FAR Did Not Preclude Contractor From Requiring Cost/Pricing Data from Subcontractor to Substantiate REA; ASBCA No. 57530, Appeals of Kellogg Brown & Root Services Inc.

Appeal of the deemed denial of a claim seeking reimbursement of the costs of a subcontractor’s REA is denied, where the fixed-price subcontract placed the risk of delay on the subcontractor and therefore the prime was not obligated to pay delay costs. ASBCA also found the contractor failed to show the government had not performed its obligations under the prime contract or objected to delivery extensions required by the security situation in Iraq. To the extent any of the claims had merit, the board found the contractor had failed to substantiate any of the subcontractor’s claimed costs and instead relied on general commercial rates and estimate models that were clearly based on faulty assumptions. While the appellant argued the FAR precludes agencies from requesting cost or pricing data for commercial contracts, the board explained the FAR did not govern the subcontract.

Kellogg Brown & Root Services Inc. appealed the Army’s denial of its claim seeking costs it incurred settling two requests for equitable adjustment submitted by a subcontractor providing accommodations to house military personnel under KBR’s LOGCAP III contract.

The Army awarded KBR a LOGCAP III cost-plus-fixed-fee task order requiring the contractor to provide living accommodations to military troops and coalition forces in various locations in Iraq. The task order required the trailers to be provided no later than December 15, 2003, and stated that the government would provide for the security of contractor personnel in convoys and on-site, commensurate with perceived threats and DoD guidelines.

When KBR’s intended supplier would not deliver the trailers to sites in Iraq, KBR subcontracted the job of buying, transporting, and installing the units to First Kuwaiti Co. of Kuwait via a fixed-price contract for $80,978,562 for 2,252 prefabricated trailers. The subcontract required delivery to be complete by December 15, but allowed for delays in KBR convoy coordination and support and stated that FKTC would be entitled to an equitable adjustment if delays were caused by KBR or the government. Outside of several specific exceptions, the contract provided that no order, statement, or conduct would entitle FKTC to an equitable adjustment.

Although the government provided that security escorts would be available to contractor convoys, resources were not unlimited and security forces were assigned to priority shipments first. In short, the threat environment often resulted in delays to the shipment of non-essential goods, including the trailers to be delivered by KBR and its subcontractor. While FKTC had hundreds of trailers ready for delivery, the military prioritized the shipment of food and fuel. On December 10, 2003, KBR and FKTC executed a subcontract change order extending the period for delivery to February 1, 2004, to account for convoy delays.  There is no evidence that the government objected to this extension. KBR later issued a second subcontract for the delivery of an additional 1,760 trailers to another location, after KBR determined that its original subcontractor would be unable to perform.

On December 23, 2003, Kuwaiti officials ordered FKTC to remove overflow trailers from state property near the Iraq border, where trailers were stored awaiting delivery. In addition, once trailers were delivered to the designated locations, changes to the installation plans by government officials required some trailers to be placed in a storage area and then moved a second time to the permanent location. KBR extended FKTC’s period of performance to August 1, 2004, and the government did not object.

FKTC submitted a request for equitable adjustment to KBR seeking costs related to the leasing of land for temporary storage prior to delivery, costs arising from double handling trailers when delivered to the designated military bases, and repairs to equipment related to the double-handling. In sum, FKTC sought $30.6 million.

KBR’s subcontract administrator determined that KBR had ordered FKTC to perform double handling and had “guaranteed” FKTC reimbursement of costs, and asked the subcontractor to submit an itemized breakdown. After negotiations, the parties agreed to add $23.8 million to the price of the subcontract.

On July 15, 2004, FKTC submitted another proposal to KBR for an equitable adjustment in the amount of $41.9 million, in relation to 83,942 claimed days of idle truck time FKTC alleged occurred at the Kuwait/Iraq border. To arrive that this number, FKTC estimated a five to seven-day travel time for each truck from the origination point to the border, when in fact the trip could takes weeks. The estimate also assumed that every truck arriving at the border would cross into Iraq the next day, without accounting for delays at the border or delays due to a lack of a security escort. In total, the REA assumed that any travel time to the border beyond seven days and any idleness at the border was compensable.

However, The model also did not account for where trucks were located on any given day and failed to account for trailers offloaded onto the leased land, relieving trucks from having to wait. According to the model, on multiple occasions FKTC experienced over 400 truck delay days on a single day, though FKTC had said it only needed between 100 and 150 trucks available for convoys per day. Further, FKTC did not always have the number of trucks available at the border dictated by the model or have access to the model’s required number of trucks.

KBR’s subcontract administrator concluded that the contract did not entitle FKTC to payment for convoy delays. He also stated that FKTC’s $500 daily rate was a market rate, and suggested that any request had to be supported by actual costs incurred. However, after negotiations, KBR concluded the government was responsible for the delays—and payment—and added $24.9 million to the subcontract price, reflecting a lower price per delay day per truck.

KBR paid both REAs and received reimbursement from the government. During an audit, DCAA asked KBR for cost data to support the settlement amounts, but KBR never obtained cost information from FKTC, except for data related to the land lease at the Kuwaiti border. DCAA suspended the settlement amounts, then disapproved them. The government recovered $51,273,482, which constituted the settlement amounts plus indirect costs and the award fee.

Though the contracting officer considered a possible settlement with KBR, and issued an interim determination allowing $25.5 million of the amount sought. This amount recognized government-caused delays requiring the rental of storage areas and repairs due to double-handling. The CO did not approve amounts related to convoy delays. While the CO concluded that $300 per day was a reasonable delay rate, he found that KBR and FKTC had not substantiated the number of trucks delayed or the number of days each truck was delayed. Despite the interim determination, the settlement was never approved and KBR appealed form the deemed denial.

Considering the delay REA seeking compensation for 83,078 days of delay of the transport of the trailers into Iraq, the board found it unreasonable for KBR to conclude that the government failed to perform the prime contract and therefore was responsible for the delays. KBR did not suggest the government failed to provide the agreed-upon security escorts or that the military had not made its best efforts to place FKTC’s trailers into convoys as quickly as possible. On appeal, KBR suggested the government failed its obligations by not providing convoys within enough time to prevent FKTC’s trailers and trucks from having to wait at the border. Alternatively, KBR argued the government was obligated to change the period of performance.

The board disagreed, explaining that neither the prime contract nor subcontract identified a specific time table that the military and KBR were obligated to follow to place trailers into secured convoys. Thus, neither KBR nor FKTC had any contractual right to expect the military to place any and all trailers arriving at the border into convoys the very next day, as assumed by FKTC’s delay model. In fact, the board noted that KBR was well aware of the security situation, movement restrictions, and security requirements, and therefore could not assume that arriving transports would cross the border within 24 hours. KBR consciously chose to pass on the risks of delay to FKTC through its fixed-price subcontract, the cost of which covered any prolonged delays at the border.

KBR argued that the board previously found that the military did not promised for other materials and services delivered by KBR under the same task order, and therefore should make a similar finding here. However, in that previous appeal, KBR and its subcontractors had to use private security to perform their work. In this case, however, the military provided security for every convoy and KBR merely argued the government did not act quickly enough to place the trailers into secure convoys. ASBCA’s previous decision did not address, much less hold, that the contract dictated time limits upon the government’s provision of convoy security.

KBR also suggested the contracted delivery date of December 15, 2002, amounted to the government’s guarantee that its convoy security would enable KBR to comply. However, the board found this inference unreasonable. Further, the board noted KBR provided no evidence the government objected to changes to the subcontract extending the delivery dates or took any adverse actions. Therefore, the board found no reason for KBR to conclude it was still required to comply with the December 15 deadline.

While KBR extended additional compensation to FKTC, the board found it was not contractually obligated to do so under the terms of the fixed-price subcontract, and therefore any loss was due to KBR’s business judgment, not government action.

Further, the board found that KBR had repeatedly failed to substantiate FKTC’s cost assertions. For example, while KBR concluded that a $300 per day delay rate was reasonable, the board found the contractor made no inquiry into FKTC’s actual costs to lease the trucks or pay its drivers. Additionally, instead of requiring evidence of the number of days trucks were delayed, KBR accepted an unrealistic FKTC model of delay days developed from a series of impractical assumptions. KBR also ignored the fact that once FKTC procured land for a storage area, the trucks were unloaded and freed for other deliveries, and therefore were not idle during the entire delay period. The board found it unreasonable for KBR not to request this information and for FKTC not to provide it.

KBR also argued that its subcontract with FKTC was for commercial items and therefore it was barred by the FAR from basing the REA on actual costs. The board stated plainly that this was not true. Even if the contract were commercial in nature, KBR subcontract with FKTC was not governed by the FAR. The board found no evidence FKTC relied on the FAR to develop its REA, or that KBR had previously employed this interpretation when settling other subcontract REAs—including 70 other subcontracts with just FKTC—and then received reimbursement from the government. KBR also offered no legal precedent supporting this contention, and in fact acknowledged that it was not required to adhere to the FAR in administering its subcontracts. In short, the board found KBR failed to show that a prudent person conducting a competitive business would have resolved FKTC’s delay REA based upon the model submitted by FKTC.

The board also found KBR’s settlement of the double-handling REA on the basis of price and not costs was unreasonable, on the same general grounds. While the task order did not contemplate double-handling arising from the government’s delay preparing the sites for the trailers, and therefore the board found some merit to the REA, KBR did not require FKTC to substantiate its costs. Instead, KBR based its settlement on a negotiated price and various rates. KBR never verified these costs, what equipment was used to perform the work, or any invoices.

Kellogg Brown & Root Services Inc. is represented by Craig D. Margolis and Christian D. Sheehan, Arnold & Porter Kaye Scholer LLP, and by Amy L. Riella, Carla Jordan-Detamore, and Christina J. Ferma, Vinson & Elkins LLP. The government is represented by Arthur M. Taylor, DCMA Chief Trial Attorney, Carol Matsunaga, Senior Trial Attorney, and Kara M. Klaas, Trial Attorney, Defense Contract Management Agency; and by Russell B. Kinner, Patrick M. Klein, and David W. Tyler, Trial Attorneys, Department of Justice.