“Men must turn square corners when they deal with the government.” So began the Court of Federal Claims decision in Lodge Construction, Inc. v. United States, which the court described as “a cautionary tale to government contractors.” Unlike private sector construction projects, government contract claims are subject to a myriad of statutes and regulations, including the Contract Disputes Act (CDA) and the False Claims Act (FCA), which carry substantial penalties. There are many traps for the unwary in government contracts, including on delay and disruption claims. This article explains how to make best efforts to recover delay and disruption costs, avoid these traps, and avoid the draconian penalties that may result from failing to do so.
The Government Contract Clauses
Standard private sector construction contracts, such as those from the American Institute of Architects (AIA), ConsensusDocs, and EJCDC, include provisions addressing time extensions and delay and disruption costs. However, in the construction industry, parties frequently tailor contracts for different projects. As a result, the terms governing time extensions and delay and disruption costs may vary, and contractors must search contracts carefully to identify the appropriate clauses that may limit or otherwise govern the contractor’s right to recover for those costs. This is not the case for government contracts that include standard provisions from the Federal Acquisition Regulation (FAR). Remedy-granting clauses, allowing time and compensation for delay, are dictated by the FAR and do not vary from one fixed-priced government construction contract to another. Even if a key remedy-granting clause is omitted from a contract, it is, nonetheless, incorporated into the contract through the Christian Doctrine.
Following is a sampling of the clauses in federal government contracts that affect the contractor’s right to recover a time extension or compensation for delay and disruption:
- FAR 52.243-4 Changes
- FAR 52.236-2 Differing Site Conditions (DSC)
- FAR 52.236-3 Site Investigation
- FAR 52.249-10 Default
- FAR 52.242-14 Suspension of Work (SOW)
- FAR 52.211-18 Variation in Estimated Quantities (VEQ)
- FAR 52.233-1 Disputes
- DFARS 252.243-7002 Requests for Equitable Adjustment
- FAR 52.215-11 Price Reduction for Defective Certified Cost or Pricing
- FAR 52.215-13 Subcontractor Certified Cost or Pricing Data
- FAR 52.215-21 Requirements for Certified Cost or Pricing Data (mods)
- DFARS 252.236-7000 Modification Proposals—Price Breakdown
There are three types of delay in construction: (1) excusable delays for which the contractor is entitled to a time extension but no compensation, (2) compensable delays for which the contractor is entitled to compensation and a time extension, and (3) inexcusable delays for which the contractor is entitled to no time or money and for which the owner may be entitled to liquidated and/or actual damages.
The contractor’s right to receive a time extension or compensation for each category of delay is defined in several clauses in the standard government construction contract and defined further by the FAR and agency regulations. In addition to the regulations, the Boards of Contract Appeals (BCA), the Court of Federal Claims (COFC), and the Court of Appeals for the Federal Circuit (CAFC) have issued many decisions that define the contractor’s right to recover for delay and disruption. As a result, the contractor’s rights relating to delay and disruption in government contracts are well defined.
The Default clause gives the contractor the right to receive a time extension for excusable delay. It does not provide for compensation. The Default clause states in part as follows, with emphasis added:
(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if—(1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include—(i) Acts of God or of the public enemy, (ii) Acts of the Government in either capacity, its sovereign or contractual, (iii) Acts of Another Contractor in the performance of a contract with the Government, (iv) Fires, (v) Floods, (vi) Epidemics, (vii) Quarantine restrictions, (viii) Strikes, (ix) Freight embargoes, (x) Unusually severe weather, or (xi) Delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and (2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of the delay. . . .
Thus, to constitute excusable delay for which the contractor is entitled to an extension of time, the contractor must prove that the delay (1) resulted from unforeseeable causes, (2) was beyond the control of the contractor, and (3) was without the fault or negligence of the contractor. The non-exhaustive list of examples of excusable delays in the Default clause include delays caused by the government and delays not caused by either the government or the contractor,e.g., acts of God, fires, floods, strikes, quarantines, etc.
The clause specifically allows an extension of time for weather delays but limits the extension to delays caused by “unusually severe weather.” This limitation is in keeping with the definition of excusable delay as unforeseeable. Thus, the contractor is entitled to a time extension for weather that is beyond the normal severity for the location of the project; however, defining “normal” is a problem. To solve this problem, the US Army Corps of Engineers (USACE) developed guidelines for assessing claims for unusually severe weather. In addition, the USACE often includes a table in the contract specifying the number of days of normal weather that should be anticipated on the project.
The primary government contract clause giving the contractor the right to recover compensation for government-caused delay and disruption is the Changes clause, which states as follows:
(a) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes−
(1) In the specifications (including drawings and designs);
(2) In the method or manner of performance of the work;
(3) In the Government-furnished property or services; or
(4) Directing acceleration in the performance of the work.
(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; Provided, that the Contractor gives the Contracting Officer written notice stating-
(1) The date, circumstances, and source of the order; and
(2) That the Contractor regards the order as a change order.
(c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.
(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.
(e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of the proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) of this clause.
(f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.
The Changes clause allows the contractor to recover compensation for both directed changes and constructive changes, defined as any written or oral order, instruction, interpretation, or determination that results in a change falling under the clause. For a change, the contractor is entitled to receive an “equitable adjustment” to the extent the change increases or decreases the “cost of or time required or performance.” Thus, the contractor is entitled to a contract adjustment for both time and money, for delays resulting from directed or constructive changes to the work. The equitable adjustment under the Changes clause includes profit on the work performed.
Common delays that give rise to compensation under the Changes clause include:
- Government review and comments on design (for design-build).
- Government review and comments on submittals or submissions.
- Government letters, meeting minutes, emails, and notes.
- Quality control reviews, comments or deficiency notices, and improper or over-inspection.
- Defective specifications (rare on design-build).
- Government direction to remove and replace work that results in economic waste.
- Government-directed method or manner of performance.
- Improper contract interpretation.
- Government interference.
Similarly, the federal DSC clause provides compensation for Type I and Type II differing site conditions. The DSC clause states as follows:
(a) The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the Contracting Officer of−
(1) Subsurface or latent physical conditions at the site which differ materially from those indicated in this contract; or
(2) Unknown physical conditions at the site, of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract.
(b) The Contracting Officer shall investigate the site conditions promptly after receiving the notice. If the conditions do materially so differ and cause an increase or decrease in the Contractor’s cost of, or the time required for, performing any part of the work under this contract, whether or not changed as a result of the conditions, an equitable adjustment shall be made under this clause and the contract modified in writing accordingly.
(c) No request by the Contractor for an equitable adjustment to the contract under this clause shall be allowed, unless the Contractor has given the written notice required; provided, that the time prescribed in paragraph (a) of this clause for giving written notice may be extended by the Contracting Officer.
(d) No request by the Contractor for an equitable adjustment to the contract for differing site conditions shall be allowed if made after final payment under this contract.
The contractor is entitled to an equitable adjustment for additional time and costs, including profit, resulting from a Type I DSC, defined as a condition that differs materially from those indicated in the contract, and a Type II DSC, defined as an unknown physical condition of an unusual nature. As with the Changes clause, the equitable adjustment under the DSC clause is for the increase or decrease in the “cost of, or time required for, performance” and includes profit.
The SOW clause provides recovery for unreasonable delay caused by government actions. The SOW clause states:
(a) The Contracting Officer may order the Contractor, in writing, to suspend, delay, or interrupt all or any part of the work of this contract for the period of time that the Contracting Officer determines appropriate for the convenience of the Government.
(b) If the performance of all or any part of the work is, for an unreasonable period of time, suspended, delayed, or interrupted (1) by an act of the Contracting Officer in the administration of this contract, or (2) by the Contracting Officer’s failure to act within the time specified in this contract (or within a reasonable time if not specified), an adjustment shall be made for any increase in the cost of performance of this contract (excluding profit) necessarily caused by the unreasonable suspension, delay, or interruption, and the contract modified in writing accordingly. However, no adjustment shall be made under this clause for any suspension, delay, or interruption to the extent that performance would have been so suspended, delayed, or interrupted by any other cause, including the fault or negligence of the Contractor, or for which an equitable adjustment is provided for or excluded under any other term or condition of this contract.
(c) A claim under this clause shall not be allowed−
(1) For any costs incurred more than 20 days before the Contractor shall have notified the Contracting Officer in writing of the act or failure to act involved (but this requirement shall not apply as to a claim resulting from a suspension order); and
(2) Unless the claim, in an amount stated, is asserted in writing as soon as practicable after the termination of the suspension, delay, or interruption, but not later than the date of final payment under the contract.
The relief granted under the SOW clause is also an equitable adjustment for the increase or decrease in the “cost of, or time required for, performance”; however, unlike the Changes and DSC clauses, the SOW clause does not allow the contractor to recover profit. The SOW clause only allows for recovery following unreasonable suspensions. First, this means that not all government suspensions are compensable—only unreasonable suspensions. Second, contractors should prefer recovery under the Changes clause since the equitable adjustment under the Changes clause includes profit. Lastly, the contractor must carefully choose which clause to use as its basis for recovery, since the SOW clause recognizes the possibility of recovery under other clauses and prohibits equitable adjustments “for which an equitable adjustment is provided for or excluded under any other term or condition of this contract.” The SOW clause, if used, must be the sole means of equitable adjustment for the particular delay at issue.
As stated at the beginning of this article, contractors working with the government should carefully review their claim, including any assertions of damages. Additionally, while private contracts may include “no damage for delay” clauses, remedy-granting clauses in federal contracts are mandated by regulation and reflect “a significant or deeply ingrained strand of public procurement policy” that courts will read into the contract, if applicable. Accordingly, contracts cannot be tailored to exclude clauses mandated by law.
Proof of Delay and Disruption Costs
Delay and disruption costs often dwarf the direct costs included in a construction contractor’s claim. And to compound the problem, delay and disruption costs are normally complicated to prove. Trying to demonstrate the cause and effect of delay is never an easy task. The contractor not only must demonstrate how long it took and how much it cost to perform the impacted work, but it must also demonstrate with reasonable certainty how long it should have taken and how much it should have cost to perform the work if the delays and disruption had not occurred—often a daunting task. The BCAs and COFC require the contractor to prove the cause and effect of the delay and disruption.
Additionally, government contracts prescribe the costs that may be included in the claim, which, if not followed, can result in the disallowance of costs, or if fraud is involved, can result in false claims liability. Some of the FAR provisions relating to pricing of claims include:
- FAR Part 31—Contract Cost Principles and Procedures (what costs are allowed to be recovered as part of an equitable adjustment)
- FAR 52.215-11 Price Reduction for Defective Certified Cost or Pricing Data-Modifications
- FAR 52.215-13 Subcontractor Certified Cost or Pricing Data-Modifications
- FAR 52.215-21 Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data-Modifications
- DFARS 252.236-7000 Modification Proposals—Price Breakdown
Faced with the task of proving a delay and disruption claim, contractors may fail to perform their analysis with the necessary rigor and care, resulting in a delay and disruption claim that is unrealistic—a mistake in the private sector, but even more so in the world of government contracts.
CPM Analysis
The law relating to proof of delay and disruption claims at the BCAs, COFC, and CAFC is relatively well developed and does not differ materially from most state law on the subject. In fact, the federal decisions probably preceded and often served as underlying bases for the various states’ laws.
To obtain a time extension and compensation for a delay, the contractor generally must prove that the delay extended the completion of the job and caused the contractor to experience increased costs. These costs are typically extended job costs, extended overhead, and inefficiency. However, the fact that a delay occurred to an activity on the job does not necessarily mean that the delay impacted the final completion of the project or that the contractor incurred extended job costs. The delayed activity may not be critical to completion and may contain float or slack. The impact to the completion date typically can only be established through the use of a network analysis, typically in the form of a Critical Path Method (CPM) schedule.
Today, the BCAs and COFC generally require the use of CPM scheduling to prove that the delay occurred on the critical path and, therefore, caused the final completion date to be extended and to sort out complex concurrency issues. Only on the simplest of delay claims can the contractor avoid a CPM presentation.
CPM analyses often start with a baseline schedule developed before the start of the work and approved by the government. The schedule is then updated monthly and contemporaneously with the project to demonstrate how each delay impacted the critical path as the job progressed and how the contractor and government reacted to the delays. If the baseline schedule and monthly updates were accurate, the approach works well and is convincing. However, due to the complexity of the project and exigencies occurring on the job, the contemporaneous schedules may not be entirely accurate and do not always reflect the way the work was planned to be performed or was actually performed. The BCAs and COFC have recognized that under those circumstances, the schedules must be adjusted to reflect reality. However, adjustments to the contemporaneous schedules may be met with a healthy degree of skepticism by the boards and courts.
Concurrent delay is another reason for the requirement to use a CPM analysis. Often, multiple excusable, compensable, and unexcused delays occur throughout the job, and many are concurrent with each other and interwoven. Each type of delay carries a different remedy and outcome for the contractor. The analysis is then made more complex when the contractor accelerates to mitigate the delay. Sorting out the impact of concurrent delays and acceleration is always difficult. The CPM provides the contractor and government with the best, although not perfect, tool to help analyze and resolve this issue.
Methods of Analysis
CPM scheduling has become increasingly sophisticated with the development of new scheduling software and methods of analysis. Schedules now contain multiple calendars, resource loading, and many other tools. These innovations make it easier to more accurately analyze the impact of delay. However, the new tools can make analysis more complex, allow a party to mask the true impact of delays, and/or allow an expert (either retained by the contractor or the government) to manipulate the results of an analysis. One article referred to the problem as “Flawed Schedules—Rotten Bananas in a Software Paradise.”
Then there is the question of how the CPM schedule was used to prove the impact of the delays on completion. Whether it be in the private sector or government contracts, there are numerous approaches that have been offered by parties to prove the impact of delay including the total time approach, impacted as planned, as-built schedule, collapsed as built, time impact analysis (TIA), windows approach, and other novel methods. Each approach has different strengths and weaknesses, and all have subjective elements.
There is no single objective way to analyze delay. One study showed that using different methods of CPM scheduling analysis applied to the identical facts can result in different outcomes. A thorough discussion of each method is beyond the scope of this article; however, it is fair to observe that, generally, the best approach is a TIA or windows analysis utilizing contemporaneous monthly updates. But that is only true if the schedules produced during the job accurately reflect the intent of the parties and the actual performance of the work.
Costs
Extended Costs
Certain costs flow naturally from the extended duration the contractor is on the job. These costs typically include extended project overhead (most notably supervision costs), extended home office overhead, escalation, and extended/idle equipment and labor costs.
Project overhead can be calculated either by using a percentage of direct costs incurred due to the extended delay event or by multiplying a daily rate times the days of delay to final completion. The Armed Services Board of Contract Appeals (ASBCA) held that, under the FAR, a contractor on a government contract project must select one of these two methods for allocating field office overhead. The contractor cannot use a percentage markup for changes that involve increased direct costs and no delay and then switch to the application of a daily rate for changes that have a large delay component and little or no direct costs. It must choose one or the other method for the job. This can be unfair to the contractor. There are arguments to avoid these harsh results, but it is presently the law today as pronounced by the ASBCA.
The Eichleay formula allowing the contractor to use a daily rate to apply home office overhead to delay originated in government contracts. The daily rate is calculated as follows:
Eichleay formula PDF download.
The courts and boards have since issued numerous decisions restricting and defining when and how the Eichleay formula can be used.
Acceleration
When an excusable delay occurs, the government can direct the contractor to accelerate by increasing manpower, supervision, or equipment; working additional shifts; working overtime; or using other means in order to mitigate damages because it needs the project by a certain date, or for any other reason. The acceleration directive is a change to the contract for which the contractor is entitled to compensation under the Changes clause. However, the government often achieves the same result by refusing to grant the contractor a time extension to which it is entitled and directing the contractor to maintain the unextended completion date. This constitutes a constructive acceleration and constructive change for which the contractor is also entitled to recover an equitable adjustment under the Changes clause for additional incurred costs. Acceleration, and particularly constructive acceleration, typically results in a large inefficiency, which is compensable as part of the equitable adjustment.
Disruption and Inefficiency
The natural consequence of delay and acceleration is the disruption of the contractor’s planned method, sequence, and manner of performance, which results in lost productivity for both labor and equipment. The additional costs resulting from this disruption are real and can be extraordinary in amount. However, the costs cannot be directly observed, measured, or recorded. As a result, it can be hard to convince a judge that the costs are real. The Veterans Administration BCA recognized that determining disruption and inefficiency costs with exactitude is “essentially impossible.” Still, the contractor has the burden of proving liability, causation, and the extent of the resulting injury by a preponderance of the evidence. So, how does a contractor quantify and prove these costs in a claim against the government?
Contractors have been successful to varying degrees in proving disruption and inefficiency due to delay and acceleration on government contracts by using several different approaches, including total cost, modified total cost, measured mile, jury verdict, and published inefficiency factors. The proof normally requires a forensic expert in pricing construction claims.
The measured mile approach is the preferred method of proof. Under this method, an expert identifies the productivity actually achieved during an unimpacted or a least-impacted period of the job for work similar to the impacted work. This work is called the “reasonable productivity” and is compared with the productivity achieved on the impacted work to determine the lost productivity. There are numerous versions of this approach. However, it is often difficult to find an unimpacted period where comparable work was performed. In those circumstances, the parties may have to utilize one of the other approaches listed above.
Cautionary Note
Due to the difficulty in objectively identifying and quantifying delay, disruption, and inefficiency costs, the calculation and presentation of delay and disruption claims may be subject to manipulation and puffery. This can be a real problem in presenting a delay and disruption claim against the government.
One of the main differences between private sector claims and government contract claims is the certification requirement of the CDA, applicable to claims against the government. On claims over $100,000, the contractor must certify that “(1) the request is made in good faith, and (2) the supporting data are accurate and complete to the best of that person’s knowledge and belief.” The FCA adds teeth to the certification requirement of the CDA establishing monetary civil penalties, claim forfeiture, debarment, and even criminal penalties for certain false certifications, statements, and claims. Thus, it is not business as usual in government contracts.
The following two cases provide a cautionary tale to government contractors and their counsel and consultants regarding the results of failing to comply with the contract, regulations, and statutes and to remove the puffery from their delay and disruption claims. Submitting an inflated claim as a ploy to get more money in a settlement is a step toward disaster.
In Lodge Constr., Inc. v. United States, the COFC warned contractors doing business with the government as follows:
This case should serve as a cautionary tale to government contractors. For those who seek to recoup sums of money from the Federal Government, and thus burden taxpayers, rudimentary recordkeeping and approximated claims are likely insufficient. When job cost data and recordkeeping are inaccurate, the claim will inevitably contain errors and the line between negligence and reckless disregard for the truth becomes vanishingly thin. Cross it, and the government contractor’s claim becomes fraudulent as a matter of law, a designation that carries financial, practical, and stigmatic consequences. Here, while some elements of Lodge’s claims may reflect nothing more than slapdash formulae, overwhelming evidence establishes that substantial portions of those claims are patently deceitful.
It is now apparent that Lodge failed to earnestly undertake the obligations of claim certification: to ensure a claim submitted for payment is accurate and truthful. Lodge failed to accurately identify the equipment it used and support the valuation of that equipment with proper documentation in an act of deceit to increase its claim. Lodge used a dubious metric, riddled with errors, to measure its inefficiencies and dishonestly inflate Lodge’s claims. Lodge employed an artifice through which it sought to inflate costs of its equipment by reporting operation hours to the Army Corps differently than it recorded them internally. And finally, Lodge sought double recovery of costs for which Lodge assumed the risk of increased operation.
… Lodge knew or should have known them to be false. And when a contractor acts intentionally or with reckless disregard for accuracy, submitting a false claim for payment is fraud.
The Lodge case arises out of the construction of a levy in South Florida for the USACE. Lodge certified and submitted a Dewatering Claim seeking $3,282,123 in compensation and 91 calendar days to complete the work. The USACE denied the claim. The amount of the claim was subsequently revised. A trial was held before the COFC, and a decision was issued.
The claim alleged that Lodge’s work was impacted by the failure of the water to percolate from the project, which caused additional costs and delay that was compensable under Changes and DSC clauses. Lodge based its claim on an inefficiency ratio calculated by dividing the total actual days of performance by the allocated days to perform it initially.
The calculated inefficiency factor was 2.5. The factor was applied to costs and time incurred during the impacted period. The COFC found many errors in the calculation and use of the inefficiency factor, including (1) Lodge did not account for days granted by modification as a time extension; (2) Lodge included days where almost no hours of work were performed in the calculation of actual days, thereby erroneously increasing the actual days in the formula; (3) Lodge’s expert repeatedly testified that the actual days were not reasonable, accurate, or truthful, but that error was unintentional; (4) Lodge improperly decreased the baseline schedule days to arrive at the allocated days; and (5) Lodge applied the percentage to days beyond the claimed impact period.
The COFC found that the inefficiency percentage was not “a reasonable, accurate, or truthful measure of inefficiency” and that the use of this percentage demonstrated that “Lodge exhibited a reckless disregard for the accuracy of its Dewatering Claim.” The court went on to conclude that Lodge’s conduct likely goes beyond mere reckless disregard for the accuracy of its claim and that it was “more likely than not, Lodge intentionally used its inefficiency ratio as a tool to inflate the damages calculation of the claim it presented to the Army Corps.” As a result, the COFC found that Lodge’s claim constituted a false claim, which required Lodge to forfeit civil penalties and its claim for time and money in its entirety.
The ultimate construction case dealing with false claims in government construction contracts is Daewoo Engineering & Constr. Co. v. United States. Daewoo entered into a contract in the amount of $88,600,000 with USACE to construct 53 miles of road in the Republic of Pulau. During performance of the project, Daewoo filed a certified claim seeking a total of $64,000,000, consisting of $13,000,000 in incurred costs and $51,000,000 in future anticipated costs. Daewoo sought 898 compensable days of delay and eight non-compensable days, presenting a claim based on defective specifications, government breach of its duty to cooperate and disclose superior knowledge, and impossibility to perform the work within the originally specified time period in the contract.
The primary cause of the delays for the project was the amount of rainfall encountered. The USACE included its standard weather clause in the contract to establish the estimated number of normal weather days for the project. In addition, Daewoo made its own estimate of normal weather days, which agreed with the weather clause in the contract. However, Daewoo contended that the weather clause in the contract was an affirmative representation of anticipated weather delays, was defective, and misled Daewoo. Daewoo also contended that the USACE had superior knowledge of the weather days that it failed to divulge.
The COFC first noted that a contractor is only entitled to a time extension for rainfall, and then only for unusually severe rainfall. The COFC found the USACE did not have superior knowledge that it failed to disclose and that the weather clause was properly calculated, and even if it was in error, Daewoo did not rely on it.
The COFC also found that the specifications were standard performance specifications, not design specifications, and that the project was not impossible to perform. To support this conclusion, COFC noted that the job was in fact completed and that it was just a matter of how much labor and equipment would be applied to perform the work.
The COFC determined that the $51,000,000 claimed by Daewoo in prospective costs was fraudulent. Daewoo’s calculation assumed that the government was responsible for each day of additional performance beyond the original contract period, even though there was contractor-caused delay and other delay for which the government was not responsible. Daewoo essentially relied on a total time approach with no adjustments. The court also found that there were numerous delays that were Daewoo’s responsibility.
After it had submitted and certified a $64,000,000 claim, Daewoo retained experts to assist it in pursuing its claim. These experts estimated the claim to be $42,000,000, or $22,000,000 below the certified claim value. Even at that lower amount, the court was critical of the expert’s calculations and testimony. The experts used a measured mile approach to prove damages. However, the court found that the productive and nonproductive periods of work used by the experts were arbitrary at best and more likely chosen to achieve a predetermined result. The court found the testimony of the experts as borderline “unprofessional.”
The court confirmed that contractors have the burden of proving delays attributable to the government with a CPM that Daewoo failed to provide. The COFC discussed the testimony of many of Daewoo’s witnesses in painstaking detail, referring to their testimony as unclear, not credible, unresponsive, inconsistent, unreliable, and vague. The most telling comment by the court is its citation to Daewoo witnesses about the purpose of such a high claim submission. They testified that the claim was simply intended to indicate the seriousness of the situation and to get the government to pay attention. One witness testified the claim was being used as a negotiating ploy. The court pointed out this was just the type of conduct that Congress enacted the CDA to prevent. This approach may be common and acceptable in the private sector, but not in government contracts.
The COFC found that the government had proven by clear and convincing evidence that Daewoo knowingly presented false claims. The court awarded the government $10,000 under the FCA and $50,629,855 under the CDA and forfeited Daewoo’s $64,000,000 in claims for time and money. Daewoo came to court seeking $64,000,000 and left owing $50,000,000. It is unlikely this would have been the result in the private sector.
Current Topics in Government Delay Claims
The COVID-19 pandemic and its subsequent economic impacts have changed the landscape of the construction industry. Fundamentally, the issues most commonly giving rise to construction claims against the government are unchanged: Contractors are performing work on fixed-price contracts with a defined scope of work and the actions of the government are impacting those scopes of work. A government-caused delay can result in time-related cost impacts to a contractor. These time-related cost impacts fall into the following categories: home office overhead, general conditions, idle equipment, and price escalation.
When a project is delayed and a contractor’s work is pushed into a later period when prices have increased, the contractor can incur cost impacts from price escalation. In the years immediately preceding the pandemic, the cost of labor and materials generally experienced limited variability. In some circumstances, project delays did not result in a cost escalation claim because the prices did not change after the delay. In contrast, there are numerous instances during the post-pandemic period when prices for materials substantially increased at an unprecedentedly fast pace. The labor market also tightened in conjunction with historically low unemployment and higher wages. The realities of increasing costs for materials and labor increased the importance of escalation claims when a contractor has been delayed.
Cost escalation in the construction industry can be seen in prices for construction materials measured by the Producer Price Index (PPI). The Bureau of Labor Statistics states that the PPI program measures the average change over time in the selling prices received by domestic producers for their output of goods and services. The growth in construction materials’ prices outpaced the growth in consumer prices, measured by the Consumer Price Index (CPI) for urban consumers excluding food and energy. Chart 1 illustrates the reported cumulative percent growth for both the CPI and the PPI for construction materials as indexed to December 2017. Prior to the pandemic, growth in PPI for construction materials generally outpaced CPI. However, immediately preceding the pandemic, the price of construction materials trended back down to a level commensurate with CPI, such that both the CPI and the PPI for construction materials had grown 5 percent from December 2017. This reflects an average inflation rate of about 2.5 percent per year.
Chart 1: PPI for Construction Materials and CPI, Indexed to December 2017
PDF download for Chart 1
From the start of the pandemic (March 2020 through March 2024), the CPI grew at a faster rate relative to recent historical trends. However, during the same period, the growth in PPI for construction materials significantly outpaced the CPI. At its peak, in May 2022, the PPI for construction materials outpaced the CPI by 43 percent (58 percent – 15 percent) relative to the December 2017 baseline.
Examining trends within construction material types highlights unique volatilities of different materials. Chart 2 shows the PPI for lumber. From December 2017 to March 2020, the price of lumber declined 5 percent. There was some price volatility during this period. For example, the price of lumber decreased by 19 percent from June 2018 to June 2019. However, the pre-pandemic period is in stark contrast to the post-pandemic period. After an initial 3 percent price decline from March to May 2020, lumber prices skyrocketed 118 percent in the next 12 months. From June 2021 to March 2023, prices yo-yoed: falling 38 percent from June through September 2021, then increasing 52 percent from October 2021 through March 2022, and then again falling 49 percent by March 2023. As of March 2024, lumber prices remained 18 percent higher than pre-pandemic levels.
Chart 2: PPI for Lumber
PDF download for Chart 2
Compared to other raw materials, lumber was unique in that its price fluctuated so drastically over such a short period. While Chart 3 only represents a portion of commonly used construction materials, it demonstrates that each commodity had its own unique price escalation trend following the start of the pandemic.
Chart 3: PPI for Other Construction Materials, Indexed to December 2017
PDF download for Chart 3
Construction wages also increased. However, as shown in Chart 4, they grew in tandem with CPI and did not have the rapid growth experienced by materials.
Chart 4: Construction Wages and CPI Indexed to December 2017
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These various indices show that the price of doing business in the construction industry has increased rapidly in recent years. This price escalation can dramatically impact the costs contractors incur on projects that experience delays. By preparing an escalation claim, contractors can seek to recover costs for price escalations caused by delay.
Cost Allowability for Escalation Claims Against the Government
When preparing a claim against the government, a contractor needs to consider the allowability of the costs it intends to include in its claim. Cost allowability limits the types of costs a contractor is able to recover on a government contract. Cost allowability is a unique aspect of performing work for the government, as opposed to working in the private sector. The government defines cost allowability in FAR Part 31—Contract Cost Principles and Procedures. Cost allowability impacts all government contracts, including fixed-price contracts. FAR Part 31.102 states that FAR Part 31 applies to fixed-price contracts “whenever (a) a cost analysis is performed, or (b) a fixed-price contract clause requires the determination or negotiation of costs.” FAR 31.201-2 states for a cost to be allowable, it must meet the following five criteria:
- Reasonableness.
- Allocability.
- Standards promulgated by the CAS [Cost Accounting Standards] Board, if applicable, otherwise, generally accepted accounting principles [GAAP] and practices appropriate to the circumstances.
- Terms of the contract.
- Any limitations set forth in this subpart.
Reasonableness
The reasonableness of a cost is established by determining if the nature and amount of the cost would be incurred by a prudent person in the conduct of competitive business. There are a variety of considerations for the government when determining reasonableness of a cost, including (1) whether the cost is generally recognized as ordinary and necessary for the conduct of the contractor’s business or contract performance and (2) whether the cost is generally accepted as a sound business practice. A full list of considerations in determining reasonableness is found at FAR 31.201-3. Given the volatility in the price of construction labor and materials, proving the reasonableness of the contractor’s actual costs may require additional explanation and documentation from the contractor.
Allocability
The allocability of a cost is defined by FAR 31.201-4. The FAR states allocability is determined by establishing if the cost “was assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationships.” The FAR also states that a cost is allocable to a government contract if it “(a) Is incurred specifically for the contract; (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.”
Within the context of an escalation claim, the contractor should demonstrate through its records that the specific contract’s materials or labor increased in price because of a government-caused delay. If a contractor maintains a stock of common materials used on multiple contracts, it may need to provide an allocation method showing how inventory was utilized and demonstrate that it paid a higher price to acquire or replenish its inventory.
Standards Promulgated by the CAS Board, if Applicable, Otherwise, Generally Accepted Accounting Principles and Practices Appropriate to the Circumstances
In many instances, the government requires that contractors track their costs depending on the type of contract. The government developed its own set of cost accounting rules—the CAS. These standards, developed by the Cost Accounting Standards Board (CASB), prescribe how contractors measure, allocate, and assign costs on a government contract. Contractors who primarily work under fixed-price government contracts are generally not considered CAS-covered. A contractor should know if it is performing work under a CAS-covered contract, if it is subject to modified CAS, or if it is exempt from CAS. If a contractor is not subject to CAS, FAR 31.201-2(a)(3) states that the contractor should track its costs using GAAP. However, the contractor can also deviate from GAAP and use accounting practices appropriate to the circumstance.
Terms of the Contract
The terms of the contract also can define cost allowability. While a contract cannot make an unallowable cost allowable, it can define an otherwise allowable cost as unallowable. A contract, for example, could limit an escalation claim by incorporating ceiling rates or limiting cost increases to market indices. These clauses should be reviewed to determine their applicability to a claim and the relevance to the cost escalation quantification.
Any Limitations of This Subpart
FAR 31.201 includes other specific limitations on cost allowability. A detailed review of all the limitations of the subpart is beyond the scope of this article. However, contractors working with the government should be familiar with the allowability for selected costs under FAR 31.205. This section of the FAR identifies certain costs that the government considers allowable or unallowable, or whose allowability is based upon the nature of the cost. A contractor can track its unallowable costs in its normal accounting system. Common unallowable costs include bad debt, interest, entertainment including alcohol, donations, fines, lobbying efforts, and losses on other contracts. When preparing a claim against the government, the contractor should be educated about the FAR standards defining cost allowability and, depending on how costs are tracked in the contractor’s accounting system, perform a screen for unallowable costs prior to submitting a claim.
Causation for Escalation Claims
For a contractor to make a claim for escalation against the government, the contractor needs to establish that the project delay occurred because of the actions of the government. Escalation claims can arise even if the delayed work was not on the project’s critical path. For example, an escalation claim could arise if noncritical activities are re-sequenced because of a delay and shifted into a later, more expensive period. In this case, the substantial completion date of the project may not change, but the contractor may be able to establish a claim for the impact from escalation. A claim like this may require a schedule analysis to determine why the work was re-sequenced. The contractor also should consider adjustments for any concurrent delay.
Labor Escalation Claims
Next, once entitlement has been established and a contractor has established the government caused the delay, the contractor should determine what costs it incurred because of the delay. If making a claim for escalation, those costs can include labor, materials, rental charges, or repairs and maintenance costs. The contractor needs to show that it performed its work in a period with higher costs because of the government’s delay to claim labor escalation. In its quantum calculation, the contractor may need to account for work that was planned to occur in the escalated period. For example, assume a contractor provides a wage increase to its employees on January 1. If a particular task was scheduled for five months, the last three months of 2021 and the first two months of 2022, but due to delay, all five months of work will occur in 2022, typically the escalation costs for the additional three months of work performed in 2022 will be claimed.
While all government construction contracts have a required completion date, contractors have the right to finish early. If the contractor can show that it would have completed the project early but for government-caused delays, the contractor may be able to recover delay costs incurred prior to the contract completion date. Using the context of the escalation claim described above, if the contractor can demonstrate that it would have completed its work in 2021 but for a government delay that caused the contractor to perform five months of work in 2022, the contractor may be able to claim escalation costs for all five months of work performed in 2022.
Labor Escalation Quantum Methodologies
There are three common methodologies used to quantify labor escalation: (1) direct measurement, (2) modified total cost, and (3) total cost. Under the direct measurement method, labor escalation can be calculated by comparing the actual labor cost incurred in the delay period to what the labor costs would have been, but for the delay. The comparison can be performed at the individual employee level or, depending on the contractor’s labor mix, potentially compared by pools of labor. The pools can be created by identifying common characteristics among the pool members, such as union classification, experience level, or specific trade, among others. These incurred costs can be identified in the contractor’s accounting system. The costs are often required to be supported by common documentation, including timecards, payroll records, and labor category descriptions.
Using the direct measurement method, the labor mix of the project should be considered when performing a calculation of labor escalation. For example, assume a contractor bid a project with an aggregate labor rate that assumed a 50/50 mix of lower-paid apprentice labor and higher-paid journeyman labor. If there was a government-caused delay, but the actual labor mix consisted of 30 percent apprentice labor and 70 percent journeyman labor, the contractor’s costs would be higher than planned, but some or all of the increased cost would not be caused by price escalation. Assuming the difference in the labor mix was not attributable to an action of the government, the contractor would need to make an adjustment for the different labor mix to isolate the cost increase due to wage escalation.
Alternatively, assume the same set of facts, with the following exception: During the government-caused delay, the composition of the available local labor changed and there were no longer sufficient apprentices to staff the project. If the apprentice labor on the project was replaced by journeyman labor, the claim adjustment to the labor mix may not be necessary. The contractor may need to show that, on the planned start date, the labor market had sufficient labor to support the proposed labor mix. In other words, a government-caused delay would not necessarily change the fact that the contractor may never have been able to supply the planned labor mix. The actual methodologies and potential adjustments will be determined by the facts of the case.
Using the modified total cost methodology to price labor escalation damages requires the contractor to establish that (1) its bid was reasonable, (2) its actual costs were reasonable, (3) the contractor was not responsible for the overrun, and (4) the losses make it impossible or highly impractical to determine them with a reasonable degree of accuracy. Additionally, with the modified total cost method, the contractor must adjust for any nongovernment impacts. Common adjustments for an escalation claim using the modified total cost method include adjustments for concurrent or contractor-caused delay. The contractor also should consider adjustments for differences between the bid labor rates and the actual labor rates that were not caused by actions of the government. Additionally, the contractor should review its bid labor and the underlying assumptions and adjust for errors. The actual adjustments required, if any, will depend on the facts of the case. The circumstances would need to be extraordinary for a contractor to prevail on a labor escalation claim using the modified total cost methodology.
Labor Escalation with Disruption
Regardless of the methodology, when preparing a labor escalation claim, the contractor should explore the possibility that there were also disruptive impacts or changed work in addition to the delay. Delay and disruption are two distinct impacts. Delay costs are incurred because of the passage of time. Disruption costs are incurred because of additional effort, either through lost labor productivity or additional unanticipated work. A contractor facing both delay and disruption impacts may attempt to price the delay elements, such as escalation, separately from the disruption elements.
A disruption claim could have different elements of causation than a delay claim. In some circumstances, labor productivity could be impacted by delays. For example, if the delay pushes the contractor from fair-weather months into unfavorable winter months, the contractor could make a claim for lost labor productivity from working in the adverse conditions. This, however, could be a distinct claim from labor escalation. Chart 5 summarizes examples of cost impacts to bid labor, assuming causation and entitlement have been established.
Chart 5: Overrun Claim Type Matrix
PDF download for Chart 5
When the actual labor cost exceeds the bid labor cost, but there is not an associated hour overrun or labor mix issue, the overrun may be due to escalated labor rates. This results in the contractor likely claiming escalation costs. This scenario is denoted by the red “Delay” box. When the actual labor hours exceed the bid labor hours, the contractor could be claiming costs for disruption or changed work. This scenario is denoted by the yellow “Disruption and Changed Work” box. If both delay and disruption occur, the contractor may have additional hours from the disruption or changed work and be incurring those hours at a rate higher than the bid rate. This scenario is denoted by the orange “Overlap” box in Chart 5. The claim strategy and the facts of the case will determine whether the “overlap” should be (1) included with delay costs, (2) included with disruption or changed work costs, or (3) calculated independently. Contractors preparing claims for delay plus disruption or changed work need to exercise care to avoid double-counting the “Overlap” area.
Material Escalation Claims
When developing a claim for material escalation, there are many similarities to developing a claim for labor escalation. The contractor will need to show the delay was caused by the government and adjust the claim for concurrent or contractor-caused delay. Assessing material price escalation requires an understanding of how the materials are procured and when the pricing for the materials was set for the contractor.
A nuance to material escalation is determining if the delay impacted when the contractor needed to procure the materials, or if it impacted when the materials were used on site. A delay in the work performed on-site does not necessarily mean there is a delay in the procurement of the materials, as materials may have been purchased when planned and then stored. If making a claim for material escalation, the contractor may need to show why the materials were not purchased as planned. For example, perhaps storage was not a viable option due to space limitations or perishability.
The timing of the delay can also impact material escalation. A delay occurring at the beginning of the project, before any materials have been procured, is likely to have a larger impact on material escalation than a delay occurring later in the project, once much of the material has been procured.
It is important to understand the distinction between a delivery date and a purchase date when evaluating a claim for material escalation. A contractor may be able to purchase the materials on a supplier’s lot and then request partial deliveries from that lot as needed on-site. This scenario essentially results in the supplier providing free storage for a limited time for the contractor and could eliminate any escalation impacts. This scenario can be identified by reviewing the project documentation, including vendor quotes, or by interviewing contractor management or the supplier to determine their practices.
Material Escalation Quantum Methodologies
Like labor escalation, material escalation can be priced using direct measurement, the modified total cost method, or the total cost method. Under the direct measurement approach, the contractor would provide documentation showing that costs increased. Typical documentation to establish the planned costs includes vendor quotes for the materials and the anticipated dates of purchase and use of the materials. The contractor can compare these costs to the actual price paid for the materials and the timing of the actual transactions. The documentation for the actual costs incurred typically includes a purchase order, a vendor invoice, receiving tickets, and proof of payment.
The requirements for using a modified total cost approach to price material escalation are the same as discussed above regarding labor escalation. Utilizing the modified total cost method, the contractor deducts the actual price for materials from the bid price for the materials. The contractor then adjusts for nongovernment impacts. A modified total cost approach could include adjustments for quantity overruns or underruns, savings from sale of scrap, improvements for substitute materials, concurrent delays, or contractor-caused delays.
Overlapping Material Impacts
Like labor, claims related to materials can have overlapping impacts for both delay and changed work. Chart 5 above also can be used to summarize the cost impacts to materials, assuming entitlement and causation have been established.
When the actual material cost exceeds the bid material cost, but there is not a quantity overrun or change in materials purchased, the overrun is likely due to the price of the materials increasing, and the contractor could pursue an escalation claim. This scenario is denoted by the red “Delay” box. When the actual quantity exceeds the bid quantity, the contractor could be claiming costs for changed work. This scenario is denoted by the yellow “Disruption or Changed Work” box. If both delays and changed work occur, the contractor may have additional quantities from the changed work and be paying a higher rate than it bid for the materials. This scenario is denoted by the orange “Overlap” box in Chart 5. Again, determining where to include the escalated material cost differential on the additional quantities (1) with delay costs, (2) with changed work costs, or (3) calculated independently depends on the claim strategy and the facts of the case.
A unique aspect of claims involving materials is quantity discounts. For example, assume work is slowed by a government-caused delay and storage is not available for bulk-purchased materials, but a limited amount of material is needed for work that can be performed. In this scenario, the contractor may be able to claim escalation costs for materials purchased at a later period. However, the contractor also may lose out on quantity discounts since it will be making smaller lot purchases. To show a lost quantity discount, the contractor should provide support for the quantity discount, which typically includes vendor quotes and pricing sheets showing per-unit discounts for larger order quantities. The contractor will need to show that the actions of the government resulted in the contractor making multiple smaller purchases with a higher per-unit price than the contractor would have paid if it had procured the materials in a single large purchase. The contractor also may need to show that the vendor had sufficient material available at the time to purchase in bulk.
Alternatively, if a contractor chooses to mitigate the escalation and lost quantity discounts by purchasing and storing materials, the contractor may experience other cost impacts. For example, the contractor could claim costs for increased storage, additional handling, added security costs, additional insurance costs, increased freight or less-than-truckload charges, or increased shrinkage from longer storage duration. Financing cost (e.g., interest) is generally not recoverable on government projects but may be recoverable in state and local contracts.
Conclusion
Proving a delay and disruption claim in a government contract is not significantly different than proving a delay and disruption claim in the private sector. However, the statutes, regulations, and decisions of the BCAs, COFC, and CAFC apply restrictions to what a contractor must do in presenting and pursuing claims against the government, including claims for delay and disruption, which, if not followed, can produce harsh results. So, when preparing and presenting a claim to the government, contractors and their counsel and consultants should take heed of the opening warning in the Lodge decision that “Men must turn square corners when they deal with the Government.”
In the post-pandemic market for construction labor and materials, contractors potentially face significant cost impacts from price escalation when a project is delayed. The timing of the delay can have a meaningful impact on the potential escalation in costs that the contractor incurs. Further, the contractor may also need to provide support showing that the contractor had access to sufficient materials and labor to perform the work as planned. The examples discussed in this article are for illustrative purposes and are not an exhaustive list of possibilities. The facts of the case will determine the claim preparation and presentation strategy.
Branca and Foux would like to thank Joel Lesch, Director with LitCon Group, LLC, for his advice, insight, and review of portions of this article.