Assumptions Will Make a Fool out of You and the Reasonableness of your Delay-Related Costs Claim

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In one of its recent opinions, Kellogg Brown & Root Services, Inc. v. Sec’y of the Army, the Federal Circuit issued new guidance on what contractors must show to prove the reasonableness of costs incurred following an (alleged) government-caused delay.

The U.S. Army (the “Army”) and Kellogg Brown & Root Services, Inc. (“KBR”) contracted for KBR to deliver thousands of trailers to Iraq by an agreed-upon deadline. In turn, KBR entered into a fixed-price subcontract with First Kuwaiti Co. of Kuwait (“Kuwaiti”) to transport the trailers. The Army was tasked with providing force protection for the mission – an obligation KBR alleged the Army breached – consequently preventing Kuwaiti from timely delivering the trailers and forcing it to incur costs for rented land to store the trailers, idle truck costs due to the backup of trailers at the border, and double-handling (i.e., unloading and then reloading the trailers).

KBR, as the prime contractor, filed two requests with the Armed Services Board of Contract Appeals (the “Board”) for equitable adjustments with the Army, asserting that it was entitled to recover the payment to Kuwaiti because the delay and double-handling costs were due to the Army’s failure to provide the contractually-required force protection. The Board awarded KBR roughly $4,000,000 in costs associated with the land lease to store the trailers, but the remaining amount of KBR’s nearly $51,000,000 adjustment claim associated with delay and double-handling costs was rejected. KBR appealed the Board’s decision on the basis that it was entitled to the full amount requested and that these delay costs were reasonable. In addressing the issue of cost reasonableness, the Federal Circuit assumed – without deciding – that the Army was required to provide force protection to enable KBR to timely perform under the contract.

In deciding the issue, the Federal Circuit looked to KBR’s justification (or methodology) for its claimed costs to determine whether the costs were reasonable. The Federal Circuit ultimately concluded that KBR failed to prove reasonableness of the costs for the following five (5) reasons:

#1: KBR assumed “perfect performance” on the part of Kuwaiti despite records showing the contrary. For example, Kuwaiti would report that it had 150 trucks, but KBR’s model charged for 403 idle truck days. “KBR provided no explanation for why its model could be reliable when it was ‘inconsistent’ with the records that Kuwaiti did maintain.”

#2: KBR’s model assumed that all delays at the border were the result of inadequate force protection. The evidence, however, showed that other factors outside of the Army’s control contributed to delays. “Yet KBR assigned every delay at the border to the lack of force protection without attempting to disaggregate the causes of those delays.”

#3: “KBR’s spreadsheets calculating idle truck days, ‘without substantiating data or records,’ were insufficient to establish the reasonableness of its costs. “KBR offered no fact or expert witnesses to support the reasonableness of its estimated number of idle truck days.” KBR failed to support its estimates with any representative data whatsoever.

#4: KBR only offered conclusory testimony, unsupported by any data or evidence in the record. KBR knew (from the truck leases submitted by Kuwaiti) that Kuwaiti had records showing more precise daily costs for its idle trucks. “It simply strain[ed] credulity” that Kuwaiti, a “sophisticated company” having “over 70 subcontracts with KBR alone,” would “not record how much it actually paid its drivers while they waited …”

#5: KBR charged a $300 rate for all claimed delay days, implicitly assuming that each trailer was always attached to a truck with a driver. The basis for claiming additional delay costs related to drivers and trucks for such stored trailers was not explained and “ignored the fact that, once [Kuwaiti] procured land … it removed the trailers from trucks and placed them in the yard, relieving at least some trucks and drivers from having to remain idle the entire time the trailers were delayed.”

The Federal Circuit ultimately held that KBR supplied no meaningful evidence demonstrating the reasonableness of its costs, nor had it explained the inconsistencies between its proposed cost model and the factual record. As a result of the foregoing evidentiary deficiencies, the Board’s decision was affirmed and KBR denied the full amount of its delay-costs claim.

The lesson here seems to be that any cost-estimating model developed to prove delay-related costs faces a high burden of proof and should, at a minimum: be supported by evidence and documents entered into the record; be substantiated by fact or expert testimony, or both; account for and segregate other factors that could have contributed to the delay; and importantly, not be based on assumptions, especially those which can be contradicted by the factual record.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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