Edward Arnold and Anthony LaPlaca | Seyfarth Shaw
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.
[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).
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.