Claims and Home Office Overhead

Claims and Home Office Overhead AASHTO Subcommittee on Construction • San Francisco • August 14, 2012

Meet Your Instructor, Scott Lowe, P.E. • Principal , Trauner Consulting Services • 30 Years Experience • Professional Engineer • Instructor, Scheduler, Author, Analyst, Expert Witness

What Will We Be Talking About? • What is a claim and why would home office overhead be a part of the claim costs? • What is the legal framework upon which recovery would be based? • How is unabsorbed home office overhead calculated? • Some possible contractual language to consider with regard to addressing unabsorbed home office overhead. • Offsets • Fraud

What is a Claim? A claim is an unresolved dispute.

Call it Macaroni

What are the Parts of a Claim? • Entitlement • Impact • Cost

Entitlement answers the question… Was there a Change?

An Impact is… the effect or consequence of the change.

The cost of a change is … the price or value assigned to the change.

Impacts • The need for more or different materials • The need for more labor or labor with different skills • The need to operate equipment longer or the need for different equipment • Delays • Inefficiencies

Delays have Two Causes • Delays caused by the addition of work • Delays caused by the suspension of work

Delays Come in Two Types • Non-critical Delays • Critical Delays

Delays Come in Several “Flavors” • Excusable • Non-excusable • Compensable • Non-compensable • Concurrent

Example Provision: The Contract 108.6.1 General* If warranted, the engineer will extend the contract completion date by issuing a "Contract Amendment" (Form E_61). The engineer will do so only if an excusable delay extends the scheduled late finish date beyond the lattermost contract completion date or its most recent extension. The engineer will not consider a request to revise partial or contract completion dates without notice as specified in subsection 104.2.7, "Contractor-Department Notification," and without documentation from the project schedule, including updates, supporting the need for a revision. The engineer will evaluate the information submitted and determine the time extension due, if any. * Excerpted from the Wyoming Department of Transportation, Section 108.6, Extension to the Contract Completion Date

The Contract 108.6.1 General The engineer will not grant a time extension based on pleas that the contract specified insufficient time for the completion of the project.

The Contract 108.6.2 Excusable Delays Excusable delays are delays that the contractor cannot reasonably foresee or avoid and are not the contractor's fault or responsibility; they include, but are not limited to: delays due to floods, tornadoes, lightning strikes, earthquakes, fires, epidemics, or similar natural phenomena; weather delays as specified in subsection 108.6.5, "Working Day Extensions for Increased Quantities"; extraordinary, unforeseen, and unavoidable delays in material deliveries; delays due to the acts of government entities other than the department; delays from industry-wide strikes affecting the contractor's (or subcontractors' or suppliers') workforce that are beyond the contractor's power to settle; if time allowances are not specified, or if specified allowances are exceeded, delays caused by the noncompletion of work by utilities or other third parties; delays arising from a contract amendment in accordance with subsection 104.2, "Contract Amendments."

The Contract 108.6.3 Nonexcusable Delays Nonexcusable delays are delays caused by the contractor or that the contractor could reasonably have foreseen or avoided. The engineer will not make an extension to partial or contract completion dates for nonexcusable delays.

Concurrent Delay 8. Concurrent Delays. Concurrent delays are separate delays to critical activities occurring at the same time. When a non-excusable delay is concurrent with an excusable delay, the Contractor is not entitled to a time extension for the period the non-excusable delay is concurrent with the excusable delay. When a non-compensable delay is concurrent with a compensable delay, the Contractor is entitled to a contract time extension but not entitled to compensation for the period the non-compensable delay is concurrent with the compensable delay.

Compensation for Delay • Labor (Idle, Extended, Cost Escalation) • Equipment (Idle, Extended) • Material (Cost escalation and Storage) • Overhead (Field and Home Office) • Profit

Overhead • Field Office Overhead costs are the costs of maintaining operations in the field that cannot be assigned to a particular item of work. • Home Office Overhead costs are the costs of maintaining operation in the field that cannot be assigned to a particular project.

How Do Contractor’s Bid Overhead? Contractor’s traditionally bid field and home office overhead differently. Field office overhead is bid much as any “item.” The contractor estimates the cost of providing field office services. In contrast, home office costs are usually included as a “mark up,” sometimes labeled as G&A (General and Administrative). Sometimes, this number includes profit, as well.

Entitlement to Recovery of Home Office Overhead United States Court of Appeals for the Federal Circuit 02-1290, -1401 P.J. DICK INCORPORATED, Appellant, v. Anthony J. Principi, SECRETARY OF VETERANS AFFAIRS, Appellee. --------------------------------------------------------------------------------------------------- Anthony J. Principi, SECRETARY OF VETERANS AFFAIRS, Appellant, v. P.J. DICK INCORPORATED, Appellee. __________________________ DECIDED: April 7, 2003 _________________________

And What Does This Case Say? To show entitlement to … Eichleay damages, the contractor must: • …first prove there was a government-caused delay to contract performance… • …that was not concurrent with a delay caused by the contractor or some other reason… • …The contractor must also show that the original time for performance of the contract was thereby extended, or that he finished the contract on time or early but nonetheless incurred additional, unabsorbed overhead expenses because he had planned to finish even sooner… • …it must then prove that it was required to remain on standby during that delay. • If the contractor proves these three elements it has made a prima facie case of entitlement and a burden of production shifts to the government to show that it was not impractical for the contractor to take on replacement work and thereby mitigate its damages.

What Else Does it Say? Our case law allows recovery where there has been a suspension of work on the contract but no delay to completion of the contract where, in addition to all of the other prerequisites to Eichleay damages, a contractor shows from the outset of the contract it: “(1) intended to complete the contract early; (2) had the capability to do so; and (3) actually would have completed early, but for the government’s actions.” In other words, “to show that any portion of the overhead was unabsorbed, such a contractor must prove that the bargained for ratio of performance revenue to fixed overhead costs during the stipulated performance period . . . has been adversely affected by the delay.”

What Else? • This court has previously discussed the requirement in great detail and we direct the reader to that discussion for more guidance. All State Boiler, 146 F.3d at 1373-81, 1381-82; see also id. at 1381 (“[W]e clarify that it is the delay at the end of performance resulting from that suspension that results in unabsorbed overhead expenses which a contractor may recover under Eichleay. Thus, the relevant time frame for replacement work analysis begins at the start of the suspension period and continues to the end of the extension period.”).

And… • In short, a court evaluating a contractor’s claim for Eichleay damages should ask the following questions: (1) was there a government-caused delay that was not concurrent with another delay caused by some other source; (2) did the contractor demonstrate that it incurred additional overhead (i.e., was the original time frame for completion extended or did the contractor satisfy the Interstate three-part test); (3) did the government CO issue a suspension or other order expressly putting the contractor on standby; (4) if not, can the contractor prove there was a delay of indefinite duration during which it could not bill substantial amounts of work on the contract and at the end of which it was required to be able to return to work on the contract at full speed and immediately; (5) can the government satisfy its burden of production showing that it was not impractical for the contractor to take on replacement work (i.e., a new contract) and thereby mitigate its damages; and (6) if the government meets its burden of production, can the contractor satisfy its burden of persuasion that it was impractical for it to obtain sufficient replacement work. Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages. 28

And… • Turning to PJD’s specific legal argument, our review of the law makes clear that the Board applied the correct legal standard for standby. Our case law clearly requires that the contractor must show a suspension, whether formal or functional, of all or most of the work on the contract.

What Do the States Do? From NCHRP Synthesis 315, Compensation for Contractors’ Home Office Overhead, states approach this issue three ways: • Avoidance Model • Compliance Model • Proactive Model

Specifications There are four basic solutions to the question of how to handle unabsorbed home office overhead: • Silence • Denial of reimbursement • Allowance as a mark up, only • Reimbursement by formula

Silence The Wyoming DOT standard specification does not explicitly use the phrase “home office overhead.” It does not expressly forbid payment of home office overhead, but also does not expressly provide for its payment.

Denial of Reimbursement PennDOT’s standard specifications deny payment of home office overhead: “111.02 General Conditions Concerning Delay Claims…the following items of damage cannot be included in any delay claim against the Department: • home office overhead, including but not limited to costs of any kind for home office personnel…

Allowance as a Mark Up, Only • The new Michigan DOT standard specifications (2012), limit compensation for home office overhead to a mark up. “109.05.G Unrecoverable Costs. The Contractor is not entitled to compensation of costs not specifically allowed or provided for in this subsection including…”

109.05.G Unrecoverable Costs. “5. Unabsorbed or extended home of field office overhead or any damages using an Eichleay or similar equation, except as otherwise provided in the mark ups specified…”

Reimbursement by Formula • Ohio DOT • Florida DOT • Minnesota DOT * *Minnesota DOT has contemplated the use of this approach for its shutdown claims.

Questions “The one thing I’ve always looked for or considered were any deductions for HOH and profit that would have been paid as a result of quantity overruns. For example, if a pay item overran by $100,000, could you assume that 15% was built into that item for profit and OH, and therefore a deduction for $15,000 (or $8,000 assuming 8% for OH) should be deducted from any “absorbed” costs, or is it all contractor profit?”

Discussion This is the foundation upon which most DOT’s base their delay compensation provisions – that the mark ups provided on the costs of the change provide full and complete (or at least adequate) compensation for home office overhead.

Further Discussion • What if the delay was the result of a suspension of work? Would a “mark up” based approach work? • Is the compensation provided via a mark up adequate to compensate a contractor for home office overhead? • What is a “typical” contractor’s home office overhead cost as a percentage of a contractor’s revenue?

Questions • Court decisions or policy updates related to falsification of claims.

Discussion White Construction Company, Inc. won the three projects in Marion County with a combined bid price of $31,876,176.81. The Department of Transportation paid White Construction $34,064,038.51 for the total job. The additional money was paid for changes and unforeseen problems. At the conclusion of the projects, William Cooper prepared claims which White Construction Company, Inc. filed against the FDOT for an additional $30,636,440.97. Investigation revealed that Cooper had committed fraud by double and triple billing DOT for labor and equipment and by filing claims for incidents which did not occur. White Construction won the Walton County project bid for $4,009,218.16. White Construction Company, Inc. was paid the contract amount and then filed claims against the FDOT for another $3,658,666.42.

Outcome • Attorney General Charlie Crist today announced that White Construction Company, a major road builder headquartered in Chiefland, FL has pled guilty to six counts of Grand Theft. As a result of the plea agreement, White Construction was placed on probation for 30 years and is barred from doing business with the Florida Department of Transportation (FDOT) for 30 years. In addition, the company was ordered to pay restitution as well as costs of the investigation and prosecution totaling almost $1.5 million and fined $60,000. • The company was charged with making inflated, fraudulent claims for extra compensation on state highway contracts. White Construction was also charged with filing claims that detailed double and triple-billing for every laborer and piece of equipment used on certain state projects… • In addition to the sanctions on the company, Luther M. White, Jr., 59, was placed on probation for 30 years and barred from doing business with FDOT for 30 years. As the family member who ran the company, he was separately fined $10,000 and also made liable with the company for the restitution and costs. • The charges against the company and family members resulted from an investigation initiated and conducted by the Office of Inspector General of the Florida Department of Transportation, assisted by the Office of Inspector General of the U.S. Department of Transportation and the Florida Department of Law Enforcement. The case was prosecuted by the Attorney General's Office of Statewide Prosecution. 42

New Jersey False Claims Act a. Knowingly presents or causes to be presented to an employee, officer or agent of the State, or to any contractor, grantee, or other recipient of State funds, a false or fraudulent claim for payment or approval; b. Knowingly makes, uses, or causes to be made or used a false record or statement to get a false or fraudulent claim paid or approved by the State; c. Conspires to defraud the State by getting a false or fraudulent claim allowed or paid by the State… e. Is authorized to make or deliver a document certifying receipt of property used or to be used by the State and, intending to defraud the entity, makes or delivers a receipt without completely knowing that the information on the receipt is true… g. Knowingly makes, uses, or causes to be made or used a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the State.

Questions? 44

More Information? • Please contact me at: • (215) 814-6400 • or • scott.lowe@traunerconsulting.com • Or visit our website: • www.TraunerConsulting.com 45

Claims and Home Office Overhead

Claims and Home Office Overhead

Presentation Transcript

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