Contractors are entitled to recover consultant and attorney costs reasonably incurred in preparing, pricing, and negotiating a change order under federal government contracts, including U.S. Postal Service contracts. That’s the holding in Tip Top Construction, Inc. v. Donahoe, No. 2011-1509, issued on September 19, 2012. The Court overturned a Postal Service Board of Contract Appeals (PSBCA) decision that had erroneously limited the contractor’s recovery of these costs. End result: if an agency changes your contract (whether by unilateral direction or constructive change), your request for an equitable price adjustment may include reasonable consultant and attorney costs.

Tip Top’s contract

Tip Top received a work order to install an air conditioning unit at the Main Post Office in Christiansted, U.S. Virgin Islands. After the contract was signed, but before the unit was installed, the Postal Service required that a particular refrigerant be used. Unfortunately, that refrigerant could not be used with the equipment specified in the contract. So the contractor was required to change the equipment and incur other costs to use the new refrigerant. The contracting officer recognized that this was a change and asked Tip Top to submit a proposal to furnish compatible equipment.

Tip Top employed a consultant to oversee its projects, including this one, and had the consultant to prepare the proposal. Tip Top’s proposal included the costs incurred by its consultant in preparing the proposal. The contracting officer eventually directed Tip Top to provide the new equipment at a price to be determined later. The contracting officer also told Tip Top that it could not recover consultant costs incurred in preparing the change proposal. This caused Tip Top to hire a lawyer to advise on the recoverability of such costs.

Ultimately, the contractor submitted a claim to recover various costs, including the consultant costs incurred in preparing and negotiating the proposal, and the attorney costs incurred on advising on cost recoverability. The contracting officer only granted the portion of the claim related to equipment costs and denied recovery of any consultant and attorney costs. The contractor appealed the partial denial of its claim to the PSBCA.

PSBCA decision

At the PSBCA, the Postal Service offered several arguments as to why consultant and attorney fees should not be recoverable. The PSBCA rejected all of them. But the PSBCA imposed a limitation: consultant and attorney costs could be recovered only up to the date when the contracting officer approved the substitute equipment.

The PSBCA held that consultant and attorney costs incurred after the contracting officer approved the new equipment had nothing to do with the changed work. The PSBCA considered such costs as being solely directed at trying to convince the contracting officer to accept Tip Top’s price for that work. In the PSBCA’s view, consultant and attorney fees could be recovered only when they related to aspects of contract performance, not to price negotiations.

Adding insult to injury, the PSBCA also held that the contractor had not met its burden of proof in establishing that the consultant’s and attorney’s time charges related to these negotiations. Unsatisfied with this result, Tip Top appealed the PSBCA’s decision to the Court of Appeals for the Federal Circuit.

Court of Appeals decision

The Court of Appeals for the Federal Circuit sustained Tip Top’s appeal and overturned the PSBCA’s limitation on the recovery of consultant and attorney costs. The Court noted that in a prior case, Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995), it held that a contractor was entitled to recover consulting costs incurred in connection with negotiations relating to an agency-caused delay. The Bill Strong case involved the recovery of costs incurred under a contract governed by the Federal Acquisition Regulation (FAR) and the Postal Service is not subject to the FAR. But the Court saw no reason why a different rule should be imposed on Postal Service contracts.

The Court stated that the recoverability of consultant and attorney costs depends on whether they were incurred as part of contract administration or prosecution of a contract claim. If the former, they are recoverable as part of the contractor’s request for an equitable price adjustment submitted in response to a contract change. In looking through the record, the Court determined that the consultant and attorney costs were incurred for the genuine purpose of furthering the negotiating process. The costs were thus recoverable as part of Tip Top’s changes claim.

The Court next addressed the PSBCA’s finding of fact that the contractor had not sufficiently established that the billings of its consultant and attorney were attributable to these price negotiations. Findings of fact by lower level tribunals are offered great deference by appellate courts and rarely overturned. But here, the Court had no trouble overturning the PSBCA’s finding of fact. The billing records prepared by Tip Top’s consultant and attorney fully supported Tip Top’s claim. The Court thus held that Tip Top was entitled to recover the full amount of the consultant and attorney costs it had sought.

What costs are recoverable? 

If you are directed to perform additional work, and you reasonably require a consultant to assist you in preparing and pricing a change proposal, then those costs are added to the total costs of performing the changed work. The same would be true if you are responding to a constructive change to your contract. Similarly, costs incurred by a consultant in negotiating with the agency on your proposal or request for equitable adjustment are also recoverable. If you reasonably require the assistance of an attorney to advise you on the recoverability of various costs applicable to the change, or other related assistance, those costs are also recoverable. You are also entitled to recover profit on top of these costs. See Unarco Material Handling, PSBCA No. 4100, 00-1 BCA ¶ 30,682.

To be recoverable, these costs must be incurred as part of the good faith contract administration process that normally would occur in response to a directed or constructive change. But that encompasses a lot. It does not require that the Postal Service agree with your consultant. Indeed, the Tip Top court noted that “there is sometimes an air of adversity in the relationship between the CO and the contractor” that occurs during this process.

Costs that are incurred solely for the purpose of preparing a claim to be submitted pursuant to the Disputes clause of the contract are not recoverable under this doctrine. But costs incurred in the preparation of a request for equitable adjustment would be recoverable. It is thus often preferable for the contractor to submit a request for equitable adjustment before submitting a claim pursuant to the Disputes clause.