Recently, in Tip Top Const., Inc. v. Donahoe, Postmaster Gen., (Fed. Cir. No. 2011-1509, Sept. 19, 2012), the Federal Circuit reiterated its earlier position that although professional fees incurred in connection with prosecution of a Contract Disputes Act (“CDA”) claim are not recoverable, the costs of such professional fees incurred in connection with the administration of a contract are recoverable. What’s the difference?
The Federal Circuit has previously held that there are “three distinct categories” of legal and consultant costs in the cost principles of the FAR: “(1) costs incurred in connection with the work performance of a contract; (2) costs incurred in connection with the administration of a contract; and (3) costs incurred in connection with prosecution of a CDA claim.” Bill Strong Enterprises, Inc. v. Shannon, 49 F. 3d 1541, 1549 (Fed. Cir. 1995). The Federal Circuit held that if a contractor incurs a cost for the genuine purpose of materially furthering the negotiation process, that type of cost should normally be considered an allowable contract administration cost. However, if a contractor’s underlying purpose for incurring a cost is to promote the prosecution of a CDA claim against the government, then such a cost is unallowable. The cost of preparing a request for equitable adjustment has, in some cases, been allowed as a cost incurred for the purpose of furthering negotiations.
In Tip Top, the contractor received a change order under its contract for the renovation of postal facilities in the U.S. Virgin Islands. Tip Top incurred consultant costs and attorneys fees while it was still attempting to further the negotiation process, specifically, to resolve the price of the change order. The negotiations only ended when Tip Top submitted its claim under the CDA. The Court held that Tip Top could recover its legal and consultant fees incurred to the date of submission of the claim as genuine contract administration cost. The Court specifically held that “[c]onsideration of price is a legitimate part of the change order process [which is contract administration].”
The facts and procedural history of this case are useful in understanding the full import of this decision. Accordingly, I have provided a brief summary with some additional background below.
In July 2007, Tip Top was awarded a work order contract by USPS. The contract contained a provision, B.309, which provided that the contractor could not recover any costs incurred in developing a work order.
In May 2009, USPS issued a work order to Tip Top to replace the air conditioning system in a post office. Tip Top told the Postal Service that the system would be compatible with a particular refrigerant. USPS later changed the requirement and ordered that the system be compatible with a different refrigerant. For its change costs, Tip Top submitted a proposal for $28,838.43, which was approved. In April 2010, however, the contracting officer informed Tip Top that it would not be compensated for the costs of preparing the estimate, because they were overhead costs. After further negotiation, Tip Top filed a claim for $34,553.77 for (a) the subcontractor’s price for the change, (b) estimate preparation costs and extended overhead, and (c) legal fees. The CO determined that the estimate preparation costs, extended overhead, and legal fees were not recoverable under provision B.309.
On appeal, the PSBCA held that Tip Top was entitled to the cost of the consultant up until the government accepted Tip Top’s initial proposal, but it denied all costs incurred after approval. In denying reimbursement, the PSBCA conceded that Tip Top should be entitled to reimbursement for contract administration costs, but reasoned that the negotiations did not relate to contract administration. The PSBCA also found that Tip Top presented insufficient evidence to support its costs. Despite the undisputed evidence, the PSBCA speculated that the consultant hired by Tip Top might have been working on other projects.
Tip Top appealed this decision to the Federal Circuit (CAFC). The CAFC reversed the PSBCA for the reasons discussed above. The CAFC also held that Tip Top sufficiently established its costs by submitting time sheets for the consultant, declarations from the consultant, and attorney billing records.