1. Unique Pricing And Estimating Challenges Faced In Change Orders, Requests For Equitable Adjustments, And Claims
Breakout Session # 408
Greg Bingham
Date: July 20, 2010
Time: 11:15 am - 12:30 pm 1

2. Recognized Claim And Damages Theory “Three Column Approach”
Actual
Would Have Been
Claim
Less
Equals

3. Reasons For Increased Costs
Scope Increases
Unit Rate Changes
Labor And Material Unit Rates
Inefficiencies (Disruption)
Delays
Time Related Costs
Inflation
Cost Of Capital (e.g., Interest)

4. Time-Related Cost
$1,000
Direct Labor
$500 $0

5. Activity-Related Cost
$1,000
Direct Labor
$500 $0

6. “Joint” Cost Direct Labor Activity- Related Time- Related $1,000 $500$0

7. Claim Methods Actual Costs Change Orders Change Orders Change Orders
Total Cost Claim
(Entire Overrun)
Contractor
Inefficiencies
Not Claimed
Modified Total
Cost Claim
Build Up Claims
Change Orders
Change Orders
Change Orders
Contractor
Original
Cost
Estimate
Contractor
Original
Cost
Estimate
Contractor
Original
Cost
Estimate
Contractor
Original
Cost
Estimate

8. “Sanity Check” Overrun Claimed Claimed (Entire Overrun) Claimed
(More Than
Entire
Overrun)
Not Claimed
Contractor
Cost
Estimate
(with Changes)

9. How Do The Methods Compare?
High
Modified
Total Cost
Detailed
Cost
Build-Up
Total Cost
Low

10. Methods Compare? (continued)
How Do The
Methods Compare? (continued)
High
Total Cost
Detailed
Cost
Build-Up
Modified
Total Cost
Low

11. Observations On The Detailed Cost Build-Up Method
Customers And Courts Strongly Prefer Detailed Cost Build-Up Method
Significant Up Front Preparation Effort, But Often The Least Costly Method In The Long Run
Faster Settlement (Less Customer Resistance)
Generally Higher Recovery Percentage Than Total Cost Or Modified Total Cost Methods

12. Observations On The Modified Total Cost Method
Modified Total Cost Claims Can Be An Effective Tool For Getting A “Quick And Dirty” Claim On The Table For Customer Consideration
Vulnerable To Customer “Slow Roll”
Should Be Supported By Detailed Cost Build-Ups Or “Benchmark” Support Where And As Soon As Possible
Properly Done, A Modified Total Cost Claim Requires Much More Effort Than Perceived

13. Improving Modified Total Cost Claims
Combine The Modified Total Cost Claim With Some Detailed Cost Build-Up Claims
Example Constructive Changes
Delay Impacts
Labor Disruption Examples
Contractors Can Present Both Types Of Claims And Argue In The Alternative
Different Pricing For Different Legal Arguments
Early Settlement Discussions Or ADR

14. Labor Claims

15. Reasons For Increased Costs – Labor Claims
Scope Increases
Unit Rate Changes
Labor And Material Unit Rates
Inefficiencies (Disruption)
Delays
Time Related Costs
Inflation
Cost Of Capital (e.g., Interest)

16. Labor Overrun Components
$30
Wage
Variance
$25,000
9,000
Hours
Quantity
Variance
$120,000
10,000
Hours
Productivity
Variance
$30,000
$25 $
Budget
$125,000
5,000
Hours
Time

17. Labor Overrun Components
$30
Wage
Variance
$50,000
$25
9,000
Hours
Quantity
Variance
$100,000 $
10,000
Hours
Productivity
Variance
$25,000
Budget
$125,000
5,000
Hours
Time

18. Labor Claims, Generally Should
Be Based On Actual Project Experience.
Be Based Upon Concurrent, Objective Evidence.
Reflect A Reasonable Attempt By The Contractor To Capture Costs Expended Outside Of Its Control.
Reflect Actual Productivity Information, If Available.
Consider Actual Labor Rates Vs. Change Order Rates.
The Contractor Advances Its Position By These Methods

19. Labor Claims – Approaches
Total Cost / Modified Total Cost
Measured Mile
Industry Factors

20. Measured Mile Example 1.36 MH/LF 1.13 MH/LF 1.0 MH/LF Period Period2
Period 3
1.36 MH/LF
Impact .23 mh/lf
1.13 MH/LF
Budget
.75 MH/LF
1.0 MH/LF

21. Measured Mile Example

22. Industry Factors Mechanical Contractors Association Of America (MCAA)
Used For Thirty Years
Updated Publication In 2005
Derivation Of Factors Not Known
Most Complete Approach
Corps Of Engineers Modification Impact Evaluation Guide (COE Guide)
July 1979
Curves For Certain Impacts (Trade Stacking, Crew Size, Overtime)
Officially Withdrawn By The Corps
Construction Users Roundtable (CURT)
Recent Empirical Data
Not Published
Deals With Overtime, Weather, Schedule, Planning

23. Pitfalls Of Industry Factors Approach
Basis Of Data Is Often Unclear
Applicability To Your Situation
Different Industry
Different Impacts
Very Judgmental

24. Equipment Costs

25. Reasons For Increased Costs – Equipment Costs
Scope Increases
Unit Rate Changes
Labor And Material Unit Rates
Inefficiencies (Disruption)
Delays
Time Related Costs
Inflation
Cost Of Capital (e.g., Interest)

26. Equipment Costs – Issues
Construction Equipment Can Be Owner-Supplied, Contractor-Owned, Or Rented.
Very Complex Area Due To Number Of Disparate Views Of “Actual” Costs.
Can Be Complicated By “Related Party” Transactions.
Equipment Is Frequently Priced By “Agreed To” Rates To Avoid Confrontations Over Costs.
Blue Book
Cal Trans

27. Equipment Costs – Cost Components
Ownership Costs - Charges For Depreciation Of Acquisition Costs, As Well As Overhauling, Insurance, Financing, Taxes, And Storage Of Equipment.
Operating Costs - Expenses The Contractor Faces By Turning The Equipment “On.” Charges Include Routine Equipment Maintenance, Fuel, Lubrication, Tires, Tracks, And Tool Attachment Repair.

28. Equipment Cost Issues What Does The Contract Say?
Change Order Rates Vs. Major Claims?
Recording Equipment Hours
Idle Vs. Standby
What Are Actual Costs?

29. Home Office Overhead Costs

30. Reasons For Increased Costs – Home Office Overhead
Scope Increases
Unit Rate Changes
Labor And Material Unit Rates
Inefficiencies (Disruption)
Delays
Time Related Costs
Inflation
Cost Of Capital (e.g., Interest)

31. Home Office Overhead – Conceptual Issues
Year 7
G&A 14%
Planned Revenue
Year 10
Planned G&A 15%
Year 13
G&A 12% 20 40 60 80
100
120
140
160 5 6 7 8 9 10 11 12 13 14 15
YEARS
$ MILLIONS
$20M G&A Supports
$131M-?M in Revenue
Actual Revenue
$10M G&A Supports
Up to $70M in Revenue
Actual G&A 21%
$15M G&A Supports
$71M-$130M in Revenue
G&A Expenses

32. Home Office Overhead – Example Costs
Officers’ Salaries
Rent
Advertising & Promotion
Corporate Accounting
General & Administrative
Estimating
Legal
Insurance
Utilities
Office Supplies
Telephones
Contributions
Medical And Other Benefits
Taxes

33. Home Office Overhead
Generally Represents The Cost To The Project For Support From A Remote Home Or Division Office, Which Provides Some Services To The Project. Also Called General & Administrative (“G&A”) Costs.
The Eichleay Formula Is Often Used As A Means Of Allocating Some Portion Of Home Office Overhead To Projects, Which Have Been Delayed By Owner Caused Interference (Billings To Billings).

34. Home Office Overhead – Eichleay Formulax
Home Office Overhead
For Actual Contract
Period =
Allocable Home Office
Overhead
Contract Billings
Total Billings For Contractor
In Contract Period
Daily Home Office
Overhead Rate Allocable
To Contract
Actual Days Of Contract Performance
Number Of Days Of
Compensable Delay
Claimed Home Office
Overhead Allocable To
Contract

35. Home Office Overhead – Eichleay Vs. Cost-To-Cost
Percentage
Percentage
Project A
10%
TOTAL
100%
Project B
40%
Project C
50%
Costs
$195,000
$520,000
$585,000
$1,300,000
15%
40%
45%
100%
$140,000
$560,000
$700,000
$1,400,000
Billings
Claim Project
Eichleay Method
$480,000 x 10% = 48,000
Cost-To-Cost Method
$480,000 x 15% = $72,000
vs.

36. Why Are We So Careful?

37. Daewoo Engineering And Construction Co. , Ltd. V
Daewoo Engineering And Construction Co., Ltd. V. United States of America

38. Background

39. Background Palau Has A “Compact Of Free Association” With The U.S.
U.S. Was To Build A Road Around Island Of Babeldaop (One Of 300 Islands That Make Up Palau).
Issue Was Compaction Specification For Embankments, Weather.

40. Background Daewoo’s Certified Claim
$13.4 Million In “Incurred Damages,” Additional Costs Of $50 Million Not Yet Incurred.
REA Was Ultimately Denied By The CO.
Daewoo Hired Exponent To “Update/Reprice” The Claim. Resulted In Measured Mile Study Of $42M.

41. $50 Million Court Findings Contracts Disputes Act Fraud Clause:
“If a contractor is unable to support any part of his claim and it is determined that such inability is attributable to misrepresentation of fact or fraud on the part of the contractor, he shall be liable to the Government for an amount equal to such unsupported part of the claim in addition to all costs to the Government attributable to the cost of reviewing said part of his claim.”
$50 Million

42. Claims Analysis And Pricing
Setting The Stage To
Claims Analysis And Pricing
Relevance Of Claims
Some “Street - Lore”
Identifying Contract Changes
Challenges Of Claim Preparation
Hypothetical Claim
Possible Reasons Claim Might Be Waived 42 42

43. Why Claims Are Relevant
Management – Claim Knowledge Will Improve Job Performance
Customer – Expects Some Claims
Owners And Creditors
Equity
Security For Financing 43 43

44. NOT! Some “Street - Lore” 100% Avoidance Of Changes
Customer Is Offended By Changed Work Claims
Claim Preparation Is Not “Fun”
NOT! 44 44

45. Identification Of Contract Changes Formal Changes
Unilateral Customer Directives
Pricing
Constructive Or Informal Changes
Technical Specifications
Statements Of Work 45 45

46. Claim Preparation Challenges
Skill - Mix
Sufficiency Of Resources
Scope And Pricing
Timeliness
Organization 46 46

47. Hypothetical Claim 47 47

48. Hypothetical Claim
(Continued) 48 48

49. Hypothetical Claim Claim Settlement Compared To New Business
(Continued)
Claim Settlement Compared To New Business
Assume Average Before Tax Profit Is 10%
$30 million ÷ 10% = $300 million 49 49

50. Possible Reasons Claim
Might Be Waived
Lack Of Training
Insufficient Cross Checking With Counsel
Lack Of Clarity Regarding The Original Contract Requirements
“Our Fault” Attitude 50 50

51. Conclusion
Claim Control And Preparation May Be Challenging, But Is Very Important And Beneficial To Your Company.
Damage Claim 51 51

52. Simple Example Of Dispute Process Involving The Government
FAR, Part 33: Protests, Disputes And Appeals
Contractor Notifies Contracting Officer And Prepares Claim
Claim Summary
Requirements Of The Original Contract
Describe Change (Entitlement)
Describe Impact (What Changed)
Quantify Increased Costs And Increased Schedule
Audit And Technical Evaluation Performed At Contracting Officer’s Request
Contracting Officer Negotiates With Contractor Representative
Final Decision By Contracting Officer 52

53. Simple Example Of Dispute Process Involving The Government
(Continued)
Contractor Can Accept Or Appeal Final Decision
Boards Of Contract Appeals
U.S. Court Of Federal Claims
Contractor And Government Prepare For Trial
Claim Brought Current
Document Production
Depositions
Other Preparation
Trial Or Hearing 53 53

54. Claims Pricing “How To’s”
Types Of Increased Costs
Some Recommendations For Identifying And Pricing Claims
Claim Pricing Challenges 54

55. Developing The Claim Determine The “Rough” Cost Baseline
Cost Baseline Is Generally The BAFO + Formal Changes, Or The Budget
Develop Overruns By Task, Functional Area Or Both
Cost Analysis Helps You Avoid Missing The 800 lb. Gorilla
Determine The Technical Baseline - Know The “Hard Legal Requirements” Of The Contract 55

56. Changed Work Claim
Identification 56 56

57. Typical Changed Work Claim Elements
Direct Cost Claims For Changed Work
Labor
Material
Subcontracts
Delay-Related Costs
Sustaining Personnel (i.e., Fixed Direct Charging Personnel)
Escalation (Both Material And Labor)
Unabsorbed Overhead 57

58. Typical Changed Work Claim Elements (continued)
Disruption, Acceleration And Inefficiencies
Other
Profit
Claim Preparation Costs (Internal & External)
Legal Fees
Interest 58

59. Some Challenges In Developing The Claim
Claim Development Is Resource Intensive
Requires Input Of Key Program Personnel Throughout The Process
Perspective Of Program Personnel
Waivers And Other Legal Issues
Waivers Not Fully Considered Or Too Broadly Interpreted
Schedule Slippage 59

60. Avoid Common Pricing Challenges
Double Counting Between Claim Elements
Improper Baseline
Overstated Claims
Understated Claims
No Linkage Between Entitlement And Pricing (Cause And Effect) 60

61. Summary And Recommendations
Generally Avoid Use Of Total Cost Method
Use Modified Total Cost For Settlement Discussions, ADR And Trial Where Appropriate
Consider Combination Of Modified Total Cost And Detailed Cost Build-Up Methods
When Using Modified Total Cost, Still Demonstrate And Prove Costs Claimed 61

62. Summary And Recommendations (continued)
Detailed Cost Build-Up (Change By Change) Generally Results In Fastest And Best Settlement
Perform Thorough Technical And Legal Evaluation To Determine The “Hard Legal Requirements Of The Contract”
Coordinate Cost, Technical And Legal Claim Efforts To Maximize “Hardcore” Claim Pricing
Avoid The Common Claim Pricing Pitfalls 62

63. Delay-Related Cost “How To’s”
Sustaining Personnel
Material And Labor Escalation
Fixed Overhead Costs
Claim 63

64. Schedule Analysis Goals
Quantify Actual Program Delays
Identify Actions, Inactions Or Events Which Caused Delays
Determine Party(ies) Responsible
Identify Impact On Costs = 64

65. As-Planned Vs. As-Built
Hardware
Procurement
Start
Finish
5 Months
As-Planned
Design
Assembly
4 Months
4 Months
Software
Development
Delay
3 Months
4 months
Hardware
Procurement
Start
Finish
5 Months
As-Built
Design
Design Mods
Assembly
4 Months
3 Months
4 Months
Software
Development
6 Months 65

66. Sustaining Personnel
Certain Direct Charge Personnel Perform Work As A Function Of Time
Program Extension Can Cause A Direct Increase In The Cost Of Time-Related Efforts
In Order To Identify Time-Related Personnel:
Focus On Program Roles Not Individuals
Critically Evaluate Which Roles Must Continue In Order To Maintain The Program 66

67. Sustaining Personnel Examples Of Time-Related Personnel:
Program Manager
Certain Program Control Personnel
Departmental Managers, Supervisors, And Liaisons
Direct Charge Clerks Or Administrative Personnel
Some Engineering Personnel
Certain Personnel In Quality And Product Assurance 67

68. Sustaining Personnel To Fully Support This Area Of Claim:
Provide Accounting Records For All Hours Incurred On Time-Related Efforts
Prepare Exhibit Depicting How Each Time-Related Effort Transitioned To Different Personnel Throughout The Program
Prepare A Graph Of Total Time-Related Work Throughout The Program To Show Consistency Over Time 68

69. Sustaining Personnel Direct Labor Hours Total Direct Labor Impact Of
Extended
Manning Of
Time-Related
Personnel
Time-Related Personnel Direct Labor
Planned Performance Period
Extension Period 69

70. Sustaining Personnel
Impact For This Claim Area Can Be Calculated As Follows:
Months Of Compensable Delay
Multiplied By: Average Monthly Hours
Multiplied By: Labor And Overhead Rates
To Try To Simplify Pricing, Consider Estimating The Impact Of Each Department Separately 70

71. Labor And Material Escalation
When A Program Is Delayed, The Performance Of Certain Activities And The Procurement Of Certain Material May Occur In A Later Time Period Than Otherwise Would Have Been The Case
The Increased Cost Which Is Caused By Direct Labor Rate Or Material Unit Cost Increases Are Typically The Subject Of Escalation Claims 71

72. Labor And Material Escalation
Compensable Labor And Material Escalation From Customer Delay Can Occur From:
Normal Economic Inflation
Negotiated Union Contracts
Purchase Agreements
Labor Or Skill Mix Variance $ 72

73. Labor And Material Escalation
To Prove This Claim Area:
Emphasize The Difference Between The Actual Rates And The Rates That Should Have Occurred Had There Been No Delay
Avoid Relying On Overly Simplistic Comparisons Of Bid Vs. Actual Rates Or Unit Costs 73

74. Recap Of Delay-Related Damages
Recovery Of Damages Is Dependent On Proof Of Delay
Sustaining Personnel
Material And Labor Escalation
Fixed Indirect Costs 74

75. Disruption Pricing “How To’s”
Definition Of Disruption
Some Example Causes Of Disruption
Entitlement, Causation, And Increased Cost
Some Pricing Approaches 75 75

76. What Is Disruption? Loss Of Productivity On Original Scope Of Work
Change In Working Conditions, Resources Or Manner Of Performing Work
Change Orders Can Affect Work Not Otherwise Thought Of As Changed 76

77. Example Causes Of Disruption
Changed Work
Rescheduling Of Planned Work
Excessive Overtime To Avoid Schedule Slippage
Less Than Optimal Work Sequencing
Changes In Manufacturing Or Design Work Methods
Excessive Rework
Loss Of Learning 77 77

78. Example Causes Of Disruption (Continued)
Customer Delays
Unnecessary Starts And Stops To Contract Activity
More Loss Of Learning
Underutilization Of Work Force
Loss Of Economies Of Scale
Acceleration
Excessive Overtime
Congestion In The Work Place
Resequencing Of Work Performance 78

79. Entitlement, Causation And Increased Cost
Entitlement: Often The Same As For Discrete Claims
Causation: Demonstrate The Effects Of Changed Work On The Original Scope Of Work, i.e. The Unchanged Work
Increased Cost: Quantify Increased Cost Of Performing Original Scope Of Work, Plus Profit 79

80. Simple Example In Millions Estimated Cost-At-Completion $500
Less: Original Budget <200>
Cost Growth 300
Less: Discrete Changes <110>
Unexplained Cost Growth $190 80 80

81. Disruption Pricing Approaches
“Should Cost” Approach - Compare Actual Productivity To Productivity On:
Unaffected Portions Of Work
Similar Work
Productivity Contemplated In The Original Bid
Learning Curve Analysis 81

82. Regression Analysis
Method Of Using One Or More Independent Variables To Quantify A Dependent Variable
Applying Regression Analysis To Disruption
Independent Variable - Increased Costs Of Changed Work
Dependent Variable - Increased Costs Of Unchanged Work
Regression Calculates The Mathematical Relationships Between The Variables
Least Squares Regression Analysis 82

83. Cost Recovery Issues on Claims Disclosing Cost Information
Cost Information Under CAS And / Or FAR Part 31
Cost Information Assuming CAS And FAR Part 31 Do Not Apply
Direct Costs Only
Disclosure Of Indirect Cost Rates
Disclosure Of Typical Profit Rates
Inclusion Of Expressly Unallowable Costs
Establishing That Contractors Books And Records Should Be Relied Upon
Prior Government Audits (e.g., DCAA, DCMA, IRS, EPA, DHS, Etc.)
Audited Financial Statements
Lending Covenants
Special Purpose Audits Of Claimed Costs
Reliance On The Work Of Others
Work Papers

84. Termination For Convenience Equitable Adjustment After Partial Termination
Contractor May Request An Equitable Adjustment On Continued Work (FAR )
Contracting Officer Has Authority, Unless Delegated To The TCO
Follow Cost/Pricing Proposal Format (FAR )
Costs Included In A Request For Equitable Adjustment Shall Not Also Be Included In The Termination Settlement Proposal
Contractor Shall Complete TINA Certification

85. Termination For Convenience Pricing Unsettled Contract Changes
Resolve All Unsettled Contract Changes As Part Of Negotiating The Final Termination Settlement Proposal (FAR )
Incorporate Resulting Changes In Contract Price Into The Profit/Loss Analysis (FAR )

86. Reference Materials
“BACK TO BASICS: As The Pendulum Shifts To More Fixed Price Contracts, Be Prepared For More Contract Changes and Know How To Price Them,” By Greg Bingham, Cheryl LeeVan And David Hall, American Bar Association Annual Meeting Of The Public Contract Section, August 2010.
“Administering Subcontracts After A Termination For Convenience,” By Greg Bingham and Patricia Meagher, Briefing Papers, March 2004, Thomson West Publishers.
“DCAA Contract Audit Manual Chapter Auditing Contract Termination, Delay/Disruption, And Other Price Adjustment Proposals Or Claims”

87. Greg Bingham
Greg Bingham is a Vice President with The Kenrich Group, LLC. He has over 22 years of experience in the fields of business and litigation consulting including investigation of allegations of fraud or overbilling.
Professional Experience
Mr. Bingham has assisted clients on Government Contract matters including: 1) regulatory consulting on allowable costs issues arising from the Cost Principles found at Part 31 of the Federal Acquisition Regulation (“FAR”) as well as allocation of cost issues associated with the Cost Accounting Standards (“CAS”), 2) consulting on matters involving allegations of defective pricing, false claims, mischarges and other improper billings to the Government, 3) the Earned Value Management Systems requirements of Department of Defense regulation R, 4) financial statement and special purpose auditing, 5) management consulting and 6) Foreign Military Sales issues and foreign sales issues. This experience has provided him with substantial knowledge of the program management, financial and accounting records and systems maintained by companies who sell to the Federal Government.
Greg’s work has included the quantification of cost impacts and negotiation with Government auditors and oversight personnel. Greg has planned and performed reviews of various defense contractors’ systems including Internal Controls, Accounting, Billing and Estimating as well as policies and procedures.
Contact Information:
1250 Connecticut Avenue NW, Suite 650
Washington, DC 20036
Tel: (202)
Fax: (202)
Masters of Business Administration
University of Texas at Austin
Bachelor of Science in Electrical Engineering
University of Kentucky