The Contractor's Perspective

$37 million may be too much for a warzone cafeteria

Posted in Claims and Disputes, Construction Contracting, Cost Issues, Subcontracting

Contributed by Husch Blackwell Associate Thomas J. Rath

It makes sense to require contractors seeking reimbursement of costs they incur in the performance of a government contract to show that the costs were reasonable. According to the latest decision addressing KBR’s effort to recoup costs incurred to support the United States military in Iraq, the rule is no different for work performed in a warzone. Without additional proof of reasonableness, the Court of Federal Claims concluded that $37 million may be too much for a dining facility needed to feed and protect 6,000 American soldiers. See Kellogg Brown & Root Services, Inc. v. United States, Nos. 09-428C & 09-578C (Fed. Cl. Sept. 27, 2012).

The decision arises from KBR’s claims for costs incurred to construct and operate a reinforced concrete dining facility needed to feed and protect 6,000 soldiers in Mosul, Iraq. Though KBR’s contract was awarded on a cost-reimbursement basis, KBR awarded a fixed-price subcontract for the work to ABC International Group. Army representatives urged KBR to begin work on the new facility quickly, citing the need for “force protection.” Responding to this pressure, KBR accepted a proposal from ABC that doubled the expected monthly cost of labor without seeking competing bids. KBR concluded the increase was reasonable because the work would be conducted amid “violence and the beheading of hostages by terrorists [which] caused a drastic increase in the cost of labor and a severe shortage of available staff.” By the end of the contract, the government asserted that KBR had paid over $12 million more to ABC for labor than it should have.

What proof was there that KBR acted reasonably? KBR had conducted a “greensheet” review, which was its standard approval process for subcontractor transactions. The process consisted of “a technical review and analysis of all documents” supporting the ABC proposal to determine whether it should be implemented. With respect to the questioned labor costs, the greensheet process included a review of a document produced by ABC to justify the increase. KBR asserted that this was sufficient to demonstrate that it had acted prudently and that the costs had been considered rationally.  

The court found KBR’s review insufficient to establish that the incurred labor costs were reasonable. In the court’s view, the greensheet review amounted to “little more than a rubber stamp.” KBR had considered the costs, but there was no proof it had questioned whether they were reasonable.

The court cited several specific examples to supporting its conclusion:

  • KBR’s review of the subcontractor’s justification for increased labor costs failed to disclose a mathematical error that would have justified quadrupling the costs.
  • A KBR representative had noted that ABC’s proposed costs were high, but never asked ABC to modify or justify them.
  • KBR had not requested ABC to assign a specific dollar amount to effects of “turmoil” at the site.

The court accepted the logical argument that the violence in Iraq would have increased labor costs, but found there was no evidence to support a determination as to the reasonableness of the amount of the increase. This ruling creates an interesting caveat to the holding of Lockheed Martin Tactical Aircraft Systems, ASBCA No. 49530, 00-1 BCA ¶ 30,852 (Mar. 22, 2000), which the court distinguished. Lockheed Martin also involved a military procurement against a backdrop of “political and military turmoil” and government pressure to perform. The board there allowed the contractor’s costs over the government’s objection. While KBR agrees with the holding in Lockheed Martin that government pressure and wartime circumstances are relevant to cost reasonableness, the KBR decision requires more specific evidence of reasonableness.