In Kudsk Construction Inc. v. The United States, No. 18-1032C (August 30, 2019), the Court of Federal Claims addressed damages in the context of a delayed notice to proceed and addressed the Christian doctrine in the context of recent federal reporting requirements.

In Kudsk, 10-days after award of a construction contract, the project was suspended due to a bid protest. After the protest was denied, Kudsk filed a claim for “administrative and overhead costs” incurred while “waiting for [a] Notice to Proceed.” Kudsk also filed a claim for costs incurred in complying with the reporting requirements of the American Recovery and Reinvestment Act of 2009 (ARRA).

Following denial of its claims, Kudsk filed a complaint in the Court of Federal Claims. The government responded by filing a motion for dismissal of Kudsk’s claims for failure to state a claim upon which relief can be granted. The government’s motion was denied in its entirety.

In ruling on the unabsorbed overhead claim, the court provided the following definition of unabsorbed overhead: when the government delays a construction contract so that no direct costs are incurred by the contractor for a period of time, fixed home office overhead costs, which normally are paid proportionally through payments for the direct costs of various construction projects, may be “unabsorbed.”

The court noted that Kudsk’s complaint clearly contained a claim for unabsorbed home office overhead.

Government Cites Nicon in Defense

The government argued that Kudsk’s unabsorbed overhead claim is barred by Nicon, Inc. v United States, 331 F.3d 878 (Fed. Cir. 2003) because:

  • (a) No Eichleay damages can be awarded for delays that occur before a Notice to Proceed has issued;
  • (b) No alternative compensation formula, different from the Eichleay formula, is applicable to the case; and
  • (c) Kudsk could not meet the strict prerequisites for an award of unabsorbed overhead.

In responding to the government’s argument, the court held that Kudsk “cannot benefit from the Eichleay formula, but there is no holding in Nicon which categorically bars Kudsk from recovering unabsorbed overhead.”

The Court did acknowledge that Nicon set forth the three prerequisites for recovery of unabsorbed overhead:

  1. “There must have been a government-caused delay of uncertain duration”;
  2. “[T]he contractor must also show that the delay extended the original time for performance or that, even though the contract was finished within the required time period, the contractor incurred additional costs because he had planned to finish earlier”; and
  3. “The contractor must have been on standby and unable to take on other work during the delay period.”

The court held that the complaint contains a plausible unabsorbed overhead claim under Nicon but noted whether Kudsk’s unabsorbed overhead claim will survive a motion for summary judgement is a question reserved for further inquiry.

The court then turned to Kudsk’s second claim, i.e., that Kudsk incurred administrative costs preparing and submitting ARRA reports to the Contracting Officer along with its monthly payment applications and that such costs constituted extra work for which the government must pay. The government argued that the ARRA reporting requirements must be incorporated into the contract through the Christian doctrine and that the government is not liable to Kudsk.

The Court noted that “under the Christian doctrine, a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal administrative regulations.” For a court to incorporate a clause into a contract under that doctrine, it must generally find:

  1. That the clause is mandatory; and
  2. That it expresses a significant or deeply ingrained strand of public procurement policy.

In this case, the court noted it was not clear if ARRA funds were used on this project nor that Kudsk was on notice of funding. Given the state of the record, the court stated the first element of the Christian doctrine had not been met. Nor was the court persuaded that the second element was satisfied, noting that the “newly-minted” ARRA reporting requirements were the expression of a “deeply ingrained federal procurement policy.”

The bottom line is that federal contractors (a) have some bright-line rules on when unabsorbed overhead is recoverable in the Federal Court of Claims and (b) have been provided some thoughts on how to seek recovery for costs incurred in implementing new regulations when the government fails to incorporate the applicable FAR clauses into the contract. If you have any questions about either of these issues, please do not hesitate to contact us.