Equitable adjustments and other takeaways in the Armed Services Board of Contract Appeals’ Derian decision
In Appeal of Derian, Inc., ASBCA No. 62957 (August 25, 2023), the Armed Services Board of Contract Appeals provided detailed guidance on how to price a deductive change order and what evidence should be utilized to establish the amount of a deductive change.
At the outset, the Board stated the general principle that a contract equitable adjustment should safeguard contractors and the government against the increased and decreased costs engendered by modifications adding or deleting contract work. As such, the equitable adjustment must be closely related to and contingent on the altered position the contractor finds itself in because of the modification. Thus, the government is entitled to a downward adjustment in the contract price only to the extent any reduction in the contract work decreases the contractor's costs of performing the contract, i.e., the credit is measured by the contractor's net cost savings from the deleted work. Further, the government has the burden of proof as to the extent to which contract requirements were reduced and the savings resulting from those reductions. Unless the government demonstrates it is entitled to a price reduction for the deleted work, the contractor is entitled to its full contract price.
To determine the correct price reduction, the trier of fact must attempt to reconstruct as accurate an estimate as possible of the value or cost of the unperformed work. To do so, the trier of fact considers the contractor's current estimate or "would have cost" project rather than the original proposal prices. In Derian, the Board accepted the government's estimated cost of the deleted work as an "appropriate starting point" to determine the value of the reduced work since the government based that estimate on Derian's estimated costs to complete the work and not Derian's proposed price. The government's calculation was based on Derian's documented and acceptable costs from its proposed and various cost-estimating tools, methods, labor rates, and indexes. The information supporting the government calculation included the RSMeans Unit Price Book, Davis-Bacon abor rates, and material prices from quotes, supply catalogs and previous estimates. The Board made adjustments to the government calculation for certain errors Derian identified such as work Derian performed prior to issuance of the deductive change and overstatements of labor necessary to perform discrete work items. The difference between the overhead and profit rates applied to the direct costs by the government and Derian was negligible and the Board accepted the government's proposed rates.
The Board also allowed Derian a credit for time spent in discussions with the government and responding to various information requests from the government pertaining to establishing the value of the terminated work. The Board noted that contract administration costs are "presumptively allowable if they are reasonable and allocable" and not incurred in connection with pursuing a CDA claim. The Board found documentation sufficient to support the claimed hours and costs incurred by two Derian representatives, i.e., monthly timecards indicating the numbers of hours each month worked on the project. However, the Board did not find supporting documentation sufficient for a third individual since the evidence consisted of hours listed on a spreadsheet without any supporting documentation. The Board pointed out that the contractor bears the burden of providing supporting documentation showing the claimed costs have been incurred and are allocable to the contract, and in the instance of the third individual, Derian failed to meet that burden.
The teaching lesson from this case is that deductive changes are priced based on information at the time of the deduction, not at the time the contractor's proposal was submitted. This may result in a loss greater than the original estimated cost of the work if material prices are rising during the course of contract performance. Further, a contractor should carefully segregate and document the time it spends responding to the deductive change if it wants to have those contract administration costs considered in pricing the deductive change.