PULLING BACK THE LAYERS OF THE METRO (LA) RED LINE LITIGATION WITH PARSONS-DILLINGHAM

1. PULLING BACK THE LAYERS OF THE METRO (LA) RED LINE LITIGATION WITH PARSONS-DILLINGHAM Monday February 22, 2016 Presented by Jennifer L. Meeker 777 South Figueroa St. Los Angeles, CA 90017 (213) 612-7863 jmeeker@nossaman.com “The views expressed herein are solely those of the presenter and not of Nossaman LLP or any of its clients including the Los Angeles County Metropolitan Transportation Agency.”

2. WHY WE CARE ABOUT THE MTA V. PARSONS LITIGATION • $3.6 billion project – Parsons, as Construction Manager, billed $365 million • Contract in effect from 1984 through 2004 • Litigation spans over 20 years (1994 through present) – has survived multiple judges and lawyers • Current judgment: over $93 million in improperly billed Overhead (incl. interest)

3. PUTTING THINGS IN PERSPECTIVE • In 1984, when the Contract was entered into…

4. PUTTING THINGS IN PERSPECTIVE In 1994, when the first lawsuit was filed… Forest Gump released

5. PUTTING THINGS IN PERSPECTIVE • In 2001, when trial started… iPod was released

6. PUTTING THINGS IN PERSPECTIVE • In 2009, when the Statement of Decision was issued…phones started navigating

7. MANY, MANY … MANY LAYERS

8. Layer No. 1THE PROJECT AND CONTRACT

9. METRO (LA) RED LINE HISTORY • $3.6 Billion Project • 14 Stations, 16.4 Miles • First Heavy Commuter Rail Line in LA • Opened in stages between 1993 and 2000 • Metro (LA) Heavy Rail (Red and Purple lines) Daily ridership of 169,478 as of October 2013 • The Parsons-Dillingham Defendants supervised the project

10. BUILT IN THREE MINIMUM OPERATING SEGMENTS (“MOS”) • MOS-1Union Station to McArthur Park opened January 30, 1993 – governed by the Base Contract • MOS-2 McArthur Park to Wilshire /Western opened in 1996 – governed by Amendments 13/14 to the Contract • MOS-3Wilshire/Vermont to North Hollywood opened in 2000 – governed by Amendment 17 to the Contract

11. THE CONSTRUCTION MANAGER

12. THE CONSTRUCTION MANAGEMENT CONTRACT • Effective 1984 through 2004 • Numerous amendments – ultimately over 600 pages • Important amendments • Amendments 13/14 in 1991 • Amendment 17 in 1993

13. Cost reimbursable plus fixed fee • A cost-reimbursement contract is a contract where a contractor is paid for all of its allowed expenses to a set limit, plus an additional fee to allow for a profit. • Cost- reimbursement contracts contrast with a fixed-price contract, in which the contractor is paid a negotiated amount regardless of incurred expenses.

14. IMPORTANT CONTRACT TERMS “RecoverableCosts” “Direct Labor” Indirect Costs or “Overhead” “costs of subcontracts” “other direct costs” or “ODCs”

15. LIMITATIONS ON “RECOVERABLE COSTS” • The “Exclusivity Clause” • All costs must be reasonably incurred exclusivity in connection with services performed under the Contract • Federal Acquisition Regulation Subpart 31.2 • Governs reasonableness, allowability and allocability of costs • The “No Cost” Clause • Any costs already paid for by the MTA shall not be included in Parsons’ overhead rates

16. $365 MILLION BILLED AND PAID

17. COSTS EXPLAINED: DIRECT LABOR COSTS • Proven by “Actual Payroll Records”– which required: • Payroll data – actual compensation paid to employees • Hours worked by individual day • All labor billed had to be classified into labor categories • Invoice certifications

18. COSTS EXPLAINED: INDIRECT COSTS - “OVERHEAD” Parsons commingled general and administrative costs (“G&A”) + true overhead as “Overhead” on their invoices BUT THERE IS A DIFFERENCE OVERHEAD: Costs such as office space, reprographics, office supplies, utilities, phones, furniture, etc. incurred for carrying out a specific contract of series of contracts. G&A: Costs for the operation of a business as a whole, such as the president’s salary, accounting and legal departments, and so forth.

19. COSTS EXPLAINED: SUBCONTRACTOR COSTS • Parsons responsible for subcontractors • Many of the Contract’s key provisions flowed down to subcontracts • Parsons required to maintain records to prove subcontractors’ actual costs

20. IMPORTANT CONTRACT TERMS: AUDIT RIGHTS General Conditions 19 “the COMMISSION … shall had the right to examine … any books, records, accounts, and other documents of CONSULTANT directly pertain to costs when such costs are the basis of a claim or of reimbursement…” “CONSULTANT shall keep and maintain full and complete records and books of account of its costs and expenses relating to the performance of services, in accordance with generally accepted accounting practices.”

21. IMPORTANT CONTRACT TERMS: NO WAIVER General Conditions 41

22. Layer No. 2Precursor to the lawsuit

23. QUESTIONING THE BILLS • Deficiencies in Parsons’ records • Commingled G&A and Overhead • Failure to submit their actual Indirect Cost rates and methodologies, instead only billing “provisional rates.” • Gerlinger’s qui tam action (“whistleblower”) lawsuit under the Federal and California False Claims Acts – alleged that Defendants engaged in multiple schemes to overstate their “Recoverable Costs”

24. Layer No. 3 THE LAWSUITs begin

25. THE TALE OF TWO LAWSUITS • BREACH OF CONTRACT CASE • Filed in 1997 • Sought an “accounting” to determine Parsons’ “Recoverable Costs” which could not be discerned from the invoices, and the return of ALL costs improperly billed. FALSE CLAIMS CASE • Gerlinger’s qui tam lawsuit dismissed by Federal Court • State lawsuit filed in 1996. • MTA intervenes. • Longest running lawsuit in the history of the False Claims Act since the law was approved by President Lincoln.

26. THE EARLY YEARS – 1996/97 THROUGH 2001 • The cases are consolidated • The issues are bifurcated – • Phase 1 - Contract Interpretation/liability • Phase 2 – Damages • Phase 3 – false claims • Trip to Court of Appeals on statute of limitations for fraud claims • Numerous motions for summary judgment/adjudication • Hundreds of days of depositions

27. Layer No. 4 trial

28. PHASE 1 BENCH TRIAL: 2001 TO 2006 114 days of trial on contract interpretation and Defendants liability for improper billing practices • Costs at issue: Overhead, G&A, Direct Labor, subcontractor costs, and payroll burden • October 14, 2005: MTA rests • March 14, 2006: Defendants rest

29. THE 2004 STATEMENT OF DECISION October 2004 SOD • dismissed cross-complaint against MTA that sought recovery of approximately $10 million in short pay plus interest. • Finding that Defendants’ invoices did not comply with the Contract

30. Layer No. 5 POST trial

31. THE 2009 STATEMENT OF DECISION June 2009 SOD • 3 years after Defendants rest • Parties brief proposed SOD for over 18 months • 60+ pages of contract interpretation • Court interpreted most contract terms favorably to MTA. • G&A = not allowed by the “exclusivity clause” • Overhead = could not include items paid directly by MTA

32. THE ACCOUNTING… 2009 through 2012 • Accounting Referee retained September 2009 • Judge Wolf appointed to preside over accounting – numerous disputes over documents • April 12, 2012 - Referee issues his report on just one invoice • 2013 - Court dismisses Referee and directs parties to provide further briefing

33. Layer No. 6JUDGMENT

34. A NEW JUDGE AND FURTHER BRIEFING Court directs further briefing on Payroll Burden, Overhead, General & Administrative (G&A) and Subcontractor Costs. • MTA’s consultants calculate damages based on a sampling of invoices. Defendants do not offer alternate calculations, but instead re-argue the SOD and now claim a violation of due process

35. GETTING TO THE JUDGMENT August 2013. • $29 million in Overhead and G&A Payroll Burden Subcontractor Labor Costs • February 2014. • Court awards additional $26 million in subcontractor overhead costs

36. TOTAL JUDGMENT • $29 million in Principal Overhead and G&A, plus Interest. $26 million in Subcontractor Overhead Costs, without interest • TOTAL = $93 MILLION

37. Layer No. 7POST JUDGMENT & APPEAL

38. POST JUDGMENT PROCEEDINGS • 2014 – 2015: Court grants summary judgment in favor of Defendants on False Claims Action violations – now on appeal. April 2014 appeal and cross appeal filed. Bond of about $144 million posted. 142 volume Appendix and 66 volume Reporter’s Transcript

39. Layer No. 8LESSONS LEARNED

40. CONTRACT DRAFTING. • Have a clear contract formation record. • Include means of conducting & how to treat audits. • Obtain privilege waiver to get tax records • Consider how contract provisions impact who has the burden of proof in a dispute. • Consider making contractor an agent and fiduciary as to its bills and handling subcontractors.

41. CONTRACT ADMINISTRATION • Enforce the benefits due. Who administers subs? Who provides insurance? What documentation accompanies bills? Who does design? Use it or risk losing it. • Have a clear contract administration record. • Don’t explain, vary or excuse contract terms. Just cite and enforce them. Be wary of “Practical Construction.” • Constantly reserve rights and indicate that correspondence is not intended to waive or amend contract terms.

42. WHAT WE LEARNED ABOUT DIRECT COSTS • Insist on documentation of actual costs. Payroll records, not labor reports. • No support for Subcontractor billings at all other than invoices. $69 million undocumented. • The more direct allocation the better. • Job shoppers and misclassification of employees

43. WHAT WE LEARNED ABOUT INDIRECT COSTS • Expressed as rates, not dollars. • Indirect costs are the remainder after direct is allocated. FAR SECTION 203 PROVIDES: • Must be “allowable” - Alcohol, first class tickets, political donations, etc. • Must be “allocable” - pro rated in a logical matter.

44. CONTRACTORS BREAKING THE RULES • Contractors seek to expand the pools and shrink the bases to get a higher rate. • Small unallowables in the numerator are a distraction. • Two goals: Shift costs to cost reimbursable contracts and shift profits to lower tax jurisdictions. METHODS? • Fail to adjust for support paid as ODCs • Illogical groupings. • Cost-shifting. ESOP example. • Rate base. Fragment it or pick a bad measure in order to over allocate costs.

45. QUESTIONS?