Requests for Equitable Adjustment: Taking Care of the Bottom Line

By Susan J. Moser and Samuel G. Davidson, Cherry, Bekaert & Holland, L.L.P. (CB&H)
Email: smoser@cbh.com or sdavidson@cbh.com

One significant difference between contracting with the federal government and contracting with commercial organizations is the government's insistence on the right to make changes in work during contract performance. In return for this right, the government provides the contractor access to an equitable adjustment to the contract price and/or schedule whenever a change is made that will increase or decrease the cost of contract performance or impact contract deliveries or completion.

The basic premise of the equitable adjustment is the definition of the cost impact or harm of a change on the contractor. The adjustment is measured by the actual cost to the contractor, and is the difference between the reasonable cost of contract performance without the change or changes and the reasonable cost of contract performance with the change or changes.

The burden of proof in demonstrating the need for an equitable adjustment lies in showing a need for an adjustment (harm), the reasonableness of the adjustment amounts requested (quantum), and the connection of these circumstances and amounts to the contract (entitlement).

Equitable adjustments are non-competitive pricing actions, so the proposed amount is cost or pricing data. If the change is valued at more than $650,000, then it is certifiable and covered by the Truth in Negotiations Act.
Advantages of the REA Process

Utilizing the request for equitable adjustment (REA) process can provide several significant advantages to the contractor, including:

Improve Profits - The biggest advantage to utilizing the REA process is getting what is rightfully yours. We all want to be responsive suppliers, but we must be compensated for changes in the contract, which increase our cost of completion.

Increase Competitiveness - Utilizing the REA process can be a subtle way to increase your competitiveness. Pricing what the proposal specifications call for and not including those things that are not asked for may mean the difference between winning and not winning the award. Let the changes process, on a non-competitive basis, correct for proposal deficiencies.

Avoid the Perception of Program Mismanagement - Utilizing the REA process also avoids the perception of mismanagement when overrun situations occur. Documented and negotiated changes increase the contract value for the additional work performed or redefine contractual periods of performance keeping the blame for cost overruns and untimely performance on the buyer, not on the contractor.

Identifying REA Situations
Recognizing equitable adjustment situations early is the key to success as identifying changed situations is the first step in preparing and submitting a REA. All contractors have a responsibility to recognize and promptly report changes in contract performance, which means that they must be aware of the negotiated contractual requirements. Deviations from what is contractually required and events that make performance more costly, take longer, or can be less efficient, must be immediately recognized and the appropriate actions taken.

There are two types of changes – express or formal changes and constructive changes.

Express or Formal Changes - Formal changes are not a problem to recognize. The Contracting Officer (CO) either issues a bilateral change that includes a price or schedule change agreed to by both parties before execution of the change, or a unilateral change issued prior to the two parties agreeing on price. During contract performance, the government can order any change within the scope of the contract and the contractor must perform.

Constructive Changes - On the other hand, constructive changes are generally more difficult to recognize since the government is usually unaware that it has changed the contract, and for that reason, unlike the express or formal change, does not tell the contractor that a change has occurred.

Constructive changes are up to the contractor to recognize, require the contractor to convince the government of the value added, and are almost always priced after the change has occurred when complete documentation and costing records are not available.

Common causes of constructive changes can include the following:

• Differing interpretations of the contract
• Acts of over-inspection
• Defective specifications that make performance of the contract impractical or impossible
• Failure of the government to disclose superior knowledge
• Acceleration of contract performance
• Government-furnished property (or information) that is late or unsuitable for its intended use
• The government’s failure to cooperate
• The government’s failure to order all of its requirements of a particular supply or service under a requirement contract
• The government’s exercise of an option after the options indicated contractual expiration date
• Variance in estimated quantities
• Untimely notice to proceed
• Differing site conditions

Delays
Delays affecting contract performance may also result in the need to prepare and submit a request for equitable adjustment, and can be categorized as either excusable or compensable. Excusable delays do not entitle the contractor to recover the cost of the delay, but do allow for extension or adjustment of the contractual delivery dates. These extensions in the contractual delivery dates protect the contractor from any late performance sanctions, such as termination for default or liquidated damages.

Excusable delays have been defined both contractually and through the courts, and may, under certain conditions, include such things as: labor strikes, weather, sovereign acts of the government, subcontractor or supplier delays, floods, fire, epidemic, embargo, and acts of God.

Compensable delays, however, entitle the contractor to both be paid for the cost of the delay and receive an extension of the contractual delivery dates. Common instances may include: delays in issuing the Notice to Proceed, making the work site available, the government’s interference with the contractor’s work, unreasonable delays in obtaining government approvals, contractually established funding, inspecting the work, or issuing changes orders.

The contractor is entitled to recover costs associated with delays that are unreasonable in duration. When the delay results from the government’s exercise of a contractual right, the contractor is entitled to compensation only for the unreasonable portion of the delay. No recovery is available where there are concurrent delays that are the fault of both the contractor and the government.

Timely Notice of a Constructive Change
To be able to respond to a contractor’s claim for an equitable adjustment, the government must know the amount of the claim (quantum), the fact that a claim is being submitted, and the basis for the claim (entitlement).

The Construction Contract Changes Clause at FAR 52.243-4 applies only to construction contracts and states that only costs incurred within 20 days from the time that the contractor gives notice are recoverable. The Notification of Changes Clause at FAR 52.243-7 requires that the contracting officer be notified of a constructive change promptly, usually within 30 days.

The government generally takes the position that no recovery is allowable unless the contractor has complied with the applicable contractual notification requirement. The boards and courts however, have taken a broader view, holding that the contractual notice requirements do not bar recovery by a contractor unless the government was prejudiced (harmed) by the contractor’s failure to provide timely notice, or unless the government would have taken corrective actions different from those actually taken had timely notice been given.

Susan is a Partner with CB&H and serves as the Director of the Firm's Government Contractor Services Group.

Sam is a Director with CB&H and a member of the Firm's Government Contractor Services Group.