Federal Circuit clarifies the total cost method of proving damages

Army Lawyer, April, 2004 by Robert Neill

"If the total cost method of proving damages were not already dead, the [United States Court of Appeals for the Federal Circuit] CAFC drove a stake through its heart with the Propellex Corporation decision." (1)

Introduction

In a recent case, the United States Court of Appeals for the Federal Circuit (CAFC) clarified the requirements for recovery of damages in government contract disputes using a total cost method. In Propellex Corp. v. Brownlee, (2) the CAFC affirmed an Armed Services Board of Contract Appeals (ASBCA) decision that denied, in part, Propellex Corporation's (Propellex) modified total cost claim for damages on the basis that Propellex had not established the impracticability of proving its actual losses directly. (3) In its Propellex decision, the CAFC interpreted the four requirements for recovery of damages under the total cost method set out in Servidone Construction Corp. v. United States. (4) The Propellex decision clarified the first of the four Servidone proof prerequisites which requires that, in order to recover damages under the total cost method, a contractor must first establish the impracticability of proving its actual losses directly. (5) Here the court held that a contractor cannot establish the impracticability of proving its actual losses directly by unreasonably failing to keep records of its actual costs. (6)

Methods of Establishing Damages

The total cost method is one of several methods a contractor may employ to prove the amount of a claimed equitable adjustment. The accepted methods of proving damages include submitting actual cost data, submitting estimates of actual costs, using a total cost method or a modified total cost method, and using a "jury verdict" method. (7)

Using actual cost data to establish the amount of an equitable adjustment for additional work is the preferred method of proof. (8) Actual cost data "provides the court, or contracting officer, with documented underlying expenses, ensuring that the final amount of the equitable adjustment will be just that--equitable--and not a windfall for either the government or the contractor." (9) In the absence of actual cost data, contractors may use estimates to establish the amount of an equitable adjustment for additional work. (10)

The total cost method of measuring damages, in contrast to the specificity of proving actual damages, consists of merely subtracting the costs in a contractor's bid from its actual cost of the contract. (11) This imprecise method of proof does not identify the specific extra costs incurred as a result of the changes, differing site conditions, or delays encountered in contract performance. (12) Instead, this method assigns liability for all costs in excess of a contractor's bid estimate to the government. Accordingly, the use of the total cost method to prove damages is not favored. (13)

The modified total cost method of calculating damages uses the total cost method as a starting point, but makes adjustments to allow for various factors (e.g., a below-cost bid) to arrive at a reduced figure that fairly represents "the increased costs the contractor directly suffered from the particular action of [the] defendant which was the subject of the complaint." (14) Use of both the total cost method and the modified total cost method of establishing damages is limited to cases that meet four basic requirements described below. (15)

Apart from using actual costs or estimates, the total cost method, or a modified total cost method to calculate damages, courts and boards have also used a jury verdict method to establish the amount of a contractor's damages when there is clear proof of injury, there is no more reliable method of computing damages, and there is sufficient evidence to make a fair and reasonable approximation of the damages. (16)

The Total Cost Method and the Servidone Requirements

The Servidone decision sets out four requirements that a contractor must meet in order to use the total cost method to prove its damages. (17) A claimant hoping to employ this method has the burden of proving: "(1) the impracticability of proving actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added costs." (18) A contractor hoping to employ a modified total cost method still must prove all four of these requirements. The Propellex court noted in its decision that, "under its modified total cost method claim, Propellex still had the burden of proving the four requirements for a total cost recovery set forth above. The modified method simply was a way of easing that burden somewhat." (19)

The Dispute

In 1988 and 1990, the U.S. Army Armament, Munitions and Chemical Command awarded Propellex two firm fixed-price contracts to deliver Mark 45 electric gun primers to the U.S. Navy for a combined total price of approximately $2.6 million. (20)

The contracts required Propellex to submit production lot samples to the government for testing at the Naval Surface Warfare Center (NSWC) facility in Indian Head, Maryland. (21) This lot acceptance testing included a moisture analysis of the black powder contained in the primers. (22) As a result of this testing, in September 1990, the Army determined that lot six under the first contract did not meet contract requirements, because black powder samples exceeded the maximum allowable moisture content limit. (23) In 1991, the NSWC conducted lot acceptance testing of production lots under the second contract, and the government found lots one through three also exceeded the maximum allowable black powder moisture content limit. (24)