Government Contracts Monitor
It Might Be Reasonable to Incur Costs for Three Months before the Notice to Proceed, But Be Careful
September 14, 2017
Contractors often find themselves caught between a rock and a hard place, where the rock is the need to get ready to perform the contract and the hard place is the lack of a notice to proceed. Firms facing this dilemma must determine whether and to what extent they should incur costs without a notice to proceed and how long those costs can reasonably be incurred. These issues lie at the core of the recent Armed Services Board of Contract Appeals (“Board”) decision in Pro-Built Construction Firm, ASBCA No. 59278.
The case involved a firm-fixed price task order for the design and construction of a police compound in Afghanistan. The contract was with Pro-Built, who had several other task orders with the Government on the same contract. The task order at issue was awarded in July 2011, and it had a 365-day performance period from receipt of the notice to proceed. The overarching contract contained a few notable provisions including a “Sequence of Design-Construction (Fast-Track)” that allowed the Contractor to start working on portions of the project that had been approved by the Government even while other portions were still pending approval. The scope of work also provided that any commencement of construction prior to the notice to proceed would “be at the Contractor’s own risk and expense.”
The notice of award letter to Pro-Built advised that it was required to account for “all contractor personnel, to include subcontractors and vendors performing services under this contract in the U.S. Central Command Area of Responsibility in the Synchronized Pre-deployment Operational Tracker.” While Pro-Built waited for the notice to proceed, it prepared its pre-construction submittal, quality control plan, accident prevention plan, and security plan. It also sent staff and subcontractors to the see the site, talk with the local people and village elders, and consider elements for the design including building codes and specifications.
The Government’s project engineer scheduled the preconstruction meeting in late October 2011, and informed Pro-Built that its major subcontractors needed to attend. He also advised that he expected to issue the notice to proceed after the meeting. Approximately two weeks after the preconstruction meeting, the government, in response to a Pro-Built inquiry about the status of the notice to proceed, indicated that “[u]nfortunately we have not been given direction from the Area Office on the way forward . . . .” Having still not received the notice to proceed and waiting more than month after it had submitted its pre-construction submittals, Pro-Built followed up with the Government again, this time referencing the 14-day response time provided for in the RFP. The Government responded the next day indicating, “[t]he Area Office is working on a possible reduction in the scope of work [and advising it] would keep them informed of anticipated notice to proceed issue date.” Finally, in mid-January, the Government terminated the task order for convenience of the government under FAR 52.249-2, having never issued a notice to proceed.
Shortly thereafter, Pro-Built submitted a termination for convenience settlement proposal, which ultimately amounted to $1,115,418 after subsequent revision and amendment. A Defense Contract Audit Agency (DCAA) audit questioned the entirety of the demand as unallowable under FAR 31.201-2 because Pro-Built did not comply with the requirements of FAR 52-211-10 when it incurred costs prior to receiving the notice to proceed. Specifically, the audit found it was “unreasonable” for Pro-Built to have incurred any costs, other than to meet bond, insurance, or administrative requirements, and it further questioned the validity of the direct labor and subcontractor costs, as well as the validity of the documents submitted in support thereof.
The Contracting Officer ultimately offered a settlement of $48,972, which Pro-Built declined. It then submitted a certified claim seeking the full $1,115,418. Pursuant to FAR 49.109-7(d), the Contracting Officer issued a settlement by determination in the amount of the prior settlement offer ($48,972) and the claim was then litigated to the Board.
The Board ultimately sustained Pro-Built’s claim, despite some glaring evidentiary issues. Contrary to the Government’s assertion of inadequacy, the Board found that Pro-Built’s lack of a sophisticated accounting system and formal documentation of every dollar spent on labor costs was customary for contractors in Afghanistan. The Board further noted that it was customary practice to hire project personnel with employment contracts that were project specific and to pay them monthly salaries without requiring detailed time sheets.
Despite the fact that the evidence was contradictory or incorrect as to some of the direct labor and subcontractor costs being sought, the Board ultimately found that a portion of the costs Pro-Built incurred in preparation to perform the Contract were reasonable. Noting that a “termination for convenience of a fixed-price contract has the general effect of converting the contract into a cost-reimbursement contract,” the Board found the costs in “preparing to perform [were] reimbursable.” Citing FAR 49.201(a), the Board recognized that the test for determining “fair compensation [was] a matter of judgment . . . [and that] the use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.” In light of the local construction labor market and security situation, the Board accepted Pro-Built’s position that it was necessary to retain key employees in advance of bidding in order to “ensure the ability to complete the project.”
Reasonableness has its limits, however. The Board’s resolution of the matter turned on one remaining question: for how long was it reasonable to incur costs to keep this labor force on standby without receiving a notice to proceed? Put another way, for what portion of the time period for which Pro-Built sought costs could it recover? After noting that some of the labor force was ultimately allocated to other jobs, the Board found that three months from the time of the award was a reasonable time frame. As a result, the Board awarded Pro-Built a total of $338,708.47 for the three-month time period ($173,965.83 in direct labor costs, $90,300 in subcontract costs, $17,020 in undisputed DBA insurance costs, $24,471.87 in G&A expense and $23,075.77 in profit). Based on the facts of the case, the Board found it was unreasonable for Pro-Built to continue incurring any additional labor related costs after three months without receipt of the notice to proceed.
The big takeaway here? When it comes to standby costs, be reasonable--and be prepared to show you’ve been reasonable. The three-month period allowed here is not a hard and fast rule, but it does provide a good rule of thumb for the outside limits of reasonableness (the reasonable time period for contracts to be performed in less challenging environments might be significantly shorter). As time passes, ask yourself whether it is still reasonable to believe the notice to proceed is coming and whether there is a way to allocate some of the standby costs to other projects in the interim. Making reasonable business decisions and documenting those decisions and the bases for them can go a long way with the Board in the event the Government terminates the contract and does not to reimburse you for your costs.
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