In Lodge Construction, Inc. v. United States, the US
Court of Federal Claims (“COFC”) prefaced its 46-page
opinion by stating: “This case should serve as a cautionary
tale to government contractors.”1 Our ears perk up
any time we read that kind of admonition in a published decision.
The Lodge holding is, indeed, loaded with lessons on what
to do, and what not to do, when presenting Contract Disputes Act
(“CDA”) claims to the government. In particular, federal
construction contractors and their performance bond sureties should
take heed of the court’s holding in this highly-illustrative
fraud case.
Background of the case
In 2010, the Army Corps of Engineers (“Government”)
awarded Lodge Construction (“Lodge”) a fixed-price
contract to rehabilitate a levee in Florida. To accommodate
subsurface work, Lodge designed and constructed a temporary
cofferdam based on a geotechnical site inspection and analysis
furnished by the Government. The Government accepted Lodge’s
final cofferdam design in July 2011. In March 2012, however, water
breached two sections of the cofferdam’s sheet pile wall, after
which the Government retroactively disapproved of Lodge’s
cofferdam design. The Government requested that Lodge submit a new
sheet pile design by May 29, 2012.
Instead, Lodge submitted certified CDA claims to the Contracting
Officer, the first of which challenged the retroactive disapproval
of its sheet pile design (“Design Claim”) and the second
of which sought compensation for labor and equipment costs and
resultant delays attributable to the failed sheet pile wall
(“Dewatering Claim”). Citing Lodge’s failure to
produce a new cofferdam design or otherwise make progress toward
completing the project by the contractual deadline, the Government
denied Lodge’s claims and terminated Lodge for default.
Lodge appealed to the COFC, seeking compensation for its claims
and conversion of the termination for default into a termination
for convenience. The Government asserted counterclaims against
Lodge, seeking forfeiture, damages, and civil penalties pursuant to
the Special Plea in Fraud Defense, 28 U.S.C. § 2514; the
anti-fraud provision of the CDA, 41 U.S.C. § 604; and the
False Claims Act, 31 U.S.C. § 3729. Specifically, the
Government contended that Lodge: (1) submitted false claims for
labor inefficiency damages using an idiosyncratic and unreliable
inefficiency ratio; (2) exaggerated the costs of off-road dump
trucks and soil cement mixing equipment; and (3) double-billed the
Government for costs relating to the ownership and operation of
dewatering pumps that were already included in the contract’s
fixed price.
Legal issues presented
The Government’s counterclaims were premised on two
interrelated fraud statutes: the False Claims Act
(“FCA”), 31 U.S.C. § 3729, and the Special Plea in
Fraud Defense, also known as the Forfeiture of Fraudulent Claims
statute, 28 U.S.C. § 2514.
The FCA applies to those who knowingly submit false claims for
payment to the government. 31 U.S.C. §§ 3729 –
3733. To this end, the FCA imposes liability for any person who,
among other things: “(A) knowingly presents, or causes to be
presented, a false or fraudulent claim for payment or approval;
[or] (B) knowingly makes, uses, or causes to be made or used, a
false record or statement material to a false or fraudulent
claim.” 31 U.S.C. § 3729(a)(1). The party alleging an FCA
violation must prove: (1) defendant made false statements or
engaged in a fraudulent course of conduct; (2) with the requisite
knowledge; (3) the statements or conduct were material; and (4)
caused the government to pay out money or to forfeit monies due on
a “claim.”2
The Forfeiture of Fraudulent Claims (FFC) statute provides that
a “claim against the United States shall be forfeited to the
United States by any person who corruptly practices or attempts to
practice any fraud against the United States in the proof,
statement, establishment, or allowance thereof.” 28
U.S.C.§ 2514. This provision applies to claims brought before
the COFC. The question of whether the government has suffered
measurable damages as a result of the fraud is irrelevant to
application of the forfeiture penalty; all that is required is the
knowing submission of a false claim to the government.3
In addition, any fraud in connection with a claim results
in the forfeiture of the entire claim arising from the
contract, not just the fraudulent portion.4
Exaggerated equipment costs
Lodge’s scope of work included subsurface geotechnical
inspections, soil excavation, design and construction of a
temporary cofferdam for soil drying, and dewatering a few feet
above the groundwater table. Like many contractors, Lodge owned its
own equipment, including four Euclid off-road dump trucks used to
haul fill material. The evidence presented at trial showed that the
Euclid trucks were each between 15 and 20 years old. Lodge’s
Design and Dewatering claim included a request for $229,459 in
reimbursement for extended usage and standby costs associated with
the Euclid trucks, during a period of delay it claimed to be the
fault of the Government.
When preparing its claim, Lodge elected to utilize equipment
rates established in the US Army Corps of Engineers Manual (USACE
Manual) which, under Federal Acquisition Regulation (FAR) Part 31,
is an acceptable method of estimating equipment ownership rates.
The court explained that the FAR provides several allowable ways to
estimate rates, but that, once a contractor chooses to report
equipment and ownership rates using the USACE Manual, it is bound
to follow the instructions set forth in that
manual.5
Lodge faced an obstacle in preparing its claim; namely, that the
Euclid trucks owned by Lodge were not listed in the USACE Manual.
The USACE Manual provided that, where specific equipment was
omitted, the contractor must calculate operating rates by selecting
a piece of equipment that has similar operational specifications,
age, and value.6 Rather than following the instructions
in the USACE Manual, Lodge went a different route. In calculating
its claim, Lodge relied upon third-party software called
“Equipment Watch” to estimate the rates it subjectively
deemed most applicable to its Euclid trucks. Lodge then plucked
from the Corps’ Manual the rate most similar to that generated
by Equipment Watch, without regard to whether that rate aligned to
equipment of similar age, type, or condition of the trucks used for
the project.
The operating rates applied by Lodge aligned with equipment that
was purchased new in 2006 and which had a value of $880,000 per
unit. At trial, however, the evidence showed that Lodge had
purchased each Euclid truck at a price ranging between $14,000 and
$24,000. “Thus,” the court observed, “the total
purchase price Lodge listed for its trucks totaled less than
$100,000, yet Lodge billed for the costs of operating and owning
trucks with a combined estimated value over
$3,520,000.”7 Furthermore, the rates used by Lodge
included ownership costs such as depreciation and interest on the
Euclid trucks which, by the terms of the USACE Manual, were so old
that they should have already been fully depreciated.
Legal ruling 1: intentional fraud in certified equipment
costs
The court concluded that Lodge’s selection of false
operating rates for its Euclids constituted knowing and intentional
submission of a false claim to the Government. Despite valuing its
Euclids at $888,686 each in its claim, Lodge had knowledge that the
actual fair market value of all four Euclids was $40,000. The court
focused on Lodge’s failure to provide an adequate explanation
for its method of calculating the rates for the
Euclids.8 Despite taking the position that the rates
utilized reflected capital improvements to the Euclids, and thus
increased their value, Lodge could not provide any documents
(receipts or invoices) or elicit any trial testimony (a mechanic
who performed upgrades) to support its position. In other words,
Lodge could not establish how twenty-year old vehicles were
functionally equivalent to those manufactured in 2006, and were
thus worth millions of dollars.
In fact, the evidence at trial pointed to the opposite
conclusion. Lodge’s internal equipment records identified a
purchase price for each of the four Euclids between $14,000 and
$24,000. Furthermore, after SunTrust Bank attempted a forced sale
to satisfy a lien on the Euclids, Lodge entertained offers of
approximately $40,000 for all four Euclids together, which Lodge
agreed represented a fair objective value for that equipment.
The evidence also showed that Lodge’s consultant, who
assisted in preparation of its claims, warned Lodge that the Euclid
operating rates utilized in its claim were inflated and that the
operating rates from the USACE Manual would not provide a
sufficient basis for Lodge’s equipment costs as part of its
claim. The consultant testified that using Equipment Watch or
similar rates was an inappropriate method for calculating equipment
costs, yet, Lodge proceeded to submit its claims using inflated
rates.
The court rejected Lodge’s contention that the Equipment
Watch database was reputable, for the reason that Lodge knew it was
required to comply with the USACE Manual rates. The court also
rejected Lodge’s defense that it reduced the operating rates
for the Euclids when it carried those rates from its job cost
ledger into both of its claims—the court noted that the rate
reduction was done only to align with the USACE Manual rates rather
than to represent an independent calculation. Regardless of why
Lodge reduced those rates, Lodge understood that by selecting the
USACE Manual to report its rates, it was required to use that USACE
Manual methodology to derive its equipment costs, which it failed
to do. The mixing and matching of rates schedules in this context
is not permitted by the USACE Manual nor FAR § 31.105.
Lastly, the court disregarded Lodge’s subjective belief as
to the value of the Euclids, on the grounds that subjective beliefs
were both irrelevant and incredible, given Lodge’s experience
and knowledge of valuing the fair market value of an asset.
Moreover, Lodge was fully aware that the operating rates in its
claim were based on new equipment from 2006 that were valued in
excess of $880,000. Thus, Lodge’s valuation of the Euclids was
not the result of a mistake, but a knowing and intentional act.
Manipulation of inefficiency ratio
Lodge claimed that differing site conditions at the subsurface
water table justified labor inefficiency damages for the period
between July 6, 2011, and January 14, 2012. Rather than applying an
established damages methodology, Lodge calculated its claim by
developing an inefficiency ratio applied to its general overhead
pool. Lodge derived its inefficiency ratio as the number of days
allocated in the baseline schedule to the impacted excavation
activities, divided by the actual days spent performing those
activities. Using this ratio, Lodge determined that it took roughly
2.5 times longer than expected to complete excavation in the
impacted area.9
When evaluating the methodology used by Lodge to calculate
dewatering inefficiency, the court highlighted two major issues.
First, the court observed that the “actual days”
accounted for in the denominator of the inefficiency ratio were
based on a “rudimentary and inconsistent” process by
which the contractor failed to perform necessary diligence of the
records relied upon. In particular, the court noted that the daily
reports and labor logs used to determine actual days of work lacked
sufficient information regarding equipment or labor hours such as
to meaningfully allocate time spent on excavation. For instance,
Lodge counted certain calendar days in which it spent only a few
hours working on excavation as full “activity days.”
Thus, “if a laborer or piece of equipment worked in a single
subsection for any period of all, no matter how briefly, a tick
mark was entered and later counted as a full activity
day.”10
Additionally, Lodge’s methodology indicated that underlying
source records were unreliable and could be easily manipulated by
those interpreting them to inflate time spent on excavation.
Certain records, for instance, recorded 26 hours of work in a
single “activity day.”11 In other instances,
daily reports showed Lodge performing excavation in two different
subsections for a half a day each, which Lodge counted as two full
“activity days” in its calculation. According to the
court, Lodge “assumed that the amount of equipment or number
of man-hours utilized were irrelevant to the tally of activity
days.”12 The court also noted that the tally of
actual excavation work days included days beyond the January 14,
2012, end-date that was purported to cut off the claim period. The
court wrote that the witness had “reviewed the daily reports
after January 14, 2021 and intentionally added activity days
outside the claim period.”13
Another fundamental problem with Lodge’s inefficiency claim:
Lodge failed to account for a bilateral extension of time to
perform excavation, resulting in a lower number of
“as-planned” days (i.e., the numerator of the
inefficiency ratio), and thereby inflated the overall claim.
Earlier in the project, the Government granted a request for
equitable adjustment that authorized 81 additional days to complete
the project. Lodge, however, failed to ever issue a revised
schedule incorporating this time extension. And when calculating
the claim, however, Lodge used the original baseline schedule to
determine its inefficiencies, without spreading its 81-day
extension out over excavation activities. The understatement of
as-planned days was, notwithstanding Lodge’s plea that it was a
mere oversight, was determined by the court to be intentional fraud
that resulted in the forfeiture of the claim in its entirety.
Legal ruling 2: knowing fraud in the inefficiency
calculation
The court determined that Lodge’s method for calculating its
inefficiency ratio was flawed for two primary reasons, both of
which supported a finding that Lodge submitted a false claim.
First, the court concluded that Lodge knew or should have known
that its “inefficiency ratio” was not a reasonable,
accurate, or truthful measure of inefficiency. To calculate the
overrun of days, Lodge utilized a fundamentally flawed “tick
mark” methodology to tally actual days, but failed to consider
whether the inefficiency ratio would measure effort expended or
resources used, or whether use of the ratio was appropriate to
measure a single activity day. Despite knowing that the
inefficiency ratio would increase the claimed damages, Lodge made
no effort to reconcile the dollar value of an activity day with
actual resources expended in that day. The result of this was that
on days where minimal work was performed, Lodge billed the
Government at rates ranging from $2,000 to $21,000 for work
performed by a single laborer or piece of equipment. The court
concluded that this failure to examine the effort or resources
expended for each activity day showed reckless disregard for the
accuracy of the Dewatering Claim.
However, the court found that Lodge’s conduct went beyond
reckless disregard—rather, Lodge intentionally used a flawed
inefficiency ratio in order to inflate its damages claim. As with
the Euclids, Lodge’s consultant again warned against use of the
inefficiency ratio as an improper method for calculating impacts.
Yet Lodge proceeded to use the ratio, at its own peril. Although
Lodge introduced evidence that it reduced the inefficiency ratio
based on the warnings it received, such an act did not negate the
fraud—rather, it was indicative of Lodge’s attempt to
“conceal its fraudulent acts by reducing its inflated claims
to a degree that might evade detection.”
Second, the court found that Lodge’s “inefficiency
ratio” fraudulently counted days outside the claim period.
Lodge’s Dewatering Claim purported to capture the effects of
inefficiencies due to dewatering difficulties from July 6, 2011, to
January 14, 2012. Yet, Lodge included 55 activity days occurring
after January 14, 2012, in the numerator of its inefficiency ratio.
As a result, this inflated the ratio from 200% to 247%, and
inflated the Dewatering Claim by $358,953. The court concluded the
claim was falsely and intentionally submitted.
Additionally, the court was troubled by the testimony from
Lodge’s outside consultant who prepared the Dewatering Claim.
The court questioned whether the consultant was truly an
“independent” fact witness. First, she provided
inconsistent responses and had a flawed recollection at trial.
Second, she represented that one of the law firms representing
Lodge was her client and paid her $150 per hour for preparation in
advance of trial and her testimony as a fact witness, an
arrangement the court found “unusual and concerning.” In
addition, during a break in another witness’ testimony, it was
revealed that the attorney and the witness had met during a break
in the trial despite the court’s instructions that fact
witnesses remain sequestered even after their testimony
concluded.
Lastly, Lodge “made a conscious decision” to exclude
its project manager from reviewing the final version of the
Dewatering Claim. In sum, the court found that the Government had
proven Lodge’s reckless disregard for the accuracy of its
Dewatering Claim by clear and convincing evidence, and that it was
more likely than not that Lodge intentionally used the inefficiency
ratio to fraudulently inflate its Dewatering Claim.
Misrepresentation of batch plant operating costs
The Government accused Lodge of committing fraud by
intentionally overstating costs associated with a “batch
plant”—a generator-powered piece of stationary equipment
used to mix soil cement on site. Lodge’s claim included
requests for compensation for both operating costs and ownership
costs of the batch plant, which was the largest and most valuable
piece of equipment it owned. According to the Government, however,
the claim was fraudulent because: (1) the costs had already been
reimbursed; (2) the operating rate billed by Lodge was exaggerated;
and (3) the calculation of operational hours for the batch plant
was improper.14
A contract line item for the project included production and
placement of soil cement, as well as “utilizing the batch
plant to make the soil cement and place it on the levee.”
Lodge billed, and was paid, the sum of $1,227,600 for procuring,
shipping, installing, and using the batch plant. The court noted,
however, that due to an unforeseen condition concerning the make-up
of soil material, Lodge implemented several capital improvements to
the batch plant. These improvements, the court found, could not
have been anticipated and were reasonably necessary to ensure that
soil cement production complied with the contract
specifications.
As with its Euclid dump trucks, Lodge initially relied on
Equipment Watch to determine the appropriate operating and standby
rates for the batch plant. Lodge contended that this was
appropriate because the batch plant was a custom piece of
equipment. But whereas Equipment Watch generated an operating rate
of $339.09/hour, the USACE Manual’s CHECKRATE spreadsheet
generated a lower rate of $235.88/hour. Although Lodge used the
higher rate in its spreadsheet calculating equipment costs, the
witness testimony at trial suggested that the entry of $339.09 was
inadvertently placed in the wrong Excel cell.
When calculating the batch plant operating time, Lodge relied
upon records of the control center operator tasked with running the
equipment. However, Lodge had available to it a generator log that,
for all intents and purposes, would have provided an exact
calculation of the time the batch plant was in operation. At trial,
Lodge’s witnesses acknowledged the availability of a more
accurate method of allocating time and the resulting discrepancy in
the claim amount. The court emphasized this point, stating:
“But even further examination of the claims documents reveals
that the witness’ hours worked bore no relation at
all to the operation of the batch plant.”15 As
discussed below, this lack of correlation between time records and
time claimed not only discredited the claim, but was the basis for
a finding of fraud and a forfeiture of the claim.
Legal ruling 3: inflation of batch plant time was fraud
The court found that Lodge fraudulently inflated batch plant
run-time, but that the Government failed to establish that
Lodge’s pursuit of batch plant ownership costs was fraudulent,
and that Lodge mistakenly reported its batch plant operating
rate.
With respect to the batch plan operating run-time, the
Government argued that Lodge improperly calculated batch plant
operation hours, thereby falsely inflating the time of operation.
The court agreed. To arrive at its claimed cost of equipment
related to the batch plant, Lodge multiplied the operating rate by
the run-time. In order to calculate run-time, Lodge should have
used the hours metered by the batch plant generator because the
generator was required to be running in order to operate the batch
plant—instead, Lodge measured run-time based on
employee’s hours worked from timesheets. Moreover, the court
found that Lodge knew and understood metered hours were the correct
metric for measuring batch plant run-time and proceeded to rely on
timesheets anyway.
With respect to batch plant ownership costs, the Government
alleged that Lodge was prohibited from claiming ownership costs
related to the batch plant, and yet included these in its claim
anyway. Lodge asserted that, although the Government paid Lodge up
front for the entire cost to purchase, deliver, and install the
batch plant, this was merely an advance, and that Lodge actually
acquired the batch plant from another company. Moreover, Lodge had
financed the purchase of the batch plant through a bank, resulting
in incurred interest as a cost of capital, which Lodge would be
able to recoup under FAR § 31.205-10. The found that whether
Lodge acquired the batch plant from the Government or a third party
was a disputed issue of fact and law that did not rise to the level
of fraud.
With respect to the batch plant operating rate, the court
concluded that Lodge’s use of an operating rate of $339.09 per
hour, which it derived from Equipment Watch, rather than using the
USACE Manual rate of $235.88, was a mistake based on an error made
in Lodge’s internal spreadsheet, and thus did not rise to the
level of fraud.
Dewatering pumps included in fixed price line item
Lodge’s Design Claim included a request for $545,236 in
standby costs associated with its use of dewatering pumps. The
contract between Lodge and the Government included a line item for
“dewatering” in a lump sum of $11 million, $3,550,000 of
which was earmarked for dewatering activities. Thus, the court
observed, the risks of pumps requiring more or less use than
anticipated was incorporated into the negotiated price. “In
other words, if Lodge completed the project early, the Army Corps
would still pay Lodge the full fixed price.”16 Yet
Lodge added the costs of moving, maintaining, and running pumps in
the cofferdam area “despite the all-inclusive nature of CLIN
5-110, which Lodge understood would be compensated by fixed monthly
payments regardless of how much dewatering progress Lodge
made.”17
Lodge attempted to justify its claim for increased dewatering
pump costs by arguing that increased rainfall exacerbated the
weight of water and raised water from the groundwater table. Thus,
according to Lodge, the pumps had to work longer and harder and the
operational costs of the equipment were higher than anticipated at
the time Lodge estimated the project.
Legal ruling 4: knowing and intentional fraud in submitting
dewatering pumps
Lodge included the operating and standby costs for its
dewatering pumps in the cost pool for a six month period, from June
5, 2011, and January 14, 2012. Lodge claimed these costs despite
admittedly having already been paid a fixed-price lump sum for
dewatering activities, which Lodge received from the Government in
equal monthly installments. Thus, because Lodge sought costs that
exceeded the lump sum amount, the court found that Lodge knowingly
double-billed the Government for those costs. At trial, Lodge’s
witness admitted that he understood the lump sum was all inclusive,
and thus, that he was aware that he was seeking costs that exceeded
the fixed payments for the dewatering pumps.
Lodge defended its actions by introducing some evidence that the
inclusion of dewatering operations in its Dewatering Claim cost
pool related to its differing site condition claim (not at issue in
the trial). In essence, Lodge believed that the monthly payments
for the pumps did not contemplate the additional costs attributable
to the increased weight of the water on the site from heavy rain
pulled water up from the groundwater table due to displacement,
causing the pumps had to work longer and harder than
anticipated.
However, the court rejected this contention. First, Lodge had no
expert testimony to support this theory. Second, Lodge could not
identify any documentation of increased effort expended by its
dewatering pumps. Third, the court found that Lodge’s pumps
were not utilized in direct relation to its differing site
condition claim, but were used to move water from the levee area to
the impoundment areas. After the impoundment areas failed to
percolate as expected, Lodge used gravity—not the dewatering
pumps—to move water out of the impoundment areas to offsite
locations. Thus, the court concluded that Lodge’s contention
that it was entitled to bill for dewatering pump operating costs in
addition to the fixed installment payments was unsupportable.
The court found that, at a minimum, Lodge’s conduct
demonstrated reckless disregard for the accuracy of its Dewatering
Claim. Lodge failed to properly examine its records to determine
whether it was seeking costs the Government had already paid for
the pumps. Had Lodge done so, it would have discovered it was
already paid for these pumps. As a result of Lodge’s fraudulent
conduct, the court concluded that Lodge had billed the Government
for approximately $244,730 in dewatering pump operating costs for
which Lodge was already compensated.
Lessons learned
So what is the moral of the “cautionary tale” of
Lodge Construction? How can contractors in Lodge’s
shoes learn from the mistakes made in Lodge’s CDA claim
submission, calculation of damages, and theories of recovery? How
can contractors avoid not just the monetary fines and penalties
under the FCA, but also the complete forfeiture of claims that, at
least in part, are legitimate increased costs?
Choose your claims team wisely
The CDA requires contractors to submit claims in good faith,
with accurate and complete supporting data supporting an accurate
sum certain for which the government is believed to be
liable.18 To meet this burden, it is imperative that the
team that prepares the claim are as informed, unbiased, and
objectively reasonable as possible.
The Lodge court did not take kindly to the fact that
Lodge’s experienced project manager overseeing the excavation
was excluded from the claim preparation process. The court
questioned the wisdom of allowing employees who had little
experience and had never prepared a CDA claim, to take the lead on
presenting millions in dollars in damages to the Government. And
the court was, on no uncertain terms, highly critical of offering
paid fact witnesses to present claims in a supposedly impartial and
objective manner. The team offered by Lodge to prepare and attest
to its claims not only underpinned the Government’s rejection
of the claims, but also seems to have influenced the court’s
findings of intentional and knowing (or at least reckless)
fraud.
CDA claims, especially those in the 6 or 7 figures, cannot be
prepared by a single individual, but require a team of people
knowledgeable about the factual basis for the claim and the damages
suffered by the company. A good claims team covers all three of the
major facets of any claim—the technical, the financial, and
the legal. When submitting a CDA claim, a project manager (and even
better, a project engineer or superintendent who are closest to the
work) should be consulted to furnish the freshest information and
best documents supporting the contractor’s entitlement. A
member of the accounting team, preferably the project accountant or
someone well-versed in FAR cost-accounting issues, is imperative to
ensuring the accuracy of cost records and the calculation of
amounts due. Lastly, an in-house lawyer, outside counsel, or other
person with knowledge of the CDA process and case law, is
incredibly valuable for ensuring that the methodologies chosen for
presenting claims and calculating damages are sound.
Use the best documents available
Particularly in construction cases, the project records
typically tell the best story. When contractors prevail against the
government, it is usually because they have solid documentation of
the key data necessary to support a claim, i.e., labor hours,
machine hours, material receipts, invoices, and daily reports.
Every construction project has too many moving parts to credibly
establish facts and damages with witness testimony
alone.19
The Lodge court took issue with both the types of
documents utilized to support Lodge’s claims and the
trustworthiness of those documents. Perhaps most notably, the court
rejected the use of operator time sheets to support its batch plant
operating costs. In the absence of better evidence, such records,
adjusted for the operator’s lunch time, down time, and
non-batch-plant activities, might have been sufficient to support
the claim. However, Lodge’s records of generator operation
time, which were more closely associated to the time the batch
plant was actually running, were the best evidence of the time in
which the machine was in use. Lodge ignored those records and, in
doing so, compromised its credibility and the claims in general.
The lesson: don’t settle for records that are quasi-relevant to
the claim being submitted, especially when more reliable data is at
your disposal.
Lodge’s use of daily reports to verify the “actual
days” spent performing excavation activities was more a
problem of form than substance. Regardless of terminology used to
memorialize the day-to-day activities of the contractor (daily
reports, superintendent’s reports, daily logs, superintendent
journals, manpower reports), such records are legitimate data for
supporting a CDA claim. But those records are only as valuable as
their contents. Lodge struggled to verify the denominator of its
inefficiency ration because the information contained in daily
reports did not sufficiently correlate to the resources expended by
Lodge to excavate and re-build the cofferdam. Inconsistencies
within the information recorded, gaps in information regarding
specific activities, and erroneous reporting of full “activity
days” were fatal to Lodge’s Dewatering Claim. Indeed, a
lack of reliable records and data to support a contractor’s
damages calculation is virtually insurmountable with respect to any
claim arising out of a federal construction project.
Put your inefficiency claim in the hands of an experienced
expert
Labor inefficiency claims seem to be back in vogue in both
private and public construction, though in the opinion of the
authors, these claims often end up being little more than abstract
leverage for settlement discussions and mediation. Where rubber
meets the road, i.e., where the contractor decides to
certify its labor inefficiency claim in a submission to
the government, the stakes are real and the risks are anything but
hypothetical.
If Lodge teaches us anything about damages
methodologies, it’s that labor inefficiency calculations should
be left to experienced experts. Courts around the country consider
labor inefficiency damages to be so nuanced and specialized that,
without analysis and testimony from a qualified expert, the claim
is branded as “overly speculative” and dies at the
courthouse steps.20
The “rudimentary,” “idiosyncratic,” and
“inconsistent” ratio selected by Lodge and applied by its
paid, non-expert witness, tainted its inefficiency claim from the
outset. Even if it had considered the documents and testimony, the
court’s opinion reeks of skepticism regarding whether that
ratio was an acceptable manner of establishing damages with
reasonable certainty, given how easily it could be manipulated.
Whereas Lodge ignored the warnings of outside consultants to adopt
a different approach, future CDA claimants should listen to their
experts’ advice, or risk being implicated in knowing or
intentional fraud.
Stay consistent in calculating damages
The Lodge decision is a good reminder of the importance
of maintaining consistent accounting practices throughout a project
and complying with FAR cost-accounting principles at all times.
Lodge committed itself to pricing its equipment based on
operational rates in the USACE Manual. Having made that election,
Lodge was not at liberty to deviate from the terms of the manual,
including the instructions for pricing equipment that was not
explicitly named in the manual. By using an industry source to
derive its rates without a proper comparison of like-kind
equipment, Lodge invited unnecessary scrutiny of its damages. The
lesson: entrust damages calculations only to those who are familiar
with the FAR and understand how to apply FAR cost accounting
principles to claims.
Pick your battles
While it may sound counterintuitive, or even painful, to some
readers, sometimes the big picture justifies foregoing parts of a
claim for which the contractor has diminished confidence in its
ability to support the factual, technical, financial, or legal
bases for a submission. Taking the kitchen sink-approach and
asserting every conceivable claim, regardless of the factual
support for the claims, can result in government counterclaims
asserting fraud, and more onerously, forfeiture otherwise
legitimate claims.
For instance, when it became apparent that the costs of
dewatering pumps were already included in a fixed-price CLIN under
the contract, Lodge probably would have been better served to have
dropped this aspect of the claim. Instead, Lodge argued, without
the benefit of expert testimony or a causal nexus to the alleged
differing site condition, that elevated rainwater forced the pumps
to work harder. This type of argument, while perhaps creative, does
not lend to any favors from contracting officers or judges
reviewing their decisions.
The lesson here is that commingling unsupported or unsupportable
claims with legitimate, provable costs, can have devastating
consequences.
Understand forum selection
Contractors submitting claims under the CDA must be mindful of
the differences in the choice of forum for where they file their
appeal. The CDA permits contractors to appeal to one of the Boards
of Contract Appeals (BCAs) or to the COFC. While the vast majority
of contract claims are appealed to the BCAs, which were established
to afford contractors less expensive and more expeditious
resolution of claims, contractors often end up filing at the COFC,
either because they missed the 90-day window to file at the BCAs or
for some other strategic reason.
Fraud is addressed in markedly distinct ways at each forum. As
demonstrated by Lodge, the COFC brings with it the risk of
the government asserting counterclaims alleging fraud. While the
BCAs do not afford agencies the ability to assert fraud
counterclaims, the Contracting Officer may deny the claim based on
a suspicion of fraud, or the Agency may assert fraud as an
affirmative defense for claims otherwise properly appealed to the
BCAs, which could also result in the claim being denied. In short,
a contractor’s choice of forum has meaningful consequences, and
contractors should be mindful of these risks when proceeding
through the claims process. Regardless of which forum a contractor
elects to appeal its claim, proper claim preparation and submission
is critical to avoid the government’s fraud apparatus.
Footnotes
1. United States ex rel. Rostholder v. Omnicare,
Inc., 745 F.3d 694, 700 (4th Cir. 2014)
2. No. 13-499 (Ct. Cl. Jan. 10, 2022). https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2013cv0499-89-0.
3. Young-Montenay, Inc. v. United States, 15
F.3d 1040 (Fed. Cir. 1994).
4. Lodge Constr., Inc., 153 Fed. Cl. at 440;
see Edward Arnold and Anthony LaPlaca, US Court of
Federal Claims Clarifies the Statute of Limitations for CDA
Anti-Fraud Claims, May 26, 2021, https://www.constructionseyt.com/2021/05/us-court-of-federal-claims-clarifies-the-statute-of-limitations-for-cda-anti-fraud-claims/.
5. Supermex, Inc. v. U.S., 35 Fed. Cl. 29 (1996)
(contractor’s bribery of Government official placed a
“stigma” on the contract sufficient to deem the
contractor’s equitable adjustment claims unenforceable due to
public policy considerations); but see N.R. Acquisition Corp.
v. U.S., 52 Fed. Cl. 490 (2002) (distinguishing
Supermex).
6. Lodge, No. 13-499 at 8.
7. The rates set forth in the USACE Manual encompassed
both operation costs (such as fuel and maintenance) and ownership
costs (such as depreciation and interest). Id. at
9.
8. Id. at 9-10.
9. Id. at 10.
10. Id. at 12.
11. Id. at 14.
12. Id. at 15.
13. Id. at 15-16.
14. Id. at 17.
15. Id. at 19-20.
16. Id. at 25.
17. Id. at 27.
18. Id. at 28.
19. 41 U.S.C. 7013(b).
20. See N. Pac. Erectors, Inc. v. State, Dep’t of
Admin., 337 P.3d 495, 508 (Alaska 2013) (contractor’s
claim for differing site conditions and labor inefficiency damages
was barred by its failure to comply with record-keeping
requirements of the contract).
21. MW Builders, Inc. v. United States, 132 Fed.
Cl. 569 (2017) (supplemental expert report required to prove
pass-through claim for subcontractor labor inefficiency); see,
e.g., James Corp. v. N. Allegheny Sch. Dist., 938 A.2d 474,
498 (Pa. Commw. Ct. 2007) (labor inefficiency claim hinged on the
testimony of certified cost consultant).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
