What Is “Fair Compensation” Following Termination for Convenience by the Government?
By Amandeep S. Kahlon, Bradley
The Armed Services Board of Contract Appeals (ASBCA) recently tackled a contractor’s claim for pre-construction costs following termination for convenience by the U.S. Army Corps of Engineers. In Pro-Built Construction Firm (June 1, 2017), the Board addressed a dispute arising out of a 2011 contract to construct a police station in Afghanistan. Eight months after executing the contract, but before issuing the notice to proceed (NTP), the Corps terminated the project over security concerns in the area. Pro-Built sought payment for $1.1 million in pre-construction services, which included subcontractor payments and standby costs for employees and workers for the entire eight-month period. The Corps rejected Pro-Built’s claim arguing, in-part, that it was unreasonable for the contractor to incur costs prior to the issuance of the NTP.
The ASBCA disagreed with the Corps of Engineers and awarded Pro-Built $338,708.47 in termination costs. The Board noted that the termination of the contract had the general effect of converting the contract into a cost-plus reimbursement agreement and entitled Pro-Built to reimbursement for all reasonable costs incurred. For the Board, the determination of what costs were reasonable and thus reimbursable was a fact-intensive inquiry.
In Pro-Built’s circumstances, construction work performed prior to the issuance of the NTP was not recoverable because the contract made clear such work would be performed at-risk. In contrast, standby labor costs and subcontractor costs incurred in preparation for the issuance of the NTP could be recoverable. The ASBCA was persuaded by testimony from Pro-Built’s expert and fact witnesses that market conditions in Afghanistan made it reasonable to staff up prior to issuance of the NTP and that the preparation costs were not related to construction services.
However, the ASBCA was troubled by some of Pro-Built’s cost accounting for certain employees and the claim for all eight months of costs prior to termination. The Board did not think it was reasonable for Pro-Built to incur standby and subcontractor costs for the full eight-month period when it initially anticipated issuance of the NTP one month after contract execution. The record also showed that several Pro-Built employees were shifted onto other projects a few months after execution when no NTP was forthcoming. As a result, the Board significantly reduced Pro-Built’s claim to allow only for recovery of three months of standby/preparation costs.
There are a few takeaways from the Board’s opinion. First, government contractors should be aware of their rights following a termination for convenience. Even prior to mobilization, there are significant costs incurred to develop and prepare for a project. If a project is terminated, a well-developed claim may include pre-mobilization costs. Second, government contractors should consider carefully how they present their claims for fair compensation when terminated for convenience. In the Pro-Built case, the Board expressed concern about the “all-or-nothing” approach taken by Pro-Built (which sought all eight months of costs) and the Corps (which denied all costs summarily) in presenting their competing arguments. This forced the Board to make the reasonableness determination on its own without guidance from the parties. Pro-Built and the Corps, for that matter, may have been better served by providing additional recovery alternatives to possibly adduce a more favorable opinion from the Board.
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