DEFENSE CONTRACTING

Pitfalls Abound in Contract Disputes Act Claims

7/1/2012
By James D'agostino and Ryan C. Bradel
Preparing and filing a certified claim under the Contract Disputes Act for payment from the government for performance of a contract generally is straightforward work for contractors and their legal counsel. Yet certified claims are not without ethical pitfalls. Moreover, failing to adhere to the rules concerning such claims can expose contractors to government counterclaims and allegations of a fraudulent claim.

Typically, a claim is filed when some dispute has arisen as to the money owed to a contractor for work performed. For example, following a termination for convenience, a contracting officer may invite a contractor claim as a starting point for determining what is owed.

A proper money claim must be supported by detailed legal and factual support. The act, among other things, requires a certification that: the claim is made in good faith; the supporting data are current, accurate and complete to the best of the contractor’s knowledge and belief; and the amount claimed represents the contract adjustment for which the contractor believes the government is liable.  

Based on these requirements, the Court of Federal Claims routinely has rejected claims, or worse, penalized the claimant, when the filed claim is: frivolous or filed for an impermissible purpose; contains false or careless representations of fact; or is based on unreasonable legal positions.

Filing a claim as a negotiating ploy or to capture the government’s attention is forbidden. In private sector commercial disputes, a party may initiate a lawsuit with a large damage calculation — based on speculative theories of future expected profit —as a way of getting the defendant’s attention or in order to bargain for a favorable settlement. In the government contracts arena, such tactics are not tolerated. A certified claim submitted to the government must be based on the amount that the contractor honestly believes that the government owes it when it certified the claim. Thus, inflation of claims based on speculative estimates of future costs or profits with an eye to settling at a much lower amount is not permitted. Rather, the claim must be based on clearly articulated facts supporting the amounts presently owed, as of the date the claim is submitted.

Additionally, contractors must be scrupulous with the facts on which they rely in supporting their claims to ensure that they are carefully and accurately represented. The Court of Federal Claims has held that, at a minimum, a contractor has a duty to carefully examine its records to make certain that the amounts that it is claiming are accurate. Indeed, estimates are unacceptable when actual records are available. While a contractor will not be faulted for a simple math error or innocent mistake, intentional ignorance or reckless disregard for the accuracy of claimed amounts can lead to charges of fraud.

And it is not enough that basic facts recited in support of the claim are true.

Claims cannot include extrapolations from those facts that are based on unsupportable assumptions or the calculation of damages that are otherwise unreasonable. Contractors must use the method of damage calculation that is the most accurate and precise method available. Indeed, the Court of Federal Claims has faulted contractors for failing to use outside experts to support their calculations.

Finally, a contractor may not base its claim on an unreasonable or inconsistent legal position. Contractor claims may take advantage of a clearly disputed point of law, but implausible legal arguments can be deemed fraudulent. The Court of Federal Claims has found fraud where the claim is based on an erroneous interpretation of a regulation where the court found the meaning of the regulation clear and not susceptible to multiple interpretations, nor containing terms of art not easily understood by the layman. The same principle applies to unreasonable interpretations of the contract.

The consequences for failing to abide by the rules for certified claims can be severe. Under the Forfeiture of Fraudulent Claims Act, a claim is forfeited when the government can show there was fraud in the proof, statement or establishment of the claim.  Thus, contractors that overreach in their claims may lose them entirely. Even worse, the government may counterclaim for the amount fraudulently overclaimed.

Under the anti-fraud provisions of the Contract Disputes Act, the contractor is liable for an amount equal to the unsupported part of a claim plus the government’s costs attributable to reviewing the fraudulent portion of the claim, though the remainder is unaffected and may be pursued by the contractor. The contractor may also be fined under the False Claims Act.

The frequency and aggressiveness of government counterclaims based on improperly prepared claims has been on a steady rise.  Accordingly, contractors must exert due care in preparing claims to ensure factual accuracy, proper calculations and a legitimate legal foundation. Otherwise, claims for payment can suddenly transform into obligations to the government.

L. James D’Agostino (dagostinoj@gtlaw.com) is a shareholder and Ryan C. Bradel (bradelr@gtlaw.com) is an associate in Greenberg Traurig LLP’s government contracts practice group. The views expressed are solely those of the authors.


Topics: Business Trends, Doing Business with the Government, Service Contracts, Defense Contracting, Defense Contracting

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