ARMED SERVICES BOARD OF CONTRACTAPPEALS Appeal of

--
Watts Constructors, LLC

Under ContractNo. N62473-10-D-5418

APPEARANCES FORTHEAPPELLANT: ) ) ) ) )

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 59602

PeterN. Ralston, Esq. Alix K. Schroeder, Esq.

Oles Morrison Rinker & Baker, LLP Seattle, WA
Ronald J. Borro, Esq.

Navy ChiefTrial Attorney Tracey R. Rockenbach, Esq.

Trial Attorney

OPINION BYADMINISTRATIVE JUDGE THRASHER PURSUANTTO BOARD RULE 12.2

This appeal involves a contract awarded to Watts Constructors, LLC (Watts) by the Naval Facilities Engineering Command Southwest (government) to perform a utility upgrade for CampPendleton Marine Corps Base, California. Watts seeks an equitable adjustment for additional direct costs of$41,148 it incurred while removing
a differing site condition, as well as, interest it contends was the result ofthe government's delay in issuing a modification allowing Watts to proceed withthe work. The facts are largely undisputedbutthe parties differ as to how Watts incurred costs shouldbe allocated; whetherthe costs are direct costs or indirect overhead costs underFederal Acquisition Regulation (FAR) Part 31 cost principles (costprinciples). Watts electedtoproceedunderthe Board's Expedited Procedure (Rule 12.2) 1 and the parties elected to decide the appeal onthe record pursuantto BoardRule 11.2 Only

1The ContractDisputes Act, implemented by BoardRule 12.2, provides that this decision shall have no value as precedent, and in the absence offraud, shall be final and conclusive and may not be appealed or set aside. 2 Therecord consist of: the government's Rule 4 file (tabs 1-30); appellant's Supplemental Rule 4 file (tabs 1-8); the Declaration ofMr. Jeffrey M. Pruett (attachment to appellant's post-hearing brief); the government's ExhibitA,
an email exchangebetween 22 August 2012 and 25 September2012, Exhibit B,
an unsigned modification and Exhibit C, the Declaration ofJoseph U. Hill (attachments to the government's post-hearingbrief); and Second Declaration ofMr. Jeffrey M. Pruett (attachmentto appellant's reply brief).entitlement is at issue. The Boardhasjurisdiction overthe dispute pursuantto the ContractDisputes Act (CDA) of 1978, 41 U.S.C. §§ 7101-7109. We deny the appeal.
FINDINGS OF FACT
1. On 16 August 2012, the government awarded Watts a firm-fixed price task order 0003 (contract) under ContractNo. N62473-10-D-5418 (basic contract). This appeal primarily involves one requirement under the contract, to Relocate SewerLift Station 310406 (Sewer Lift Relocation). (R4, tab 3 at 1, 18)3
2. Pertinent to this appeal, the contract incorporated all clauses in the basic contract (R4, tab 3 at 101) which in tum incorporated the FARcostprinciples through inclusion ofDFARS 252.243-7001, PRICING OF CONTRACTMODIFICATIONS (DEC 1991) (R4, tab 30 at gov't supp. ex. 032).4 Shortly after award the government informed Watts that it must consistently use a single distribution base for computing field office overhead,5 using either a perdiem rate orpercentage mark-up to compute field office overhead on all changes (R4, tab 9). In response, Watts elected to recover overhead rates on a percentage basis, rather than a per diem basis for this contract (R4, tab 28 at 1031). The final cost objective for these costs was the contract as a whole (R4, tab 26 at 1021).
3. Watts encountered a differing site condition that interfered with the installation ofthe SewerLift Relocation (app. supp. R4, tab 7). Watts promptly notified the government and, on 10 July 2013, the government acknowledged a differing site condition existed and notified Watts any work it completed before a processed modification was issued would be at its own risk (app. supp. R4, tab 5 at 2). The work stoppage directly interfered with the installation ofa manhole, excavation and completion ofthe SewerLift Relocation work (R4, tab 20 at 978).
4. On 22 July 2013 Watts submitted its initial costproposal and a revised proposal on 31 July 2013 for the differing site condition. Both costproposals contained a percentage markup for field office overhead, as was the case on a previous

3 All Rule 4 page numbers are to the Bates-stamped numbers.
4 DFARS 252.243-7001, PRICING OF CONTRACTMODIFICATIONS (DEC 1991) states, "When costs are a factor in any price adjustment under this contract, the contract cost principles andprocedures in FARPart 31 and DFARS Part 231, in effect on the date ofthis contract, apply." 5 The term "field office overhead" is often used interchangeably with the term "job site overhead." For consistency, werefer to the claimed costs at issue as field office overhead. 2modification. 6 (R4, tabs 16-18) Mr. Jeffrey M. Pruetttestified by affidavit that the percentage method was used under the assumption that the final modification, Modification No. 4 (Mod 4) would be completed before the original contract completion date and, therefore, the costs would be shared with other contract work (Declaration ofMr. Jeffrey M. Pruett (Pruett decl.)**~** 6). The parties conducted negotiations on 13 August 2013 culminating in an agreement on the costs to be reflected in Mod 4 (R4, tab 19 at 975). While waiting for the Mod4 to be issued, Watts completed as much ofthe work as it could on the SewerLiftRelocation and other contract items; once Watts had completed all possible work on the Sewer Lift Relocation, Watts moved its equipment andpersonnel to work on other contract items (Pruett decl.**~** 11).
5. Watts completed all other contract work before Mod 4 was issued and on 18 September 2013 requested that Mod 4 include language providing for payment of"associated costs"related to time delay in executing the modification (R4,tab 22 987-89). That same day, the government responded stating, "Becauseyou charge [field office overhead] as apercentage rate, we don'tagree that you are entitled to additional costs for the delay associated withthis mod. However, you are more than welcome to submit aproposal for delay costs." (R4, tab 22 at 987)

6. On 20 September 2013, Watts submitted arevised proposal for Mod 4 that eliminated any percentage charge for field office overhead costs but requested atotal cost of$57,782 that included $42,004 for the direct site costs (R4,tab 21at984).

7. On 23 September 2013, in an attempt to avoid further delay, the government responded to Watts suggesting thatthe parties execute Mod 4 as negotiated, i.e., including the percentage field office overhead, proposing toresolve the "timeand associated costs related to this change" at a later date by the inclusion oflanguage in the mod preserving Watts' claim (R4, tab 22 at 986). Watts executed bilateral Mod 4
on 23 September 2013 reimbursing Watts in the amount of$20,991.00. Mod 4 did not provide any time extension but stated, "Ifthere is time and associated costs related to this change, it will be negotiated laterupon Government review ofthe Contractor's Time Impact analysis dated September 19, 2013." (R4, tab 23) Mod 4 also included 10% mark-up for field overhead costs on the change (R4, tab 22 at 986, tab 25 at 1018).
8. On 15 October 2013, Watts submitted its proposal for additional delay requesting $41,148 and 39 working days (56 calendar days) (R4, tab 24 at 998). The costs claimed for field office overhead were for a quality control manager, a supervisor, an officetrailer, and site fencing among other costs that Watts was

6 Modification No. 3 deleted work and included an amount for field office overhead that employed a percentage mark-up (R4, tab 28 at 1031). 3required to provide on site (SecondDeclaration ofMr. Jeffrey M. Pruett (2nd Pruett decl.)**~** 3). On 22 January 2014, the government denied Watts' costproposal because Watts shouldhave recoveredthese costs throughthepercentage mark-up for field office overhead as it elected and applied onprevious modification (R4, tab 25 at 10118). Mr. Pruetttestifiedthat, "IfWatts hadbeen aware the Governmentwould merely deny Watts' costs outright, Watts would have waited for the additional funding and/orrenegotiated Modification 4 rather than agreed to the reservation" (2nd Pruett decl.**~** 6).

9. On 30 January 2014, Watts requested a contracting officer's final decision (COFD) (R4, tab 26 at 1020). The government responded with a COFD on 8 July 2014 granting the additional time claimed but deniedthe claim for direct costs asserting Watts was impermissibly changing its accounting practices onthe same contract because Watts was only entitled to recover for these site costs as indirect field office overhead costs and on a percentage basis (R4, tab 28 at 1034).

10. On 25 September 2014, Watts appealed the COFD to the Board and elected the Board's Expedited Procedure (Rule 12.2) and submitted for decision on the record pursuantto BoardRule 11 on 3 November 2014.

DECISION

The facts are largely undisputed; appellant incurred additional field office overhead costs as a result ofthe government's delay in processing Mod4 andthe government concedes appellant is entitled to reimbursement for these costs. The dispute is whether these costs should be reimbursed on a percentage basis or direct basis. Appellant contends it is entitledto reimbursement for the actual costs ofthe claimed costs becausethey are in fact direct costs underthe costprinciples based upon the fact they were incurred differently (app. br. at 4-5) and, were not incurred for the
same purpose and in a like manner as field office overhead costs (app. br. at 5-6). In addition, appellant contends it would be inequitable not to reimburse these costs directly because oftheway they were incurred (app. br. at 6). The government responds that appellant should notrecoverthese costs because the claimed costs are indirect costs (gov'tbr. at 6-7) and, given appellant's election to charge these costs on a percentage basis, allowing appellantto recoverthese costs on a direct basis wouldbe contrary to the FARcostprinciples and our decisions in

### MA. Mortenson Co., ASBCA No. 40750 

### etal., 98-1 BCA**~** 29,658 at 146,945-46 (SeniorDeciding Group), 

### ajf'g
on recon.,**97-1BCA~28,623,** and 

### Caddell Construction Co., ASBCA No. 53144,**02-1BCA~31,850** (gov'tbr. at 8-11).

4

### Treatment of Job Site OverheadExpense Under the FAR CostPrinciples

FAR2.101 defines a direct cost as "any costthat is identified specifically with a particular final cost objective

.... Costs identified specifically with a contract are direct costs ofthat contract. All costs identified specifically with other final cost objectives ofthe contractor are direct costs ofthose cost objectives." And an indirect cost as "any cost not directly identified with a single, final cost objective, but identified with two ormore final cost objectives orwith at least one intermediate cost objective." The final cost objective on this project was the contract (finding 2). Consequently, any field office overhead costs incurred onthis contract, on anyjob site, are in reality direct costs. However, the costprinciples at FAR 31.105(d)(3) specifically address these types ofcosts allowing the contractor to treat them as either direct or indirect costs. As one commentatorhas succinctly explained,
Job site overhead costs, which are also sometimes referred to as field office overhead costs, are notreally "overhead" costs at all (unless the contractorhappens to be performing two ormore contracts at the samejob site). They are direct costs ofperforming a construction

...contract at that site. However, FAR 31.105(d)(3) permits the contractorto chargejob site overhead costs either directly orindirectly, provided it follows a consistentpractice:
Costs incurred at thejob site incident to performing the work, such as the cost ofsuperintendence, timekeeping and clericalwork, engineering, utility costs, supplies, material handling, restoration and cleanup, etc., are allowable as direct orindirect costs, provided the accounting practice used is in accordance with the contractor's established and consistently followed cost accounting practices for all work.

Karen L. Manos, 

### Government Contract Costs & 

### Pricing, vol. 2, § 87:D:3 at 316 (2d ed. 2004). Therefore, contractors may chargejob site overhead costs either directly (per diem) or indirectly (percentage), as long as they are charged consistently. 

### MA. Mortenson Co.,**98-1BCA~29,658** at 146,945-46.

Here appellant elected to use the indirect method (percentage) ofcharging these types ofcosts (finding 2). Appellant's initial proposal for Mod 4 included a percentage indirect overhead rate for field office overhead, as it had done on a previous modification (finding 4). Appellant's proposal for additional costs after Mod 4 was delayed eliminatedthe percentage mark-up for field office overhead and
5instead proposed direct costs (finding 6). Therefore, we conclude appellant's claim in this appeal is inconsistentwith FAR3 l .105(d)(3). Appellant'sEntitlement to Recover under the Equitable Principles of the Changes ClauseAppellant contends it would be inequitable not to reimburse it for all ofthe extra field office overhead costs incurred because the contractperformance period was extended as a result ofthe government's delay in processing Mod 4 (app. br. at 6). We addressed this issue in Mortenson in dicta where we stated:
We seeno convincing rationale for routinely using differentjob site overhead distribution bases on changes that extend or shorten contract performance, say, by one day (or one week, or one month), and changes that do not.... Even when a contractorproves it has failed to recover its entire overhead, that is insufficientjustification for permitting an accounting change from one distribution base to another

.... Mortenson, 98-1BCAi!29,658 at 146,948n.7. Consequently, we conclude the fact that the contractperformance period was extended and that the use ofthe percentage mark-up might not fully compensate appellant for all field office overhead costs incurred does not,perse, entitle appellant to change its distribution base. Additionally, appellant has not presented any evidence ofspecial circumstances that mightjustify allowing appellant to employ a different distribution base. Id.
CONCLUSION

Forthe reasons stated, the appeal is denied.
Dated: 26 January 2015



### 6 dministrative Judge Armed Services Board ofContract AppealsI certify that the foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContract Appeals in ASBCANo. 59602, Appeal ofWatts Constructors, LLC, rendered in conformance withthe Board's Charter.

Dated:

7 JEFFREY D. GARDIN Recorder, Armed Services Board ofContract Appeals