to be overcome like with any other kind of sales opportunity. It can take great skill resolving these things. The government is often very suspicious of claim situations. Even when it is clearly the result of their own doing their suspicions can extend to every element of the claim.

Settling changes, can be quite tedious as a result of all the objections that one must typically overcome. In some of those cases both the first tier subcontractor and the prime think it more palatable if the subcontractor proceed directly against the government. Ordinarily, since the subcontractor has no privily of contract with the government, this is not practically. In many subcontracts, however, a provision has been included that permits the subcontractor to proceed directly against the government. Essentially, what happens is the prime contractor sponsors the subcontractor’s claim and agrees to let the subcontractor essentially step into the shoes of the prime and proceed against the government directly.

While this has a certain appeal, especially when the prime has not been directly affected by the change other than the effect on its subcontractor, there are traps. One of the more common traps is that the prime will propose sponsoring the subcontractor’s claim if the subcontractor agrees that the prime is not liable to the subcontractor. Unfortunately, such a tactic kills the sponsorship, however. For it to be a valid sponsorship the prime must remain liable to the subcontractor. If the prime is not liable to the subcontractor then the government is not liable to the prime. After all, the subcontractor is essentially stepping into the shoes of the prime.

When strategizing their claims, a final thing that subcontractors should consider is that in many large procurement situations sub's customer can have a flexibly priced contract like a cost reimbursement or even a fixed priced incentive type contract. In the case when the sub's customer has a cost reimbursement contract the customer simply has no downside for recognizing and settling the sub's claim if it is meritorious. Even when the customer has a fixed priced incentive contract, there are typically cost sharing provisions such that the customer is only partially at risk for settling a sub's meritorious claim.

REA Proposal Preparation & Settlement Expenses

The costs incurred by a contractor to prepare and settle its price adjustment proposal can be significant, especially with constructive changes where all three elements of a quantum claim must be proven. The issues are often so technical that significant expertise across the entire solution spectrum is required. The legal liability issues frequently involve concepts that are beyond an obvious performance issue. Furthermore, they can be complicated with common law interpretations to the contract terms that are not obvious but well established nonetheless. In addition, the quantification issues can be arcane and require sophisticated mathematical proofs. Even understanding the changed work and how it is different from the unchanged work can require world class, state of the art engineering expertise.

The technical expertise to resolve a price adjustment proposal is not the only complicating factor. Indeed, the complexity of the procurement rules and regulations also means that the parties must go great distances before they can meet in the middle. Also, success often means that the contractor must shoulder a greater burden if the matter is to be resolved without wasteful litigation. Typically the issue can be resolved if the government is educated and shown that the contractor’s price adjustment is actually meritorious. Unfortunately, these costs are often higher than they needed to be because the government customer is often doing their best to not just challenge the veracity of the claim but avoid all responsibility through whatever means necessary or how absurd the challenge. Clearly, the effort that a contractor might have to expend educating government personnel about government contracts in general and its own contract change in particular can be quite significant. As a result, it is fortunate that a contractor's costs for preparing its REA and settling its contract change are allowable costs of the change and are recoverable.

It is a very good thing a contractor's REA proposal preparation and settlement expenses are allowable because the efforts can be quite involved, especially since the government will challenge every element of the proposal and every dollar claimed. A lot of contractors misunderstand the claims settlement process. As stated earlier, their approach to settling changes is similar to that of negotiating new work. When they adopt such an approach it is no wonder that they fail. When they do they typically move to litigation. Taking a shortsighted approach to REA preparation, submission and settlement is a big mistake for two reasons.

First, litigation is not going to settle this change any sooner. If anything it will take much longer and be more time consuming. In fact, it could easily take 3 to 5 years to get a final resolution to the claim through the litigation process. It takes so long because there will likely be a jurisdictional challenge by the government to any appeal. Resolving the jurisdictional challenge could take about a year. Once the litigation process actually begins, the discovery process, summary judgment motions, prehearing briefs, the hearing itself and any post hearing briefs could take another year or two. Then actually getting a decision could take another year or two. As a result, any resolution of the disputed change comes much later with litigation and at considerable costs. Thus, by not doing a good job preparing, presenting and settling the REA, the contractor has essentially wasted the considerable opportunity it had to settle the matter in the most timely and efficient manner possible.

The second reason moving too quickly to litigation is a mistake is that a contractor's litigation costs will not be recoverable except for the narrow situation of the Equal Access to Justice Act but in that situation there are hurdles to their recovery that may not be overcome if the contractor has not diligently and properly tried to settle their change. Also, a contractor is not going to win its litigation unless it has done the work to prepare a well conceived and well supported claim. Thus, the considerable effort that it takes to prepare a well supported and well conceived claim is going to have to be done anyway. So, why not do the work during the contract administration phase when a timely resolution is possible and the costs are recoverable.

With respect to the allowability of a contractor's settlement expenses, as with almost every other element of the contractor's price adjustment, one can expect that the government's primary resource for evaluating the contractor's proposal, a government auditor, will question the costs and often based on totally absurd, erroneous, and unfounded opinions that are designed to generate questioned cost statistics to promote their own careers or to simply to set the government’s starting negotiation position at zero. With respect to settlement expenses, the common argument advanced to deny a contractor its due is that the costs are unallowable under the cost principle at FAR 31.205-47(f)(1) under the theory that they are a claim against the government.

Such an argument is not only erroneous it is also illustrative of the tactics often used by the government when settling contract price adjustments. Specifically, the government ignores its contract management obligations when it then forces contractors to compel the government to honor it obligations and perform its duties. Then the government raises all kinds of absurd objections to excuse its poor performance and deny responsibility. Finally, when its resistance efforts completely fail, the government claims the increased costs that it forced the contractor to incur are unallowable. With respect to contractor costs in general and settlement costs in particular, such a claim is utter nonsense.

For example, a contractor’s invoice is a claim. Taking the government’s typical but erroneous logic, that preparing a claim is unallowable, to its natural conclusion would mean that a contractor’s administrative costs of preparing an invoice would be unallowable, too, but that is not what the cost principle covers just as it does not apply to a contractor’s effort in preparing and supporting its REA. Rather, the cost principle applies to the “prosecution” of a claim or appeal against the government, which is an entirely different kind effort than just preparing a claim.

There is considerable history involving the issue of claims and whether a contractor’s REA, for example, is a "claim". Clearly, prior to a contractor's REA submission achieving "claim" status the contractor's costs of preparing, submitting and negotiating its price adjustment are not covered by the cost principle at FAR 31.205-47. Thus, the contractor's settlement costs would be allowable.

Once the contractor's proposal achieves claim status the allowability of its subsequently incurred settlement expenses becomes more complicated and less obvious. Unfortunately, as part of its standard efforts to avoid accountability for its actions and honoring its contractual obligations, the government frequently does not consider the contractor's proposal until it has achieved claim status despite the policy stated at FAR 33.204 that, "The Government’s policy is to try to resolve all contractual issues in controversy by mutual agreement at the contracting officer’s level."

There are many reasons why the status of "claim" is important and most have nothing to do with cost allowability issues. Rather, the significance of "claim" status is more typically related to the payment of late payment interest or resolution before an administrative board or judicial forum. The cost principle at FAR 31.205-47(f) involving costs of legal and other proceedings makes only the "costs" of "prosecuting" a claim unallowable and not something more general such as pursuing a claim or something more narrow like preparing or submitting a claim.

The term "prosecuting" a claim is significant since, in a legal context, it has a narrow meaning related to proceedings such as those before an administrative forum like an arbitration panel or a Board of Contract Appeals or a judicial forum like the Court of Federal Claims, the Court of Appeals or a Federal District Court. Thus, arguably the cost principle applies to the costs of appealing a Contracting Officer's final decision to an administrative board or judicial forum. In other words, it applies to the costs of "prosecuting" a claim that are unallowable and not to the costs of administering a contract. As a result, the costs of contract administration, which would include preparation, submission and settlement of a price adjustment proposal under a contract clause as part of contract administration and prior to the appeal of a final decision to an administrative or judicial forum, are allowable.

The above logic is not based solely on that portion of the legal and other proceedings cost principle. Indeed, it is supported elsewhere in the legal and other proceeding cost principle such as the definition of "costs" which means costs "incurred before, during, and after commencement of a judicial or administrative proceeding". Thus, the determining criteria to cost allowability is not whether the price adjustment is a "claim" but how the resolution of a disputed claim is being pursued.

Despite a controversial history where all kinds of decisions have been rendered, the interpretation in more recent times, since the mid 1990s, of whether a contractor's settlement costs are allowable has turned on exactly that--how the resolution of a disputed claim is being pursued. In other words, is it being pursued in hopes of settlement as part of contract administration or is it being pursued to by-pass the contract administration process and prepare for resolution of the issue before a judicial forum or administrative board. In case of the former, the costs are allowable? In the case of the latter, the costs are unallowable.

Thus, it makes no difference if the claim is certified and a contracting officer's final decision requested, which is all too often required before the government gives a contractor’s price adjustment proposal any consideration. It also makes no difference if the settlement effort actually fails. Instead, what matters is how the effort was being pursued and whether it was pursued for settlement as part of contract administration or if it was pursued for resolution before a judicial or administrative forum. (For further information about the disputes process see the section below on the Disputes Process).

If there is a legitimate basis for questioning a contractor's settlement expenses it would be that settlement expenses are subject to cost allowability criteria like every other incurred contractor cost. The reasonable criteria really means that the contractor has acted in the best financial interest of its government customer. Thus, if a contractor's settlement efforts have stooped to tactics of improperly inflating its damages with unsupported costs and improper quantification techniques in order to hopefully meet in the middle then the contractor will not have acted reasonably and in the best financial interest of its government customer. Of course, this would be beyond other liabilities the contractor could encounter as a result of various anti-fraud statutes.

In short, a contractor's cost of preparing, submitting, and settling its REA are allowable, at least those efforts that are not related to "prosecuting a claim" against the government. Contractors need to understand that settling an REA for changed work is not like negotiating for new work. Indeed, the contractor will have to prove every element of its changes claim. It should make the most of the settlement opportunity and make a serious effort at resolution for both time and cost considerations. After all, the costs it incurs for settling its REA are recoverable.

Accord & Satisfaction

Under the Changes clause the government has a duty to equitably adjust the contract price when it modifies the work to be performed by the contractor. This duty is discharged through performance when a modification has been negotiated for those costs or when the contractor executes a release.

The negotiation of a modification or execution of a release is not unbounded, however. The extent to which both of these documents discharges the government's duty is generally narrowly construed and limited only to those items specifically covered or subject of the negotiation. Thus, a contractor that negotiates a change but fails to recognize the impact of that change on future performance is not necessarily precluded from further recovery.

All too often prior to settling a contractor’s price proposal for constructive changes there could have been settlements formalized on other changes. In some cases, these other changes may have even come after the constructive change forming the basis of the current price adjustment proposal. In such cases, it is not unusual for party defending the change to raise the existence of these prior definitized changes and any releases that they may have included as a defense against having to act on the undefinitized change claiming that any adjustments were released in prior formal modifications. Typically, such claims will not succeed, however, because the undefinitized work was not the basis, discussed or considered when the prior release was executed.

The significance of accord and satisfaction is important for other reasons, as well. All too often the government delays resolution of a changed condition in hopes that it will diminish or go away entirely and that once the changed work is completed the contractor will be so cash strapped that it will settle for pennies on the dollar.

Unsurprisingly, both of these tactics fail more often than they succeed. In addition, the government’s liability often increases for a variety of reasons like a contractor’s settlement costs continue to increase, higher actual costs replace lower cost projections, the quantification techniques of the contractor’s quantification model improve, and possibly economic factors like overhead rates, price escalation, and cost of money factors rise with time and turn against the government.

Indeed, the government’s liability can only be contained through resolution and settlement of the issue. The government is better advised to move promptly and settle a claim early when a contractor’s negotiation posture could be more favorable to the government.

Disputes Process

While it is often possible to resolve a contractor's REA through negotiation that is not always the case. In fact, there are all kinds of reasons why an REA is not settled through negotiation. The Contracting Officer may not be able to obtain enough money. There could be some kind of personality conflict or a recrimination or vendetta between the Contracting Officer, the agency, and the contractor. There could just be a lack of intestinal fortitude for the Contracting Officer to even make a decision. There could be a reluctance by the government to admit responsibility for prior bad acts or acknowledge the consequence of its duties and obligations under the contract just to mention a few. There could even be legitimate reasons for why a settlement cannot be reached like insufficient contractor justification and support of its claim, as discussed previously.

In the event that a contractor is not able to settle its REA, there is a disputes process that contractor's can use to have its REA adjudicated. It is very important that Contractors understand how this process works so that they can properly consider the cost and time of litigating a settlement when deciding whether to accept or reject a settlement offer and when making their go/no-go appeal decision. In addition, the disputes process has time limits within which the contractor must act or it will forgo this avenue of resolution. Thus, these limits are an important consideration as well throughout its claim management process and not just at its go/no-go decision.

The disputes process is governed by the Contract Disputes Act (CDA) which is integrated in the government contract through the Disputes clause at FAR 52.233-1 or equivalent. The clause is important because it not only requires contractors to continue with the work and argue about it later but it also advises contractors on the process for adjudicating disputes and the prerequisites for entering that process. Even when the government has arguably breached the contract, the contractor is most likely required to continue performance and argue about it later. Understanding the disputes process and how it fits within the change management process has become an essential part of a contractor’s calculus for several reasons.

First, there are times when the government is unwilling to honor all the promises it makes to contractors. Even in cases where the government makes unilateral formal changes to the contract and is inclined to pay something to the contractor, the government's view of how much it owes can be vastly different than the amount owed to the contractor as required by the promises included in the contract. Consequently, in the event that settlement efforts fail contractors need to know how to proceed in having their differences resolved.

Second, the requirements of the CDA, that are incorporated in the Disputes clause, are separate from the provisions of the various clauses like the changes clause that were explained previously. As a result, despite what promises are made in the contract’s clauses themselves, like the changes clauses, a contractor’s ability to actually collect on those promises could be lost if a contractor's adjustment proposal is not presented to the Contracting Officer within the time and manner required by the CDA. Most significant is the CDA's six year statute of limitations. While a contractor’s adjustment proposal under the enabling clauses is generally timely submitted any time prior to final payment, the CDA has a six year statute of limitations. More specifically, once the enabling event accrues, the contractor has six years in which to present its "claim" to the Contracting Officer. Once the six year limitation has lapsed a contractor can no longer use the disputes process to compel the government to honor its promises. Unfortunately, without an ability to compel performance with the contract terms, the government is not likely to honor its promises.

While the resolution for most contractor claims never comes close to the six year limit, there are those situations where it can become a factor. Calculating the six year limitation can sometimes be complicated as well. The six year limitation begins once the claim has "accrued". A claim accrues when the events giving rise to the liability were known or should have been known. Remarkably, the date when all events giving rise to liability are known or should have been known can be much sooner than one might think as a result of the “should have known” criteria. Thus, missing the six year limit is a pitfall to which contractors must be vigilant.

To satisfy the six year statute of limitations the contractor must submit its "claim" to the Contracting Officer for a written decision. A "claim" has special significance in the CDA and the FAR. A claim is a, "written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain." While that demand and assertion could be satisfied when the contractor submits its REA, if the written demand exceeds $100,000 it must also be certified by someone having authority to bind the contractor with respect to the claim. If the claim exceeds $100,000 and is not properly certified then it does not meet the requirements of a claim and does not stop the clock for purposes of the six year limitation threshold.

The importance of a proper certification cannot be overstated, since it is often the government's first point of attack to have the contractor's claim dismissed on jurisdictional grounds should the contractor fair to resolve its claim through negotiation and decide to proceed under the disputes process. To be properly certified the CDA requires some specific language that says,

I certify that the claim is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes the Government is liable; and that I am duly authorized to certify the claim on behalf of the Contractor.

For contractor claims of $100,000 or less, the Contracting Officer has 60 days to render a final decision after submission of the proposal and the contractor’s request for a Contracting Officer’s final decision. Failure by the Contracting Officer to render a decision within that time can be deemed a denial and an appeal made to one of the two designated forae. For contractor claims that are over $100,000, the Contracting Officer has 60 days in which to render a decision or provide a firm date when the decision will be rendered. Failure by the Contracting Officer to render a decision within that time can also be deemed a denial and an appeal made to one of the two designated forae.

Once the final decision is rendered, and if the final decision is disappointing, the contractor has two paths from which to choose in order to appeal a Contracting Officer’s decision. The contractor has 90 days to appeal that decision to an administrative board like the Armed Services Board of Contract Appeals or the Civilian Board of Contract Appeals or 1 year to appeal the decision to the Court of Federal Claims. If somehow contractors take too long to submit their claim and exceed the 6 year limit, or they do not properly certify their claim then they will not be able to take their dispute to one of these bodies for resolution in those situations where agreement cannot be reached through the negotiation process.

Whether a contractor appeals to a Board or to the Court of Federal claims is a decision with its own considerations. Supposedly the administrative board could provide a faster result and more economical option as a result of its less processes and evidence standards. a less rigid process. The downside is that the administrative Boards are more closely connected to the agencies themselves. Thus, some question a Board's Independence and its ability to decide troublesome cases in favor of the contractor. the Court is perceived as having more independence but also being longer to obtain an outcome and at greater expense. Regardless of the choice, neither is better than settling the REA through negotiation with the Contracting Officer, since the process through the administrative Board is likely to take at least 3 to 5 years and cost considerably more than if the contractor had taken the time to do a good job on its REA in the first place. Here is why it is going to take so long and cost so much.

After appealing the Contracting Officer's decision to a Board or Court and being assigned a judge, the first thing that the government is likely going to do is challenge the Board or Court's jurisdiction to even handle the appeal. Most often these jurisdictional challenges are based on a faulty contractor certification either because of the actual wording used or the authority of the contractor's representative signing the certification. This approach is so common and has been so problematic in thwarting a contractor's access to the disputes process that Congress has amended the statute several times over the years to try and make the contractor's certification more bulletproof and less susceptible to technical challenge by the government. Even so, that has not deterred government lawyers from challenging jurisdiction as a standard operating procedure. Congress has even recently revised the statute to permit after the fact corrections to a contractor's certification to even further bulletproof the certification process but these kinds of challenges still persist.

A faulty certification is not the only point of attack, however. Certainly the six year limitation could be one if the contractor takes too long to even submit its "claim" to the Contracting Officer. Another could be the time period in which the contractor has to appeal the Contracting Officer's final decision. As mentioned above, the contractor has 90 days to appeal to a Board or 1 year to appeal to the Court of Federal Claims. Remarkably contractors have been known to miss these deadlines by narrow margins. Another reason contractors miss these deadlines is that the Contacting Officer did not follow the decision language provided at FAR 33.211. This failure could have been done innocently out of ignorance or done deliberately to obscure the significance of the Contracting Officer's decision in hopes that time will expire before the contractor realizes that the appeal clock has even started. Thus, this is just another situation where the contractor must be able to do its own job as well as the government's. If the Contracting Officer's mutilated communication is deemed a final decision and the contractor misses the 90 day or 1 year deadline to make its appeal, it will have missed any opportunity that it would have had, unless the contractor appeals the Board or Court's decision and prevails.

When the government challenges the contractor's appeal on jurisdictional grounds, both sides prepare and submit briefs to the Board or Court. Each side would get about a month to prepare and submit their briefs. The process is performed in sequential order. The government would go first and the contractor second. Assuming the government does not choose to reply to the contractor's response, it then just becomes a waiting game for the judge to make a decision on the arguments. If the government does provide a reply to the contractor's response then that adds some additional time to process before the Judge can start their deliberation and rendering a decision. While some decisions could come in a few months others can take some time. If there is a reasonable expectation about the time it could take for this phase to be completed, one should figure about a year and the briefing process can add tens of thousands of dollars to the contractor's cost.

Assuming the Board or Court decides that it does have jurisdiction of the contractor's claim, the discovery process can begin. Discovery is a multifaceted phase where the parties uncover the facts and learn why the parties have the positions that they have. During this phase the parties exchange various documents, expert reports and conduct witness depositions. Of course, if the parties have previously been engaged in evaluation of the contractor's REA, a lot of documents have likely already been assembled and exchanged, at least the contractor's documents. The government has not usually been as forthcoming with documents at this point. After all it is the government that has been doing all the auditing and analysis of the contractor's claim to this point. When preparing its REA it is best if the contractor be assembling and organizing its documents in preparation for both government review during settlement negotiations as well as for discovery should it become necessary.

With regard to expert reports, If the contractor has already engaged an expert and then used that expert to prepare its original REA submission, the expert has likely already substantially prepared its expert report. Should discovery become necessary, all that remains is perhaps some formatting and updating of the REA for any additional information gained during settlement efforts. If the contractor tried to do it themselves and failed then the process will likely have to start over, since the expert will need to get familiar with the situation, develop his own opinions, and then prepare his report, unless he was picked to follow orders and spout the party line. Things can become problematic if once the expert is involved that they find a lot more that should be included in the contractor's claim than the contractor had thought themselves. If so, a new final decision from the contracting officer could be required and that entire process restarted, since the contractor's certification of its "claim" establishes a ceiling. Thus, if the contractor is wanting to minimize overall costs, there is a lot of benefit for assembling its litigation team at the start and using them to prepare its initial REA.

Besides the expert reports, there will be expert rebuttal reports and then depositions of both fact witnesses as well as expert witnesses. The settlement process has nothing like depositions of witnesses. Whether giving or defending a deposition, including the preparation for them, the effort can be considerable. While the settlement process includes efforts similar to expert reports such as the REA itself and then preparation of any government audit reports of the REA along with any rebuttals to the audit reports, there will still be more iterations of that kind of effort during the discovery phase, particularly when the experts prepare rebuttal reports to the opposing experts initial report and any of their findings in rebuttal reports. Six months to a year is not an unusual period of time for discovery to take. For a 2 million dollar claim with depositions of two fact witnesses and a damages expert, the contractor's costs could easily reach a $150,000 and even more depending on the issues. Of course these costs are on top of what the contractor has already spent preparing and supporting its REA. If the contractor had used an expert to prepare its REA and has already organized its documents, the discovery costs could be less. If the contractor did not go that route and tried to do it themselves then discovery will be a totally new effort and whatever costs it spent preparing its REA are essentially wasted along with the opportunity it had to settle its REA by negotiation.

After discovery completes, the parties will likely move for summary judgment. While this is often constructed to try and have the Board or Court reject the other sides claim or defenses an entire rejection is not often likely since there has to be no disagreement on the material facts and all that is needed is a decision of law. Despite summary judgment is not likely, it probably will be attempted nonetheless. Typically, both sides present arguments that there is no issue of material fact and that the Board or Court should just find in their favor. Then each side argues against the other's motions. If there is a benefit to summary judgment motions it can be for narrowing the number of issues to be addressed at the hearing. In some complex cases it is not unusual that there are certain elements where the facts are not in dispute such that all that is really needed is for the Board or Court to render a legal decision on the facts. Submitting their motions and responses, waiting on the Board or Court to render its decision could take months or longer.

If the case survives summary judgment motions then the case moves to the actual hearing where evidence is presented, arguments made and a decision rendered. The hearing itself is typically preceded with pre-hearing motions for any issues the parties need resolved prior to the hearing itself. Once those are resolved there can be pre-hearing briefs and responses where the parties educate the Board or Court about the case and their views of the law. After the hearing the Board or Court is often provided with post hearing briefs and responses where the Board or Court is supplied with each party's view of the hearing outcome and relevant law. While the hearing could be short like a few days or a week that period could be doubled with the pre-hearing briefs. The post hearing briefs could then add another couple of months to the process. In short completing the hearing phase and all of its aspects can add another 4 to 6 months to the overall time period. The costs for the hearing and all the briefing could easily reach another 100,000 dollars for 2 million dollar claim.

Once the hearing is completed all that remains is for the Board or Court to render its decision. While the time required to get a decision is hard to predict, a reasonable expectation is likely a year. At this point, the reasonable expectation period for total completion is about 4.5 years from the date of initial filing. In addition, the contractor will have incurred about 300,000 appealing the Contracting Officer's final decision on this sample 2 million dollar claim, which is considerably more costs than it would have incurred if it had just expended the effort during negotiation to prepare and submit a well supported proposal and make the effort to overcome the government's objections. Thus, by not doing a good job preparing, presenting and settling the REA, the contractor guarantees either a considerable loss or costly litigation. In addition, if the contractor's job was poorly conceived, the resolution effort will be starting over and the contractor will have essentially wasted the considerable opportunity it had to settle the matter in the most timely and efficient manner possible. What should be obvious is that litigation will deliver a result but at what cost. The government is not always a fair customer and it will expend a considerable effort trying to avoid the promises that it made but contractors are still best advised to improve their REA settlement efforts and try to avoid litigation.

REA Proposal Summary

In the field of federal government contracts changes occur in a wide variety of circumstances. Sometimes they occur when there are unexpected requirements, or where conditions were different than expected. Similarly, changes can be necessary to correct errors in the original scope of work. Unfortunately, the situations when changes occur are not always so accidental. Indeed, sometimes they are the result of government acts that were designed to obscure known conditions in order to entice contractors into a problem that the government needed solved, that it cannot afford, or wanted to induce more favorable pricing from a contractor.

Regardless of the reason, the contractor is required to do the work and essentially argue about it later. Thus, contractors will incur the additional costs for the change. The only question is how much revenue will they be able to collect in compensation. From such a perspective every dollar recovered by a claim has a dollar-for-dollar effect on the company's bottom line. Thus, when one considers how many contracts it takes to have a corresponding effect on the bottom line, it becomes clear why the pursuit of claims is so important and so worthwhile. In the average business, a contractor would have to win contracts ten times the size of the claim to have the same bottom line effect on the company.

Resolving a constructive change is not as easy as one might expect. Recognizing changes is not always easy in the slow boil of contract performance. Seemingly small and insignificant changes frequently have colossal consequences that lack visible indicators. So, while many changes are as routine as clock work there are those that will require substantial prowess. Furthermore, collecting the revenue can often require substantial effort, especially for constructive changes where a contractor must be able to prove the government's liability, the consequence of the change and its quantum. In addition, there is often considerable resistance by government personnel to recognize that a change has even occurred and agree to its consequence. Their primary evasion weapon involves the imposition of arcane accounting rules about whose actual workings and requirements they often distort and misrepresent.

Managing changes is not simply a legal liability analysis, however. Recognizing liability without adequately recognizing its financial consequence is not helpful. Also, litigation techniques are not suited for successful settlement. Indeed, settlement is a sales opportunity and sales techniques designed to overcome objections of the government's vast array of stakeholders is what is needed. The reality is that there is a certain dance that has to be performed before settlement can happen.

While the gauntlet constructed by the government is significant, there are ways for successfully running it. To be successful, however, the contractor must not only know and follow the requirements of the contract but how to employ those requirements so that the costs consequences of its changed condition reflect as best as possible the economic reality of its changed condition. It also means that the contractor must shoulder a greater burden to prove liability, causation and quantum and do it in a way that not only leads to the right decision but ensures that the decision is sufficiently documented and supported. Thus, overcoming the government's objections often means that the contractor must do both its own job in identifying and quantifying the change as well as assisting the government representative in performing theirs. Fortunately, the added burden of this effort are allowable and recoverable.

Subcontractors can face similar obstacles from their customers, although subcontractors can often have better tools for resolving a changed condition than their prime customer. The improved tools can range from poor contracting practices by the upper tier contractor when they passed down contract clauses to the subcontractor to commercial law requirements that favor the subcontractor. In any case there are skillful solutions available without having to resort to full blown, wasteful litigation.

Lawyers and litigators often dismiss such an extensive and detailed approach as just free discovery. Of course, the litigator's preference is to litigate but that approach has numerous drawbacks. The most obvious is that it can take years to get an outcome, likely 3 to 5 after receiving the CO final decision, while a proper approach to settling REAs can realize results much sooner, about 6 to 12 months after first submission of the REA. Of course, that assumes that the contractor has done a good job. If the contractor has done a bad job it will have wasted this opportunity and nothing will have been gained. Litigation will become the only option. The second down side to not doing a good job and having to litigate is that the costs of litigating, as discussed above, are not recoverable under the cost principle at FAR 31.205-47(f) while contract administration costs and settlement negotiations are allowable. Thus, if a contractor is going to have to spend a lot of money it is better to do it on preparing a really good REA that could result in settlement instead of doing a bad job that just leads to litigation. Third, cloaking the facts in shadow, the ambush tactic often employed by litigators, can often keep contractor's from accurately assessing their situation and making a good business decision about their claim and its real value. Fourth, non-merit based tactics like hiding the ball can often boomerang with colossal consequences. Thus, there are many positive reasons for adopting a disciplined and well considered approach to preparing and submitting an equitable adjustment proposal and making the most of the negotiation and settlement opportunity..

While some find the submission of a Request for Equitable Adjustment (REA) and pursuit of claims to be objectionable, they are a design feature of the government contracting machinery. Regrettably, the government has used this gauntlet and its arcane rules for quantifying a contractor's damages as a means to obtain their needs while avoiding having to pay for them. Indeed, the history of government contracting is littered with the carcasses of naive but well intentioned contractors. Thus, for many companies to survive these highly competitive times, they will have to adopt a strategy that recognizes the role of claims because to do otherwise will be to forgo life as a government contractor.

How to Get Help

Greg Fordham of Celestial Defense in Atlanta Georgia has over 30 years experience preparing and settling Requests for Equitable Adjustments (REAs) at amounts that are frequently more than the client had themselves estimated the amount to claim. In some cases, the settlement amounts were several times more than even the original contract value. Greg is simply very knowledgeable about all three elements of a quantum claim (liability, causation, and quantum) and is very good at Marshalling the facts and navigating the cost rules to demonstrate and prove the cost consequence of a changed event.

His efforts have often involved bet the company type cases. Some have involved issues that many had thought were unlikely to have favorable outcomes due to technical or cost issues but he was able to prove otherwise. His REAs are typically settled without litigation at between 60 and 80 percent of the amount claimed, even after counsel has been retained and litigation appears likely.

While Greg prepares the REA and defends his work against government auditors and during the negotiation process, clients are always in control of the process and decide when an acceptable settlement value has been reached. Most often Greg interacts directly on client behalf with the client customer. Nonethelss, a few clients, for customer relationship reasons, have preferred to keep Greg behind the scenes. During negotiations they would rely on his coaching and consultation about how to overcome customer objections during negotiations and achieve an acceptable result. Thus, we are comfortable being the tip of the spear or just the power behind it.

As indicated above in the section on proposal costs and settlement expenses, all of Greg's costs are allowable and recoverable as part of the settlement amount.

When confronted with a constructive contract change or a poorly performing contract, the Atlanta Georgia office of Celestial Defense provides several important expert consultant services to federal government contractors in general, defense contractors in particular and even the government itself, if desired. Those services involve:

  • Targeted or turnkey support for the review of poorly performing contracts or disputed issues for compensable changes, including constructive changes where the customer may even be denying that a change to the contract exists,
  • Targeted or turnkey support for the preparation of a Request for Equitable Adjustment (REA) proposal, including the liability, causation and quantification elements.
  • Targeted or turnkey support for the submission, negotiation and settlement of a Request for Equitable Adjustment (REA) proposal when contracts are changed including direct cost issues as well as more arcane issues like delays and disruptions;
  • Targeted or turnkey support for the assessment of DCAA or other outside audit findings related to a contractor's change proposal or Request for Equitable Adjustments (REA)
  • Targeted or turnkey support for the review and settlement of subcontractor change proposals or Request for Equitable Adjustments (REA) proposals.

To discuss a specific matter involving:

  • Undefinitized formal changes; or
  • Constructive changes involving:
    • Defective specifications,
    • Improper or excessive inspection,
    • Different acceptance criteria,
    • Differences in requirements interpretation,
    • Impracticable contract or specification requirements,
    • Inefficiencies from work-site crowding or excessive overtime,
    • Performance delays due to:
      • Impacts from any of the above,
      • Stop-Work-Orders,
      • Delinquent customer furnished property or information,
      • Unsuitability of customer furnished property,
      • Delinquent permits or notices-to-proceed,
    • as well as many others

and the prospect for submitting a REA for additional compensation, speak with one of our government contract consultants at 770-777-2090 or .