In a recent Armed Services Board of Contract Appeals (ASBCA) decision, Pave-Tech, Inc., the ASBCA found that the decisions a construction contractor makes, even from the very beginning of a project, have consequences. In another recent article, we warned about signing contract modifications that contain release language which could thereafter preclude recovery of costs to which a contractor thought it was entitled later in a project. The decision in Pave-Tech reinforces the importance of considering all aspects of a contract from the onset of a project.

One such decision a government contractor might be tempted to make is to accept additional field office (jobsite) overhead (FOOH) expenses for a change on a percentage markup basis, especially for a change that may not even have required an extension to the contract completion date. However, what might appear to be a windfall recovery—the government allowing the recovery of FOOH expenses (even when a change order does not require an extension to the contract’s period of performance)—could result in a contractor not being able to recover its actual FOOH when the contract completion date is extended.

In Pave-Tech, the contractor wanted to switch its method of recovering additional FOOH from a percentage markup basis to a per diem rate after executing several modifications that contained a standard percentage markup. The ASBCA reaffirmed its prior holdings that such switching, regardless of whether a time extension was involved, violated applicable Federal Acquisition Regulation (FAR) cost principles for a single distribution base for allocating a given overhead pool. Relevant FAR cost principles state that “[c]osts incurred at the job site incident to performing the work, such as the cost of superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc. are allowable as direct or indirect costs, provided the accounting practice used is in accordance with the contractor’s established and consistently followed cost accounting practices for all work.” As a result, when FOOH is treated as a direct cost, it is computed on a per diem or daily rate (e.g., $2000/day for each day of delay). In contrast, when treated as an indirect cost, FOOH is computed based on a percentage markup (e.g., adding an overhead markup of 10% on the work).

Citing prior case precedent, the ASBCA found that “a change order that does not change the contract completion date is simply at the center of a continuum which runs from a substantial increase in the time of performance at one end to a substantial decrease in the time of performance at the other.” The ASBCA went on to say that “even when a contractor proves it has failed to recover its entire overhead, that is insufficient justification for permitting an accounting change from one distribution base to another (absent special circumstances involving distortion of results, as contemplated by FAR 31.203(d).”

Thus, a contractor may choose any acceptable distribution base (either percentage markup or a per diem rate) for allocating its jobsite overhead pool to particular cost objectives, but no more than one. Among other things, the ASBCA stated that “run-of-the-mill government caused delays…. are not so special [as to qualify as ‘special circumstances’] even when they more than double the performance period.” When making a decision about how to calculate FOOH, contractors should keep in mind the ASBCA’s recent rulings and consider all possibilities for recovering overhead expenses.

If you have any questions on this topic, our Government Contracting Group is available to assist you on this or any other government contracting matters.