To Settle or Dispute?

I think Yes to both questions.

I agree.  Yes to both

Vern Edwards said:

Suppose further that the CO has been told by a reliable person that the average board case costs the government $50,000 to litigate before a board, more if the appeal went to the Court o Federal Claims.

Is this $50,000 in additional costs? Or is it for time spent by Government employees who get paid either way?

Don Mansfield said:

Is this $50,000 in additional costs? Or is it for time spent by Government employees who get paid either way?

It would be the cost of time spent by government employees on litigation that would otherwise have been spent for other purposes. Let's call it a cost diversion, rather than additional costs.

Vern Edwards said:

The CO does not think that the government breached.

Before answering the first question, on what basis for this (hypothetical?) situation does the KO “think” this?

And has the the KO determined that the impact is $40,000, as claimed?

I can not help myself as this reaches into my vivid memories when I was a Contracting Officer.   My "I think" response to the questions is bolstered by the memories and I offer this.

I think that a CO in such a situation has, or at least I hope so, invovled others most especially legal counsel (a reliable person?) for advice and counsel.  What I may think as a CO as just is not always looked at the same by others within the bureaucratic world.

The memories....

Almost the exact situation but involving hundres of thousands of dollars where pursuant to the advice of the Judge Advocate Generals office the difference of $50,000 was settled on after I as the CO walked out of negotiations (mediation if you will) after the issuance of a final CO decision.  Walked out only to have the JAG attorney follow me and have a strong conversation about a deal rather than going to court over a $50,000 difference.   At issue, I as the CO had evidence, I thought strong  evidence, that the contractor in submitting a certified claim had misrepresented factual cost information.   A matter that the JAG office was not willing to pursue as in the end the amount was not "large enough" to warrant efforts of litigation on the claim and misrepresentation.

And...

A contractor who, as discovered by a state agency, was cooking the books on their state accident insurance payments.  Essentially almost all of the effort was related to contracts awarded by one Federal agency. And those contracts were negotiated contracts.  As much as I hate to say it think 8(a).   Upon discovery the matter was also referred to the US Department of Justice with a specific and detailed response from them that while criminal intent was present (with regard state law but Federal laws of fraud related to contracting matters and 8(a) regulations) the dollar amount (calculated at a low 7 figures) was not large enough for their office to consider handling and left it in the states hands. To my knowledge the state through criminal charges never recouped the money as their abilities to extradite from a foriegn country were nil without the assistance of the Feds.

Two events in my career that opened my eyes how money is valued when it comes to bureaucratic processes.

joel hoffman said:

Before answering the first question, on what basis for this (hypothetical?) situation does the KO “think” this?

@joel hoffman I interpret your question to be: Why does the CO think the government did not breach?

Here's the case:

• The CO has rejected the contractor's first delivery as nonconforming. The contractor asserts that the rejection was improper, that its delivery did conform to the specification, and that the demand for corrective action was a change.
• The contractor went on record, but complied with the CO's demand for corrective action, and now seeks an equitable adjustment of $40,000 pursuant to the Changes clause.
• The agency attorney says that the specification might be ambiguous, that the board of contract appeals might decide that the demand for corrective action was, in fact, a change, and might remand the case to the parties in order to determine quantum.
• The CO thinks the specification is clear and unambiguous and that the demand for corrective action was not a change.

Does that answer your question?

Vern Edwards said:

The agency's lawyer says it's a close question and that success before the board of contract appeals or the Court of Federal Claims is not certain, but is possible.

Assuming the agency has other lawyers, what would they say if asked for their opinions?

Just now, Don Mansfield said:

Assuming the agency has other lawyers, what would they say if asked for their opinions?

The same as the first lawyer. "The board might find the spec to be ambiguous."

Vern Edwards said:

@joel hoffman I interpret your question to be: Why does the CO think the government did not breach?

Here's the case:

• The CO has rejected the contractor's first delivery as nonconforming. The contractor asserts that the rejection was improper, that its delivery did conform to the specification, and that the demand for corrective action was a change.
• The contractor went on record, but complied with the CO's demand for corrective action, and now seeks an equitable adjustment of $40,000 pursuant to the Changes clause.
• The agency attorney says that the specification might be ambiguous, that the board of contract appeals might decide that the demand for corrective action was, in fact, a change, and might remand the case to the parties in order to determine quantum.
• The CO thinks the specification is clear and unambiguous and that the demand for corrective action was not a change.

Does that answer your question?

Pretty much. Thanks! 
appears that the KO hasn’t made a convincing case to its lawyer.

Sometimes contracting and technical people are so close to an issue, they don’t see faults and issues.  I would ask other technical people for their opinions.   But if the contractor interpreted the specification a certain way, it’s logical that the court might see the ambiguity.  Going with the lawyers position makes sense.

On 6/28/2024 at 9:27 AM, Vern Edwards said:

First question: Would it be appropriate for the CO to consider settling rather than denying the claim on the ground that settlement at $40,000 would be a better deal for the taxpayers than litigating, even if the government might win? In other words, would the cost of litigation be a valid CO consideration?

Second question: Would it be within the CO's authority to settle on that ground?

Those were my questions. Yes or No would work as answers. Yes or No with comments or explanations are welcome.

If the government thinks that its case for no ambiguity is weak, I’d say it is appropriate to settle the dispute.

The KO has the authority to settle the dispute.

joel hoffman said:

The KO has the authority to settle the dispute.

@joel hoffman

Does that mean that the CO has authority to pay a claim on the grounds that (1) the contractor is likely to appeal a final decision that denies the validity of the claim or the amount sought, (2) the outcome of litigation is uncertain, and (3) paying is likely to be less costly than litigating?

Vern Edwards said:

@joel hoffman

Does that mean that the CO has authority to pay a claim on the grounds that (1) the contractor is likely to appeal a final decision that denies the validity of the claim or the amount sought, (2) the outcome of litigation is uncertain, and (3) paying is likely to be less costly than litigating?

Ahh. I didn’t answer your specific questions.

I dont know. I do know that my KO’s would occasionally settle for somewhat more than our bargaining position in some cases in order to close the matter rather than have to significantly extend the life and cost of our offices in Saudi Arabia to litigate. We could have possibly ended up paying much more in settlement cost, plus interest.

This was at the end of the USACE Saudi Arabia Assistance Program back in 1987

Our cost to the Saudi Government was more than ten million dollars per month to maintain the remaining USACE staff and our offices and support contracts.

The Saudis paid all costs for the Assistance Program, including the Corps of Engineers’ direct and indirect costs.

On 6/28/2024 at 7:30 PM, Vern Edwards said:

It would be the cost of time spent by government employees on litigation that would otherwise have been spent for other purposes. Let's call it a cost diversion, rather than additional costs.

Ok, so "yes" to your question.

As a taxpayer, I would want to know what else would be done with the $50,000 in resources. If they were being used to defend against a $4 million claim, then I'm ok settling the $40,000 claim. However, if the $50,000 were to be used to pay employees whose job it was to defend against claims and there were no other claims to defend against, then I'd want the money to be used to defend against the $40,000 claim.

Don Mansfield said:

Ok, so "yes" to your question.

As a taxpayer, I would want to know what else would be done with the $50,000 in resources. If they were being used to defend against a $4 million claim, then I'm ok settling the $40,000 claim. However, if the $50,000 were to be used to pay employees whose job it was to defend against claims and there were no other claims to defend against, then I'd want the money to be used to defend against the $40,000 claim.

I generally agree with Don here. Even if there are some other claims to defend, the $40,000 claim would likely, at least in my organizations, be handled by employees whose normal duties include or are dedicated to resolving or defending claims.

Edit:

It also can send signals to contractors that the government might not defend against claims in based on the cost or resources required to do so.

It also may affect the morale of employees involved in administering contracts.

It also depends upon the specific circumstances. We don’t specifically know the strength of the KO’s thinking concerning interpretation of the contract requirement.

I do know that I occasionally had to convince some our organization’s legal counsel that a case is much stronger than they initially thought. Even Steve Feldman.

So, yes - my personal opinion is based upon my experience in handling and resolving controversies, REA’s and claims at the working level and at the higher level.

Don and Joel, how does FAR 33.204 factor in to your answers?

Retreadfed said:

Don and Joel, how does FAR 33.204 factor in to your answers?

Specifically? The contractor here has demanded a final decision. It’s a claim.

I agree with 33.204, including the use of arbitration when appropriate. We also had procedures in place to try to resolve controversies prior to a contractor elevating it to a claim.

All,

I appreciate your responses.

What I've been wondering is whether the government is engaging in too much litigation.

I've been reading a lot of solicitations, and many of them are badly written. The government likes to award "without discussions," which means that the parties get little chance to talk things over before contract award, clear things up, and reach a true meeting of the minds.

When conflicts arise, contractors may face unreasonable CORs. The CO may be located far away and unengaged. Disagreements arise and then comes an REA that leads to a claim or the disagreement goes directly to a claim.

I think COs may feel compelled to deny the claim, to "support" the COR and "fight for the taxpayer," which results in litigation. We don't really know the cost of all that litigation (almost a thousand board decisions per year).

Litigation increases the total annual cost of supplies, services, and construction. I think there is every reason to believe that much of that litigation is wasteful, even when the government wins.

That's why I wonder whether it might be cheaper in the long run to settle and pay rather than litigate, even if the CO thinks they're right. I wonder if the CO should consider the costs of litigation before denying an REA or a claim.

Is the CO obligated in some way to issue a final decision, deny a claim, and fight when he or she thinks they are right? Are they obligated to fight even if they think the fight would cost more than it's worth? Should COs weigh and balance the likely cost of litigation against the cost of settling when making a decision? Should they back off a final decision that they made if the contractor decides to appeal and the litigation would cost more than the settlement.

There are people wondering if FAR should make a clearer policy statement about that in order to give COs some support. Something like: _COs should [_or may] weigh the cost of litigation against the cost of settlement before making a final decision to deny a request for equitable adjustment or a claim.

Again, I appreciate your responses.

Vern

Retreadfed said:

Don and Joel, how does FAR 33.204 factor in to your answers?

It doesn't. The way I interpreted Vern's scenario, the contractor would not be interested in ADR. In real life, ADR should be considered.

Vern,

Two thoughts I had earlier that contribute to the litigious environment but didn’t post. One is many CORs have other duties and don’t devote sufficient time to contract monitoring.  When conflicts arise, CORs don’t admit they weren't diligent  They are quick to point their finger at the contractor and are defensive.   The second is many COs just don’t want to compromise and settle.  Some, particularly those with years of experience, want to fight the contractor to show their toughness.  Others shun the responsibility of deciding a claim and want to be told or directed by a board or a mediator on settlement.

In order to make a change, either FAR coverage or strong policy by OMB needs issued.

Vern, I didn’t mention it but in the various Corps of Engineer Districts (and the Division) that I worked for, we had personnel in the Construction Division at District or Division level assigned to make an independent review, evaluation and assessment of contractor claims, REAs and disagreements from  the assigned Contract Admin Office and/or the KO.

It depended upon who the action was for. We would generally involve and coordinate with Office of Counsel and the KO.

We were supposed to review each situation from a neutral viewpoint. For issues short of dispute status that had merit or partial merit, we would so advise the field office. If the field office couldn’t resolve it, we would become involved in the negotiation with the contractor.

If a pre-claim issue was elevated to us that had no merit, we could advise the contractor.  That would sometimes  resolve the issue.

All claims were routed through our Construction Claims section for evaluation and coordination with Legal and the KO. If the claims had no merit, merit or partial merit, we would advise the KO in order to prepare a KO decision and/or for us to negotiate, as appropriate.

There's more to it than I described but an important aspect is an independent review of issues at lower levels.

Vern Edwards said:

I think COs may feel compelled to deny the claim, to "support" the COR and "fight for the taxpayer," which results in litigation.

I agree with the general thrust of your thesis.  However, while there may be problems caused by COs supporting CORs, in my experience there are more problems with contracting officers kow towing to DCAA.  I don't know how many times I have heard contracting officers say that once DCAA has taken a position on something, the CO cannot go against DCAA.  This causes needless litigation.

Over on the other side of the table, I have a hard time imagining any contractor (other than the smallest) litigating $40,000. I think there would be significant hesitations over litigating $400,000.

Ten years ago, while employed at a large DOD contractor, I was told our legal department had a rule of thumb: assume $2 million in (unallowable) attorney's fees and two years to get a decision. If the matter wasn't worth the time and expense, let it go.

I would have advised the CO in this situation to call the contractor's (assumed) bluff.

Edited to add: Oftentimes these disputes settle between the filing of the COFD appeal and the trial. I don't have the stats but I believe settlements are a common occurrence, at least based on the number of "decisions" that announce settlement.

Just now, Retreadfed said:

I don't know how many times I have heard contracting officers say that once DCAA has taken a position on something, the CO cannot go against DCAA.  T

From Government Contract Disputes § 4:9 Contracting Officer's Independence:

Quote

The function of a CO in deciding disputes under or relating to a contract is a “quasi-judicial function of deciding disputes concerning questions of fact.” A contractor is “entitled to a finding by the contractually agreed officer and that a decision by someone else is a nullity.”

This function of CO independence is of importance whenever the CO is exercising discretion, as in the case of terminations for default.

Vern Edwards said:

Is the CO obligated in some way to issue a final decision, deny a claim, and fight when he or she thinks they are right? Are they obligated to fight even if they think the fight would cost more than it's worth? Should COs weigh and balance the likely cost of litigation against the cost of settling when making a decision? Should they back off a final decision that they made if the contractor decides to appeal and the litigation would cost more than the settlement.

I think a CO's obligation is to settle and not fight as supported by the guiding principles already mentioned - FAR 33.204.  Added is FAR 1.602-2  "...contracting officers should be allowed wide latitude to exercise business judgment. ..."  In my personal world my business judgement is to consider associated costs of a fight or settlement, government contracting should not be any different.  Why not back off, again it is something that is done in the real world.  Outside of my government activity, and with siginifcant organizations, backing off has occurred with regard to litigation. 

My comments also highlight for me  a slight disagreement with Don's comment regarding "as a taxpayer".   Again at the personal level it seems I can always find something productive to do if I am not engaged in a fight and I would hope the same is true to some extent with regard to the $50,000 regarding a dispute, it could be spent on something worthwhile.   The $50,000 will get spent and I truly hope on something good.  I know a pie in sky as the Federal government has plenty of places besides fighting disputes to run through my tax dollars.

Just now, here_2_help said:

Over on the other side of the table, I have a hard time imagining any contractor (other than the smallest) litigating $40,000. I think there would be significant hesitations over litigating $400,000.

@here_2_help Your imagination needs a booster shot.

You don't need a lawyer to go to a board of contract appeals, and there is a small claims (expedited) procedure. See the ASBCA's 2023 nine-page decision, American Technical Services, iInc., ASBCA Nos. 6354 and  6355, in which the contractor sought $12,728.68 and the Government sought $36,661.93. (The government withdrew its final decision and claim and the Board declared it to be moot.)  The board denied the contractor's appeal.

It took me all of two minutes to find that online after I read your post. There are plenty of small claims.

Maybe, to borrow words from Bob Dylan, your imagination in this regard is "limited and underfed".

Vern, I am in complete agreement with your post concerning contracting officer independence.  I have made the same point to contracting officers regarding DCAA findings, but generally to no avail.  I think IG oversight is something that is lurking in the background causing COs not to go against DCAA for fear of an adverse IG finding somewhere down the line.  Another but lesser factor is congressional deference to auditor "infallibility."  I think the overarching point is that some COs are substantially risk averse.

Retreadfed said:

Vern, I am in complete agreement with your post concerning contracting officer independence.  I have made the same point to contracting officers regarding DCAA findings, but generally to no avail.  I think IG oversight is something that is lurking in the background causing COs not to go against DCAA for fear of an adverse IG finding somewhere down the line.  Another but lesser factor is congressional deference to auditor "infallibility."  I think the overarching point is that some COs are substantially risk averse.

I think the problem is practical. I think that most COs lack the knowledge of managerial accounting and government cost principles and cost accounting standards they would need to confidently argue with DCAA. They are offered a lot of opinions, and there are plenty of books, but even then COs lack the practical know-how they would need to be confident in their positions. And their bosses are often unwilling to resist DCAA recommendations for similaer reasons. Going with DCAA is safe. If you go against you have to be prepared to make an argument that you may not have the know-how to make.

H2H, I worked on some large DOD Systems contracts with one of the top DOD contractors that I believe you worked for. And other Systems contracts with one of the three largest US engineering and construction contractors.

They both avoided filing claims in lieu of submitting REAs and/or less formal methods through the Partnering process. One REA from your former firm was for $63 million. We negotiated a settlement fairly expediently after the REA submission (for a fraction of that).

Vern Edwards said:

@here_2_help Your imagination needs a booster shot.

You don't need a lawyer to go to a board of contract appeals, and there is a small claims (expedited) procedure. See the ASBCA's 2023 nine-page decision, American Technical Services, iInc., ASBCA Nos. 6354 and  6355, in which the contractor sought $12,728.68 and the Government sought $36,661.93. (The government withdrew its final decision and claim and the Board declared it to be moot.)  The board denied the contractor's appeal.

It took me all of two minutes to find that online after I read your post. There are plenty of small claims.

Maybe, to borrow words from Bob Dylan, your imagination in this regard is "limited and underfed".

Vern, ATS is a small engineering firm with less than 200 employees (according to LinkedIn). 

I agree there is an expedited procedure available.

@here_2_help I know what ATS is. I don't see how that's relevant.

here_2_help said:

I think there would be significant hesitations over litigating $400,000.

I don't agree with you. What on earth does "significant hesitations" mean? I suspect there are almost always hesitations about litigating. How much will it cost? What if we lose? And why do you bother to tell me that you agree that an expedited procedure is available? How could you not agree? The procedure is published and is common knowledge. I don't need your assurance.

In any case, what does hesitation to litigate have to do with my inquiry? Go back and read my questions. They were not about game theory.

Vern Edwards said:

I think the problem is practical. I think that most COs lack the knowledge of managerial accounting and government cost principles and cost accounting standards they would need to confidently argue with DCAA. They are offered a lot of opinions, and there are plenty of books, but even then COs lack the practical know-how they would need to be confident in their positions.

My mentor as an intern encouraged me to take two cost accounting courses at the local college.  Sound advice and I thanked him 20 years later when he retired.  That helped me several times over my career in understanding audit findings and having meaningful conversations with the auditors.  Also in many instances, I had the auditors participate via telephone calls in meetings with contractors.

On 7/1/2024 at 10:48 AM, here_2_help said:

Oftentimes these disputes settle between the filing of the COFD appeal and the trial.

Looking at the decisions at the ASBCA website, that appears to be an accurate statement.  To add to this, in my experience, matters can be settled after a claim is filed but before a COFD is issued.  Many times having a set of eyes other than those of the CO look at an issue can lead to a resolution.