A government inspector, and the inspection process, can have a dramatic effect on the profitability of a construction contract. Although the government has the right, and the responsibility, to assure that the project is built in conformance with the plans and specifications, the government is not permitted to use the inspection clause to exact a higher standard of performance than required by the contract, or to obtain the performance of additional work for which it does not intend to pay the contractor. Most assuredly, the inspection clause is not to be used to punish a contractor for what the government perceives to be performance deficiencies.
As recognized in Astro Dynamics, Inc., ASBCA No. 28381, 88-3 BCA 20,832 (1988), the government’s use of different and more stringent inspection standards or tests than is required by the contract is improper, amounts to a constructive change, and entitles the contractor to recover its increased costs of performance. Similarly, rejection of a contractor’s work on the basis of different and more stringent inspection standards than those required by the contract is improper as well. Process Equip. Co., NASABCA No. 166-3, 67-1 BCA 6,142 (1967); General Motors Corp., ASBCA No. 10418, 65-2 BCA \4,885 (1965); Al Johnson Constr. Co., ENGBCA No. 4170, 87-2 BCA 19,952 (1987). The same result occurs where the government requires the contractor to perform at a higher standard than is recognized in the industry. D.E.W. Inc., ASBCA No. 37232, 93-1 BCA 25,444 (1993); Forsbera & Gregory Inc., ASBCA No. 17598, 75-1 BCA 11,176 (1975); Marvin Eng’g. Co., ASBCA No. 25460, 82-2 BCA 16,021 (1982).
In circumstances involving multiple punch list inspections, for example, the government has been found responsible for the incurred extra costs. The rule to be applied was enunciated by the Board in W.F. Kilbride Construction, Inc., 76-1 BCA 11,726 (ASBCA 1976). There the ASBCA (at p. 55,884) declared that:[I]f inspection procedures are confusing and vacillating, and the contractor’s work is subjected to multiple inspections and to differing standards by different officials, an equitable adjustment should be granted under the Changes clause for any delay or increased costs. A similar result follows if an inspector is arbitrary and capricious in requiring work not required by the contract . . .
The rule stated by the Board in Kilbride has long been recognized, and has repeatedly been reaffirmed. See, e.g., Randall H. Sharpe, 79-1 BCA 13,869 (ASBCA 1979); Appeal of United States Instrument Co., WDBCA 940, 3 CFF 814 (1945); WRB Corp. v. United States, 183 Ct. Cl. 409 (1968), citing Roberts v. United States, 174 Ct. Cl. 940, 357 F.2d 938 (1966); and Adams v. United States, 175 Ct. Cl. 288, 358 F.2d 986 (1966).
A long line of well-established case law holds that it was, and is, the government’s burden to establish that the work it rejects (or penalizes) was, in fact, deficient, in the sense that it was not in conformance with the contract requirements. Southwest Welding and Mfg. Co. v. United States, 188 Ct. Cl. 925, 413 F.2d 1167 (1969); Hardeman-Monier-Hutcherson, ASBCA No. 11785, 67-1 BCA 6210 (1967); Randall H. Sharpe, supra; F.P. Lathrop Construction Co., ASBCA No. 25800, 83-2 BCA 16,790 (1983); Ed Goetz Painting Company, DOT BCA No. 1018, 80-2 BCA 14,554 (1980); Tamp Corporation, ASBCA No. 25766, 84-2 BCA 17,398 (1984); J.G. Enterprises, Inc., ASBCA Nos. 27287 and 28033, 84-1 BCA 17,106 (1984); Orbas & Associates, ASBCA No. 32922 et al., 87-3 BCA 20,051 (1987).
In North American Maintenance Company, 78-2 BCA 13,316 (ASBCA 1978), this Board struck down all of the government’s “deficiency deductions,” without extended analysis of individual contractor deficiencies, because the government’s use of many different, largely untrained inspectors was inherently unreasonable. The Board said there that “employing 40 inspectors with varying standards of what constitutes adequate performance” (78-2 BCA at p. 65,133) was an unreasonable inspection system. To paraphrase the Board’s observation, in a case in which it disallowed deficiency deductions and the assessment of reprocurement costs: “In compiling the deficiency listing, the [inspectors were] not inhibited by the requirements of the specifications for [they] had never read them . . .” J.G. Enterprises, Inc., supra, 84-1 BCA at p. 85,154. As the ASBCA has said, in another case in which it found the government’s inspection actions unreasonable: “We do not mean to imply herein that the visitations by [government] personnel were deliberately undertaken to harass the appellant . . . but the effect was the same whether intended or not.” G.W. Galloway Company, 73-2 BCA 10,270, at p. 48,500 (ASBCA 1973).
When a contractor is subjected to confusing and vacillating inspection procedures, the result is excusable delay to the contractor. Appeal of United States Instrument Co., WDBCA 940, 3 CFF 814 (1945). A similar result can be expected when the contractor is subjected to multiple inspections (reviews) of the same work by different government representatives, and the previous approval is followed by subsequent rejection. WRB Corp. v. United States, 183 Ct.Cl. 409 (1968), citing Roberts v. United States, 174 Ct.Cl. 940, 357 F.2d 938 (1966); and Adams v. United States, 175 Ct.Cl. 288, 358 F.2d 986 (1966). These differing standards by different officials entitled the contractor to an equitable adjustment under the Changes clause for any delay or incurred costs. W. F. Kilbride Construction, Inc., ASBCA No. 19484, 76-1 BCA 11,726.Read More
A contractor may recover for an increase in material costs where its performance is extended as a result of owner-caused delays. J.D. Hedin Constr. Co. v. United States, 347 F.2d 235 (Ct. C1. 1965); Canon Constr. Corp., ASBCA No. 16142, 72-1 BCA 9,404 (1972); Berkeley Constr. Co., VABCA No. 1962, 88-1 BCA 20,259 (1988). In order to recover, the contractor must show that the material could not have been purchased earlier. Paccon, Inc., ASBCA No. 7890, 65-2 BCA 4,996 (1965). Once justified, material escalation costs are calculated in a manner similar to labor escalation costs.Read More
A contractor’s actual costs are presumed to be reasonable. In re Michael, 04-1 BCA 32,497; Bruce Constr. Corp. v. United States, 163 Ct. C1. 97, 401 (1963); South Georgia Cleaning Svcs., Inc., ASBCA No. 38546, 93-2 BCA 525,800 (1992). Having proven actual costs, the burden then shifts to the government to prove that the costs were unreasonable. Blake Constr. Co., Inc., GSBCA No. 1176, 66-l BCA 5589 (1966). Consequently, if the government presents no evidence to overcome this presumption, the contractor’s actual costs are to be accepted. Green’s Indus. Painting, ASBCA No. 26569, 82-1 BCA 5,786 (1982). As enunciated in Blake Constr. Co., Inc., 66-1 BCA 5589 at 26,119, the government has a difficult task:
Since the presumption is that a contractor’s claimed cost is reasonable, the Government must carry the very heavy burden of showing that the claimed cost was of such a nature that it should not have been expended, or that the contractor’s costs were more than were justified in the particular circumstance.Read More
The standard government audit clause, found in FAR 52.214-26, provides the following:
Audit and Records–Sealed Bidding (Oct 1997)
(a) As used in this clause, “records” includes books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form.
(b) Cost or pricing data. If the Contractor has been required to submit cost or pricing data in connection with the pricing of any modification to this contract, the Contracting Officer, or an authorized representative of the Contracting Officer, in order to evaluate the accuracy, completeness, and currency of the cost or pricing data, shall have the right to examine and audit all of the Contractor’s records, including computations and projections, related to–
(1) The proposal for the modification;
(2) The discussions conducted on the proposal(s), including those related to negotiating;
(3) Pricing of the modification; or
(4) Performance of the modification.
(c) Comptroller General. In the case of pricing any modification, the Comptroller General of the United States, or an authorized representative, shall have the same rights as specified in paragraph (b) of this clause.
(d) Availability. The Contractor shall make available at its office at all reasonable times the materials described in paragraph (b) of this clause, for examination, audit, or reproduction, until 3 years after final payment under this contract, or for any other period specified in Subpart 4.7 of the Federal Acquisition Regulation (FAR). FAR Subpart 4.7, Contractor Records Retention, in effect on the date of this contract, is incorporated by reference in its entirety and made a part of this contract.
(1) If this contract is completely or partially terminated, the records relating to the work terminated shall be made available for 3 years after any resulting final termination settlement.
(2) Records pertaining to appeals under the Disputes clause or to litigation or the settlement of claims arising under or relating to the performance of this contract shall be made available until disposition of such appeals, litigation, or claims.
(e) The Contractor shall insert a clause containing all the provisions of this clause, including this paragraph (e), in all subcontracts expected to exceed the threshold in FAR 15.403-4(a)(1) for submission of cost or pricing data.Read More
The Federal Government has very clearly defined rules concerning what costs are allowable and what cost are not allowable. For instance, in the simple calculation of the Eichleay Formula which is used for Unabsorbed Home Office Overhead some of the costs which a contractor may normally report in accordance with generally accepted accounting practices in terms of home office overhead may not be allowable by the Federal Government.
Allowable costs are defined in the FAR as costs that are reasonable and chargeable to the contract. (See FAR 31.201-2). Although this is a broad definition, FAR Section 31 specifically addresses many types of costs a contractor may incur. It is important to note that these cost principles apply not only to cost-reimbursable contracts, but also to fixed- price contracts. When applied to fixed-price contracts, these principles govern primarily extended overhead calculation and negotiation of changes over $100,000.00 in value.
One of the elements of allowability is reasonableness. To be reasonable, the cost must:
* be generally recognized as an ordinary or necessary part of the business;
*follow sound business practices;
*comply with federal, state, and local laws; and
*be consistent with the contractor’s established practices.
The determination of reasonableness of a particular cost depends on all of the circumstances and facts concerning the cost.
The other element of allowability is allocability of the cost to the contract. Allocability involves a determination as to whether the cost can be charged to the contract. To be allocable to the contract, the cost must:
*be specifically incurred for the contract;
*benefit the contract and other work; and
*be necessary for the overall operation of the business.
If a cost is reasonable and allocable (chargeable) to the contract, then it will be allowable, unless specifically prohibited by the cost regulations.
Probably the best way to define unallowable costs is to list the ones specifically determined by the government in the FAR to be unallowable. The following costs are considered unallowable as noted in FAR Section 31:
* bad debts
* contributions or donations
* fines and penalties
* losses on other contracts
* alcoholic beverages
* business organization costs (incorporation, reorganization, merger)
There are a number of other costs which may or may not be allowable depending upon the facts and circumstances concerning the cost. Examples of these costs, which are described in FAR Section 31, include:
* employee morale, health, welfare (generally allowable)
This is an area which requires guidance from a professional familiar with the cost principles, the FAR, and judicial rulings on allowability. If an auditor raises questions about a specific cost, you should give as much background and explanation as to the reasonableness of the cost and the reason it is charged to this contract. For those costs that are unallowable, by regulation, the government will not consider any argument to include them.
The cost principles in FAR Section 31 apply to construction contracts whenever the contractor submits cost or pricing data in support of a proposal, modification, or change order which will be negotiated under the contract. For contract modifications, these principles will be utilized by the government on any proposal over $100,000.00. All proposals over $500,000.00 require an audit to be performed and the government’s auditors also will use these cost principles in evaluating your costs.Read More