If you are getting ready to submit a claim on a federal contract—especially one that challenges an assessment of liquidated damages—take note of the Federal Circuit’s decision in K-Con Building Systems, Inc. v. United States, No. 2014-5062 (Fed. Cir. Feb. 12, 2015) [pdf]. It has some specific instructions for the contents of your claim letter and demonstrates the harsh results that follow from a misstep in the disputes process.

Before I present my thoughts on the lessons learned from K-Con, I lay out some of the background details. K-Con held a Federal Supply Schedule contract for prefabricated structures. In 2004, it won a $582,000 Coast Guard task order for the design and construction of a Coast Guard cutter support building at Port Huron, Michigan.

K-Con’s July 2005 Claim

When K-Con was unable to complete the work by the deadline set forth in the task order, the Coast Guard assessed liquidated damages of $109,554—186 days at $589 per day. On July 28, 2005, K-Con submitted a one-page claim letter seeking remission of the liquidated damages.

Although it was brief, K-Con’s letter asserted three reasons why the liquidated damages assessment was improper:

  1. K-Con “was not the sole cause of any alleged delays” and any K-Con delays were “concurrent with delays caused by the government;”
  2. the government “failed to issue extension to the completion date as a result of changes to the contract by the government;” and
  3. the liquidated damages “are an impermissible penalty.”

K-Con’s letter requested a contracting officer’s final decision. Though it demanded relief of more than $100,000, K-Con’s letter asserted that a certification was not required “since the assessment of liquidated damages is a claim by the Government.”

As with most contract disputes that end in litigation, the contracting officer found K-Con’s position unpersuasive. In a letter dated August 1, 2005, the Coast Guard contracting officer asserted that she could not issue a final decision because K-Con “failed to provide supporting documentation to support your assertion that liquidated damages were wrongly assessed.”

K-Con responded two days later, on August 3, 2005. In response to the CO’s demand for documentation, K-Con explained that “[t]he documentation consists of all correspondence and any and all other documents contained in your contract file . . . .” K-Con even cited cases supporting its view that “additional supporting documentation or detailed evidence of the operative fact” was not required.

The contracting officer’s final decision

K-Con’s August 3 letter was apparently persuasive enough to cause the contracting officer to issue a final decision. On September 12, 2005, the Coast Guard issued a final decision denying K-Con’s claim. In the letter, the contracting officer concluded that “there is no evidence to support your claim. You have provided no information showing why you are not responsible for the delay. Moreover, we are not aware of any event or occurrence that would excuse your later performance.”

Having received a final decision, K-Con’s next step was to file a complaint at the Court of Federal Claims. The complaint was three pages long, with the final paragraph asserting that the Coast Guard’s “assessment and withholding liquidated damages was improper and without cause.”

The government answered the complaint and filed a counterclaim asserting its own right to assess and collect liquidated damages from K-Con. The counterclaim stated that the government had withheld $106,347 and demanded the remaining balance of $1,440. It also said that the Court had jurisdiction over the counterclaim under 28 U.S.C. § 1503 (Set-offs) and 28 U.S.C. § 2508(Counterclaim or set-off).

K-Con’s December 2006 claim

Recognizing that a favorable ruling on the liquidated damages issue would not address its entitlement to additional compensation for government-issued changes, K-Con filed a second claim on December 15, 2006. The December 2006 claim was five-page letter demanding payment of “$196,126.38 plus interest, for additional work and an extension until May 25, 2006 due to delays as a result of direction by the government . . . .”

K-Con’s letter asserted that the Coast Guard requested changes in the eve height of the building, the width of the doors, interior crane equipment, and accommodations for storage of gas tanks. K-Con also asserted that the requirement to incorporate all of the Coast Guard’s comments on K-Con’s design drawings was a compensable change. K-Con did not include any kind of critical path analysis in its claim and did not explicitly demand “remission” of liquidated damages, but it did demand a time extension.

In January 2007, K-Con filed an amended complaint asserting the relief requested in the December 2006 claim. The government answered and the parties proceeded with discovery.

The August 19, 2011 decision

When discovery closed, K-Con moved for summary judgment on its own claims. In an opinion published on August 19, 2011, the Court of Federal Claims denied the motion. As to K-Con’s demand for remission of liquidated damages, the Court found two substantive weaknesses. First, the court held that could not seek remission of liquidated damages through the suspension of work clause, FAR 52.242-14. “The suspension of work clause allows for the recovery of increased costs of performance, but not time extensions or the remission of liquidated damages.”

Second, the Court held that K-Con had not met its burden of establishing the existence of excusable delays that would preclude the assessment of liquidated damages. The Coast Guard argued that K-Con “failed to demonstrate that the Coast Guard’s purported delays were on the contract’s critical path.” The Court agreed: “unambiguous binding precedent requires a contractor asserting an excusable delay to demonstrate that the delay occurred on the critical path.”

The January 28, 2014 decision

The next substantive development came in January 2014, when the Court granted the Coast Guard’s motion to dismiss K-Con’s time-extension claim for lack of jurisdiction. According to this new government argument (asserted seven years after the case was first filed), K-Con’s July 2005 letter could not be a “claim” for remission of liquidated damages because it “lacked any explanation for why plaintiff might be entitled to a time extension.” K-Con’s December 2006 claim sought time extensions, but it could not serve as a basis for jurisdiction because litigation was already pending on K-Con’s claim. By December 2006, the government argued, the contracting officer had already been divested of her authority to issue a final decision.

In a January 28, 2014 decision, the Court of Federal Claims accepted the government’s position. The court concluded that it had jurisdiction to consider K-Con’s claim that the liquidated damages clause imposed an unenforceable penalty, which had been asserted in the July 2005 claim. But it had no jurisdiction over K-Con’s “claim for remission of liquidated damages to the extent that the claim is premised on entitlement to time extensions.” According to the decision, that claim had not been raised in the July 2005 claim, and K-Con’s decision to include a demand for time extensions in its original complaint without first submitting a detailed claim articulating the basis for its request precluded the court’s consideration of the issue.

In the same opinion, the Court also granted the Coast Guard’s motion for summary judgment on K-Con’s changes claim, holding that K-Con had failed to properly notify the Coast Guard of its claims. In the Court’s view, the contractual notice requirements were enforceable and K-Con had failed to meet its burden of demonstrating that it complied with them.

The Federal Circuit’s jurisdictional analysis

K-Con’s appeal to the Federal Circuit yielded no better result. In a February 12, 2015 decision written by Judge Taranto, the court affirmed the Court of Federal Claims. The Federal Circuit held that there was jurisdiction over K-Con’s claim that the liquidated damages were an impermissible penalty and over K-Con’s demand for additional compensation arising from government-directed changes. But those claims failed on their merits.

As to K-Con’s entitlement to time extensions, the Court of Federal Claims had no jurisdiction even to consider the merits. K-Con’s July 2005 claim lacked the details to be a claim, and the CDA jurisdictional rules barred K-Con’s effort to add the details later. K-Con was foreclosed from pursuing the time extension requested in its December 2006 claim because it had previously asserted a general right to time extensions in its original complaint.

At bottom, the time extension claim is a request for remission of liquidated damages on the ground that the Coast Guard failed to issue time extensions for additional work added to the contract. K-Con squarely placed that claim in litigation through its original complaint, which means that K-Con had to present that claim adequately in its first letter, not in the post-suit second letter. But the first letter plainly fails to allege enough detail to provide adequate notice of the basis for any time extension. Indeed, K-Con admitted to the Court of Federal Claims that its first letter “could not be a valid [time-extension] claim.”

That is certainly a harsh result for this contractor. K-Con challenged the liquidated damages assessment soon after it was assessed. When the contracting officer considered the original claim on the merits and denied it, K-Con brought the case to the court designated to hear it. No one raised a jurisdictional objection. The Coast Guard answered K-Con’s complaint and itself asserted that the Court of Federal Claims had jurisdiction to consider the propriety of the liquidated damages assessment on the merits.

There appears to have been no prejudice to the government from the lack of detail in K-Con’s original claim. The contracting officer addressed the merits of K-Con’s time-extension claim when it was first raised. Given her knowledge of the project and the facts presented by K-Con, the contracting officer concluded that K-Con had not justified its late performance. The government challenged K-Con’s claim on the merits in response to K-Con’s motion for summary judgment. In context, the jurisdictional problem with K-Con’s time extension claim appears to have been an afterthought. It might have been the best way to keep K-Con from presenting evidence that would have supported its claim for remission of liquidated damages.

Form over substance in contract disputes

Applying the K-Con decision to future claims may be simple. It makes sense to require claims to include basic information justifying contractor entitlement and quantifying the requested equitable adjustment, whether it is in the form of relief from a schedule deadline or other contract requirement or payment of additional compensation. Contractors are well advised to include factual details and supporting documentation in their requests for equitable adjustment and in their formal claims. They are also wise to ensure that all claims are presented to the contracting officer before they appear in a complaint at the Court of Federal Claims or a board of contract appeals.

But the K-Con decision may also lead to abuses. My concern with the future application of K-Con is that it elevates form over substance in the resolution of contract disputes. Contracting officers will cite it in support of an argument that they need not issue a final decision because the contractor’s claim is “insufficiently documented.” Government attorneys will cite it to seek the dismissal of a claim for lack of jurisdiction rather than having the court address it on the merits.

Inevitably, litigation of Contract Disputes Act claims will take longer and cost more. Along with the decision in Parsons Global Services, Inc. v. McHugh, 677 F.3d 1166 (Fed. Cir. 2012), the Federal Circuit’s decision in K-Con Building Systems threatens to undermine the simple and efficient process for resolving federal contract disputes that had been developing since Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995).