Federal Circuit Sinks Claim for Submarine Construction Compliance Costs as Untimely Under the CDA
Government contractors operate in a constantly changing regulatory environment, and in certain circumstances, a contractor may be contractually entitled to receive a price adjustment when it must comply with a new federal law during performance. A recent Federal Circuit decision highlights one of the pitfalls that a contractor must avoid to ensure that it receives the compensation to which it is entitled when maintaining compliance with ever-changing federal law. In Electric Boat Corp. v. Secretary of the Navy,1 the Federal Circuit affirmed an Armed Services Board of Contract Appeals (“ASBCA”) decision to grant partial summary judgment to the Department of Navy, holding that Electric Boat’s claim for compensation for the costs of complying with a new federal regulation was barred by the six-year statute of limitations under the Contract Disputes Act (“CDA”), 41 U.S.C. § 7103(a)(4)(A).
Electric Boat held a contract with the Navy for the construction of six nuclear-powered submarines. The contract was primarily a firm-fixed-price contract with some cost-reimbursement line items. The contract incorporated by reference the standard Changes clauses under Federal Acquisition Regulation (FAR) 52.243-1 and 52.243-2, requiring the contracting officer to make an equitable adjustment to the contract price or estimated cost if the Government issued a change that increased or decreased the cost of performance. The contract also included a Navy Marine Corps Acquisition Regulation Supplement clause (which the Federal Circuit dubbed the “Change-of-Law Clause”) providing for a price adjustment if Electric Boat’s costs of performance increased or decreased due to the need to comply with a new federal law or a change in existing federal law, but only for costs incurred after the first two years of the contract. The Change-of-Law Clause stated, in part:
(b) If, at any time after the effective date of this contract, a New Federal Law is enacted or a change is made to a Currently Applicable Federal Law or a New Federal Law or regulations thereunder promulgated by Federal authorities, and compliance with such new law or change directly results in an increase or decrease in the Contractor’s cost of performance of this contract, the contract price(s) shall be adjusted . . . . No such adjustment shall be made for contract costs incurred or projected to be incurred during the two (2) year period after the effective date of this contract.
Electric Boat was required to promptly notify the Navy if it anticipated a new or changed federal law triggering the Change-of-Law Clause. Electric Boat was required to follow the contract’s procedures for an equitable adjustment in requesting compensation under the Change-of-Law Clause.
On September 15, 2004, the Occupational Safety and Health Administration (“OSHA”) issued a new regulation mandating certain fire protection practices for shipyard work, which affected the submarine construction work under Electric Boat’s contract. The OSHA regulation became effective on December 14, 2004, and less than three months later, on February 24, 2005, Electric Boat notified the Navy that it anticipated compliance with the OSHA regulation would increase its cost of performance under the contract.
On June 27, 2007, Electric Boat submitted a cost proposal to the Navy, seeking price adjustments on all six submarines in accordance with the Change-of-Law Clause. Time dragged out as the Navy evaluated the proposal, and in October 2008, the Navy challenged Electric Boat’s calculations of certain costs. In response, Electric Boat submitted a revised cost proposal to the Navy in April 2008. On May 2, 2011, the Navy contracting officer issued a memorandum formally denying Electric Boat’s requested price adjustment, citing the cost proposal’s inadequate support and its discrepancies with the Government’s view of costs related to the OSHA regulation. On December 19, 2012, Electric Boat filed a certified claim under the CDA with the contracting officer, seeking a price adjustment for costs incurred in complying with the OSHA regulation. The contracting officer denied Electric Boat’s claim in a final decision, which Electric Boat appealed to the ASBCA pursuant to the CDA. The ASBCA ultimately determined that Electric Boat’s claim was barred by the CDA’s statute of limitations.
The timeliness of Electric Boat’s claim turned on when its claim for a price adjustment for increased costs from the OSHA regulation accrued. Because the OSHA regulation became effective within the first two years of the contract, and because the contract barred adjustments under the Change-of-Law Clause during that time, the Federal Circuit determined that Electric Boat’s claim accrued after the first two years of the contract had passed on August 15, 2005, as that is when costs related to the OSHA regulation could first be compensated under the Change-of-Law Clause. Having determined that the accrual date for the claim was in August 2005, the Federal Circuit held that Electric Boat’s claim was untimely because it had been submitted on December 19, 2012, more than a year after the CDA’s six-year statute of limitations deadline of August 15, 2011.
The Federal Circuit rejected Electric Boat’s argument that its claim accrued on May 2, 2011, which was the date when the Navy contracting officer denied its request for a price adjustment. The Federal Circuit reasoned that, aside from the requirement to notify the Navy of a change in law, the contract language required no actions to be completed before a certified claim could be submitted, such as requiring that the Navy make a decision on a request for a price adjustment. The Federal Circuit contrasted the contract language in Electric Boat’s contract with the contract in a previous case, Kellogg Brown & Root Services, Inc v. Murphy.2 In Kellogg Brown, the Federal Circuit held that the contractor was required to follow certain pre-claim procedures according to directions from the Army, specifically the requirement to resolve disputed costs with a subcontractor, before submitting a claim, and that the contractor’s claim did not accrue until those pre-claim procedures had been completed. In contrast, Electric Boat’s contract did not impose similar pre-claim procedures, nor did Electric Boat receive instructions to follow certain pre-claim procedures from the Navy. Therefore, the statute of limitations began running when Electric Boat first had a right to a price adjustment on August 15, 2005, and it continued to run while Electric Boat awaited the outcome on its request for a price adjustment from the Navy.
The Federal Circuit also rejected Electric Boat’s alternative theories of partial timeliness of its claim. First, Electric Boat argued that its claim for five of the six submarine costs should be timely, as the costs did not actually exceed the contract’s target price, and therefore require additional compensation for the change in law, until after December 19, 2006, making its December 19, 2012 CDA claim timely for those costs. In rejecting this argument, the Federal Circuit noted that the contract did not require Electric Boat to incur actual costs, and that the contract’s plain language instead supported claim accrual on the date on which the costs of complying with the OSHA regulation first affected Electric Boat, not the date on which those costs caused Electric Boat to exceed contract’s target price. Second, Electric Boat argued that its claim for the last two submarines’ construction costs were timely because the Navy did not authorize funds for them until after December 16, 2006, making its December 19, 2012 CDA claim timely for those two submarines’ costs. The Federal Circuit rejected the argument, holding that the plain language of the contract did not make appropriation of funds a condition precedent for seeking a price adjustment. Prior to the Navy’s authorization of funds for the last two submarines, the contract only precluded Electric Boat from incurring actual costs for their construction, but not from filing a claim to adjust the target costs.
What This Means For You
Electric Boat highlights the difficulty in determining exactly when a claim for costs related to compliance with federal law accrues, even though accrual is pivotal for bringing a successful CDA claim. Electric Boat instructs contractors that the plain language of the contract controls the claim accrual determination, and accrual will not be delayed based on events and actions not required by the contract or by instructions from the contracting agency. Therefore, federal contractors must be aware of what procedural steps their contracts do — and do not — require them to take prior to submitting a CDA claim. The date of CDA claim accrual is fact-specific and depends not only on the reason for additional costs, but also the contract’s particular requirements and incorporated FAR clauses. Federal contractors should carefully review their contracts to ensure that their right to bring a claim is not derailed by waiting for non-mandatory pre-claim processes to run their course.
1 No. 19-1621 (Fed. Cir. May 19, 2020), aff’g, Electric Boat Corp., ASBCA No. 58672, 19-1 BCA ¶ 37,233 (Dec. 10, 2018).
2 823 F.3d 622 (Fed. Cir. 2016), rev’g, Kellogg Brown & Root Servs., Inc. v. Dep’t of the Army, ASBCA No. 58492, 14-1 BCA ¶ 35,713 (Aug. 18, 2014).
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.