Author: Cheryl Adams, Esq.
Change orders happen. When you are a government contractor, it helps to understand some basics about change orders before you are issued one. Below are some common questions, and answers, about change orders, along with some tips and traps that you might encounter along the road when dealing with change orders.
WHO CAN ISSUE A CHANGE ORDER?
A U.S. Government Contracting Officer (CO), or delegee (usually an Administrative Contracting Officer (ACO)) is the only person who can issue a change order. The CO can issue the change order unilaterally, in accordance with the Changes clause of the contract. (Federal Acquisition Regulation (FAR) 43.201(a) and 43.202),
IS THE CONTRACTOR REQUIRED TO PERFORM THE WORK UNDER THE CHANGE ORDER?
Yes, the contractor must continue performance of the contract as changed.
The exception to that rule is based in federal fiscal law. For cost-reimbursement or incrementally funded contracts the contractor is not obligated to continue performance or incur costs beyond the limits established in the Limitation of Cost or Limitation of Funds clause (see 32.706-2). The contractor is limited to the amount of funding (FAR 43.201(b)).
The exceptions: Cost-reimbursement or incrementally funded contracts.
Basically, these two types of contracts have flexible dollar amount ceilings, established by the amount of funding obligated to the contract. The ceilings go up as the CO obligates more funding. Funding is added to contracts through contract modifications signed by the CO, showing the dollar amounts and the appropriation codes. The contractor is not allowed to perform work in excess of the funding ceiling.
It is possible to figure out how much funding is obligated to your government contract by simply reading the basic contract and modifications.
Ideally, the most recent funding modification should provide a funding total for the whole contract (or the whole task order, if the contract has multiple task orders). If no total is provided, you can usually calculate the total funding by adding all the funding amounts, starting with the basic contract, and adding the funding amount from each succeeding modification. If you find math errors in the funding, or the funding amount is unclear, address that with the CO.
Also, if a CO issues a change order that looks as if it will entail more work than the funding amount obligated to the contract (or task) allows, you should immediately address that with the CO.
WHAT IS THE REQUIRED DOCUMENTATION FOR A CHANGE ORDER?
Per FAR 43.204, there are two scenarios: Scenario #1 (forward-pricing) where there is agreement in advance on contract price or delivery terms, or both, before the change order is issued, and Scenario #2 (no forward-pricing) where the change order is issued unilaterally by the CO, and with any luck, agreement is reached later.
The Forward-Pricing Situation:
One required document:
- The Supplemental Agreement.
The No Forward-Pricing Situation:
Two required documents:
- The Change Order, issued by the CO, unusually unilaterally
- The Supplemental Agreement: reflects the resulting equitable adjustment.
WHAT IS A REQUEST FOR EQUITABLE ADJUSTMENT (REA), AND WHEN WOULD I NEED ONE?
An equitable adjustment is a request from the Contractor to the government for payment in response to a change ordered by the Contracting Officer. For example, FAR 52.243-1 Changes-Fixed Price (Aug 1987), paragraph (b) provides for a right to adjustment
“If any such change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under this contract, whether or not changed by the order.”
The clause requires that “the Contracting Officer shall make an equitable adjustment in the contract price, the delivery schedule, or both, and shall modify the contract.”
The Changes clause in your contract generally provides information regarding the specific circumstances that trigger a right to equitable adjustment, and deadlines for when you should submit a request for equitable adjustment. Under FAR, the applicable Changes clause for each contract type is slightly different. You need to read the clause to ensure that your equitable adjustment complies with the clause in your contract.
The Request for Equitable Adjustment is the starting point for negotiations, which ideally result in an agreement between the CO and the contractor regarding how much the contractor will get paid, etc., for performing the contract as changed. The point is to end up with a mutual agreement that makes the contractor whole, not to increase or decrease the profitability of the contract.
SHOULD I SUBMIT A REQUEST FOR EQUITABLE ADJUSTMENT, or A CLAIM, IN RESPONSE TO A CHANGE ORDER?
It is always possible that the CO and the contractor will not be able to reach an agreement on how much the contractor should get paid, etc. in order to be made whole. The Changes clause in your contract addresses that possibility.
For example, 52.243-1 Changes – Fixed Price (Aug 1987), paragraph (e) provides,
“Failure to agree to any adjustment shall be a dispute under the Disputes clause.”
FAR 52.233-1 Disputes (May 2014) sets forth the requirements for submitting a claim.
“Claim,” as used in this clause, means a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to this contract. “ (52.233-1(c)). Routine requests for payment, vouchers, or a request for equitable adjustment, usually can be converted to a claim by complying with the submission and certification requirements of the Disputes clause. The claim certification language is:
“I certify that the claim is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the Contractor believes the Government is liable; and that I am authorized to certify the claim on behalf of the Contractor.”
The exact certification language is required. If a contractor decides to edit the certification, the courts or boards of appeals may decide that the claim was not properly certified. If the court or board’s jurisdiction to hear your appeal is dependent on the existence of a valid claim, that can be a problem.
Often it can be advantageous to the contractor to simply provide the claim certification with the request for equitable adjustment. This dispels any confusion that may later ensue regarding when and whether a valid claim was submitted.
HOW SHOULD I KEEP TRACK OF MY COSTS ASSOCIATED WITH A CHANGE ORDER, and IS IT OK TO REVISE MY ACCOUNTING SYSTEM TO HANDLE TRACKING THE COSTS?
FAR takes into account the fact that contractors’ accounting systems are seldom designed to segregate the costs of performing changed work. Therefore, if your accounting system needs to be changed to enable you to track the costs, you can.
The contractor can generally recover the following items, per FAR 43.203(1):
Nonrecurring costs (e.g., engineering costs and costs of obsolete or reperformed work). (2) Costs of added distinct work caused by the change order (e.g., new subcontract work, new prototypes, or new retrofit or backfit kits); and (3) Costs of recurring work (e.g., labor and material costs).
Typically a government contract will include the clause 52.243-6 Change Order Accounting, if numerous change orders are anticipated (FAR 43.205(f). For changes, or a series of related changes exceeding $100,000, the contractor is required to have an accounting procedure which segregates all incurred direct costs in separate accounts. The contractor must maintain the accounts until either the parties agree to an equitable adjustment, or the matter is “conclusively disposed of in accordance with the Disputes clause.”
FIELD PRICING REVIEW: HOW CAN I PREPARE, and WHAT SHOULD I EXPECT?
If, in connection with the change order, and the attendant request for equitable adjustment (REA), there will be field pricing review, the Contracting Officer is required to provide to the contractor:
A list of significant contract events, which may aid in the CO’s analysis of the request for equitable adjustment. The list should include:
(i) Date and dollar amount of contract award and/or modification;
(ii) Date of submission of initial contract proposal and dollar amount;
(iii) Date of alleged delays or disruptions;
(iv) Performance dates as scheduled at date of award and/or modification;
(v) Actual performance dates;
(vi) Date entitlement to an equitable adjustment was determined or contracting officer decision was rendered if applicable;
(vii) Date of certification of the request for adjustment if certification is required; and
(viii) Dates of any pertinent Government actions or other key events during contract performance which may have an impact on the contractor’s request for equitable adjustment.
While the FAR places initial responsibility on the CO’s shoulders to provide the above information to the contractor, the contractor should review it for accuracy and completeness. Contractor/CO agreement on the basic facts surrounding a change order should be in place in order to reach agreement on who pays which costs.
Therefore, it is important for a contractor to keep good records of the sequence of events, as performance unfolds, and not necessarily rely on the CO to tell the story. Particular attention should be paid to tracking dates of delays or disruptions. There is a difference between government-caused delay (usually the contractor can recover for that), and delays caused by the contractor (usually if the contractor caused the delay, that is the contractor’s problem, and the contractor absorbs the cost of the delay). It is important to keep records of what was happening, and what caused delay or other issues such as increased costs. Merely noting a delay or having a receipt for a cost item can make it difficult to sort out causality and who is responsible for paying later.
FAR 15.404-2 Data to Support Proposal Analysis discusses field pricing assistance. The CO should request it “…when the information available at the buying activity is inadequate to determine a fair and reasonable price. The contracting officer shall tailor requests to reflect the minimum essential supplementary information needed to conduct a technical or cost or pricing analysis.” (FAR 15.404-2 (a)(1))
Field pricing assistance can include bringing in an auditor. The auditor cannot discuss the audit conclusions or recommendations without first obtaining the concurrence of the CO. (FAR 15.404-2 (c)(1)(i).
Paragraph (d) addresses deficient proposals. If the contractor repeatedly refuses to provide data, or provide access to necessary data, the CO “…shall withhold the award or price adjustment and refer the contract action to a higher authority, providing details of the attempts made to resolve the matter and a statement of the practicability of obtaining the supplies or services from another source.”
WHAT IS A “CONTRACTOR’S STATEMENT OF RELEASE” and WHEN SHOULD THE CONTRACTOR SIGN ONE?
Once all the elements of the equitable adjustment have been presented and resolved, the Supplemental Agreement should include a release. The release is designed to limit contractors’ ability to come in later with more costs, and more claims, for the same change order. The language for the release is provided in FAR 43.204(c), as follows:
A contractor should not sign the release until it is sure it no longer has any additional outstanding costs, allocable to the change order, that could be included in a future equitable adjustment (keeping in mind that there are time limits on how long a contractor can wait to submit a request for equitable adjustment, or claim, and missed deadlines can result in zero recovery of costs).
“Contractor’s Statement of Release
In consideration of the modification(s) agreed to herein as complete equitable adjustments for the Contractor’s _______ (describe) _________ “proposal(s) for adjustment,” the Contractor hereby releases the Government from any and all liability under this contract for further equitable adjustments attributable to such facts or circumstances giving rise to the “proposal(s) for adjustment” (except for ____________).”
HOW DOES INVOICING NORMALLY HAPPEN, WHERE A SUBCONTRACTOR OR AN ENTITY OTHER THAN THE PRIME PERFORMS THE CHANGE ORDER WORK?
Government contracting arrangements can be complex. The prime contractor is not necessarily the entity that does the work under a change order. Sometimes, it is a subcontractor, lower tier subcontractor, or other entity (for example, a joint venture partner) that actually performs the work under the change order.
Typically, the only entity that has privity of the contract with the government is the prime contractors. That means the change order is issued to the prime contractor, and as a general rule, it is the prime who is on the hook for getting the job done.
If you are the subcontractor who does the work and you need to get paid for that, how does that happen?
The usual case is the sub invoices the prime, the prime pays the sub, and it is the prime’s problem to deal with the government and all the change order, request for equitable adjustment, invoice the government, etc. issues.
That doesn’t always happen, though. Sometimes when primes don’t get paid, they don’t pay their subs. Or worse, the prime does get paid for the change order work, and neglects to pay the sub anyway.
FLOW-DOWN CLAUSES AND PROTECTING SUBCONTRACTOR RIGHTS: WHAT KINDS OF SUBCONTRACT CLAUSES CAN THE CO APPROVE?
When negotiating contracts with the prime, the savvy subcontractor knows that change orders can happen, and that subs can end up performing the work under a change order. They know which types of clauses the Contracting Officer can approve. Typically, where the real party at interest is the sub, in a contractor claim situation, the prime sponsors the claim on behalf of the sub. It helps to have clauses in the prime/subcontract, clearly establishing a prime’s obligation to sponsor claims against the government on behalf of the sub, or that otherwise protect a subcontractor’s ability to pursue a claim.
The CO cannot approve:
Subcontracts obligating the CO to deal directly with the subcontractor;
Subcontracts that make the results of arbitration, judicial determination, or voluntary settlement between the prime contractor and subcontractor binding on the Government, (FAR 44.203(b)(3));
Clauses that attempt to obligate the contracting officer or an appeals board to decide questions that do not arise between the Government and the prime contractor, or that are not cognizable under the clause at 52.233-1, Disputes. (FAR 44.203(c))
The CO can approve:
Clauses giving the subcontractor the right of indirect appeal to an agency board of contract appeals if the subcontractor is affected by a dispute between the Government and the prime contractor. Indirect appeal means an assertion by the subcontractor of the prime contractor’s right to appeal or the prosecution of an appeal by the prime contractor on the subcontractor’s behalf. The clause may also provide that the prime contractor and subcontractor shall be equally bound by the contracting officer’s or board’s decision. (FAR 44.203(c))
The subtle trap to avoid:
It is a subtle distinction, the difference between a sub dealing directly with the government (not allowed), vs. assertion by the subcontractor of the prime contractor’s right to appeal (allowed). The sub needs to be aware of the potential trap. The savvy sub will ensure that the language of the clause in the prime/sub contract does not ignore the distinction.
WHAT ARE SOME COMMON ISSUES WHERE A SMALL BUSINESS SUBCONTRACTOR PERFORMS THE CHANGE ORDER WORK?
Subcontracting Plan Compliance
Change orders can affect the total amounts of subcontracting dollars a prime contractor spends on its array of subcontractors. If your firm has in place a subcontracting plan that was approved by the CO when the contract was awarded, a change order can affect your compliance with your subcontracting plan in a variety of ways.
Therefore, if you have subcontracting plans in place, it would be wise to verify that change orders are not adversely affecting your firm’s compliance with its subcontracting plans. Failure to comply with a CO-approved subcontracting plan can be a material breach of a contract which can result in termination of the contract, and liquidated damages. Where the CO has approved a plan, and now you need to change it to reflect the impact of a change order, a best practice is to ensure that the CO is on board with, and approves, any changes. A requested adjustment to a subcontracting plan can be included as part of a request for equitable adjustment, and/or as part of a claim.
Small Businesses – Bigger Is Not Always Better
There are numerous dollar thresholds that matter in the arena of small business and economic preference program subcontracting. For example:
If you are a small business under a particular NAICs code, and participating in one of the government’s preference programs, be cognizant of how a change order might affect your size status. The change order that increases your revenue could be the change order that unexpectedly bumps you over a size standard threshold.
A HUBZone contractor might be subject to a change order that either increases its workforce outside the HUBZone, or decreases the workforce within the HUBZone. Relocation or displacement of employees has the potential to affect HUBZone eligibility status. A best practice would be to address the issue in the request for equitable adjustment, or the claim, associated with the change order.
Reporting to the CO: Late Payments to Small Business Subcontractors
FAR 52.242-5 – Payments to Small Business Subcontractors contains a provision requiring a prime to report, to the CO, untimely (90 days past due) payments to small business subcontractors. The reporting deadline is 14 days after entitlement to payment under the terms and conditions of the subcontract. The clause requires the contractor to provide the reason for the untimely payment in its notice to the CO.
The clause also requires reporting of reduced payments. According to paragraph (a) of the 52.242-5, the “reduced payment” reporting requirement appears only to apply where the government has paid the prime contractor for the work performed. It appears that if the government has not paid the prime, the reporting requirement of 52.242-5 would be inapplicable. Therefore, where a prime has not been paid by the government, but the sub has completed the change order work, the prime would not need to report reduced payments to the CO, the prime would only need to report untimely payment or non-payment.
That said, subcontractors are not necessarily limited to FAR or federal law remedies when prime contractors fail to pay them under a federal government contract. State law can apply to contracts between sub and prime contractors.
When change orders happen, it is good to be prepared, so that agreement can be reached quickly and easily between the government and the contractor. The goal is for the contractor to just do the work ordered by the change order, and be paid and made whole.
– Make sure that changes to your contract are only issued by an authorized Contracting Officer.
-Track your costs, so you have all the data you need for a quick, efficient, negotiation of the equitable adjustment.
– Understand what field pricing is, and how to prepare for it. Be ready to comply with requests for data from the CO.
– If you are a prime contractor, and you can’t reach an agreement with the CO on your request for equitable adjustment, you can submit a certified claim.
– If you are a subcontractor, make sure the prime contractor will sponsor your claim if you don’t get paid. Know the right language to use in your contract clauses. Know that if you don’t get paid, the prime contractor may be required to report that to the CO.
There are things a contractor can do to be prepared for every step of the FAR’s change order process, and submit a request for equitable adjustment that is easy for a Contracting Officer to review and approve.
For a free and confidential consultation with government contracts attorney Cheryl Adams call Watson & Associates, LLC on 1-800-601-5518 or 720-941-7200.