In my column last month I discussed an Ohio case on home
office overhead. This month I will discuss a recent Interior Board of Contract
Appeals decision which allowed a contractor terminated for the government's
convenience to recover 10% overhead, despite the contractor's actual overhead
costs of 5.05%, and to recover 30% profit.
Marshall Associated Contractors Inc. was the low bidder on a
Bureau of Reclamation (BOR) project to supply approximately 1,061,400 cu yd of
sand and coarse aggregate for the construction of the Upper Stillwater Dam in
Utah. The contract specifications required Marshall to take materials for
aggregate production from a borrow area that BOR represented as containing
readily crushable sandstone. Actually, BOR's own boring test results revealed
that the borrow area contained extremely hard and abrasive materials that did
not meet the specifications. However, Marshall was not given the test results
and was not permitted to conduct its own testing prior to bidding for the
project. After BOR issued the Notice to Proceed, Marshall conducted its own
tests and notified BOR of the problem with the material; however, BOR refused to
change the specifications.
Over the next two years, Marshall took extraordinary
measures to overcome the problems created by the borrow material. However,
Marshall was unable to meet the production quantities called for in the
contract, and BOR terminated Marshall for default. While BOR refused to
recognize the existence of a differing site condition as asserted by Marshall,
the reprocurement contract clearly specified that the rock at the site was hard
to very hard.
Marshall filed a certified claim with BOR. Marshall never
received a final decision from BOR regarding its differing site condition claim
and appealed BOR's default termination decision to the Interior Board of
Contract Appeals. In an entitlement decision, the Interior Board found against
BOR and converted the default termination to a termination for convenience.
After the parties were unable to reach an agreement on the amount of recovery,
the Interior Board decided for them.
Soaking it in
Generally, when a contract is terminated for convenience,
the terminated contractor is entitled to recover its allowable costs, including
profit. Indirect or unabsorbed overhead presents a problem in this situation
because it is intended to compensate the contractor for work stoppages, idle
facilities and the contractor's inability to fully use available manpower
caused by the government. Overhead tends to increase disproportionately. There
is less direct cost base over which to allocate costs incurred at the usual
rate.
Among the principal costs Marshall claimed as a result of
the differing site condition was unabsorbed overhead. Last month, I discussed
the Eichleay formula method of calculating overhead. This case was different in
that instead of a delay there was a termination. Here, salaries and expenses
went down as Marshall applied all its resources to cover increased construction
costs. BOR's auditors allowed 5.05%. Marshall argued that because of the
circumstances of the project, overhead should be based on its six- or
eight-year historic averages of 9.3% or 10.82%, respectively. The board allowed
10% of direct costs, concluding that the government's misleading contract
specifications resulted in Marshall's devoting all its resources to the
project, creating a serious distortion of administrative costs.
The board also concluded that Marshall was entitled to 30%
profit. The board found Marshall's production rate "truly remarkable"
especially when compared to the production rate achieved by the reprocurement
contractor, who was fully informed about the conditions prior to bidding.
Marshall had scheduled the project to be completed in one year.
It is not unusual for a contractor to encounter site
conditions during construction that materially differ from what the owner
represented at bid time. An owner's unwillingness to release test results
concerning materials required by the specifications may be a forecast of
problems that the contractor will encounter during construction. While in
Marshall's case the board allowed a recovery of overhead that was almost double
the costs Marshall actually incurred, contractors should take note of the
exceptional circumstances of this case.
Barring a substantially similar situation, a contractor
should not expect to will be as fortunate.
